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The Laffer curve

September 18, 2014

I read an excellent maths book on holiday this year. Yes, I read an excellent maths book this year.

My son, knowing his dad's shall we say peculiar preferred form of reading material, bought me this new book to add to my collection of recreational maths books.

 

I enjoyed several of its chapters, but most of all his recounting of the recurrent misuse of linearity. The graph below could be the projection of the number of iPhones sold; or a rising population caused by high fertility, or the rise in tax yield caused by raising tax rates.

The last example, tax rates, is the cause of the famous Laffer curve napkin.

 

Since reading the chapter, and being reminded of the Laffer curve, I have seen numerous examples of false assumptions about linearity. To give just three:

 

  • Increased turnover is always a good thing: no, there can come a point where over capacity causes quality to fall, or heedless insistence on growth causes risky behaviour; the failure of some of the banks is testament to this;
  • High performing individuals, with accomplished technical skills, are given leadership roles; it isn't necessarily the case that the best goal scorer will be the best captain or manager; the Laffer curve is particularly applicable here since neither would the just-good-enough-to-make-the-side be a good leader.
  • A woman doesn't need ever more pairs of shoes:

 

But even the Laffer curve has its limits, and sometimes linearity does apply:

  • There is always one more chess book to buy.

 

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