armchair economist

T h e A r m c h a i r E c o n o m i s t

Reviewed by

12061 Abhinav Pandey

12062 Abhishek Garg

12063 Ayush Majum-der

12064 Akshay Prasad

12065 Amit Shukla

Submitted to: Dr. Mihir Mahapatra

Submitted on: 18th August 2012

Group: 1(I year/Section B)

Batch: 2012-2014


About the Author

Steven E. Landsburg is an American professor of economics at the Univer -

sity of Rochester in Rochester, New York. From 1989 to 1995, he taught at

Colorado State University. His famous books include Price Theory and Ap -

plications, Macroeconomics, Fair Play and More Sex is Safer Sex.

In his writings, Landsburg has been particularly critical of mainstream en -

vironmentalism having devoted both Slate columns and book chapters (in

The Armchair Economist) to attack environmentalist principles. As a self-

described "Hard-core Libertarian", Landsburg emphasizes the importance

of individual choice. He supports free trade and opposes protectionism,

and his writings in the topic have appeared in various newspapers and

magazines, including the New York Times and the Washington Post. He

has also reviewed popular economics books Freakonomics and The Un-

dercover Economist for the Wall Street Journal.

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Overview of the book

The Armchair Economist is divided into five parts:

What Life is All About

Good and Evil

How to Read the News

How Markets Work

The Pitfalls of Science

Each part is further subdivided into chapters. In this book, Landsburg has

applied economic reasoning to a vast array of human behaviour. It talks

about the world purely through an economist’s point of view which makes

it very interesting. The underlying theme of the book is that most of eco -

nomics can be summarized in four words: “People respond to incentives.”

With this observation, Landsburg goes on to discuss the effects of differ -

ent policies such as environmental policies. He also talks about budget

deficit, unemployment, and cost – benefit analysis etc. In short, The Arm-

chair Economist is a fascinating book and it should be read by anyone who

wants to know how an economist sees the world.

WHAT LIFE IS ALL ABOUT

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People Respond to Incentives

Most of economics can be summarized in four words: "People respond to incent -

ives." The rest is commentary.

There is evidence that people respond significantly to incentives even in situ -

ations where we do not usually imagine their behaviour to be rational. The au -

thor sighted a lot of examples in our day to day life to support his view. People

drive less carefully when their cars are safer. The government came up with a

lot of automobile safety legislations. It did this with the intention of bringing

down accident rates. But people became less cautious.

Do harsh punishments deter criminal activity? Yes murderers do respond to in -

centives. When economists applied Econometrics in examining the effects of

death penalty they came to the following striking conclusion: During the 1960s,

on average, each execution that took place in America prevented approximately

8 murders.

In economics it is assumed that people always behave rationally. But it is not al -

ways true. When we assume that people are rational, we emphatically do not as -

sume anything about their preferences. There is no accounting for tastes—is

one of the economist's slogans.

People have different attitudes toward risk, and their behaviour appropriately

differs. There are a lot of riddles that leave us wondering about how rational

people really are. Whenever there is a rock concert starring major attractions,

the tickets sell out well in advance. We see teenagers camping out to ensure

their places in the long queue. Then why don’t the promoters sell the tickets at a

higher price. Well, there is a logical and rational explanation to this query. Teen -

age concert goers tend to follow up by buying records, T-shirts, and other

paraphernalia. Adults don't. Therefore their main aim is to target these teen -

agers. So they keep the prices low.

People are often rational, but not always. Economics applies to some behaviour,

but not to all behaviour.

Mainly there are two kinds of people in this world-cautious and reckless.

Smokers give the impression that they fall in the latter category. Therefore in -

surance companies offer lower premiums to non-smokers. Hence smoking helps

keep insurance rates low. So if cigarettes were banned, your insurance rates

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would fall. As a voluntary non-smoker, you implicitly notify your insurance com -

pany that you are probably cautious in a lot of ways they can't observe. As a

non-smoker in a world without cigarettes, you might be indistinguishable from

everybody else, and be charged accordingly.

