The Undercover Economist

Exposing Why the Rich Are Rich, the Poor Are Poor — and Why You Can Never Buy a Decent Used Car!
by Tim Harford
New York: Oxford University Press, 2006. Hardcover ISBN: 0-19-518977-9

On the jacket cover of The Undercover Economist is a blurb from Stephen Levitt, the author of the bestselling Freakonomics: "Required reading." That's a pretty strong endorsement. In this book, author Tim Harford has presented a lucid exposition of general economic principles, as applied to the big-issue topics of today. For a college student, this book might make nice supplementary reading, to introduce deeper topics that might take several semesters to get to in the regular course sequence. For the general public, it is even more important, for there is a deep disconnect at the moment between popular sentiment and economic theory.

Many ideas that are only minimally controversial in economics circles are rather highly controversial with the general public. Economist and Times columnist Paul Krugman, for example, attributes much anti-globalization rhetoric to a fundamental understanding of comparative advantage [Ricardo's Difficult Idea]. Every dozen pages in Levitt's Freakonomics, or so it seemed, the author provides an advance apology for an upcoming segment that may be offensive to some readers. Witness the controversy over Larry Summer's remarks on women in science — ill-advised, certainly, especially for someone who'd already gotten in trouble before for politically-incorrect remarks. The content, though, was either innocuous or highly offensive depending on the context in which his speech is taken.

Harford handles this dichotomy by posing and addressing the most serious objections, then cheerily proceeding as though the issue had been fully proven. This is perhaps the only way to handle it. One might not be entirely convinced, but he'll never finish the book if he had to stop to address every concern. And he has lots of topics to get through: not just used cars and wealth, but also Fair Trade coffee, cellphone spectrums, corruption in Cameroon, and more. Each of these topics is tied to topics in economics: coffee is used to explain price discrimination (though he calls it by the less sinister-sounding term "unique target"); spectrum sales provide an application for game theory and signaling in auctions; and third-world corruption addresses developmental economics. Occasionally he does run into an area of "dismal science" reasoning which may stun sensitive readers — the discussion on QUALY (quality of life-years) discusses diseases and maimings in quite a casual manner — but he does not apologize for presenting brutal facts necessary for understanding the long queues endemic to Britan's National Health Service.

Most of these topics are self-contained, and feel like they were expanded from Harford's columns in the Financial Times. Some of it feels a bit stale for 2006 — for example, on the stock market, he assures us that "We are not on the verge of another depression" (p. 149), undoubtedly writing just after the dot-com bust. But most of it can be considered relevant to our daily lives. Why is coffee so expensive at Starbucks? (Location, location, location.) Why do supermarkets run sales instead of keeping prices low every day? (As a temporal form of price discrimination — to extract surplus from the price-insensitive consumers while remaining within reach of penny-pinchers.) What good is London's congestion tax for automobiles entering the city center? (The tax captures the externalities imposed by automobile driving, and therefore forces drives to consider their own impact on others, in pounds, shilling, and pence.)

It is all written quite conversationally, as though you had approached an economist in his office and asked him to explain a topic to the layman. (The column is, after all, entitled "Ask an Economist.") This also means that it's not entirely rigorous. For example, in the section on restaurant pricing, he attributes the high price of appetizers, dessert, and wine to the desire to charge for table time. Makes sense for dessert and wine, which are consumed after the meal, but it's a bit of a stretch for appetizers (perhaps it makes you feel full, and eat more slowly?). Looking in the endnotes, one finds that this assertion is not based on published sources, but rather came from discussion with Harford's former colleague Bill Sjostrom. Some other areas could benefit from a refresh to more current conditions. Store brands, for example, are cited as deliberately cultivating a value image -- it would be detrimental to the store if they cannibalized sales from name brands. But this is changing. Likewise, air pollution in China may have a negative correlation to foreign investment prior to 1995, but ten year-old data is not very convincing in a country changing as rapidly as China.

Rigorous or no, cutting-edge or no, it's nevertheless enjoyable light reading. Perhaps because it does not dwell on details, it goes by very quickly. And Harford has a knack for picking examples that stick in the mind. He tells of the quickest way between two cities in Cameroon — drive east two hours, north two hours, then west two hours, to take advantage of the better roads in the French-speaking part of the country. He opens the chapter "How China Got Rich" in Shanghai's Rénmín Gōngyuán (People's Park) gazing at the hundred-story steel-and-glass skyscrapers. His wife, who'd visited the city a decade prior, points to a little brick twelve-story building, and declares that it used to be the tallest building in Shanghai. He follows China's economic reforms under Deng Xiaoping, when the five-year plan was "frozen", and explains how this ensured a period of stability while allowing optimal production to take place — it is the marginal calculations that ensure efficiency, and the freezing of the plan put the margin on the free market.

He also gets off quite a good defense of globalization. He addresses the reader who gleefully wrote a letter to the Guardian suggesting that an economist be put to work in a sweatshop. Sweatshops are terrible, but what if they're better than the alternative? Is it an achievement or setback if a sweatshop is closed down and the workers are driven back to grinding poverty on the farm? This is why, after all, Nicholas Kristof of the Times once wrote a column imploring readers to support building sweatshops as a way of combatting world poverty. Of course, Kristof got a response in the letters section, too — in general, people have trouble with marginal calculations, and with opportunity costs. Harford tries to address this, pointing out the reason that coffee prices never go up — if coffee prices go up, new entrants immediately swamp the market. Fair Trade and anti-sweatshop mobilization campaigns are great for the farmers and workers who benefit, but they don't help the 99-percent who don't — rather, we need to bring up the entire economy of the target countries.

That's a rather neat tie-back to the coffee-based beginnings of the book. It's unlikely to convince many people on the other side of the globalization debate, as it doesn't back up assertions with overwhelming evidence. But at least it makes an eloquent plea that the heartless economists have the same compassionate goals as the campus activists, but are just sadly cognizant of reality. (For an opposite approach, watch the polemical documentary The Corporation, which interviews some famous economists and businesspeople and cuts them in such a way that they're spouting mumbo jumbo in opposition to impassioned anti-corporate activists.)