#97 - The Undercover Economist

Add another one to the list of books that ended up impressing me more than I initially thought they would. My first impression of 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 (Oxford University Press, 2006) was that it was a halfway decent primer on economics for those who'd never studied it but thought they should, but didn't have much to offer someone like me who has had a few courses in the subject. I was initially expecting something along the lines of Robert Frank's The Economic Naturalist and Steven Levitt's Freakonomics -- economics-based explanations for everyday oddities we notice and wonder about, or not (why are there Braille buttons on drive-up ATMs? why is soda sold in round bottles, but orange juice in square cartons) -- and that's not what this book offers.

No, Undercover Economist sticks more closely to traditional economic subject matter -- but as the subtitle suggests, does so in a humorous and accessible manner that's got something for both the beginner and, well, at least for the intermediate student of econ. Harford uses real-world, if slightly unorthodox, examples to make key economic principles accessible to the layperson; the first chapter, for example, entitled "Who Pays for Your Coffee?," uses an example we can all relate to -- the seeming killing made by the Starbucks shops closest to the train station -- to illustrate the concepts of marginal cost, economic rents, and monopoly/ oligopoly power ... and then somehow, within 25 pages, manages to connect these same concepts to organized crime, immigration, and trade unions. Subsequent chapters offer similar romps through the concepts of price-sensitivity and elasticity, perfect competition, and externalities. And, as a long-time resident of a city where I'm the centrist one, even though I'd be considered a flaming pinko leftist almost anywhere else, I personally enjoyed the following good-natured jab at some of the more myopic environmental advocates among us:

"Why would an environmental charity organize a carbon-neutral meeting? The obvious answer is 'so that it can engage in debate without contributing to climate change.' And that is true, but misleading.

"The Undercover Economist in me was looking at things from the point of view of efficiency. If planting a tree is a good way to deal with climate change, why not forget about the meetings and plant as many as possible? (In which case, everybody should say they came by steamship.) If the awareness-raising debate is the important thing, why not forget about the trees and organize extra debates?

"In other words, why be 'carbon-neutral' when you can be 'carbon-optimal,' especially since the meeting was not benzene-neutral, lead-neutral, particulate-neutral, ozone-neutral, sulfur-neutral, congestion-neutral, noise-neutral, or accident-neutral? Instead of working out whether to improve the environment directly (by planting trees), or indirectly (by promoting discussion), the charity was spending considerable energy keeping itself precisely 'neutral' -- and not even precisely neutral on all externalities, nor even a modest range of environmental toxins, but preserving its neutrality on a single, high-profile pollutant: carbon dioxide. And it was doing so in a very public way.

"A kind view would be that the charity was setting a 'good example,' if acting nonsensically can ever be a good example. An unkind view would be that it was engaging in moral posturing."

Of particular relevance today, though the book was published three years ago, is the "The Inside Story" chapter, which addresses issues of asymmetric information and market failure in the context of health insurance. (In fairness, insurance is the classic example used to teach econ students about incomplete information and moral hazard, at least in the classes I've taken -- but given the current political context, it seems especially pertinent.)

Personally, I found the book got really interesting beginning in Chapter 6 ("Rational Insanity"), which introduces the random walk theory in the context of the 1990s dot-com stock bubble. Later chapters talk about the persistent difficulties of alleviating poverty in developing-world kleptocracies, using Cameroon as an example; the overall benefits of globalization (which you may or may not buy); and why China has had so much more success than, say, India. Some of this did remind me of something I'd observed in grad school, which is that economics is not apolitical at all (gee, who knew?), and again -- you may or may not agree with Harford's conclusions. You can't argue, though, with the fact that he gives you some interesting ideas to chew on.