Thursday, October 30, 2008

Markets in everything: teeth and shoes

Sean Masaki Flynn says:

Good shoes and nice teeth are costly signals of reproductive fitness.

A signal is only credible if it is costly. A person telling you they are honest is one thing. Watching that person later stick to being honest even though it costs him his job is another thing. Such an action shows a much higher level of credibility that he will be honest in all situations.

In the same way, a person telling you that he has good genes that would produce lots of descendants is one thing, while providing you with costly evidence to that effect is much more credible. To the extent that a person has nice teeth, they either have good genes or could afford braces growing up. Both may be taken as signs indicative of being able to provide either good genes or plenty of resources to help make a lot of descendants.

And the same is true for good shoes. A person with good shoes must be both fashion conscious and able to afford good shoes. Being fashion conscious indicates a level of social skills that might help one’s descendants to survive and do well in our very social species, while the ability to afford good shoes indicates the capability of marshaling resources that could also be useful for descendants and thereby increase their evolutionary fitness.

He also says:

Entrepreneurs make new jobs and new industries and new products. The question from a public-policy perspective is how to best encourage them. My personal view is that the government does a really bad job choosing whom to support — either through direct subsidies, protection against foreign competition, the provision of tax incentives, or any sort of industrial policy that favors some entrepreneurs over others.

Worse yet, the possibility of successfully lobbying for subsidies, tax incentives, or protection from competitors means that it is often more profitable to direct one’s entrepreneurial efforts not toward developing new products or better methods, but rather toward figuring out better ways to game the system; better ways to lobby Congress, get increased corporate welfare, get higher tax subsidies, and so on.


I went through the Los Angeles public schools, and I can tell you from firsthand experience that they are poorly managed, incredibly wasteful of money, and produce pathetic results. As a result, I would be the last one to put economic education as a top priority.



For example, do you want more spending on Head Start programs for preschool children? O.K., but remember that any increased spending for Head Start has an opportunity cost. Every dollar spent on Head Start means giving up a dollar of spending on feeding starving children in poor countries, efforts to decrease pollution, helping poor people get affordable housing, etc. Once a person starts thinking in terms of opportunity costs, they start making much more serious decisions about how to spend both their own money as well as taxpayer money.


The most important philosopher of science of the 20th century, Karl Popper, argued that economics was the only social science that had turned into a real science. To him, economics was the queen of the social sciences just as physics was the king of the physical sciences.

But why did he think this? Because economics was, to him, the only social science that engaged in systematically testing hypotheses about how the world works. Doing so is actually much easier if you engage in a lot of mathematical modeling. Why? Because in a ath model it is crystal clear what your assumptions are, and also what implications follow from those assumptions …

Economics was the social science that most early on embraced math modeling and therefore was the social science that led the way in terms of making very precise, testable predictions that could be compared with the real world to see if they held up. That is why economics got the reputation of being more of a real science than psychology.

To see what I mean, think about any of the Sigmund Freud’s writings. Is it at all clear what his assumptions are? What are his X, Y, and Z? And then, is the logic that he uses to get from his vague assumptions to his often-vague conclusions totally air tight? Not really. And then, are his predictions about human behavior in a given situation very precise? No. So, if we went out to test his “model” against what happens in an actual situation would we be able to? Not at all.

But before I get slammed by sociologists, anthropologists, psychologists, and others, let me say that much has changed. All the social sciences are now very much more mathematical and precise and thus very much more able to produce models that make precise, testable predictions. So, these days, I can’t really say that economics is more of a real science than many of the others. But I would say that we were first, and that we led the way, and that that was a very good thing.

Smart, articulate, honest guy.  Probably my favorite Freakonomics interview to date.

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