Steven Landsburg's The Armchair Economist is one of the best economics books ever written. It is insightful, disarmingly simple and yet sophisticated and, at the same time, provocative, passionate, and witty. Were I to detail the many things I like about it and why, I would write much too long a review. So instead I'll highlight a number of the particularly good and important parts of the book, extend one, and criticize another.
One of the book's most insightful chapters is titled "The Indifference Principle." Landsburg states the principle as follows: Unless you're unusual in some way, nothing can ever make you happier than the next best alternative. You might prefer living in San Francisco to living in Lincoln, Neb., for example, but if everyone shared your preference, people in Lincoln would move to San Francisco. When would the movement stop? When the higher demand for housing in San Francisco has raised housing prices there and the lower demand in Lincoln has dropped prices there--to the point where the two places are equally attractive. The fact that many people in San Francisco are not indifferent but prefer San Francisco to Lincoln is not evidence against Landsburg's thesis: It simply means that not everyone is the same. He notes that most of us are unusual in many ways and points out an important implication of basic economics: "[T]he greatest gains in life come in the areas where we're most unusual." So if you love San Francisco, chances are that you're not the marginal person who is indifferent between San Francisco and Lincoln, and you get big benefits from living in San Francisco. In short, unusual preferences pay off.
An implication of the Indifference Principle for policy analysis:
Landsburg uses this Indifference Principle to show that requiring a barber to obtain an expensive license doesn't hurt barbers but does hurt those who want haircuts. By the same token, police crackdowns on drug dealers don't hurt drug dealers but do hurt drug users.
Surprisingly, Landsburg's failure to apply the Indifference Principle:
In a chapter titled "Choosing Sides in the Drug War," Landsburg does a beautiful critique of an article by Richard J. Dennis, who opposes the drug war. I'm virtually positive that Landsburg opposes the drug war also, but he also opposes bad arguments for good positions. Dennis has many such arguments and Landsburg does a good job of taking them apart.
Unfortunately, Landsburg adds his own bad argument: he incorrectly evaluates the benefit of lower drug prices that would result from legalizing currently illegal drugs. Landsburg believes there would be no net benefit from lower prices on the amount of drugs that people are already using. He analogizes lower drug prices to a lowering of the price of pizza and concludes that the amount consumers gain from the lower price on the number of pizzas they would have bought at the high price is just offset by the amount that pizza producers would lose. But that ignores why legalization of drugs would cause their prices to fall. It's because legalization reduces the risk of dealing in drugs and, therefore, drug dealers would no longer be compensated for that risk. Landsburg's Indifference Principle should have led him to that conclusion. So the gain to consumers of a lower price has no offsetting loss to producers and is a pure gain to society.
Finally, some humor about how the benefits of free trade are hidden in plain sight:
Virtually all economists are in favor of free trade. One of the main reasons is that it allows people to buy things of a given quality at a lower price. Landsburg makes this point well with a true story. When George H.W. Bush relaxed import restrictions on Japanese trucks, Bill Clinton complained that the United States got nothing in return. Bush answered that what he had gotten was the Japanese government to open its market to U.S. goods. Landsburg's comment: "Apparently both failed to notice that what Americans gain when they buy Japanese pickup trucks is: Japanese pickup trucks."