Product Description

“The economy [isn’t] a bunch of rather dull statistics with names like GDP (gross domestic product),” notes Tim Harford, columnist and regular guest on NPR’s Marketplace, “economics is about who gets what and why.” In this acclaimed and riveting book–part exposé, part user’s manual–the astute and entertaining columnist from the Financial Times demystifies the ways in which money works in the world. From why the coffee in your cup costs so much to why efficiency is not necessarily the answer to ensuring a fair society, from improving health care to curing crosstown traffic–all the dirty little secrets of dollars and cents are delightfully revealed by The Undercover Economist.

“A rare specimen: a book on economics that will enthrall its readers . . . It brings the power of economics to life.”
–Steven D. Levitt, coauthor of Freakonomics

“A playful guide to the economics of everyday life, and as such is something of an elder sibling to Steven Levitt’s wild child, the hugely successful Freakonomics.”
–The Economist

“A tour de force . . . If you need to be convinced of the everrelevant and fascinating nature of economics, read this insightful and witty book.”
–Jagdish Bhagwati, author of In Defense of Globalization

“This is a book to savor.”
–The New York Times

“Harford writes like a dream. From his book I found out why there’s a Starbucks on every corner [and] how not to get duped in an auction. Reading The Undercover Economist is like spending an ordinary day wearing X-ray goggles.”
–David Bodanis, author of Electric Universe

“Much wit and wisdom.”
–The Houston Chronicle
From Publishers Weekly
Nattily packaged-the cover sports a Roy Lichtensteinesque image of an economist in Dick Tracy garb-and cleverly written, this book applies basic economic theory to such modern phenomena as Starbucks' pricing system and Microsoft's stock values. While the concepts explored are those encountered in Microeconomics 101, Harford gracefully explains abstruse ideas like pricing along the demand curve and game theory using real world examples without relying on graphs or jargon. The book addresses free market economic theory, but Harford is not a complete apologist for capitalism; he shows how companies from Amazon.com to Whole Foods to Starbucks have gouged consumers through guerrilla pricing techniques and explains the high rents in London (it has more to do with agriculture than one might think). Harford comes down soft on Chinese sweatshops, acknowledging "conditions in factories are terrible," but "sweatshops are better than the horrors that came before them, and a step on the road to something better." Perhaps, but Harford doesn't question whether communism or a capitalist-style industrial revolution are the only two choices available in modern economies. That aside, the book is unequaled in its accessibility and ability to show how free market economic forces affect readers' day-to-day.
Copyright © Reed Business Information, a division of Reed Elsevier Inc. All rights reserved.
From Bookmarks Magazine
Harford exposes the dark underbelly of capitalism in Undercover Economist. Compared with Steven Levitt’s and Stephen J. Dubner’s popular Freakonomics (*** July/Aug 2005), the book uses simple, playful examples (written in plain English) to elucidate complex economic theories. Critics agree that the book will grip readers interested in understanding free-market forces but disagree about Harford’s approach. Some thought the author mastered the small ideas while keeping in sight the larger context of globalization; others faulted Harford for failing to criticize certain economic theories and to ground his arguments in political, organizational structures. Either way, his case studies—some entertaining, others indicative of times to come—will make you think twice about that cup of coffee.
Copyright © 2004 Phillips & Nelson Media, Inc.

Product Details

• Amazon Sales Rank: #10416 in Books
• Published on: 2007-01-30
• Released on: 2007-01-30
• Number of items: 1
• Binding: Paperback
• 288 pages

Features

• ISBN13: 9780345494016
• Condition: NEW
• Notes: Brand New from Publisher. No Remainder Mark.
• Click here to view our Condition Guide and Shipping Prices

Review
"Required reading."
—Steven Levitt, author of Freakonomics

"A playful guide to the economics of everyday life, and as such. . . something of an elder sibling to Steven Levitt’s wild child, the hugely successful Freakonomics."
—The Economist

"A book to savor."
—The New York Times

"The Undercover Economist is a book you must pick up if you want a fresh perspective on how basic ideas in economics can help in answering the most complex and perplexing questions about the world around us."
—Business Today


