The Undercover Economist Strikes Back

The Undercover Economist #3

by Tim Harford

A provocative and lively exploration of the increasingly important world of macroeconomics, by the author of the bestselling The Undercover Economist.

Thanks to the worldwide financial upheaval, economics is no longer a topic we can ignore. From politicians to hedge-fund managers to middle-class IRA holders, everyone must pay attention to how and why the global economy works the way it does.

Enter Financial Times columnist and bestselling author Tim Harford. In this new book that demystifies macroeconomics, Harford strips away the spin, the hype, and the jargon to reveal the truth about how the world’s economy actually works. With the wit of a raconteur and the clear grasp of an expert, Harford explains what’s really happening beyond today’s headlines, why all of us should care, and what we can do about it to understand it better.

Genres: Economics, Nonfiction, Business, Finance, Politics, Audiobook, Science

307 pages, Paperback

First published January 1, 2013

About the author

Tim Harford is a member of the Financial Times editorial board. His column, “The Undercover Economist”, which reveals the economic ideas behind everyday experiences, is published in the Financial Times and syndicated around the world. He is also the only economist in the world to run a problem page, “Dear Economist”, in which FT readers’ personal problems are answered tongue-in-cheek with the latest economic theory.

--from the author's website

Reviews

[Caroline · Rating 4 out of 5]

.

I approached this book with some trepidation. It's book about macroeconomics - the large scale economics of concern to countries and governments. Plus it is written by an economist working for the Financial Times, which in itself is not an easy read. It seemed likely to be way over my head. But the book has had lots of reviews commenting upon its accessibility and humour; so I decided to go for it. In the event I had no regrets. It was excellent.

It is written in the format of you, the reader, wanting to set up an economy - and during this process having a conversation with Tim Harford, the author. Not only does he cover all sort of basics relating to macroeconomics, but he's a warm and funny writer, and has a wonderful stock of stories to back up his ideas. The book is entertaining, gripping and painlessly educational. I didn't understand all of it - but I understood a lot of it - much, much more than I expected to.

As an economics newbie I can't begin to encapsulate the terrain covered by Harford - instead I will just make my usual list of things that particularly caught my attention. (It's a huge list, purely for my own record, and mainly just copying segments from the book.)

1) Someone to find out more about - Bill Phillips, an amazing engineer, sociologist and economist, mostly self-taught. He not only lived a fascinating life, but invented an incredible computer model of a country's economy - an hydraulic (yes, hydraulic!) representation, known as MONIAC, or the Monetary National Income Analogue Computer - and later as the Phillips Machine.

2) Being unemployed is one of the most unpleasant experiences that can happen to anyone.
And if you are unemployed for 6 months or more, it becomes much more difficult to get a job, even if you have the appropriate training and experience.

3) Side effects of a recession:

Nepotism, racism and other forms of intolerance rise, and with them, anti-democratic forces.

4) A simple, common-sense view of the economy is attractive but dangerous. In macroeconomics, whenever you point at some obvious change occurring right before your eyes, there is almost always something changing behind your back - the two phenomena connected by invisible strings and pulleys.

KEYNESIAN ECONOMICS

5) Inflation and wages:
If you get a straight wage cut you are liable to be furious. But if your salary increases by 3% when inflation is 6%, this is also a wage cut - yet it doesn't seem like one. This is a money illusion. (Nominal salaries and prices = effects of inflation etc are not taken into account. Real salaries and prices = effects of inflation etc are taken into account.)

6) Recession and wages:
Ideally wages should be decreased in order to handle the effects of a recession, but in reality this is usually too difficult to put into practice, so workers are made redundant instead, and the remaining workers are kept on at their original wage level.

6) Printing money, via a central bank like the Federal Reserve or Bank of England can help in a recession. This is monetary policy. But this has to be done in limited way or you can end up with crazy inflation.

7) Sticky prices:
Prices in an ordinary economy "stick" and this creates problems. If prices adjusted in complete freedom to competitive forces, then the actual amount of money in an economy would not matter eg as an extreme example people could just offer to do double the amount of work for half the price, when there was a recession. Instead, the prices "stick" and we get into problems. This can be helped by banks printing more money.

Other reasons prices stick:

A) Illogical prices
People can't always charge logical prices for their goods - society would often deem these logical prices unfair. eg the latest iPhone should logically be $100 more expensive for the initial batch, before more are able to be produced. But people would deem this unfair. They prefer to queue all night outside an Apple store for the privilege of buying the new phone.

Another example is that when a hardware stores raised the cost of its snow shovels from $30 to $40 after a heavy snowstorm because 'demand' had increased - people were furious.

B) Menu costs
Coca-Cola stayed the same price for 70 years because it was sold via a vending machine for 5 cents (ie a nickel coin)! (During the same time the price of coffee rose eightfold.)

C) Fixed price contracts, or advertised prices that people don't forget.

