The Undercover Economist

— Exposing Why The Rich Are Rich, The Poor Are Poor — And Why You Can Never Buy A Decent Used Car! — 

Need a clue about the interconnectedness of life on our planet? The subtitle of this book hints at the ‘systems thinking’ found in the best of economists and the many real-world applications of this dark and seemingly esoteric art. With his wry and witty prose, author Tim Harford also shows that economics writers can be interesting and eminently readable, too. As he states near the end of the book, “In the end, economics is about people — something that economists have done a very bad job at explaining. And economic growth is about a better life for individuals — more choice, less fear, less toil and hardship.” While this is not Dr. Seuss and will require some attention and thought, it is an accessible book.

Harford goes “undercover” with economics because he sees many underlying systemic factors that affect relatively innocuous actions and things we cope with every day. As indicators of fruitful areas to explore, the chapter titles include:

  • Who Pays for Your Coffee?
  • What Supermarkets Don’t Want You to Know
  • Perfect Markets and the ‘World of Truth’
  • Crosstown Traffic
  • Beer, Fries, and Globalization

Now, let’s get back to the bookstore and that cup of coffee (or is it a cappuccino?) while you decide whether or not to purchase this tome, or that morning jump-start you picked up at the only coffee shop near the train station on your way to work….

“You may think you’re enjoying a frothy cappuccino,” says Harford. “But the economist sees you — and the cappuccino — as players in an intricate game of signals and negotiations, contests of strength and battles of wits. The game is for high stakes: some of the people who worked to get that coffee in front of you made a lot of money, some of them made very little, and some of them are after the money in your pocket right now. The economist can tell you who will get what, how, and why.” And with that kind of information, we can all have better choices, realize more clearly the impact of those choices, and make better decisions about our options.

Sticking with the frothy, hyperactive, brown brew for a bit, Harford acknowledges the interconnections involved in its creation. “Who, after all, could boast of being able to grow, pick, roast, and blend coffee, raise and milk cows, roll steel and mold plastics and assemble them into an espresso machine, and finally, shape ceramics into a cute mug? Your cappuccino reflects the outcome of a system of staggering complexity. There isn’t a single person in the world who could produce what it takes to make a cappuccino.”

What’s more incredible, “[t]he economist knows that the cappuccino is the product of a team effort. Not only that, there is nobody in charge of the team. Economist Paul Seabright reminds us of the pleas of the Soviet official trying to comprehend the western system: ‘Tell me…who is in charge of the supply of bread to the population of London?’ The question is comical, but the answer — nobody — is dizzying.” Throughout the book, Harford demonstrates how this system works, how it can be improved but never ‘perfect,’ who benefits and why — and how more people can gain from its wonders. It’s not pie-in-the-sky dreaming; it’s very practical and definitely possible, even if Harford’s explanation starts at an improbable spot.

“David Ricardo managed to write an analysis of cappuccino bars in train stations before either cappuccino bars or train stations existed. This is the kind of trick that makes people either hate or love economics. Those who hate it argue that if we want to understand how the modern coffee business works, we should not be reading an analysis of farming published in 1817.

“But many of us love the fact that Ricardo was able, nearly two hundred years ago, to produce insights that illuminate our understanding today. It’s easy to see the difference between nineteenth-century farming and twenty-first-century frothing, but not so easy to see the similarity before it is pointed out to us. Economics is partly about modeling, about articulating basic principles and patterns that operate behind seemingly complex subjects like the rent on farms or coffee bars.”

Stating that “[e]conomics is in many ways just like engineering; it will tell you how things work and what is likely to happen if you change them,” Harford examines the field’s principles — scarcity power, the effect of missing information, decisions that have side effects on bystanders, and others — in the context of real-world situations, including:

  • Supermarket (and other business) pricing strategies and how you can be a smarter shopper
  • The health care and health insurance crisis
  • Traffic jams and stock market gyrations and how to avoid both
  • The impact of technology and fallacy of ‘first to market’ thinking (“Google is living proof that moving first counts for nothing on the Internet. What counts is being best.”)
  • Love, war, poker, game theory, and the nature of telecom spectrum auctions
  • The downward spiral found in poor countries with corrupt governments (“The lesson of the story might appear to be that self-interested and ambitious people in power are often the cause of wastefulness in developing countries. The truth is a little sadder than that. Self-interested and ambitious people are in positions of power, great and small, all over the world. In many places, they are restrained by the law, the press, and democratic opposition. [Elsewhere, the] tragedy is that there is nothing to hold self-interest in check.”)
  • Why “globalization will never homogenize what we have, not while new ideas are always appearing and adding fresh ingredients to the slowly turning blender of economic integration”
  • China’s economic growth, India’s relative stagnation, and the impact — direct and indirect — of both countries on other world economies
  • The usefulness of world trade and how a “‘no imports’ policy is also a ‘no exports’ policy” (“Trade can be thought of as another form of technology. Economist David Friedman observes, for instance, that there are two ways for the United States to produce automobiles: they can build them in Detroit, or they can grow them in Iowa. Growing them in Iowa makes use of a special technology that turns wheat into Toyotas: simply put the wheat onto ships and send them out into the Pacific ocean. The ships come back a short while later with Toyotas on them. The technology used to turn wheat into Toyotas out in the Pacific is called ‘Japan,’ but it could just as easily be a futuristic biofactory floating off the coast of Hawaii. Either way, auto workers in Detroit are in direct competition with farmers in Iowa. Import restrictions on Japanese cars will help the auto workers and hurt the farmers…. The solution, in a civilized but progressive society, is not to ban new technology or restrict trade. Neither is it to ignore the plight of those people put out of work by technology, trade, or indeed anything else. It is to allow progress to continue while helping support and retrain those who have been hurt as a result.”) Perhaps, taking advantage of the thoughtful perspective of an “undercover economist” can help us figure out how?

In the end, Harford states that we all benefit by embracing “the basic lessons of economics…: fight scarcity power and corruption; correct externalities; try to maximize information; get the incentives right; engage with other countries; and most of all, embrace markets, which do most of these jobs at the same time.” Whether or not you agree, The Undercover Economist is well worth exploring.

Author: Tim Harford
Published: New York: Oxford University Press ©2006

Copyright ©2013 Jill J. Jensen | Clarity from Chaos

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