An excellent treatment of everyday economics

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	• The Undercover Economist: Exposing Why the Rich Are Rich, the Poor Are Poor--and Why You Can Never Buy a ... Tim Harford Random House Trade Paperbacks, 2007 - 288 pages average customer review:based on 40 reviews view larger image
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highly recommended

Powerful and fun!

Who said that economics was boring?

Tim Harford, a young English economist, has written a splendid book, probably the best I have read of its kind, about the application of the basic economic principles to little things. This book is for anyone with common sense ---even economists--- who want to better understand the world we live in.

The analysis is rigorous and consistent, yet simple and fun. In a natural way, Harford reaps the rewards of almost 300 years of economic doctrines to explain how things work, why frequently they fail to work properly, an what can be done to fix them.

Setting "good economics" at the service of anyone who wants to learn from it, the author explains with a clean logic why freedom and trade probably are the main pillars of modern societies. Indeed, it seems that there is not more direct way for achieving sustained economic growth and social development.

Harford emphasizes the goodness of a free market, in which prices give adequate information for efficient resource allocation, but without idolatrizing this system of exchange. In fact the author devotes many pages of the book to explain the serious problems that emerge when imperfections, as the lack of competition, the presence of externalities, information asymmetries, and inadequate institutions, are important.

Current affairs as corruption, poverty, globalization, environmental problems, and the emergence of China are analyzed with good detail under the magnifying glass of the "undercover economist", who always offers a fresh perspective of the problem and an opportune remark. If these remarks were listened by at least some of the people that actually takes policy decisions, no doubt it will deliver some gains to more than one person without taking from any other.... Pure economics!

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An excellent treatment of everyday economics

I must begin by saying that I liked this book very much. Not to cut suspense, since the review is obviously favorable all along, but just to set a positive tone for the start.

On the surface, "The Undercover Economist" is just another popular economics book, of the kind that is quite common lately (Freakonomics is one example that immediately comes to mind). However, once you finish reading it (paying attention all the way, of course), you realize it presents some relatively deep ideas, explaining them very thoroughly and logically connected pieces from different aspects of economics.

The book begins by a thorough overview of supply and demand, providing simple and befitting examples, both from real life and imaginary. Next, it treats the topic of price targeting (also called "differential pricing") - with really a huge assortment of examples from diverse fields. Then, it explains about free markets and what's good about them.

The connection of market freedom to "finding the truth" is enlightening, and becomes even more so while reading further. The author then moves to more macro-economic topics, discussing globalization and the economic situation in third world countries, such as Cameroon. Finally, he concludes the book with a thorough treatment of the changes in the Chinese economy in the past 30 years. This is the best part of the book, in which all the concepts presented in previous sections come together to explain why the communist system prevailing in China before 1976 failed, and why the gradual freeing of its economy in the years that passed since succeeded on a magnificent scale.

Here are another few topics that I found interesting, in no particular order:

* Why is wine always very expensive in restaurants ? Because one of the big costs in a restaurant is table space. Restaurants would therefore like to charge customers for dawdling, but because they can't do that, they charge higher prices for products that tend to be consumed in longer meals, like wine, appetizers and desserts.
* The story of how the Environmental Protection Agency (EPA) in the USA reduced sulfur pollution problems in the 1990s by cleverly issuing "pollution permits" that factories could buy. This way, the "truth" was exposed - the real costs of pollution reducing equipment to companies.
* Did you ever think about what an "efficient economy" means. Simple. If we can point to a change that could make at least one person better off, and nobody worse off, we (economists) say that the current situation is inefficient. This simple explanation is much deeper than it first appears, as it sets one of the basic rules of free markets - in an efficient market, everyone lives on the margins (excepts of one having scarcity power). If some field is too profitable, more competitors will enter it.
* There is an excellent treatment of the problems with the USA's current health care system that's worth reading, not only for Americans.
* When we bash dictatorships in third world countries, we must keep in mind that not all dictatorships are equally bad. In fact, stable dictatorships damage their country's economy much less than unstable ones. This is because stable dictators expect to stay in power for a long time, and hence don't have an interest to rob the economy too much, because that will reduce from their future profits. Unstable dictators, OTOH, are the worst kind - they just come to power, steal as much as possible and disappear. The author cleverly compared stable dictatorships to biological viruses, that have over time evolved not to kill the host body, but rather to use it in order to feed and reproduce to other bodies.

As I mentioned, I really liked this book. In fact, I think it's one of the best popular-economics books I've ever read. It is very highly recommended.

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Econ 101 Deja Vu

Not as incisive as all the reviewers seemed to think....that is all those folks in New York and Washington. A nice review of how principles of economics work out in the marketplace. A bit thin on decisions made by individuals. Still, a useful primer for the person who never thought about economics before.

The Economist as Detective

Ever since the surprise success of "Freakonomics", a flood of economics books for the general public have been published, all trying to cash on the success of that peculiar best seller. According to the principles explained in Tim Harford's book, that is probably a mistake: profits come from scarcity - so further books about `the economics of everyday life' face diminishing returns. And yet, Harford offers several explanations as to why such books may continue to be published: one is that if everyone thinks that economics books are going to be best sellers, an editor who wouldn't publish economics books may lose her job. I'm merely speculating, of course, but this is what happened (with dotcom stocks instead of econ books) to Tony Dye, chief executive of Phillips & Drew (pp. 135-137).

Tim Harford's stuff, though, is worth reading. A regular contributor to slate.com and the financial times, Harford has the gift of explaining complicated economic ideas in accessible language.

