6 Economics Books You Must Read
Levitt's predictions vs UK stats
‘How many people here have read the book Freakonomics?’ said the energetic admissions tutor at the London School of Economics Open Day in March, during her admissions talk ; the point she was attempting to make is that every aspiring economist, or indeed anyone interested in the academic field of Economics, has (or at least ought to have had) read the cult classic that is Freakonomics.
Steven Levitt, a populist and unorthodox Economist, has written a series of essays to look at economic phenomena and uses irrefutably correct data to draw peculiar real world conclusions, which stimulate lots of thought. Examples include the undeniable link between abortion and crime rate, why fines may actually encourage illegal activity by allowing the establishment of a market price on guilt (Chapter 1, Stories from an Israeli Day-Care Centre), and he considers the economics of terror, by looking at the imperfect information associated with the Klu Klux Klan.
I was personally incredulous to accept several of the conclusions Levitt makes, shrugging them off as happy coincidences. Consequently, I chose to delve into the Abortion and Crime Rate research. In Levitt’s 2001 paper on such a topic he offered proof that ‘Legalized abortion has contributed significantly to recent crime reductions’. He showed this trend in several ways. Firstly, in the USA, there is a visible drop in crime from 1992; 19 years earlier the Supreme Court permitted abortion in America. Since the modal age of criminals in America is likely to be those aged 18-21, it is easy to deduce that crime starts to fall as the first group of citizens aborted would have been most active in committing offences. Secondly, since certain states legalized abortions at different times, this trend can be compared between states. Indeed, five states decriminalised abortion three years before it became a nationwide policy in 1973. Adding to Levitt’s claim, these states experienced the 1992 crime drop several years before those who waited until 1973, further strengthening Levitt’s argument. Levitt justified this argument as such: ‘The legalization of abortion may lead to lower crime through either decreases in cohort sizes or through lower rates of offence for these particular cohorts.’ There are fewer people generally, and fewer people most susceptible to commit crimes, in society to make those crimes, more simplistically.
In 2001, Levitt predicted that owing to Abortion, the crime rate would fall by 1% every year for two decades. The statistics prove him astonishingly accurate: In the ten years between 1999 and 2009, the number of violent crimes fell from around 1.45million to 1.25million, representing a 14% decline over these years, or a 1.302% annual decline. When considered with property crimes, it is even more accurate; at 1.27%.
In the U.K., however, such trends are not demonstrated. The adjacent diagram shows the British Crime Rate, compared with the bold black line, representing Levitt’s predictions of crime rate falling. Abortion was made legal within the UK in 1967, yet the data shows that crime most radically began to drop in 1996, about 2-3 years after Levitt’s study would have otherwise proposed, with the crime rate in fact growing the most in 1991, the year Levitt would suggest a fall could be seen!
Irrespective of British applications of his studies, Levitt’s simple to understand and easily comprehended writing style makes this of great interest and a really enjoyable and thought provocative read; a great starting point for anyone interested in understanding Economics, and more broadly, the way the world in which we live functions.
2. The Undercover Economist
I got into Economics in rather an unconventional way. As a class, in my first year of secondary school, we were collectively punished for generally disrupting and annoying our Maths teacher. The aforementioned punishment was that we were all made to return to the classroom during our lunch break to read, in silence. Not such a huge ordeal, but being twelve at the time, it was the worst thing imaginable for our class. As a further punishment, for those of us, including myself, who had forgotten, despite being forewarned, to bring with a book, we had Economics textbooks aggressively thrown down in front of us to read. My maths teacher at the time was the Head of the Economics Department; he also taught Maths as fewer students than expected had opted to take Economics that year (He used to make remarks about the Labour Market for Economics Teachers at the time).
The textbook in question was called Economics, written by Alain Anderton. In the twenty minutes or so I was in the classroom I read the first chapter on scarcity and found it very interesting and thought provoking. In fact, it was this chance event that inspired me to take up A level Economics, and subsequently at university too.
When doing my first year of microeconomics at school, I would have killed for such a book to accompany my learning. In the Undercover Economist, Harford provides excellent and amusing real world examples of these microeconomic theories we learn about: externalities, scarcity, supply and demand.
