Lexington, KY - Let's admit it: despite the ongoing daily emphasis in the media on the economy, most of us don't really understand how it works. While there is no end to the finger pointing regarding the current downturn, few of us own up to our own personal impact on something as enormous as the world economy.
But what if we could learn to see the world with an economist's eyes? Would we make different choices? Would we make better choices?
The answer is a resounding yes, according to Tim Harford, author of The Undercover Economist. If more individuals could learn to use the investigative tools of the economist, it would impact not only how we consume, but also how we invest, save and even vote. Harford is dedicated to helping us become economic detectives, uncovering the mysteries of everyday modern life.
While it may seem like a Herculean task, Harford's approach is not about using strong-armed statistics to provide insight into business cycles or economic theories. Harford would have us become economic detectives to understand people "as individuals, as partners, as competitors, and as members of the vast social organizations we call economies."
He starts to teach us to become economic detectives with a cup of Starbucks. Why do we pay $3 for a cappuccino but coffee growers in the third world get only a few cents per cup? According to statistics cited by Harford, markups on coffee are around 150 percent. In other words, it costs 40 cents to make a one-dollar cup of coffee, and less than a dollar for a small latte, which costs almost $3.
While it may seem that someone is making a lot of money (such as Howard Schultz, the owner of Starbucks), the economic reality is more complex.
With a bit of economic detective work, the truth is revealed that "Starbucks' most significant advantage is its location." That is how the company is able to make such a margin on a cappuccino. However, the location is controlled by the landlord, who has the option to lease to any number of competing coffee companies. With a limited number of potentially successful sites, the landlords have the upper hand.
After coffee, Harford takes us with his armchair reasoning to explain a number of everyday examples. Why do we pay $80 for a barrel of oil (or up to $140) when the production cost in Saudi Arabia or Kuwait is about $2 a barrel? What are the economic reasons behind the failure of the U.S. health insurance system? Harford urges us to develop our economic detective skills to understand the workings of the modern world.
Being the superb teacher that he is, Harford wants us to go a step beyond macroeconomics, and look through our collective magnifying glass to see how intensely personal economics really are. At one point he bluntly asks, "Do you care if you get ripped off?"
The answer should be yes. Before your next trip to the grocery store, read Harford's section on "Price-gouging the natural way." His insight on the natural food bandwagon may give you second thoughts about buying those organic bananas.
At a time of global economic recession, Harford's chapter on "Beer, Fries and Globalization" is insightful in several ways, but of particular interest is the discussion on the environment. Harford provides an economist's insight on the complex relationship between economic development and the environment. He argues that economic growth may indeed hurt the environment. At the same time, economic growth and trade can cure environmental problems, such as unsafe drinking water.
From supermarkets to stock markets, Harford encourages us to develop our skills as economic detectives. Unlike a college textbook on economics, this is a fun read. The concepts are given in a clear format of logical deductions. They are then applied to everyday life situations. This is economics for every person from single consumer to corporate business. Harford encourages us to look carefully at the evidence, think critically and not react emotionally.
Harford tells us "economics is about people - something that economists have done a very bad job at explaining." The Undercover Economist is a major step forward in changing that.