Francis Ogutu Silda Nikaj Econ 360 12/1/11 Book Review The Undercover Economist by Tim Harford: Exposing

why the Rich are rich, the Poo r are poor and why you can never buy a Decent Used car An entertaining and pain-free introduction to the key concepts of economics, by a Financial Times writer, Tim Harford, this book is a significant guide to econo mics ideas and principles that corresponds to our daily activities. Writing from the experiences gathered traversing the globe, Tim Harford shows those of us wi th limited to null ideas on how economics applied to real world issues, and reve als that everyday events are in fact complex series of negotiations, contests of strength, and battles of brains. Tim argues that the cappuccino that we might b e enjoying sitting in a restaurant reflects the outcome of a system of staggerin g complexity. There isnt a single person in the world that could produce what it takes to make a cappuccino. Cappuccino is the product of team effort. Referring to the work of David Ricardo, Tim argues that a person in possession of the desired resource does not always have as much power as one would assume. Bargaining strength comes through scarcity, as owners of resources have no barga ining power. However, in the long run as resources become limited and the demand rises, competition arises leading to a higher bargaining power for the resource owners. Sometimes relative scarcity and bargaining strength really do change qui ckly and with profound effects on peoples lives. We often complain about the symp toms the high cost of buying a cup of coffee or even a house. The symptoms cannot be treated successfully without understanding the patterns of scarcity, which u nderlie them. The Marginal land as an analogy for substitute in a competitive market plays a s ignificant role a free market system. Availability of a substitute changes consu mers and suppliers behavior. Just as fertile land will command high rent if the grain they produce is valuabl e, prime coffee bar locations will command high rents only if customers will pay high prices for coffee. Rush hour customers are so desperate for caffeine and i n such a hurry that they are particularly price blind. Harford agrees that a lot of things have gotten so expensive, and that this might be as result of power o f scarcity. How can we tell the difference between things that are expensive bec ause they are naturally scarce, and things that are expensive because of the art ificial means-legislation, regulation, or foul play? We need to appreciate the h idden parallel between natural resources, like fields or busy locations and comp anies. In real life, companies or firms are faced with different levels of resou rces: those that are very efficient, less efficient and even less efficient reso urces which determine the quality of the production and profitability (17). Profitable business usually attracts competition, but in some cases the competi tion is reckon that there must be a safer way to make a living. This suggest tha t it isnt a violence as such that creates barriers to entry and sustainable profit its the effectiveness of an organization. Tim continue to argue that some profess ional bodies like Legal, medical and such like, usually work their best to limit competition by limiting the supply of fully qualified professionals and outlaw any low cost substitution which ensure that no alternatives is available for cli ents resulting in high returns for such like professions (24). Finally, Harford highlights the controversial issues surrounding immigration in which he mentions that well educated workers with jobs requiring skills and trai ning, along with business men in need of cheap labor, tend to welcome immigratio n as a part of an enriching process, which adds to each nations economic and cult ural life. On the other hand, the less educated citizens dislike immigrants unde r the belief that they steal our jobs. Even though this claim might seem illogical , Tim Harford agrees that it may have some substantial base from a self-interest p

erspective. In a nutshell, by introducing the concepts of scarcity and bargaining power, Tim is saying that the premium price we pay for coffee on our morning commute to wo rk has nothing to do with the quality of the coffee and everything to do with lo cation, competition, policies and bad policies surrounding trade. Chapter two mostly focuses on the behaviors of business entities and how fairnes s, efficiency and scarcity power plays a major role in determining market price competitiveness among firms. Tim begins this chapter by emphasizing that even th ough businesses scarcity power cannot force us to pay unlimited prices for their products; these business entities possess a wide range of strategies in which t hey can lure customers into paying more. Companies trying to increase their profits and get the maximum value out of thei r scarcity are interested in who is willing to pay more rather than who can affo rd to pay more. Harford also highlights the fact that being rich is sometimes co nnected to with being insensitive to prices, but not always. He follows with exa mples such as business class air travel which normally is expensive, because com panies are willing to pay, and airlines have the scarcity power to take advantag e of the fact. Business telephone calls are inexpensive, because although compan ies would be willing to pay, there is too much competition around for any phone company to force them to. Despite the difficulties associated with product compe tition and price sensitiveness, Tim concludes that companies are still able to e xplore new ways to become profitable like instituting group target strategy of di scounts for groups or local customers because its easier to put into action, soci ally acceptable and welcomed.