January 10, 2008

highlight number 2

The last few chapters of the books discussed among other things, criticism of economist's assumptions of rationalism and economic development, how poor countries become unpoor. The chapter "Rational Insanity" discusses how incredibly intelligent economists can make amazingly profound calculations, but fail to account for anything that an actor in the equation may do irrationally. This, in my opinion has always been the closest thing to a valid argument against economics as useful. I do disagree with it, however, as such an argument. Economics studies and determines the effect of certain causes acting upon a preexisting set of circumstances.

This is evidenced in the fact of how, in this chapter, Harford used the example of the bidders' collusion or cheating on each other. Yes, there is irrationality, but Game theory studies causes and effects of actions, with rationality being irrelevant. At the end of this Chapter, Harford validates the game theorists by showing how there predictions of how the British granting of such scarcity power in the form of these (natually) limited telecom liscenes at the highest possible prices, such that they will be paid for in the form of taxes up to and equal the amount the firms value them, including the benefit the firms get for the scarcity power.

After this point, the book continues by talking about poverty and the study of why some nations are rich and why some are poor. We analyse reasons, or at least potential reasons for this. It seems that free market economies contribute to prosperity. It seems that a not-preditory government helps in this cause. Openness to foreign cooperation helps in the way of increased trading partners bringing about increased incentive to roduce and increased technological kn0ow-how.

Perhaps the most interesting part of the last chapter was Harford's look into why economics is not as straight forward as one may think. As economist we sometimes fall into the trap of thinking that if we merely free up our industries and put them into the hands f the peopleeverything will instantly and eficiently become perfect. Harford contends that this is not the case, and that any kind of economy, even Lassez Faire capitalism, requires certain legal frameworks in which to exist. Any kind of economy must hae the cooresponding legal framework in order to be viable.

We learn how China has gone about libralising it's trade and convincing it's people (long socialised into loking to a paternalist government) to adopt this more free economy by gradual, and most interestingly natural, growth out of communism, by freezing the size of the socialist economy and allow the free market to grow and overtake it. This way, those who were used to the paternalistic government still have it for the transition and citizen's outdated mindsets ca fade with the tyrannical government.

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