Economics is one subject that has special appeal to anyone who ever wonders why things happening around him are the way they exist. It tries to explain the mysterious myth that people refer to as "Common Sense" or as Adam Smith called it - The Invisible Hand.
However, over the years, economics, like religion, has become undecipherable for the common people whose actions it tries to explain! Quite ironic, isn't it?
But then, economics really need not be as arcane as it is made out to be. Tim Harford gives you a chance to be The Undercover Economist!
Beginning over a cup of coffee, Harford the question "Who pays for your coffee?" Something that we would not normally get ourselves to think about though it appears to be a very natural and innocent question. The book expertly introduces the concept of marginality that is the basis any economic analysis while attempting to answer the question. Herein comes the most powerful insight from economics (and which has easy applicability almost everywhere in life): "Strength comes from scarcity." The simple sentence that explains both the buyer and supplier powers in the Porter's model, why coffee bars located in popular places have to pay more rent, why workers want governments to work against immigration, and pretty much everything else!
The book then moves on to first degree and second degree price discrimination (oh that reminds me of first Term!) . The two ways that can be used to eat up into the so called consumer surplus, the difference between the maximum value you would be willing to pay for something and the price that you end up paying in the market. The discussion is kept simple and lucid and Harford also shows how price discrimination is not always bad (read inefficient). Inefficiency means that in the current situation, no person can be made better off without making someone else worse off. I think it will be wasteful for me to explain in greater detail here because the book has done a much better job of it (in line with the Theory of Comparative Advantage).
Next comes the critical analysis of markets and market failures. Here, it is again refreshing to find that Harford has not lost focus and does not get too much involved about the all-encompassing power of markets. As he says, markets are merely a means of finding the truth about what people desire through the price mechanism and market failures occur when the ability of the market to determine this truth is hindered. Even the term externality has been effectively defined as something where negotiations between the affected parties are not possible.
The keyhole economics, that he suggests to counter market failures, is insightful. What it means is that government policies should target the problem exactly where it occurs in a manner that is least disruptive to the functioning of markets and their ability to discover the truth. He uses this to address the social insurance problem and containing public spending on insurance. He focuses on the key issues of adverse selection and availability of information. He shows how passing the responsibility of making the choice about treatment from the insurance company to the patient can help curtail the social insurance bill whilst ensuring that no one spends too much on medical expenses (through catastrophic insurance).
The undercover economist also touches upon the issue of lemons in the market, why stock markets crash and why poor countries are poor. The conversational approach of the book gets the reader involved into the subject while giving the reader merely the right direction to thinking. The concluding parts of the book provide a comprehensive perspective of globalization and how it is not as bad as it is made out to be. We often hear about big companies having "sub-human" working conditions in their factories in developing countries and the outcry against them in the media. However, we seldom realize that the conditions of the workers should be compared to what they would be in the absence of the factory (they would not even have two meals a day!) rather than sentimentally comparing them with the conditions that developed countries consider as human. The book allows you to think about all these issues with a great degree of the "fairness question" in a more rational manner. One realizes how sweatshops are better than the alternatives and without doubt, starvation.
Finally, the book sheds some light on the growth of China since the late seventies and how the Maoist Great Leap Forward never really worked because it stifled the market and discovery of truth. How investing for the future and growing out of the plan helped China unleash the great growth potential for economic development.
After all, economics is about people and economic growth is about a better life for individuals - more choice, less fear and less hardships. An understanding of this fact is critical to what we think about economic policies and everything that is happening around us.
