I started reading The Undercover Economist last year, and
though it took me a while to get round to finishing, it largely didn’t
disappoint. In it, economist and Financial
Times columnist Tim Harford seeks to put economics in everyday context,
explaining theories in straightforward terms and giving an eye-opening account
of how various actors behave in the marketplace. My copy was actually an
amended edition, re-published to respond to the financial crisis of 2008 (the
original, published in 2005, instead focused more heavily on the Dotcom
bubble).
In the opening chapters, Undercover Economist looks into
importance of location and scarcity power. Harford also lifts the lid on how
supermarkets and coffee chains have developed sophisticated ways of responding
to the price sensitivity of different customers, ensuring that they can secure
business from more sensitive customers while still giving more free-spending
patrons the chance to pay more (which they reliably take). He points out that a
basic shopping basket in different chains in practice varies little, for
example - it’s the definition different clienteles have of “the essentials”
that makes shopping in Waitrose appear pricier. Harford’s summary of Costa
coffee’s price list on p.39 is also amusing from this angle:
However, Harford also points
out how consumer pressure in some cases led to price-targeting practices to be
dropped, once discovered (he cites Costa Coffee charging a mark-up on fair trade
coffee, without passing the proceeds on to farmers or actually needing to cover
higher costs). And throughout the book, Harford leaves you to wonder at the
complexity and success of what markets can sometimes do with (relatively) minimal
direction. On page 2, he recounts the story of a Soviet official in London
asking who is in charge of making sure supplying bread to the population,
remarking that “The question is comical, but the answer – nobody – is
dizzying”. In the final chapter, ‘How China Grew Rich’, he looks at the failure
of Maoist policies, and how starting with Deng Xiaoping, the introduction of
market-style incentives into China’s agricultural and industrial systems led to
the startling growth and greater prosperity we see there today (Harford’s
take on the rise of China also complemented well what I read last year in Liam
Byrne’s ‘Turning to Face the East’ – reviewed
here).
Parts of the book remind us
that there are limits to what economic theory alone can tell us about optimal
outcomes, though. In chapter 5 (‘The Inside Story’), Harford looks into the
“lemon” problem that plagues health insurance markets in the US, wherein costly
enrolees push up the price of insurance for all, and thus discouraging
healthier people from buying insurance in a spiral pattern. He then moves on to
exploring what “keyhole economics” would tell us is the optimal way a country
can finance healthcare. He makes short work of the US system, understandably
pointing to its average outcomes, excessive costs and lack of universal
coverage, and then cross-compares with the NHS (Harford correctly notes that
the US government spends more as % of GDP directly covering a quarter of its
population than Britain does on our free-at-the-point-of-use NHS and private healthcare combined).
He then examines the drawbacks of the NHS, and while his observations are valid
(a relative lack of patient choice, issues with waits, the presence of more hospitals in marginal seats, the inevitable need for a body like NICE to apportion scarce
resources), his sensitive “keyhole”-based solution isn't an improvement.
Harford to proposes a system
that “compels patients to pay for many of the costs, thus providing an
incentive to inform themselves and make choices…but which leaves the most
severe costs to the government or insurance”, citing Singapore’s mixed
public-private system of Medical Savings Accounts and catastrophe insurance as
an alternative to either public or private management (in the UK, this idea is
a favourite of Thatcherites such as Dan Hannan, Douglas Carswell and the ASI
and CPS think-tanks). But this is only superficially attractive as a ‘third way’
solution – in practice, Harford’s assertion that “most medical bills are not
catastrophic” clashes with a weight
of evidence showing that even nominal co-payments for healthcare can
exacerbate inequality of access and ill-health among vulnerable groups, while
failing to save money (this
blog by a Singapore resident looks at the increasingly unaffordable costs
the Singaporean model imposes on its residents, while this one notes
how it’s mostly supply-side government regulations that have kept the system
vaguely workable). His point that the NHS model has pitfalls and restricts
choice is easy enough to articulate, but at least this example of “keyhole
economics” fails to give us a better solution as to how we might deliver high
quality care for all. However, Harford’s account of the world is nevertheless
not doggedly pro-privatisation. He acknowledges that gradual liberalisation in China
has been beneficial when compared to the “shock therapy” in Russia in the 1990s,
and that in China (where many enterprises remain effectively state-run) it has
been the presence of market incentives and “the world of truth”, rather than
changes in ownership, that have perhaps been most pivotal to China’s economic
miracle.
Finally, my edition of the
book also included the first chapter of his 2011 book Adapt: Why Success Always Starts with Failure included, which I
much appreciated and will consider reading. The book appears to lay out the
case for far greater tolerance of “trial-and-error” approaches, especially in
the high-pressure world of politics and public policy making.
All in all, Undercover
Economist gives some interesting insights and plenty of background on both some
of the most basic and large-scale economic dynamics in the
world around us. Worth a read.
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