But once the people are insured they are likely to take more risks. One alternat -

ive is for the insurance company to help its customers avoid risk. Your car insur -

ance company might be willing to subsidize your purchase of an antitheft device;

your health insurance company will undoubtedly provide you with free informa -

tion on the benefits of diet and exercise; your fire insurance company can give

you a free fire extinguisher. But there are limits to what can be accomplished.

According to the author except when people have unusual tastes or unusual tal -

ents, all activities must be equally desirable. Consider the case of a person who

has no particular skills and he takes up the job of a gold engraver anticipating

great wealth. If gold engravers lead better lives than street sweepers then even

they will leave the job of a street sweeper and become gold engravers. Gradu -

ally this will drive down the wages and working conditions of all gold engravers.

The process will continue till both the jobs become equally desirable.

All economic gains accrue to the owners of fixed resources. If there is an in -

crease in the demand of actors then it will not benefit the actors because more

people will be attracted to this profession. But an increased demand for some

particular actor like Shahrukh Khan can benefit him because no one else can

substitute him. Here his personality is the fixed resource. But when a fixed re -

source is not owned by anyone economic gains are discarded.

THE COMPUTER GAME OF LIFE: Learning What It's All About

Steven E. Landsburg mentions about the students learning behaviour and intro -

ducing fictitious business as a computer game.

In this game of economic life, success is measured in the same way economists

measure success in the Game of Life Itself, not by asset holdings or productivity

but by the amount of fun you have along the way.

Students would learn a lot from this game. They would learn that your success

in life is measured not by comparison with others' accomplishments but by your

private satisfaction with your own. They would learn that in the Game of Life

there can be many winners, and one player's triumphs need not diminish any -

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body else's. They would learn that hard work has its rewards, but that it also

takes time away from other activities, and that different people will make differ -

ent judgments about what to strive for.

Most important, they would learn that consumption and leisure, not accumulation

and hard work, are what Life is really all about.

GOOD AND EVIL

Telling Right from Wrong: The Pitfalls of Democracy

There are number of policies present in system but very difficult to choose which

one is right, even if you apply policy to people one will apply contradictory res -

ults so one can imagine how much it is difficult to apply on Millions of people.

To defend a policy he suggests that our task is not to demonstrate that it does

some good, but that it does more good than harm. In the real world any mean -

ingful policy proposal must entail a huge number of trade-offs involving innumer -

able gains and losses to innumerable people. For policy makers, it is easy mak -

ing long lists of pros and cons, but they forget that we must decide how many

cons it takes to outweigh a particular pro.

A number of concepts have been proposed telling what is right and wrong and

each has Paradox attached with it. For example, make policy to make least

happy man happy will contradict if that man doesn’t want the policy, in the same

way if we argue to increase sum of happiness so what about maximising it, so it

is better to leave on shoulder of economics, it is better explained with help of

Economic efficiency or cost benefit analysis.

Why Taxes Are Bad: The Logic of Efficiency

Taxes are bad for someone and good for others but it is very difficult to say

whether the transfer of taxes is desirable or not.

Economists agree that taxes are bad because they are avoided, which results in

economic losses. Taxes nearly always do more harm than good. To collect a

dollar, you need to take someone's dollar; almost inevitably, in the process, you

discourage somebody else from buying. When a policy does more bad than

good, then we call it inefficient and tend to deplore it. This mode of analysis is

called characteristic of economists, who doesn’t consider ledger and accounts

but considers only the impact on individuals, whether they gain or loss.

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Best conclusion to find it is good or bad is to collect votes from every one with

interest in outcome ,efficient decision is what who win the vote, Alternate ruling

is also there that both sides would have been preferred.

The logic of efficiency and why economists tend to favour it is discussed as it is

the only alternative to inefficiency and mentioned that general level of prices is

determined by supply of money, Efficiency criterion treats everybody equal. A

cost is a cost no matter who bear it. Calculation is always leads to conclusion

that feel right but distinction would be very hard to justify philosophically.

