Monday, May 01, 2017

Thoughts on Literature, Economics and Education

My recent posts here have dealt with my current project of putting together a book of short works of literature that have interesting economic ideas embedded in them. I've gotten suggestions both here and in response to emails that I sent to people who I thought might help. Some of the suggestions I expect to use. But my reaction to most of them was that they were not what I was looking for. The purpose of this post is to explain why. Part of doing so is looking at the difference between the project I am planning and the somewhat similar, but I think fundamentally different, project that Michael Watts produced in The Literary Book of Economics.

What is Economics?

Probably the most common definition is "the science of allocating scarce resources to diverse ends." Watts offers Marshall's definition: The study of mankind in the ordinary business of life. Neither of those is what I think of as economics. Still less is it the study of the economy, which I suspect would come closest to what most people think the word means.

To me, economics is that approach to understanding behavior that starts from the assumption that individuals have objectives and tend to take the acts that best achieve them. That is what economists mean by "rationality," and it is the assumption of rationality that is, in my view, the distinguishing characteristic of economics. What I am looking for are works that tell us something interesting about the implications of that assumption.

Someone at some point suggested Orwell's Down and Out in Paris and London. It is an interesting book, although much too long for my purposes. But what makes it interesting, economically speaking, is not the vivid picture of poverty in the period between the wars but particular details relevant to implications of rational behavior.

I can give, by memory, an example. Orwell observed waiters in a fancy Paris restaurant, out of sight of the diners, spitting in the dishes they were going to serve. In an idealized market context, the waiter would never spit in the dish unless the value to him of doing so was more than the disvalue to the patron he was serving, which is unlikely. But throw in the inability of either the patrons or the waiter's employers to monitor the waiter's behavior and any benefit to the waiter of expressing his hostility is a sufficient incentive to make him do it. That suggests the further point that, when you cannot monitor someone's behavior, his preferences matter--you want the job he is doing for you to be done by someone whose preferences are close enough to yours so that he will want to do what you would want him to do–even if nobody is watching.

Economics is not the study of the economy. A picture of poverty, or unemployment, or wealth, or economic growth, however accurate and vivid, does not in itself teach you any economics. A story such as Poul Anderson's "Margin of Profit," which deals with a wholly fictional future, does, because it demonstrates in that world an important implication of rationality that holds in our world as well–that in order to prevent someone from doing something you do not want him to do it is not necessary to make it impossible, merely unprofitable.

How to Learn

One difference between my project and Watts' is that he includes things that are not, by my definition, part of economics, along with others that are. The other difference is that most of what he includes are not complete works but excerpts from much  longer pieces. 

I can imagine an economics professor reading through The Literary Book of Economics in search of things he can use in his teaching. But I find it hard to imagine anyone else doing so on his own initiative, merely because he enjoyed reading it. There is a reason why a book is the length it is; a novel is not, with rare exceptions, a series of short stories. I conclude that most of the people reading Watts' book, most of the people it was written for, will be students reading it because their professor told them to. And, judging by my experience of students over the years, many of the students told to read it won't. 

That fits the pattern of most modern schooling at all levels. Someone else decides what you should learn, tells you what you must do to learn it, and makes some attempt to make sure you follow his instructions. It is not a model I think highly of. A much superior model in my view, if you can pull it off, is to get someone to learn something primarily because he finds it interesting. The best way of doing that is to provide students with things to read that are  worth reading on their own, not things they read only because they are ordered to. Not even things they read only because they think the labor of reading them will pay off in future benefit. 

That view of education is why both children of my present marriage were unschooled. It is also why all of my nonfiction books, with the partial exception of Price Theory, were targeted at the proverbial intelligent layman. They can be, and sometimes are, used as textbooks, but they were written with the assumption that if the reader did not find a chapter worth finishing he was likely not to finish it.

It is also why I am not looking for literary excerpts that can be used to demonstrate economic points, unless the excerpt can stand on its own as a work of literature.


At 10:33 PM, May 01, 2017, Blogger Ryan said...

Wouldn't it be odd if economics couldn't explain something concerning the economy, all because economics had been defined in terms of rational choice theory?

At 11:43 PM, May 01, 2017, Blogger David Friedman said...

It would be surprising if any approach explained everything concerning the economy. The question is whether rational choice theory does a better job than alternative approaches.

At 3:02 AM, May 02, 2017, Blogger Sound and Fury said...

I've long defined economics as "the continuum limit of game theory" (I'm fairly sure I was reading something of yours when I realised that). On my definition it is properly a branch, not of the social sciences, but of mathematics.

As so often in mathematics, the discrete case is far harder than the continuous to solve in full generality...

At 9:07 AM, May 02, 2017, Anonymous Below Potential said...

@Sound and Fury:

Economists love to show off their mathematical prowess (which is also the best way to get published in a prestigious journal). That doesn't mean economics is a branch of mathematics. Mathematics is a tool of economics. And these days this tool is used to excess even when it doesn't contribute anything useful (take, e.g., DSGE macro-models).

At 12:01 PM, May 02, 2017, Blogger David Friedman said...


