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Economic naturalist breaks down theory
By Wu Jiayin |
July 18, 2009, Saturday
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TEACHING economic principles usually involves a lot of charts, complex mathematical equations and jargon.
Yet in his book "The Economic Naturalist," Robert H. Frank innovatively takes a different approach: he attempts to reveal the economic principles behind everyday matters.
Not all Frank's explanations of certain daily enigmas are necessarily convincing or perfect, yet overall, the book is easy to read and educational.
Frank devotes each chapter to a basic economic principle and draws on many interesting and puzzling social phenomena to explain the principle in the form of question-and-answer.
For instance, when elucidating the cost-benefit principle, Frank asks why a soft-drink vending machine gives you one can at a time while a newspaper machine makes it possible for you to take as many copies as you want once you put money into it.
The answer, as Frank finds it, is that people might want more than one soda if possible, but few would need more than one copy of newspaper. Given the fact that newspaper machines are simple and thus cheap, companies that sell newspapers would naturally choose a cheap machine rather than an expensive one, other factors being equal.
When using the supply and demand principle to explain some seemingly paradoxical business practices, Frank raises another intriguing question: why do almost all taverns in the US offer free peanuts?
He says the reason is that nuts are salty and eating them increases thirst and the demand for beer, a major product. It is obvious that beers have a much larger profit margin than nuts.
Frank also advises people to apply economic principles in their everyday decisions to prevent irrational behavior.
"Economists often assume that people are rational, (however) behavioral economics challenges these assumptions," Frank says.
He adds, however, that "although social relationships are influenced largely by sentiment, they are by no means exempt from economic logic."
This reminds me of Dan Ariely's book "Predictably Irrational," which points out that people are not only irrational, but predictably irrational.
Ariely asks: "Wouldn't economics make a lot more sense if it were based on how people actually behave, instead of how they should behave?"
And that's what Frank is trying to do.
For example, he cites the "tragedy of commons," which says that people individually do what's best for them, yet sometimes the pursuit of self-interest makes everyone worse off.
Frank suggests people avoid the problem through coordination.
He cites the example of hockey players to illustrate.
Players usually prefer a league rule requiring helmets. While wearing helmets means more safety, players would choose not to wear them if there were no rule, as helmets limit vision. Only a rule can solve the problem, Frank observes.
Perhaps a weakness in Frank's book is that he tends to take things for granted when answering some questions he raises.
Take an example.
Frank asks why all drive-up cash machines in the US have Braille labels, as common sense tells us that blind people don't drive.
His explanation is that as cash machine companies have little reason to make two machines (which naturally means bigger costs), one with Braille and one without, they make the same machine for all the clients.
However, he himself points out later that this explanation is flawed. A person working in the industry told him putting Braille on the machines is mandated by a law benefiting the disabled.
Despite this shortcoming, the book is useful in explaining fundamental economic principles in a different way.
Yet in his book "The Economic Naturalist," Robert H. Frank innovatively takes a different approach: he attempts to reveal the economic principles behind everyday matters.
Not all Frank's explanations of certain daily enigmas are necessarily convincing or perfect, yet overall, the book is easy to read and educational.
Frank devotes each chapter to a basic economic principle and draws on many interesting and puzzling social phenomena to explain the principle in the form of question-and-answer.
For instance, when elucidating the cost-benefit principle, Frank asks why a soft-drink vending machine gives you one can at a time while a newspaper machine makes it possible for you to take as many copies as you want once you put money into it.
The answer, as Frank finds it, is that people might want more than one soda if possible, but few would need more than one copy of newspaper. Given the fact that newspaper machines are simple and thus cheap, companies that sell newspapers would naturally choose a cheap machine rather than an expensive one, other factors being equal.
When using the supply and demand principle to explain some seemingly paradoxical business practices, Frank raises another intriguing question: why do almost all taverns in the US offer free peanuts?
He says the reason is that nuts are salty and eating them increases thirst and the demand for beer, a major product. It is obvious that beers have a much larger profit margin than nuts.
Frank also advises people to apply economic principles in their everyday decisions to prevent irrational behavior.
"Economists often assume that people are rational, (however) behavioral economics challenges these assumptions," Frank says.
He adds, however, that "although social relationships are influenced largely by sentiment, they are by no means exempt from economic logic."
This reminds me of Dan Ariely's book "Predictably Irrational," which points out that people are not only irrational, but predictably irrational.
Ariely asks: "Wouldn't economics make a lot more sense if it were based on how people actually behave, instead of how they should behave?"
And that's what Frank is trying to do.
For example, he cites the "tragedy of commons," which says that people individually do what's best for them, yet sometimes the pursuit of self-interest makes everyone worse off.
Frank suggests people avoid the problem through coordination.
He cites the example of hockey players to illustrate.
Players usually prefer a league rule requiring helmets. While wearing helmets means more safety, players would choose not to wear them if there were no rule, as helmets limit vision. Only a rule can solve the problem, Frank observes.
Perhaps a weakness in Frank's book is that he tends to take things for granted when answering some questions he raises.
Take an example.
Frank asks why all drive-up cash machines in the US have Braille labels, as common sense tells us that blind people don't drive.
His explanation is that as cash machine companies have little reason to make two machines (which naturally means bigger costs), one with Braille and one without, they make the same machine for all the clients.
However, he himself points out later that this explanation is flawed. A person working in the industry told him putting Braille on the machines is mandated by a law benefiting the disabled.
Despite this shortcoming, the book is useful in explaining fundamental economic principles in a different way.
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