The Undercover Economist

I recently finished reading the book The Undercover Economist, and went along and saw Tim Harford, the author, talk at the Sydney Writers Festival. Both the talk and book were excellent, although the talk covered (unsurprisingly) much of the material that he covers in the book.

It would be wrong to compare the book to Freakanomics, which while entertaining, was for a large part just a collection of curiosities and from my point of view much more statistics than economics. Rather, The Undercover Economist explains actual microeconomics and in a way that is both enthusiastic and interesting. As a lay person, even if one who has recently been interested in economics, I found the explanations of some basic ideas made things much, much clearer. The passion that Tim Harford clearly has for his subject is also evident both in the book and how he talks in person.

The early chapters of the book are brilliant. Starting with an analysis of what the costs actually are in making a cappuccino in London, he branches into Ricardo’s theories of rents and the power of scarcity, to explain why rent makes up most of the cost of the coffee. From this he then builds into price targeting and how to avoid it and why this explains the ugly wrapping on the generic brand supermarket products.

The third chapter slips a little away from his practical explanations of everyday phenomena to discuss markets, but is no less interesting. Focusing on topics such as how a free market, via price signals, can coordinate the production of extremely complex products such as your cappuccino that no one person knows enough to produce it end to end. From here he discusses the concept of market efficiency, how this by no means guarantees outcomes that we would consider “fair”, and the work of Ken Arrow which shows how markets can achieve outcomes that are both efficient and fair if redistribution is done correctly. While all this material drifts away a little from the practical, it is needed for the later chapters.

Chapter 4, deals with negative externalities – what the term means, and how we can reduce problems such as congestion and pollution simply by ensuring that people pay for the costs of their actions – such as clogging up the road with your car, or warming the earth with CO2, and how if we take this route rather than regulations, we can solve the problem cheaper and faster.

The next section deals with inside information and how it can destroy markets, whether it be, most notoriously, used cars or perhaps more interestingly health insurance. The stuff on health insurance I thought was most interesting, and why a private health insurance system can be totally disfunctional.

The following two chapters deal with the stockmarket and rationality, and with auctions and how to construct them. I found both these chapters less interesting for different reasons. The first because I knew most of the stuff already, and the second because, while auctioning may be important, it didn’t really tell me anything I think I need to know. Maybe I missed something.

The final chapters are on poverty and globalisation. Again while I found the book highly readable it was overall not as interesting as the earlier chapters. The section on poverty explains how corruption, red-tape and kleptocracy can combine to conspire to keep a country poor. The section on globalisation was for the most part a familiar line on the value of low tarrifs, trade and foriegn investment. While I agree with virtually all of this, it seemed to be more predictable and without the fresh originality I felt came out in the early chapters.

My slightly more negative reaction to the sections at the end shouldn’t put you off. Its a great read, he writes freely, is easy to read and the explanations are clear. Importantly he clearly has a passion for the subject which came out strongly in his talk. You are left feeling that economics and economists really are more interesting than you may have thought.

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5 Responses to The Undercover Economist

  1. Sacha says:

    I’m reading it now – it’s very enjoyable and well written, and connects with what I observe, so in that sense it’s “real”! I’ve only quickly read through the material on health insurance, but it was very interesting… especially the discussion on Singapore’s health insurance system (everyone has an account for their health insurance which the govt contributes to at first)… perhaps that’s the best system we’ve come up with to date!

  2. Steve says:

    Its very good in the sense that its gives you an insight into some economics why giving you practical insight into things you observe. I guess that is less so in the later chapters which is why I was a little bit negative about them.

  3. […] However there are good arguments against it. One concern is that it is a regressive tax. The rich are barely effected and the poor can’t afford to pay and suffer as a result. As Tim Harford pointed out in his book The Undercover Economist this is not necessarily so. Certainly in London it was mostly the well off who would drive into the city, the poor already caught public transport, so it was in effect a progressive tax. He acknowledges though that in other places this may not always be the case, but it is possible to redress this in other ways. […]

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