I agree with your point about what Gordon Tullock used to refer to as "ornamental mathematics." But I think Sound and Fury also has a legitimate point. Game theory was invented with the idea of providing a rigorous mathematical basis for strategic behavior, which would cover, among other things, economics. It failed--possibly the most impressive failure of the century. But it was the right objective, although not even Von Neumann could accomplish it.

At 1:18 PM, May 03, 2017, Blogger J Oliver said...

Has anyone suggested the Little Red Hen:

At 5:41 PM, May 06, 2017, Anonymous Anonymous said...

Economics likes to think itself a science, but it's not.

At 7:00 AM, May 08, 2017, Anonymous Below Potential said...


Economics is an inexact science, but science nevertheless.

At 6:52 AM, May 09, 2017, Anonymous Anonymous said...

Hi David,
Do you elaborte somewhere in one of your books about why do you think Game theory was a failure and possibly the most impressive of the century?
Would be very curious to know the reasons why you think this is the case.
Thanks !

At 12:29 PM, May 09, 2017, Blogger David Friedman said...


The chapter on game theory in my webbed Price Theory may give you some idea of my view of the subject.

The general problem Von Neumann was trying to solve was strategic behavior, which would cover economics, diplomacy, games, war, ... . He gave something reasonably describable as a solution to one simple version, the two person fixed sum game, then spent the rest of the book trying and failing to solve the more general problem.

At 10:46 PM, May 11, 2017, Blogger Xerographica said...

Your posts about economics match my preferences. Your posts about climate change? Not so much. And of course you have absolutely no obligation to cater your posts according to my preferences. But I don't believe that your topic decisions can be truly informed without actually knowing our preferences for your topics. So for me the essence of economics is communication. Not cheap talk though... sacrifice.

Society's resources are limited... so we want them to be used as relevantly as possible... but this will only happen when we can and do use our sacrifices to signal the relevance of things.

For me the problem with school is that you have one teacher grading (determining the relevance) of everybody's work. But why should we be at all confident that one person can come close to correctly divining the true social relevance of any work? I certainly have no idea how relevant your climate change posts are to society. All I know is that they aren't relevant to me. But maybe they would be more relevant to me if it turned out that they were super relevant to society? If I'm hiking along and I see a big gold nugget, then for sure I'm going to pick it up. It will be relevant to me because I know it's super relevant to society. Knowing the social relevance of gold allows me to behave in a way that benefits me and society. This really doesn't change just because we replace a rock with an idea.

There's a new page on Classtopia's blog that lists their most relevant entries. Right now the relevance of the entries is determined by the students, their teacher, and myself grading them with our own money. But in theory everybody in the world could help determine their relevance. This system should be the future of education. Students would put any of their work online and its relevance would be determined by the market. Just like the market will determine the relevance of your book once it's published. Everybody who purchases your book will essentially be a teacher giving it a good grade with their money. But of course it's a really funny thing to grade a book without actually having read it first.

In the history of the world... how many economics professors have used their money to grade their students' papers? How many econ professors have given their students the opportunity to use their money to grade each other's papers? Have any? This is why so much of our economic system is incredibly incoherent and so many resources are wasted on largely irrelevant endeavors.

At 4:17 AM, May 12, 2017, Blogger John said...

This comment has been removed by the author.

At 4:18 AM, May 12, 2017, Blogger John said...

Hello David,

I wanted to run an idea past you, and I couldn't find an e-mail address to send it to, so I'm putting it in this blog post. Would you mind telling me if you think I've got this idea right or not? I'm not an economist or an academic, and I'm sorry but I don't know the lingo. I'll try to be concise.

The harm that thieves do to an economy consists primarily of making other people spend their time on things that human being don't inherently want, instead protecting themselves against thieves (whether digitally or in terms of making and buying locks and safes and thousands of little security measures for handbags and other things that nobody inherantly wants). We'd much rather, as human beings, spend our time making things that will make us happier. So thieves are really stealing from society as well as the individual person they steal from, in this sense: if you had 1 thief in a population of 10 living on a desert island, immediately the 9 other people would have to spend their time resources on protecting themselves, than doing things that would make them happier than that.

So that got me thinking: if rich people do not spend their money on other people's time - that is to say, if they keep their money in a bank account, or spend their own time buying and selling shares for ever higher prices (as the wealth of the rich, as a class, increases), then the human race is not spending as much time on them as they could potentially be spending. Instead they are spending their time and resources making things for less wealthy people. This means that the wealth of the rich consists of their potential to have a larger proportion of the human race's time than the potential of others. But if they (the rich) do not cash in on that (i.e. if they do not spend their money on that) then in another sense they're a lot less wealthy than the monetary statistics may lead us to believe.

To illustrate this by way of example. Bill Gates could, if he wanted to, buy 50 new luxury yachts. If he did, that would mean the luxury yacht company would have to hire a lot more people, and they would buy resources from various other companies who would themselves either have to increase production (meaning hiring more people and putting more strain on the job market) or increase their price (meaning other people couldn't get the resources they sell), and so on with other companies.

