The Worldly Economists — Book Notes

The Worldly Economists¶

A fairly hardcore economics book overall. One core idea: economists need to enter the market and account for how the real world will respond to policy changes — only then can they better evaluate and collect data.

Engineers vs. economists: Given a choice between building a technological marvel or ordinary infrastructure, engineers almost always choose the marvel. Economists tend to argue the opposite — considering opportunity cost, stability is king.

Another economic instinct: opportunity cost carries an implicit "right now" — economists favor stability and account for probability and success rates. (Some R&D has a knowable probability in the short run, but long-run exploration is nearly impossible to predict.)

The book notes that some government policies don't produce economic benefit. One reframe: perhaps some government measures exist to offset social costs (the tragedy of the commons) — garbage collection, national health insurance — things that may produce near-zero or negative economic efficiency yet still need to happen.

Advanced thought on polling: A more effective survey both states the benefit and discloses the opportunity cost behind it.

New car fuel efficiency standards: Everyone intuitively assumes raising fuel standards is good for the environment. But economically: higher standards raise car prices, causing current owners to delay replacing their older, less efficient vehicles. People who do buy fuel-efficient cars tend to drive more. And raising efficiency standards only hits people buying new cars — whereas raising fuel taxes would affect all drivers universally.

On technology: "Technological progress is not a clearly definable, plannable activity... In hindsight, everything seems obvious, but at the outset there is only a dizzying array of choices, and which ones will work or prove fruitful is impossible to predict." Government-directed technology development plans therefore tend to make things worse.

On employment protection: France's law requiring companies with 50+ employees to get approval before layoffs created a perverse incentive: companies with 49 employees proliferated; those crossing 50 became rare. Ironically, a policy meant to protect workers increased unemployment — those lucky enough to have jobs may have been better off, but the unemployed pool grew.

On progressive taxation: Higher rates on the wealthy reduce the incentive to work hard (the more you earn, the higher the rate), and increase the incentive for smart people to find ways to evade taxes. The challenge is finding a balance between social welfare protection and encouraging innovation.

On productivity growth: economists are nearly unanimous that the key is innovation and capital accumulation driven by investment.

On externalities: Whether through economics or game theory, it's clear that as long as there is profit to be made, almost no one — person or company — will voluntarily absorb the external costs they create. Chemical plants don't self-clean; if costs can be externalized, profit increases and competitive position improves. Car pollution: without regulation, environmental progress stalls. The right moment for government intervention is when the benefit of intervening exceeds the externality being caused.

Economics typically assumes self-interest and doesn't expect altruism — any that exists is assumed to serve indirect interests. But increasingly, investors are willing to give up some financial return to pursue values, altruism, and gratitude. Compassion is a virtuous cycle: the more you exercise it, the more it grows. #finance