- Most of economics can be summarized in four words: “People respond to incentives”. If we cannot monitor the decision maker, at least present him with the right incentives.
- “The economic way of thinking emphasizes the importance of incentives, the gains from trade and power of property rights as forces for good. It embraces the confidence that perfect markets generally yield desirable outcomes. Markets can fail when information is hidden from one party or when contracts cannot be enforced.”
- Physicists will assume experiments operate in a vacuum; engineers will assume no friction; economists assume human behavior is rational. These assumptions describe basic principles and theories, they are not judged by their literal truth, but by the quality of its implications. However, de gustibus non est disputandum (there’s no accounting for taste).
- Capital punishment prevents murders: Prof. Ehrlich of University of Buffalo study found that each execution, on average, prevents 8 murders.
- Seat belts kill: Peltzman study revealed auto seat belts and safety regulations of the 1960’s produced fewer driver deaths per accident, but led to more driver accidents, leaving the number of driver deaths essentially unchanged. However, pedestrian deaths increased. Similarly, energy-efficient cars won’t necessarily reduce the consumption of gasoline, low-tar cigarettes won’t necessarily reduce lung cancer, and low-calories synthetic fats won’t necessarily lower the average weight of Americans.
- The Indifference Principle: markets are efficient—diner tips (in aggregate) are compensated by lower menu price. Costs and benefits must tend towards equilibrium. Only people with a fixed resource (e.g. unusual preference, land) can benefit from change.
- Some apparent anomalies can be reconciled: concert tickets sell out for low prices possibly to attract teenagers, who end up buying more souvenirs and memorabilia; celebrity product endorsements signal quality and longevity of the business; fancy banks buildings signal financial strength; men spend less on health care possibly because they are more prone to violent deaths.
- Given that others vote, voting is irrational in terms of probabilities.
- Asymmetric information—insurance, employees—need to design incentives to illicit appropriate behavior. In insurance, smoking therefore is a useful signal to the insurance company of a person’s general health. High executive compensation may be to encourage risk-taking (wealthy people take more risks; and high severance encourages future executives to take prudent but risky ventures).
- For economists, success in life is measured by consumption: work as little as you can, consume as much as you can for as long as you can. Output, exports, and work are economic losses; gains are imports, leisure, and consumption. Die with the most happiness, not with the most money.
- All debatable policies have good. The key is to determine whether the benefits outweigh the costs. That requires a moral philosophy to weigh costs against benefits. Is it more “fair” to tax Jack 5% of his $10,000 income or tax Jill 5% of her $100,000 income? Is it better to have a world where everyone makes $40,000 a year or one where three-fourths of the population earn $100,000 and the rest earn $25,000? What is the ideal income distribution?
- Almost everything you buy is a bargain—if not, you wouldn’t have bought it (i.e. it costs less than the maximum amount you were willing to pay). This is consumer surplus. Government policy should be designed to increase consumer surplus and eliminate inefficient dead weight losses (losses that benefit no one). Measure all gains and losses by willingness to pay.
- Taxes (in and of themselves) are neither a net benefit nor a net cost—it is merely a redistribution of income. Only when taxes create deadweight losses, are they inefficient and bad.
- A college degree, like long elaborate bird tails, is an expensive signaling device.
- Prices and competition lead to efficient outcomes. Remarkably, free markets of rational self-maximizing individuals lead to maximization for the group.
- Inefficiency often arises from the absence of markets. Sometimes it is not “too much capitalism run amok”—it is not enough capitalism. When a commodity is not priced, or is not owned, it can be exploited. No one owns clean air so therefore there is no incentive to not pollute. Markets tend to naturally develop, to help allocate resources efficiently.
- Coase Theorem: judges do not ultimately affect economic outcomes. They should just make it easier for parties to negotiate.
- Cost-benefit analysis is a helpful tool, but be careful to measure costs accurately (including implicit costs, foregone opportunities, non-monetary costs, etc.).
- Focus not on the national deficit, but on government spending. The deficit is merely financing spending (vs. taxation). The official deficit figure is highly flawed and has little economic significance (no accounting for inflation, future promised spending, Social Security transfers, interest on past debt is deferment of taxation)
- People prefer to spread pain (and consumption) over time—convey bad fortune in small doses.
- Remember there is a price to be paid for each benefit. When surrogate mothers were allowed to renege on their contracts, hiring surrogate mothers became less desirable; when women gained the Family Medical Leave Act, hiring women became less desirable.
- “Figures don’t lie, but liars figure.” Some misleading economic statistics:
- CPI doesn’t measure the basket of goods people buy today, but a basket that people used to buy. Understates previously unconsumed goods (e.g. laptops).
- The income gap widened in the 1980’s. Part can be attributed to lower tax rates—discouraging people (generally the rich) from hiding their income.
- Family breakups suddenly transform a $50K middle-income household into two $25K low-income households.
- Leisure is not accounted. We are all under-employed, our leisure time is worth something.
- GNP does not count household work. Maids are counted as wage-earners, wives are not. Less developed countries have a disproportionate people doing household work which understates their true GNP.
- Social security disfavors the young because not all of them (e.g. smokers) will live to reap the rewards in old age. It is just a transfer of wealth with no aggregate net gain.
- If literacy is so desirable, why isn’t there more demand for it? Why aren’t the incentives (e.g. higher income) enough to induce it? Need to consider the costs expended to attain education.
- There should be no shame necessarily in producing low quality goods. There should be producers along all points of the quality spectrum. Focus on profitability (like Walmart).
- Price discrimination—charging one group more for the same product than another group. There is normally a very good reason for it to be so.
- Senior citizens discounts are not necessarily due to income (as a group they are generally well off) but due to time—they have time to comparison shop.
- Courtship behaves like supply and demand in a market. The more women there are, the less bargaining power they have individually. Polygamy actually benefits the average woman because it restricts the supply of women in the market. Anti-polygamy is analogous to cartels—by agreeing to limit output (each man can have only one wife), the average man benefits with reduced competition. Like cartels too, the parties tend to cheat.
- Winner’s curse appears in English auctions, as the highest bidder is (by definition) most likely to have overvalued the item. For the auction seller, honesty is actually the best policy over time, because it helps alleviate the buyer’s winner’s curse, thereby garnering higher bids.
- Interest rates are not the price of money, it is the price of consumption. How much does it cost to defer current consumption for future consumption? When current consumption demand is high, interest rates are high.
- The random walk hypothesis is well supported by empirical data. Any investment strategy using historical prices (e.g. dollar cost averaging) is inconsistent with the random walk.
- Protecting one domestic industry from foreign competitors hurts other domestic industries (Toyota cars are made from Iowa wheat (trade with Japan)), and results in economic inefficiency.
- Policy proposals that assume everything stays constant are ineffective. People change their strategy in response to policy. First understand the why—the fundamental cause and effect. Correlation does not equal causation.
- If one agrees to transfer income from the relatively wealthy to the relatively poor, then why not agree from future generations (who are bound to be wealthier) to the present generation?
- Landsburg feels “Environmentalism” is becoming an intrusive religion, with excessive moralizing and inadequate logic.
- Recycling paper eliminates incentives for paper companies to plant trees and causes forests to shrink.
- Eliminating carcinogenic pesticides makes fruits more expensive, less people eat them, which cause cancer rates to rise.
- Relocating high-pollution industries to Third World countries leads to increased welfare for them—they sacrifice air quality for economic opportunity to increase income.
- Economics is free of moral values. It is a science, committed to pursuing arguments to its logical end.
Finished: 11-Nov-2010