THE UNDERCOVER ECONOMIST
by Tim Harford
Little, Brown £17.99, 276 pages
A friend of mine settling into a new home with his family once asked me to be the house economist. Along with the nanny, the cleaner and the gardener, he thought an economist would be a useful addition to the household - someone to turn to when pondering which car insurance to buy, or the best way to allocate time on the PlayStation 2.
Alas, he lived quite far away and I didn’t fancy the commute. But I liked the idea and I was glad when the FT seemed to hit on a print version of it, with the weekly Dear Economist column and, more recently, The Undercover Economist. Over the years Tim Harford has used these weekly slots to advise readers on the economics of everything from flossing your teeth to buying leeks. His tone somehow manages to be both a parody of serious economic analysis and an appealing demonstration of it.
His new book is not a collection of his columns - more a guide to their underlying philosophy, which you could summarise as “Why economics really has very little to do with GDP”. Being also an economist of the more populist persuasion, I take my hat off to Harford for producing 276 pages of lucid prose aimed at convincing a general reader that economics is more useful - and certainly more interesting - than you might have thought.
This is important work, because economics, by and large, gets a bum rap. On the basis of most “economic” reports in the mainstream media, you would think economics was a discipline obsessed with interest rates, the latest borrowing numbers, or the future of the long bond. Of course, these things are immensely important - one can hardly say anything else in the pages of the FT - but they are not why most of us got into this economics business in the first place. We got into it because it gave us new and illuminating stories to tell about the world around us.
Take markets. Why do economists like markets? You might say, “because they are efficient”. But why are they efficient? Because, as Harford, explains, when a market is freely operating, everyone is forced to tell the truth. He likens it to the film Liar, Liar, in which a lawyer (Jim Carrey) is forced by his son’s birthday wish to spend an entire day telling the truth.
In a perfectly efficient market, the coffee shop can’t lie about how much it cost them to make your coffee, because there would soon be a competitor next door selling it for less. And I can’t pretend I don’t really want that tall decaf latte I ordered, because the fact that I was willing to pay £3.50 for it showed the world I wanted it rather a lot. The result is that the right things are made in the right quantities and they go to the people who value them most.
This is the idea of a perfectly efficient market, in which neither buyers nor sellers have any market power and lots of other crazy conditions are met, which critics rightly point out bear little relation to the real world. But Harford is good at showing why the efficient market story is still a useful one, and why rejecting markets has a cost.
Most countries, for example, don’t like to rely on markets when it comes to education, because people don’t like the idea of schooling being determined by parents’ ability to pay. Fair enough. But as we know, the result isn’t that education gets distributed according to merit - nor that everybody’s school is the same. Richer parents still get to send their children to better schools. But without a functioning market, there are no clear signals to tell us how much parents would be willing to pay for more teachers and better schools. Instead, there are higher house prices in areas with better schools, with parents paying to estate agents and homeowners the extra money that might have gone towards creating more good schools. Moving away from the “land of truth” has a downside.
The good news about The Undercover Economist is that Harford is rather good at getting these kinds of core economic ideas across: whether it’s the story of markets, or game theory, or buying a second-hand car. The bad news, if there is any, is that this is truly a book for the uninitiated. Anyone with more than a passing acquaintance with economics, or for that matter any regular reader of John Kay or Martin Wolf’s columns in the FT, or the Economics Focus section of The Economist, will find themselves regularly skipping ahead. But the word should go out to teachers of first-year economics: The Undercover Economist is an excellent Undercover Introduction to Economics. If you think that sounds boring, you probably ought to read it.
Stephanie Flanders is economics editor of the BBC’s “Newsnight”.
