The Armchair Economist

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The Armchair Economist By Steven E Landsburg

BY: VARUN KUMAR (12175)

SHREETHA T.S. (12176)VINAY A HAMASAGAR (12177)

VINAY PRAKASH (12178)

VISHNU PRASAD (12179)

YUGHANDARA RAMESH M (12180)

ASHISH JAIN (12181)

SUBMITTED TO: Dr. MIHIR K MAHAPATRA

SHRI DHARMASTHALA MANJUNATHESHWARA

INSTITUTE FOR MANAGEMENT DEVELOPMENT

BOOK REVIEW



The Armchair Economist 2012-14

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TABLE OF CONTENTS

PREFACE ............................................................................................................................................... 2

WHAT LIFE IS ALL ABOUT? ............................................................................................................. 3

GOOD AND EVIL ................................................................................................................................. 5

HOW TO READ THE NEWS................................................................................................................ 9

HOW MARKETS WORK .......................................................................................................................... 12

THE PITFALLS OF SCIENCE ............................................................................................................ 15

THE PITFALLS OF RELIGION.......................................................................................................... 15

CONCLUSION ..................................................................................................................................... 16




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PREFACE

The Armchair Economist: Economics and Everyday Life is a book written by noted

professor of Economics, Sir Steven Landsburg. The book is a collection of everyday

examples illustrating important economic theories in a lucid language for easy understanding

of the concepts even by a non-economics background reader. The underlying theme of the

book, as Landsburg states on the first page, is that most of economics can be summarized in

four words: ―People respond to incentives.‖ In the first few chapters, Author tried to explain

the Responsiveness towards Incentives with quite a many examples such as Accidents, safety

legislations, etc. He also tried to explain the rationality issues with the economist‘s slogan -De

gustibus nonest disputandum — there's no accounting for tastes. With this observation,Landsburg discusses some unexpected effects of various policies.

Part Two entitled "Good and Evil" provides some insight as to how the pure

Economists think. Dr. Landsburg correctly points out that public policy-making is inherently

flawed because it is not based on any fundamental principles relating to what constitutes good

or fair.

Dr. Landsburg also explains the Coase Theorem of property rights using the example

of a doctor whose patients are upset by the noisy candy-making machines that are operated in

the building next door.

The rest of the book includes expositions on a wide range of topics, including budget

deficit, unemployment, economic growth, and cost-benefit analysis.

The group enjoyed the book because it is very easy to understand and the author‘s

way of explaining the things is quite comprehendible. The author has rightly pointed in one

of the chapters that the fact that you have chosen to read this book is a sign that you have

probably overvalued it in relation to all the other books you could have read instead.

Landsburg has written a very clear introduction to the thinking of a particular kind of

economist: those of the so-called Chicago school of which he is himself a member. He has

pointed out that as Economics students, the group used to answer almost all problems




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encountered by the World at that time by ―Demand and Supply‖, but he realized later, with

experience, that the problems were much more complex. The book tries to explain such

issues in a comprehendible manner and hence, we recommend this book to all.

THE ARMCHAIR ECONOMIST: ECONOMICS AND EVERYDAY

LIFE

The Author tried to amalgamate the general concepts of Economics with the daily

activities. Here‘s a brief summary of, what the author wants to express and what we learnt.

WHAT LIFE IS ALL ABOUT?

The first chapter is about the critical role played by incentives in economic behavior.Dr. Landsburg explains that the introduction of a regulation causes a consumer to change his

behavior. He says that economics can be summarized as ―people respond to incentives‖. The

author says that if the prices are allowed to rise freely, customers will reduce their

consumption. It clearly depicts the relationship between quantity demanded and price of the

product as explained by Law of Demand. As per this principle, the incentives provided to the

drivers in the form of seat-belts, padded dashboards, collapsible steering columns, dual-

breaking systems and penetration-resistant windshield did not result in a decline in vehicular

accident-related deaths as lawmakers had anticipated. While the use of safety belts helped to

prevent some deaths, this phenomenon was offset by the propensity of drivers to drive less

carefully because the incentive to drive with prudence in the absence of seatbelt protection

had disappeared.

