The Undercover Economist

“Economists study power, poverty, growth, and development. It is hard to wield the models that underlie such subjects and remain unmoved by the real world behind them.”

This quote serves as the justification for Harford’s decision throughout the book to depart from academic objectivity and decry injustice, as well as advocate for solutions to those injustices. His admission of nonobjectivity serves to create a foundation of credibility for Harford’s opinions later on in the book, when he makes arguments against boycotting sweatshops and advocating free global trade as a solution for global inequities. By establishing that he is willing to betray academic neutrality to better the world, he becomes a more reliable source of ethical global development theory.

“Sales are an effective form of self-targeting. If some customers shop around for a good deal and some customers do not, it’s best for stores to have either high prices to prise cash from the loyal (or lazy) customers, or low prices to win business from the bargain hunters.”

This quote describes the economic strategy employed by sellers known as “self-targeting,” which designs the purchase experience in a way that makes customers reveal important information about their buying priorities. It introduces the concept of price-blind and price-sensitive customers, a concept that Harford returns to throughout the book.

“When we talk about big companies it is easy to get carried away with notions of how they are infinitely powerful and we are infinitely gullible. Not true.”

This quote points out that while the machinations of corporations seem impossible to counter, the buying power of customers can in fact make or break a company. In a perfectly free market, any company trying to sell something that people are unwilling to trade their money for simply goes out of business, meaning that companies must constantly work to provide their customers with superior products at a good price.

“If we can point to a change that could make at least one person better off, and nobody worse off, we say that the current system is inefficient, or, in everyday language, that it could be better. (We also say that the current situation is efficient if every change that could make at least one person better off will also make somebody else worse off. It doesn’t mean that an efficient situation can’t be improved; it’s just that there is no costless way to improve it).”

This quote introduces the concept of efficiency, a term with very different meaning to an economist as opposed to a layman. Efficiency in economics means a system in which no one can benefit from a change without harming another, so the system is working at its best for everyone in a stable manner.

“If the right things are being made right in the right quantities and going to the people who value them most, there is no room for any gains in efficiency. To put it another way, you can’t get more efficient than a perfectly competitive market.”

This quote discusses the economic ideal of the perfectly competitive market. This practically unattainable concept involves the ideal economic relationship between customers and sellers, and this benefits both parties. This ideal is a good way to explore different market failures through comparison to the “perfectly free market” and how existing markets fall short.

“When a problem arises, it’s worth asking whether the problem can be addressed by rearranging the starting blocks rather than interfering with the race.”

This quote describes the head-start theorem, a clever way of addressing a market failure of artificial scarcity. The head-start theorem is a good example of how observant, human-centered economic regulation can lead to global justice and better lives for the people in the system.

“Economies that work smoothly because they are full of perfect markets are neither interesting nor realistic. But because perfect markets provide such a clear benchmark, economists find it much easier to start from them and work out what is going wrong, rather than start from scratch and work out what is going right.”

This quote lays bare the limitations of economic models of perfect markets because they cannot exist in the real world. However, they are useful as a starting point for figuring out the specifics of different market failures and how they can potentially be addressed.

“Externalities simply aren’t externalities if people can easily get together and negotiate. Remember that they were called ‘externalities’ because they stood outside market transactions. But some of the things that we imagine to stand outside the market can be easily brought into it.”

This quote serves as an effective definition of externality charges, which force consumers to take into account the consequences to others of their buying decisions. Though the externalities don’t come into play in market transactions, they can be introduced through economic policies and regulations that force the market to benefit society as a whole, rather than just itself.

“There is much more to life than what gets measured in accounts. Even economists know that.”

This quote points out the limitations of economics as a field since it is necessarily tied to money as a form of measuring value. The author cautions readers that believing that money determines all value in the world is a mistake and that economics are necessarily reductive and should not be seen as the “whole picture.”

“Fairness is not, strictly speaking, a market failure; it is something that even perfect markets do not necessarily provide. But we care deeply about fairness when it comes to medical care, both because we do not want the poor to be deprived, and because the cost of health care can vary dramatically, depending on the luck of each individual.”

This quote illustrates the limitations of market-based models in determining good social policy. The efficiency of a market cannot be used to determine necessities like healthcare since it is unconscionable to leave some people high and dry as markets tend to do.

“Governments can replace markets, but they will often do better to try to fix them. They are unlikely to succeed unless they appreciate exactly what the problem is in the first place.”

This quote discusses the importance of economics as a method of studying markets in order to implement effective policies. Governments cannot fix markets to be more ethical and helpful if they cannot grasp the problems that make them dysfunctional.

“Essentially, the banking crisis came about because banks and other financial institutions were taking very big bets on the chance of events that […] seemed too unlikely to contemplate. They were wrong, because they had made the wrong assumptions about the process producing these events.”