Why prices are good: Smith Versus Darwin

Author make comparison of Darwinian evolution which allows only the fittest to

survive, with Adam Smith’s economic actor who intends only his own gain but is

nevertheless led "by an invisible hand to promote an end which was no part of

his intention," that end being the welfare of society, which economists call effi -

ciency.

Economist describes inefficient outcome with an example of comparing birds of

paradise with students and employers with female birds. Rational behaviour of

humans is compared with “herd of cows”, as it is not a vaccine to inefficiency.

Invisible hand theorem is now called the First Fundamental Theorem of Welfare

Economics, and it states – “Competitive markets allocate resources efficiently”.

The Second Fundamental theorem says “No matter which of the many efficient

allocations you want to achieve, you can always achieve it by first redistributing

income in an appropriate way and then letting competitive markets function

freely”.

The critical feature in the formulations and proofs of these theorems is the exist -

ence of market prices. Without prices, there is no reason to expect efficient out -

comes. This was explained considering the Czar of American culture (wheat

market).

The Invisible Hand theorem tells us that if we seek the source of inefficiency, we

should look for markets that are missing, but not for markets that exist. We

should look for goods that are not priced, which often means that we should look

for goods that are not owned.

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HOW TO READ THE NEWS

Steven E Landsburg's most interesting declaration in this book is that "econom -

ics in the narrowest sense is a science free from values"; but I'm not sure that

it's exactly true. Free from certain kinds of values perhaps. Landsburg's opposi -

tion to environmentalism, for instance, just involves different values: environ -

mentalists want to ban pesticides, he says, but the economics of such a ban

would mean that "fruits and vegetables become more expensive, people eat

fewer of them, and cancer rates consequently rise". What Landsburg argues is

that a world run solely on an economic basis would produce some bad things,

some good things, but that the good or the bad outcome is incidental. (The use

of pesticides isn't, in the end, to prevent cancer, but to increase profits.)

In the Sound and Fury file, he explains that Government spending plays a major

role in driving the economic engine as he relates it to the recession in universit -

ies and scientific research resulting due to cutbacks in government programs.

He concludes that the Government programs have directly led to our economic

downturn.

Here he mentions that Economics has its own conservation laws similar to that

of the energy conservation laws.

He states that none of the models is consistent with Professor Breslow's

simplistic analysis, which consists of blatantly ignoring the government's source

of funds.

Here, he speaks about pantyhose manufacturers who deliberately create

products that self-destruct in a week leading to a serious crimp in their sales. He

also relates the economic concept to that of artists who do not collect royalty on

their artworks, leading to poor artists getting poorer and rich artists getting

richer. He also disagrees with James K. Glassman’s statement about stock and

real estate by stating the fact that if stocks and real estate appreciated at the

same rate, nobody would own stocks.

In ‘How Statistics Lie – Unemployment can be good for you” he explains about

the way the government reports inflation statistics by relating it to the sale

prices offered by grocery stores in Washington. He says that every product he

buys, the price would have increased the next time he visits the store, due to

which he ends up buying another product. He puts across a very important point

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in terms of the consumer price index, very interestingly by stating that The Con -

sumer Price Index reports price changes not for the mix of goods that people

buy today but for the goods that people used to buy. That mix tends to over rep -

resent the goods that were bargains in the past and to underrepresent the goods

that are bargains today. As a result it overemphasizes the biggest price in -

creases and makes overall changes appear worse than they are. He also em -

phasizes on the fact that how CPI concentrates only on the rise in prices and

not on the fall in prices. Also, he relates inflation with CPI by stating an example

to drive in this point beautifully, “A person whose income goes up at the same

annual rate as the CPI generally experiences an increase in buying power each

year, and because the CPI always makes inflation look worse than it really is.

He says that Unemployment is good for you. He explains it by saying that Eco -

nomy wide unemployment can be a sign that times are getting worse or a sign

that times are getting better. The same is true at the level of the individual.

