SDM INSTITUTE FOR MANAGEMENT DEVELOPMENT

THE ARMCHAIR ECONOMIST

A BOOK REVIEW
STEVEN E LANDSBURG 9/18/2010

SUBMITTED BY SARITA G KRISHNAN SEEMA SHAH SAUMIL JATINBHAI SHYLESH V SOURAV DUTTA SOWMYA B

-10103 -10104 -10105 -10106 -10107 -10108

Contents
ABOUT THE AUTHOR ................................ ................................ ................................ .......................... 3 ABOUT THE BOOK ................................ ................................ ................................ .............................. 4 THE POWER OF INCENTIVES ................................ ................................ ................................ ...............5 RATIONAL RIDDLES ................................ ................................ ................................ ............................ 6 TRUTH OR CONSEQUENCES................................ ................................ ................................ ................7 THE INDIFFERENCE PRINCIPLE ................................ ................................ ................................ ............7 ECONOMICS IN THE COURTROOM ................................ ................................ ................................ .....8 COASE THEOREM ................................ ................................ ................................ ............................... 9 FLIP SIDE OF COASE THEOREM ................................ ................................ ................................ .......9 COST BENEFIT ANALYSIS................................ ................................ ................................ ..................... 9 THE MYTHOLOGY OF DEFICITS ................................ ................................ ................................ ......... 11 UNEMPLOYMENT CAN BE GOOD FOR YOU ................................ ................................ ....................... 13 THE END OF BIPARTISANSHIP ................................ ................................ ................................ ........... 14 WHY POPCORN COSTS MORE AT THE MOVIES?................................ ................................ ................ 15 COURTSHIP AND COLLUSION ................................ ................................ ................................ ........... 17 CURSED WINNERS AND GLUM LOSERS ................................ ................................ ............................. 18 HOW FUTURE INTEREST RATES WILL BE DETERMINED?................................ ................................ .... 19 CONCLUSION ................................ ................................ ................................ ................................ ...19

ABOUT THE AUTHOR

STEVEN E.LANDSBURG is an American professor of economics at the University of Rochester in Rochester, New York. From 1989 to 1995, he taught at Colorado State University. Landsburg currently writes a column on "everyday economics" for Slate magazine. The subjects of the columns are diverse and often draw on current affairs. Landsburg has even addressed legal issues: in a Slate column from 2003, he proposed punishing jurors when a jury's decision is later "proven" to be wrong, such as when an acquitted defendant later admits to committing the crime. If a jury's judgement is later "proven" to be right, Landsburg suggested the jurors should be financially rewarded.
BOOKS BY LANDSBURG

y y y y y y

Price Theory and Applications (1989) The Armchair Economist (1993) Macroeconomics (1996) Fair Play (1997) More Sex is Safer Sex, The Unconventional Wisdom of Economics (2007) The Big Questions: Tackling the Problems of Philosophy with Ideas from Mathematics, Economics and Physics (2009)

ABOUT THE BOOK

Landsburg has written a very clear introduction to the thinking of a particular kind of economist: those of the so-called Chicago school of which he is himself a member. Where their thinking is confused, the book is confused; where it is clear, so is the book. Since economists of this kind are still vastly influential in public policy (though less so academically than in their heyday), this primer to understanding their thinking is useful and important.

Steven E Landsburg's most interesting declaration in this book is that "economics in the narrowest sense is a science free from values".Free from certain kinds of values perhaps. Landsburg's opposition to environmentalism, for instance, just involves different values: environmentalists 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".

In his theoretical asides, Landsburg is at pains to emphasise that economics should measure people's overall happiness, not merely their financial welfare; and that how to optimise this across many people is not a question capable of a scientific answer. Even if we could somehow measure everyone's happiness on some scale, what next? Do we maximise their sum, or their product, or the happiness of the least happy person, or something else? This can only be a matter of preference. This at least is the position Landsburg pays lip service to, but he makes it very clear he doesn't believe it. Landsburg justifies the definition of "efficiency" as a sum of payoffs by saying that, even if someone loses out by one policy decision, they will probably gain in the long run if the criterion is applied consistently. This would be quite true if the costs and benefits were applied randomly, but if they have a systematic bias the story is quite different. As they are, in fact, systematically biased to favour the rich, the cost-benefit criterion turns out to be morally bankrupt. There are probably literally hundreds of examples in the book which make the same basic error, and assorted others too. It's no surprise that he affects astonishment (p. 227) that anyone could have rationally objected to the suggestion of the chief economist of the World Bank that polluting factories should be moved to developing countries.