“[Harford] is in every sense consumer-friendly. His chapters come in bite-size sections, with wacky sub-headings. His style is breezy and no-nonsense. . . . The Undercover Economist is part primer, part consciousness raiser, part self-help manual.” --Times Literary Supplement

"Anyone mystified by how the world works will benefit from this book – especially anyone confused about why good intentions don’t, necessarily, translate into good results."
—The Daily Telegraph (UK)

"Harford writes like a dream – and is also one of the leading economic thinkers of his generation. From his book I found out why there’s a Starbucks on every corner, what Bob Geldof needs to learn to make development aid work properly, and how not to get duped in an auction. Reading The Undercover Economist is like spending an ordinary day wearing X-ray goggles."
—David Bodanis, author of E=mc2 and Electric Universe

"Popular economics is not an oxymoron, and here is the proof. This book, by the Financial Times columnist Tim Harford, is as lively and witty an introduction to the supposedly 'dismal science' as you are likely to read."
—The Times

About the Author
Tim Harford is an editorial writer at the Financial Times, where he also writes the newspaper’s “Dear Economist” column and “The Undercover Economist” column, which also appears in Slate. He lives in London.

Excerpt. © Reprinted by permission. All rights reserved.
One

Who Pays for Your Coffee?

The long commute on public transportation is a commonplace experience of life in major cities around the world, whether you live in New York, Tokyo, Antwerp, or Prague. Commuting dispiritingly combines the universal and the particular. The particular, because each commuter is a rat in his own unique maze: timing the run from the shower to the station turnstiles; learning the timetables and the correct end of the platform to speed up the transfer between different trains; trading off the disadvantages of standing room only on the first train home against a seat on the last one. Yet commutes also produce common patterns—bottlenecks and rush hours—that are exploited by entrepreneurs the world over. My commute in Washington, D.C., is not the same as yours in London, New York, or Hong Kong, but it will look surprisingly familiar.

Farragut West is the Metro station ideally positioned to serve the World Bank, International Monetary Fund, and even the White House. Every morning, sleep-deprived, irritable travelers surface from Farragut West into the International Square plaza, and they are not easily turned aside from their paths. They want to get out of the noise and bustle, around the shuffling tourists, and to their desks just slightly before their bosses. They do not welcome detours. But there is a place of peace and bounty that can tempt them to tarry for a couple of minutes. In this oasis, rare delights are served with smiles by attractive and exotic men and women—today, a charming barista whose name badge reads “Maria.” I am thinking, of course, of Starbucks. The café is placed, inescapably, at the exit to International Square. This is no quirk of Farragut West: the first storefront you will pass on your way out of the nearby Farragut North Metro is—another Starbucks. You find such conveniently located coffee shops all over the planet and catering to the same desperate commuters. The coffee shop within ten yards of the exit from Washington’s Dupont Circle Metro station is called Cosi. New York’s Penn Station boasts Seattle Coffee Roasters just by the exit to Eighth Avenue. Commuters through Shinjuku Station, Tokyo, can enjoy a Starbucks without leaving the station concourse. In London’s Waterloo station, it is the AMT kiosk that guards the exit onto the south bank of the Thames.

At $2.55 a tall cappuccino from Starbucks is hardly cheap. But of course, I can afford it. Like many of the people stopping at that café, I earn the price of that coffee every few minutes. None of us care to waste our time trying to save a few pennies by searching out a cheaper coffee at 8:30 in the morning. There is a huge demand for the most convenient coffee possible—in Waterloo Station, for example, seventy-four million people pass through each year. That makes the location of the coffee bar crucial.

The position of the Starbucks café at Farragut West is advantageous, not just because it’s located on an efficient route from the platforms to the station exit, but because there are no other coffee bars on that route. It’s hardly a surprise that they do a roaring trade.

