The Undercover Economist

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.

The Little Prince

Well.. the book blog series continues! And this time I am writing about a book that, at least superficially, is a book meant for children. But it makes some deeply inspiring philosophical points about life which make it a very enjoyable read.

To add a historical perspective (Courtesy: Wikipedia), The Little Prince was written by Antoine De Saint-Exupery as the French Version, Le Petit Prince, in 1943. The author was a French aviator and mysteriously disappeared during the Second world war. [It is supposed that his plane had crashed into the Mediterranean during the war but there have been speculations that this could have been motivated by a suicidal intent.]

Coming back to the book, it distinguishes the interpretation of life from the point of view of children and grown-ups. Apart from the difference of age that is apparent in these two points of view, the children's point of view is the one which is centred on emotional perceptions (driven by feelings) rather than on the material perceptions (driven by what one can observe and measure) of the grown-ups. The latter point of view is the more objective and logical point of view as accepted by many adults but which unfortunately is heavily centred on prejudices. The children's viewpoint is expressed through the experiences of the author as a child and through those of the little prince as he travels across the different planets.

Being a very small book that can be easily read within one hour, I would rather not go into describing the incidents or characters in the book but rather mention a few striking sentences verbatim from the book. [Read the book yourself when you have an hour to spare.]

1. Grown-ups never understand anything by themselves, and it is tiresome for children to be always and forever explaining things to them. Children should always show great forbearance towards grown up people.
Here grown-ups need not necessarily be adults and children need not necessarily be less than thirteen years of age. Rather, a grown-up is someone who has collected a set of experiences in his life and tends to look at the world only through the lens of this experience. Thus he is a captive of his own prejudices and utterly incapable of comprehending a point of view other than his own. In contrast, a child is free from such prejudices. Grownups cannot appreciate abstract ideas such as love, beauty and friendship and would consider someone talking about golf, politics and neckties as a sensible person!

2. Where I live, everything is very small. Straight ahead of him nobody can go very far.
These words were said by the little prince after the author gifted him the drawing of a sheep in an opaque box and the prince was concerned whether the sheep would need a lot of grass to live on! The second sentence just says that one cannot progress too far by just trying to move straight ahead. To experience the richness of life, it is necessary to look around oneself rather than indulging in plans to move straight ahead.

3. I have serious reason to believe that the planet from which the little prince came is the asteroid known as B-612.
A sarcastic comment that tries to throw light on how we spend time paying attention to unnecessary details in life and how an argument based in numbers (reliable or not) tends to command serious attention. Also many a times, our acceptance of an idea stems from how we feel about the person presenting that idea rather than on the merits of the idea itself (The Turkish astronomer example in the book).

4.If you were to say to the grown-ups, "I saw a beautiful house made of rosy bricks, with geraniums in the windows and doves on the roof", they would not be able to get any idea of the house at all. You would have to say to them, "I saw a house that cost $20,000." And they would exclaim, "Oh! What a pretty house that is!"
Something that exposes the ridiculous obsession of people towards figures and statistics. Just as an aside, when I say to people that Tendulkar is a very good cricketer, they refute by saying, "No. He is unnecessarily overrated. Just tell me how many wins he has secured for India?" But I am not free from this obsession either. More often than not I end up saying, "But he has scored the maximum runs in international cricket and also the most number of centuries." Probably the rational thought is too heavily dependent on numbers.

5. Children, watch out for the baobabs!
The baobabs here represent nothing but the bad thoughts that take root in our mind gradually and if un-attended, may grow into rigid thoughts and prejudices which would deprive us of the ability to look at life as it is. The baobabs are very similar to the roses (good thoughts) when they are young and so it takes a discerning and alert mind to spot the differnce.

6. It is such a secret place, the land of tears.
The above line comes when the author finds himself helpless to console the Little Prince who is driven to tears by the author's indifference towards the safety of his flower.

7. "The fact is that I did not know how to understand anything. I ought to have judged by deeds and not by words.She cast her fragrance and radiance over me. I ought never to have run away from her. I ought to have guessed all the affection that lay behind her poor little stratagems. Flowers are so inconsistent. But I was too young to know how to love her."
Coming in the form of the little prince's mulling over his experience with his flower, it is a subtle reminder of how we should not try to interpret too much from the external behaviour of the flowers, especially in a relationship.

8. "What a queer planet! It is altogether dry and altogether pointed and altogether harsh and altogether forbidding. And people here have no imagination. They repeat whatever one says to them. On my planet, I had a flower. She was always the first one to speak."
These innocent thoughts of the prince after hearing the echoes from the mountains on earth very subtly ridicule the social structure that exists here, where people are forever engaged in behaving in a manner that pleases others around them and expect the same from others.

9. One only understands the things that one tames. It is an act too often neglected. It means to establish ties.
The fox says these words and goes on to explain what it means to tame someone. It is this act of taming that makes someone special and different from rest of the world. More details about this in the book. :-)

10. And finally my favorite quote, "It is only with the heart that one can see rightly. What is essential is invisible to the eye."
This is the secret that the fox shares with the little prince at the time of the latter's departure. It's beauty will be evident after thinking it over again and again.

Apart from these top 10, there are numerous other simple thoughts scattered throughout the book. Specially the experience of the prince on each of the six planets (or asteroids) before he comes to earth. But I will leave you to explore these by reading the book yourself.:-)

And now, I think it is time to put a full stop to this blog post which has already out-grown its size. But when I sit down to write blogs on topics like this one or the Fountainhead, I simply cannot stop the flow. Finally, a word of appreciation for those readers who had the patience to read through these mostly unorganized thoughts that never allow my mind to remain unoccupied. And there will be a lot more writings here in the days to come.