The "Bubble:" How a High-School Dropout Taught Me Capital Theory
There have been a lot of good comments on Arnold Kling’s post on Charles Murray’s “bubble” and a few on mine. On Arnold’s post, Tom West makes a good point about not taking any particular question of the 20 too seriously.
Still, I do find something missing and it’s a point I made in “Tea and Empathy,” my response to what I saw as a little (just a little) elitism toward the Tea Party on Arnold’s part. I think that it would be absurd not to let your education influence your thinking about lots of things. If you didn’t, then education would be almost totally just a screen. That said, it would be equally absurd not to think that you can learn from people with way less formal education than your own. I won’t repeat what I said in “Tea and Empathy,” but I do recommend reading it and the comments, especially the one about the bottle of soda on the supermarket checkout belt.
Rereading my original post, I noticed that I had promised to tell how a high-school dropout had taught my UCLA apartment mate and me (when he and I were entering the Ph.D. program at UCLA in September 1972) capital theory. I never told it. Here it is:
Harry Watson, my roommate, and I were looking for an apartment in West Los Angeles or Santa Monica. We found one that was within our budget, was just over the West L.A. border into Santa Monica (on Berkeley St.), and was just a little nicer–slightly bigger bedrooms and a nice high ceiling–than the others we looked at. Moreover, it was about $20 a month cheaper–$145 a month, if I recall correctly, rather than the $165 for the others.
There was just one problem: it had no stove and no refrigerator. The woman showing it to us was a resident of the apartment block next door and had been hired by the owner to show it. Her name was Darlene. She was in her late 30s and had moved there from rural Oklahoma. We said that although we liked it a lot, it didn’t have a fridge or stove. We regretted it, but we just didn’t think it would work.
Darlene shook her head. “I can’t believe you two. You’re going to UCLA graduate school? Think about it. You’re going to save $20 a month. You can go down to a used appliance store and buy a good used fridge and stove for less than $100 each. You’re signing a one-year lease and so in the first year, it will pay for itself.”
We grinned at her, looked sheepish, and asked her to give us an hour to check the prices on fridges and stoves. We did, she was right, and we signed the lease.
Darlene, by the way, was the first person to introduce me to U.S. Thanksgiving. She found out that I was home alone that day and felt bad for me. (I didn’t. It was a great day to catch up on the daily curve balls Armen Alchian was throwing our way.) So she brought over a plate piled high with turkey, mashed potatoes, vegetables, and stuffing. Sweet!
Jan 28 2012 at 6:31pm
I wonder why Darlene didn’t buy a used fridge and stove and then charge $165!
Jan 28 2012 at 6:57pm
1972? Really? According to Wm. Allen, you missed out on the golden age of Alchian, which (coincidentally) ended when I left (1972). Apres moi, le deluge! 🙂
Jan 28 2012 at 7:03pm
Why does it not surprise me that a couple of UCLA PhD candidates would not have a grasp of simple consumer economics.
Jan 28 2012 at 7:04pm
Wow! What a great post and great links. (I haven’t been following you closely previously; I can only wonder what I’ve been missing.)
My parallel to your nickel mine experience was when (somewhat later in life) I, a fairly nerdy and unathletic guy, decided to take up scuba diving and then cave diving. Training with a very blue collar instructor (and fellow students) was an education. You quickly learn great respect for the man you’re relying on to make sure you swim out of the cave alive. Social class and higher education suddenly seems rather unimportant, and practical knowledge more so.
I now have The Joy of Freedom in my Amazon cart; looking forward to it.
Jan 28 2012 at 7:15pm
Present value = capital theory?
Jan 28 2012 at 7:28pm
From personal experience I can attest that both the fridge and the Thanksgiving half of that story sound rural Oklahoman indeed.
David R. Henderson
Jan 28 2012 at 7:29pm
Thanks so much.
Jan 28 2012 at 8:42pm
that just sounds like you’re dumb
Jan 29 2012 at 3:17am
My first year, I think, as a grad student in physics at Chicago, I and a friend from high school shared a basement apartment on 60th street, which at that time was still just inside Woodlawn, a black low income area on Chicago’s south side.
That was at the time when silver was getting close to the price at which silver certificates were monetized, which meant that a one dollar silver certificate had an expected value of more than a dollar–if silver went down it was still worth a dollar, if silver went up it was worth more. As I explained to my roommate, Gresham’s law implied that silver certificates would go out of circulation as people who had them paid with Federal Reserve notes instead. His response was that that was all very well in theory, but ordinary people didn’t know about such things, so not likely to happen in practice.
Shortly thereafter I was buying something in a small grocery store near us, I think about 61st street and Woodlawn.The woman at the checkout counter handed one of my dollar bills back to me, with the explanation that it was a silver certificate and I didn’t want to pay with that.
Jan 29 2012 at 7:06am
I must say that, and this is indeed very unfortunate, successful academic economists have were not among the brightest economists that I’ve met during my lifetime, with very few exceptions.
Jan 29 2012 at 2:27pm
Good story David. You could have said, “Lady, you’re assuming perfect capital markets?! I guess you never went to grad school.” And stormed off.
Jan 30 2012 at 1:14pm
Yes, but Darlene forgot about the time value of money! Given high enough interest rates (or for that matter, transaction costs), the pricier apartment would’ve been a good deal. (I suppose if interest rates were high, landlords would also increase apartment costs as much as they are allowed to.)
Still, a good story to show that much of what economists do is to formally show results that most people use in everyday life. That’s not a bad thing, because often enough, economists find that common wisdom is completely wrong!
Jan 30 2012 at 3:41pm
As an irony collector I would like to thank David for occassioning and others for providing this tasty juxtaposition
“Darlene forgot about the time value of money.”
“I wonder why Darlene didn’t buy a used fridge and stove and then charge $165.”
Jan 31 2012 at 9:21am
Darlene didn’t buy the used fridge because A) she was the representative, not the owner (read the story) and B) if the owner did he was on the hook for repairs and replacements, which can be dicey for used appliances. (I know) For someone who is only going to own them for 1 year, (the tenants) the gamble is worth it, for someone who’s going to own them till they break, it’s probably not.
You have to factor time, trouble, and hassle into an owners costs, even if they’re hard to monetize.
As far as this thought of there being some “intellectual class” – only an intellectual could be ignorant enough to believe in something like that!
Jan 31 2012 at 11:12am
These people that think they are the smartest people in the room but have ZERO real world experience are running the federal government. Is it any wonder why the USA is in such an economic mess?
Comments are closed.