If you buy as much coffee as I do you may have come to the conclusion that somebody is getting filthy rich out of all this. If the occasional gripes in the newspapers are correct, the coffee in that cappuccino costs pennies. Of course, the newspapers don’t tell us the whole story: there’s milk, electricity, cost of the paper cups—and the cost of paying Maria to smile at grouchy customers all day long. But after you add all that up you still get something a lot less than the price of a cup of coffee. According to economics professor Brian McManus, markups on coffee are around 150 percent—it costs forty cents to make a one-dollar cup of drip coffee and costs less than a dollar for a small latte, which sells for $2.55. So somebody is making a lot of money. Who?

You might think that the obvious candidate is Howard Schultz, the owner of Starbucks. But the answer isn’t as simple as that. The main reason that Starbucks can ask $2.55 for a cappuccino is that there isn’t a shop next door charging $2.00. So why is nobody next door undercutting Starbucks? Without wishing to dismiss the achievements of Mr. Schultz, cappuccinos are not in fact complicated products. There is no shortage of drinkable cappuccinos (sadly, there is no shortage of undrinkable cappuccinos either). It doesn’t take much to buy some coffee machines and a counter, build up a brand with a bit of adver- tising and some free samples, and hire decent staff. Even Maria is replaceable.

The truth is that Starbucks’ most significant advantage is its location on the desire line of thousands of commuters. There are a few sweet spots for coffee bars—by station exits or busy street corners. Starbucks and its rivals have snapped them up. If Starbucks really did have the hypnotic hold over its customers that critics complain about, it would hardly need to spend so much effort getting people to trip over its cafés. The nice margin that Starbucks makes on their cappuccinos is due neither to the quality of the coffee nor to the staff: it’s location, location, location.

But who controls the location? Look ahead to the negotiations for the new rental agreement. The landlord at International Square will not only be talking to Starbucks but to other chains like Cosi and Caribou Coffee, and D.C.’s local companies: Java House, Swing’s, Capitol Grounds, and Teaism. The landlord can sign an agreement with each one of them or can sign an exclusive agreement with only one. She’ll quickly find that nobody is very eager to pay much for a space next to ten other coffee bars, and so she will get the most advantage out of the exclusive agreement.

In trying to work out who is going to make all the money, simply remember that there are at least half a dozen competing companies on one side of the negotiating table and on the other side is a landlord who owns a single prime coffee-bar site. By playing them off against each other, the landlord should be able to dictate the terms and force one of them to pay rent, which consumes almost all their expected profits. The successful company will expect some profit but not much: if the rent looks low enough to leave a substantial profit, another coffee bar will be happy to pay a little extra for the site. There is an unlimited number of potential coffee bars and a limited number of attractive sites—and that means the landlords have the upper hand.

This is pure armchair reasoning. It’s reasonable to ask if all of this is actually true. After I explained to a long-suffering friend (over coffee) all of the principles involved, she asked me whether I could prove it. I admitted that it was just a theory—as Sherlock Holmes might say, a piece of “observation and deduction,” based on clues available to all of us. A couple of weeks later she sent me an article from the Financial Times, which relied on industry experts who had access to the accounts of coffee companies. The article began, “Few companies are making any money” and concluded that one of the main problems was “the high costs of running retail outlets in prime locations with significant passing trade.” Reading accounts is dull; economic detective work is the easy way to get to the same conclusion.

Strength from scarcity

Browsing through the old economics books on the shelf at home, I dug out the first analysis of twenty-first-century coffee bars. Published in 1817, it explains not just the modern coffee bar but much of the modern world itself. Its author, David Ricardo, had already made himself a multimillionaire (in today’s money) as a stockbroker, and was later to become a Member of Parliament. But Ricardo was also an enthusiastic economist, who longed to understand what had happened to Britain’s economy during the then-recent Napoleonic wars: the price of wheat had rocketed, and so had rents on agricultural land. Ricardo wanted to know why.

The easiest way to understand Ricardo’s analysis is to use one of his own examples. Imagine a wild frontier with few settlers but plenty of fertile meadow available for growing crops. One day an aspiring young farmer, Axel, walks into town and offers to pay rent for the right to grow crops on an acre of good meadow. Everyone agrees how much grain an acre of meadow will produce, but they cannot decide how much rent Axel should pay. Because there is no shortage of land lying fallow, competing landlords will not be able to charge a high rent . . . or any significant rent at all. Each landlord would rather collect a small rent than no rent at all, and so each will undercut his rivals until Axel is able to start farming for very little rent—just enough to compensate for the landlord’s trouble.

