Sunday, July 10, 2005

L&S: The Two Things

Glen has now shifted over to talking about "The Two Things". For economics, Glen argues that the two things are "Incentives matter" and "There's no such thing as a free lunch." I've thought a lot about this one and I'm not sure those are the two I would pick. I'd probably keep TANSTAAFL, but I might swap out the incentives one for something about the dispersed and tacit nature of knowledge and the role of economic/social institutions in making that knowledge socially usable.

He also has two really good examples about how incentives matter. The first is the, presumably apochryphal, story about the American elementary school class who raised money to buy African children out of slavery as a way to reduce the total amount of slavery. His point was that this raised the price of slaves and encouraged more people to "reallocate" children into slavery to capture the now higher returns. (For the econ-geeks, the demand curve shifted up and to the right, raising the price of slaves, leading to an increase in the quantity supplied.) Incentives matter and they often create unintended and undesirable consequences. The other example was increased security at airports leading people, on the margin, to drive instead of fly, which is, of course much more dangerous. Thus the attempt to increase airline safety backfires and causes more problems. I've made this same point about proposed legislation to require all small children on planes to be in carseats. Kids who currently fly free on a parent's lap would now have to be charged as the carseat takes up a paying seat. That additional expense will lead some folks on the margin to drive, dramatically increasing the danger to the child.

He's now talking about his Wal-Mart and Mexican labor regulations example he mentioned here.

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