In spite of this, there are many astute pieces of analysis in the book, so it is valuable for more than just the insight it gives into the thinking of economists. The section near the end on "How markets work", from which the quotation at the start of this review is taken, is superb, and is alone worth the cover price. The chapter in that section on "Courtship and collusion" examines what is in effect the Prisoners' Dilemma problem from an economic mindset.

THE POWER OF INCENTIVES

According to the author most of the economics can be summarised in just four words-People respond to incentives. He sighted a lot of examples in our day to day life to support his view.
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People drive less carefully when their cars are safer. The government came up with a lot of automobile safety legislations, mandating the use of seat belts, padded dashboards, collapsible steering columns, dual braking systems, and penetration-resistant windshields etc. It did this with the intention of bringing down accident rates. But people became less cautious. The price of accidents (eg., The probability of being killed or the expected medical bill) became lower. So people chose to drive more recklessly to enjoy the thrill of speed and to reach everywhere faster. This ultimately resulted increase in the number of driver deaths as well as pedestrian deaths. Do energy efficient cars reduce our consumption of energy? Now we will say that it obviously does. But the reality is something else. Before the advent of energy efficient cars people used to go out less to save gasoline. But once they bought energy efficient cars,they started going out more believing that the new energy efficient will take care of their consumption rates. And they end up going out so much that they still use the same amount of gasoline. Do harsh punishments deter criminal activity?Yes murderers do respond to incentives. 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.

RATIONAL RIDDLES
In economics it is assumed that people always behave rationally.But it is not always true. 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 dont the promoters sell the tickets at a higher price.Well,there is a logical and rational explanation to this querry. Teenage concertgoers tend to follow up by buying records, Tshirts, and other paraphernalia. Adults don't. Therefore their main aim is to target these teenagers.So they keepthe prices low.

TRUTH OR CONSEQUENCES
There are two kinds of peoplein this world-cautious and reckless.Smokers give the impression that they fall in the latter category.Therefore insurance companies offer lower premiums to non smokers.Hence smoking helps keep insurance rates low.So if cigarettes were banned, your insurance rates would fall.As a voluntary nonsmoker, you implicitly notify your insurance company that you are probably cautious in a lot of ways they can't observe. As a nonsmoker 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 alternative is for the insurance company to help its customers avoid risk. Your car insurance company might be willing to subsidize your purchase of an antitheft device; your health insurance company will undoubtedly provide you with free information 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.

THE INDIFFERENCE PRINCIPLE

According to the the author Except when people have unusual tastes or unusual talents, 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. Gradually 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 increase 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 resource is not owned by anyone economic gains are discarded.

ECONOMICS IN THE COURTROOM

Landsbury opens the chapter with a discussion of the famous Bridgman v. Sturges case. And the chapters "Of Medicine and Candy, Trains and Sparks: Economics in the Courtroom" helps to understand the coase theorem. When there are many people who need to be negotiated with , Coase Theorem doesn't apply because negotiation is either impossible or prohibitively expensive. He used Coase Theorem as a stepping stone on the way to an analysis of an economy with positive transaction costs. Bridgman and Dr.Sturges have a dispute between medical services and chocolate candy. If the decision is favourable to Dr.Sturges, the downside is disappearance of Bridgman candies from market If it is favourable to Bridgman then Sturges medical services will be vanished.The Judges decision was in favourable of Sturges to demand Bridgman to stop using machines.Reason quoted was effects of production of various goods and services
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Suppose Bridgman -$100 per week Sturges- $200 per week and court in favour of Bridgman, Sturges to Bridgman - $150 per week to turn off machines. Bridgman = $50 per week more than he would earn. And Sturges with $50 per week ,though not as good as $200.Each party benefits and bargain is struck Conclusion Bridgman shuts down irrespective of judges decision