The first lesson here is that the person in possession of the desired resource—the landlord in this case—does not always have as much power as one would assume. And the story doesn’t specify whether Axel is very poor or has a roll of cash in the false heel of his walking boot, because it doesn’t make any difference to the rent. Bargaining strength comes through scarcity: settlers are scarce and meadows are not, so landlords have no bargaining power.

That means that if relative scarcity shifts from one person to another, bargaining shifts as well. If over the years many immigrants follow in Axel’s footsteps, the amount of spare meadowland will shrink until there is none left. As long as there is any, competition between landlords who have not attracted any tenants will keep rents very low. One day, however, an aspiring farmer will walk into town—let’s call him Bob—and will find that there is no spare fertile land. The alternative, farming on inferior but abundant scrubland, is not attractive. So Bob will offer to pay good money...

Customer Reviews

The Economist as Detective
Ever since the surprise success of "Freakonomics", a flood of economics books for the general public have been published, all trying to cash on the success of that peculiar best seller. According to the principles explained in Tim Harford's book, that is probably a mistake: profits come from scarcity - so further books about `the economics of everyday life' face diminishing returns. And yet, Harford offers several explanations as to why such books may continue to be published: one is that if everyone thinks that economics books are going to be best sellers, an editor who wouldn't publish economics books may lose her job. I'm merely speculating, of course, but this is what happened (with dotcom stocks instead of econ books) to Tony Dye, chief executive of Phillips & Drew (pp. 135-137).

Tim Harford's stuff, though, is worth reading. A regular contributor to slate.com and the financial times, Harford has the gift of explaining complicated economic ideas in accessible language.

Although the comparison to "Freakonomics" is made prominently by the book's cover (which in my version includes an endorsement from Freakonomist Steven Levitt himself, as well as a description as the "elder sibling" of Freakonomics by `The Economist'), `The Undercover Economist' is the better economics book. Freakonomics, after all, doesn't teach too much economics: beyond emphasizing that "people respond to incentives" (an important message, for sure) it answers such questions as whether Sumo wrestlers cheat (They do) and what name should you give your child (It doesn't matter). Harford, on the other hand, explains such valuable economic concepts as rent seeking, externalities and asymmetrical information, and does so in a language that suits both academics and laypeople, with fun examples and a little history of economic though to boot. What more can you ask for in a popular book?

For those with a little knowledge of economics (I have an undergraduate degree in Business Economics) much of it will be familiar. And yet there are enough interesting tidbits that don't make it into your average introductory economics textbook. The chapters about the stock exchange and the application of game theory for auctions were both informative, thought provoking, and fun to read.

For me, the great revelation was the discussion of the environmental effects of globalization. I admit that I have long considered environmental damage to be the most credible counter argument to economic benefits of trade; But Tim Harford makes a good case that that ain't so. "Races to the Bottom" in which countries compete for the worse environmental regulations are unlikely, Harford argues - the advantage in producing "dirtily" is simply not big enough. Rather, Harford shows that protectionism leads to over production, and thus to pollution. And yet, Harford acknowledges that economic growth as such does hurt the environment. And therefore the dilemma of environmentalism or growth is not entirely imaginary - just exaggerated.

There are times when Harford does not raise his opponent's best arguments. In the chapter on free trade, Harford does not discuss various theories of Path Dependencies and learning curve. In the chapter of poverty, he hardly discusses the effects of the environment on economic growth (a major issue in Jeffrey Sachs'The End of Poverty: Economic Possibilities for Our Time), or the questionable legacy of western imperialism. I'm not saying that these are irrefutable objections - quite the contrary - but Harford doesn't quite do them justice.

Still, Harford's book is well written, entertaining, and informative. It targets the economically challenge but has something to offer to all readers, no matter how economically astute.