The seat-belt regulation did reduce the number of driver deaths by making it easier to

survive an accident. But it also increased the number of driver deaths due to reckless behavior

and the number of pedestrian deaths. There were more accidents and fewer driver deaths per

accident, but the total number of driver deaths remained essentially unchanged. At the end of

the day, incentives do matter. One cannot underestimate the power of incentives

Chapter Two explores talks about rational chaos. For example, why don't rock concert

promoters raise ticket prices in the face of a sellout? The answer here is simple. Rock concert

tickets sell out in advance even if the promoters increase the price of the tickets. But the




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promoters don‘t increase the price. The rationality of this decision is argued and the probable

reasons for not increasing the ticket prices are as follows:

The long queues for the concert are a good advertisement to the show. Therefore, the

promoters do not increase the ticket price. But the author argues that the high selling price of the tickets is also a good advertisement to the rock shows.

The other reason for not increasing the ticket prices is that the promoters want a

teenage audience who buy rock memorabilia whereas adults don‘t buy those. Therefore it is

necessary to keep the ticket prices affordable.

Describing the decisions made by individuals as rational and finding the reasons why

the particular behavior is rational is one of the basic principles in microeconomics.

In Chapter three, ―Truth or consequences‖, The author speaks about how insurance

premium rates are conferred based on consumer‘s living habits and how cautious behaviour

helps consumers gain from the insurance policies but study reveals that insured people are

more reckless just as safety belts induces drivers to be more reckless in their driving.

In recent years, economists have discovered that, contrary to all intuition, there are a fantastic

number of mechanisms that can often induce people to reveal everything they know. The

following are the two perfect examples:

There is a class of logic puzzles where the speaker visits an island populated entirely

by liars and truth tellers. Liars always lie and truth tellers always tell the truth. Unfortunately,

the two are indistinguishable. The problem is usually to draw some inference from the

utterances of various islanders or to formulate a question that will elicit some hidden

information. The simplest problem is: When you meet an islander, what single question

enables you to identify whether he is a liar? "Are you a liar?" doesn't work, because truth

tellers and liars both answer "No." A common solution is to ask, "How much is two plus

two?"

In Joseph Conrad's novel Typhoon, a number of sailors store gold coins in private

boxes kept in the ship's safe. The ship hits stormy weather, the boxes break open, and thecoins are hopelessly mixed. Each sailor knows how many coins he started with, but nobody

knows what anybody else started with. The captain's problem is to return the correct number

of coins to each sailor.

Have each sailor write down the number of coins he is entitled to. Collect the papers

and distribute the coins. Announce in advance that if the numbers on the papers don't add up

to the correct total, you will throw all of the coins overboard. It turns out that even when a

decision maker has no information at all he can frequently design a mechanism that elicits

absolute truth from all concerned.




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In Chapter four, the author explains this concept with ―the tale of two cities‖. The

cities included are Cleanstown and Grimyville. Cleanstown has pristine air while Grimyville

air is affected because of the local steel factory. The only differing factor between the two is

the life expectancy in Grimyville is 10 years less than that of Cleanstown. A house that rents

for $10,000 a year in Cleanstown can be had for $5,000 in Grimyville. If it weren't, peoplewould leave Grimyville and rents would fall even further. The Grimyville Council passed a

Clean Air Act that requires Grimyville Steel to adopt extensive antipollution measures. Soon

the air in Grimyville will be as pure as the purest air in Cleanstown. And when that happens,

the rents in Grimyville will rise to Cleanstown levels. But as per the author, this legislation

does little good to the Grimyville residents. If they'd wanted to live in Cleanstown, they could

have moved there long ago but the residents were more concerned about the rents than clean

air. The rents would increase because of the legislation thereby making the residents of

Grimyville worse off than before. Earlier they were indifferent between the two cities but

now the act has uprooted the Indifference Principle running its smooth course in these cities.

The only people who stand to gain from this entire affair are the property owners of

Grimyville, who can now command higher rents than they did before. The Clean Air Act is

equivalent to a tax on Grimyville Steel with the proceeds distributed entirely to Grimyville

landowners.

In Chapter five, Steven E. Landsburg mentions about the students learning behaviour

and introducing fictitious business as a computer game. In this game of economic life,

success is measured in the same way economists measure success in the Game of Life Itself,

not by asset holdings or productivity but by the amount of fun you have along the way.

Students would learn a lot from this game. They would learn that your success in life

is measured not by comparison with others' accomplishments but by your private satisfaction

with your own. They would learn that in the Game of Life there can be many winners, and

one player's triumphs need not diminish anybody else's. They would learn that hard work has

its rewards, but that it also takes time away from other activities, and that different people

will make different judgments about what to strive for.

