Customer Reviews

The Undercover Economist

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1 star:		(4)

 

 

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.

Tim Harford's "The Undercover Economist" is in many ways a return to the fundamentals of economics. In recent years, the field of economics has seen a growing influence of quantitative modeling and econometrics, to the extent that the medium has become the message. The complexity and elegance of the modeling often obscures the fact that these are mere tools for the study of economic behaviour. At its foundation, economics is the study of human behaviour with the focus on how people make decisions by applying (consciously or unconsciously) the basic economics concepts of scarcity, relative pricing, comparative advantage, marginal cost etc.

Harford is a columnist for the respected Financial Times and it shows in his clear and almost conversational writing style. He almost entirely avoids the use of jargon and technicalities, using simple logic and even common sense to explain economics ideas. His use of everyday situations to illustrate his points makes the book read like a collection of anecdotes, with the difference that the anecdotes serve to buttress the theme in the background. Readers will doubtless enjoy his application of economic reasoning to shopping at the supermarket, pricing of a cup of coffee, health insurance and so on. And for those who like the bigger picture, Harford's explanation of the benefits of globalisation and the rise of China are top drawer.

I wish he had not glossed over the free loader issue while discussing externalities. Similarly, in explaining the problem of asymmetrical information in used car sales, he glosses over the role of independent 3rd party information providers who can help in restoring the balance of information. Perhaps he will attack these in a future book? I for one will stand in line to buy it!

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.

This is the kind of book any non-fiction writer can envy: a complex subject described with fluidity, wit and confidence. However, the view of economics that you will get from this book is often a bit *too* confident.

For example, no distinction is drawn between what's known from empirical research and what's "known" from utterly non-empirical mathematical proofs such as Kenneth Arrow's proof of the efficiency of markets (@ 68-69). Arrow's proof is based on the properties of abstract convex sets, not on those of real-life markets. (You can get the flavor of Arrow's argument by downloading his Nobel lecture.) Moreover, Harford doesn't always integrate the subjects he discusses. Two chapters after discussing Arrow's proof, he spends a chapter discussing the impact of information asymmetries on economics (Ch. 5). But he doesn't mention that one of the achievements of information economics, albeit again accomplished by proofs, is to show that markets are virtually *never* efficient. (Check out the 2001 Nobel lecture of Joseph Stiglitz, esp. @pp. 503-507). Harford also ignores the impact of psychology on economics, which was recognized by the Nobel in 2000. In particular, the empirical work of laureate Daniel Kahneman and his late collaborator Amos Tversky challenges the assumptions of "rationality" that underlie the neoclassical theory that the book so smoothly espouses. (For a popular introduction to the work of Kahneman and Tversky, try Barry Schwartz's excellent "The Paradox of Choice", as well as Kahneman's Nobel lecture.)

As other reviewers have noted, the book's justifications for globalization are not its strongest suit. Harford assures us that the "circular flow of currencies" in US trade with other countries "will balance out in the end" (@196), but doesn't factor in the flow of interest the US is paying to its foreign creditors, now that we're again the world's #1 debtor nation. In his glowing discussion of China, he mentions that wages have gone up in the countryside, but omits to say that they have increased at only a fraction of the rate of increase for urban jobs, resulting in heightened income inequality. But aside from a facetious reference to Bill Gates owning everything (@66), you won't find any discussion about income inequality in this book, much less about whether "free market"-type reforms play a role in enhancing it. And when Harford glibly describes Chinese textile workers as "selfishly" looking for the best jobs (@77), he omits to mention that often they're looking for jobs in order to support the education or health care of family members back home. And how free are most labor markets anyway: consider whether you'd "selfishly" dump your current job if no one would give you a recommendation for your next one -- or for a more Chinese example, if your employer promised you he'd pay you your back wages sometime in the future, and suing him was not an option. His remark is more apt, if at all, only for the most highly-educated and fluid segments of the labor market in certain areas, such as software engineers in the Shanghai region.

I was scribbling my disagreement with the author in the margins of many pages of this book. But for his expository skill, I have only admiration. My rating reflects a compromise between style (5 stars) and substance (a bit less than 2 stars). For a slightly drier, but much more balanced and informative book covering a lot of the same subject matter, try "Reinventing the Bazaar" by the late John McMillan.

Using Ricardo's theory of rent seeking as a jumping off point, Tim Harford's "The Undercover Economist" is an upbeat introduction to microeconomics couched in language that is accessible to the layman without being trite or boring for those that already have a solid grasp of the subject.

The first half of the books deals with a somewhat more modern version of standard theories of supply and demand, rent seeking, perfect and imperfect information, externalities and incentives. Modern examples such as the location of Starbucks and the cost of a double latte grande clarify the points completely.

In the second half of the book, Harford moves into the realm of macroeconomics dealing with issues such as taxation, government subsidies, incentives and disincentives related to externalities, the seemingly endless cycle of poverty in third world countries, the theory of comparative advantages, third world dictatorship and communist government policies as contrasted with democratic capitalist economies, education and so on.

Not quite a treatise on macroeconomics, Harford makes the subject infinitely more interesting by exploring the margins of the topic and explaining how such macroeconomic considerations drift into the world of microeconomics and affect such basics as pricing, supply, demand, production and incentives.