Although the comparison to "Freakonomics" is made prominently by the book's cover (which in my version includes an endorsement from Freakonomist Steven Levitt himself, as well as a description as the "elder sibling" of Freakonomics by `The Economist'), `The Undercover Economist' is the better economics book. Freakonomics, after all, doesn't teach too much economics: beyond emphasizing that "people respond to incentives" (an important message, for sure) it answers such questions as whether Sumo wrestlers cheat (They do) and what name should you give your child (It doesn't matter). Harford, on the other hand, explains such valuable economic concepts as rent seeking, externalities and asymmetrical information, and does so in a language that suits both academics and laypeople, with fun examples and a little history of economic though to boot. What more can you ask for in a popular book?

For those with a little knowledge of economics (I have an undergraduate degree in Business Economics) much of it will be familiar. And yet there are enough interesting tidbits that don't make it into your average introductory economics textbook. The chapters about the stock exchange and the application of game theory for auctions were both informative, thought provoking, and fun to read.

For me, the great revelation was the discussion of the environmental effects of globalization. I admit that I have long considered environmental damage to be the most credible counter argument to economic benefits of trade; But Tim Harford makes a good case that that ain't so. "Races to the Bottom" in which countries compete for the worse environmental regulations are unlikely, Harford argues - the advantage in producing "dirtily" is simply not big enough. Rather, Harford shows that protectionism leads to over production, and thus to pollution. And yet, Harford acknowledges that economic growth as such does hurt the environment. And therefore the dilemma of environmentalism or growth is not entirely imaginary - just exaggerated.

There are times when Harford does not raise his opponent's best arguments. In the chapter on free trade, Harford does not discuss various theories of Path Dependencies and learning curve. In the chapter of poverty, he hardly discusses the effects of the environment on economic growth (a major issue in Jeffrey Sachs'The End of Poverty: Economic Possibilities for Our Time), or the questionable legacy of western imperialism. I'm not saying that these are irrefutable objections - quite the contrary - but Harford doesn't quite do them justice.

Still, Harford's book is well written, entertaining, and informative. It targets the economically challenge but has something to offer to all readers, no matter how economically astute.

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Good Read About How Economics Affects Us

"The Undercover Economist" by Tim Harford gives readers an economist's view of many aspects of how the free market works and how it can bring about certain societal conditions.

Topics discussed in "The Undercover Economist" include the power of controlling scarce resources, how supermarkets price goods to maximize profits and confuse consumers, and how inside information affects negotiations.

An interesting chapter Why Poor Countries Are Poor evaluates the role corruption and kleptocracy play in keeping poor countries poor. Harford points out that corruption is not only unfair, but it's also ineffective at distributing resources and growing a country's economy.

As one resident of a poor country notes, even if the country receives massive financial aid to improve infrastructure, it doesn't matter, because the dictators tend to pocket the money. And, what is actually spent on infrastructure is often wasted.

Harford writes: "Development projects are often commissioned by people with no great interest in success but a great interest in bribes and career advancement. If the effectiveness of the project is a minor consideration, then it can hardly be a surprise if the project does not deliver on the publicly announced aims, even if it has delivered on the real aims of enriching bureaucrats." [Unfortunately, this is happening more and more in America today due to the growth of earmarks, where politicians set aside government investment for specific projects. These projects benefit cronies who in turn support the politicians.]

People have little incentive to get an education in a corrupt country, because people don't receive jobs based upon meritocracy. Jobs are given to political cronies. Governmental institutions then become dysfunctional. The institutions tend to become more corrupt. The lesson: institutions do matter, and an objective rule of law is crucial to a country's economic well-being. The citizens of a country ultimately pay for political corruption.

"The Undercover Economist" devotes one chapter to understanding what happened during different government auctions of cellular radio spectrum, i.e., the right to create cellular networks and thus sell phone service to customers. How the auctions were set up played a major role in determining if the auctions were effective in raising revenue for the government.

Harford compares the spectrum auctions to auctioning off your house, worth $300,000 and receiving either $3,000 or a whopping $2.3 million. The author includes a good discussion of poker and game theory. In the case of the successful U.K. auctions, Harford says economists showed they could "earn their keep."

"The Undercover Economist" argues it's important to set rewards and penalties, so it's in the best interests of people and industries to behave responsibly (we'll just define "responsibly" as meaning what broader society wants). By doing so, Harford suggests economic policies can address major problems not usually considered economic in scope.

For example, Harford discusses how sulfur emissions were reduced by auctioning off the rights to produce a given quota of sulfur emissions. Harford explains: "They [the EPA] set up an auction for the right to emit sulfur dioxide, which causes acid rain. Polluters were given a quota of emission permits and could either buy more permits in the auction or reduce their emissions by shutting down, installing sulfur scrubbers, or buying cleaner coal. When the EPA simply tried to tell them to install sulfur scrubbers, the power generators argued that it would be very expensive to do so, and they lobbied hard to stop the mandatory regulation. Even the EPA estimated that the cost of reducing sulfur dioxide emissions by one ton would probably be in the range of$250 to $700 and might be as high as $1,500. But when the EPA conducted the auction in 1993, very few polluters made high bids. The companies had been exaggerating their costs. By 1996, permit prices had fallen to $70 a ton, and even at that price many polluters were buying cleaner coal or installing scrubbers rather than buying permits to continue polluting. ... The regulators discovered that getting rid of sulfur dioxide was so cheap that few people were willing to pay much for the right to keep producing it."

Harford says economists today could create the same sort of auctions for dealing with greenhouse gas emissions to combat global warming. Through such an auction system, Harford says, we'd quickly learn just how much it really costs to reduce greenhouse gas emissions.

"The Undercover Economist" by Tim Harford is a readable introduction to many aspects of economics and how they play out in everyday life.

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reviews: 1, 2, 3, 4, page 5, 6, 7, 8

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