Most important, they would learn that consumption and leisure, not accumulation and

hard work, are what Life is really all about.

GOOD AND EVILAuthor starts the Pitfalls of Democracy with the ―fairness‖ of paying taxes and moral

philosophy followed by policy analysis. To defend a policy he suggests that our task is not to

demonstrate that it does some good, but that it does more good than harm. In the real world

any meaningful policy proposal must entail a huge number of trade-offs involving




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innumerable gains and losses to innumerable people. For policy makers, it is easy making

long lists of pros and cons, but they forget that we must decide how many cons it takes to

outweigh a particular pro.

He later admits that he do not yet know what justice is but believes that economics

illuminates the possibilities. He feels ―Majority‖ is one of the approaches to justice and later

on views the philosophy of rights in economics point of view by taking the concept of

measuring the happiness.

In Chapter seven, the author states what economists mean when they talk about

efficiency. ―If it isn't clear to you that rescuing the dollar is inefficient, then you and I are

using the word efficiency in different ways.‖ Speaking about taxes, the most obvious sense in

which taxes are bad it that it‘s not fun to pay them. But this is not conclusive; one could

equally well argue that taxes are good because it‘s great fun to collect them. As each tax

dollar paid is a tax dollar collected, the accounting so far shows that the good exactly cancels

out the bad.

He also states that economists agree that taxes are bad because they are avoided,

which results in economic losses. Taxes nearly always do more harm than good. To collect a

dollar, you need to take someone's dollar; almost inevitably, in the process, you discourage

somebody else from buying. When a policy does more bad than good, then we call it

inefficient and tend to deplore it. This mode of analysis is called characteristic of economists,

who doesn‘t consider ledger and accounts but considers only the impact on individuals,

whether they gain or loss.

The logic of efficiency and why economists tend to favour it is discussed as it is the

only alternative to inefficiency and mentioned that general level of prices is determined by

supply of money.

In Chapter eight, Steven compares Darwinian evolution, advancing the species

biologically by allowing only the fittest to survive, with Adam Smith‘s economic actor who

intends only his own gain but is nevertheless led "by an invisible hand to promote an end

which was no part of his intention," that end being the welfare of society, which economists

call efficiency.




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He speaks about how an economist describes inefficient outcome with an example of

comparing birds of paradise with students and employers with female birds. Rational

behaviour of humans is compared with ―herd of cows‖, as it is not a vaccine to inefficiency.

Invisible hand theorem is now called the First Fundamental Theorem of Welfare Economics,

and it states – ―Competitive markets allocate resources efficiently‖.

The Second Fundamental theorem says ―No matter which of the many efficient

allocations you want to achieve, you can always achieve it by first redistributing income in an

appropriate way and then letting competitive markets function freely‖.

The critical feature in the formulations and proofs of these theorems is the existence

of market prices. Without prices, there is no reason to expect efficient outcomes. This was

explained considering the czar of American culture (wheat market).

The Invisible Hand theorem tells us that if we seek the source of inefficiency, we

should look for markets that are missing, but not for markets that exist. We should look for

goods that are not priced, which often means that we should look for goods that are not

owned.

In Chapter nine, the author speaks about the concept of Economics in the Courtroom.

In law and economics, the Coase theorem, attributed to Ronald Coase, describes the

economic efficiency of an economic allocation or outcome in the presence of externalities.

The theorem states that if trade in an externality is possible and there are no transactions

costs, bargaining will lead to an efficient outcome regardless of the initial allocation of

property rights. In practice, obstacles to bargaining or poorly defined property rights can

prevent Coasian bargaining.

Dr. Landsburg explains the Coase Theorem of property rights using the example of a

doctor whose patients are upset by the noisy candy-making machines that are operated in the

building next door. Bridgman made candy in the kitchen of his London home. In 1879, Dr.

Sturges built a new consulting room at the end of his garden, adjacent to Bridgman's kitchen.