Perhaps the most interesting chapter in the entire book was Harford's brief explanation of the mathematics of game theory and how economic game theorists constructed a series of government auctions to attempt to sell frequencies for cellphone licences to the highest bidding communications companies. The devil was obviously in the details as one auction succeeded beyond the wildest expectations of the government policy wonks whereas another garnered less than 1% of the anticipated revenue for the sale. Another chapter that will raise more than a few eyebrows explained in some depth why the world should welcome the globalization of trade and the elimination of trade barriers entirely.

Informative and entertaining, somewhat more academic in approach than the likes of "Freakonomics", "The Undercover Economist" is good reading for anyone who would like to have a deeper understanding of what makes the world's economies tick.

Paul Weiss

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 in which 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, and 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 a 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 idolizing 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 a good detail under the magnifying glass of the "undercover economist", who always offers a fresh perspective of the problem and opportune remarks. If these remarks were listened by at least some of the people that actually take policy decisions, no doubt it will deliver some gains to more than one person without taking from any other. Pure economics!

Wow. Granted, I like economic discussions; but, I am NOT an economist (my undergrad was a psych degree). This book was phenomenal. It explained complex economic discussions in simple terms, used excellent analogies (if at times a little too belabored), and avoided almost all political leanings.

Highly recommended for anyone who wants a basic understanding of why capitalism produces the least evil and most innovations compared to other government systems, as well as discussions on the prices we pay for choosing capitalism.

Tim Harford is a sharp-minded columnist for the Financial Times, one who spends most of his time applying the laws of economics to everyday problems. His book, "The Undercover Economist", is a natural progression from his FT column: each chapter starts with a simple premise, from the price of a cup of coffee to the difficulties of buying a used car. Along the way, Harford attempts to undercover the broad economic issues that underly even the simplest transactions.

It's a tactic that has managed to draw in even the least business-savvy of readers, and his analyses of the various transactions we don't often think about are good fun. His sceptical approach to 'free trade' goods and environmentally-friendly business is particularly refreshing in this era of buzzwords and eco-hype.

But overall, the book is a disappointment. Harford's chapters don't meld into a cohesive whole, with each one coming across as a self-contained column or essay without forming an overarching argument. In fact the only real opinion in the book is the rather predictable one favouring unfettered capitalism and laissez-faire liberalism, a claim which is never really explored in depth.

I also think it falls firmly into the 'popular economics' camp of books without really improving the genre. Yes, economics can be fun - but at some point the coffee cups, apple cores and used cars have to be put away so the facts and theories can be taken in. Harford makes a few attempts at didactic, explanatory writing, but they never last long. It seems like this book doesn't want to be an introduction to economics, but on the other hand can't avoid being one because of its desire to please those turned off by facts and figures. All this confusion leads to a confused product.

If you read or think to read Freakonomics, read this book it is far better structured and gives a good overview on many current issues on economics.
Mr Harford carries us through the world of economics asking himself questions on the things he observes and trying to proove whether he is doing the correct assumptions.

He starts analyzing how markets work and wondering why a coffee cup is so expensive at a railway station, the main reason is one of the market failures: the power of scarcity, this relates that some things are not easy to be replicated, eg a second coffee shop at the railway station. To follow the case the "undercover economist" visits a couple of supermarkets and sees how the tricks work to increase revenue and target the right product to the right customers. Target pricing works as well in other onsets like drugs or transports. Perfect markets, those where no profit can be made other than the cost of capital, are explained afterwards showing their benefits, specially the fact that perfect markets are efficient which as consequence means that products are offered at the lowest possible price.

Two other market failures are analyzed: the cost of externalities and information assymetries. In each case the author proposes solutions to overcome this shortcomings with examples of the real world. We learn that the congestion tax in London is a good solution to the problem (externality) created by too many people that try to go by car to London city and find themselves in a traffic jam. Equally Singapore is an example how health costs can be maintained at a low cost overcoming the information gap that patients and insurers have.

Two chapters follow where the internet bubble and the auctions for mobile telephony are reviewed explaining in the way how exchanges work and what determines the share price, and what you should think before setting up an auction.

The last part of the book takes care of country prosperity. It starts analyzing why poor countries are poor and looks what receipts might help to solve poverty. Next globalisation is reviewed with its consequences, the author is optimistic and gives some data on what has been improving during the last decades. The final chapter of the book is devoted to the rise of China in the last 25 years and what has made China so successful.

The author manages to combine a well made case for each issue he develops while being entertaining and interseting, using straightforward reasoning that can be followed by newcomer without being boring to the proficient.

This is an entertaining and informative journey through some aspects of economic theory. By using contemporary examples (such as the various factors that influence the price of a cup of coffee), Mr Harford removes some of the mystery and explains how some of the conclusions consumers may draw can be both logical, and flawed. While this won't make your coffee any cheaper, it may make some decisions more informed. And you can always strike up a conversation with your fellow coffee aficionados about the analysis of coffee rents. Just wait until they've had at least one coffee first.

Readers should note that this book addresses market behaviour rather than social issues. Most readers will consider sweatshops to be inherently bad: however the alternatives for the participants need to be considered as well.

Like other books in this field, this could be a starting point for discussion. Knowing more about the way in which supply, demand and the markets which address both work gives some insight into a field which is often seen as full of dry, mechanistic arcana. Who knows? You may even understand the used car market.

Jennifer Cameron-Smith