Thinking marginally

An aerial view of the new Eurostar passenger terminal at St Pancras Station on April 20, 2007 in London, England. (Photo by Mike Hewitt/Getty Images)

I stunk at economics because I am not good at graphical reasoning. (You can imagine how badly I did in calculus.) However, I was pretty good with microeconomics, which if you're in business school (not me) they call "The Economics of the Firm."

If you read this blog regularly, you know I write quite a bit about marginal returns, agglomeration economies, competitive advantages, opportunity costs, return on investment, and the "seen hand" or frictions in the operating of markets, particularly retail and land use demand and location decisions.

The Reason Foundation blog has a blog entry, "Think on the Margins," linking to my positive entry on the new St. Pancras Station and improved Eurostar service. Their entry is critical and negative, focusing on the marginal return of time saved on a train trip from the new investment, believing that the investment wasn't worthwhile.

But the analysis fails to take into account other costs and the return on investment that derives. One is the environmental impact of airplane vs. railroad travel. Another is the amount of energy used in these respective forms of travel. Another is deferred investments, e.g., greater investment in rail will reduce the need for similar investments in airports.

The Financial Times has some interesting letters to the editor that I haven't blogged about regarding Bilbao, but they also have had some about St. Pancras, that I didn't save (either Weds. or Thurs. or both) making the point about how short trips of under 250 miles make more sense on rail--plus rail has a long term advantage being able to run on coal...

A friend of mine finds economic thinking worthless. I disagree, because I think as an analytical tool, it's powerful, but as John Kay says, economics is about organizational forms that are particularly good at replicating but that doesn't necessarily mean that they are the most efficient.

To be useful, economic thinking must be more than marginally focused. It must focus on the entire life cycle of the unit under review, and broader impacts and calculations for overall return on investment.

(I would have written this in the Reason blog entry but the signon routine there wasn't working.)