Trade-Offs

I just finished reading Trade-Offs: An Introduction to Economic Reasoning and Social Issues by Harold Winter. I thank Peter Cavagnaro of the University of Chicago Press for sending me a review copy.

I think Trade-Offs is a fine little book. It’s one of a number of recent books—Freakonomics, Naked Economics, Sex, Drugs and Economics, How to Think Like an Economist, The Armchair Economist, Hidden Order: the Economics of Everyday Life, and Thomas Sowell’s Applied Economics—that try to convey the excitement of economics to lay readers. Trade-Offs, like these other books, keeps math and jargon to a minimum.  What sets Trade-Offs apart, I think, is its tone: the other authors at times present economics with a near-missionary zeal; readers may resist what sounds like prosletyzing. But Professor Winter is modest, even-handed, and extraordinarily calm.  This is an especially useful book for readers who suspect economists are all arrogant and economics is completely crazy.

Winter’s themes are simple. Economics is not the only way to think about public policy issues, but it is a good way. To think carefully about almost any public policy, one will have to think carefully about trade-offs.  (Winter quotes Thomas Sowell: “There are no solutions, only trade-offs.”). And finally, “One role of social policy . . . is to try to provide incentives for private parties to take into account the social costs they may impose on others.” (p. 17)

Winter develops these themes with examples drawn primarily from health economics and law. What should public policy be toward organs for transplants? What is the best way to protect the intellectual property of authors? What should be done about smoking? What should be done about other externalities—should we use liability rules or negligence rules? Civil law or contract law or regulation? Along the way, Winter does three things:

1.    Asks some interesting questions. “Driving and smoking have a lot in common. They are both potentially dangerous activities, and they have both attracted the attention of social regulators. If anything, driving is a far more regulated activity than is smoking. So why has smoking been vilified but driving hasn’t?”

2.   Illuminates some surprising possibilities. Banning cigarette advertising could well make incumbent cigarette manufacturers better off; widespread AIDS testing might increase the spread of the disease; the optimal rate of blackouts is positive, so the best government policy might be to do nothing new.

3.   Introduces a surprisingly large amount of economics. In just 124 small pages, Winter covers, among other ideas, how economists estimate the value of a statistical life (and what the reasonable purpose for such estimates is), why trade is mutually advantageous, why price does not equal consumer value, what market failures are and how they can be addressed, the Coase theorem, the possible dynamic efficiency of monopolies, the theory of offsetting behavior, and the economic purpose of “fair use”.

     His prose is consistently straightforward and clear. Some of his exposition is striking.  One example is his proof that drivers will take more risks when wearing seat belts than when not wearing them (p. 88). Another example is his discussion of markets: markets can produce efficient allocations without anyone knowing what the efficient allocation is and markets, unlike governmental allocations, don’t require “a third party to decide where resources are best allocated” (p. 27). But, he quickly points out, markets are neither necessary nor sufficient to achieve efficient allocations.

I have only a few nit-picks.

  1. In chapter 2 Professor Winter tells the familiar story of the Ford Pinto. He discusses the infamous Ford memo that argued against installing an $11 part in the Pinto that could have prevented a number of horrible deaths. But he doesn’t discuss (and his references don’t list) an important article by UCLA law professor Gary Schwartz. Schwartz argued, “. . . everyone's received ideas about the fabled 'smoking gun' memo are false. The actual memo did not pertain to Pintos, or even Ford products, but to American cars in general; it dealt with rollovers, not rear-end collisions; it did not contemplate the matter of tort liability at all, let alone accept it as cheaper than a design change; it assigned a value to human life because federal regulators, for whose eyes it was meant, themselves employed that concept in their deliberations; and the value it used was one that they, the regulators, had set forth in documents. In retrospect, Schwartz writes, the Pinto's safety record appears to have been very typical of its time and class." (The article is not available on the Net or even in Lexis; this summary is from http://www.overlawyered.com/archives/000063.htm.)

  1. Also in chapter 2, when discussing how economists value a statistical life, Winter should have discussed the newer approach of “risk-risk analysis”. Laypersons typically find the assigning of a dollar value to life quite disturbing. “Risk-risk analysis” is a more appealing approach. (See, for example, http://ideas.repec.org/a/kap/jrisku/v8y1994i1p5-17.html.)

  1. Winter asserts on p. 35, “In general, the more firms there are producing an identical (or very similar) product, the lower price will be.” This is an incautious statement. First, it doesn’t necessarily follow from the simple theory of monopoly he discusses. And second, the empirical evidence supporting the statement is thin to nonexistent.

But none of these complaints is a big deal. For lawyers and public policy fans who don’t know economics, or think little of it, or for anybody wanting a clear, simple, and interesting explanation of the heart of economics, this is a book worth reading.

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