Undercover Economist

I'll let Tim Worstall provide an introduction to my review of "The Undercover Economist" by Tim Harford.

Julie Bindel in The Guardian.

My local supermarket, in a posh area of London, inadvertently offers shopping based on a sort of class apartheid. The shelves containing organic vegetables draw shoppers' attention to the free-range eggs, which in turn point to the small freezers selling a range of expensive organic ice creams placed near the array of dried fruits promising "no fat or sugar". People with children called Oscar and Chloe shop in those sections, leaving others to the shelves groaning with brightly coloured pop, sweets and own-brand tins of spaghetti hoops, where you can almost hear the mental calculations of hard-up mums worried about overspending.

"Inadvertently"? ItÂ’s deliberate you uneducated fool. Supermarkets will never put the organic vegetables next to the conventional ones, organic ice cream next to regular. ItÂ’s called price discrimination...to put it another way they donÂ’t actually want you, the organic shopper, to see quite how much theyÂ’re ripping you off for your middle-class guilt trip. That brightly coloured pop is that luminescent orange precisely so that you wonÂ’t buy it in preference to the vastly more expensive pastel hued one that wonÂ’t clash with your curtains.

In his book, Harford explores topics such as how supermarkets stack organic foods together with other higher priced items because organic items are signaling mechanism that the consumer is willing to spend more money. He also has a bit of an unhealthy interest in coffee, and pointing out my favorite point about Fair Trade coffee; if you pay producers of coffee more, more coffee producers will enter the market.

Another interesting discussion in the book is about health care. While he doesn't spell it out, Harford basically endorses HSA's. Health care consumers now have no incentive to price shop or question treatments because insurance companies will be paying for it. When given the motivation to question treatment or put a dollar value on a treatment, overall health care prices will go down. And for serious healthmaladiesladies catastrophic insurance would be necessary.

Another great aspect of the book deals with market failures called externalities. Externalities are the biggest problem people have with Capitalism and free markets. But, coupled with the discussion of externalities is discussion of government failures stemming from externalities. For instance, because I wrote about it yesterday, the minimum wage, the government is basically setting a wage floor with the minimum wage. Raising the minimum wage in the name of helping the poor, is a rather poor way of doing it because not everyone earning a minimum wage is poor and trying to support a family. In fact, raising the minimum wage would increase the household income of quite a few middle class families with teenagers working and moms and dads with a part-time job to get out of the house or to pay for painting for example. Instead, maybe focusing on increasing the payout of the Earned Income Tax Credit would be a better policy decision because only the poor receive the EITC. Raising the minimum wage has an externality of raising prices for many goods and since many union wages are tied to the minimum wage it would benefit many middle class homes and in effect hurting poor households. Harford discusses how best to work a tax to prevent congestion on roads. His idea would be to have a tracking device in your car that would charge you more for driving during rush hour and in congested areas. This in turn would reduce the externality of crowded roads. As well for polluting industries, the carbon trading system is a great success because it puts a price tag on those industries for installing carbon reducing systems.

Later in the book, after Harford has done a fine job of teaching basic economic principles, he takes on some tricky economic subjects such as why some countries are poor, globalization and why China has been a success. The answer is, of course, the government getting out of the way. In poor countries, officials are corrupt, won't enforce contracts and don't invest in infrastructure. Globalization benefits countries because of competitive advantage. China is a success story because they switched to market mechanisms away from central planning.

Read the whole book, it's very interesting and informative.