In my favourite Bruce Lee movie Enter the Dragon (which I have watched at least a dozen times) there’s a very telling scene. Just before a particular fight, Bruce Lee’s opponent, to demonstrate how awesomely tough he is, holds up a wooden board and with one swift punch smashes it to bits. Bruce Lee impassively looks him in the eye and calmly says, “Boards don’t hit back.”
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Category: Incentives Matter
Happy 101st Birthday, Milton Friedman
Today is the 101st birthday of Prof Milton Friedman (1912 – 2006). His erudition, eloquence and dedicated struggle for human freedom and dignity have helped advance civilization. Here he is on Phil Donohue’s show in 1979. In this 2-minute extract, Donohue asks him about capitalism and greed. The response is classic Friedman — devastating but funny, profound and based entirely on common sense. Happy 101st birthday, Milton Friedman. May your tribe increase. Your eloquence has illuminated the world.
Three Lessons of Development Economics, or Why Utsav Mitra is Mistaken
The first lesson of development economics is that economic policies matter. Even if a country has everything going for it, lack of good policies condemn it to poverty. So it is easy to believe that if only good policies were known to those in power, economic development would necessarily follow. My good friend, the globe-trotting adventurer and consultant to capitalists, Utsav Mitra, brought that lesson to mind in a recent twitter exchange on my timeline. As a student of development, I have written a bit over the years on the matter and Utsav refers to it in a tweet which is embedded below.
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Incentives and Policies
Capturing Externalities
It’s an economics truism that generally people respond to incentives. If you truly and deeply understand that, you know a fundamental truth about the world.
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Of Freedom, Markets, and the Future of India
Markets Work, Incentives Matter
The two broadest generalizations one arrives at from a study of economics are that markets work and that incentives matter. People respond to incentives because that is at the core of what it means to be rational. To the extent that humans are rational, their behavior is predictably in the direction that existing incentives point to. Trade between humans is rational because both parties in any voluntary trade benefit. The abstract mechanism which enables trade is called the market. Markets work in the sense that they maximize the gains from trade among an arbitrary number of entities. There are other methods of enforcing trade among people, such as the command and control mechanism often employed by communist governments. But they are at a distinct disadvantage relative to the market because the latter is based on the premise that rational actors respond to incentives.
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Milton Friedman: A Joke and Some Serious Stuff
One day an economist looked up and saw a little girl being attacked by a vicious dog, just down the street. He rushed over and saved the girl by strangling the dog.
A reporter interviews him and says, “Sir, this is a wonderful thing you have done. Did you say you are an economist?”
“Yes, I am,” says the economist.
“Very good, sir,” says the reporter, “this will be our lead story tomorrow, and the headline will be ‘Radical libertarian economist saves little girl from vicious dog.‘ ”
“Well, I’m not that radical,” says the economist. “I’m really more of a classical liberal.”
The reporter scratches his head and says, “Well, we’ll come up with something. Whose views would you say you are closest to?”
“Oh, I suppose it would be Milton Friedman,” says the economist.
Next day, the economist buys the paper. Across the front page is splashed: “CHICAGOITE KILLS FAMILY PET!”
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Life is a Random Draw 