Review: The Undercover Economist

Continuing on a somewhat related topic with “Freakonomics” that I read a short while back, The Undercover Economist by Tim Harford takes aim at partly similar things but from a different perspective. While the very beginning is a little bit annoying in its pomp, the book quickly gets under way to handle more interesting issues. A lot of interesting issues to be exact.

Like with most excellent books, it’s impossible to give an overview of what exactly is discussed – I wrote many pages of notes and there’s no way to cover even 10% of those in a short blog post. To give a quick glimpse on to some of the topics in the book, however, below some selected items I found insightful and/or fascinating.

• The hefty premiums paid for Fair Trade coffee and other goods is basically a scam, which is why many companies have begun to charge the same for Fair Trade goods than “regular” goods. This would be a lesson to learn in Finland, too. Anyway, over 90% of the extra price the consumer pays never reaches the farmer who is intended to be the beneficiary. Instead, it goes to the companies:
  

  .. so the money went to Costa’s bottom line – unless using fair trade coffee somehow increased their costs hugely. The truth is that fair trade coffee wholesalers could pay two, three or sometimes four times the market price for coffee in the developing world without adding anything noticeable to the production cost of a cappuccino, because coffee makes up such a small proportion of that cost.

  Sounds similar to my earlier musings about bread and rising wheat prices, no? The raw ingredients make up such a tiny proportion of the end product cost that justifying price hikes by increased raw material costs is nothing short of dishonest. The same is true for organic goods to some extent; for example in the UK, organic milk commands a 15p premium per pint, but the farmer sees less than 6p of this.

  Another interesting bit of information was to see just how little all kinds of “options” add to the production cost – compared to what they add to the final price..

• Ever wonder how people are lured to buy the more expensive stuff even when the cheap would be just as good? A lesson from supermarkets gives you some hints:
  

  Supermarkets will often produce an own-brand ‘value’ range, displaying crude designs that don’t vary whether the product is lemonade, bread or baked beans. It wouldn’t cost much to hire a good designer and print more attractive logos. But that would defeat the object: the packaging is carefully designed to put off customers who are willing to pay more.

• People often complain when health care services have to make value judgments on life and death matters because money is limited. Yet, people themselves constantly make value decisions; it’s enlightening to see just how often and how serious those value judgments can be even without us explicitly thinking about it. Consider this:
  

  Individually, we constantly make decisions that put a value on our own environment, our own time and even our own lives. If you pay more to avoid a noisy area when you rent a flat or a hotel room, then you have implicitly put a value on peace and quiet. If you decide you can’t be bothered buying a smoke alarm, you have traded off saved time and expense against an increased chance that you will die. However, when you make any of these decisions, you probably don’t come clean to anyone, even yourself, about the price you’ve put on quiet, time or life.

  This line of thinking leads us health care and why it’s so broken in so many countries. The US system, driven by problems with asymmetric information, is incredibly expensive and wasteful, yet doesn’t provide the results it could be expected to. A suggested solution involves keyhole economics with two guiding principles; ensure the widespread availability of information and give patients an opportunity to use this information. The proposed plan of catastrophe insurance and mandatory health care savings account sounds great – and what’s even better is that it’s been working in Singapore for decades. The cost? The cost of the system is $1,000 per person per year – less than the cost of bureaucracy alone in the US. Yet, the average age of Singaporeans is 80.

• Interesting insight is offered on two countries in particular; Cameroon and China. The former focuses on why exactly Cameroon is so poor. On China, the focus is on how it grew to be such an economic powerhouse. Both are fascinating accounts. On a lighter note, consider this on Cameroon:
  

  .. the most popular way to make the trip is by bus; minibuses ply all long-distance routes in Cameroon.Designed to seat ten people in comfort, they will depart as soon as thirteen passengers have boarded.

• Other fascinating topics included, but were not limited to, discussions on problems of game theory (mainly the assumption of hyperrational players), details on the 3G auctions and why some worked some didn’t, bidding strategies, the ecological benefits – or the lack thereof – of local production (local movement doesn’t translate to small transport costs – the transport costs of moving a CD player from Osaka harbor to the port of Los Angeles are less than the transport costs of moving it from the LA harbor to a local Best Buy branch), market failures vs government failures, taxation of imports and the free market. In other words, a very interesting collection of topics.

The Undercover Economist is constructed interestingly in terms of “plot” development; starting off from a few simple examples of things like coffee prices, it goes on to explain some key concepts like scarcity power and what Harford calls the “world of truth” that a hypothetical perfect open market would implement. Towards the end the book veers to handling bigger things like globalization and whether it’s good or bad, wrapping up with a chapter on the economic wonder of China.

As has been seen elsewhere – and as was seen in Freakonomics – what really matters in how people behave is their incentives. If you have poor, misplaced or misaligned incentives, you’re asking for trouble whether it’s on a small scale like in a coffee shop or large scale like running a country. While it’s a great book, the undercover economist is not a perfect one; for example, Harford gives some wrong information on why oil is so expensive. He also repeats music industry propaganda without any filters and states that we’re “probably not on the verge of another depression”, which is pretty close exactly what the US was a year or so ago.

Still, even with its shortcomings, I can highly recommend this book. It’s an enlightening – and at times even funny – book that sheds some much-needed light on many, many important issues. The list above doesn’t even begin to scratch the surface.