Hidden Order: The Economics of Everyday Life

"It is Milton Friedman’s son. So Milton won a Nobel Prize in economics and is a famous libertarian thinker arguing for small government. David Friedman took the libertarian project further and has done a lot of philosophical work on how a proper libertarian society could work. But alongside that he wrote this lovely book, Hidden Order . It’s sort of a textbook and sort of a popular introduction to economics—it hasn’t quite made up its mind which it is. It was published about the same time as Steven Landsburg’s The Armchair Economist , which is also a great book. Both are great introductions to what it means to think like an economist. A typical example: Friedman uses an economic lens to explain why marriage has become less popular. It’s simple: before the pill, the freezer, and antibiotics, women were kept busy full-time having babies and putting food on the table. With few marketable skills they had to stay married, no matter how miserable the relationship. Once women had more time and the ability to earn a living independently, there was far less reason to stay in an unhappy marriage—or to bother with marriage in the first place. I chose Hidden Order because it’s full of these intriguing economic insights into the way that the world works and the way the economic mode of reasoning can be powerful, but it also has a little bit of maths. So you can read this book—which is very, very readable—and, at the end of it, you have actually covered a basic microeconomics 101. I have to say, I don’t think the strengths and weaknesses of economics are best judged by whether the subject predicts banking crises. I’m not saying it’s not a problem. I’m not saying that economics doesn’t have things to think about. But the number of people in academic economics who were trying to predict banking crises was vanishingly small. Maybe that’s a problem in and of itself, but if you weren’t trying, you can hardly blame them for not succeeding. The distinction between microeconomics and macroeconomics is an interesting one. Microeconomics was always my enthusiasm. It’s trying to use mathematical logic to understand how people make choices, how they respond to different price incentives, how competition works. Increasingly, in modern times, through this new field of behavioural economics , it’s incorporated psychology as well. So, if you go to a supermarket and you’re trying to figure out these three-for-two offers, and why certain products are prominently displayed and others aren’t, all of that is microeconomics. “Microeconomics is trying to use mathematical logic to understand how people make choices, how they respond to different price incentives, how competition works” Macroeconomics is much more about, ‘Why are there recessions? Why is the unemployment rate 6% rather than 12%?’ Macro is just intrinsically a harder problem. You’ve got less data. You can’t run experiments very easily. Everything is connected to everything else. It’s just a hard problem to solve. I did write a book about macroeconomics, partly to teach myself macro… The Undercover Economist Strikes Back (2013) . By the end of writing that book, I was a little bit in love with macro. I thought, ‘Okay. I understand even though macroeconomists have made all these mistakes and even though the subject often seems highly mathematical and seems to have all these flaws, there is a reason why they do the things they do. It’s not just because they’re a bunch of crazy people. There is a logic and they do have some achievements, and there is a certain sort of beauty to the almost impossible task of trying to understand the macroeconomy.’ It’s very much micro. So let me give you one beautiful example of the way he thinks. Imagine a factory which has invented this amazing way of turning grain into automobiles. It’s like a Dr. Seuss invention, you just pour in the grain at one side and out the other side come these automobiles. It’s a Silicon Valley startup, on the coast of California. So people grow grain in Iowa and they send it to the factory, and out come cars. “Macro is just intrinsically a harder problem. You’ve got less data. You can’t run experiments very easily. Everything is connected to everything else” Then there is an investigative report by local journalists who break into the factory and discover that, actually, there is no factory. It’s just a dock. It’s a concealed dock and all they’re doing is they’re putting grain on ships that set sail for Japan and when the ships come back, they’ve got Toyotas on them. So it’s a trick. It’s not this new technology at all. Then Friedman says, ‘Okay. What’s the difference? Why does it matter that there isn’t actually a machine in the factory and that the machine is actually Japan?’ Japan is a machine for turning grain into automobiles. Should we feel differently about it? Now, whether it’s good or bad is a separate question that we can discuss and explore. But it was just a beautiful piece of reasoning that makes you understand that, fundamentally, there is an enormous amount of similarity between technological progress and just opening up trade with other countries. He then asks what the consequences would be. Support Five Books Five Books interviews are expensive to produce. If you're enjoying this interview, please support us by donating a small amount . One of the consequences, by the way, is that American grain farmers are in direct competition with American automobile manufacturers, because you can turn grain into automobiles via Japan. Therefore, if you want to protect American automobile manufacturers, you can do that by hammering American grain farmers, but is that what you want to do? Maybe. Maybe not. But you start to understand that things are connected not-at-all in the way that you thought they might have been. Friedman being Friedman, he’ll then take it further and say, ‘And therefore, free trade is great, et cetera, et cetera.’ But you don’t need to go all the way down that line to appreciate the power of that kind of reasoning. You mean like Thomas Piketty ? He’s really, really not right wing. There is a huge amount of political variability in economics. There are some very left-wing economists and some very right-wing economists, just as in any other profession. I’m not sure I would say that it’s neutral. It has certain biases to it and it leads to a certain way of perceiving the world. So I think economists do tend to the right on certain issues and to the left on others. We tend to be pro-choice. We are pro-immigration, generally, and pro-human freedom in all sorts of ways. These causes are often associated with the left. But we also tend to be pro-choice when it comes to buying from Amazon. That’s okay. You don’t have to feel embarrassed about it. So pro-market but also pro-freedom. So that often leads to economists being in rather strange political spaces. “There is a huge amount of political variability in economics” Right now in the UK, the leader of the Liberal Democrats is an economist, but both of the leaders of the main parties are very, very far away from positions that most economists would recognise as rational."