OR
y

Suppose Bridgman -$200 per week Sturges- $100 per week and court in favour of Sturges, Bridgman to Sturges-$150 per week to stay in business Sturges- $50 more and Bridgman-positive net profit

Economists summary on this observation courts decision does not matter. But for Bridgman and Sturges decisions matter very much to them and not to anyones else. The decision does not affect the
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1. allocation of resources 2. what gets produced/means of production

IMPOTENCE OF JUDGES Whoever controls the resource and however his control is protected, he will find it to his private advantage to direct the resource to its most profitable use,regardless of whether that use is by him or by his neighbour.

COASE THEOREM
It applies whenever the parties to a dispute are able to negotiate , to strike bargains and to be confident that their bargains are enforceable.

FLIP SIDE OF COASE THEOREM 1. When circumstances prevent negotiations , entitlements liability rules, property rights and so forth matter. 2. In some cases like pollution created by factories it the courts decision that matters and the efficient decision depends on the particulars of that case. Example of coal miners and installation of safety equipments- decision of whether to install safety equipments by owners is independent of whether owners are liable for injuries to miners. The greater moral in this coal miners-owners story is that the judges should assign liabilities in such a way as to maximise the opportunities for posttrial negotiations.

COST BENEFIT ANALYSIS

Richard J. Dennis is chief adviser to the Drug Policy Foundation in Washington, D.C. He is also a commodities trader, Dennis's article entitled "The Economics of Legalizing Drugs."
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Principle 1: Tax revenues are not a net benefit, and a reduction in tax revenues is not a net cost Dennis says if the drugs were legalised then govt would earn around $13 billion dollar.But tax revenue. are money from ones pocket into anothers.So there is neither gain nor loss. The tax revenue is neither a net benefit nor a net cost.

Principle 2: A cost is a cost no matter who bears it

Cost-benefit analysis makes no moral distinctions; it simply totals all of the good that arises from an action and contrasts it with the bad. If a drug dealer is unhappy or unproductive when he is in jail, his losses in that dimension are as much social costs as the jailer's salary and the cost of prison construction. The prospect of abolishing those costs is a legitimate benefit of legalization.

Principle 3 : A good is a good no matter who owns it

When a TV is stolen by a thief it has only moved from one place to another and still remains a source of entertainment whether the recipient is a thief or anyone else. Thieves do have social costs time and energy and their productive capacity. If I spend a noon stealing someone s bicycle we end up one bicycle within us while if I spend building it I end up having two.the social costs that a person takes in protecting their property like burglar alarms,security guards should also be taken into consideration. When these are accounted for, the social cost of crime could be either more or less than the value of the stolen property.

Principle 4 : Voluntary consumption is a good thing

Assumption Legalisation of drugs lower prices and hence more consumers. Consumers are only reaping a benefit and not bearing a cost. Dennis counts this as a cost of legalisation. Consumers surplus- maximum you are prepared to pay the amount you actually paid in the marketplace

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Principle 5: Dont double count

The Economics of legalising drugs failed in 2 super principles Only Individuals matter and All individuals matter equally. So the govt revenue by legalising drugs cannot be counted as the govt is not an individual. Price change by itself is neither good nor bad as the buyers gain is sellers loss here. Price changes are often result from changes in technology or legal environment. When cost-benefit analysis is done we commit ourselves to treat everyone equally. Buyers on par with sellers, borrowers with lenders ,thieves, drug dealers, addicts with police officials, commodities brokers etc. We like the cost-benefit criterion first because we think its application makes almost everybody better off over the long haul, and second because it is easy to apply. In other words, the benefits are high and the costs are low. The reasoning may be slightly circular, but the cost-benefit criterion recommends itself highly.

THE MYTHOLOGY OF DEFICITS

The myths about the deficit underlie three grand misconceptions. 1. the numbers that are officially reported and widely analyzed are actually reflective of anything approaching economic reality. 2. government deficits clearly cause high interest rates via simplistic mechanisms that people think they understand. 3. certain identifiable groups are clearly and unambiguously hurt by deficits.