D) The cost of changing prices. (It can cost up to 20% of profits to change prices.)

E) Competition between firms selling the same products, to be as cheap as possible.

F) Inflation.

G) Minimum wage laws.

H) Regulated prices.

I) Public sector pay. It can become a political football.

*8) The spectacle of Drummond and Canty burning one million pounds

People were outraged - but they only destroyed their own buying power, they didn't destroy £1 million worth of society's resources. (I don't understand this....)

9) The loss of the gold standard.

The author thinks this is a good thing. Money doesn't have to be intrinsically valuable, all that is necessary for money to have value is for everyone to believe it has value.

The value of gold fluctuates. Sometimes it is a good investment, sometimes it is a bad investment, therefore it doesn't make good money.

The author also discusses Bitcoin. It was developed in 2008 by a mysterious person or group of people with the pseudonym Satoshi Nakamoto. They developed a way by which Bitcoin could be produced, or mined, slowly, like gold. Some people love Bitcoin for the same reason people love gold. It is independent from any government and there's a hard limit on how many Bitcoins can ever exist. But just like gold, Bitcoin is not money for a very simple reason. It's far too volatile. On 10 April 13 for instance, the price of Bitcoins dropped by 61%. Bitcoins may prove to be a good long-term investment, but they aren't money.

If central banks are not tied to the gold standard, they can print money when it is needed - during recessions.

Countries with high inflation and strong economic growth: India and China. Lower inflation than they are experiencing might have been preferable, but high inflation has been manageable.

10) Hyperinflation.

Excessive inflation. Experienced by Germany, Brazil, Yugoslavia and Hungary....and more recently, by Zimbabwe.

11) Deflation.

This is much worse than inflation, and it's where prices fall, year after year, along with your wages. But your mortgage remains the same - taking up a larger and larger proportion of your salary. On the other hand savers benefit.

But during a recession what you want is people spending money, to stimulate economic activity....and borrowers are much more likely to spend money than savers.

Today most central banks want a bit of inflation - about 2% The author thinks that 4% would be better. It gives central banks more leeway in lowering interest rates.

12) Another way of stimulating the economy in a recession. The Spending Multiplier.

The government employs people for special projects eg building a railway link or roads. To pay for this they either raise taxes or borrow money. Usually they borrow money (which amounts to higher taxes in the future.) This is assessed in the following way.....The Spending Multiplier

eg

The government spends £1 million
The economy grows by £1 million
Multiplier = 1

The government spends £1 million
The economy grows by zero
Multiplier = 0

The government spends £1 million
The economy grows by £5,000
Multiplier = 0.5

eg when Barack Obama's Council of Economic Advisors estimated the effect of the 2009 stimulus bill, they were working with multipliers as high as 1.6. In other words they estimated that for every million dollars the government borrowed and spent, the US economy would grow by $1.6 million dollars.

Three points re spending multipliers....

a) They must only be initiated in a slump.

b) The government must try and organise things so that they money circulates through its own economy rather than going abroad.

c) The government must try and avoid civil servants and unions getting too involved with its project, so it can stop the project when it wants to.

13) Tax Cuts.

Another way of growing the economy.

And if if a government cuts sales tax or VAT, rather than income tax, then that will have a more direct effect on encouraging spending.

14) Different methods of tackling a recession.
Since the 2009 crisis some countries have tried to grow their economies by tightening their belts. Others have governments which have borrowed and then spent money (like offering tax rebates on certain schemes.) Spending money works particularly well in countries with large domestic market, like the USA. There it is less likely that the government money will end up being lost via imports from other countries.

15) Cutting Interest rates:

this is your first line of defence in a crisis or recession. It is monetary police. It is simple, quick and easy to reverse if the economy recovers and inflation begins to rise.
It is also more likely to be under the supervision of independent, central banks, who are less influenced by short-term political expediency.

It works best with recessions that are short and shallow.

It works particularly well if interest rates are well above zero.

*It also helps if the economy is small and open with a flexible exchange rate (I don't understand this.)


CLASSICAL ECONOMICS

16) Classical economists say we shouldn't try and tinker with the economy. Rather we should just step back and let the economy fix itself. It will do its own adjusting.

Classical economists follow Says Law, which says it is simply impossible for an economy to suffer a glut in demand, instead prices adjust until supply equals demand.

The author feels that it depends upon the nature of the problem, on which view (Keynesian or classical) one should adopt.

GENERAL ECONOMICS

17) Politics
The author feels that when the economy is doing well, it is good to have a conservative approach.
Trim spending
Pay off debt
Reduce unnecessary regulations.

But when the economy is doing badly, then a much more left-wing approach is needed.
Keep spending
Run up debt
Launch big infrastructure projects.

