It’s easy to give economists a hard time. Like academics, it’s hard to figure out what they really do besides sit around and think about the economy. They don’t run businesses or make anything useful. Of course most big corporations have one on the payroll to look into the crystal ball and we all know that we need a few tame economists to deliver stern warnings during market bubbles and to run the Fed. But can you name a single thing that an economist has ever done that actually benefits you?
(I’m going to lay off the potential downside of economic thinking, including Karl Marx. I’m also not going to touch Fischer Black and Myron Scholes, the guys who figured out the formula used to price options. Even though their 1973 work paved the way for the leveraging and hedging excesses that caused the markets to cough up a hair-ball last year, I think they’ve paid their debt to society.)
But I do have an unsung hero-economist to tell you about, and if you’ve taken a flight on a major airline in the past 30 years, you’ve reaped the rewards of this man’s work.
The guy is Julian Simon, an economist who took his PhD at the University of Chicago and made many of his biggest contributions to the study of economics as a professor at the University of Illinois at Urbana-Champaign.
If you’re beyond a certain age, you may remember that having an airline ticket and getting bumped off an airline flight–which airlines used to do without offering any compensation–was a rage-inducing catastrophe.
Because flying with empty seats was a huge money loser, airlines routinely sold more tickets than they had seats. They saw overbooking their flights as the only possible solution to the problem of no-shows, and when more people than expected showed up, down came the ax.
Simon’s big idea was that airlines should essentially auction off the option of being bumped voluntarily. By offering an increasing amount of money to the volunteer bumpees, airlines could keep both full flights and satisfied customers.
It took a long time for this new system to catch on. Simon had the idea in the late 1960s and finally got it adopted in 1979 as part of the Carter administration’s deregulation of the airline industry.
The power of a good economic idea isn’t always obvious in the short term. But the “get paid to get bumped” idea allowed airlines to run fuller flights, make more profits, pay more taxes and have people happy to get bumped. One economist has estimated that the switch to this system has contributed $100 billion to the U.S. economy over the years.
Simon is an interesting figure in his own right, although his insistence on having actual data to support policies made him unpopular at times. But he’s a great illustration of the power of a good idea and a shining example of an economist who made a difference.