Economics is often regarded as a complicated discipline that is difficult to understand for people without academic education. In his book, The Armchair Economist: Economics and Everyday Life, Steven Landsburg aims to discuss some of the principles that economics uses to answer questions about issues that concern people every day. The book is separated into 5 chapters and 24 smaller parts – each of them targets a particular problem, analyzing the cost of popcorn at the movie theater or the outcomes of wearing a seatbelt on the rate of traffic accidents. Notably, the author considers the principles of efficiency and incentive as the foundational aspects of economic theories. Landsburg states that “people respond to incentives” – a simple phrase that explains a vast number of inquiries in the book (p. 11). In this work, the author tackles such topics as taxes, monopoly, competition, and price discrimination, often delivering unusual responses to common problems.
One of the topics discussed in the class that is mentioned in the book is taxes. While the role and the impact of taxation on people are talked about in several parts of the work, Landsburg devotes an entire chapter to explaining why taxes are bad, using the logic of efficiency. According to the scholar’s argument, taxes are almost always more harmful than helpful to people. His example is that tax discourages purchases of goods and services, which negatively affects the economy and creates deadweight loss – and inefficiency of the market that puts its supply and demand out of equilibrium (Landsburg, p. 74). The belief that taxes impede innovation and economic progress is generally supported by scholars who state that risk-taking is lowered due to higher tax rates (Mukherjee et al, p. 196). Nonetheless, Landsburg argues that the evasion of paying taxes is the actual reason for their ineffectiveness.
Another problem that Landsburg covers is price discrimination, which he finds an inherent part of the market. The author provides several examples in which price discrimination can and cannot work, showing that its success depends on the target customer group and the industry’s conditions. For instance, a difference between a barber and a baker offering senior discounts is the person that is able to use the service immediately (Landsburg, p. 42). A person cannot get a haircut at a lower price if they are a senior, while someone could ask their grandmother to buy them bread. Thus, this tactic works in particular markets, and managers should always consider the demographic they aim to attract (Chevalier and Kashyap, p. 128).
Finally, the topic of monopoly is brought up several times in the book. Interestingly, Landsburg links the idea of price discrimination to monopolistic competition, arguing that the business needs some power to establish varying prices. In this case, such authority decreases the risk of competitors appealing to the highest paying clients by offering a lower price cap (Crapis et al, p. 3589). In the same chapter, Landsburg questions the statement that movie theaters have a monopoly over popcorn, arguing that this belief fails to consider the diversity of customers and their preferences. This question is left unanswered, but economic theory poses that high prices are justifiable due to customer demand.
The book The Armchair Economist: Economics and Everyday Life offer some interesting ideas about the way economic theory attempts to explain some mundane problems. It is rather simple to understand, which makes the logic of the author approachable to a broad audience. However, in my opinion, the author focuses on two separate entities – a person and the market – and neglects the impact of a community on people’s decisions. As a result, the utilized logic prioritizes the belief that economists always correlate efficiency with actions that prevent the economy from improving the social welfare of the world (Leeson, p. 1). Therefore, the answers provided by Landsburg lack nuance, showing a narrow view of economic theory.
References
- Chevalier, Judith A., and Anil K. Kashyap. “Best Prices: Price Discrimination and Consumer Substitution.” American Economic Journal: Economic Policy, vol. 11, no. 1, 2019, pp. 126-159.
- Crapis, Davide, et al. “Monopoly Pricing in the Presence of Social Learning.” Management Science, vol. 63, no. 11, 2017, pp. 3586-3608.
- Landsburg, Steven E. The Armchair Economist: Economics & Everyday Life. 2nd ed., Simon and Schuster, 2012.
- Leeson, Peter T. “Logic Is a Harsh Mistress: Welfare Economics for Economists.” Journal of Institutional Economics, 2019, pp. 1-6.
- Mukherjee, Abhiroop, et al. “Do Corporate Taxes Hinder Innovation?” Journal of Financial Economics, vol. 124, no. 1, 2017, pp. 195-221.