Microeconomics is about the things an individual does, such as buy a stock or take a job.Macroeconomics, on the other hand, is not about any individual. It is about the large forces and agglomerations that no one understands, such as unemployment and the gross domestic product.

The Undercover Economist Strikes Back

By Tim Harford 
Riverhead, 245 pages, $27.95
An 1864 cartoon. © Corbis
Tim Harford is a brave man to write a book about macroeconomics for the lay person; luckily, he is also a funny man. It is faintly embarrassing to reveal that I giggled in bed while reading "The Undercover Economist Strikes Back: How to Run—or Ruin—an Economy." But though his perky style and chatty asides keep us grinning, it would be wrong to call him a pop economics writer. His quarry isn't the freakish or bizarre—it is stuff you will see in textbooks.
His hope is to explain what makes the economy tick. He isn't out to identify villains in the financial crisis (a welcome respite), and he doesn't fault economists for failing to predict it. We should think of economists like dentists, he says: When something is wrong, they try to fix it.
Mr. Harford, a columnist for the Financial Times, has a knack for posing questions the average reader will have wondered about. (In fact, he frames the book as a dialogue between himself and a policy-curious bureaucrat.) Why couldn't government solve unemployment by creating useless work? Why is money that is merely paper valued?
On monetary policy, he has a bias toward higher inflation—a bolder Ben Bernanke, if you will. Mr. Harford says a dose of inflation is needed to correct an imbalance inherent in both labor and product markets. In theory, employers would respond to slack demand by cutting wages and prices. This happens rarely, if at all. Prices are "sticky," so the economy suffers. The fix is a little inflation. That way, employers can impose real wage cuts simply by holding wages flat. This isn't a new idea, but Mr. Harford makes more of it—properly so—than do most discussions about the Federal Reserve.
And what of the risks of runaway inflation? Mr. Harford presents some gory examples. He defines hyperinflation as 50% price increases per month. In Zimbabwe recently, it was necessary to mint currency in units of 100 trillion. In Hungary in 1946, after a week's delay, a monthly paycheck purchased less even than a cup of coffee. Such episodes are usually the result of a specific shock—not, as many suppose, of gradual moral loosening. Mr. Harford says Bernanke's critics are "excitable" for claiming that a percent or two more of annual inflation will turn us into Zimbabwe.
Generally, the author aims less for controversy than for clarity. The heart of the book plunges into whether, and how, governments should respond to recessions. Anyone who reads it will get a passing understanding of when, say, a Keynesian approach is warranted, and when it is not.
Mr. Harford doesn't try to (over)simplify. Macroeconomics, he cautions, is difficult. Like a prodding professor, he challenges his reader, perhaps for the purpose of an antipoverty policy, to define who counts as "poor." Should the "poverty line" be fixed, or should it adapt to society's evolving definition of a minimally tolerable lifestyle?
If you say an absolute standard, people in America who eat three meals a day but can't afford a computer aren't poor. That doesn't sound right, the author says. All right, then, let's try a relative standard. Eurostat, a European agency, defines the poverty line as 60% of median income. Seems reasonable—except, Mr. Harford points out, if you doubled everyone's income, the same number of people would still be "poor."
Mr. Harford reckons the answer is an absolute standard with reasonable adjustments now and then. But he wonders whether today's geeky macroeconomists have the human gifts to make such calls. Macroeconomists build elegant models but suffer a "disconnection from reality." They pay no attention to behavioral psychology; surprisingly, they don't even consider banking. On topics such as inequality, you will learn more from a political scientist such as Charles Murray than from a roomful of macroeconomists. Mr. Harford is nostalgic for the day when, as Keynes put it, an economist had to be part mathematician, part "historian, statesman, philosopher." Today, sadly, mathematics reigns alone.
—Mr. Lowenstein is the author of "The End of Wall Street" and "Buffett: The Making of an American Capitalist."