The Hindu Business Line : Economic growth is about better life for individuals

Economics is about people — something that economists have done a very bad job at explaining. To help you see the world like an economist, and become a savvier consumer and voter, Tim Harford offers The Undercover Economist. D. MURALI terms the book an ideal read to start the new fisc with. "A normal person looking at an economist wouldn't notice anything remarkable. But normal people look remarkable in the eyes of economists."

Economics. Does the very word go above your head, and make you run for cover? If yes, it's quite likely you will find Tim Harford there, with The Undercover Economist, from Little Brown (www.twbg.co.uk).

"There might be an economist sitting near you right now. You might not spot him — a normal person looking at an economist wouldn't notice anything remarkable," alerts Harford. "But normal people look remarkable in the eyes of economists."

To help you see the world like an economist, the author unlocks the mystery of phenomena; teaches you the use of `the investigative tools of the economist'; and urges you to become a savvier consumer and voter.

COFFEE MEADOWS

Start, therefore, with a coffee, at the AMT's bar right on "the desire line of 74 million commuters" in the Waterloo station. "According to economics professor Brian McManus, mark-ups on coffee are around 150 per cent — it costs 40 cents to make a one dollar cup of drip coffee and costs less than a dollar for a small latte, which sells for $2.55." Harford digs up David Ricardo's book of 1817 to read up the factors that determine the rent on prime locations such as meadowland.

"Just as meadowland will command high rents if the grain it produces is valuable, prime coffee-bar locations will command high rents only if customers will pay high prices for coffee," reasons Harford. "Rush-hour customers are so desperate for caffeine and in such a hurry that they are practically price-blind. The willingness to pay top whack for convenient coffee sets the high rent, and not the other way around." Cappuccinomics, we may call that, as on http://obtusehumorist.com.

Next, find out `what supermarkets don't want you to know'. What's that? `First degree price discrimination' or `unique target'. That is, evaluating each customer as an individual and charging according to how much he/she is willing to pay. With the right technology, where each customer has an identity tag, it may be possible for price labels to change `according to who was looking at them'!

At times, the trick is out, as in the Amazon's case: "Customers started to realise that if they deleted the cookies on their computers, they were offered different, often lower prices... Amazon has promised not to do it any more."

QUEST FOR TRUTH

Why are free markets like Fletcher Reede's son in the film Liar, Liar? Because "they force you to tell the truth," explains Harford. "That truth comes from the fact that stores and consumers do not have to buy or sell at a given price — they can always opt out."

That way, most transactions happening in a free market `make both parties better off' and improve efficiency.

"Even if markets are not perfect, they can convey tremendously complex information. Governments — or any organisations — find it hard to respond to such complex information." You can't get more efficient than a perfectly competitive market, declares the author. Reason: Such a market "is like a giant supercomputer network with amazing processing power and sensors in every part of the economy — reaching even inside our brains to read our desires," to constantly re-optimise production and allocate the results.

The bad news, however, is that taxes, rather than subsidies, are more a cause of inefficiency. "Because they destroy the information carried by prices in perfectly competitive, efficient markets: price no longer equals cost, so cost no longer equals value." That should make you dislike taxes more!

WHAT IS ECONOMICS REALLY ABOUT?

`What is economics really about?' asks the author in a chapter that delves into externality charges. Is it about `a bunch of rather dull statistics with names like GDP (gross domestic product)'? Most economics has very little to do with GDP, explains Harford. "GDP measures lots of things that are harmful (sales of weapons, shoddy building work with subsequent expensive repairs, expenditure on commuting) and misses lots of things that are important, such as looking after your children or going for a walk in the mountains." There is much more to life than what gets measured in accounts, reminds the author.

A chapter titled `the inside story' is about the skew that asymmetric information can cause. Harford applies `keyhole economics' to healthcare and observers how "the insurance-based market solution is misfiring badly in the US." The UK swept away the market and replaced it with bureaucracy. "Catastrophe insurance, which pays out only when a particular course of treatment is very expensive, is fairly cheap," suggests the author, and cites the Singapore example.

"The typical Singaporean lives to the age of 80, and the cost of the system (both public and private) is a thousand dollars per person — less than the cost of the bureaucracy alone in the US."

Who pays? "Each year, the typical Singaporean pays about $700 privately (the average American pays $2,500 privately) and the government spends $300 dollars per person (five times less than the British government and seven times less than the American government." Instructive.

STOCK MARKETS AND PRETTY FACES

Gather essential stock market tips in the chapter on `Rational Insanity'. All stock prices incorporate tremendous expert knowledge, says Harford. "If you plan to try to make serious money, better have a clear idea what you think you know, and what market insiders are ignoring." Another insight is that a company's long-lasting profitability "comes from having some capability that others cannot match." Do you know that John Maynard Keynes had compared the stock market to `a silly newspaper competition in which readers were invited to pick several pretty faces from a hundred photographs'? Not an easy game, please note. Because it is not about choosing "those which, to the best of one's judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest".

Keynes had said, "We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be," because in this contest, "the winner was a reader who chose girls closest to the general opinion." There could be "the fourth, fifth, and higher degrees," Keynes had postulated!

Meet `the men who knew the value of nothing' in a chapter on auctions — "not of bricks and mortar but of thin air, wavelengths of radio spectrum." Governments hired economists as consultants to set up the auction; "one auction really did raise less than 1 per cent of what was hoped for, while another raised ten times as much as expected." Why? Because "auctioning air, like playing poker, is a game of greater skill," explains Harford. He introduces readers to John Nash, Von Neumann, game theory, and `spirals of second guessing' such as, "If he thinks that I think that he thinks that I have four kings, then... "

How does that apply to the allocation of scarce public assets, be it the right to mine or use radio waves? "To sift out competing companies' cheap talk and empty promises, the government had to impose high stakes and... force each negotiator to put his money where his mouth is." For, talk is cheap, but bidding is expensive, adds Harford. "No company will drop out while the price is still lower than their prediction of the licence's value, and no company will keep bidding once the price rises too high."

THEORY OF `GOVERNMENT BANDITRY'

Find answers to the serious question `why poor countries are poor' in a chapter that begins with `The Armpit of Africa,' Douala, Cameroon. "The average Cameroonian is eight times poorer than the average citizen of the world, and almost fifty times poorer than the typical American." In 1999, Cameroon was `the most corrupt country', according to Transparency International. To explain the poverty there, the author offers his theory of `government banditry'! The book wraps with chapters on `Beer, Chips and Globalisation', and China.

"In the end, economics is about people — something that economists have done a very bad job at explaining," concedes Harford. "Economic growth is about a better life for individuals — more choice, less fear, less toil and hardship." Ideal read to start the new fisc with.

Economics@TheHindu.co.in

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