18) The Eurozone.
One of the central ideas behind the creation of the Eurozone - and certainly the reason why so may weaker economies wanted to join it - was that it allowed every country in Europe to acquire the unassailable credibility of the Bundesbank, (which has a lot of influence on the Central European Bank.) As a result, peripheral economies would gain ready access to cheap money for borrowing. The lenders believed that now these countries had tied themselves to the Euro they would be unable to devalue their debts. But countries - particularly Greece - rang up unsustainable debts anyway. When the banking crisis hit in 2008 they found themselves in real trouble. And the European Central Bank, like the Bundesbank, is very against any type of inflation re the euro. The price of 'credibility' can be a severe lack of flexibility when something goes wrong.

19) Do we have to keep growing the economy?

The author feels that this isn't a problem. Growing the economy is okay, and a zero-growth economy would be all right too - although it would require some changes in approach.

20) Zero-growth economy:

Each generation would be no richer than the generation before it.

Governments wouldn't be able to base the funding of their pension and health care benefit systems on the hope that each generation would be larger and richer than the previous one (& could therefore comfortably pick up the bill.)

Nor could they reasonably run small deficits in the knowledge that the debt burden would stay stable as a portion of GDP. Governments might even find it sensible to pay off all their debts gradually - even accumulate assets, as a few resource-rich countries already do.

In the long run, in a low or zero-growth economic system, everyone from individuals to governments would have to be more careful about debts than they have been in recent years.

21) Poverty and inequality.

These are not often addressed in macroeconomics. They are tricky things to measure across countries and time.

You can get inequality between countries and within countries. The first often leads to people trying to migrate to wealthier countries, the second can lead to social corrosion.

The Gini Coefficient is a measure of inequality:

A gini of 100% would be a single person making all the money in the country.

The gini of various countries...

China 61%
Brazil 52%
US 45%
UK 34%
France 33%
Finland 27%

America and inequality:
After decades of falling, inequality has been rising now for 25 years, especially with the richest 1%, or even the top 0.1%

Average incomes have not grown much. If you look at the average income growth of the poorest 99% (ie families up to those who make $370,000 pa), their growth in average income is just 5.8% over the course of 18 years, which is very low.

The salaries of the most highly paid are now so high that it is no longer a question of symbolism - they are having a real impact on the shape of the economy.

Countries where the richest have got richer...

USA
UK
Canada
(& to a lesser extent New Zealand and Australia.)

Countries where this has not happened, and inequality has been stable...

France
Germany
The Netherlands
Switzerland
Japan.

Why is this?

The author feels that the in the counties where inequality has increased, there is now a very mediocre education in schools, with pupils doing badly in maths and the sciences. So they leave school not prepared to do well in the job market.

These same countries have very good and very elite universities - so a small proportion of the population do extremely well.

22) The future of macroeconomics.

* We must not expect macroeconomists for foretell the future, about shares or anything else. Forecasts of complex systems are much too difficult. They are rather there to help us keep the economy working well, and to help us when it malfunctions.

* They need to widen the scope of their discipline. They used to be mathematicians, historians, statesmen and philosophers - and they need to embrace these areas again.

* There are some big things removed from macroeconomics which also ought to be there.

A) Banking

But the intellectual project of understanding the interaction between banking and the economy is a difficult one.

B) Behavioural economics

A fusion of economics and psychology. Has made big inreoads in economic thought in the last 15 years.

Major figures in behavioural economics.
Daniel Kahneman
George Akerlof
Robert Shiller (and expert on financial bubbles)
Matthew Rabin
Richard Thaler (author of 'Nudge')

C) Complexity theory.

Helps with the dynamics of systems.

All in all (and it did cover a lot of ground!) I thought this book was a great introduction to macroeconomics. I look forward very much to reading more of Tim Harford's work. (A very good taster of which can be found on his website - see below...)


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The Independent's review of this book:

http://www.independent.co.uk/arts-ent...

Tim Harford's website: (I now subscribe to his blog here, and think it is absolutely brilliant....)

http://timharford.com/articles/underc...

And to see the man in action - an interesting 18 minute TED talk that Tim Harford gave in praise of a questioning stance (versus certainty), and the rewards of experimentation.

https://www.ted.com/talks/tim_harford...#

[Kressel Housman · Rating 4 out of 5]

I’m a fan of Tim Harford a/k/a “the Undercover Economist.” He’s an academic who has thrown his hat into the pop economics genre, but while he does use a conversational tone and give real life examples, he doesn’t dumb the concepts down. Unfortunately, that means that I don’t always understand what he’s talking about. That was especially true of this book, the fourth of his that I’ve read so far. It’s the shortest and written in a Q&A style that anticipated my questions and threw in jokes here and there, but it was still the hardest to understand. Harford explains the reason for that. His previous books were about microeconomics – how people make decisions – and that’s something everyone can relate to. This book was about macroeconomics – the big concepts like GDP, inflation, the causes and cures for recession. Macroeconomics is complicated, which is why the world is in such a mess. Nobody can agree on which principle to apply when.

