Theory Versus Reality

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Economic theory is a powerful tool and results in creative ways to address old problems. But sometimes theory seems to run amok in the harsh light of reality. Some thoughts about economic theory and economic reality.... If you are too impatient, just go to the end of this post.

Trade Promotes Peace (Cafe Hayek 11/20/06)
Back in 1748, Baron de Montesquieu observed that "Peace is the natural effect of trade. Two nations who differ with each other become reciprocally dependent; for if one has an interest in buying, the other has an interest in selling; and thus their union is founded on their mutual necessities."

Okay, then my thought about attempting to normalize relations with Iran as a step toward Middle East peace (and North Korea just to get our troops out of South Korea?) should begin with dropping all trade sanctions and granting most favored nation status... if we want to be good economists?

Selling body parts is a good economic idea (Cafe Hayek 11/20/06)
It is against federal law to receive anything of value in return for donating a kidney. The result is the following kind of absurd kidney gymnastics reported by Forbes: (quote followed)....

What a bizarre definition of ethics (not allowing people to sell body parts). Try and explain that one to your kids. I can't.

Okay, then it's all about individual decisions by well informed people like this Pakistani farmer... "I pant. I cannot run. I cannot pick up heavy things," said Allah Yar, a 50-year-old farmer who has suffered poor health for seven years since selling a kidney. He needed to pay off a $3,000 loan, but got only $1,200 for his kidney, meaning he remains in debt.

Sitting nearby, Mohammed Akram, a brick kiln worker, sold his kidney to pay off his father's debt.

"I cannot work like I did before. I cannot walk. I cannot run," Akram, 22, said. "I did this for my father but destroyed myself."

Safety regulations are costly and ineffective (Cafe Hayek 11/15/06)
Sam (Peltzman) found that mandatory seat belts did indeed cause more accidents. But this effect was roughly the same as the effect in the opposite direction, that accidents were less harmful. So the net number of fatalities of drivers was unaffected by the law. Sam found some evidence that the effect of the law might be to reduce driver fatalities. Unfortunately, because drivers were more reckless, there were more accidents involving pedestrians and cyclists. So their death rate due to cars increased. Total deaths were unchanged. (ditto for airbags)

I won't attempt to answer that. I let the data speak to it. From the NHTSA/DOT:

• In 2001, the estimated economic cost of police-reported crashes involving drivers between 15 and 20 years old was $42.3 billion.⁷
• Safety belts saved more than 12,000 American lives in 2001. Yet, during that same year, nearly two-thirds (60 percent) of passenger vehicle occupants killed in traffic crashes were unrestrained.¹²
• Research has shown that lap/shoulder belts, when used properly, reduce the risk of fatal injury to front-seat passenger car occupants by 45 percent and the risk of moderate to critical injury by 50 percent. For light truck occupants, safety belts reduce the risk of fatal injury by 60 percent and moderate-to-critical injury by 65 percent.¹³
• Safety belts should always be worn, even when riding in vehicles equipped with air bags. Air bags are designed to work with safety belts, not alone. Air bags, when not used with safety belts, have a fatality-reducing effectiveness rate of only 12 percent.¹⁴
• Safety belt usage saves society an estimated $50 billion annually in medical care, lost productivity, and other injury-related costs.¹⁵
• Conversely, safety belt nonuse results in significant economic costs to society. The needless deaths and injuries from safety belt nonuse account for an estimated $26 billion in economic costs to society annually.¹⁶ The cost goes beyond the lost lives of unbuckled drivers and passengers: We all pay - in higher taxes and higher health care and insurance costs.

Economic theory... like many theories taken past their legitimate purview... may fail the "real world" litmus test. I'll admit that I express opinions as my own, not as part of an academic discipline... but I use data and expert opinions as much as possible to support my own opinions. Economists might think twice about straying too far with opinions that are not necessarily economic at their core.

For views differing somewhat from Cafe Hayek try: Economist's View and specifically this, for example. There are those who question how good it is to let China "subsidize" us through "free trade" and "globalization". It may well be that we are subsidizing China and India and other competitors.