The Undercover Economist
by Tim Harford
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Book Reviews of The Undercover Economist
Book Review: Outstanding style, but not the whole story
Summary: 3 Stars
This is the kind of book any non-fiction writer can envy: a complex subject described with fluidity, wit and confidence. However, the view of economics that you will get from this book is often a bit *too* confident.
For example, no distinction is drawn between what's known from empirical research and what's "known" from utterly non-empirical mathematical proofs such as Kenneth Arrow's proof of the efficiency of markets (@ 68-69). Arrow's proof is based on the properties of abstract convex sets, not on those of real-life markets. (You can get the flavor of Arrow's argument by downloading his Nobel lecture.) Moreover, Harford doesn't always integrate the subjects he discusses. Two chapters after discussing Arrow's proof, he spends a chapter discussing the impact of information asymmetries on economics (Ch. 5). But he doesn't mention that one of the achievements of information economics, albeit again accomplished by proofs, is to show that markets are virtually *never* efficient. (Check out the 2001 Nobel lecture of Joseph Stiglitz, esp. @pp. 503-507). Harford also ignores the impact of psychology on economics, which was recognized by the Nobel in 2000. In particular, the empirical work of laureate Daniel Kahneman and his late collaborator Amos Tversky challenges the assumptions of "rationality" that underlie the neoclassical theory that the book so smoothly espouses. (For a popular introduction to the work of Kahneman and Tversky, try Barry Schwartz's excellent "The Paradox of Choice", as well as Kahneman's Nobel lecture.)
As other reviewers have noted, the book's justifications for globalization are not its strongest suit. Harford assures us that the "circular flow of currencies" in US trade with other countries "will balance out in the end" (@196), but doesn't factor in the flow of interest the US is paying to its foreign creditors, now that we're again the world's #1 debtor nation. In his glowing discussion of China, he mentions that wages have gone up in the countryside, but omits to say that they have increased at only a fraction of the rate of increase for urban jobs, resulting in heightened income inequality. But aside from a facetious reference to Bill Gates owning everything (@66), you won't find any discussion about income inequality in this book, much less about whether "free market"-type reforms play a role in enhancing it. And when Harford glibly describes Chinese textile workers as "selfishly" looking for the best jobs (@77), he omits to mention that often they're looking for jobs in order to support the education or health care of family members back home. And how free are most labor markets anyway: consider whether you'd "selfishly" dump your current job if no one would give you a recommendation for your next one -- or for a more Chinese example, if your employer promised you he'd pay you your back wages sometime in the future, and suing him was not an option. His remark is more apt, if at all, only for the most highly-educated and fluid segments of the labor market in certain areas, such as software engineers in the Shanghai region.
I was scribbling my disagreement with the author in the margins of many pages of this book. But for his expository skill, I have only admiration. My rating reflects a compromise between style (5 stars) and substance (a bit less than 2 stars). For a slightly drier, but much more balanced and informative book covering a lot of the same subject matter, try "Reinventing the Bazaar" by the late John McMillan.
Book Review: Economics demystified (for the developed world only)
Summary: 4 Stars
Harford is a mecro-economist, a bridge between macro and micro economics. Harford explains macro-economic phenomena such as retail pricing, stock market behavior, taxation, health-care, environment, and licensing air-waves; by one-by-one getting inside the heads of each stake-holder on that poker table and dissecting their behavior in accordance with the first principles of economics: scarcity and choice. However, the insights only go as far as the developed world does. In the last 3 chapters where Harford tries to similarly explain the woes of the poor and developing worlds with examples of Cameroon, Belgium and China; his views quickly appear shallow and cliche, lacking the same wisdom as the rest of the book. 70% of the book is therefore a 5-star, and the rest is a 2-star.
With the Undercover Economist, Tim Harford de-mystifies the wiggling jelly of economics (where you cannot kill farm-destroying birds without suffering population explosion of farm-destroying insects and so on). What sound like conundrums are actually logical explanations of common-sense causal chains. For example, he explains that "more rational the behavior of stock market investors, the more erratic the behavior of the stock market becomes." I try to summarize: rational investors would buy shares today if it was obvious that they would go up tomorrow, but then everyone would buy today driving the price high enough so that it cannot go higher tomorrow. Rationality would obviously and consistently second-guess rationality, implying rationality cannot lead to predictable behaviour. The only thing left then is unpredictable news, which is a random event. This means that shares would behave like random walks. But if this was absolutely true, it would be a paradox, since rational investors would not invest in shares and only invest in predictable alternatives. The balancing point then lies somewhere in between. Harford then goes on to draw parallels with supermarket queues and how everyone tries to predict the fastest one, and a game of poker with players analyzing the outcome based on fundamentals yet betting based on their understanding of what the other players are thinking.
The book loses its panache, though, in trying to decipher globalization and the developed world through the "X-ray goggles of the undercover economist". Harford falls into the trap of taking the one-dimensional view of large developing countries (India and China in particular) as if they are obviously in a certain step in their evolution to become more and more like western developments. These simplifications might be half true, but hardly insightful. Statements of generalization based on anecdotes about either India or China is like generalizing about North and South Americas combined (a contiguous land-mass with about a billion people) or Europe and USA combined (the developed nations with about a billion people). Generalizations about India and China as an afterthought in the last couple of chapters lacked appreciation or perspective on the infinite diversity of the subject.
Except those week spots, a very readable economist with a fun and easy style. References to Nobel Laureates in Economics, and key theorems of importance would also make you keep going back to the book. This is one to keep.
Book Review: Why Poor Countries Stay Poor
Summary: 3 Stars
Tim Harford, we learn from the back cover, has been an economist at the World Bank. Although he doesn't refer to any article he wrote while working there, or indeed to any academic publication that he may have authored, he draws many of his examples from papers written by his World Bank colleagues, or from discussions he had with them. We would therefore expect him to have firm and elaborate ideas about world development, and to give them prominence in his survey of applied economics.
