Wednesday, July 30, 2008

Book Review: The Logic of Life

A book written by an economist, that attempts to use economic theories to explain pretty much everything in life, probably sounds more like a cure for insomnia—perhaps even masochism—than a page-turner. But in The Logic of Life: The Rational Economics of an Irrational World, author Tim Harford, writer of the Undercover Economist column for the Financial Times, pulls off a truly amazing feat, making economics not merely interesting, but fascinating.

Just to make sure he's got your attention, Harford begins his book with discursions on the economic rationales underlying teen sex, Mexican prostitutes, and the world of professional poker. In this last topic, Harford introduces us to Chris "Jesus" Ferguson, a doctoral student at UCLA who used John von Neumann's game theory to become one of the top professional poker players in the world:
    "By the late 1990s Ferguson was one of the most recognizable sights in poker, earning the nickname `Jesus' as he hid his face behind a long beard and hair that cascaded over his shoulders, buttressed by wraparound mirror shades and a big cowboy hat. He never spoke during play, trying to remove any sign of human emotion; he didn't pay much attention to other players' nervous tics either. He drew his information only from the cards, like a computer—or like von Neumann himself."

After these first few sections, Harford gets more serious, but no less engrossing. He addresses a wide range of topics, demonstrating in each case how rational economic theories explain seemingly irrational human behavior: nuclear war, cigarette smoking, our choice of snacks, speed dating, marriage, divorce, and why young women are often attracted to older men (and vice versa, though economics seems superfluous in that case).

He devotes significant space in the book to the problem of racism, particularly in relation to blacks in America, showing that while racism is reprehensible, it is also, unfortunately, rational. The contention is that blacks, as a group, have under-invested in their own education and skills development, believing that white racism prevented them from getting a fair shot at economic opportunities. In response, employers (of many colors, not only white) have preemptively denied opportunities to blacks. The result is a tragic downward spiral.

The problem is vexing. Obviously, blacks have faced significant discrimination in America, unfairly and in many cases maliciously. On the other hand, the problem can't be reduced to "white people don't like people with dark skin." Look at southeast Asians as an example of a group that has had a very different experience in America (and elsewhere), that of a virtuous upward spiral. While an employer may invite Mary in for interview before Latoya, Krishna may very well get the interview before Mary. Sterotypes can be unfairly positive as well as negative.

The solution, therefore, is going to require changes in behavior, and beliefs, on the part of both blacks and whites. Not an easy task, but possible.

Along the way, Harford explains why your office, dysfunctional though it likely seems, is perfectly rational: with a relatively small number of exceptions (sales, windshield replacement, pole vaulting), most professions are either hard to measure, or easy to measure but nevertheless difficult to compensate on that basis: "In most jobs, there are more than two variables at play and some are very hard to pin down. For those jobs, managers need a more holistic, all-encompassing measure of performance." This leads to a discussion of "tournament theory"—paying employers based on their performance relative to each other, as in a tennis tournament. The trick to applying tournament theory to employee pay, of course, is to make sure bonuses incent employees to do great work, not merely to undermine and backstab each other.

While Harford's book is very, very good, it does have three minor weaknesses. First, the author approvingly and at length quotes from Freakonomics, a book which had an unfortunate tendency to extrapolate from the specific to the general among other logical fallacies. John Lott's Freedomnomics: Why the Free Market Works and Other Half-Baked Theories Don't, though lesser known, is a far superior work.

Second, while Harford does an outstanding job of demonstrating how various economic theories can be used to explain particular decision processes or types of behavior, he ignores the possibility of other causes. In other words, while he does a fine job of showing how A causes B, he fails to even acknowledge that C, D or Z might provide a much better explanation. On various topics, religious faith, patriotism, family ties, environmental concerns or a one of a host of other factors may be more important that economics, but Harford simply ignores that possibility. A very strong case can be made, for example, that Brits would be better off economically with the Tories in charge, yet the majority don't vote that way.

Finally, Harford at times ignores his own conclusions. After demonstrating convincingly that human prosperity is directly correlated with two factors—freedom and innovation—he expresses concern over pseudo-problems like global warming. If he believes his own research, and he should, he would realize that global warming cannot be a problem. When the incentives to change behavior become significant enough, people will change them. And even if the most dire theories of global warming are accurate, and human burning of hydrocarbon fuels is a significant cause, then only the innovation of free economic actors—not the regulation preferred by those on the left—can ultimately solve the problem.

These quibbles aside, The Logic of Life is a fascinating and enlightening book that deserves a wide audience.


Contact Tom Pick: tomATwebmarketcentralDOTcom


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