The Undercover Economist

When I was in college, our professor used to tell us that the laws of thermodynamics are always true but the laws of economics are truer. I could never make sense of it. Nevertheless, since all of us make economic decisions every single day I am starting to see his point. Economics governs our everyday life like no other science does.

Tim Harford's book, The Undercover Economist, tries to explain to the laymen the rules of economics, and their importance, using everyday occurrences, anecdotes and examples. The tagline claims to expose "why the rich are rich, the poor are poor and why you can never buy a decent used car". All these are very important questions; who would not want to know why the rich are rich and the poor are poor?

Have you ever wondered why the hell Starbucks coffee costs $3 and you still buy it? Did you know that if there is a frost in Brazil, the price of aluminum roofing in Kenya increases (it is like the butterfly effect!)? Did you know that game theory is used to design mighty successful bids for cell phone frequencies or that the talk about ‘sweatshops’ is not exactly motivated by compassion? There are many other fascinating questions that are tackled in this book, and it is done in a very impressive manner.

There are two chapters that I would particularly like to mention. The first goes by the title “Why Poor Countries are Poor”. Describing one poor country that Tim visited, he writes

"That is not to say that X international airport is a well-oiled machine. Far from it; it’s a humid, chaotic shambles where you have to fight your way through packed crowds”

Sample another conversation with a taxi driver:

“Sam, how long was it since the roads were last fixed?”
“The roads have not been fixed for Y number of years”
“Don’t people complain about the roads?”
“They complain, but nothing is done. The government tells us there is no money. But there is plenty of money…”

Or this

“I was warned so starkly about the government corruption and the likelihood that officials at the airport would attempt to relieve me of my wad of francs”

If you thought this description was about India, you were wrong. It was about Cameroon. But if the same prose was used to describe India, it would not be very far off! So, what is it that makes Cameroon, and India, poor? You should read the book to find that out.

The other chapter is about stocks. The chapter “Rational Insanity” talks about fundamentals of stock markets and the irrational exuberance of the tech boom. The author does not give tips on investing, although there is tongue in cheek mention of the “Grolsch” method of investing; an attempt to take advantage of what mistakes you think other investors will make!

If you have even a passing interest in the way the esoteric world of economics, and if you are not an economist, this is a very good book to read. The purists should stay away though; this book seems too easy to appeal to the insiders.