Posted on 12/06/2005 3:19:55 PM PST by Sonny M
"The favored game at the moment has to be price-gouging the natural way, riding the bandwagon of organic food...For example, in the UK, organic milk commands a premium of around 50 cents per quart, but the farmer sees less than twenty cents of this." -- Tim Harford, The Undercover Economist, p. 42-43.
What does buying organic food say about you? It might say that you believe that it is healthier to ingest food grown in a certain way. But to Tim Harford, it also says that when it comes to price, you are a sap, willing to hand a store high profit margins. He ends his discussion of the organic food rip-off by issuing a plea to organic-preferring consumers to shop more price-consciously and "not let food retailers exploit your enthusiasm."
Thus does Harford explain "price targeting," whereby a seller tries to identify saps who will overpay for a product. Once you get the idea, you can see examples all over. For example, just the other day in the Wall Street Journal, Holman Jenkins went "undercover" to expose the Toyota Prius and other hybrid smugmobiles.
"Hybrid technology is not 'green' technology. Like heated seats or flashy exterior trim, it's merely an expensive option that generates large markups for the Toyota Corporation and its dealers."
I am not against hybrid technology, and it warms my heart to see other people sacrificing to help hold down the price of gas for me. But until the price premium comes down to the point where I can count the number of years of gasoline savings I need to break even without using my toes, I myself will stick with regular cars.
Review It as a Textbook?
When it comes to the inevitable comparison with Freakonomics, I can give a much more enthusiastic recommendation to The Undercover Economist, or UE. Perhaps a book on amateur sociology can be more entertaining, but UE more accurately reflects economics and has much higher educational value.
In fact, the substance of UE is so strong, that I am tempted to review it as if it were a textbook. Not because it resembles the freshman textbooks that are commonly used today, but because it resembles what I believe such books ought to be. In fact, it is not far from the book that I argued for five years ago. If the Ivy League economics courses were designed for the benefit of students rather than the convenience of professors, then Harford, not Greg Mankiw, would be the $1.4 million man.
The traditional freshman economics textbook says little or nothing about economic growth and development, asymmetric information, and tactical price discrimination. Harford covers those important topics, while omitting the usual long, boring, and not-so-enlightening discourse on cost functions and industrial organization.
UE's pedagogical devices are anecdotes and stories, rather than mathematical diagrams. For the vast majority of students, that certainly represents a better approach.
For example, instead of presenting economic growth and development in terms of dry abstractions, Harford narrates personal experiences in China and Cameroon that illustrate success and failure in economic policy. In describing Cameroon's corruption, he writes, "Bullying gendarmes, often drunk, stop every minibus and try their best to extract bribes from the passengers. They usually fail but from time to time they become determined. My friend Andrew was once hauled off a bus and harassed for several hours." (p. 187)
Questionable Illustrations
Occasionally, the examples that Harford uses to illustrate economic concepts may not have been the best choices. For instance, he describes the auction in the United Kingdom of spectrum for third-generation phone licenses in 2000, which raised $22.5 billion pounds, as a triumph of the use of game theory in auction design. In a narrow sense, that may be correct. However, in the larger scheme of things, I would say:
* Government creates artificial scarcity in spectrum by managing spectrum poorly.
* Government licenses of spectrum fail to create true property rights, because the "owner" of spectrum does not have choice as to how to use it.
* The amount of money raised is not an indicator of whether or not a spectrum auction allocated the resource efficiently.
Harford also goes astray in attributing problems in health care markets to asymmetric information. He says that it is difficult for consumers to know whether they are receiving cost-effective treatment. However, this is not an information asymmetry -- doctors, too, rarely know whether they are providing cost-effective treatment (see The Commission We Need to understand why that's so).
He also argues that consumers know too well whether or not they are likely to get sick, and that this is what makes private health insurance unworkable. However, in reality, this information asymmetry is not such an issue. In fact, Bryan Caplan caught Harford contradicting himself by stating that illness is "extremely unpredictable."
The Best Introduction
I expect that regular readers of my columns would enjoy this book a great deal. It shows how to apply economic reasoning in many interesting and important circumstances.
Overall, The Undercover Economist is the best introduction to economics to appear in quite some time. I hope that economics professors give serious consideration to using this book in their courses. My guess is that teachers who incorporate UE will achieve more success in terms of students who can apply economic knowledge after they finish the course.
Or recommend any good economic books?
For what its worth, I already do have several Thomas Sowell books, and a couple of Friedman written ones along with Hazlett.
I like the hybrids cars and organic foods.
These worthless products take money from stupid leftists --- who go otherwise use it to do harm, such as by donating to PETA, Hamas, or other terrorist organizations --- and gives it to capitalists.
This is only partially true - the problem is without outside monitoring doctors have no incentive to try a less costly treatment - instead the reverse is true. 15 years or so ago many of the Medicaid audits focused on "kickbacks" to MDs who recommended a specific treatment. More recently, we see HMOS pressuring doctors on the payroll to recommend the least costly treatment. Ether way, cost and certain economies play very heavily into treatment decisions.
H also argues that consumers know too well whether or not they are likely to get sick, and that this is what makes private health insurance unworkable. However, in reality, this information asymmetry is not such an issue. In fact, Bryan Caplan caught Harford contradicting himself by stating that illness is "extremely unpredictable."
The truth is somewhere in the middle - in general, people know whether they are healthy or not - so on a macro scale health insurance attracts those who need it the most - left to it's own devices with result in what is commonly known as the "spiral death" syndrome. At an individual level, though, incidents of illness are unpredictable, and can be economically distorting at the personal level.
Free to Choose and Capitalism and Freedom
are both superb and both by M. Friedman.
Then skim Das Kapital for the other side. A week with Marx and you'll understand why communism was doomed to failure.
"Or recommend any good economic books?"
I am making the assumption that you are interested in good economics books of the non-academic variety. I have two classics that have withstood the test of time: "A Radical's Guide to Economic Reality" by Angus Black; this crafty little paperback came out at the height of the Vietnam War and, contrary to its title, is full of subtly delivered conservative economic thought--e.g., school vouchers. A second book worthy of your attention is "A Time for Truth" by William E. Simon. Mr. Simon commits unspeakable heresy when he writes that government spending is just a middle class subsidy. That is, all the welfare programs and public school subsidies are designed more to employ otherwise unemployable college graduates than they are to help targeted clients. There are more that I can suggest at a later time.
I've read a few socialist/marxist books (including good ole Karls original stuff).
It simply amazes me how many people make the foolish claim that this stuff works in theory and has just been screwed up in practise.
Its even screwed up in theory.
Its also pretty clear that the original communists never ever gave a seconds thought about applying these ideas to anything other then industrialized society (and even there, they skip over some without thought, its not an economic threory, its a pseudo junk philosophy).
Mao revamped communism with populism, and still China couldn't do anything with it.
Bad theories always make worse policies in practise.
I've read one of the 2 books mentioned by Friedman along with another book by him about education.
Much better economist then his son is, then again his sons views are "anarcho-capitalist" and uses mostly circular logic.
Another good economics book is a paperback by heretofore unknown economist P.J. O'Rourke. Can't think of the title offhand. It is a quick read and each chapter cuts to the chase in each country's economy he profiles.
He is 2nd to Sowell in writing.
One of the most brilliant minds I have ever read (thought he would disagree).
He also has some funny stroies outside of economics about the "rolling stones" which are just plain funny (non political) which still make me laught.
I love his book "eat the rich".
I like Tom Sowell, but most of his books are written for grad students. PJ, on the other hand, wants you to laugh while you are learning.
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