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14.08.2014Making the world a better place, one economist at a time

"The Economics of Everything" manages to be at once a call to action for Australian policymakers

By Gigi Foster, UNSW Australia Business School

“The Economics of Just About Everything” is the latest contribution by Andrew Leigh MP, ex-ANU economics professor, to the bookshelf of the intellectually curious Australian. The book is a long-overdue Antipodean interpretation of the global wave that took off in 2005 with Freakonomics: a sharing with the smart layperson of “the economist’s lens” on diverse issues from across society. Along the way, the reader learns that far from being a dismal science, economics is a compassionate yet pragmatic discipline that proposes particular ways of viewing situations in order to understand better where behaviour comes from, and hence how to change it to achieve better outcomes.

Re-branding economics is no mean feat, particularly in this country where arguably most non-economists operate under the delusion that economics is mainly concerned with money, not welfare. Leigh confronts this misguided view with a raft of citations to research by economists, including himself and many other authors from down under and around the world, offering guidance on topics that carry significant implications for social welfare, individual welfare, or both.

Perhaps Leigh’s most uniquely Australian example relating to social welfare documents the effects of the different incentives facing the Second and Third Fleets sent to Australian shores in the late 1700s.

The same firm financed both voyages, but for the Second Fleet it was compensated based on the number of convict heads taken on board in England, whereas for the Third Fleet it was compensated based on the number of convict heads alighting in Australia. With the monetary incentives that previously supported over-crowding now shifted towards survival, the death rate plummeted.

While this example is riveting, such uplifting stories about how incentives can be used to increase aggregate welfare might not be enough to retain the attention of many self-interested readers for 187 pages plus references, and Leigh - as an economist after all - knows that.

He hence cleverly includes plenty of examples of how the reader can personally benefit from economic insights, organising his material thematically into creatively-titled chapters like “Fit for Tomorrow”, which highlights the implications for individual welfare of economic thinking on matters such as obesity (i.e., how do I lose weight?) and smoking (how do I quit?).

If you want to know how to behave in the dating market, see Chapter 1, “For Love or Money”; if you want to know how to plan your child’s birth so s/he has a leg up in the trials for national sports teams, see Chapter 3, “Starting Lineup”.

“What we are trying to do is hard!”

But true to what is arguably the main agenda of the economics discipline, Leigh also addresses some of the big social welfare questions of our time: how to reduce violence (examining recidivism, firearms access, and terrorism through an economist’s lens); how to understand the persistent gender gap in wages; how to help people in the developing world. He also confronts head-on economists' famously inaccurate forecasting, using an apt quote from Treasury’s David Gruen: “Economic forecasters aren’t stupid; what we are trying to do is hard!”

Indeed, while it has been said that social scientists are prone to “physics envy”, wishing to be but not quite being the hard scientists of their fantasies, Leigh’s presentation is more in line with the claim that economics is harder than physics since economists have no laws to lean upon, but only best guesses.

And Leigh is unafraid to propose some of his own best guesses, such as that Australia would be better off if we paid prisons a bonus for every released prisoner who does not re-offend; and that the rest of the world would be better off if we Aussies concentrated our foreign aid efforts in activities where he argues we have a comparative advantage - namely, assistance in dryland farming, natural resource management, and security provision in unstable states.

Stopping short

The book is terrific airplane reading, but it stops short at times from a full exploration of what is being revealed. For example, the fact that births dipped before, and peaked just after, expectant mothers became eligible for the baby bonus in mid-2004 implies that there were fewer earlier-term inductions and C-sections in that cohort of births, which in turn should have implications for the health outcomes of that cohort of babies; yet this is not pursued.

It is observed that Australia is comparatively good at keeping the peace in unstable places; but why is this, and how might we teach others to mimic our success? Obesity is described mainly as a problem of eating too much of the wrong things, and partly as a problem of time-inconsistency. Yet becoming truly obese brings such a dramatic reduction in quality of life that it is hard to believe that most obese people really got to where they are through mindless present-biased munching, correctable via a properly designed array of little nudges: something more must be going on.

In sum, “The Economics of Everything” manages to be at once a call to action for Australian policymakers, a fascinating introduction to some of Australia’s most entertaining applied economic research, and a supreme source of cocktail-party banter. Buy it for what it can teach you about economics and ideas, and use it to help make your world a better place.

Gigi Foster receives funding from the Australian Research Council.

This article was originally published on The Conversation. Read the original article.

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