Economists Know More Than You Think

I was telling my colleague Danny Finkelstein about my new theory that the free market doesn\’t work properly when the real customers are those who commission a product rather than those who use it. It is, for example, businesses, not the householder, that choose the courier service that makes you stay in all day in case it calls; it is insurance companies, not patients, that are are private medicine\’s real customers. “Ah,” said Danny, “this conundrum is well known to economists. They call it the Principal-Agent Problem. There are whole chapters in textbooks about it.”

I felt as proud as Molière\’s Bourgeois Gentleman, enchanted to discover from an expert that quite spontaneously he had been speaking something called “prose” all his life.

Not all that unusual. You see someone struggling to a conclusion, working from first principles, and they then come up with the answer. And it\’s already there in the textbooks, they just didn\’t know that it was.

One example I like currently is all those greens, telling us that markets don\’t take account of externalities, that we have to make the cost equal the "real cost". Indeed, and economists did indeed note this a long time ago. Vast amounts of modern economic research is in trying to work out "how" to do this: it\’s already accepted that "whether" to do this is either useful or necessary (dependent upon circumstances).

5 thoughts on “Economists Know More Than You Think”

  1. “And it’s already there in the textbooks, they just didn’t know that it was.”

    And the correct response ought to be to have a touch more respect for people who study the subject closely as you have just proved them to be correct by your own un-biased efforts…

  2. I’m not an economist but I have learned from experience that when one of thse externalities is Governements picking winners and/or subsiding (same thing?) the “law of unitended consequences” kicks in and we get a dogs breakfast as an outcome.

  3. Matthew Parris’s experience and his recollection of Moliere’s Monsieur Jourdain match one related in “Travels in Computerland”. In that case a professor of English literature collaborating on a project suddenly grasped from the muttered phrase “[musical] instrument is a syntactic role” that during all his hours parsing sentences in grade school he had been engaged in “syntax analysis”. Perhaps was that account which shamed formerly pompous obscurantist IT professionals into simply saying “parsing” these days.

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