In “The Policy Vice” he puts across a very beautiful point to bring to light an

economist’s view “The economist's greatest passion is not to change the world

but to understand it”, which is very true in general terms. He explains that while

economists take up positions on nearly every side of every issue, they share

certain perspectives. The economic way of thinking emphasizes the importance

of incentives, the gains from trade, and the power of enforceable property rights

as forces for good. It embraces the confidence that perfect markets generally

yield desirable outcomes and an instinct to make outcomes more desirable by

making markets more nearly perfect.

Here, he explains that economists recognize the gains from trade. He says that

trade separates our consumption choices from our production choices. He intelli -

gently puts across the point that we can build cheap cars and drive expensive

ones, if we build the cheap ones profitably. But he very intently concludes with a

warning that an economist who has abandoned his resistance to policy analysis

is liable to fall prey to the even more seductive and dangerous vice of policy for -

mulation.

In, “Some Modest Proposals- The end of Bipartisanship”, he makes a very inter -

esting observation on the very basic economic situations. The experience with

competitive markets tells us that there is no end to the bidding war until all ex -

cessive profits are competed out of existence. When an industry is dominated by

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two highly profitable firms, theory tells us that if there is no price war then there

is probably collusion. In the case of the Republicans and Democrats, the requis -

ite collusion is on display for all to see. It is called bipartisanship.

Steve Landsburg’s attention for detail is highlighted when he compares the bid -

ding wars between the Republicans and the Democrats who outrun each other to

gain votes. He also explains the fact that Economists know that there are many

circumstances in which governments could benefit if their promises were en -

forceable.

Theory and evidence suggest that when an expected inflation fails to material -

ize, aggregate output can fall. A government that could credibly promise not to

follow inflationary policies could prevent costly expectations from forming in the

first place. He concludes this chapter with the fact that there is nothing in eco -

nomic theory to suggest that existing political institutions are even close to op -

timal, in any sense of the word. If the best policy proposal seems bizarre, it

might be only because we are unused to seeing anything like the best policy

proposal in action.

In a wide-ranging, easily digested, unbelievably contrarian survey of everything

from why popcorn at movie houses costs so much to why recycling may actually

reduce the number of trees on the planet, the University of Rochester professor

valiantly turns the discussion of vexing economic questions into an activity that

ordinary people will enjoy. This book might have offered a more intriguing argu -

ment, though, at least to me, but for Landsburg's fondness for the kind of pro -

positions (if three men carry five bags in four hours, how long will it take five

men to carry 10 bags?) I used to loathe in school exams.

HOW MARKETS WORK

Why Popcorn Costs More at the Movies and Why the Obvious Answer Is Wrong

"Why popcorn costs more at the movies and why the obvious answer is wrong."

In this chapter author tries to explain price discrimination: the serious cinephiles

like the movies-and-popcorn experience and they can be made to pay a differen -

tial price via expensive popcorn. Finding a way to extract higher prices from

those with higher reservation prices is the name of the game.

But the author lets this explanation go because no movie theatre is a monopoly;

any price discrimination profits made would be competed away. In Landsburg's

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brief discussion of price discrimination, he mentions "monopoly" twelve times.

The obvious answer is that the cinema has a monopoly and can charge what it

likes. But the real reason is that it could charge less for the popcorn and more

for the tickets, or less for the tickets and even more for the popcorn; the actual

pricing attracts the most money from different customers, based on hard-won

experience Students, children, and people with large families are usually more

price sensitive, and not likely candidates to spend money on snacks.

What we are really buying when we purchase a movie ticket is an opportunity: a

chance to enjoy the movie, or to enjoy it with popcorn. Economists call this a

two-part tariff, defined as a pricing strategy in which the customer must pay a

fee in exchange for the right to purchase the product. This is not to imply price

discrimination based on race, gender, religion, or ethnicity, but rather based

upon ability and willingness to pay.

Landsburg ends the chapter with his popcorn riddle left hanging in the air. He

leaves the discussion where it is because he is seemingly attached to the stand -

ard model (where price discrimination is only practiced by "monopolists").