MYTH 1: Interest on past debt is a burden . Interest payments on past debt are included in the calculation of the deficit, which implies that these payments add to the taxpayers' burden. Interest on past debt should not be included

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in any meaningful measure of government spending or government deficits and hence the deficits are grossly overestimated

MYTH 2: A dollar spent is a dollar spent A dollar spent on erecting a govt building is equivalent to dollar paid out by social security which is clearly false.

MYTH 3: Inflation doesnt count Inflation is an enormous boon to debtors including governments. The real value of the debt gets reduced

MYTH 4: Promises dont count If the government makes a promise neither the govt nor the ppl are sure if they are serious about it, it is not sure whether to calculate it as a debt or not and calculate in the current deficits

MYTH 5: The Goliath myth The dollars borrowed by the government are immediately available to the individuals only

MYTH 6: The Myth of Dick and Jane For the govt to increase its borrowing and make people borrow more it should increase the interest rates to change their mind which is not so. MYTH 7: Our grandchildren will inherit our debts Our grandchildren will inherit not only our debts but also our savings accounts, which include the additional wealth that we save by paying lower taxes in the present.

MYTH 8: Myth of crowding out Govt borrowing uses resources that would be better employed by the private sector.Govt borrowing doesnt consume anything. What consumes resources is govt spending.

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MYTH 9 : Deficits hurt our trade position Incorrect arguments that deficit affect interest rates which in turn affects the value of the dollar.The link between deficits and interest rates is tenuous and it would take us far afield to explore the relationship between interest rates and exchange rates.

UNEMPLOYMENT CAN BE GOOD FOR YOU

After busting some of the most widely held believes (myths), Landsburg shifts his aim to statistics. And once again he hits the bulls eye with his creative criticisms. According to the author, statistics never lie but interpreting what it says can be tricky, if not outright risky. Take supermarket sales for example, places like Big Bazaars always advertise saying that( in effect ), whatever you buy from them, you will have to pay much more to buy from anywhere else. Its true, but the point is that other stores can make the same claim and they will be right too. The reason is that all this stores are always giving discounts and usually on different items, so when you go to a store you buy whats on discount there and it will obviously be costlier in other supermarkets. Next take unemployment for example. We always think of it as an indicator of a countries backwardness when the truth is that unemployment may mean that a nation is well-developed that a many of its citizens donot need to work all the time to make a living. Also, no one ever seems to consider the opportunity cost of employment. Landsburg seems to derive a lot of pleasure from criticizing government policies that everyone takes for granted, like literacy rate. Governments of every country aim for a 100% literacy rate as something highly desirable. It may be so from the point of view of particular individuals who are being made literate but not for the nation as a whole, atleast thats what he tries to prove. His argument is that after a certain percentage our governments have to spend a lot of money as incentives in the form of free books, meals etc to convert the truly reluctant from the backward areas and these people rarely contribute to the nations wealth of knowledge in any meaningful way. Its a case of diminishing returns if there ever was any.

However the author does not make any attempt to define the literacy rate at which marginal returns equal the marginal costs.

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The author, in support of his theory on policy vices, continues with the example of Anti-Racism laws. Everyone believes that governments take a strict stand against any racial discrimination, but Landsburg has tried to prove that it is not so. He cites two examples. An employer cannot choose employees on basis of their race or religious beliefs but it is perfectly legal for an employee to choose his employer on basis of his race and beliefs. And No.2, the government wont allow you to choose your secretary by her race and religion but the same government turns a blind eye when you choose a wife. But here also Landsburgs arguments, though valid, seems somewhat trivial and irrelevant.

