Economics Without Graphs

November 14, 2008

The Undercover Economist, by Tim Harford (2004)

Tim Harford’s The Undercover Economist offers a model for how economics ought to be taught in high school and undergraduate courses. Before Economics was Economics, before it got loaded up with concepts like supply and demand curves, total surplus, and deadweight loss, there was Adam Smith, who asked how regular people make decisions, and “Why are some nations rich and other nations poor?” The Undercover Economist gets back to these roots by asking questions normal people might actually ask about everyday life, and showing how Economics offers common-sense answers. Questions like “What’s so great about the free market?”; “How come groceries are so expensive at Whole Foods?”; and “Why are some nations rich and other nations poor?”

The theme of the book is that the free market is a mechanism for getting people to tell the truth about their preferences. Since Economics is ultimately the study of how to use resources well, this information is incredibly important to economists. Without information on what people actually want, it’s impossible to know what “using resources well” means. This will turn out to be the key to both of the next questions, actually.

Why is arugula pricey at Whole Foods? Because, as Harford explains, it’s not a perfectly competitive market, after all, and grocery stores know this. Specifically, they know that some customers are going to be willing to pay more than others for certain products, but the stores can’t know who will pay what. Hence, labels like “organic” on bananas, which tell stores “I’m not sensitive to price, I’ll pay more than the normal price.” This is also why many coffee shops charge more for “fair trade” coffee, even though the actual difference in cost of production is a fraction of a cent. But, if you are the kind of person who cares about getting fair trade coffee, they’re not charging you enough for normal coffee.

Why are some nations poor and others rich? Mainly, because their production isn’t guided by the free market, but rather by top-down control. Harford illustrates with the story of “How China got rich.” In the 1950s and 60s, Chairman Mao decided what China should produce, and in what quantities. He decided that China should produce lots of steel, but his decision was made without any signal, via price, that would indicate whether steel production was what China needed or not. It was the lack of a signal about who needed what that caused China to double its grain exports from 1958 to 1961 as millions of Chinese died of starvation (Literally, millions. It’s not a competition, but if it were, Mao would probably win).

Overall, Harford’s book is accessible, entertaining, and does a great job of presenting fundamental economic concepts. Most of microeconomics, as its currently taught, is boring and unenlightening for students. The Undercover Economist offers an excellent example of how to do better.

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