Review: Hidden Order

Hidden Order
Hidden Order: The Economics of Everyday Life
David Friedman
HarperBusiness, HarperCollins Publishers, New York, NY, 1997

Review Copyright © 1998 Garret Wilson — October 15, 1998; 2:30pm

I have 50 books on the top of a table. One of them is Hidden Order: The Economics of Everyday Life by David Friedman, the rest are dense, hardcover tomes with complex language nary an economics joke within. I want to maximize my knowledge of economics in the minimum amount of time (and the minimum times of falling asleep while reading). Being a (sometimes) rational individual, choose the former.

That’s the kind of style you can expect in Hidden Order, along with a multitude of useful economics concepts. If you aren’t an economics expert (after all, that’s why you’re reading the book in the first place), you may not even realize how useful and integral the concepts are in and to economics. For example, you will not have read very far in the book before you go shopping with Mrs. Smith. As you visit two separate grocery stores, you learn about a curious little thing that can appear on a graph: an indifference curve (28). Its relevance becomes clear, not only later in the book but also when you read a (gasp) real economics book and you see the same thing. Only this time, you’re reading about cars and wheat being traded between countries. And in the latter instance, it seems so stuffy. Stuffy but familiar and completely understood.

Hidden Order is, in short, the book I would have written on economics (if I actually knew anything about economics beforehand). It explains economics using everyday language, common situations, and familiar objects (e.g. grocery shopping and waiting in lines). Furthermore, economics is then used to explain situations of everyday life (e.g. marriage and crime). David Friedman apparently has written the book for the purpose of teaching you something, something which many textbook writers apparently don’t feel the need to take into consideration.

One of the most important concepts in the book is introduced early, but it reverberates through all of economics is the idea of rationality. It seems that many situations, such as buying groceries from a grocery store, can be looked at overall as if someone were buying all the groceries after taking the time to analyze a certain set of variables and make a rational decision on which groceries to buy and how much. Now, each person who buys groceries may not act rationally. Some people may purposely buy vegetables that cost more than at another store that is nearer. That would be irrational. But all the actions of all the people buying groceries tend to even out, allowing us to analyze the collective actions as one big, rational set of decisions.

As I mentioned, ideas in the book may not seem significant at the time, but they appear not only in economics but many other areas. The "Prisoner’s Dilemma" (152) seemed immediately familiar — I had just read about it in the context of international relations in Nye’s Understanding International Conflicts (12).

Friedman’s explanation of the arguments against protectionistic trade policies are brilliant and easily understood. One simply needs to follow his explanation of two roommates sharing the responsibilities of cooking and cleaning up afterwards. His description explains why it would benefit the two to share in the work if one of the roommates was better at one job than the other — even if he/she was not better than the other roommate at either job (i.e. he/she is relatively better at a job, even if not absolutely better) (67).

From his description, it follows that countries can benefit from trading as long as one of the countries involved is better at producing one thing than another (69). Yeah, but... There must be some logical element missing here, but I haven’t found it yet. And as I was mulling over the reasons why this couldn’t be correct, I started reading the recommended reading list for my International Economics class, and found that this is basically an accepted idea (but not as well explained as done by Friedman, of course) in modern economics.

Furthermore, when the professor in the actual International Economics class demonstrated the argument graphically, it was easily understood from the aforementioned reading, even though I hadn’t yet reached the almost identical graph in Hidden Order, wonderfully entitled, "How to Hit Yourself on the Head with a Hammer" (282). Similarly, the ideas of marginal cost and marginal value, fully explained in the book, are absolutely essential in economics analysis.

Hidden Order does leave me with some questions about validity, but I assume that these are common questions concerning forms of market systems. For example, in showing how a free-market system is efficient, Friedman introduces the concept of a bureaucrat-god, an entity that has all knowledge of the market that any individual has and could adjust the market accordingly to make it more efficient. Could the bureaucrat-god produce a more efficient system by changing the allocation — that is, who gets what?

Friedman’s argument is that no, each item has been allocated to the person who values it the most. (But, as an unrelated side-note, does Friedman himself confuse allocation and distribution here, according to his definitions on page 248?) Since overall, marginal value to person is equal the price paid, if the bureaucrat-god were to take an object from a person who bought it and give it to a person who did not buy it, it would taken from the person to whom it was worth more and given to the person for whom it was worth less (228).

There are several objections I have to this at first glance (which is not to say that any of them are correct objections.) This discussion assumes that dollars themselves are worth the same to everyone. If one person (Richie) has $1000 and other (Poorie) $10, Richie may buy a turkey for $5, but Poorie would only pay $2 (because Poorie must pay rent to have a place to live). Does this mean that the turkey is worth more to Richie than Poorie?

Since Richie has plenty of money, $5 is worth only 0.5% of the total amount he has, while to Poorie $5 is worth 50% of the total amount he has. So, even though Richie paid more dollars for the turkey, the actual amount Poorie would have paid was more valuable to Poorie than the amount that Richie actually paid was worth to Richie. So taking the turkey from Richie and redistributing it to Poorie would mean that we would be taking it from the person from whom it is worth less (even though they paid more physical dollars) and giving it to the person for whom it is worth more (even though they would have paid fewer physical dollars).

This does not mean that I am (or am not) becoming a Marxist or something — it simply means that I initially have some questions, which I guess means I don’t necessarily accept Friedman’s assertion that a free-market is completely efficient, even in economic terms. I admit, however, that there are many more things that must be considered, such as whether the market itself would automatically equalize the value of a dollar between Richie and Poorie somehow, or if in a completely free market the idea that a dollar’s worth varying between people even makes sense.

Economics is apparently a huge subject, and a lot of concepts are (quite clearly) covered in the book. They can’t all be covered in depth, of course. One little thing that was not fully brought to light occurs in Friedman’s reasoning that his carrying a large walking stick will keep muggers from stealing from him, on the basis that they want to minimize their effort when stealing. "By raising the cost I could inflict on them if I chose to resist, I was also announcing my intention of resisting. They would rationally choose easier prey" (298). "Little old ladies… get mugged. Football players do not" (299).

Two things are not taken into account in this scenario. The first is that, although carrying a large stick should reduce the probability of getting mugged, since, on the average, muggers should act rationally and avoid targets that raise the cost of mugging, this is only the rationality of all muggings. If you recall the economic application of rationality, it applies to groups; therefore, all muggers as a whole take this into account, reducing the number of people with large sticks who get mugged. It does not preclude any one (or more) mugger who, acting irrationally, decides to attack even a football player carrying a crowbar.

The second, and possibly the more important, thing to take into consideration is that muggers will probably minimize their effort in relation to the amount of money they expect to get. It then follows that, if a mugger were to infer from your carrying a big stick that you are carrying thousands of dollars, it may then make it more profitable to go after those with big sticks; the mugger would get a bigger return on the output of effort than a little old lady with no stick and not much money.

Little omissions like that might as well have been included (can you include an omission?) for the very purpose of stimulating further discussion and a critical analysis of the ideas involved, because they do not subtract from the value of the book, and in some instances (as the above case illustrates) add to it by encouraging thinking. Indeed, throughout the book are "To Think About" sections, along with end-of-chapter "For Further Reading" lists. I find it obvious that Hidden Order not only proved invaluable by providing necessary economics concepts, it also gave me the ability to make the analyses (however simple) you see here. Hidden Order is an essential read for economics beginners, if I do so say myself. After all, it’s the economics book I would have written, if only I had known something about economics to begin with.