Book review: Economic Fables

One of the things I tell my first-year economics students, in the very first week of class, is that economics is about telling stories. And when there is a diagram involved, then it is an illustrated story. That idea comes through strongly in Ariel Rubenstein's 2012 book, Economic Fables. Here's what Rubenstein has to say in the Introduction:

Economic theory formulates thoughts via what we call "models". The word model sounds more scientific than the word fable or tale, but I think we are talking about the same thing.

The author of a tale seeks to impart a lesson about life to his readers. He does this by creating a story that hovers between fantasy and reality. It is possible to dismiss any tale on the grounds that it is unrealistic, or that it is too simplistic. But this is also its advantage. The fact that it hovers between fantasy and reality means that it can be free from irrelevant details and unnecessary diversions. This freedom can enable us to broaden our outlook, make use aware of a repressed emotion and help us learn a lesson from the story. We will take the tale's message with us when we return from the world of fantasy to the real world, and apply it judiciously when we encounter situations similar to those portrayed in the tale.

Rubinstein would have us treat economic models in this way, which I think is a fair goal to have. The book itself is partly a memoir, partly an exposition of some economic fables that are clearly favourites of Rubinstein's, and partly a discussion of some interesting interdisciplinary research that Rubinstein has been involved in. At times, the fables become more mathematical than is probably necessary, making them into more abstract models. The real highlights of the book are Rubinstein's linking to his own experiences, and then his discussion of interdisciplinary research in, surprisingly, linguistics.

Rubinstein starts this latter part of the book by describing interdisciplinary work, and especially the 'colonisation' of other disciplines by economists and the tools of economics. I particularly appreciated this bit:

But, in general, it seems to me that the spread of economics to other areas derives from the view expressed by the economist Steven Levitt: "Economics is a science with excellent tools for gaining answers, but a serious shortage of interesting questions."

The interdisciplinary research (in linguistics) that Rubinstein describes relates to persuasion - how one person persuades another as to the truth of something. It makes for interesting reading, but is difficult to excerpt here. Let's just say that it involves a lot of applied game theory, but thankfully is not too math-centric.

The book has lots of interesting asides, and I made a number of notes that will come in handy in both of my first-year papers next year. One bit got me thinking about the difference between income taxes and inheritance taxes (emphasis mine):

Nonetheless, and despite the fact that inheritance tax is imposed in nearly all of the countries that we envy, there is enormous opposition to instituting this tax in Israel. The tax is perceived by most people, including those who are not affluent, as crueler than income tax. This is because income tax takes something that is not yet owned, while inheritance tax takes a bite out of something that has already found a home among a person's assets.

I had never thought about inheritance taxes in this way, but it makes sense. The opposition to an inheritance tax is an endowment effect - we are much more willing to give up something we don't yet own (some of our income, as income tax), than to give up something we already have (some of our wealth). Unlike income tax, an inheritance tax is a loss to us, and we are loss averse - we are very motivated to avoid losses, and that would be expressed in an unwillingness to have an inheritance tax (and, like Israel, New Zealand currently has no inheritance tax).

This is an interesting book, and well worth reading. I can see why Diane Coyle recommended it as "a great book for economics students", and I would share that recommendation.