Courtship and Collusion: The Mating Game

In the markets for sex and marriage, men compete among themselves for wo -

men and women compete among themselves for men. But men compete differ -

ently than women do, in part because men are more inclined to seek multiple

partners. There are, of course, many people of both genders who fail to fit the

pattern, but more often than not, there is a germ of truth in the observation that

"a woman seeks one man to fill her every need, while a man seeks every woman

to fill his one need."

The author envisages collusion like sex as ancient and ubiquitous. He also

states that there is no surprise in the fact that these two so popular enterprises

have been pursued in tandem. Taking the example of sex and marriage as a

market, the author is trying to lay emphasis on the fact that mutual agreements

and conspiracies though intend to do good to the end consumers, they seldom

work and are sometimes more harmful.

The mating game is a game that everyone can win. Even so, there is room for

conflict about how to divide the spoils. With so much at stake, it is not surprising

that coalitions form, break apart, and call on governments to resurrect them.

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Games breed strategic behaviour. That includes the game where some believe

that every strategy is fair.

Cursed Winners and Glum Losers: Why life is full of disappointments

Economic theory Under certain reasonable assumptions and as a matter of

mathematical fact, all of the auction rules I've mentioned yield the same revenue

to the seller on average over many auctions. When you are the high bidder, you

can be certain of one thing: Nobody else in the room thought the item was worth

as much as you did. That observation alone implies that you've probably overes -

timated its true worth. Most things in life don't turn out as well as you thought

they would. While psychologists, poets, and philosophers have often remarked

on this phenomenon, few have recognized that it is a necessary consequence of

informed, rational decision making. The logic of probable disappointment haunts

every aspect of life in which we choose among alternatives. Even when your

judgments in general are free of bias, your judgments about those activities that

you choose to engage in are usually too optimistic.

He also concludes with the fact that honesty has been the best policy and

sellers by being honest not only help the buyers but help themselves. The win -

ner‘s curse is initially the buyer's problem but becomes the seller's problem also

because buyers defend against it by shading their bids downward. It is therefore

a good idea for the seller to help buyers ward off the curse. A history of honest

dealings can be an effective talisman.

Ideas of Interest: Armchair Forecasting

According to author if we lend at 8% in a time of 3% inflation, our buying power

grows not by 8% each year but by 5%; the first three cents that we earn on

every dollar goes just to maintaining the real value of our principal.

Money growth affects nominal interest rates, but it affects them in quite the op -

posite direction from what the financial pages typically suggest. The trade-off

between current and future consumption is a matter of personal taste, but it

pays to understand the terms of trade .Each profession has its drawbacks. Doc -

tors get emergency calls in the middle of the night. Mathematicians spend

months stuck in blind alleys .Poets worry about where their next check is coming

from. And economists get asked to predict interest rates.

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The author here tries to talk about what actually is the rate of interest and its im -

pact on consumption of goods by the people in general. The author‘s theory

here is that the interest rate is the price of consumption, and consumption refers

to real tangible goods and services, not some abstract entity like money.

So with this basic understanding a person can actually predict the future rates of

interest and adjust accordingly. He can actually end up getting rich. But can this

knowledge alone make you rich cause the general consensus is that interest

rates adjust to news in effectively no time at all. Hence a person will actually

have to have a high sense of instincts to predict what the government will an -

nounce to actually take benefit of the outcome.

Random Walks and Stock Market Prices: A primer for investors

The author says that the random walk theory is not a theory of prices but a the -

ory of price changes. With a random walk everything is permanent. Today's

price is the sum of all the (positive and negative) changes that have come be -

fore. Also present value of a random walk foretells a lot about the future; its past

values are of no additional use. Hence the future price of a stock is not related

to what is its price today or in the past. Therefore the report that because a par -

ticular stock, or the market as a whole, has recently fallen, it is likely to undergo

a "correction" upward in the near future.

The strategy of dollar cost averaging and the general notion to buy more stock

when the price is low is also rejected by the author. The arguments he provides

are again related to a roulette wheel where he says that will anyone bet more

when he is running low on balance.

