“The Armchair Economist” – purely average

I’m quite interested in economics; I’m not an economist, though I have done some economics classes over the years, and I find popular economics books like Levitt and Dubner’s Freakonomics and Harford’s The Undercover Economist fascinating. In another life, I might have been an economist.

I recently read the first of this style of popular economics books, Steven Landsberg’s The Armchair Economist: economics and everyday life, originally published in 1993.

Some of the book was interesting; some baffling. But much was irritating and badly written or edited, too.

He brings it on himself. In his chapter “Choosing Sides In The Drugs War”, he lambasts Richard J. Dennis for “the most poorly executed cost-benefit analysis ever to appear in print” (p95), in which (according to Landsburg) Dennis counts “costs as benefits… benefits as costs, omitting a variety of important factors on each side of the ledger, and double counting some of those that he remembers to include” (ibid).

And then in the later chapter “How Statistics Lie”, Landsburg writes this paragraph:

“Suppose that initially we all have incomes of $50,000, with no inequality whatsoever. Now a change in the economic causes half of all incomes to fall to $40,000 while the other half rise to $100,000. You might think that half of all households are worse off and the other half are better off. But if we all take turns, so that half of us earn $40,000 in the even-numbered years and $100,000 in the odd-numbered years while the rest of us do the reverse, then we all average $70,000 a year and we all win.” (The Armchair Economist, p133.)

This is undoubtedly true. But it is also meaningless. If the economy Landsburg writes about has 100 people in it, the initial state is total income of $5,000,000 (average income $50,000); Landsburg then waves his magic wand (and I bet governments throughout the world wish they could do the same just now!) and 50 people earn $40,000 and 50 $100,000 – as Landsburg says, average $70,000 with total income of $7,000,000. Or, he could equally well wave his wand and everyone’s income could rise from $50,000 to $70,000 – with no increase in inequality.

All that Landsburg has shown, I think, is that if the total income goes up, the average income goes up.

Who’d have thunk it?

(It is of course possible that I am missing something. In which case I will be glad to be enlightened!)

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3 thoughts on ““The Armchair Economist” – purely average

  1. Steven E. Landsburg

    The point of the example is that a rise in annual income inequality does not imply a rise in lifetime income inequality.

    That’s very different from “if total income goes up, the average income goes up”.

    Reply
    1. patrickhadfield Post author

      Thank you for reading, and commenting on, this post. It is easy to forget the ease with which the internet is able to connect people.

      I take your point, but believe that your use of an example in which the average income increased as well as annual (but not lifetime) inequality was unnecessary and confusing. Could it not have been equally well illustrated by maintaining average income at $50k with half earning $40k and half $60k?

      Reply
      1. Steven E. Landsburg

        You are right that it might have been clearer with your proposed alternative example. I had thought it would be more striking to demonstrate that even if

        a) Annual income inequality increases
        and
        b) As part of that, some people’s annual incomes go down

        that nevertheless, it’s possible for everyone to be better off (from the point of view of lifetime income). Your example is perhaps easier to follow, but the conclusion (that nobody has to be worse off) is a little less strong than in the original (where everybody is better off).

        Obviously, you’re a smart and careful reader who missed the point. This suggests that the simpler example might have been better. An alternative explanation, though, is that you just had an idiosyncratic lapse that’s unlikely to befall other readers.

        I’m currently revising the book for a new edition, and will ponder this.

        Reply

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