I’m currently reading Dani Rodrik’s ‘Economics rules”, a carefully considered analysis of the strengths and weaknesses of the discipline. While I’m familiar with many of the theories and examples he discusses, he successfully sheds light on even the most basic foundations of economics. His wealth of experience and the breadth and depth of his knowledge are evident and inspiring.
Plus, his points are usually illustrated with colourful examples, such as this one:
“Economists’ attachment to particular modelling conventions – rational, forward-looking individuals, well-functioning markets, and so on – often leads them to overlook obvious conflicts with the world around them.
Yale University game theorist Barry Nalebuff is more world-savvy than most, yet even he has gotten into trouble. Nalebuff and another game theorist found themselves in a cab late one night in Israel. The driver did not turn the meter on but promised them he would charge a lower price at the end of the ride than what the meter would have indicated.
Nalebuff and his colleague had no reason to trust the driver. But they were game theorists and reasoned as follows: Once they had reached their destination, the driver would have very little bargaining power. He would have to accept pretty much what his passengers were willing to pay. So they decided that the driver’s offer was a good deal, and they went along.
Once arriving at their destination, the driver requested 2,500 shekels. Nalebuff refused and offered 2,200 shekels instead. While Nalebuff was attempting to negotiate, the outraged driver locked the car, imprisoning his passengers inside, and drove at breakneck speed back to where he had picked them up. He kicked them to the curb, yelling, “See how far your 2,200 shekels will get you now.” (pages 102-103)