TCS Daily

This Is What Textbooks Should Be Like

By Arnold Kling - December 5, 2005 12:00 AM

"The favored game at the moment has to be price-gouging the natural way, riding the bandwagon of organic food...For example, in the UK, organic milk commands a premium of around 50 cents per quart, but the farmer sees less than twenty cents of this."
-- Tim Harford, The Undercover Economist, p. 42-43.

What does buying organic food say about you? It might say that you believe that it is healthier to ingest food grown in a certain way. But to Tim Harford, it also says that when it comes to price, you are a sap, willing to hand a store high profit margins. He ends his discussion of the organic food rip-off by issuing a plea to organic-preferring consumers to shop more price-consciously and "not let food retailers exploit your enthusiasm."

Thus does Harford explain "price targeting," whereby a seller tries to identify saps who will overpay for a product. Once you get the idea, you can see examples all over. For example, just the other day in the Wall Street Journal, Holman Jenkins went "undercover" to expose the Toyota Prius and other hybrid smugmobiles.

"Hybrid technology is not 'green' technology. Like heated seats or flashy exterior trim, it's merely an expensive option that generates large markups for the Toyota Corporation and its dealers."

I am not against hybrid technology, and it warms my heart to see other people sacrificing to help hold down the price of gas for me. But until the price premium comes down to the point where I can count the number of years of gasoline savings I need to break even without using my toes, I myself will stick with regular cars.

Review It as a Textbook?

When it comes to the inevitable comparison with Freakonomics, I can give a much more enthusiastic recommendation to The Undercover Economist, or UE. Perhaps a book on amateur sociology can be more entertaining, but UE more accurately reflects economics and has much higher educational value.

In fact, the substance of UE is so strong, that I am tempted to review it as if it were a textbook. Not because it resembles the freshman textbooks that are commonly used today, but because it resembles what I believe such books ought to be. In fact, it is not far from the book that I argued for five years ago. If the Ivy League economics courses were designed for the benefit of students rather than the convenience of professors, then Harford, not Greg Mankiw, would be the $1.4 million man.

The traditional freshman economics textbook says little or nothing about economic growth and development, asymmetric information, and tactical price discrimination. Harford covers those important topics, while omitting the usual long, boring, and not-so-enlightening discourse on cost functions and industrial organization.

UE's pedagogical devices are anecdotes and stories, rather than mathematical diagrams. For the vast majority of students, that certainly represents a better approach.

For example, instead of presenting economic growth and development in terms of dry abstractions, Harford narrates personal experiences in China and Cameroon that illustrate success and failure in economic policy. In describing Cameroon's corruption, he writes, "Bullying gendarmes, often drunk, stop every minibus and try their best to extract bribes from the passengers. They usually fail but from time to time they become determined. My friend Andrew was once hauled off a bus and harassed for several hours." (p. 187)

Questionable Illustrations

Occasionally, the examples that Harford uses to illustrate economic concepts may not have been the best choices. For instance, he describes the auction in the United Kingdom of spectrum for third-generation phone licenses in 2000, which raised $22.5 billion pounds, as a triumph of the use of game theory in auction design. In a narrow sense, that may be correct. However, in the larger scheme of things, I would say:

  • Government creates artificial scarcity in spectrum by managing spectrum poorly.
  • Government licenses of spectrum fail to create true property rights, because the "owner" of spectrum does not have choice as to how to use it.
  • The amount of money raised is not an indicator of whether or not a spectrum auction allocated the resource efficiently.

Harford also goes astray in attributing problems in health care markets to asymmetric information. He says that it is difficult for consumers to know whether they are receiving cost-effective treatment. However, this is not an information asymmetry -- doctors, too, rarely know whether they are providing cost-effective treatment (see The Commission We Need to understand why that's so).

He also argues that consumers know too well whether or not they are likely to get sick, and that this is what makes private health insurance unworkable. However, in reality, this information asymmetry is not such an issue. In fact, Bryan Caplan caught Harford contradicting himself by stating that illness is "extremely unpredictable."

The Best Introduction

I expect that regular readers of my columns would enjoy this book a great deal. It shows how to apply economic reasoning in many interesting and important circumstances.

Overall, The Undercover Economist is the best introduction to economics to appear in quite some time. I hope that economics professors give serious consideration to using this book in their courses. My guess is that teachers who incorporate UE will achieve more success in terms of students who can apply economic knowledge after they finish the course.



Harford Doesn't Have a Clue About Organic Food
As a consumer of organic food and a physician who specializes in nutritional therapy, it is clear to me that Harford doesn't have a clue about organic food and its superior value. Does he think that organic food is somehow exempt from market forces? Consumers are willing to pay more for organic food because they feel it is worth it, just like buying a more expensive car with better features. The amount of retail price that the farmer gets is small with all types of food, not just organic food. Buying and consuming organic food not only promotes superior nutrition, leading to better health, but it protects the environment from pesticides and environmentally destructive farming practices. Organic food buyers are as price conscious as other consumers but Harford is not very conscious of the value of organic food or what factors motivate organic food buyers.

Oaganic vs non organic
"value of organic food"

Some organic food has the nutritional value of the paper bag it comes in.

"or what factors motivate organic food buyers."
Yep the feeling of smug superiority !

Not forgetting that it takes more land (=precious forest being cut down) to produce the same amount of food

TCS Daily Archives