Comparison of the Armchair Economist and Hidden Order
There are several ideas discussed in these two books which have also been discussed in class. In The Armchair Economist, Landsburg addresses several of these topics.
The indifference principle was discussed in chapter four of this book. His definition of this principle is when one thing is preferred to another, people switch to it until it stops being preferred or until everyone has switched to it. Although this exact terminology has not been used in class, the idea has. The related concept learned in class was that when there is positive economic profit in an industry, more firms enter the industry. This causes the supply curve to shift back until zero economic profit is made. The firms in this example switch to a particular industry where economic profit is being made. They continue switching to this industry until it stops being preferred, that is, until economic profit returns to zero.
Another concept discussed in class is the concept of opportunity cost. This is defined as the foregone value of the next best alternative not chosen. This was discussed in chapter six of Landsburg's book. Landsburg's definition is that if you want one thing you must be willing to give up another. That is if you want something you must use certain resources in order to obtain it. You must want that thing more than any other things that could be obtained by using those resources.
Interest rates are another common idea between class discussion and Landsburg's book. They both explained the difference between the nominal and real interest rate. Landsburg's book also examined some events that could affect interest rates. In class ways that the Federal Reserve, by changing the minimum reserve ratio, by the buying and selling government securities, and by changing the discount rate, could manipulate the interest rates were discussed. Ways that the Federal Government could change interest rates by increasing or decreasing government spending and/or taxes were also discussed in class.
Finally, in Landsburg book the Random walk theory was discussed, describing the unpredictability of the stock market. In class, this theory was also described, saying that day to day stock prices follow a random walk. One illustration given in class was that of the yearly
experiment performed by the Wall Street Journal. Every year the Wall Street Journal gets several top stock analysts to pick a certain number of stocks that they think will do good in the upcoming year. They also randomly throw darts at the stock page to pick the same number of stocks. At the end of the year they compare the two sets of stocks. The darts are usually better predictors than the analysts.
David Friedman's book The Hidden Order: The Economics of Everyday Life also contains many concepts discussed in class. In chapter three of his book, Friedman discusses budget curves. These same ideas were discussed in class in the examples of wheat production vs. corn production. The concepts of normal and inferior goods were also discussed in both class and Friedman's book.
Chapters four, seven, and eight of The Hidden Order Friedman examines several of the basic concepts of economic theory. These concepts include simple supply and demand, equilibrium, shifts in supply and demand curves, and price elasticity. All these concepts were covered in depth in class. Another key concept of class that was in these chapters was the concept that people buy an item until marginal revenue (value) equals marginal cost; that is MR=MC. Finally in chapter eight, Friedman examines how changes in the supply and demand curves of one good affects the curves of many goods. This idea is related to class discussion because the concepts of how a change in industry curves affect curves for individual firms were studied.
Firms and corporations were studied in class and discussed in chapter nine of The Hidden Order. The theory of the firm, which is to maximize profits, and how the entry and exit of firms affect supply and demand curves was also discussed in this chapter. The next few chapters
discuss price discrimination, including monopolies, profit maximization for monopolies, monopolistic competition, cartels, and antitrust laws. All these topics were covered in class discussion.
Chapters twelve and thirteen discuss present value calculations, diminishing marginal utility and sunk costs. These issues were discussed in class also, although the term sunk cost was not used. In class, fixed costs were discussed and the decision of whether a firm should remain in business in the short run time period. The fixed costs are examples of sunk costs.
Finally, in several chapters, efficiency was discussed. It played a part in many concepts conveyed in the book, including evaluating whether something was good or bad. Class discussion has steered away from evaluating the worth of a decision or policy, yet efficiency has come up. The main discussion being of the efficiency of production curves, that is whether a firm is producing at it's full potential.
I tended to agree with the ideas of David Friedman. He simply stated many of the most common ideas of economic theory. Many are applicable, in the way he stated them, to everyday life. Others would require some modification to apply them to everyday life. However, I still agree with how Friedman explained them because in modifying these ideas for everyday life application they would become immensely more complexes. Such complexity could not be conveyed in his book without doubling its length and making it harder for the intended audience to read.
I only agreed with some of Steven Landsburg's ideas. Most illustrated simple economic theory in much the same manner as Friedman did. However, he tended to over-analyze many issues, such as his evaluation of the efficiency of picking up a dropped dollar bill. These tendencies were further shown in his evaluation of environmentalists and religion. I tended to disagree with him strongly on these points.
Of the two books, Landsburg's was more enjoyable to read because its content intended for a wider audience. However, Friedman's book was better at describing and illustrating the fundamental ideas of economics