So here’s my take-away from this book. There are Keynesians who believe that recessions can be solved by government stimulus, and then there are classical economists who believe that markets naturally correct themselves. The debate between them is fiercer than nature vs. nurture used to be amongst psychologists, but just like the answer to nature vs. nurture turned out to be nature and nurture, the right approach to macroeconomics is a hybrid of the Keynesian and classical views. A recession caused by a weakening of demand – people afraid to spend money – can benefit from government intervention. A recession caused by a weakening in supply can be cured by government staying out so that innovative people are free to come up with alternatives to whatever supply of commodities has dried up.

But having said that, I still don’t quite get it. If a country suffers a famine, it seems to me that their best way out of it is aid from other richer nations. And second, while I understand that spending money keeps the national and global economies running, if I would spend less and save more, I’d be doing much better in personal economy. If a whole lot of people came to that conclusion and acted on it, it would be better for them, so why should it be worse for everybody? Questions like this have got me scratching my head. But since nobody’s asking me to create monetary policy, I’m not going to break my head over macroeconomics. I read the book, I got what I could out of it, and now I'll move on. I’ll work as hard as I can, save as much as I can, and hope that living a fiscally responsible life will improve not just my own well-being but the well-being of the larger world.

[☘Misericordia☘ ⚡ϟ⚡⛈⚡☁ ❇️❤❣ · Rating 5 out of 5]

Q:
(I think we can all agree that a bunch of lawyers on Capitol Hill are capable of mismanaging anything, and if babysitting is all that suffers, we can count ourselves lucky.)
(c)

[Eustacia Tan · Rating 5 out of 5]

I’ve been following Tim Harford’s blog and I realised it’s been some time since I read one of his books. So I checked out one of his older books from the library and had a fun time revising the main topics of macroeconomic theory.

Written in a conversational style, The Undercover Economist Strikes Back provides a broad introduction to the history and theories of macroeconomics. Starting with the Philips machine (fun fact: I did not realise this was the same guy who came up with the Philips curve), Harford takes us through the benefits and drawbacks of monetary policy, what inflation is all about, how prison economies could work, the difficulties of defining poverty and unemployment, whether management really makes a difference, and how much attention we should pay to GDP and happiness indices.

As you can see, this is a broad range of topics, but Harford does a great job of introducing the most salient points so that the reader understand why a certain topic (say: inflation) is so complicated. The tone of the book is light and I think the text is accessible even for people who aren’t students of economics.

For the most part, what Harford is saying is in line with modern economic theory. The most controversial part of the book may be his disagreement with the emphasis on happiness indicators, but I think the people who tend to promote these new ways of evaluating a country aren’t economists. I think the only chapter where a reader may want to explore further would be the one on whether the economy can keep growing. His views on the possibility of infinite growth are basically what I’ve learnt in school, and I think reading a book like Post Growth by Tim Jackson would add an interesting new viewpoint to the topic.

Overall, this was a quick, fun read about the basics of one part of the field of economics. I’m planning to read his other books, like The Data Detective when I can get it on Kobo.

This review was first posted at Eustea Reads

[Jurij Fedorov · Rating 3 out of 5]

Yet another low level macroeconomics book. And it does explain how economists explain and define the basic principles of economics. A good start for people wanting to get into a discussion on the subject.

Pro:
Very simple book. The language is clear and most examples are clearly explained. Easy to understand and the dialogue with the student character in the book adds an interesting narration to the book. Also pretty much explains the basics and even uses some great examples.

Con:
At times more focused on being silly and simple than diving in head first into the most complicated theories on the subject. So, for anyone already familiar with the basics this book will not add a lot to your understanding of things. This is the first economics book to read. Or maybe read another simple book instead. Your choice. This is the basics in an interesting package.

At one point he says a small study showed that head start was a huge success with a small group of children. Well, I have read huge studies on head start and similar programs and this is not the data I've personally seen on this area. I'd consider his claim false or misleading, but obviously you can always find some effect from any program if you just p-hack or look at smaller details. I would probably not proclaim a program effective unless it was conclusively proven to be so.

[Edmole · Rating 3 out of 5]

Not nearly as flat out interesting as The Undercover Economist, more of an interesting (fake) conversation about how the big tectonic plates of economies shift. Although, in offering a guide to improving the economy I found it disappointingly heterodox and vanilla, in that there was no suggestion that a different structure to lightly regulated international free markets was available or possible, whereas he was able to offer plenty of fresh insight into small scale economic phenomena in the original book. But as he says, he is a microeconomist, not a macroeconomist, so insight into the big picture is not his specialism.

Overall, worth the £3 I paid for it in Fopp. No doubt Harford could cook up a fascinating chapter on why his third book ended up being sold for pocket change in a jumble sale record shop.

[Dennis Mitton · Rating 4 out of 5]

It’s odd in economic writing but Hartford makes a genuine attempt to understand and explain economics based on numbers without political bias. In a sea of books purporting to explain why the other guy is wrong and the writer is correct it’s nice, I think, to find an accessible writer focusing on what is provable. Well, arguable.

