Book review: The Undercover Economist Strikes Back, By Tim Harford

Our chief economic storyteller turns his talents to the big picture of recession – and recovery

Tim Harford is trying to do for macro-economics what he – and a handful of others – have sought to do for micro-economics. That is to de-mystify the subject, explaining in simple language what we know and don't know about the way the world economy works.

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Someone needs to, for this end of the subject is in serious disarray. Most economists failed to warn adequately of the risks in the run-up to the last recession, and now are confused about the best prescription for pulling out of it. We know quite a lot about how individuals and companies respond to economic stimuli and books such as Freakonomics by Steven Levitt and Stephen Dubner have brought the subject to millions. Harford's The Undercover Economist carried on this work. But while there have been a host of prescriptive books, there has been much less of a mission to explain.

So Harford takes us through the ambiguities of macro-economics, how it developed, the ideas of John Maynard Keynes and Milton Friedman, and also contributors less well-known to the outside world such as Bill Phillips and Andrew Osward. There are implications for policy. The meat of the book is how to deal with recessions, the central question facing the Western world now. But there are also nice diversions into the baby-sitting co-op that workers on Capitol Hill in Washington founded, Henry Ford's doubling of his workers' wages in Detroit, and why cigarettes were a currency in Germany in PoW camps. The first, by the way, failed because there were not enough sitters, the second succeeded because it cut labour turnover, and the third resulted in the cigarettes used for trading having part of their tobacco extracted and smoked – the PoWs debased the currency.

As for recessions: is it shortage of demand or shortage of supply? Or both, but maybe at different times? Was the most recent recession a demand shock or a supply shock? These ambiguities are what Harford so cleverly captures. As a general proposition there is usually a conflict between the short-term and the long-term, in that short-term measures to cope with recessions may undermine long-term potential growth. He is also sensible. Macro-economists did not cause the banking crisis, for it was the job of bankers, accountants, politicians and lawyers to keep things safe. But "when the banking crisis hit, the macro-economic mainstream didn't have good models of what the economic consequences might be," even if "casual empiricism suggested they wouldn't be pretty". So they didn't really know what to do.

That common-sense approach shows through in other parts of the book. Why do we have faster-rising inequality in Anglo-Saxon economies than on the Continent? He suggests it might have something to do with the fact that the English-speaking world has very good universities but not very good schools. He is sceptical of the current fashion for focusing on happiness rather than GDP, noting that the one country that has happiness as a policy objective, Bhutan, has a dubious record on human rights. And as for the concern that growth cannot continue forever, he points out that the peak in energy consumption per person in the UK was back in 1973. It is now the lowest for 50 years.

Economists will continue to attract opprobium. Indeed, by their wild assertions they bring a lot of it on themselves. But maybe, thanks to people such as Harford, the profession will gain a better-informed audience, and a more perceptive one for its real shortcomings.