A look under the bonnet of economic policy

FT.com

August 30, 2013 6:18 pm

Macro machine

Review by Pietra Rivoli

The Undercover Economist Strikes Back: How to Run – or Ruin – an Economy, by Tim Harford, Little, Brown RRP£20, 320 pages

For years economics professors had little competition in their own market, and shamelessly bored generations of students with dusty graphs of wine and cloth. Thankfully, the past decade or so has brought some variety and colour to the enterprise. We now have simulations, case studies and plenty of gimmicks (I recall a professor who wheeled in a cart of Big Macs and proceeded to eat them to illustrate the principle of diminishing marginal utility).

But if there is an undisputed leader in this spoonful-of-sugar approach, it must be the Financial Times columnist Tim Harford. His 2005 book The Undercover Economist cleared the muddy windshield of microeconomics for more than a million readers. Now, in The Undercover Economist Strikes Back, Harford’s target is macroeconomic policy. He tackles this using, well, a gimmick: putting a hypothetical reader in the driver’s seat of the economy and offering guidance in a book-long series of Q&As.

Can it possibly work? To illustrate, allow me to try myself. Reader, from now on, you are in the driver’s seat of this book review.

Me?

Yes, you. You must be interested or you would not have read this far.

Yes, well, I get that macroeconomics is important. But it seems imponderably complex, not to mention boring. Life is short, after all.

Exactly! Harford thinks this should be fun. His formula is to distil an economic idea to its essence and assign to it an image that sticks in the mind. For example, let’s imagine stale chocolate coin shovellers and exhumers . . . 

Let’s imagine what?

Suppose the government owns a stock of stale chocolate coins and the country is in a recession. Harford asks whether we should hire some people to bury the coins and others to dig them up. The image crystallises the difference between the Keynesian and Classical approaches on the subject of “stimulus spending” – Keynesians argue that even non-productive spending should sometimes be used to stimulate demand, while a Classical economist would argue that the chocolate coins should be left alone.

What does Harford think, then? Is he a Keynesian or Classical economist?

Not so fast. Before deciding about the chocolate coins, we need to know whether we are in a prisoner-of-war recession (this actually happened in a German POW camp in the second world war, when the supply of Red Cross parcels of food and cigarettes fell) or a babysitting recession (as experienced by a 1970s Washington co-operative when too many parents wanted to babysit and too few to go out). The POW recession was caused by a supply problem, the babysitting recession by a lack of demand. A stimulus might help the babysitting economy but it will be useless, or worse, in the POW camp. Harford is not trying to persuade us to adopt one economic religion or another. Instead, he shows the complexity of making a diagnosis and the perils of the wrong medicine.

What about the hollowing out of the middle class and whether we might have another financial crisis?

For better or worse, the textbook principles that Harford illuminates have little to say directly about a number of current concerns regarding how growth is distributed, or stability in global financial markets. Though Harford treads a bit into the inequality debate at the end of the book, he mostly stays away from headlines.

But isn’t that the whole problem with economists? That they assume away the real world?

Harford is worried about this, too. My favourite chapter is the last, in which Harford argues that while microeconomists of the past generation have been busy solving real problems, macroeconomists have been looking into their navels and ignoring intellectual progress in other fields. It is difficult to discuss the financial crisis, for example, with macroeconomists who assume away banks.

So should I buy the book?

Without question. Reading Harford is like finding yourself next to the funniest, smartest fellow at the party. It is such fun that readers will hardly notice that, by the end, they’ve mastered macroeconomics through perhaps the intermediate level. Economics professors everywhere should be very afraid.

Pietra Rivoli is professor of finance at the McDonough School of Business at Georgetown University and author of ‘The Travels of a T-Shirt in the Global Economy’ (Wiley)