• Cocktail and Dinner Party Economics
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  • Dinner Party Economics

Everything you always wanted to know about Prosperity (but were afraid to ask)

It is precisely because there is so much poverty, hunger and illness that the world must be very careful not to get in the way of the things that have bettered so many lives already– the tools of trade, technology and trust, of specialization and exchange.  It is precisely because there is still so much further to go that those who offer counsels of despair or calls to slow down in the face of looming environmental disaster may be not only factually but morally wrong.   Matt Ridley in The Rational Optimist on page 354 This book had me at ‘feeding the nine billion’! I am a naturally optimistic person and The Rational Optimist: How Properity Evolves gives credence to my inclinations.  I have always thought that humans were capable of solving problems and this book hammers that nail  firmly in place. His basic thesis is as follows.  Humans have the ability to specialize and trade.  This allows more bang for an economic buck and we are never going back to pre-barter days.  Furthermore, since the advent of fast communication, ideas now have sex with one another resulting in an explosion of new technologies.  No DNA to slow things down. This fecundity is the reason so much of the world is better off than it was fifty years ago never mind one hundred years ago.  Except for a few cases of governmental disasters (for example the policies of (Mao,  Stalin, and Mugabe) the average human being would never trade places with their ancestors, even if that ancestor was very wealthy.  For the poor, things have gotten even better. This book is a must read for any leftwing person just so they know the arguments of free market types.

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Reading Fast and Slow

For behavioral economists, however, freedom has a cost, which is born by individuals who make bad choices, and by a society that feels obligated to help them. The decision of whether or not to protect individuals against their mistakes therefore presents a dilemma for behavioral economists. The economists of the Chicago school do not face that problem, because rational agents do not make mistakes.  For adherents of this school, freedom is free of charge.  Thinking Fast and Slow page 412 by Daniel Kahneman. I like this book.  In fact, I think it would make a great supplementary text for an experimental economics course.  Kahneman explains carefully and exhaustively why human beings should think carefully about the process of making decisions. He argues that human beings can be quite irrational  and this material is good to know especially if you want to make good decisions. However, I do have a couple of quibbles: 1) The book is very long and I got really tired of reading over and over again why people make the wrong decision between two choices.  The examples made me feel like I was at the optometrist.  “Is this clearer or is this clearer?”  After a while you just don’t care anymore. 2) He goes on a bit of a rant against economists (note that economists are quite willing to give a psychologist a Nobel Prize in economics it they think the work is worthy) and the assumption of rational agents.  We understand the problem of this assumption BUT  and this is a big but,  rational agent models are still the best way to make initial predictions about market behaviour.  What doesn’t work at the individual level seems to sort itself out at the market level. 3)  Much of his policy implications just reinforce the economic idea that incentives matter.  For example, an opt out system for savings will generate more savings in total because people will just have the money taken from their pay cheque without any effort.  To the economist, the act of opting in is a transaction cost and the results make perfect sense.  If  it takes effort to start a savings program then less savings will occur. This doesn’t imply that the person is irrational. Quibbles aside, this is a good read.  

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