The Armchair Economist (S. Landsburg)

I love economists. They are a special breed of scientists. They tower high above all the other ones in their all-knowing wisdom and dispense it to the rest of the world in little parcels, mostly at dinner parties and economic summits.

Ok, maybe I don’t love economists in general, only some of them. People that tell me something that is unexpected, especially when they combine an obvious piece of information with another one and come up with something totally unexpected. The Peter principle, for instance, is a really good example.

Some books by economists are great. I haven’t written a review of it yet, but More Sex is Safer Sex by the same identical author is very interesting and insightful. The Armchair Economist, though, is extremely poorly researched and an embarassement to the author and to the whole science of economics.

Why is that? Well, let’s start with the premise: the professor asks his students to provide examples of unexpected paradoxa in normal life, and he explains them away using economic principles. Neat idea, but only from the ivory tower of economics. In real life, a lot of different things happen without any invocation of economic principles, and the continued use of examples that have nothing to do with economic pressure makes the book and its explanations totally uninteresting, since many of its conclusions are so patently wrong that even the ones that are right are cast in a limbo of doubt.

I am not going to discuss many examples, only one at any length. Many times, though the argument chain is incomplete, broken, or implies things that are opinable.

Incomplete is the example of why unemployment in Germany is higher than in the United States: the author states (correctly) that unemployment benefits are much better than in the States, and hence the economic pressure to find a job is lower. The author, though, doesn’t mention that this is just a side effect of a Faustian bargain.

Indeed, Germans have chosen labor laws that protect employment of the employed to a level that many in America would find questionable. This makes employers much more leery of hiring unknowns, since they can’t fire them, and hence unemployment is higher because employers don’t like hiring. Better unemployment benefits are a secondary effect of this: to be able to keep up the employment laws, the employed have to offer the unemployed something in return for their patience, more money.

As a proof, I’ll point to the fact that unemployment is particularly concentrated in the young and inexperienced. Those (a) do not receive unemployment benefits at all, and (b) have no experience by which an employer could reasonably figure out how well they work.

Objectionable is the implication that mathematical formalism in economic theory is unnecessary and irrelevant. Not only is the statement in the book put right next to a question about why work authored by humanistic professors unreadable, but the answer itself seems to imply that mathematical formalism is an unnecessary flourish.

Fact is that Landsburg’s little questions and answers, that so frequently miss the mark, are the perfect example of why the scientific method is so important to economics. It would behoove the good author if he heeded the advice of Galileo and brethren a little more and checked his assumptions and conclusions against reality.

Broken in the case of the DVD vs. CD question (the example I am going to cover at greater length). Landsburg’s student notes that while if you buy a CD anywhere on Earth, it will play on any CD player, a DVD bought in Paris will not work on a DVD player bought in New York.

Well, whatever the explanation is (I am not going to go into detail, since it’s wrong anyway), the real explanation of the difference has nothing to do with economics, but with technology. CDs are much older than DVDs: indeed, they stem from a time when the average computing power available to electronic gadgets was microscopic. All that a CD player had the power to do was to read bits and pass them on to a digital analog converter.

Pass some time, and processing power gets cheaper and cheaper. Come the day of DVD, you could put a whole personal computer into consumer electronics for no money at all. And that’s what DVD players do.

Video data is much more resource intensive than music data. If you have two stereo channels at 16 bit per channel and 44.1kHz, you get 44100 * 16 * 2 bits/second – that’s 1.4MBit/sec. An RGB signal on RTSC needs 8 bits * 3 colors * 640 horizontal * 480 vertical * 30 frames / second = 221.1 MBit/sec. So if a CD holds approximately 70 minutes on 700MB, a DVD would have to store 200 GB for a two hour movie. It certainly does not do that.

With the increase in processing power, though, media companies decided they wanted to do a lot more than just compress the data. They decided to encrypt it and to offer additional “features”. For instance, have you ever tried to fast-forward or skip the Copyright Infringement Notice? You can’t. The DVD tells the player that this part of the DVD cannot be skipped. It’s your DVD, it’s your player, but you cannot skip this notice. And that’s because some lawyer said so. (So much for economic principles).

The DVD standard is full of hare-brained ideas. One of the particularly vexing and fairly stupid ones is regional coding: the idea that you could curb piracy by adding a “region code” to a DVD. The idea, it seemed, was that pirates and legal purchasers lived on different continents. Having the pirates copy a DVD coded for the local market would allow the DVD for the other markets to remain untouched.

The basic notion actually worked out: DVDs pirated in India and China flood the local market at almost no price, while we in the United States still need to pay $30 for a movie on DVD. What didn’t work is that this is no way to make a product unusable. You’d have to really hate your customer to make them buy something that is going to be unusable just because he or she happens to be out of the country.

And so, the only part about the DVD debacle that is, indeed, tied to economics is the fact that the antics of the media industry are not raising enough hackles to make a difference. It’s a classical case of sleeping dogs.

Now, please don’t misunderstand me: as a software developer, I am all for clear copyrights and enforcement of royalty payments. People that steal other people’s work for their own profit or just because they are too cheap to pay are terrible, certainly not the example of “free speech” they like to portray themselves as.

On the other hand, I have to question an industry that thinks it’s a great idea to force me to watch a minute of copyright infringement notice every time I pop the same DVD into the player. Sure, I am not going to sue them over it, but just as with the stupid hard-shell plastic packaging they are using these days to seal electronics – I am surprised nobody has ever successfully done so.