THE END OF BIPARTISANSHIP

Now this is truly one of the most interesting and enjoyable chapters of the book. Landsburg talks of ubiquitous price discriminations that should only be possible in monopolies but prevalent in competitive markets. For example, price difference of hardcover and paperback books that cost almost the same to print or doctors charging higher fees from rich patients for the same service. The author argues that the prices are different not because of cost but because the products/services are actually different. In case of books, hardcover books are for those readers who love their books and buy them as a collectible not as a use-and-throw item. So they are two different level of product. Same with doctors. They charge rich people more because the level of service is higher. Rich patients call more often, for trivial reasons, very likely at the middle of the night. They are also more likely to sue for malpractice in case something is not to their liking. However, the most interesting is his explanation of why popcorns cost so much in movie theatres. The obvious answer would be that inside the theatre the owner has a monopoly and can charge whatever he wants to make more profit. But there is a strong argument against this. People go to theatres not just for movies but an evenings experience for which the owner charges them say Rs.140, Rs.100 for the ticket and Rs.40 for the popcorn that costs Rs.10. But he can charge less for the popcorn say Rs.30 and make it up by charging Rs.110 for the ticket. The theatre- goer wont mind because he is paying the same price for his evening. Plus, there is good chance that people will buy more popcorns because now they are priced lower. So the owner actually ends up making more profit by charging less for popcorns. Landsburg believes that this is because people go to theatres in
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groups, some of whom dont eat popcorn. If ticket prices are higher they might object and the whole group may move to another theater.

WHY POPCORN COSTS MORE AT THE MOVIES?

This part of the book is given to some suggestions that sound good but are not very practical. He makes bipartisanship in politics sound like a crime just like that in the case of collusion between companies in a duopoly. Competitive politics may be beneficial to the population but there are considerable advantage in co-operation between political parties that cannot be ignored. Similarly, his suggests legally binding contracts for politicians, especially in case of pre-poll promises and holding judges accountable for their verdicts. Now these may seem wise decisions but their implantation will be a nightmare, to say the least. Suppose we incentivize the working of judges, what will happen is that they will start giving safe verdicts instead of right ones. The US economy and UK economy, Gross Domestic Product, International trade, Finance, The term economics refers to somewhat of an abstract concept: the fact that humans are generally rational, and we make choices and respond to incentives. Armchair Economist attempts to explain and investigate the how and why behind those choices and incentives. Economics can also usually answer the other interrogatives as well (who, what, when, where, and how much). The author claims that our world is full of hows and whys that spark curiosity, and that economics is about recognizing this and attempting to solve them in a manner that is consistent with the assumption that humans behave a certain way for a reason. In some cases, this can be called sociological economics or psychological economics. Attempting to solve these mysteries is made easier with the use of assumptions and models, which I'll get to later. There may never be an absolute solution to a particular mystery, but proposing some ideas based soundly on the principles of economic. Assumptions included in the basic principles of armchair economics are simple propositions that economists call assumptions. Assumptions allow us to simplify the seemingly complex world we live in and make certain aspects of it easier to understand. Essentially, they simplify situations or issues and make the problem-solving easier and more approachable. For example, if we wanted to approach or understand international trade, we could assume that

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there are only two countries in the world and that each country produces o two goods. nly This is usually the example given in introductory economics courses. While quite unrealistic, the assumption simplifies the concept and we can have a better understanding and a tighter focus. Assumptions comprise the framework of economics, and everything and anything related to economics is built upon certain underlying assumptions. Economists use models like diagrams and equations which are built with assumptions to illustrate the fundamental principles of economics. Just like my model in third grade simplified the solar system, economic models attempt to simplify reality in order to better understand it. The applicability of the theories and laws and principles of economics is vast. Most economists use economic reasoning when observing human behavior. Moreover, when the range of that applicability is in question, economists prefer to be overly inclusive, pushing the limits a bit, which definitely makes things more interesting. Think about what you know now about economics. I'll make an armchair economist out of you yet. In his theoretical asides, Landsburg is at pains to emphasise that economics should measure people's overall happiness, not merely their financial welfare; and that how to optimise this across many people is not a question capable of a scientific answer. Even if we could somehow measure everyone's happiness on some scale, what next? Do we maximise their sum, or their product, or the happiness of the least happy person, or something else? This can only be a matter of preference. This at least is the position Landsburg pays lip service to, but he makes it very clear he doesn't believe it. The Chicago school relies heavily on using high-powered theorems to create mathematical models of the marketplace - theorems with, in general, very unrealistic assumptions. One says that under certain circumstances (for a more precise statement you'd better read the book), markets reach the most efficient outcome possible. "Efficiency" simply means maximising the sum of individual payoffs. So when Landsburg says we know on theoretical grounds that [under suitable conditions] market prices maximise the excess of benefits over costs. In these circumstances, we can confidently predict that a price control must be a bad thing relative to a market outcome, even without calculating any costs or benefits explicitly. we know that though he can't bring himself to admit it, he is taking this simple sum of payoffs as being the only possible yardstick by which to measure outcome; any other would