Only after the construction was complete did the doctor discover that Bridgman's machinery

made noise — so much noise that the consulting room was unusable. Sturges brought suit in

an attempt to shut down Bridgman's business. But, the judge ruled for Sturges. When




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negotiations between the doctor and the candy-maker are possible, it is shown that resources

are most efficiently allocated when they are directed to their most profitable use. A judge is

unable to identify and thus direct resources to their most profitable use. This can only be

decided by the owners of the resources. In the event that the doctor's business is more profitable than making candy, the doctor should pay the candy-maker a fee that is sufficiently

large enough to motivate him to cease making candy and allow the doctor to enjoy a

prosperous practice.Economists are usually far more concerned about the allocation of

resources than they are about transfers of income between individuals. That is, it does not

affect what gets produced, or the means of production.

There is a flip side to the Coase theorem, which can be dealt as :

When circumstances prevent negotiations, entitlements — liability rules, property

rights, and so forth — do matter.

For certain cases the court's decision matters, and the efficient decision depends on

the particulars of the case.

Dr. Landsburg continues to argue in this chapter on the benefits of the price system.

He presents a cogent argument as to how signals by consumers and producers are best

reflected in the price-setting mechanism of a free market. Adam Smith would be very happy

with the explanation of the invisible hand concept presented herein. His conclusion is that

inefficiency exists when markets are missing. This is a truism for economists. Unfortunately,

the merits of a free-market system in which prices convey information about wants and needs

is an idea that is woefully misunderstood by the public at large.

Consider air pollution. If a market existed for clean air, local residents and polluting

factories could set the appropriate price for clean air and the optimal amount to be

maintained. Because this market does not exist, the exact benefits and costs associated with

clean air cannot be assessed and regulation is promulgated to provide for less pollution.

Unfortunately, as Dr. Landsburg explains, regulation further distorts the supply and demand

equation, and the result is a wholly unsatisfactory one for all parties.




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HOW TO READ THE NEWS

In Chapter ten, the author speaks about choosing sides in the drug war. Richard J.

Dennis is chief adviser to the Drug Policy Foundation in Washington, D.C. He is also a

commodities trader; Dennis's article entitled "The Economics of Legalizing Drugs."

Principle 1: Tax revenues are not a net benefit, and a reduction in tax revenues is not a

net cost

Dennis says if the drugs were legalised then government would earn around $13

billion, but tax revenue is the money from one‘s pocket into another‘s. There is nothing like

gain or loss, so the tax revenue is neither a net benefit nor a net cost.

Principle 2: A cost is a cost no matter who bears it

Cost-benefit analysis makes no difference; it simply totals all of the good that arises

from an action and contrasts it with the bad. If a drug dealer is unhappy or unproductive when

he is in jail, his losses in that dimension are as much social costs as the jailer's salary and the

cost of prison construction.

Principle 3: A good is a good no matter who owns it

When a TV is stolen by a thief it has only moved from one place to another and still

remains a source of entertainment whether the recipient is a thief or anyone else. Thieves do

have social costs – time and energy and their productive capacity.

Principle 4: Voluntary consumption is a good thing

Assumption – Legalisation of drugs lower prices and hence more consumers.

Consumers are only reaping a benefit and not bearing a cost. Dennis counts this as a cost of

legalisation.

Consumer‘s surplus- maximum you are prepared to pay – the amount you actually

paid in the marketplace.

Principle 5: Don’t double count

―The Economics of legalising drugs‖ failed in 2 super principles – Only Individuals

matter and all individuals matter equally. So the government revenue by legalising drugs




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cannot be counted as the government is not an individual. Price changes are often resulting

from changes in technology or legal environment.

In Chapter eleven, the author talks about the myths of deficit. The myths about the

deficit underlie three grand misconceptions. One is that the numbers that are officiallyreported and widely analyzed are actually reflective of anything approaching economic

reality. Another is that government deficits clearly cause high interest rates via simplistic

mechanisms that people think they understand. A third is that certain identifiable groups

("future generations," the private sector generally, the export industry in particular) are

clearly and unambiguously hurt by deficits.

The parable of the purchase agent of making shopping decisions on your behalf helps

us understand that when you assume a debt, the costs and the benefits cancel each other out

exactly. The parable used does not take into account other factors such as death of theindividual in six months‘ time and consumer preferences on being taxed in lump sum or in

instalments which helps equate the deductions and does not pinch the consumer‘s disposable

income. It demonstrates that deficits, in and of themselves, are no better or worse than

taxation and makes it plausible that our primary concern should be with the level and

composition of government spending, rather than with how that spending is financed.

