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, 288 pp., $26)
The overwhelming success of Steven Levitt’s Freakonomics demonstrates both the need for accessible books on economics, and the appeal of economic thinking in the country that taught the world the power of the free market.
But Freakonomics, as its title indicates, has limited value, since it focuses on unusual results of stylized academic papers. One still wants a clear and popular presentation of some of the most powerful applications of economic thinking. Why, after all, has the “dismal science” become one of the most popular college majors? Why has economics attracted many of the brightest intellectuals of the 20th century, including mathematicians such as the “beautiful mind,” John Nash, biologists such as E. O. Wilson, and even Pope John Paul II? Economics needs to give an account to the general public of its value and appeal–I mean true economics, which is definitely not high-flying accounting or business operation, but which is philosophical and attuned to human nature. This approach to economics comes closer to what used to be called “political economy.” Enter The Undercover Economist by Tim Harford of London’s Financial Times, an enjoyable read which can help raise the level of “economic literacy” among readers.
Need it be said that Americans, despite our impressive economy, are illiterate about economics? Consider, for example, the idea that trade generates wealth. Most Americans are not sure that’s true. And those who believe it can hardly tell you why it’s true. Harford’s readers, however, will not suffer the same confusion. He makes a kind of economic morality tale out of the fate of Bruges and Antwerp in the 15th century. Trade made Bruges at first fantastically wealthy, until the silting of the Zwin river shifted fortunes to Antwerp, on the more navigable Scheldt River. “The contrasting stories of Bruges and Antwerp,” he warns, “suggest a simple message: If you would like to be rich, then it is a good idea to forge close links with the rest of the world. If you prefer nothing to change, then it is best to have a harbor that silts up. If you would like to be rich and have nothing change, then you will be disappointed.”
Harford uses economics to give a realistic analysis of so-called transitional economies: places where sweatshops abound, and people chose to work long, difficult, low-paid hours for foreign-owned companies like Nike. He stresses that since people choose this work, we should assume that it is preferable to the available alternatives (principle of revealed preference), such as picking through garbage dumps, prostitution, or seasonal agricultural employment. Yet on economic principles one should conclude that sweatshops are necessary but also necessarily short-lived. Sweatshops are necessary: If sweatshops didn’t exist in the short run, then developing economies couldn’t attract the sort of foreign, direct investment needed for swift economic growth. (After all, only foreign firms can afford to build factories in developing countries.) But sweatshops are also necessarily short-lived: If firms are making a profit off the sweat of local workers, other firms will invest too, and in time the price of labor will be bid up to a comfortable level. Harford provides evidence to suggest this has happened already in Shanghai and other Asian cities.
Harford thus diverges from the bleeding hearts who decry sweatshop economies as evidence of exploitation. But he also diverges from economists like Jeff Sachs who believe that development is a matter of pouring more first-world money into third-world countries. Harford thinks that private (foreign or national) investments, and local decision making, ought to be sufficient to secure growth, but only where decent political institutions and stability exist. All the money in the world won’t turn Cameroon into Japan.
Harford strikes at economic illiteracy closer to home as well. His book opens with a fascinating discussion of the price of a cup of coffee. Doesn’t Starbucks price gouge? Just what is captured in the price of a thing? Doesn’t the coffee industry exploit poor farmers in Brazil? Who exactly is getting rich off my $4.15 café mocha? It turns out that classical economic thinking about scarcity power, incentives, market structure, distribution, and self-interest go a long way toward illuminating the flaws in our arm-chair answers to these and other questions. Harford also covers plenty of other engaging topics in the same manner, such as auction design, health care policy, and how to get drivers to curtail car usage in congested areas.
The Undercover Economist should be placed in the hands of any young person looking for a quick introduction to economics, any older person who missed out on Economics 101, or anyone who took Economics 101, but was not able then to realize that it applied to real life.
–C. R. Hardy writes from Cambridge, Mass., where she is studying for her doctorate in economics at Harvard University. She notes that women with advanced degrees in economics are a scarcity and congratulates herself for choosing so wisely. But she also bears in mind that the market for mothers to her four children is even more limited–in fact she enjoys a pure monopoly in that market. Thus she writes from home and leverages her scarcity power in the market in which she currently has the greater comparative advantage.