Top critical review
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on 6 April 2008
I quite enjoyed the Undercover Economist, but I was less impressed by Tim Harford's second book The Logic of Life. I guess it's primarily about asserting rational choice as a (the?) major force in human history and society. This comes at a time when behavioural economics is on the rise and challenging (successfully or otherwise) economic assumptions about rationality.
I think Harford does quite a good job at arguing back against the behavioural approach (though this isn't a stated objective). He makes the point early on that much of the research that suggests we make 'irrational' decisions comes from labatory experiments utilising more abstract ideas. However when we are in the real world (or in our comfort zone as Harford puts it) we are more likely to act rationally. Experience makes us more able to make the rational choice. In contrast when we are in a new and unusual situation - interestingly he uses the example of deciding how much to save for a pension - we find it much harder to act rationally.
He then goes on to apply the rational choice perspective to various different issues. The section on bosses' pay is interesting, and presents a fairly convincing argument both for why management pay is probably undeserved and why shareholders in companies with high pay may not bother to challenge it. I liked the comparison to splitting the bill at a meal. (He could have added the principal-agent problem of the investors not typically investing their own money).
I found the section on 'rational' racism particularly interesting/depressing. It describes how the impact of racism can become a vicious circle - if black kids don't see an advantage in education (because employers don't take them on anyway) they won't bother, and in turn that will reinforce employer prejudices about the educational standards of black kids. There's also some interesting stuff about how neighbourhoods end up very segregated because of a relatively mild preference to not live in an area where people of your ethic group are a small minority. This actually looked familiar to me - I think Paul Ormerod covered similar ground in Why Most Things Fail.
Sometimes I think he overplays it. At one point he asserts in passing that obesity in wealthy societies might be a 'rational' response to the ease of getting food, and time required to undertake exercise. Maybe, and maybe it's much more complicated than that. Why are some people obese and others not? Is it just because those people who are obese are responsing to different incentives - or are other factors at play?
And its little examples like this that bother me about the book. They remind me that as seductive as rational choice is as a perspective for explaining what is going on it has its limitations. Though I finished the book more convinced by some ideas (the stuff about unreliable political regimes and their impact on economies can surely be applied to places like Zimbabwe) I didn't find it anything like as illuminating as I thought I would.