Hartford has the enjoyable skill for making the difficult sound a little less so. His writing is accessible and his explanations easy to digest. Compared to his other books this one is different: he writes in question and answer form. I notice that other reviewers are bothered by it. The style lends itself to reading in smaller chunks - slogging through page after page of Q&A wears one down. But don’t be put off – it’s accessible and very readable.

In this book he takes on the larger picture of macroecomonics with the same insight he uses in his other books. He lauds logic and history when it is repeatable and explores more deeply when it seems to fail us – we are human beings after all – as in unemployment. Topics include GNP, inflation, money, stimulus, and both the ‘babysitting’ and ‘prison camp’ recession.

No doubt there are cranks on all sides deriding Hartford as leaning too far this way or that. It’s how economists who don’t write books make a living. But for the average interested reader there is much to learn from this very able teacher. You won’t come away understanding triple variable investment curves but you will have an uncommon insight into economy that ought to make you the life of the party.

[Guilherme Zeitounlian · Rating 4 out of 5]

I decided to pick up this book because I liked his first one (The Undercover Economist), and was eager to learn more about this fascinating field.

And learn I did: while the first one dealt with microeconomics - and I was familiar with the main concepts - this one was about macroeconomics (which I knew nothing about).

The fact that I was learning something new at every chapter kept me interested, and highlighting a lot of passages and concepts.

Also, the dialogue style in which the book is written makes it more approachable, even if sometimes I had to read the same passage two or three times (because of my unfamiliarity with the subject).

The way the author talks about the life and work of important characters (such as Bill Phillips) also makes it more interesting to read.

And some of the topics had me glued to the page, such as the discussion on the need for economic growth.

I finished the book with the impression that macroeconomics is not an exact science, and that there is a lot of different schools of thought and ways of modeling it.

(The fact that it is hard to run randomized experiments makes it even less "sciency".)

But there are some key concepts to understand when we are talking about macroeconomics - and this book can help you get familiar with the language and the ideas around it.

In short, there are no hard and fast answers in this book. But it can teach you a ton, specially if you don't know much about the subject.

[Henna · Rating 2 out of 5]

This was the first book i read by Tim Harford, a columnist of the FT. I saw this at an airport and thought id give it a try since it talks about macroeconomics, a subject i love, and studied at uni. I found the writer humouristic, and i guess he was targeting a reader who had no background in economics at all...Harford spells out practical examples to explain key economic concepts such as inflation, deflation, recession, unemployment, inequality etc etc For sure the author is an expert on the subject and a talentful writer, i have no doubt, but i cant help it that i found this boring and basic. I guess it just wasnt a book for me. Maybe i ll try his microeconomics books some time when i see them at the next airport.

[Josh Friedlander · Rating 4 out of 5]

Perfectly balanced guide to understanding the world's economic shambles (includes up-to-date insights on Bitcoin and the Euro crisis) pitched at amateurs but still covering a lot of the essentials. I learned a lot and it never felt like homework. The jokes are awful; Harford is an unapologetic free-market wonk. Still highly recommended for anyone with the relevant interests.

[Sue · Rating 4 out of 5]

I’m pretty sure I didn’t absorb everything in this book, and it will demand a revisit. Harford is a splendid interpreter of economics, and he does his best to make the subject real-world understandable, but because so much macroeconomics was new to me, I’ll be back. I learned a lot, and I’ll dip into the book as I want to review subjects.

Harford’s conceit was to appoint me, his reader, to make decisions for a world economy. The ensuing Socratic dialogue made me squirm. Who, me? Really? Isn’t that akin to trusting economic decisions to legislatures? Oh, wait. That’s what we do.

I’ve read a lot in the past about economics, but it mostly qualified as microeconomics. Macro is a lot harder to wrap one’s mind around. Harford takes the field to task because the discipline has tended to isolate itself and has become too theoretical about economies that don’t actually exist in the real world. He would like to see more practical approaches.

The book covered a vast number of macro topics – currency, inflation, deflation, stimulus, supply/demand, employment, management, definitions of poverty, GNP, GDP, other dubious indexes. The financial crisis of 2008-09, continuing in its impact, receives a lot of Harford’s attention.

Here a few conclusions that are firmly embedded in my takeaway:

• To stimulate the economy or to tighten the belt? This is a decision argued all the time in the political arena by non-economists. Harford believes that in recession, it’s good to stimulate. In boom times, it’s better to trim spending. Politically we tend to do the opposite.

• Harford believes that economic growth can continue even if population growth does not. In other words, energy consumption per person can go down - and in fact has gone down in developed countries, even in the US - while growth has continued.

• It’s very difficult to define poverty, and countries vary in their ways of measuring poverty. Harford draws from research the very human conclusion that early childhood intervention is the most economical way to combat poverty.