The 2007 banking crisis, which is the main focus of the revisions and updates of this version of The Undercover Economist, is explained simply but effectively in this quote. The failure of banks to understand the risks of getting their calculations wrong has far-reaching global consequences, and unfortunately, this did not result in the kinds of policy changes and financial consequences that would incentivize the banks to keep this from happening again.

“A game, to a game theorist, is any activity in which your prediction of what another person will do affects what you decide to do. Such games include poker, nuclear war, love, or bidding for thin air in an auction.”

Game theory and radio spectrum rights in auctions are fascinating economic puzzles that are difficult to construct correctly. When constructed correctly, however, they lead to perfect competition in a limited sale situation, as occurred in the British sale of radio spectrum rights, carefully designed by economists to enrich the country at the expense of telecom companies.

“A purely self-interested dictator will realize that he cannot destroy the economy and starve the people if he plans on sticking around, because then he would exhaust all the resources and have nothing to steal the following year.”

This quote describes Biya, the president of Cameroon. Harford says that dictators are essentially thieves, but they have a stake in the future of their countries since stealing everything would leave the people with no way to generate more wealth for the dictator to steal. Dictators therefore have an incentive to create and maintain a somewhat stable economy that would keep generating wealth for their personal coffers.

“Seemingly stupid mistakes are so ubiquitous in Cameroon that incompetence cannot be the adequate explanation we’re looking for. There is something more systematic at work.”

This quote explores the fact that Cameroon’s infrastructure is so dysfunctional that it cannot be explained by incompetence. Corruption, born from an essentially exploitative government structure, creates mistakes that are purposefully used to enrich individuals and keep the country poor.

“Self-interested and ambitious people are in positions of power, great and small, all over the world. In many places, they are restrained by the law, the press, and democratic opposition. Cameroon’s tragedy is that there is nothing to hold self-interest in check.”

This quote reminds the reader that while Cameroon’s dictator is allowed to cause harm unchecked, there are powerful people around the world who would happily do the same if allowed. Corruption and self-interest are not specific to Cameroon; they simply go unchecked in that environment.

“A small country cannot survive without the world economy. With it, small countries can thrive.”

This quote explains the author’s position that global free trade is good for alleviating poverty. He argues that small countries should not be closed off from larger markets in an attempt to bolster their own domestic markets; this isolation does nothing to improve the lives of the average global citizen.

“If you would like to be rich, then it is a good idea to forge close links with the rest of the world. If you prefer nothing to change, then it is best to have a harbor that silts up. If you would like to be rich and have nothing change, then you will be disappointed.”

This quote utilizes the example of Bruges, a powerful port city that lost its ability to trade due to environmental changes. The next most accessible port city, Antwerp, quickly rose to power instead. Change is unpredictable, but it must be embraced and compensated for in order to acquire wealth.

“The solution, in a civilized but progressive society, is not to ban new technology or restrict trade. Neither is it to ignore the plight of those people put out of work by technology, trade, or indeed anything else. It is to allow progress to continue while helping support and retrain those who have been hurt as a result.”

Through trade and innovation in industry, people are necessarily disenfranchised when their industries become obsolete. The solution to this problem, Harford argues, is not tamping down change and isolating a nation but creating more robust social structures to allow those people to thrive.

“Economists don’t always agree. But it is a rare economist who will not be enthusiastic about the merits of free trade.”

This quote shows that free trade, despite frequent political arguments against it, is enthusiastically endorsed by people who study the flow of money and goods. Even though free trade can cause upheaval and growing pains for different industries, economists believe that countries and people always benefit from it.

“Billions of people in the developing world are much richer than their parents were. Life expectancy and education are improving, even in countries that are not getting richer. This is only partly because of free trade; there is far more to the story.”

Although economists advocate for free trade, other elements need to be put in place for societies to thrive. An unchecked global free market is a recipe for disaster without prudent measures that take into account the unique resources and challenges of a nation.

“Partly by accident, partly by benign neglect, and partly by design, Deng introduced the world of truth to Chinese agriculture. Those who had good ideas, good luck, and who worked hard prospered. Bad ideas were quickly abandoned. Good ones spread rapidly.”

Though Deng did not necessarily advocate for free markets, he did famously state that “socialism does not mean poverty.” Through careful societal planning and implementation of good incentives, Deng fostered a free-market atmosphere that helped China’s economy explode in only a couple of decades.

“Poverty costs lives—because poverty kills—and it also robs people of their autonomy and ability to make meaningful choices about their own lives.”

Harford argues that poverty is the gravest threat to humanity and that it must be alleviated at all costs. In China, more money creates more opportunity and autonomy. In Cameroon, people lead lives of desperation because their “bandit government” has no incentives in place for building legitimate wealth.