Tim Hardford: Economy Theories Analysis

The Logic of Life

This book was written by Tim Harford. He is an economist, journalist, broadcaster, a father to three children and a husband. He is the author of the books, “The Undercover Economist” that sold 1 million copies worldwide in 30 languages, “The Logic of life”, “Dear Undercover Economist”, “Adapt”, and “The Undercover Economist Strikes Back”. Tim is a senior columnist of the long running column, “The Undercover Economist”, at the Financial Times. He has already spoken at TED Global 2011, Sydney Opera House 2012, Wired 2012, Pop Tech 2012 and Royal Economic Society annual public lecture 2013. He is a visiting fellow at Nuffield College, Oxford. (Harford, 2014). He was an economist at Shell and World Bank. He has won lots of awards in journalism and recognitions for his complex ideas through witty and irreverent touch. He is a presenter of BBC Radio 4’s “Pop Up Ideas” and “More or Less”. “More or Less” has won a Royal Statistical Society award for excellence in journalism in 2010, 2011, 2012 and 2013. Tim Harford won the Bastiat Prize for economic journalism in 2006 (Leigh Bureau, n.d.).

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We define life as something simple when the journey is enjoyably smooth. When the going gets tough, life is described as complicated. This world is constantly changing from better to worse or the other way around. This change causes life to be unpredictable. This book carries us to the hidden logic of life that is affected or molded by numerous unseen rational decisions that we make and cause the constant changes around us. To understand this world and be able to make a difference, we should understand the rational choices that shapes it. In this book, the author uses the “rational choice theory” that is being compared to an x-ray machine that produces an x-ray image of human life. Just like the x-ray machine, this theory is limited and cannot show everything and is neither something attractive. This tool maybe limited but it projects something that we could not see before. This book would like to show a world that can be explained by economics and unfold life‘s mystery through the use of “rational choice theory”.

Rational choice theory is a principle being used in this book, “The Logic of Life”, to explain how economics works or is being applied to explain this world. Rational choice theory is a principle in economics that assumes that individuals can make prudent and logical decisions or choices that provide them with satisfaction. Tim Harford defined rational people to be responsive to incentives: when it becomes more costly to do something, they will tend to do less; when it becomes easier, cheaper or more beneficial, they tend to do more. People weigh their choices through the overall limitations or the future consequences of the present choices regardless of the costs and benefits of a specific choice. In the first chapter of this book, it tackled about how the knowledge of the consequences of sex changed the preferences of young people and the persons being involved in such activity. There were lots of people preferred blowjobs than going all the way because they thought that it would be costly if they will acquire HIV or get someone pregnant. There were others that became cautious about the sex, but there were some who took the risk due to monetary constraints. Being a risk taker doesn’t mean that he or she didn’t weigh the costs, they did, but they just need money than sexual satisfaction and safety. People do significant things in response to the changes happening around them like exposing themselves to sexually transmitted diseases for money. In the second chapter of this book, the author talked about hidden logic in gambling, war and addiction as a rational behavior through the application of the game theory of John von Neumann. Game theory is trying to focus on the participants in the game or in the particular situation and predict their optimal decision or strategy to win or lose. Game theory was mainly crafted to analyze Poker and War, but they both have little in common. In Poker, it is a zero-sum game wherein one player’s lose is another player’s gain. On the other hand, war is neither a zero-sum game nor has a well-defined rules. Addiction is torn between being rational and irrational. Economists Kevin M. Murphy and Gary Becker pointed out in this book that addiction is entirely rational because people consuming addictive products such as cigarettes, alcohol, slot machines, calculated that the pleasure of the habit will outweigh the pain. I can agree with these two economists, being addicted in simple things such as chocolates or junk foods are choices that we make for satisfaction. We know the consequences of too much consumptions of these things, but it’s the urge inside us to gratify our cravings. As rational people, we also respond to increasing prices of these goods. We try to think of substitutions and limitations for the cravings, when the situation becomes unstable and we are on the losing end. According to another economist, Schelling, addiction is a battle of self-control and neither purely rational nor irrational. For him, it is a mind battle that involves self-discipline and choices that we can maneuver. The third chapter is something interesting that involved economics, marriage and divorce. Supply and demand has a great impact in the choices or preferences of people for dates or partners in life according to this chapter. Due to a limited supply of men, women being rational and knowledgeable of the scarcity, tend to bargain or offer more, in the form of physical, mental or monetary value that are highly competitive. I guess it is true since there has been a controversial increase in the number of women undergoing plastic surgeries, and women in the universities to increase their potentials by being attractively smart and rich to men. As of the present, divorce has decreased unlike in the early 1970’s where the rate peaked, for a reason that people became more rational. Modern world has learned to enjoy taking pleasures with each other without being tied in the marriage knot and responsibilities of being husbands, wife or parents. They have learned to test the waters if the relationship would work for a lifetime commitment or will it just be another expensive divorce trial and compensation. In the following chapter, tournament theory is being used to define the rational responses of employees in their performances and relationship with their co-workers in the company. Employees perform, earn and stab each other’s back according to the incentives that they receive from the company while their CEO just sits comfortably on his chair earning lots of money through his hardworking employees. The last chapters showed how politics, great cities and history has been molded by rational behaviors.

Humans are indeed rational beings with rational behaviors that respond accordingly to the changes in the environment. We make rational decisions often, but not all the time. Sometimes our response to the change doesn’t make any sense. We respond according to what we value most at that given time. People weigh things, the costs and benefits of the decisions that will be made. In most situations, we tend to bluff, bargain, substitute or use different strategies in order to win. The rationality of human beings are highly affected by the costs, benefits, supply, demand, and utility in our economy, lifestyle, work, and even in our homes. We make logical decisions, but not all is beneficial. This book is a great help in understanding why people make foolish and wise decisions in life. The rational behavior of people can affect stagnation and progress of the economy as well as that of the health economics. Choosing blowjobs over penetrative sexual intercourse to gain sexual pleasure without being at risk to having AIDS or being pregnant doesn’t mean being safe to other health problems. Oral sex is just a low cost substitute sexual pleasure but has health issues that can be lighter than that of AIDS such as gonorrhea. Hookers knew that not using condoms can make them more vulnerable to sexually transmitted diseases but they tend to bargain unprotected sex to earn higher prices because of the need of money than safety that cause in increase in the rate of cases of AIDS. Addicts respond to increasing prices by lowering the doses or intake of alcoholic beverages, tobaccos, or prohibited drugs that can contribute to a decrease in mortality rates, but decreases the income of suppliers and retailers. These decisions can either decrease or increase consumptions of goods and services as well as the supply and demands in the market. In either ways there is a win-win, lose-lose, or win-lose situation in the economy. There are people who chose to have a healthy lifestyle but there are those who were forced to have a healthy lifestyle due to financial constraints and overwhelming increase in the prices of goods that they were addicted to. The fluctuation in the morbidity and mortality rate in a particular place can also be determined by the rationality of human beings of choosing their priority. Some of the decisions can be positive and some can be quoted as insanity, but understanding the reasons behind every decision can explain that those were just backfired rationality. People are pretty smart that our rational behavior has helped in shaping the world for years and if it will be used well it can help in shaping more years.

References:

Tim Harford. (2014). Tim Harford The Undercover Economist. Retrieved on November 15, 2014 from http://timharford.com/etc/biography/

Leigh Bureau. (n.d.). Tim Harford. Retrieved on November 15, 2014 from http://www.leighbureau.com/speakers/THarford/