There is good empirical evidence for the random walk hypothesis as a descrip -

tion of most stock price behaviour most of the time. For over 25 years, the eco -

nomics and finance journals have overflowed with articles reporting unsuccess -

ful attempts to reject the random walk hypothesis. The vast majority of econom -

ists find this evidence overwhelming, and among this vast majority there are

some who are smart, sceptical, and not easily bamboozled.

Iowa car crop

This chapter explains the way an economist thinks how incentives are a good

way to produce new and successful theories. He explains a way to find a path

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between the two existing paths so that an efficient solution may be generated.

His explanation is supported by these lines-

If you protect Detroit carmakers from competition, then you must damage Iowa

farmers, because Iowa farmers are the competition. The task of producing a

given fleet of cars can be allocated between Detroit and Iowa in a variety of

ways. A competitive price system selects that allocation that minimizes the total

production cost. It would be unnecessarily expensive to manufacture all cars in

Detroit, unnecessarily expensive to grow all cars in Iowa, and unnecessarily ex -

pensive to use the two production processes in anything other than the natural

ratio that emerges as a result of competition.

THE PITFALLS OF SCIENCE: Was Einstein Credible?

With a simple example of selection of a black sock from two different drawers-

the left drawer containing one-half black and the right drawer without a black

sock - the author tries to explain the difference in the impact created by finding

evidence to support an existing fact and making unexpected predictions. He

says that the psychological influence in both the cases, are different. To explain

this he cites the example of Albert Einstein’s “Theory of relativity” and its implic -

ations which presented the reason for the aberration in the Mercury’s orbit and

the bending of light in front of the whole world. Though the cause behind both

the phenomenon was the same i.e. gravity, the bending of light was more sensa -

tional than the Mercury’s orbit as it was an unexpected prediction, while the lat -

ter was an already known fact and the theory just strengthened the fact with

proper evidence. Thus, he says that the novelty in prediction of scientific theor -

ies is more important.

He questions the credibility of Einstein had the facts been discovered before the

theory was presented. Had the facts of bending of light been established well in

advance, then Einstein would have lost the psychological impact that comes

from predicting the unexpected. He says that novel prediction is a mechanism

for revealing information. He says, “Talented scientists are both more likely to

construct true theories and more likely to be successful in their novel predic -

tions.”

According to the author, theorizing first is a wasteful act as scientists would de -

vote resources to construct those theories which might be rejected by the facts

ultimately. Rather, by gathering facts in advance, scientists have more time to

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produce good theories and avoid all unnecessary mistakes. But one issue with

producing good theories after gathering resources is that there is no way to dif -

ferentiate between the good and bad theories. The optimal solution would be to

distinguish the scientists into two groups, namely, theorizer-first and look-first,

each one with different pay-scales. The former group has a higher pay than the

latter. The work of each of the groups has both advantages in the sense that it

can be a basis of deciding who are good and who are bad. Thus balanced sys -

tem can be made between the two groups on the basis of novelty.

NEW, IMPROVED FOOTBALL: How Economists Go Wrong

As the title suggest, the chapter points out the mistakes committed by an eco -

nomist while analysing a situation, in predicting the future happening and the

solution to the problem. He takes the example of an economist who tries to

provide solutions in two different situations. One is the example of punting in a

football match and the other is to increase the consumption of corn flakes by the

American citizens.

In the case of analysing the trend of punting in a football match, the economist

finds that punting nearly always took place on the fourth down. When asked to

come up with a solution for this problem, he suggested that there could be only

three downs from now on in every football match. Though this solution was

given after thorough analysis by simulating in the form of a computer program, it

failed. This was because of the fact that the football players started punting in

the third round itself.

In the second case when the US government asked the economist to come up

with a strategy to increase the agricultural production, he started off by collect -

ing data about the consumption pattern of individuals. He found that on an aver -

age, a family would consume two boxes of corn flakes every month. He forecas -

ted that the families would continue to consume the same quantity of corn flakes

despite small fluctuations in their income. Hence, he suggested the government

that they provide two boxes of corn flakes every month to every American fam -

ily. This suggestion was made on the assumption that the families would con -

tinue buying two boxes of corn flakes in spite of getting two boxes from the gov -

ernment. But, the outcome was totally opposite to what was expected. The famil -

ies stopped purchasing corn flakes from shops and were quite contended with

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what was provided by the government. The economist failed again as he did not

analyse the solution correctly.

