The Undercover Economist

I recently bought a book called The Undercover Economist by Tim Harford. After a rather too cutesy beginning, in which his explanations of how scarcity determines the price of everyday items are somewhat more longwinded and waffly than they ought to be (a bit like this sentence), Harford’s book warms to the task of convincing the lay reader (for that is the audience at which the book is aimed) that free markets are good for the most part. If you’ve ever wondered about the connection between used cars and private health insurance (I can’t say I have, but I found that chapter interesting), or why countries like Cameroon are poor, or why China’s economy is taking off, then this book is for you; but don’t expect too much depth.

The Undercover Economist starts out by giving a pub-counter lesson in David Ricardo’s theory of economic rent. It goes on to explain the strategies used by Supermarkets and other shops to get as much money out of you as possible, and why competition is important. The middle chapters outline why perfect markets convey ultimate truths, why and how externalities (positive ones and negative ones) ought to be accounted for and under what circumstances markets fail. It’s in the chapter about market failure that he discusses used cars and private health insurance – which are both examples of where the market can and often does fail (hint: think about the disparity between what a seller knows and what a buyer knows in the used car market or in the market for health insurance). There’s a chapter which explains why rational investment behaviour leads to erratic stock prices. One of my favourite chapters was about designing auctions to sell radio spectrum: Australia, New Zealand and the US got some of their auctions terribly wrong, leaving the public short-changed. Britain, on the other hand, designed a near perfect auction for 3G licences, leading to a big windfall for the public (Harford goes on to show why the common assumption that high costs for 3G licences imply high prices for consumers of mobile phone services is a fallacy). The last three chapters tackle "the big issues", which are often the subject of news stories: poverty, globalisation and the rising behemoth called China. Harford argues that sweatshop conditions are better than what came before them, and that sweatshop economies are a mere stepping stone to a much brighter future, which, given the evidence is an argument hard to refute. However, he doesn’t answer the question as to whether the sweatshop path is the only way to an improved quality of life.

Overall, an interesting book, though not groundbreaking. It provides a nice refresher in Economics 101, and clears up some misconceptions for the lay reader. For example, it’s easy to think about prices and rents the wrong way, and sometimes I catch myself making the mistake. Starbucks on the corner of Queen’s Plaza in the city will charge high prices for coffee because that’s what I’m willing to pay, and the owner of Queen’s Plaza charges high rent to Starbucks because the price of a cup of coffee is high. The price of a cup of coffee isn’t high because rent is high. Some people have claimed that Freakonomics is a better book, though Harford does a better job of showing how economic theories postulated in the nineteenth century explain a lot about the way the world works in the twenty-first century.