(35) Companies are always alert for ways to squeeze the maximum advantage out of what ever the scarcity power they have, and price targeting is the most common way to do that. In this chapter, Harford made numerous observations concerning scarcity and how different business employ their scarcity powers in various ways such as price di scrimination, sales mix up and concludes that the difference between two differe nt supermarkets has very little to do with the relative price of goods sold in t hose two different places but rather has a lot to do with who the shoppers are.( 35-55) In chapter three, Tim continues with the discussion of the competitive markets a nd how it influences fairness and asks whether any situation that leads to highl y unequal distribution of cash can be considered fair. In this chapter Harford e xplains what the truth mean in economic terms and how does it lead to perfect ma rket efficiency. He explores areas within the competitive markets in which effic iency could be beneficial and in which areas, efficiency might have some difficu lties (75-92). In chapter four and five, Tim talks about externalities and how they help deal wit h some of the major problems on our society: pollution, congestion, and fights w ith neighbors. The cost of driving a car is not just the car plus the gas. He su ggests that we can reduce problems such as congestion and pollution simply by en suring that people pay for the costs of their actions. It is also a fact that wh en driving, one is using space on the road leading to more traffic jams and poll uting the atmosphere. If this is not included in the price, then it is each pers on s best interest to take a car trip, leading to pollution and traffic jams. Th e solution is an externality charge, which basically make the government to incr ease the price to reflect the real cost. He gives an example of how London, inst ituted a per-trip charge through a certain area, which resulted in a quick and d ramatic traffic drop. The marginal cost of a trip to the local grocery store was originally close to zero, so everyone drove. Now it was larger, so more people chose to walk or bike. (Harford 93-121). Chapter five highlights how similar to the market failures, government failures is imminent because within the government itself, there are politicians and bure aucrats who would always have personal motivations. He goes on to explain that sc arcity power, externalities and imperfect information do not magically disappear

when the economy is run or regulated by government. When market and government failure are both present, the choice is between the lesser of the two evils (138 -142).You could have the government provide health care, but there is never enoug h money to go around, so you have to choose who gets what treatment; since there is not a good way of doing this, you get situations like in the U.K. where if y ou are going blind in both eyes, you can only get one eye treated (and not at al l if you are going blind in just one eye).The solution to this sort of problem is to identify what the scarcities are, allow both parties to get equal informatio n, and let markets take care of the rest. He explains why health insurance is ex pensive, because the people that think they are likely to get sick are the ones who will buy insurance, but the insurance company has less information on whethe r the person will get sick than the person does In chapter six, Tim talks about different theories and scenarios surrounding th e stock market, how rational judgment plays a great role in the decisions made b y the stock traders and how a market full of unexploited opportunities offers bi g rewards to any investor willing to research them and how a rational investment i n beer keeps the market nearly-random. Also, from time to time the market cannot set a correct price because of lack of appropriate information. (151-168) In chapter seven is a brief look at game theory reveals how auctioning radio sp ectrum air space is like playing poker. In this chapter, Tim describes the chall enges of applying the game theory emanates from the fact that it was developed b y men of nearly superhuman intellect. However he is quick to reiterate that this should not act as a knockdown to game theory, rather, it should be appreciated that even with all the high intellect power with which the game theory was devel oped it can still have its flaws. And that it is always useful to for the game t heorists to draw an experience as well as pure theory because if the game becom es too complex for the players to understand, the theory becomes as nearly usele ss for practical purposes since it tells us nothing about what they actually cou ld do.