I was unable to place the following book review in the magazines I thought might want to print it, but since it makes a pleasant essay regardless of its original purposes, which were to sell a few books for Landsburg and to make myself famous, too, I print it here.
Note: I refer below to "the collapse of the European Monetary Union," and no longer remember which European Monetary Union I was referring to when I wrote this, in 1993.
The Armchair Economist: Economics and Daily Life
by Steven E. Landsburg
The Free Press, 1993, vii + 235 pages, hb, ISBN 0-02-917775-8
Reviewed by Ralph A. Raimi, University of Rochester, Rochester, NY 14627.
Harry Truman is said to have said he wished he could find a one-armed economist, since all the ones he knew were constantly saying, "...on the other hand..." This story is surely an exaggeration, since Milton Friedman -- to take one example -- was flourishing in Truman's time, young as he then was. Someone once said, "I wish I were as sure of anything as Milton is of everything."
In the days of Harry Truman, however, Friedmanites – and the whole "Chicago school" -- were regarded as covert tools of economic royalism, while government interventions of all sort were thought "liberal" and "progressive." Keynes, the advocate of deficit spending, was also the architect of the Breton Woods monetary agreement, by which exchange rates were to be insulated from market forces -- just one example of the kind of faith in state action that should have reached its last gasp with the collapse of the European Monetary Union, but which is still being put forward by such modern economic gurus as Felix Rohatyn, John Kenneth Galbraith and maybe George Papandreou.
One need hardly mention the faith in state action exhibited in Truman's time by the new Communist rulers of Poland and Hungary, to understand what Hayek was warning against in The Road to Serfdom. It is sufficient to look at the quasi-socialist hamstringing of the economy indulged in during the postwar years by India, as compared with the spectacular success stories of laissez-faire Taiwan, Hong Kong and Singapore, to see what simple governmental inaction with regard to the economy will accomplish. Britain, during the same time, disregarded Hayek's advice and mostly went along with the Trades Union Congress and the Labor Party, running itself down from one of the richest countries in Europe to one of the poorest. Its recent revival, for all that the compassionate classes were one- hundred percent against her, dates from the ministry of Margaret Thatcher.
Does economics now have a scientific way to prescribe public policy? Is it a science at all? The answer to the first question is no, and the answer to the second one is yes. To see that the questions are not equivalent one might imagine the same two questions asked of physics. There is no doubt that physics is a science, of course, but there are certain predictions -- indeed, most predictions – it is still unable to make. The laws of mechanics have been exactly known for centuries: gravity exerts such and such a force, for example, and accelerations are determined by these forces thus and so. Agreed. Now join a physicist at the top of a hill, a steep but bumpy hill with bushes and trees on it, and holes. Show that physicist a rock you plan to release, and ask him to predict where that rock will end up when it finishes rolling or bounding down the hill. His "on the other hand" qualifications will fill the air. Even if you let him spend half a billion dollars charting the bumps in the hill and the shape of the rock, and let him use the most gigantic imaginable computer for his arithmetic, his guess will be little better than yours.
It isn't that the laws of physics are not known. Some aren't, of course, but the laws governing the rolling of a rock down a bumpy slope are. The problem is in the complexity of the boundary conditions, small changes in which can yield enormous changes in the final position of the rock. Analogous observations can be made in other sciences and studies. If there were any laws of history, for example, they would certainly be of even less use for prediction of future events than the Newtonian laws are in predicting the motion of a rock, for in history the mere starting data are hopelessly beyond listing. And we are by no means agreed that there are any laws of history worth the name.
There are those who believe the same of economics, taking as evidence the inability of economists to predict next year's Gross National Product or inflation rate. But it is consistent with this inability to insist that economics is a science just the same, indeed that it is a mathematical science with all the exactness that implies, just as the exactness and correctness of physics as a science is consistent with physicists' inability to predict the trajectory of a rolling rock.
Steven E. Landsburg, in The Armchair Economist, takes this point of view. Economics, he argues, is an exact science, and its main truths are not even very difficult to understand, once you get in the way of thinking as economists do. Some of these truths can be illustrated by even the most familiar marketplace phenomena of daily life. Just as the physicist can predict with exactitude a sufficiently simple event, like the time of the next lunar eclipse, or the magnetic force exerted by a given copper coil carrying a given current, the economist can predict (for future events) and explain (for hypothetical ones) the economic reaction to changes in economic forces. The results are well worth understanding, and are sometimes quite surprising, even paradoxical at first glance. But on reflection, the reader of Landsburg's examples will gradually learn a mode of analysis he cannot help but find convincing.
Landsburg, who is both a mathematician and an economist, takes care to deny any intention to press a political point of view. Economics, as he sees it, is a dispassionate calculus of forces: If you want A, you must also have B; if you want C, you must also have D. Whether you prefer A to C is another matter, perhaps a political matter; therefore the economist cannot possibly prescribe B or D, but can only tell you what the structure demands. Furthermore, in a real situation, especially one of political choices, one seldom simply chooses between A and C, for there is a whole alphabet of possibilities out there, with a Pandora's box of "methods" of achieving them.
