[Paleopsych] NYT: Exposing the Economics Behind Everyday Behavior

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Exposing the Economics Behind Everyday Behavior
http://www.nytimes.com/2005/12/18/business/yourmoney/18shelf.html

[These are articles stacked up, as I was complying with Howard's request 
to keep my posting down to seven a day. I'm not breaking my Gregorian New 
Calendar New Year's resolutions. Sorry about the bad formatting of some of 
these articles. I was using different software and can get the lines right 
only with a lot of extra work.]

    Off the Shelf
    By ROGER LOWENSTEIN

    A FUNNY thing seems to be happening to economics writing: it's getting 
better. In
    recent books like "Freakonomics" and "The Travels of a T-Shirt in the Global
    Economy," economists have taken it upon themselves to explain something of 
how
    the world works. They even tell little stories.

    What interests Tim Harford, the author of "The Undercover Economist," are 
the
    stories behind the myriad little transactions that take place every day. Do 
you
    drive to work or ride a subway? Do you buy coffee en route? Is it a 
high-priced,
    frothy variety, or something plainer? And if it's the first kind, why is it 
so
    darn expensive, when the incremental cost of steaming a little milk amounts 
to
    only pennies?

    One question that interests Mr. Harford is: What will persuade you to fork 
over
    $26 for a copy of "The Undercover Economist" (Oxford University Press)? He 
seems
    to believe that witty, bracing prose will do the trick. "I would like to 
thank
    you for buying this book, but if you're anything like me you haven't bought 
it at
    all," he begins. "Instead, you've carried it into the bookstore cafe and 
even now
    are sipping a cappuccino in comfort while you decide whether it's worth your
    money."

    While we're on the subject of that cappuccino, Mr. Harford explains that
    Starbucks would like to charge each of us exactly what we are willing to 
pay, but
    that it would simply not do for it to advertise "Cappuccino for the Lavish, 
$3,"
    and "Cappuccino for the Thrifty, $1." It has to be clever about it. 
Something
    like, "Hot Chocolate, $2.20; Caffe Mocha, $2.75; 20 oz. Cappuccino, $3.40." 
To
    the customer, the choice of drinks is what matters. To Starbucks, it is the
    choice of prices.

    Similarly, when Disney World in Florida offers discounts to people who live 
in
    the Orlando area, Mr. Harford observes, "They're not making a statement 
about the
    grinding poverty of the Sunshine State." They are making an educated guess 
that
    out-of-towners, who visit only once in a while, are willing to pay more than
    people from nearby.

    The author, a Briton who lives in Washington and who writes the cheeky Dear
    Economist column for The Financial Times, says that "there is a story to 
tell" in
    nearly every such interaction.

    For instance, Whole Foods lures you to spend more by offering distinct and -
    relative to what the competition offers - more expensive foods. It sells 
organic
    broccoli in addition to the customary industrial-strength variety, and it is
    careful never to display them side by side, because you would then notice 
the
    difference in price. Whole Foods wants you to be thinking only about the
    incremental good health that organic broccoli presumably confers.

    "The economist's job," Mr. Harford says, "is to shine a spotlight on the
    underlying process." Sounds reasonable, but that is not what most economists
    actually do. Most professional economists are paid to predict the future. 
This is
    why so much of economics writing is dull - and pretty silly. No one can 
predict
    the future, least of all an economist.

    Mr. Harford fancies himself to be more like a detective - an "undercover"
    economist. Perhaps he is less policeman than psychologist. Psychologists are 
not
    much good at predictions, either, but they do help us understand behavior, 
and
    recognize what sort of social settings induce people to behave better or 
worse.

    Just so, Mr. Harford's undercover op is a creature of incentives. Recalling 
that
    in his university days, student clubs allowed unlimited drinking in return 
for an
    upfront fee, he notes that these encouraged bingeing because the cost of 
each
    additional drink was zero. What matters in terms of limiting intake is the
    marginal cost of each new drink.

    So, too, with reducing automobile traffic: it's not the average cost per 
trip
    that matters, but the cost of getting into your car each additional time.

    To an economist, the truly interesting decisions are those that occur at the
    margin - the point at which one employee more is hired, one dollar more is
    invested, one cappuccino (on top of all those you have already imbibed) is 
drunk.
    Mr. Harford explains this central concept by returning to the source - 
namely,
    the classical economist David Ricardo's explication of how the yield from a
    marginal piece of land determined rents in pre-industrial England.

    The author is good at showing how such basic concepts apply across a complex
    modern economy. After observing that rents in London today are higher thanks 
to
    the surrounding Green Belt, which cuts off development, he notes that as an
    undercover economist, "you start to see 'green belts' of one kind or another 
all
    over the place." For instance, professional associations that restrict entry
    into, say, medicine serve as green belts that shield doctors from 
competition.

    NONE of this is the least bit unconventional. Though the author enjoys being
    politically incorrect ("sweatshops are good news," he offers tartly), he is 
not
    economically incorrect. In fact, lively presentation aside, he has written a
    pretty standard primer, one that defends free markets to a fault and attacks
    government as the source of just about everything bad.

    Predictably, he says that the best way to limit pollution is through 
free-market
    incentives; he then goes overboard by suggesting that environmental debates 
are
    mere "moral posturing." Yet without some discussion first, it is unlikely 
that we
    would have developed any incentives. And some of his arguments are far too 
brief
    to carry their intended weight. The author cannot really expect to explain 
"Why
    Poor Countries Are Poor" in a single chapter, the highlight of which is an
    interview with a cabdriver in Cameroon.

    A final criticism is that too many of Mr. Harford's interesting details lack 
a
    source or a footnote. He gets Amazon's stock-price history wrong. (The 
author
    says that during the dot-com bust, it fell below its initial offering price;
    adjusting for splits, it never did.) Many other details lack the specificity 
or
    the attribution to enable one to check. But these are quibbles. For those of 
you,
    even now, still stuck in the bookstore cafe, this is a book to savor.