Unfortunately his chapters on Why Poor Countries Are Poor and on How China Grew Rich are, to my personal opinion, the weakest parts in an otherwise well-written and informative essay. To summarize his presentation, and at the risk of caricaturing it, Cameroon is poor because it is run by a crook, and China grew rich the day it began to believe in markets.
Now I have no personal insight into the integrity of Cameroon's president, or in any country's leader for that matter. But surely there is more to explain Cameroon and other developing countries' misery than just the banditry of a den of thieves. Many leaders of poor countries, we can reasonably assume, are committed both to the advancement of their nation and to personal standards of integrity. They try hard to implement sound policies and to introduce market reforms, and development agencies are there to help them with advice and financial support.
It makes little sense for a development bank to approach its client by saying: "You are a crook. And I am going to lend you money". To function properly, the market for aid needs to be based on a certain degree of trust. Poor countries' leaders must be reassured that donor agencies are not trying to oust them by labeling them as thieves, or to sell them shoddy development projects. Donors, in turn, need to ensure that their money is not going to end up lining the pockets of some high ranking officials. Otherwise no transaction is possible, just as with the market for used cars where only lemons are on sale.
To be true, Tim Harford sees some role for institutions like the World Bank in countries run by crooks. Expand access to information. Measure the degree of corruption and red tape, and shame governments into reforming their business environment. Empower agents of change. This all sounds like good ideas, but I doubt that a public institution like the World Bank is in a position to implement them. NGOs, private think tanks, and the media might do a better job.
Meanwhile, economists have many ideas on why poor countries stay poor. It is not just about bad leadership and rampant corruption. In fact, the area of problems that these countries face boggles the mind. And as Nobel laureate Robert Lucas put it, "The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them, it is hard to think about anything else". The plight of poor countries would have deserved more than a passing thought.
Book Review: An excellent introduction to economics that will interest the novice and the proficient
Summary: 5 Stars
If you read or think to read Freakonomics, read this book it is far better structured and gives a good overview on many current issues on economics.
Mr Harford carries us through the world of economics asking himself questions on the things he observes and trying to proove whether he is doing the correct assumptions.
He starts analyzing how markets work and wondering why a coffee cup is so expensive at a railway station, the main reason is one of the market failures: the power of scarcity, this relates that some things are not easy to be replicated, eg a second coffee shop at the railway station. To follow the case the "undercover economist" visits a couple of supermarkets and sees how the tricks work to increase revenue and target the right product to the right customers. Target pricing works as well in other onsets like drugs or transports. Perfect markets, those where no profit can be made other than the cost of capital, are explained afterwards showing their benefits, specially the fact that perfect markets are efficient which as consequence means that products are offered at the lowest possible price.
Two other market failures are analyzed: the cost of externalities and information assymetries. In each case the author proposes solutions to overcome this shortcomings with examples of the real world. We learn that the congestion tax in London is a good solution to the problem (externality) created by too many people that try to go by car to London city and find themselves in a traffic jam. Equally Singapore is an example how health costs can be maintained at a low cost overcoming the information gap that patients and insurers have.
Two chapters follow where the internet bubble and the auctions for mobile telephony are reviewed explaining in the way how exchanges work and what determines the share price, and what you should think before setting up an auction.
The last part of the book takes care of country prosperity. It starts analyzing why poor countries are poor and looks what receipts might help to solve poverty. Next globalisation is reviewed with its consequences, the author is optimistic and gives some data on what has been improving during the last decades. The final chapter of the book is devoted to the rise of China in the last 25 years and what has made China so successful.
The author manages to combine a well made case for each issue he develops while being entertaining and interseting, using straightforward reasoning that can be followed by newcomer without being boring to the proficient.
Book Review: "Why are some countries poor?" is the most interesting question.
Summary: 4 Stars
I had mixed feelings throughout the book. The book started out really well and captivating, but kind of stalled as I continued reading on. I almost gave up reading it, having set a rule to myself that I should not force myself finishing a book I am no longer captivated by. I am glad I broke my own rule this time. The book got really interesting after reading half of it.
The book starts off by asking, "Who pays for your coffee?" A cup of coffee served at a Starbucks outlet goes through an international chain of events before reaching you. A Starbucks cup of coffee is more expensive than the competition. Why? Why is there a Starbucks on every corner? Though those questions were interesting, I found the chapter on Starbucks and coffee a bit too long.
The economics behind airline fares was very interesting. Ever wondered why most airlines operate three passenger classes: Economy, Business, and First Class? According to the author, some airlines use very tight seats in economy class to force passengers to upgrade to Business and First Class. Most of an airline's profit comes from First and Business class passengers.
The book got really interesting at chapter 8, "Why poor countries are poor." This chapter really captivated me and showed me how a few people (mainly a president and his entourage) could cause the misery of millions. The story of Cameroon and its poverty is fascinating and sad. This chapter alone makes this book a required reading.
The last chapter of the book is about how China grew rich. I have read many books on China's success story, but this chapter added information I had not read before. Cameroon's president destroyed his country and brought poverty to his people. China's leaders, though at first destroyed their economy, quickly learnt from their mistakes and became the fastest growing economy in the world! Their success story shows that any country, with the right leaders, could prosper and grow. Countries are poor not because of their national resources, but because of corrupt leaders. Power corrupts; absolute power corrupts absolutely! There is no excuse today for any country to be poor, other than to have its leaders to blame.
I have always loved economics, and on my `O' Levels had the highest grade in my class. Economics is fun and easy to understand, and this book makes the subject matter easy to grasp.