Friday, June 28, 2024

Common Sense Economics: not so common sense?

 From my Goodreads review: The authors cover a lot of ground in macroeconomics. While they claim this is common sense, there are still a lot of assumptions and conclusions based on a certain worldviews and political biases. For example, they say lower tax rates boost the overall economy. In this example, most argue that high tax rates reduce capital expenditures and expansion in hiring, etc. However, the authors give examples that show businesses make expenditures because high marginal tax rates (such as Britain’s 98 percent in the 1970s) actually boosted expenditures, boosting the economy because the tax savings paid for the expenditures. Likewise, common sense would tell you that a business owner will invest in an opportunity—buy equipment, hire employees—when the opportunity will make money, such as customer demand is increasing. Taxes will take a portion of the profit, but a big chunk will go into the business owner’s pocket or be reinvested for further growth. If a business owner has a money-making opportunity, and says to himself/herself, “Well, I’d do it if Congress would cut taxes” then that business owner is not showing common sense and is claiming to pass on business growth when demand is high.

There are a lot of platitudes in this book and reliance on the free market. They ignored their own discussion of how free markets led businesses to petition governments to restrict trade through licensing, certifications and other barriers for new entrants into the market space. They also ignored history that led to slavery for economic reasons, robber barons in the late 1800s as the Industrial Revolution heated up. Free markets meant low wages, unsafe workplaces, unsafe food, monopolistic pricing, and so on. Adam Smith’s invisible hand of the free market was also fooled by the “growth” of 1930s Germany and fueled Hitler’s militaristic expansion. Depending on abundance of resources, free trade can decimate national economies, or at minimum certain business sectors. We just have to look at how much of our consumer goods in the US are produced in China. Or as one person told me, “It costs me more to raise chickens in Haiti than the cost to import from the other side of the island, from the Dominican Republic.” 

Surprisingly, they seem to totally ignore the work of Kahnemann, Tversky and Thaler who pointed out the irrational decision-making processes of consumers, business leaders and economists. Thaler mentions in an interview how even economists won’t drive 10 minutes to save $5 on a $400 item, but will drive that distance to save the same amount on a $20 item. The cost and savings are the same but the decision is different. Why? Anyone who pays attention understands that most of us in the real world don’t see common sense or rationality applied. But neither does this book.

I appreciate the publisher providing an advanced copy.

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