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be immoral (a "bad thing"). Here is how you measure "efficiency" of, say, a proposed policy measure in practice, by a cost-benefit analysis. Landsburg justifies the definition of "efficiency" as a sum of payoffs by saying that, even if someone loses out by one policy decision, they will probably gain in the long run if the criterion is applied consistently. This would be quite true if the costs and benefits were applied randomly, but if they have a systematic bias the story is quite different. As they are, in fact, systematically biased to favour the rich, the cost-benefit criterion turns out to be morally bankrupt. There are probably literally hundreds of examples in the book which make the same basic error, and assorted others too. It's no surprise that he affects astonishment (p. 227) that anyone could have rationally objected to the suggestion of the chief economist of the World Bank that polluting factories should be moved to developing countries. In short, this is a fascinating, infuriating book. In spite of its absurdities it should be read by anyone who wants to know how economists think about the world.

COURTSHIP AND COLLUSION

Here the author has taken the example of courtship in a way that In societies that allow polygamy, it is almost invariably men who take multiple wives, rather than the reverse. combinations as we do today. Even so, it would be a very different world. By custom and by law, men have managed to enforce a collusive agreement to limit their attentions to one woman apiece. Producers, initially competitive, gather together in a conspiracy against the public or, more specifically, against their customersEventually, the cartel crumbles unless it is enforced by legal sanctions, and even then voilations are legion. The conspiracy consists of an agreement under which each man restricts his romantic endeavors in an attempt to increase the bargaining position of men in general. But the improved position of men invites cheating, in the sense that each man tries to court more women than allowed under the agreement. The cartel survives only because it is enforced by legal sanctions, and even so violations are legion. A law that prohibits any man from marrying more than one woman is not different in principle from a law that prohibits any firm from hiring more than one worker. Theory suggests that when an enforcement mechanism is available, any group of competitors will attempt to colludeThe cartel's best hope for survival is a law that bans the innovation,
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and substantial resources are devoted to lobbying for such laws. General Motors is capable of deciding for itself whether to adopt a new automotive technology but might still want the technology bannednot to protect it from itself but to protect it from its competitors. If GM could be the only innovator on the block, it would be happy; given the realities of competition, it would prefer to see the innovation disappear.

CURSED WINNERS AND GLUM LOSERS

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 overestimated its true worth. Economists, ever dismal, call this phenomenon the winner's curse. If you are bidding on an antique brass candelabrum, and you have examined it closely, and you know exactly how you plan to use it, and you don't care whether it is attractive to others, and you are certain that you will never want to resell it, then buying the candelabrum for $1,000 is an equally good bargain regardless of what the other bidders may think. In such cases there is no winner's curse.. Given his limited information, the seller is in no position to choose the rule that will maximize the selling price at any one auction. But he can hope to choose the rule that will maximize the average selling price over many auctions. 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. Cattle and slaves havealways been sold in English auctions, tulips in Dutch auctions, and oildrilling rights in sealed bid auctions. If all rules are equally good for the seller, why do sellers insist on one rule rather than another? On the one hand we have an argument that under certain assumptions, the choice of auction rule is a matter of indifference. On the other hand, wehave the behavior of auctioneers, from which we infer that the choice of auction rule is a matter of considerable concern. The inescapable conclusion is that those "certain assumptions The most important assumption is that there is no winner's curse English auctions are by far the most common and appear to be the form most favored by auctioneers. The theory suggests that the only reason why auctioneers would have such a preference is that bidders

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respond to information about one anothers' assessments. This means in particular that bidders are subject to the winner's curse. Another key assumption is that buyers do not have large fractions of their wealth riding on the outcome of the auction. Another questionable assumption in the standard theory is that the population of bidders does not change when the rules change.

