What do Firms Want?

Here is another little sectionette from my book review  “Economics and Common Sense” on Steven Landsburg’s book “More sex is Safe Sex: The Unconventional Wisdom of Economics”, that just appeared on the AMS Notices site. Of course this topic can lead to a lovely discussion. Update (March 2011): Here is a related discussion on Noam Nisan’s blog in the context of research grants offered by Google.

What do firms want? Reading Landsburg’s book, one gets the impression that firms and their owners and executives just want to maximize their profits. They will avoid polluting the environment if and only if this is good for business. They will obey the law if and only if the cost/benefit tradeoff in violating the law are unfavorable.

It is not clear if this characterization of what firms want is just an assumption essential for developing the theory (which is reasonable), or an approximation of reality (which also sounds reasonable), or perhaps a solid precise description of reality (which as such sounds unreasonable), or maybe a normative teaching of economics theory (which sounds unfortunate), or perhaps even a representation of moral values (which also sounds unreasonable).

This description is simplistic even in the context of classical economic theory, Continue reading

Is More Sex Safe? A book review.

I was asked by the Notices of the AMS to review the book “More Sex is Safe Sex: The Unconventional Wisdom  of Econmics” by Steven E. Landsburg.  My review entitled “Economics and Common Sense”, will appeared in the June/July issue of the Notices and you can find it here. (And in the August issue of the AMS Notices, there is will be a book review by Olle Häggström on John Allen Paulos’ new book: “Irreligion”.)

In his book, Steven E. Landsburg uses the “weapons of evidence and logic, especially the logic of economics” to draw surprising insights which run against common sense. “If common sense tells you otherwise,” says Landsburg, “remember that common sense also tells you that the Earth is flat”.     

I will include a few little sectionettes from the review here in this post. Some of the issues raised in this book are related to many discussions and debates we had over the years at the Center for the Study of Rationality of the Hebrew University of Jerusalem. Questions regarding “efficiency,” “subsedies,” “monopolies,” “labor union,” “differential salaries,” “law and economics,” “rationality and the judicial system,” and various other related topics were amply discussed at the Center, and some of these topics and discussions are related to issues raised in Landsburg’s book.


The Unconventional Wisdom of Economics



The Armchair Economist 

Sometime after writing my review, I saw in the Yale book store, along with several copies of Landsburg’s new book, a copy of his older book from the early 90s, “The Armchair Economist”. I bought it and read some of the chapters. So before quoting excerpts from my book review on the new book let me first talk a little bit about the older book. Several chapters are devoted to describing some classic teachings of economics, such as general equilibrium theory, and they are very good. I liked Landsburg’s explanation of the notion of “efficiency” – it is the best popular explanation of “efficiency” I read or listened to.

The Peltzman Effect

Armchair Economist starts with an interesting finding from the 1970s by Sam Peltzman, a U. of Chicago economist, asserting that safety seat belts have led to an increase in the number of car accidents, and that the net effect on death from car-accidents, which is reduced by the direct effect of seat belts and other safety measures, but which at the same time is increased by the indirect effect of drivers taking more risks because of these safety measures, is close to zero. Peltzman’s study also asserts that seat belts have raised pedestrian death toll caused by accidents.

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Rationality, Economics and Games

1. The “Center for Rationality”

“Founded in 1991, the Hebrew University’s Center for the Study of Rationality  [at first it was simply called “Center for Rationality”] is a unique venture in which faculty, students, and guests join forces to explore the rational basis of decision-making. Coming from a broad sweep of departments — mathematics, economics, psychology, biology, education, computer science, philosophy, business, statistics, and law — its members apply game- theoretic tools to examine the processes by which individuals seeking the path of maximum benefit respond to real-world situations where individuals with different goals interact.” 

Game theory was always strong at the Hebrew University of Jerusalem, and a nice aspect of it is the combination of mathematics and debating. As an undergraduate I was quite interested in game theory along with combinatorics and convexity, and my first published paper was on game theory, with Michael Maschler and Guillermo Owen. Later I moved in other directions, but more recently, in part because of my membership in the Center for the last ten years and in part because of my collaboration with economists Ariel Rubinstein (who was my classmate in my undergraduate years) and Rani Spiegler, I am trying to do research and write papers in theoretical economics. Not having the basic instincts of an economist, and lacking some basic background, makes it especially difficult.

Let me also mention that there are very interesting connections between computer science and economics and a very large emerging research community.  

2. Many many controversies

Among the many issues discussed and debated in seminars at the Center (the regular ones are the “Game Theory Seminar” on Sundays and the “Rationality on Friday” seminars on… Fridays,)  roundtables, the annual retreat, Sunday’s sandwich gatherings, and ample debates over e-mail were:

The controversy over expected utility theory (we will come back to it below); (Little updates: May, 21)

The role of psychology in economics;

The relevance of “neuroeconomy”;

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