24 February 2011

The General Theory of the Second Best

As I understand it, the general theory of the second best states that
the second best is often better than the best. The original article by
Lipsey and Lancaster is here: http://bit.ly/hiLgM8.

An anecdote, possibly true, helps to understand the concept.

A woman, looking sad, comes to Gary Becker, the economist, for marital
help. "Gary," she says, "I'm a professor of economics. I've proven,
mathematically, that the most efficient way to run a marriage is
50:50. Here's the paper. My husband, also a professor of economics,
has read it. He finds nothing wrong with my paper. We have two small
children. I try to run my household by the 50:50 rule. I do 50%, I
expect him to do 50%. I vacuum 50%, I expect him to vacuum 50%, for
instance. I cook a meal, I expect him to cook a meal, but he just
microwaves or we go out to eat. It's just not working. I'm not happy.
I'm measuring every thing all the time. My husband is disgruntled. Our
marriage is in crisis. What's wrong?"

Prof. Becker says, "Well, your paper is perfect, I can find nothing
wrong with the concepts or the mathematics. You've come to me for
advice and so I say what I want you to do is stop measuring. Stop the
50:50 business and just see how things go. Come back in a month and
let me know things are going."

One month later, the woman returns. "Gary," she effuses, "life
couldn't be better. I'm happy. My husband's happy. Things get done,
and, if they don't perhaps, they didn't need doing in the first place.
If I were measuring, I'm sure I'm doing more than 50%, but for some
things he does 100%. It varies. Best of all, our love life's returned.
Why is this way better than the 50:50?"

Gary says, "Sometimes the second best is better than the best."

Yves Smith referenced this article a lot in her book, Econned, which
is her account of the recent financial crisis.


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