[Daniel Taylor · Rating 4 out of 5]

In his latest Undercover Economist book, Tim Harford puts you – the reader – in charge of an economy and shows you how to make it work.

Harford is a microeconomist, meaning he looks at the impact of individuals and firms on an economy. This time round he tackles macroeconomics, which looks at the broader issues in an economy and their possible causes.

He introduces problems one after the other that affect an economy, and just as you think you’ve got his point and the required solution; he introduces a twist that reveals more complexity than you first thought.
The book is written as a conversation between Harford and you. You ask a question and he answers it, which prompts further questions from you, until you’ve mastered the topic.

For investors, this book will help you understand the problems within economies and how those problems affect your investments. When you know what the problems are, you’ll be able to understand what responses are needed from governments to run the economy well.

This book will appeal to smart investors who want a guide to macroeconomics in everyday language.

[Rohit Shinde · Rating 5 out of 5]

Tim Harford is a wonderful writer in addition to being a good economist! This book is an absolute delight to read. The Undercover Economist Strikes Back takes a look at Macroeconomics as compared to the Microeconomics covered in The Undercover Economist.

The book gives a bird's eye view of Keynesian economics which includes government spending that can be used to remedy a demand based recession. He does a good job of describing situations in which it would be helpful. Similarly he describes the viewpoints of classical economists like Thomas Friedman and gives examples of situations when their solutions would be useful. He also addresses issues like tackling poverty, reducing inequality, the inadequacy of GDP as an incomplete indicator and a few others.

For someone with a casual interest or a background in economics, some of the examples that he draws would be familiar, but nonetheless they serve to illustrate key concepts in the discipline. The writing resembles a conversation, but not entirely. I feel that the hallmark of the book is its utter lack of partisan bias. Most popular books on economics, tend to be partisan to some extent. This is especially noticeable in the field of Macroeconomics. Economists tend to be either Keynesian or Classical economists and this bias tends to show in the writing. I find it remarkable that such a bias is pretty much absent from the book.

Before reading this book, I had gone through Grek Mankiw's Principles of Economics. I think this book along with its companion The Undercover Economist is a good compliment to that. While Mankiw's book has the dry and clinic rigor of a textbook, this book is more humorous and replete with practical examples to illustrate its point. Every economics enthusiast and even not-so-enthusiasts will enjoy this book.

[Dan Organ · Rating 3 out of 5]

In his latest Undercover Economist book, Tim Harford puts you – the reader – in charge of an economy and shows you how to make it work. Looking at the different branches of macroeconomics he uses an interview to answer questions about how economies work and how you could run or ruin one by implementing different policies. He keeps it very light and easy to understand without going into the heavy maths that we all know usually comes with economic theory.

Great book for an economics novice.

In the introduction the author mentions New Zealander Bill Phillips, he was a pioneering macroeconomist who built the MONIAC. Monetary National Income Analog Computer. A water-fed hydraulic representation of how an economy works. I remember my High School Economics teacher, Don Miller, taking us to see a working model of it that was briefly on display at Waikato University. It was really interesting with water pumping around the system and leaking out of pipes just like money does in the economy.

[Michael Lockwood · Rating 4 out of 5]

The Undercover Economist Strikes Back is about macroeconomics aimed for the average person...an easy to understand overview of the study of the economy of taken as a whole. This description may make it seem like boring difficult read, but text brims with Tim Harford's wit and skill at explaining complex subjects in regular english. It's a followup to Harford's earlier book The Undercover Economist which was about the subject of microeconomics and follows much the same formula. Written to be a popularization of economics (much as Cosmos was a popularization of astronomy and cosmology) this is not a book with a particular ideological bent but one which he lays out what the macroeconomists know (or think they know) not only about subjects like unemployment, inflation and growth but also less touched upon topics like the effects of poor management practices and alternative measures of of a society's wellbeing. Where there is a divide in the field (and indeed there is a pretty large divide in the heart of macro) Harford covers the strengths and weakness of the different points of view pretty well.

He also does the good and difficult work of discussing inherent difficulty of making any sort of viable macroeconomic statement at all. Since we can't do anything like control experiments on countries (for example randomly making half of them increase government deficits during a recession while the other half not), there is even greater uncertainty for the practitioners of macro than there is for their microeconomic cousins. Harford does a good job presenting the evidence to support why they think they know what they think they know while also stressing the reasons not to take things as definitive.

The book is short, clocking in at 203 pages if you don't include acknowledgments and footnotes and I found it to be a quick and enjoyable read (I got through it on a single slow Saturday). However it's brevity might be a cause for one weakness. While the first half of the book covered the basic ground of one usually associates with macro (recessions, inflation, unemployment etc), the second half branches out to less well trod but highly interesting topics such income inequality, the effects of poor management practices, the sustainability of continual growth and others. I found these later chapters interesting and fun to read but also felt that they were too short. I think the desire to prevent the book from becoming too thick and intimidating plus the desire to cover such a wide berth of topics lead to the coverage of these later subjects to be more scant than was optimal.

