*The Economist* reviews Discover Your Inner Economist

by on September 7, 2007 at 6:59 am in Books | Permalink

Here is the link, excerpt:

It stands apart from its predecessors by making its revelations not so
much about the way the world works as about the way we ourselves work
(and play) and how we can take practical steps to do both better.


The version of economics advanced here has nothing to do with algebra
or interest rates.  It is economics in Ludwig von Mises’s formulation of
a “logic of choice”.

Thanks to numerous loyal MR readers for the pointer.

1 liberty September 7, 2007 at 8:17 am

never bad to be compared to Mises…

2 Student September 7, 2007 at 9:03 am

Who is running the show at the Economist these days?
Everytime I turn around they are making various to Austrian economists or economic theories (especially Austrian Business Cycle Theory). What gives?

3 Keith September 7, 2007 at 6:10 pm

Tyler, I liked the book a lot. I will take this opportunity to offer my biggest critique: At times, the book suffered the bias that prices and incentives function to get people to behave in certain ways. I think this is a fallacy that many economists (especially more statist ones, so it was surprising to see you make it) fall into.

Prices and other incentives exist to transmit information, and then allow people to do what they please given that information and given that the price they face reflects the social costs of their action. This allows us to make ourselves as happy as we can in any way we like, subject to the constraints of bearing the social costs of our actions. Some economists, especially when they’re afraid of seeming too “cold” or “economistic” start making the mistake that prices and other incentives function to get people to behave the “right” way.

I think the example in the book that highlights my disagreement on this point comes from the daycare example. You cite a daycare that decided to try to discourage parents from leaving their kids at the daycare by charging the parents for after-hours care. Parents then responded by leaving their kids at the day more frquently after-hours, because they figured they were paying for it. Thus, you claim, pricing failed in this context.

I disagree. Pricing did not fail. The daycare (and you) looked at prices the wrong way. Prices are not a means to get the behavior you desire. Prices are a means of communication, to tell someone the amount they would have to give you to make you happy to bear the costs of their action. The daycare’s mistake was that they did not charge a high enough price. What would have been the right price? That would be the price that would make the daycare happy (or at least indifferent) to take care of the kids after hours.

I believe both you and the day care looked at prices the wrong way, and that’s why the day care charged the wrong prices, and that’s why you concluded (incorrectly, in my view) that using prices was a mistake. Prices weren’t the problem here; incorrect pricing was.

The lesson here: In our life, we should prices to communicate with people. Think of the amount that would make you happy to do a job or a bear a burden, and charge that (if you can). Don’t think of prices as ways to get other people to behave in your favored way, think of prices as ways to communicate your needs.

4 Ray G September 9, 2007 at 12:29 am

Hey! How long has that Economist ad in the sidebar been running?

5 Keith September 10, 2007 at 8:17 am

“Keith — your approach may solve the day care issue (“don’t worry about how parents will respond, just make sure you’re covered no matter what”) but then you’re left with an economic theory that can’t even begin to predict how people will respond to price shifts.”

No I’m not. It’s just that prices and markets are robust to many situations and conditions, even those that economists might normally find puzzling.

In the case of the daycare, observed demand curves (in this case, the response of quantity demanded to price) sloped a funny way because parents had been implicit altruists. Parents had acted as if they cared about the day care’s incurred costs of after hours care. Once the day care charged the wrong price, the day care signaled the wrong costs.

Charging the right price would have solved the problem.

6 srp September 10, 2007 at 9:34 pm

Ariel Rubenstein has made a compelling argument that the cited example of the Israeli day care center is unlikely to be accurate. Basically, he has pointed out that the situation around pickup time at such centers is chaotic, with kids running around, etc., and that no one is likely to keep track of when parents actually come for their kids. Bascially, he called BS on the whole thing, at least in an Israeli context.

When last I checked, he had not been able to get access to the raw data or how they were generated. The story is too useful for behavioral economists to let go of, so I suspect even a complete refutation would not stop it continuing on as the academic equivalent of an urban myth.

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