Myths about what the numbers mean: The author Landsburg clears speaks about how

the various errors occur while calculating debt by the government and how the government

overestimates the deficits by considering benefits as transfer of payment and not taking into

account current inflation rates. Myths about interest rates: The author talks about flow of cash

inside the economy and how it circulates among various individuals and also how

government has to lend money at the same rate at which it borrows from individuals. Myths

about the burden of the debt: The author specifies how if we make a one-dollar debt payment

today, we can indeed free our grandchildren from a two-dollar debt burden tomorrow, but

only at a cost. He also mentions about how if purchased excessively by government will

reduce the availability to the private sector and lastly this affects the economy‘s export which

consumers draw an analogy by saying that interest rate increase leads to exchange rate

decrease.

In Chapter twelve, the author compares economy with energy. Great depression and

its impact by reducing lifetime consumption and it forces you to adopt an inferior pattern of

consumption, alternating feast with famine instead of spreading your good and bad fortunes

more evenly across your life. Mr. Landsburg very creatively mocks at the letter received from

Mr. Rohatyn a prominent financier, chairman of New York's Municipal Assistance

Corporation, and a member of President Clinton's circle of advisers to New York times which

defies basic economic principles such as value of money does not remain constant, income

tax does create an impact, borrow to finance losses that have already been incurred by

repaying in equal instalments. In general the consumer behaviour of reducing the impact byspreading over a larger amount of time the impact during economic crisis is what Landsburg




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addresses. The Rohatyn Plan is a recipe for a severe recession, justified by an invented

principle that implies that recessions are desirable. Another letter speaks about Mr. Ronald

Breslow New York, Dec. 18, 1991 who is a professor of chemistry at Columbia University

and a winner of the National Medal of Science who needs to focus on circulation of economic

resources within the economy. The other articles mentioned in this chapter also pay minuteattentions to aspects such as economies of scale, consumer surplus, control leads to reaching

market equilibrium, false monopoly and so on. The most ironic example which addresses that

interest in loan is a form of economic gift defies the very basics of economics and how it

functions in the economy.

In ―How Statistics lie‖, the author wants to convey that although statistics are used

very much in economics, but people make mistakes in interpreting the statistics. The author

takes various examples to make us understand how statistics can mislead us. For instance, he

writes about unemployment. According to him, when the unemployment statistics is

measured by surveying the people on a given day, and asking them how long they have been

unemployed, and averaging the responses, it is possible that people who are unemployed for

long period are very likely to be unemployed on that day and the people who are unemployed

for short period are very unlikely to be unemployed on that day, so the final statistics about

unemployment will indicate something different as compared to the reality. Author, thus

wants to prove that although statistics do not lie, but the result that it indicates may not be

completely true. Similarly, he talks about Gross National Product and writes that it is not the

exact measure of countries well-being as it takes into account all goods and services produced

in the economy but it does not consider many goods and services that are produced in

household. For example, if you pay a maid to wash your dishes GNP reflects it, but if you

wash it yourself it does not do so. He believes that there is no single way to construct such

measures which is not biased in one way or the other. Finally, he says that as an economist

we should try to identify these errors and correct them as best as we can.

In chapter fourteen, the author tells us that as an economist we need to develop the

habit of looking deep into various policies prevailing in markets and indulge ourselves in it.

He further writes that there are always two sides of coin and as an economist we should

carefully analyse both the sides of coin. He further discusses whether quality can be related to

profit or not, in order to make us understand how to analyse both sides of coin. He argues that

although there are many people willing to pay more for better, but there are also many other

people who prefer to pay less for inferior quality products. It is beneficial to sacrifice quality

in exchange of keeping costs down in which case the profit will not be affected, but you




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cannot sacrifice quality without keeping costs down. Further he talks whether literacy is a

good thing or not. He says that even if it is a good thing but we cannot decide it is good till

which extent. If literacy is too much then the cost of education will go high and so it might be

possible that people will get good returns if they spend these money somewhere else. Soaccording to him, we should encourage further literacy until the additional costs begin to

exceed the additional benefits. He also mentions that it is not easy to find answers to

questions which include to which extent solution to any problem is correct. But as an

economist we should always try to do cost benefit analysis of various policies.

In ―Some modest proposals: The End of Bipartisanship‖, the author talks about how

prices are decided and the price discrimination prevailing in today competitive markets. He

also mentions bipartisanship, whereby he writes that when an industry is dominated by two

highly profitable firms, either there is a price war or there is secret agreement between them.

