The Undercover Economist: notes from Tim Harford’s 2005 debut

“Economics is about who gets what and why.”

It’s a fundamental part of how the world works, so everyone should better understand how an economy works. So argues business journalist Tim Harford in his 2005 debut book The Undercover Economist, informed by his syndicated columns. Published the same year as the breakout success Freakonomics, The Undercover Economist helped establish a category of pop economics nonfiction books to help explain the world. They’re heavily influenced by behavioral economics and mix in lots of real world examples. Harford was part of a wave of writers that brought in greater familiarity with otherwise arcane economics concepts, a trend that has only continued the last 15 years.

That’s fitting a trend to less academic and more practical uses of the field of economics. Keynes wanted economists to be not great theorists but “rather like dentists” to solve everyday problems. Harford has been part of the movement to make it so.

Below I share my notes from the book for future reference.

My notes:

• David Ricardo (1772-1823) helped advance economics with his field metaphor: meadow, scrubland and grassland (the marginal option) Ricardo later helped repeal corn laws which ushered in era of free trade
• John Kay: sustainable competitive advantage
• Who makes money off Starbucks? Property owners with high-traffic valuable locations
• Find customers who are more cavalier about price:
  1. First degree price discrimination or “unique target” (used car salesman)
  2. Group target (students, elderly, kids eat free and Disney offers discounts to in-state locals who will come often
  3. Self incrimination (Starbucks with several coffee choices that cost them same to make but charge more)
• Price sensitivity and “own-price elasticity:” if we raise prices how much do we lose, if we drop prices how much do they fall?”
• Whole Foods isn’t a more expensive store; it has more expensive upgrades
• Supermarkets vary prices between low and high to attract bargain hunters and earn off loyal regular shoppers. Sale prices are often real price and the rest is a grab at more money per product for those who will self incriminate
• Early French trains kept third class seats open air and wooden benches not to hurt the poor but to scare the rich from saving money by trying third class
• “Having refused the poor what is necessary, they give the rich what is superfluous.”
• IBM LaserWriter printer: made two models and one had a chip that slowed it down so it could sell two models to get higher price buyers
• Two leaks in price strategy: (1) rich customers buy the cheaper products (unless sabotaged) and (2) leaks from one group to another
• Pharma innovation is driven by and paid for by the big US drug market
• Economists say a market is inefficient when something could change that would make someone better off without making anyone worse off
• Kenneth arrow: Balance efficiency and fairness
• Head start theorem : Don’t subsidize fuel, just give elderly cash
• Marginal price: for one more customer
• Revealed preference
• Congestion pricing
• 1993 EPA set up an auction for sulfur emitting. That gave them price discovery for sulfur scrubbers
• Don’t make environment a moral issue but an economic one: “Even with the best will in the world, it is hard to know how to make the right choice” 102
• Disposable diapers (landfill) or reusable (water and electric to clean)?
• “Economics is about who gets what and why”
• George Akerlof on inside information (information asymmetry): used cars: only lemons are on sale because peaches (Good cats) get devalued by the market
• True for health insurance too
• “The more we know the less we can insure” insurance needs mutual ignorance
• Spence wins the Nobel prize by showing credibility signals override information asymmetry (years into business and prominent billboards for Coca Cola and expensive bank buildings)
• Stiglitz shared the same Nobel prize by showing other side of the coin: how those without information can find it. Insurers offer high deductible plans to lure those who are healthy (peaches) and higher premium ones to attract the less healthy (lemons)
• This lemons problem is “adverse selection”
• Market fundamentals: a share is a stake in future company profits. Stocks should go on a “random walk” because random news is a big contributor to price
• Tony Dye: for 7 years said internet stocks were overvalued and held in cash. Eventually he was right but it was a long time
• Robert Shilller: we always drift back to 16 P/E
• Irving Fisher: stocks in 1928 “A new and permanently high plateau”
• Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market is a 1999 book that predicted continuously higher stocks, just before the dot com bubble burst
• Transformational technology tends to destroy stock value and result in many failed new companies , it never does create outside long-term value. Look at the example of the great western railway which the author says would have returned a long-term investor no more than 5% annually including dividend
• Because there is little scarcity at the moment of transformational technology: Microsoft is an exception: companies need scarcity power (of land, of brand or tech)
• Graham Bailey: internet was not scarcity it was about claiming territory (but Google proved him wrong)
• Oscar Wilde: A cynic is a person who knows the price of everything but the value of nothing
• Jon Van Nuemann developed game theory: author says that a game “is any activity in which your prediction about another person will affect what you decide to do”
• Game theory failure in spectrum auctions when one went only for 1% of expected bid because companies found a way to avoid competition
• Keynes wanted economists to be not great theorists but “rather like dentists” to solve everyday problems
• Auction for spectrum licenses: it is scarcity power not cost if licenses that predict what company will charge. These auctions put on display the practical use of economists
• Man-made resources, human and technological resources make countries rich but why do many poor countries stay poor? Diminishing returns should slow rich and help poor. But also “increasing returns” mean rich countries benefit from network effects. But Paul Rosenstein-Rodan’s 1943 “big push” hadn’t worked for most countries
• Mancur Olson: autocrats motivated to do absolute least to keep country alive long enough to plunder it. 20 years of a single dictator is better than 20 years of coups
• Napoleon is credited with saying “never ascribe to conspiracy that which is adequately explained by incompetence”
• Cameroon’s lousy education system makes Cameroon twice as poor as it could be, and the terrible infrastructure makes it twice as poor again. We would expect them to be four times poorer than the United States but it’s 50 times poorer. Kleptocracies and poor institutions are part of a culture and tradition that are harder to overcome than just dollars and know how for an infrastructure project. Social capital and rule of law explain almost all the gap
• Edward o Wilson: in a few generations we’ll all be same race
• “Those who fear a terrible global sameness must remember that new ideas, welcome more unwelcome, will always arise faster than they can be mixed in.“ 204
• Comparative advantage (Ricardo): do not what you’re relatively better at but absolutely best at
• Bruges was once a great city whose port was obstructed by silt and replaced by Antwerp. Now Bruges is a tourist hub and Antwerp has an active port
• To trade, a country always has to produce something; no imports policy equals a no exports policy (Lerner theorem ) but yes some industries are destroyed in periods of transition
• Joan Robinson of trade barriers: just because others throw rocks into their harbors doesn’t mean we should throw rocks into our own
• David Friedman says there are two ways for the U.S. to produce cars: build them in Detroit or grow them in Iowa (by exporting wheat to Japan to pay for Toyotas)
• Between 1993-2002, 310 million jobs lost and 327m created. Need retraining
• Globalization means five things: trade; migration; technical knowledge exchange; FDI; and cross-border investments in shares and bonds
• Martin Wolf: “factories do not walk”
• Global free trade helps, not hurts ,environmental obstacles: Efficiency and growing out of poverty
• Sweatshops are symptoms not cause of global poverty
• Harry Truman wanted a one handed economist so they can’t say on the other hand
• Reagan: “If Trivial Pursuit were designed by economists, it would have 100 questions and 3,000 answers”
• International isolation is good political stability
• “Coffee growers are poor because they have no scarcity power” and because it’s relatively easy to start growing and can be grown in many climates around the world . He argues coffee growers will never be richer than other roles
• You need incentives and information: Cameroon had neither, Maoist China had incentives (Mao pressure) but no information
• At time of the book’s publishing (just a few years after the country jointed the WTO), China is the big free market success story: Deng politically transitioned and the educated workforce and big domestic market attracted interest; Hong Kong and Taiwan helped too with special economic zones