Economics as a guide to human behaviour

A version of this review, of "The Undercover Economist" by Tim Harford, was published today in the Indian Express. Amit Varma Indian Express: Sunday, April 16, 2006

Art aims to reveal the human condition, but there is no better way to understand human behaviour than through the tools of economics. After all, we live in a world of scarcity, none more so than that of time, and are buffetted constantly by incentives of various kinds to do various things. Thinking like an economist helps us to understand the complex web of inter-actions that exist between us, and to make clear choices.

For decades, though, economics has been regarded as a ‘dismal science’, an arcane subject with no relevance to common life. But that is a mistaken belief, and just as popular science books gave science a wider audience from the 1970s onwards, a series of books and websites are performing the same ser-vice for economics. Blogs like Marginal Revolution, Cafe Hayek, Assymetrical Information and EconLog have made econo-junkies out of tens of thousands of people in the online world, an audience reflected in meatspace by the success of Freakonomics last year. The lat-est in that list is The Undercover Economist by Tim Harford, a book that turns the jargon of economics into the lingo of cool kids, and is enlightening and fun at the same time. About how many books can you say that? If you head out to your local outlet of Barista, you will notice that a Cappucino costs Rs 33 while a Cafe Mocha costs Rs 47. Both cost approximately the same to make, so why this difference in price?

Why are economy lounges in airports across the world so uniformly shabby? Why are books first released hardcover and later in paperback? Why is popcorn so expensive in movie halls? Harford draws on examples from our daily lives and uses them to illustrate basic con-cepts of economics, such as marginal cost, information assymetry, price targeting and externality pricing. Some of the truths that economics teaches us are commonsensical, but other are deeply unintuitive: the fact that the world is non-zero-sum, for example, and that everyone can benefit at the same time, or that markets don’t need central planners, and prosperity is caused by “human action but not human design”, as the economist Friedrich Hayek would have put it. Harford illustrates this well, likening a well-function-ing free market to a ‘World of Truth’, with prices acting as the spies that reveal valuable information about the world. Interfering with this ‘World of Truth’, as subsidies and tariffs and taxes inevitably do, harms all of us and destroys value.

Special-interest groups do this in some countries, dictators in others, and Harford writes about it with such lucidity that many such pernicious examples from India will no doubt pop up in your mind. The Undercover Economist is no weighty tome, though, pontificating grandly on the world. Instead, it is a book with utility, which will help you decipher the world around you a little better, and will, even, save you a few rupees every time you venture out to the su-permarket. Also, it is out in paperback in India, which indicates exactly what the pub-lisher thinks of you. Buy it nevertheless: you will both benefit.