This thing is applicable in only duopoly and to some extent in oligopoly markets. He then

makes some proposals for avoiding bipartisanship in government. For example, when the

presidential elections come both the parties makes various promises but none of them stick to

their promises after coming to power due to bipartisanship. He suggests that in order to tackle

this situation the promises made by candidates during presidential elections should be

enforceable legally. Further, he wants us to recognise the trade-off that government faces by

giving one example where the accused criminal out on bail commits a shocking murder while

awaiting trial. In such situation it is difficult to figure out what steps should be carried out to

stop such things as there is a trade-off between the public safety and the rights of accused.

Finally, he concludes the chapter with an observation made by him which says that ―if the

best policy proposal seems bizarre, it might be only because we are unused to seeing anything

like the best policy proposal in action.‖ Each of these proposals has some flaws which can

only be known by once the policy is experimented.

HOW MARKETS WORK

In the Chapter, ―why popcorn costs more at the movies and why the obvious answer is

wrong‖, the author here explains the mystery of why popcorn is so expensive at the movie

theatre. The general notion among all is that the movie owner has a monopoly, so he sets

prices according to his will. But the author argues that theatre owner has monopoly over

many things in the theatre like the restrooms and lobby. But making them pay for that will




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make theatre less attractive. When we go to watch a movie and buy a quart of popcorn, we

may be paying $7 for the ticket and $1 for the popcorn or $5 for the movie and $3 for the

popcorn. End of the day owner collects $8. He also says keeping the movie prices feasible

and charging more on popcorn will make popcorn lovers pay more and non-snackers see onlythe movie. Popcorn lovers will enjoy their evenings.

Price discrimination of products are done everywhere, it is economic jargon for

selling the same product at more than one price. Airlines, hotels, doctors and universities

charge different prices. Price discrimination works only when the seller has a monopoly, to

understand this statement consider if a theatre reduces its popcorn price from $3 to $2.50,

which will make him earn profits but another theatre will also reduce its price and there will

be price wars. Author finds price discrimination during his trip to New Mexico and in taxis.

The author explains a scenario in an auction, where we are the highest bidder and

this infers that nobody in the auction thought the item was worth your bidding price. This

observation suggests that you have overestimated the true value. This phenomenon is called

the winners curse by economists. In some circumstances winners curse is not an issue

because auction goers maybe certain how much to pay for the item, without regard to how

much others are willing to pay. The seller of the auction is also a strategic player in the

auction game because he sets the rules. There are different types of auctions such as English

auction, Dutch auction, Glum Losers auction and first-,second-,third-,fourth- and fifth- price

sealed bid. The seller can choose any one among these to maximize the selling price. The

author goes on to tell that sellers using vastly different rules do equally well on average,

because the argument is technical. Different rules are used accordingly to the auction

conditions. English auction are by far the most common and appear to be the form most

favoured by auctioneers. If you are bidding for a painting we will be willing to me any price

for it. The winners curse is initially the buyer‘s problem but becomes the seller ‘s problem

also because buyers defend against it by letting their bids downward.

Economists study interest rates because interest rates are a pervasive social

phenomenon and economists aspire to understand everything about human society. The

interest rate has to be whatever is necessary to convince the average family to consume its

average share of the goods that are available for consumption. Basically there are two interest

rates – nominal interest rate and real interest rate. Nominal interest rate does not account for

inflation, whereas real interest rate does. The interest rate is not the price of money. It is the




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price of current consumption. Keynes and Friedman‘s works prove that money can affect the

interest rates in the short run and its effect is through subtle channels. In the case of any

economic development or situation, interest rates change. If the supply of a good falls, its

price rises until consumers demand no more than is available. We can assume good to becurrent consumption and price to be interest rate. As the interest rate rises, savers choose to

save more and borrowers choose to borrow less. Interest rates continues rising, until the

consumer has decided to spend less. In general, if the supply of goods falls, as when the

government wastes resources, the interest rate must rise. If the supply of goods rises, the

interest rate must fall.