Nevertheless, one soon discovers that Landsburg's pure science leads immediately to public policy, in that it often -- uncomfortably often -- discovers that current policy on quite familiar matters is either irrelevant to its stated economic ends, or downright subversive of them. Worse, the "stated economic end" of some law or tax or treaty or prohibition, such as "full employment" or "reduction of the national debt," is itself either meaningless (i.e. without a sensible definition), or pointless, or inefficient. Thinking of such things as an economist must think of them, he shows, might never tell us what we want, or what is "good," but it can and will tell us when we are talking nonsense, or when we are getting less of something than another policy would achieve.
There are those who deplore the economist's way of setting prices on all things. "What is the value of a life?" such a person might ask, imagining the question to be rhetorical. But it isn't; we can calculate the value a man puts on his life every time he crosses the street. If the errand that requires him to cross that street is worth five dollars to him, and if it is demonstrable that the probability of getting killed in doing so is one in a million, then he is clearly valuing his life at five million dollars (or less). The calculation goes as follows: For every million times he (or anyone like him) crosses that street, errands worth five million dollars are accomplished and one death results. If the man thinks his life is worth more than five million dollars, he had best cross only when his errand is worth more than five dollars, or at a safer corner.
Anyone who thinks our hypothetical man doesn't calculate that way should imagine further: Ask that street-crossing man if on the same errand he would attempt to cross the Henry Hudson Parkway at five p.m., and he would surely say no. The chance of getting killed there is perhaps one in a thousand, and he values his life at more than five thousand dollars. Or, as the man himself might put it, "It isn't worth the chance."
Part of the charm of economics is the observation that people make calculations like this all the time, but are unaware they are doing so; indeed, they will often hotly deny any such motives (motives based on prices being known as base motives). Yet economics can use such indirect measurements to determine convincing truths about human behavior, truths that can be expressed in terms of prices or not, as one's moral predispositions may dictate, but which can be verified in terms of other behavioral measurements as certainly as the timing of a future eclipse can be related to other astronomical measurements made today and yesterday.
If the behavior to be predicted is a detail dependent on an enormous amount of data, little of it exactly known to begin with, economic prediction too must be uncertain, like the prediction of the path of the rock on a hill. But if one wants to be persuaded that economics as a science holds water it should be sufficient to work out a few simple -- or simplified -- illustrations, and at this game Professor Landsburg is a master.
As with any scientific system, one must begin with some axiomatic truths, or one can prove nothing. Jefferson began with "self-evident truths," i.e. axioms, in his famous proof that "these colonies ...of right ought to be free and independent states." His axioms were that God had provided men with "certain inalienable rights...," and his argument went on to show that the behavior of George III had been such that these rights could not be maintained unless the ties with that tyrant were severed. Conclusion: If the rights are inalienable, and are being alienated by George III, then George III has to go.
The basic axiom of economics is that a higher price will find fewer customers, and a higher cost will generate fewer producers. In short, people respond to incentives as measured in dollars. For those who don't find such statements axiomatic, who argue that people are irrational in unpredictable ways, for example, one can adduce experience: However irrational certain individual people might be, how many bakeries have you known to sell more loaves of bread after having raised the price? (Other things being equal, of course.) I cannot imagine such a market, and if I meet a person who says otherwise I simply have to say that the two of us are unable to communicate. It is as if that person denied that 2 + 2 make 4; he may be a fine upstanding citizen, but I shall have to avoid discussing arithmetic with him.
The basic axioms of economics are so few, and so widely agreed upon (once they are understood), that explaining some of the consequences is very persuasive -- but only to an unprejudiced mind. For example, Landsburg shows convincingly that taxing for governmental expenditures and borrowing for the same expenditures are completely equivalent, and that a rise in the national debt is no more a burden on future generations – or anyone else -- than a tax bill that makes that borrowing unnecessary. Every economist knows this, and almost all editorialists do not. One has to wonder why. There is something willful about such widespread ignorance. But in a society that reads tea-leaves and the Zodiac for advice in business and love this is probably to be expected.
It should not be thought that The Armchair Economist is a popular, painless introduction to economics as such. There are as many good-hearted attempts at such books as there are popularizations of relativity theory; the thing can't really be done. Euclid is reputed to have told Ptolemy (or perhaps it was Laplace who said it to Napoleon) that "there is no Royal Road to geometry." Landsburg has himself, in fact, written the nearest possible thing to a painless introduction to economics, his textbook, Price Theory and Applications (Dryden Press, 1989), but the present volume must not be compared to a textbook, "popular" or otherwise. Just the same, it is a clear example of the economists' art, with genuine illustrations and analyses of daily economic phenomena, large and small. They range from the price of popcorn in movie theaters (Exorbitant? Guess again) to the causes of auto accidents (seatbelts, among others). If you don't believe some of these things, read The Armchair Economist. If after having read Landsburg's explanation you still don't believe them, read it again.
Ralph A. Raimi
November 13, l993