Economics in Daily Life - with a difference!
Tim Harford's "The Undercover Economist" is in many ways a return to the fundamentals of economics. In recent years, the field of economics has seen a growing influence of quantitative modeling and econometrics, to the extent that the medium has become the message. The complexity and elegance of the modeling often obscures the fact that these are mere tools for the study of economic behaviour. At its foundation, economics is the study of human behaviour with the focus on how people make decisions by applying (consciously or unconsciously) the basic economics concepts of scarcity, relative pricing, comparative advantage, marginal cost etc.

Harford is a columnist for the respected Financial Times and it shows in his clear and almost conversational writing style. He almost entirely avoids the use of jargon and technicalities, using simple logic and even common sense to explain economics ideas. His use of everyday situations to illustrate his points makes the book read like a collection of anecdotes, with the difference that the anecdotes serve to buttress the theme in the background. Readers will doubtless enjoy his application of economic reasoning to shopping at the supermarket, pricing of a cup of coffee, health insurance and so on. And for those who like the bigger picture, Harford's explanation of the benefits of globalisation and the rise of China are top drawer.

I wish he had not glossed over the free loader issue while discussing externalities. Similarly, in explaining the problem of asymmetrical information in used car sales, he glosses over the role of independent 3rd party information providers who can help in restoring the balance of information. Perhaps he will attack these in a future book? I for one will stand in line to buy it!

An excellent treatment of everyday economics
I must begin by saying that I liked this book very much. Not to cut suspense, since the review is obviously favorable all along, but just to set a positive tone for the start.

On the surface, "The Undercover Economist" is just another popular economics book, of the kind that is quite common lately (Freakonomics is one example that immediately comes to mind). However, once you finish reading it (paying attention all the way, of course), you realize it presents some relatively deep ideas, explaining them very thoroughly and logically connected pieces from different aspects of economics.

The book begins by a thorough overview of supply and demand, providing simple and befitting examples, both from real life and imaginary. Next, it treats the topic of price targeting (also called "differential pricing") - with really a huge assortment of examples from diverse fields. Then, it explains about free markets and what's good about them.

The connection of market freedom to "finding the truth" is enlightening, and becomes even more so while reading further. The author then moves to more macro-economic topics, discussing globalization and the economic situation in third world countries, such as Cameroon. Finally, he concludes the book with a thorough treatment of the changes in the Chinese economy in the past 30 years. This is the best part of the book, in which all the concepts presented in previous sections come together to explain why the communist system prevailing in China before 1976 failed, and why the gradual freeing of its economy in the years that passed since succeeded on a magnificent scale.

Here are another few topics that I found interesting, in no particular order:

* Why is wine always very expensive in restaurants ? Because one of the big costs in a restaurant is table space. Restaurants would therefore like to charge customers for dawdling, but because they can't do that, they charge higher prices for products that tend to be consumed in longer meals, like wine, appetizers and desserts.
* The story of how the Environmental Protection Agency (EPA) in the USA reduced sulfur pollution problems in the 1990s by cleverly issuing "pollution permits" that factories could buy. This way, the "truth" was exposed - the real costs of pollution reducing equipment to companies.
* Did you ever think about what an "efficient economy" means. Simple. If we can point to a change that could make at least one person better off, and nobody worse off, we (economists) say that the current situation is inefficient. This simple explanation is much deeper than it first appears, as it sets one of the basic rules of free markets - in an efficient market, everyone lives on the margins (excepts of one having scarcity power). If some field is too profitable, more competitors will enter it.
* There is an excellent treatment of the problems with the USA's current health care system that's worth reading, not only for Americans.
* When we bash dictatorships in third world countries, we must keep in mind that not all dictatorships are equally bad. In fact, stable dictatorships damage their country's economy much less than unstable ones. This is because stable dictators expect to stay in power for a long time, and hence don't have an interest to rob the economy too much, because that will reduce from their future profits. Unstable dictators, OTOH, are the worst kind - they just come to power, steal as much as possible and disappear. The author cleverly compared stable dictatorships to biological viruses, that have over time evolved not to kill the host body, but rather to use it in order to feed and reproduce to other bodies.

As I mentioned, I really liked this book. In fact, I think it's one of the best popular-economics books I've ever read. It is very highly recommended.