This might be the cause with my one major gripe with the book...in the chapter on income inequality Harford mentions that in the US, Britain and to a lesser extent other English speaking countries, most of the rise to income inequality can be attributed to gains in the top one percent. However in the next section he suggests that much of the rise inequality is likely due to educational issues and technological change and supplies advice as to how this might be remedied. And I think it's good advice and based on the evidence he lays out is likely to help the poor, but it doesn't really explain why the top 1% would be getting so much richer than the next highest 4% (since one wouldn't expect a large difference in education levels between the two groups). Harford does mention that this pattern isn't observed in non-english speaking developed countries so that there is likely something societal is going on but doesn't go into it more that that. It should be noted that the chapter covers a lot of things, from global inequality measures to the various issues and techniques for measuring poverty so it's possible that this is something that he didn't have room to fit in except in the briefest terms, but I still found the lack of space given to this issue disappointing.

On the whole though, I think this is a great book and one that is well worth reading. Harford has great talent for making the often dull subject of economics to be interesting and making difficult to understand economic concepts easy to understand with clever stories embedded with the basic models behind those concepts. He also does so without pushing the political hot buttons that are so easy to exploit. No to say there is nothing political in the book...indeed how could a book on macroeconomics not touch on the political issues. But Harfords aim is to suggest a way to think about these issues, framing them in the way macroeconomists view the world. I think it's good book for people to read because I find that so many people (both on the right and on the left) don't really know anything about how economists actually think. On the right many purported supporters of free markets make claims that don't come close to the economic consensus on the subject. And on the left there are many people who feel mainstream economic is invalid based on incorrect assumptions of what economists actually think. Even if someone does have real criticisms of modern macro (Harford has a few himself in the last chapter actually) it would still be best to be knowledgeable about the what the field actually says and what the strengths and weaknesses of it's theories are. And if you already are knowledgeable about this stuff? I would say that personally I still found it an very enjoyable read and while much of the material was familiar to me, I still managed to learn a thing or two.

[laween · Rating 4 out of 5]

An interesting book some economical terms it is not an easy book for somebody who doesn’t have a well background in economic but a good introduction to the subject

[Kevin Anderson · Rating 4 out of 5]

This book was very readable. I'd never read much about macroeconomics, so this was really interesting.

[David Readmont-Walker · Rating 4 out of 5]

Quite good. My knowledge of macroeconomics has increased, and in an engaging way.

[Nancy Mills · Rating 4 out of 5]

Informative and entertaining

[Garrett Barth · Rating 5 out of 5]

Got me into behavioral economics

[Filip Ligmajer · Rating 4 out of 5]

page 5 | location 70-72 | Added on Tuesday, 16 December 2014 09:51:44
the Great Depression profoundly revolutionized economics—how could it be otherwise? Economists asked themselves what was happening, and why, and whether anything could be done. They took new measurements, formulated new theories and proposed new policies, all concerned with the central question of economic performance as a whole. In short, the Great Depression gave birth to macroeconomics.

page 14 | location 212-214 | Added on Tuesday, 16 December 2014 10:42:33
Microeconomics concerns things that economists are specifically wrong about, while macroeconomics concerns things economists are wrong about generally. P. J. O’ROURKE, Eat the Rich

page 18 | location 265-268 | Added on Tuesday, 16 December 2014 15:15:23
If, like Simon Kuznets, you’re looking for a single number to measure the size of the economy, having everything measurable on the same scale is handy. Think of it this way: it’s a little bit like mass. Your brain weighs probably around three pounds, and a small bag of sugar typically can weigh one pound. The fact that you value your brain more highly than three bags of sugar doesn’t tell us that mass is a useless concept.

page 18 | location 272-272 | Added on Tuesday, 16 December 2014 15:15:53
The man who invented GDP never thought it was a measure of welfare, and neither should anyone else.

page 23 | location 344-345 | Added on Tuesday, 16 December 2014 15:31:33
Anyone who insists that running a modern economy is a matter of plain common sense frankly doesn’t understand much about running a modern economy.

page 24 | location 367-370 | Added on Tuesday, 16 December 2014 15:35:39
A simple, commonsense view of the economy is attractive but dangerous, because in macroeconomics, whenever you point to some obvious change occurring right before your eyes, there is almost always something else changing behind your back, the two phenomena connected by invisible strings and pulleys. The definitive statement of this

page 49 | location 744-745 | Added on Saturday, 20 December 2014 23:06:56
Money systems such as the goldsmith’s notes were initially anchored to an intrinsically valuable commodity, but against all intuition that valuable commodity turned out to be unnecessary. All that is necessary for money to have value is for everyone to believe that it has value.