An economist will succeed only if he has a theory and not just statistical extra -

polations. The relationship between employment and inflation also has been

misunderstood. Inflations fool workers into accepting more jobs and employers

into hiring more workers. In such a situation, the government tries to take ad -

vantage and manipulates the inflation rate. When the workers and employers no -

tice what the government is doing, they cease being fooled and hence the cor -

relation between inflation and unemployment breaks down.

Had the economist predicted that in a football match teams punt in the last

round rather than telling that they punt in the fourth round; families eat two

boxes of corn flakes each month and not families buy two boxes of corn flakes

every month; and that unanticipated inflation puts people to work and not infla -

tion puts people to work, would have been more appropriate and the analysis of

the situations more fruitful. The author says, “An economist who understands

why teams punt knows what will happen if you change the rules; an economist

who understands why people buy cereal knows what will happen if you give out

free corn flakes; an economist who understands why people accept certain job

offers knows what will happen if you manipulate the inflation rate.”

To understand people’s behaviour, economists must tell stories and spend a lot

of time worrying about whether their stories are plausible, and how they can tell

better ones.

THE PITFALLS OF RELIGION: Why I Am Not an Environmentalist

The Science of Economist versus the religion of Ecology

The author says that the naive environmentalism of her daughter's preschool

was a force-fed potpourri of myth, superstition, and ritual that has much in com -

mon with the least reputable varieties of religious Fundamentalism. He says,”

The antidote to bad religion is good science. The antidote to astrology is the sci -

entific method, the antidote to naive creationism is evolutionary biology, and the

antidote to naive environmentalism is economics. Economics is the science of

competing preferences. Environmentalism goes beyond science when it elev -

ates matters of preference to matters of morality.”

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There is always a clash between what environmentalism wants and what eco -

nomics wants. Both try to allocate the same resources in two different ways. The

author quotes,” The hall-mark of science is a commitment to follow arguments to

their logical conclusions; the hallmark of certain kinds of religion is a slick ap -

peal to logic followed by a hasty retreat if it points in an unexpected direction.”

He argues that suggesting an actual solution to an environmental problem is a

poor way to impress an environmentalist, unless that solution happens to feed

his sense of moral superiority.

The author claims that Economics in the narrowest sense is a science free of

values. But economics is also a way of thinking, with an influence on its practi -

tioners that transcends the demands of formal logic. With the diversity of human

interests as its subject matter, the discipline of economics is fertile ground for

the growth of values like tolerance and pluralism.

The most interesting part of this chapter is a letter written by Steven Landsburg

to the teacher of his daughter making a plea for the level of tolerance that eco -

nomists routinely grant and what they expect in return. It is as an example of

how the economic way of thinking shapes an economist's thoughts.

He starts the letter with an instance in his daughter’s Colorado school where the

teachers forgot about the religion diversity in the class and made remarks that

were only appropriate for a particular religion. He wrote, “We are not environ -

mentalists. We ardently oppose environmentalists. We consider environmental -

ism a form of mass hysteria akin to Islamic fundamentalism or the War on

Drugs. We do not recycle. We teach our daughter not to recycle. We teach her

that people who try to convince her to recycle, or who try to force her to recycle,

are intruding on her rights.”

He expresses his worry about his daughter becoming an environmentalist than

bout her becoming a Christian. Finally the author ends the letter by giving his

views on responsibility. He doesn’t agree that with great privilege comes re -

sponsibility. He believes that responsibilities arise when one undertakes them

voluntarily and also that in the absence of explicit contracts, people who lecture

other people on their "responsibilities" are almost always up to no good.

16

armchair economist

Documents

random walk hypothesis

insurance company

price discrimination

fundamental theorem

corn flakes

armchair economistthere

ec onomics

football match