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The Undercover Economist, by Tim Harford

Creative accounts

Hamish McRae
Friday 26 May 2006 00:00 BST

Economists are not by nature folk heroes. Those of us who earn our living writing about the subject have to recognise that we are seen as a pretty shadowy bunch, to be laughed at or simply ignored. We practise an arcane craft - and we get it wrong. Of course, the profession does not help itself. Too often academic articles whizz off into algebraic hieroglyphics, designed to exclude anyone without advanced maths. But they have huge influence. The heads of both the Federal Reserve and the Bank of England are professional economists.

True, in the past some policies advocated by economists are plain silly. All professions have quacks, but economists have had one enormous triumph. The whole market revolution, extending the market economy to Russia and China and expanding its reach in India, was the result of applying straightforward economic ideas. This has led to the greatest burst of prosperity the world has even known.

How to explain the role of economics in society has been a challenge that economists have only recently taken up. In the US, one pioneer has been Steven Levitt with Freakonomics, packed with examples of why people behave as they do: why, for example, they become drug dealers when for most it is a poorly-paid and dangerous lifestyle. Now British economist Tim Harford has taken an even wider look at the practical ways in which economics affects our lives. As the cover on the US edition proclaims, it is a book "exposing why the rich are rich, why the poor are poor - and why you can never buy a decent used car".

It certainly explains why China is getting rich: by applying market theory or "the world of truth". The key point is that markets - the collective activities of millions of people - process vast amounts of complex information about what people want and how much it costs to create what they want. It is the clearest explanation of why markets, if true rather than rigged, can satisfy people's desires and needs in a way that bureaucrats inevitably fail to do.

Harford also explains the limits to markets: where they can fail. He contrasts the US and UK health care systems, which he argues show an imperfect market system and an imperfect state-managed one. Only 17 per cent of US citizens are satisfied with their health system, which sounds terrible. But only 25 per cent of Britons are satisfied, so we have little to be proud about. Memo to HM Government: have a look at the Singaporean experience, detailed in Chapter 5.

Why are the poor poor? Tim Harford went to Cameroon to discover how a really badly run country was administered. In 1999, it was ranked the most corrupt country in the world by Transparency International. By 2001, it had pulled up a bit and was only the fifth most corrupt. The tourist bureau seemed designed to discourage tourism, requiring a payment to a friend in Cameroon to get an official stamp and then "only three journeys to the embassy and some mild grovelling" for a visa.

When the author got there, there were scores of examples of dreadful administration, which mostly stem from poor institutions. Why are institutions so weak? Here, Harford gives one of the clearest, and indeed most sympathetic, explanations of the ways in which society is destroyed by perverse incentives. "There is no point in investing in a business because the government will not protect you against thieves. (So you might as well become a thief.)" Once you can identify the problem, then you can start to fix it. Politicians seeking to help Africa should start about page 201.

And why can't you buy a good used car? The theoretical work on that was done by US economist George Akerlof in 1970 and has to do with imperfect information. It also explains why it is hard to get a good meal in tourist traps. Console yourself with the explanation next time you are badly fed in Times Square or Leicester Square. Suddenly all is clear. If every policy-maker in the land read this book, there would be far fewer examples of their policies demonstrating the law of unintended consequences.

Hamish McRae was named Business Jounalist of the Year at the British Press Awards

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