Wednesday, January 26, 2011

Filthy Lucre by Joseph Heath

Almost everyone I know should read this book; yes, it is that worthwhile. By examining the major economic fallacies that confuse the ideological right and left, Heath performs a great service. While it might be useful to have some prior economics exposure before reading Filthy Lucre, it isn’t necessary. In fact, it would likely make the key message – things are complicated – more salient.
For those with some economics exposure, this book will be a nice refresher as well as likely teach you an important thing or two (that annoyingly wasn’t covered in your previous classes).
Finally, if you have a great deal of experience with economics, as in you don’t have time to read this because you are working on your doctoral dissertation in economics, then you should buy it for a friend to help them better understand the economic way of thinking and avoid the common fallacies most make.

Personally, I enjoyed the reminder of complexity and how changing incentives within systems can have ripple effects within and outside of it, and how some core aspects of human behaviour are largely unchangeable. I appreciated learning about the cost of collecting taxes, the costs of transference, the importance of markets as instruments for organizing exchange, and the impulsivity of the poor. The book sometimes meta-analyzed analyze economics from a wide stance and this helped me understand the idea that government and private organizations are different ways of providing services in exchange for resources. The parts that stood out the most were (1) that if you want a more equitable society it is often better to transfer income than it is to fiddle around with prices and controls; and (2) the Second Best Theorem – (from Wikipedia): In welfare economics, the theory of the second best concerns what happens when one or more optimality conditions cannot be satisfied. Canadian economist Richard Lipsey and Australian-American economist Kelvin Lancaster showed in a 1956 paper that if one optimality condition in an economic model cannot be satisfied, it is possible that the next-best solution involves changing other variables away from the ones that are usually assumed to be optimal.

This means that pro-market ideologues cannot automatically say that even though an economic situation isn’t optimal, because it is 98% percent optimal that is almost as good. It could be that that high percentage doesn’t translate into things being nearly as good and some (usually disdained) economic correction might be necessary. Arthur Ripstein has very useful analogy to understand why 98% might not be almost as good: Say you want to go to Hawaii, would you consider a flight that gets you 98% of the way there almost as good as one that goes 100%? No, you’d end up in the ocean. In short, situations have to be taken on a case by case basis.(Why was this never mentioned to me?!)

Go read the book and try to ignore its unoptimal title and subtitle (from a marketing perspective of course).


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