Economics for the Intelligent Amateur

We warned readers several months ago to expect an onslaught of books talking of the evils of the free markets and (fallaciously) talking up Behavioral economics as the mutually exclusive counterpoint. So we can’t help feeling somewhat vindicated by the fact that How Markets Fail, by John Cassidy, does just this.

In all fairness, Cassidy does believe that the markets tend to work well, only that they fall far short of what is needed. Of course, he then neglects to explain what exactly is needed, and how much and by whom, but rather talks of the evils of “the market” when it comes to the environment, healthcare, CEO salaries, etc. He seems to forget that the market is comprised of individual players and is not a big monster operating willy nilly (although many would agree with his point of view over ours).

We do give him special mention, however, due to his analysis on Adam Smith’s “Wealth of Nations”. Few, if any, economists, let alone columnists writing about economics, have actually read the WoN and are able to address Smith’s views (such as how he stated banks should not make loans to speculators). For those of you interested in the history of economics, we recommend reading the first part of this book. The rest regurgitates much of the same dribble we’ve been hearing and will no doubt continue to hear.

At first we were not going to read and review Superfreakonomics. Since we had already written a review on Freakonomics and we knew this follow up book was in the same vein, we didn’t think there would be much to add.

What changed our mind was the overwhelming response to their chapter on climate change. We figured that with that much outrage at what they said, they must have done something right. So yours truly bought the book, read it, and is quite happy he did. Having said all this – and possibly piqued your curiosity – we will not delve into the climate change chapter here. You can read some of the outrage at it here, here and here, and you can read a brief response by the Steves right here. We do, however, recommend you read this chapter before making judgments, as it is quite enthralling.

We will only say that this book does, in fact, continue in the same vein as Freakonomics, and it doesn’t cease to entertain. From debunking the Ultimatum game (every behavioral economist’s favorite game), to the story of Kitty Genovese, to showing why monkeys seem to be loss-averse (and documenting the first ever case of monkey prostitution).

Of course, those of you who have read Nudge, follow Tyler Cowen’s blog, or read anything by Dan Ariely will be familiar with these alternative uses of economic principles. In fact, some of the tidbits (such as the section on organ donors) overlap directly. As always, we don’t recommend you read through the book, take everything at face value, and retain bits and pieces just to impress your friends. We do, however, recommend you study what they write, be skeptical, and enjoy new ways of observing occurrences, seeing if you can apply their methods to discover new facts in your own lives.

Also, we keep admiring Nathan Myhrvold more and more.

You can buy the book here.

As a follow up to our last article, it seems this idea of the evil foreigners is in vogue, and will probably stay that way until the economy recovers. It is just unfortunate when one encounters literature of a seemingly intellectual status regurgitating the same lopsided information. Reflections on the Revolution In Europe: Immigration, Islam, and the West, by Christopher Caldwell, is just one of those pieces of literature.

Throughout this book he refers to Europeans (and European culture) as feeble and weak, while calling Islam “self-confident”. This to show how the minority of muslims in Europe is poised to take over the continent.

Rather than review the whole book, we just wanted to point out that what makes this book an interesting read is to substitute ‘Islam’ with ‘Latino’ and ‘Europe’ with ‘United States’. You’ll realize that a simple “Find & Replace” could create a Bestseller in the States as well. Too bad it doesn’t contain more truth.

Nudge is a thought-provoking new book by Richard Thaler and Cass Sunstein. Being a fan of Thaler’s we kept reading past the point where they introduce the name for their new concept: Libertarian Paternalism, despite growing apprehension. It turned out to be worth it.

Libertarian Paternalism remains somewhat true to both terms, at least as much as can be. When a choice is to be made, they condone free will, while at the same time thinking experts (whom they call Choice Architects) might know best. Their conclusion is to make the most beneficial option also the easiest. Many who have studied behavioral economics know the difference between opt-in and opt-out, and how people tend to follow the flow. Thaler and Sunstein take this one step further and say that the easiest, least-effort option for all users should be the one judged to bring them the most benefit. If they then still want to change, they are perfectly free to do so.

A good example is the difference between the number of organ donors in Austria and Germany. In Germany, 12% of the population are organ donors, while in Austria 99% are (p. 181, paperback version). (more…)

Gloss at any Economics or Business best-seller list these days, and you will see a sign of the times. While the year 2000 brought us The Millionaire Mind, by Thomas J. Stanley, The Millionaire Next Door, by William Danko and Thomas Stanley (Stanley kept busy) and Jack, by Jack Welch, 2006 brought us Why We Want You to be Rich, by Donald Trump and Robert Kiyosaki, The Tao of Warren Buffett, By Mary Buffett and David Clark, as well as The Starbucks Experience, by Joseph A. Michelli. 2009, however, is turning out to be a different story.

These days you will see The Black Swan, by Nassim Nicholas Taleb, A Drunkard’s walk, by Leonard Mlodinow and Outliers, by Malcolm Gladwell. How are these so different? Well, The Black Swan is about how unforeseen events can control our lives; a Drunkard’s Walk is about how Randomness rules our lives, and Outliers discusses how the luck of the draw has more of a say in success than any innate abilities. Add to these the obvious Ultimate Depression Survival Guide, by Mar­tin D. Weiss and Suze Orman’s 2009 Action Plan, by Suze Orman and you can see where the trend is.  Also worrying is the inevitable emergence of books such as The Myth of the Rational Market by Justin Fox.

Our guess is that, while the recession continues, we will see more of these, and many more like House of Cards, by William D. Cohan (about the fall of Bear Sterns) while companies keep requiring bailouts and declaring bankruptcy. Meanwhile, Thomas J. Stanley hasn’t written a book since 2000.