I should have learned a lesson after reading Tim Harford's first bestseller "The Undercover Economist": that Harford is good at throwing out an eye-opening premise at the outset and building his discovery of strange pattern around a theory, which is nothing but simple logic. He did it again in "The Logic of Life".
I must admit that the introductory chapter is very interesting, but it all goes down from here. In the first chapter, Harford set the scene of his "great discovery" of the logic of life, which is fraught with illogical phenomenon. Basically, he said that the rational choice theory of economics explains most irrational behaviours of human beings, and we are rational beings after all. Rational choice theory, despite its high-sounding intonation, is in fact very simple: that rational people respond to incentives, make decisions by weighing up the overall costs and benefits, consider the future consequences of present choices, and have intelligible motives. Harford introduced this concept to explain today's corrupt and immoral behaviours ranging from teenage sex, prostitution to juvenile delinquency. I have to say I never thought that such social problems can be explained by economics and found the first chapter very interesting.
But thereafter, Harford's theory and analysis become repetitive, convoluted and above all, silly. The most anticipated chapter on "Why your boss is overpaid" is a flop. I kind of understand what Harford was trying to get at: that a reward system based on competition (i.e. the tournament theory) encourages staff to back-stab one another and drag others down rather than work hard or improve oneself. For senior positions (e.g. MD or VP) whose success depends more on luck than individual merits or efforts, the pay disparity from the next lower level has to be big enough to drive the subordinates to perform better with the hope of taking over their boss' job. But then it just doesn't make sense that the management of any company would design their remuneration system for the said reasons, because this is irrational! Harford did not elaborate further but instead talked about why stock options do not produce performing CEOs (because of the "split-the-bill" problem), leaving me baffled and unsatisfied.
For the rest of the book, Harford looked at gambling, marriage, divorce, ghettos and racism etc. and used rational choice theory to explain seemingly irrational behaviour. He cited a lot of laboratory, experiments and studies to prove his point, but I think he has way overdone it. His so-called rational choice theory is just common sense (although I admit common sense is not very common and some people don't have it, e.g. your overpaid idiot boss). It's the basic instinct of human beings to act that way - driven by incentives, consider costs and benefits and think about consequences. What's the big deal? Harford is just making simple logic complicated. Sometimes after quoting one research after another, he lost track of his analysis (and readers became lost too).
The final chapter on "A million years of logic" is even more implausible. Harford concluded that more population would give rise to more brains, more inventions and higher technology and hence, better chances for us to see out the next million years. Now what kind of insight is that? Isn't that a tautology?
On the whole, the book is disappointing. But the first chapter is enjoyable and worth reading, and it is only 32-page long. You can finish that at the bookstore....Continua
The chapter on externalities is quite so-so: spending much energy in eventually expounding how knowledge spillover/urbanization/clustering of industry work -- proposing Marshall's: one giant firm corners at a geographic area (e.g. Microsoft), Porter's: many firms in the same industries cluster in a single area (e.g. pharmaceutical companies in Boston)/ a person's that I forget the name (many firms across different industries stay in one area). The conclusion is that the last hypothesis has more predictive power than the first two in cases that were studied. The penultimate conclusion is that urban dwellers choose to pay higher cost to settle in city (despite their relative wage increases gained from moving away the country side/suburban areas would not be justified those higher cost) -- the reason is the externalities (benefits or costs that are not directly arise from the incidents themselves) of living in cities are high -- for career development (human capital inquisition).
The last chapter on economic development is nicely written though. I particularly like the analogy/description of world's history from the existence to now being represented through the 24 hours of a day....Continua
Harford is an great explainer of the latest economic ideas--- just witness his clear and funny columns for the Financial Times. His discussion of racism is particularly good. Highly recommended light reading.