Economist View of the World

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 was glad when the Financial Times seemed to hit on a print version of it with Tim Harford’s weekly Dear Economist column and, more recently, his book, “The Undercover Economist.”

Over the years, Harford has used his weekly slots to advise readers on the economics of things as diverse as flossing your teeth and buying leeks. His tone manages to be a parody of serious economic analysis and an appealing demonstration of it.

His new book is not a collection of his columns; it’s more a guide to their underlying philosophy, which you could summarize as, “Why economics really has very little to do with the GDP.” Being also an economist of a populist persuasion, I take my hat off to Harford for producing 288 pages of lucid prose aimed at convincing a general reader that economics is more useful -- and certainly more interesting -- than he or she 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 media, you would think the discipline was obsessed with interest rates, the latest borrowing numbers or the future of the long bond. Of course, these are immensely important, 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.

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 tell the truth for an entire day.

In a perfectly efficient market, the coffee shop can’t lie about how much it costs 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 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 useful and why rejecting markets comes with a cost.

Most countries, for example, don’t like to rely on markets when it comes to education, because many people don’t like the idea of schooling being determined by parents’ ability to pay. Fair enough. But as we know, education isn’t distributed according to merit, nor are all schools the same. Richer parents can send their children to better schools. But without a functioning market, there are no clear signals for 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, and parents pay extra on real estate that might have gone toward 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 skilled at getting these kinds of core economic ideas across, whether it’s the story of markets or game theory or buying a secondhand car.

The bad news, if there is any, is that this is a book for the uninitiated. Anyone who has more than a passing acquaintance with economics will find himself or herself 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.

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This review appears by special arrangement with the Financial Times, where it first appeared.

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Breaking it down

* 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, $26, 288 pages

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Source: Publisher

Los Angeles Times