So a whole ton of people in the world would, as soon as Gates's order was placed, immediately be working (spending their time) towards giving Gates 50 yachts, which would then probably just sit there in a harbor and not be enjoyed by many people.

Without Gates placing an order for 50 yachts, more time and resources would go to other things in this world, to benefit a whole lot more people, making them happier.

In other words, even though there is an absolutely massive disparity between the amount of money that the rich and the poor own in this world, as long as the rich do not spend their money, the "wealth" gap (if we're defining wealth according to the amount of time and resources an individual is directly benefiting from) is much smaller than the monetary statistics would lead us to believe.


At 5:55 PM, May 12, 2017, Blogger Xerographica said...

John, your comment reminds me of my issue with Modern Monetary Theory (MMT). They think there would be no problem with the government minting a trillion dollar coin that would be kept in the treasury. This would allow the government to spend more money on things like building bridges and feeding hungry children (as opposed to bombing hungry children).

But it really doesn't matter how the government justifies or rationalizes its spending, if it does spend more money... then it will effectively compete more resources away from the private sector. The government will have more influence in determining how society's limited resources are divided among its unlimited wants.

In all cases though, society's benefit is maximized when your influence (in determining how society's limited resources are divided) accurately reflects how relevantly you are using society's limited resources. But the true social relevance of your use of society's limited resources can only be determined by each and every member of society, deciding for themselves, with their own dollars, how relevant your use of society's limited resources is to their reality.

So the issue isn't whether or not Gates spends his money, it's how closely his influence correlates with how relevantly he's using society's limited resources. I'm sure there's some disparity but not nearly as much disparity as we find in the public sector. This is because we don't have the opportunity to use our tax dollars to signal how relevantly any given government organization is using society's limited resources.

At 3:10 AM, May 18, 2017, Blogger George Haley said...

According to Oxfam, the eight richest men in the world own 63% of the world's wealth. They do not, however, eat 63% of the world's food, or wear 63% of the world's clothes or live in 63% of the world's houses, to illustrate your point.

At 12:25 PM, May 18, 2017, Blogger John said...

I realized that the point I was making was actually rather an obvious one, that people who consume less of the world's resources (including labor) on themselves leave more resources available for other people.

At 11:21 PM, May 18, 2017, Blogger David Friedman said...

George: Checking on the Oxfam claim, I don't think you have it correct. It is that the eight richest own as much as the bottom 50%. If true, that has to mean that they own less than a third of the world's wealth, not 63%, since the top half must own more than the bottom half. My guess is it's much less than a third.

I have seen an explanation of the Oxfam figures which claimed that they were including in the bottom half wealthy individuals whose wealth, by some accounting measure, was negative. One person whose wealth by accounting measures is minus a hundred million dollars but who would have plus a hundred million if he liquidated everything cancels out all of the wealth of a lot of people near the bottom of the wealth distribution.

At 6:23 PM, May 21, 2017, Blogger John C. Webb said...

Economics: The study of what humans value.

At 8:38 PM, May 21, 2017, Blogger David Friedman said...


I would have said the study of the implications of humans valuing things and acting to get them.

I've just read "The Machine Stops" by Forster. It's a very interesting story, and impressive for something written more than a century ago. But I think my only excuse for including it in the collection, if I do, is the light it throws on the question of what the objective function is, what matters to humans.

The setting is a future where almost everyone lives in an underground cell, almost never seeing or touching another human being. So far as one can tell, practically nobody is engaged in anything more productive than giving lectures to each other. Almost everyone regards it as the perfect life, until the enormous machine that is providing everything for them eventually breaks down and nearly everyone dies.

It reminded me of the experience machine in Anarchy, State and Utopia, which is also ultimately about what people value--things happening inside their heads or things happening in the real world.

At 2:30 PM, May 29, 2017, Blogger Mike Dolbear said...

I copy from Baen's Bar [Baen Jim Minz's Biergarten] Balance of Trade

Virginia Easley Demarce (Baen author) to Jim Minz (Baen Editor)

Here is the reminder you requested that Miller and Lee's Balance of Trade was a big success among a class of 8th graders whom I know a year ago and the teacher, since it was already circulating and they were reading it quite voluntarily, used it for social studies to teach the principles of supply and demand. I think that if you packaged it as a YA with a teachers' guide, there might be a widening of the market for that particular book. You mentioned that Baen already has it marked as YA-suitable.
Balance of Trade is a Liaden Universe novel which was expanded from a novelette which is still available.

I mention it because it appears to be what you were asking for.

At 2:14 AM, May 30, 2017, Anonymous Anonymous said...

A nice 1900s Brazilian short story that you might find interesting is Machado's "Father versus Mother". The story is about a poor man who makes his living catching runaway slaves, “one of the trades of the time,” in Rio de Janeiro.

I think you would notice some economic ideas embedded in it, but I'm afraid you may find its main subject, namely slavery, too delicate or controversial.

Anyway, here's an excerpt: "A great part of them [slaves] were only scolded [not beaten]: there would be someone in the household who acted as their sponsor, and the owner himself was not always mean; besides, the feeling of ownership moderated his actions, because money hurts too."

You can take a closer look at it here:


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