(169-177). In Chapter eight, Tim describes the reason behind the unending poverty in most t hird world countries using Cameroon as an example comparing it other developing countries which have broken the line of poverty while Cameroon and such like cou ntries are crippled with deteriorating economies. In his analysis, he points out that the corrupt governments are the general cause of all the economic misfortu nes for the developing countries like Cameroon. The rot starts with government, but then spread over to the entire society creating more distress. He goes on to point out that theres no point in investing in a business because the government will not protect you against thieves (so you might as well become a thief). Ther es no point in paying your phone bill because nobody can successfully take you to court (so theres no point being a phone company). Theres no point getting an educ ation because jobs are not handed out on merit (and in any case you cant borrow m oney for school fees because the bank cant collect on the loan, and the governmen t doesnt provide good schools). Theres no point in setting up an import business b ecause the customs officers will be the ones to benefit (and so there is little trade, and so the customs office is underfunded and looks even harder for bribes ). (191-213.) How did China grow from a mere nobody in the international trading scene to the fourth largest exporter in the world in less than 20 years? Tim explains that th e incentives, education, investment and just a little bit of luck had a greater role to play in chinas economic advancement. He acknowledges that china has had a lot of struggle to be where it is today. He points out some of the reasons why things went wrong for such a long time and at which point things started to turn around for China. He claims that china is lifting one million people a month ou t of poverty since it moved away from the communist regime to state capitalist a nd that China will continue to develop further. However, he cautions that even t hough chinas growth is rapid, the extent to which China will grow is still uncert ain. He concludes by suggesting that the continued expansion of the Chinese econ omy would certainly pave way for political freedom. The Undercover Economist has been developed with a rich narrative skills and ric h examples that explains various economic concepts in an easy to understand mann

er; starting off from a few simple examples of things like coffee prices, it goe s on to explain some key concepts like scarcity power and what Harford calls the world of truth that a hypothetical perfect open market would apply. Towards the e nd, the book swings to handling bigger things like globalization and whether its good or bad, concluding with a chapter on the economic wonder of China. Something I appreciate from this book is the fact that Harford was able to highl ight the problems faced by Britain health care system. Even though Britain offer s free medical care for its citizens, its associated with a lot of problems such as crowded medical clinics, long waiting lines and also I was surprised to learn that even in an advanced country as Britain, the system of free health care lim its the patients choice of treatment (Tim 125-147). This book explains the variou s economic scenarios that one would encounter in everyday life and from a laymans point of view, this would teach one so great ideas about economic issues in the real world. I will have to read it more deeply to get insight of many great ide as highlighted in this book. "The Inside Story," of chapter four that talks more about the differences in the health care systems across the world. I wondered why a country as small as Sing apore could be able to afford to provide compulsory health coverage for its citi zen while a strong economy such as United States wouldnt even dare to provide for the health insurance for its citizen for the fear of encouraging socialism. Th is chapter gave an insightful analysis of the health insurance crisis in the Uni ted States. No country spends as much on medical care than US, yet for many Amer icans the system of private insurance is prohibitively expensive (135-136). I fe lt like Tim had tried to offer a suggestion of how to tackle the issue of expens ive health care whereby the government pays for those poor and aged who can t fu nd their mandatory medical savings accounts. In general, this book is quite entertaining especially to me, as I have always w anted a book that could simplify the economic theories and models in simple term s that is easier to follow and keep focused given that most books on economics i deas is usually dry and contain technical terms. It is an easy read because of t he simplified language and also use of very familiar scenarios made it much more enticing. The discussion about the why the rich are rich and the poor are poor was more ap pealing to me especially illustrating how China has struggled over the periods t o emerge one of the fast growing economies on the globe. Bringing into light the causes of the economic deterioration in the third world countries was quite inf ormative even though some of his claims are a little bit controversial and is de batable. Especially, making a strong claim that African countries are crippled w ith corruption as the major causes of poverty. To a greater extent, yes, but the re are other many factors that Tim had overlooked like the impact of the colonia l rule, support of dictatorial powers in Africa by the West in the early years o f independence. Most of the chapters and topic of the book were very interesting, however, I fel t that the at some parts of the book the author used a lot of examples especiall y in chapter one and two and I felt like it was becoming redundant. In fact some of the parts were very slow reading especially chapter six and seven. I felt as though book focused more on consumerism and the markets and might have overlook ed the importance of issues such as education and labor issues which even though mentioned once in a while, werent delved into much. Nevertheless, this book is amazing to understand the basics of how the whole eco nomic system works, without the trouble of understanding the jargon. This book i s based on the fundamental principle of supply and demand, which it has very sub tly tried to establish in each of its chapters. I would definitely recommend any reader to read because it is all rounded and an eye opener as it focuses on iss ues that affect us in our daily decisions.