The Armchair Economist: Economics and Everyday Life
Shortly after I arrived at the University of Chicago to begin my graduate studies, the Wall Street Journal published a list of “ways to stump an economist.” It was written by a man named John Tracy McGrath, who raised a series of embarrassingly simple questions about everyday life that he thought economists would be unable to answer: Why does a pack of cigarettes bought from a cigarette machine cost more than a pack of cigarettes bought from the man at the candy store? Why can’t racetracks make change in less than 20-cent increments? Why does orange soda cost four times as much as gasoline?
That night over dinner, my friends and I—first-year graduate students all—had quite a laugh at McGrath’s expense. With just a little knowledge of economics, all of his questions seemed easy.
Today, with over 30 years of additional knowledge, I think that all of McGrath’s questions are both fascinating and difficult. In my recollection, the answers that came so easily over dinner consisted of nothing more than refusals to take the questions seriously. I believe that we dismissed most of them with the phrase “supply and demand,” as if that meant something. Whatever we thought it meant, we were sure that it was what economics was about.
Here is what I now think economics is about. First, it is about observing the world with genuine curiosity and admitting that it is full of mysteries. Second, it is about trying to solve those mysteries in ways that are consistent with the general proposition that human behavior is usually designed to serve a purpose. Sometimes the mysteries themselves—like McGrath’s—are hard to solve, so we practice by trying to solve similar mysteries in fictional worlds that we invent and call models. If the goal is to understand why orange soda costs more than gasoline, we might begin by thinking about a world where the only things that anybody ever buys are orange soda and gasoline. If the goal is to understand why particular constituencies want to outlaw silicone breast implants, we might begin by thinking about a world where men choose their marriage partners exclusively on the basis of breast size.
We think about models not because they are realistic, but because thinking about models is a good warm-up exercise for thinking about the world we live in. The goal, always, is to understand our own world. The first step toward understanding—and the step that we had not yet taken when we started graduate school—is to admit that the world is not always easy to understand.
This book is a compendium of essays about how economists think. It is about the things that we find mysterious, why we find them mysterious, and how we try to understand them. It describes some mysteries that I think are solved and others that I think are not. There are a lot of good reasons to learn about economics, but the reason I have tried to stress in this book is that economics is a tool for solving mysteries, and solving mysteries is fun.
For most of my adult life, I have had the splendid privilege of eating lunch every day with an extraordinary group of economic detectives who never fail to inspire me with their incisiveness, their whimsy, and their capacity for wonder. Almost daily someone arrives at lunch with a new mystery to solve, a dozen brilliant and original solutions are proposed, and a dozen devastating objections are raised and occasionally overcome. We do it for sheer joy.
This book is largely a chronicle of what I have learned at lunch. I am sure that some of the ideas are original with me, but I am no longer sure which ones. Many others I learned from Mark Bils, John Boyd, Marvin Goodfriend, Bruce Hansen, Hanan Jacoby, Jim Kahn, Ken McLaughlin, Alan Stockman, and the others who have come and gone over the years. With profound thanks for taking me along on their roller-coaster ride, this book is dedicated to the lunch group.
A NOTE ON THE CHAPTERS
These chapters give a sampling of how economists see the world. For the most part, they can be read in any order. Some chapters refer to ideas from earlier chapters, but these references are never essential to the flow of things.
The ideas expressed in this book are intended to give a fair representation of how mainstream economists think. Of course, there is room for disagreement over specifics, and any particular economist would surely want to dissent from some of the things that I say. But I believe that most economists who read this book will agree that it accurately reflects their general viewpoint.
Attentive readers will observe that this book applies economic reasoning to a vast array of human (and sometimes nonhuman) behavior. They will note also that when a question arises regarding the range of applicability of an economic principle, the author always prefers to risk error in the direction of being overly inclusive. I believe that the laws of economics are universal; they are blind to race and blind to gender. I am therefore confident that no attentive reader will mistake my occasional use of the generic pronouns “he,” “him,” and “his” for the exclusively masculine pronouns with the same spellings and pronunciations
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