David R. Henderson  

Henderson on Landsburg's "Armchair Economist"

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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.
The above is the introductory paragraph to my just-published review of Landsburg's book in Regulation.

Some other highlights:

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."



COMMENTS (10 to date)
jeff writes:

One of the areas where unusual preferences pays off big is online dating (or maybe dating more generally).

When you're on a popular site, where all the men want the same 10% of the women and all the women want the same 10% of the men, having an odd preference is a big help.

Ted Levy writes:

David, you say:

"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."

But isn't this backwards? Isn't the indifferent marginal consumer the highly unusual one? Aren't the vast majority of consumers the supramarginal ones that are not indifferent? Why would you call the vast majority "unusual"?

If I'm right, is this your error, or Professor Landsburg's?

Tom DeMeo writes:

" By the same token, police crackdowns on drug dealers don't hurt drug dealers but do hurt drug users"

You might want to rethink this one.

Ted Levy writes:

@Tom DeMeo: I think Professor Landsburg means they don't hurt those who remain drug dealers, though obviously they hurt those former drug dealers who were arrested. Similarly, licensure doesn't hurt those who remain barbers, but hurts those who sought to become but were unsuccessful in becoming barbers (as well as consumers).

David R. Henderson writes:

@Ted Levy,
But isn't this backwards? Isn't the indifferent marginal consumer the highly unusual one? Aren't the vast majority of consumers the supramarginal ones that are not indifferent? Why would you call the vast majority "unusual"?

If I'm right, is this your error, or Professor Landsburg's?

Good point. The vast majority will be supramarginal or submarginal, but not marginal. So it is strange to call them all "unusual." That might have been my miswording but if memory serves, I think it was Professor Landsburg's wording too. Fortunately, the point remains even if the wording is strange.

@Tom DeMeo,
Clearly, the people thrown in prison are worse off. Professor Landsburg and I are making a long-run point comparing two long-run equilibria.

t3 writes:

If Landsburg was actually claiming that GHWB didn't recognize the benefit of US citizens being able to buy Japanese trucks, it's a silly claim.

GHWB was not an idiot; he was a politician. He said the politically-acceptable thing about opening Japanese markets to the US, but there is no reason to infer that he failed to grasp the core benefit of free trade.

Why do columnists insist on this cutesy type of gotcha?

Ken B writes:

One of the reasons it's difficult to expalin the benefits of free trade is that even in plain sight the benefits are not quite so plain. Let's look at the claim above:

"Apparently both failed to notice that what Americans gain when they buy Japanese pickup trucks is: Japanese pickup trucks."

Now this, endorsed by DRH too, is cute, clever, and makes the point. But it's not actually right is it? After all you can buy a Chevy truck. The benefit is the higher value of the Japanese truck less the price difference (and even that isn't quite right). Abtter way to put it is the benefit is the choice to buy the Japanese truck.

David R. Henderson writes:

@Ken B,
Good point but the statement is literally true. The truck is the gain. It's just not the net gain.

Ken B writes:

@DRH: I never knew you were a lawyer! :)

Ted Levy wrote: I think Professor Landsburg means they don't hurt those who remain drug dealers, though obviously they hurt those former drug dealers who were arrested.

No, that's not quite the point. The point (in the baseline case where all drug dealers are identical) is that no drug dealer is harmed ex ante; that is, the risk of being arrested is fully compensated by the increase in profit.

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