A random walk is not a theory of prices; it is a theory of price changes. When firms

do something, it affects the stock price and it might go up or down depending on the

situation. According to the efficient markets hypothesis, no investment strategy based on the

use of publicly available information can successfully beat the market. The efficient markets

hypothesis and the random walk hypothesis are closely related, but are quite distinct. The

random walk hypothesis says only that you can't get rich by observing price histories; the

efficient markets hypothesis says that you can't get rich by observing anything that is publicly

available. Today's price is the best possible predictor of tomorrow‘s. Tomorrow's price is

today's price, plus a random adjustment. The current price predicts the future price and it does

not depend past price. To earn large rewards, you must accept risk. The trick is to accept no

more risk than is necessary. The method is to diversify, by recognizing assets that tend to

move in opposition and by using this information judiciously. Random walk theory implies

that you can never improve your prospects via a strategy that relies on examining past price

behaviour. With or without random walks, financial markets continue to reward hard work,

talent, and occasionally luck.

Author in the chapter titled, ―The Iowa Car Crop‖ has discussed two technologies for

producing automobiles in America, one is to manufacture in Detroit and other is to grow

them in Iowo. Now, allocation of production of fleet of cars can be allocated between Detroit

and Iowo such that a competitive price system minimizes total production cost. Protecting

Detroit against the foreign competition impoverishes nation as a whole. Trade theory by

David predicts first that if you protect American producers in one industry from foreign

competition, then you must damage American producers in other industries.




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THE PITFALLS OF SCIENCEAuthor in this chapter , ―Was Einstein Credible? The Economics of Scientific

Method‖, speaks about Einstein‘s application of relevancy of time with innovation and

application of game theory. He compares the theory of knowing and unknowing with probability. He also speaks about the problems that scientist under go in the process of

discovery. He also debates about novelty which has gone on for over four hundred years

without any of the participants, feeling obliged to specify his model of scientific behaviour.

He says Beware of great thinkers who advertise their conclusions without revealing their

assumptions? He says he likes Economics because it insists on a higher standard.

The Author in the chapter, ―New, improved Football: How Economists go wrong‖,

showed how economists go wrong when they apply theories directly in their models. He cited

an example of an economist who has done immense research on football, as a result he was

called by commissioner of national football league to counter punting but he failed. The same

economist failed to impose government policy of increase in consumption of cornflakes.

Author also cited the example that earlier people thought inflation will result in employment,

but with few instances they realized it not like that always. Here an author wants to say that

an economist who relies on nothing but statistical extrapolations has no chance at all.

THE PITFALLS OF RELIGIONAuthor in this chapter has discussed the thinking of environmentalist and why as a

economist he is not an environmentalist. He cited few examples such should there be a

parking lot against the woodland. Some of the arguments are difficult to agree, such as

recycling paper being bad for trees, but are quite obvious which make you think differently

and more lucidly. He also cited an example in which environmentalist call for ban on

carcinogenic pesticides which will results in less production of fruits and vegetables. Also he

discussed rich countries want to transfer pollution to poor countries which are ready to accept

some pollution generating industries in exchange of jobs. Author believes that in the absence

of explicit contracts, people who lecture other people on their "responsibilities" are almost

always up to no good.




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CONCLUSIONThe book ‗Armchair Economist: Economics and Everyday Experience‘ great, easy-to-

read book about economic principles. Although reading this book requires some basic

knowledge of economics in order to connect it with theory, but author has wonderfullyexplained how economics is used in day to day life with the help of brilliant examples and

tried his best to make it easy to understand for people who doesn‘t have any knowledge of

economics. The book has totally changed our perception about economics. Before reading

this book we haven‘t ever thought that economics can be ap plied at every point of your life. It

is a good book about how most people fail to apply basic economic principles in their lives.

He first writes what the general public thinks about the issues and then explains how

economists think. What Landsburg argues is that a world run solely on an economic basis

would produce some bad things, some good things, but that the good or the bad outcome is

incidental. I liked this book better than Fair Play, mainly because Landsburg admits that he

doesn't have all the answers to the questions he brings up. Moreover, where he has an answer,

he tends to refer to it as the best explanation he's come up with so far.

On the other hand we also felt that sometimes he keeps on giving examples so much

that reader gets confused whether which example to remember and connect with the

particular topic. Also, most of the times he keeps on talking about opinions rather than facts.

Reader will find it more interesting if he gives factual examples. Also, as an Indian reader we

are not able to understand some of his examples which are about events and places related to

US. So, as an international author he should adopt universal approach.

In short, this is a fascinating book. In spite of its absurdities it should be read by

anyone who wants to know how economists think about the world and how we should look at

world economically.

The Armchair Economist

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Transcript of The Armchair Economist