The Undercover Economist [book review]

The Undercover Economist,  [Tim Harford, 2007]

Is economics dull, referring to complex data analysis and presenting not-so-exciting conclusions inaccessible to the general public? Tim Harford replies with a definite no and supports his opinion with The Undercover Economist, where he brilliantly presents his theories, based on thorough research and analysis, on hot topics such as the US health system of the rise of China as an economic power of the 21st century.

The Undercover Economist is an exciting book that tries to present the world through the eyes of an economist: where you see an expensive cup of coffee, for example, the economist will see coffee beans cost, countries that base their economies on coffee exports, rents, location, profit and, more interesting, who gets wealthy from selling coffee and who really pays for your coffee: 40 cents cost to make a 1-dollar cup of coffee, less than a dollar for a small latte, that sells for $2.55. How is this possible? One of the conclusions reached by Harford is that location and accessibility are the most critical factors: Starbucks, or another famous coffee brand, can impose those charges because there is no coffee shop next door to compete with them. They have exclusive contracts for very crowded places – e.g. train stations – where they have a monopoly on the offer. Thus the consumer accepts to pay whatever is required of her to get her “daily fix”.

Going through the book, an unknown world opens up in front of you, hidden behind the price of a coffee or the price differences encountered in supermarkets: how is it possible that identical products have different prices in different supermarkets or in supermarkets that are parts of the same brand but are located in a separate area? “Supermarkets have turned price-targeting into an art”, Harford saysPrice targeting refers to a unique target – evaluating each customer and charging what they are willing to pay or group target – offering different prices for members of other groups. These techniques allow the possibility to have a completely different price for identical products by using the location advantage (e.g. a supermarket positioned near a very crowded area will have higher prices), providing expensive products (e.g. organic food), which makes the cost of regular food more appealing to the customer, or sale prices.

Other topics approached in the ten chapters of the book analyze and explain the game theory, present ways to deal with some significant issues of our society: pollution, congestion or fights with neighbours or, one of my favourite topics, explain why some poor countries stay poor.

The respective chapter presents a deep analysis of the causes that determine certain poor countries of Africa – e.g. Cameron – to stay poor and not benefit from the general economic growth of other countries in the area. According to Harford, a poor country can grow richer if a series of investments are made all at once: factories, infrastructure, electricity, and ports to allow goods to be manufactured and exported and thus build wealth. As a result, many poor countries managed to grow, but others were left behind. The main reasons for the lack of growth in these countries are “government banditry”, corruption starting at the highest levels distributed to the lowest levels of society (politicians – police – regular citizens), widespread waste and oppressive regulations that ease the collection of bribes.

Overall the book is a beautiful trip into the mind of an economist, proving to be an interesting and exciting adventure, which opens the door for transforming economics in daily reading, helping the general public understand the economic reasoning behind common phenomena that translates into finally uncovering the logic of life, which is also the title of the next book by Tim Harford.

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