HOW FUTURE INTEREST RATES WILL BE DETERMINED?

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. The real interest rate is the nominal interest rate minus the rate of inflation. The interest rate is the price of consumption, and consumption refers to real tangible goods and services, not some abstract entity like money. Because the interest rate is the price of tangible consumption goods, it isat least to a first approximationdetermined by the supply and demand for tangible consumption goods. If fast money growth increases inflation, then it must also increase the nominal interest rate, because the nominal interest rate is nothing but the real interest rate (which is unchanged) and the inflation rate (which is up) added together. So money growth affects nominal interest rates, but itaffects them in quite the opposite 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. The interest rate is not the price of money. The interest rate is the price of consumption, and consumption refers to real tangible goods and services, not some abstract entity like money.Great events are linked to interest rate movements through the choices of ordinary consumers. What convinces people to abandon their new spending plans? The answer is that the interest rate must rise. By rising, the interest rate convinces people to spend less, and it continues to rise until the average family's original spending plans are restored.

CONCLUSION

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This book uses real world examples to debunk some of the common misconceptions and preconceived notions people have about economics. A delightfully thought-provoking look at many everyday matters, seen through the eyes of an "economist." Rather, it's economics as the study of Man the decision-maker. He asks such simple questions as "Why are concert tickets usually under-priced?" (i.e., why is there greater demand than supply). And the wonderful part is, he's often unafraid to say, "Economics can't provide the answer." Likewise, he can find no reason why people tip anonymously in restaurants. Landsburg demonstrates to the layman just how easy and fascinating economics can be. One nice thing about most of the book is that it provides a libertarian analysis of the decisionmaking process, but doesn't openly advocate libertarian politics. Starting with his observations, we can begin to understand the incredible social changes that have occurred since contraception became widely available. But he refrains from passing judgement on whether this is good or bad. Milton Friedman,Nobel Prize-winning economist praised this book. Enough said: it's worth the read. Not too many books on economics could be described as a "hoot." But Steven Landsburg, an economics professor at the University of Chicago when he wrote this book (now he's at the University of Rochester), has a delightfully sharp sense of humor and a gift for clear, logical exposition. His theme is easily stated, and he states it on the first page: the substance of economic science is that people respond to incentives. "The rest," he writes in deliberate imitation of Rabbi Hillel, "is commentary." Landsburg fills the rest of the book with such commentary. His witty and occasionally sarcastic exposition deals neatly with such topics as why recycling paper doesn't really save trees; why certain statistics are not reliable measures of the "income gap" between rich and poor; why the GNP is not an especially accurate measure of national wealth, why unemployment isn't necessarily a bad thing, why taxes are a bad thing, why real economists don't care about what's "good for the economy" or endorse the pursuit of monetary pr ofit apart from personal happiness; and lots of other points that will no doubt be profoundly irritating to people who just _know_ he _can't possibly_ be right.

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For example, Landsburg is delightfully allergic to the claims of the "environmental" movement and recognizes it quite clearly as a strongly moralistic religion. And contrary to the opinions of some not terribly careful readers, he does distinguish firmly between the actual harm caused by pollution and the psychic harm caused by (e.g.) the use of automobiles to people who object in principle to such technology. Interestingly, Landsburg recognizes a problem here for his own cost-benefit approach: if economic efficiency with regard to utilitarian/consequentialist goods and bads were really the whole story, he notes, he should care about both the physical harm and the psychic harm, and yet he doesn't. Which leads neatly into the other notable feature of this volume: Landsburg is stunningly forthright about the nature and the limits of cost-benefit analysis. Unlike some economists who like to pretend such analysis is value-free and involves no commitment to any particular view of morality, As Landsburg notes several times, cost-benefit analysis does not regard "theft" as a cost, since it merely transfers existing stuff from one person to another. And even at that, it looks only at one abstract feature of such outcomes, namely, how much "good" there is in the aggregate. So this volume is fantastically written even though Landsburg doesn't have much to say about what should supplement cost-benefit analysis. It's a terrific introduction to economic thinking generally, and it's also a clear and frank recognition of the limitations of such thinking at least as practiced by many mainstream economists.

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