In the introduction Harford insists that everything in the world can be considered Economics (as every decision is underpinned with incentives of some sort) and that we can dispel many life mysteries by thinking logically and wearing our economic glasses (similarly to the film ‘Beautiful Mind’ and Mathematics).
This book should be read, if not for the sake of Economics, but so as to understand the ways in which we are almost being scammed on a daily basis and it will definitely provoke you to question your behaviour and way of purchasing goods and services in the future!
Daniel Kahnemann talking about his book
3. Thinking Fast and Slow
Daniel Kahnemann, a Nobel prize winner no less, is widely acknowledged as the pioneer of the increasing populist field of Behavioural Economics; which was widely unheard of merely twenty years ago. The field combines psychology and economics and throws question to the idea of the ever-rational consumer, a premise of Adam Smith's free market economy ideals.
In his book, Thinking Fast and Slow, Kahnemann first discusses his understanding of the way the mind works looking at 'two systems'. System 1 is the part of your mind that you do not consciously control - reflexes, turning your head to find the source of a noise, perceiving distance and such like, whilst System 2 performs the more difficult tasks.
As an example, there are several thought examples that can be undertaken to demonstrate the question:
A console and game cost £110. The console costs £100 more than the game. How much is the game?
Your system 1 may instinctively tell you the game costs £10, but it is not until your System 2 kicks in that you notice the correct answer would be £5. (Don't feel down heartened if you feel into the trap, so did half of Princeton students tested too).
This experiment also demonstrates that System 1 dominates System 2 as we are of the predisposition to always reserve energy and take the easiest option.
The consequences of this: our System 1, which is inherently biased and potentially incorrect, holds the principal decision power in economic choices and thus we cannot be truly rational all of the time.
This book is a great read and the thought experiments are excellent realisations as to how we behave irrationally, perhaps without knowing that ourselves!
Development Economics Hubs
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4. The Wealth and Poverty of Nations
David Landes' fantastically acclaimed book, its title themed upon the famous book of one of the founders of Modern Economics, Adam Smith, provides a fascinating insight into the causes of poverty and global inequality. It bolsters my opinion that economics holds the clues to solve the world's many problems and injustices, and this is what has drawn me to the field of study!
The content could seem down-heartening, seemingly highlighting the plight of people in developing countries and how potentially simple solutions could prevent such suffering, but Landes sees the book as a way to better appreciate the goings on of the world and then how to solve them thereafter. His book is full of historical anecdotes too, painting a fascinating story of how such inequalities came to be.
5. The Art of Strategy: A Game Theorist's Guide to Success in Business and Life
Game Theory is a fascinating branch of Economics which seeks to apply Mathematics to human decision making, particularly prevalent to economic decisions. Game Theory is ubiquitous in our society and many of us make use of it in our subconscious daily.
As a child I would religiously watch the British game show called Goldenballs. The participants would seek to reach the final round by deceiving one another and the show culminated with the final two players playing a round entitled ‘Split or Steal?’ to try and win the jackpot that had been accumulated in the previous three or four rounds. The premise of this game was that each player had two balls, one entitled split and the other steal, of which the other player could not see. At the end of an allotted time they would select either ball and the outcomes were as follows: if both select steal then the jackpot is completely lost; if they both select split then they share the money, but if one person displays steal and the other split the 'stealer' scoops the jackpot.
This game is an interpretation of the 'Prisoner's Dilemma', perhaps the foundation stone of Game Theory (although the show is likely biased as the players could communicate, had prior knowledge of the likelihood of the other lieing in earlier rounds and may have acted more altruistically on television).
Indeed the prisoners dilemma is where the art of strategy begins. The book provides a fascinating insight into this interesting field of study and does not alienate those not studying economics or mathematics by providing an accessible entry point. A must read!
6. The Worldly Philosophers
This book is an absolute delight to read. Robert Helibroner details the economic history of Great Britain by recounting vividly the lives of each of the pioneering economists of the time within the context of their thinking at the given time. The book is so well written, with a beautiful use of the English language to demonstrate its points and details the lives of the economists to such great detail that you can imagine being in the room with them when they discover their ideas. What I most liked about this book is that it has encouraged me, a student of Economics, to consider the world around me and the current socio-economic culture in which I live and in this respect this book, regarding the history of economic thought, has a futuristic element too. I really would recommend this book as it is truly fascinating and an excellent supplement for those with a passion for economics.
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