The Undercover Economist

The Undercover Economist
(Exposing Why the Rich Are Rich, The Poor Are Poor — And Why You Can Never Buy a Decent Used Car)
Tim Harford
Oxford University Press: 2006

This is an enjoyable book that explains the basics of how economics works, which is to say, how the world works. Mr. Harford doesn’t go into any technical detail at all, so there are no charts and graphs to decipher (although a very few are used for illustration), and there are no mathematical formulas.

Mr. Harford seems to believe more than I do that government may need to step in and correct some types of market failures. All in all, though, I agree with almost everything Mr. Harford writes.

In one chapter, Mr. Harford correctly assesses the current U.S. health care payment system as a mess. What he proposes as a solution is health savings accounts, where a low cost (about $1,500 per year) insurance policy to cover catastrophic charges is combined with individually owned health care savings accounts. People manage their own health care savings accounts. They get to keep what they don’t spend, so there is an incentive to spend wisely and reduce the need for health care through prevention.

Mr. Harford, with slight modification, believes in the random walk theory of security prices. I don’t think I would trust an economist who doesn’t.

In a chapter titled “Why Poor Countries Are Poor” he explains, using his trip to Cameroon, how terrible a plague political corruption is. That alone, he says, is the most important reason why most poor counties stay poor. He didn’t mention lack of formal property systems as described in Hernando De Soto’s book The Mystery of Capital.

A chapter on globalization explains relative advantage and how it contributes to the increased wealth of nations that participate in free trade. A quote:

Contrary to popular belief, it is simply not possible for trade to destroy all of our jobs and for us to import everything from abroad and export nothing. If we did, we would have nothing to buy the imports with. For there to be trade at all, somebody in America must be making something to sell to the outside world.

He explains the Lerner theorem, which says that a tax on imports is exactly equivalent to a tax on exports. Another interesting insight:

Trade can be thought of as another form of technology. Economist David Friedman observes, for instance, that there are two ways for the United States to produce automobiles: they can build them in Detroit, or they can grow them in Iowa. Growing them in Iowa makes use of a special technology that turns wheat into Toyotas: simply put the wheat onto ships and send them out into the Pacific Ocean. The ships come back a short while later with Toyotas on them. The technology use to turn wheat into Toyotas out in the Pacific is called “Japan,” but it could just as easily be a futuristic biofactory floating off the cost of Hawaii. Either way, auto workers in Detroit are in direct competition with farmers in Iowa. Import restriction on Japanese cars will help the auto workers and hurt the farmers; they are the modern-day equivalent of “frame breaking” [what Luddites did to mills and machines in England].

(Perhaps Mr. Harford has never been to Iowa, because in my experience, Iowa wheat fields are rare. Corn, however, is abundant.)

The problem is that the change that trade brings about affects different groups in different ways. Politicians love trade protection measures because they generally help a small, well-defined group immensely, at a lower and perhaps unnoticed cost to the rest of the people.

This book, combined with a few others such as Thomas Sowell’s works and Common Sense Economics: What Everyone Should Know About Wealth and Prosperity (all reviewed on this site) will work to increase anyone’s understanding of how economics works.

By Bob Weeks

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