page 51 | location 782-786 | Added on Saturday, 20 December 2014 23:11:29
That’s what I mean by a standard of value: if you want to keep track of how you are doing, it helps to choose a unit of measurement that is stable relative to the problem at hand. This will often mean thinking of your salary or your net worth in terms of a currency, because good currencies typically are quite stable relative to all the things you might want to buy. It is confusing to think of your salary in terms of Apple shares; for that matter it is confusing to think of your salary in terms of apples.

page 61 | location 933-935 | Added on Saturday, 20 December 2014 23:28:03
(There’s a handy rule of thumb called the rule of 72—divide 72 by the annual inflation rate and the result is approximately how many years it will take prices to double. In this case, 72 divided by 0.7 gives you prices doubling in a century.) Today, 0.7 percent inflation isn’t much: these days central banks aim for 2 percent inflation, or thereabouts. At that rate, prices would double every thirty-five years or so.

page 62 | location 938-946 | Added on Saturday, 20 December 2014 23:30:01
Specifically, remember the money illusion—the professor who was infuriated by a pay cut, but didn’t mind a below-inflation pay raise, even though they are exactly the same thing. That should tell you that a little bit of inflation can be quite helpful. Imagine a sector of the economy in which productivity is falling, perhaps because foreign competition is reducing the price that companies can get for their products. Wages need to be trimmed or the whole sector is likely to go bust. We know that bosses probably can’t get away with cutting nominal wages. If inflation is zero, that means they won’t be able to cut real wages either. But if there’s some inflation, they can get away with making the necessary cuts to real wages by giving below-inflation raises. There’s another reason to aim for a bit of inflation, one that’s arguably even more important: monetary policy is not a precise science. Central banks will sometimes overshoot and sometimes undershoot their targets. If they aim for zero inflation and undershoot, they get deflation—and I want to persuade you that deflation is a much more serious problem than moderate inflation.

page 63 | location 952-957 | Added on Saturday, 20 December 2014 23:31:28
But with deflation, prices begin to drop. Your wages are a price, so they are falling. Of course, the prices of food, clothes and fuel are all falling, too. But your mortgage repayment never changes. It is taking up a larger and larger portion of your monthly salary. Your loss is some saver’s gain, of course. But remember that in a recession, what we want is people spending money to stimulate economic activity. An unexpected dose of deflation is going to achieve the exact opposite, because it redistributes money from borrowers to savers, and borrowers are more likely to be spending than savers—they wouldn’t be borrowing otherwise. Add in the problem that when lots of people find it hard to pay back their loans, the entire banking system can run into trouble.

page 64 | location 981-987 | Added on Saturday, 20 December 2014 23:35:49
If you print $100 and give it to a starving man, he’ll spend it. If on the other hand you give the $100 to a ninety-year-old lady with a decent pension and an anxious disposition, she may simply put it in a cookie jar, just in case she needs it. That $100 is going to do nothing whatsoever to stimulate demand, and it will not increase inflation either. And at the moment, despite enthusiastic money-printing by many of the world’s central banks since 2008, a lot of the money is ending up in the equivalent of cookie jars. The money may be helping prop up spending in the economy as a whole, or it may be distorting decisions and storing up trouble for the future. But one thing it is not doing is creating hyperinflation: the inflation rate remains close to the central bankers’ targets.

page 102 | location 1554-1559 | Added on Monday, 22 December 2014 23:21:24
The babysitting recession is an example of Keynes’s Law: Lack of demand creates its own lack of supply. In a Keynesian recession, Say’s Law doesn’t hold, and it is possible for supply to stand idle for lack of demand. If consumers don’t want to spend, instead preferring to save or pay off their debts, perhaps no price cut will tempt them to change their mind—or perhaps a price cut would, but the price cut does not come because prices are sticky. Business investment might take up the slack, but then again it might not, because why would businesses invest when they already have factories and shops standing quiet, dark and empty?

page 102 | location 1562-1565 | Added on Monday, 22 December 2014 23:22:29
So we’ve found an example when Say’s Law applies, and another when Keynes’s Law does. It sounds like neither of them are really laws at all. Yup. This is social science—what did you expect? Sometimes an economy’s output is constrained by the demand for goods and services (Keynes’s Law) and sometimes it is constrained by their potential supply (Say’s Law).

page 113 | location 1718-1725 | Added on Monday, 22 December 2014 23:43:23
It feels like what you’re saying is that I should run my economy like a tough bastard right-winger during a boom, and like a bleeding-heart left-winger during a recession. That’s not such a bad idea. A boom is a great time to trim spending, pay off debt and try to make markets function better by reducing unnecessary regulations. These are all right-wing hobbyhorses. A recession, however, is a terrible time to do those things. It’s better to keep spending, run up debt and launch big infrastructure projects. Unfortunately, it seems we tend to get the opposite: in booms, we feel like we can afford to elect left-wing governments to improve labor protection and launch big public-sector projects, often running up debt in the process; then when trouble hits, we elect a right-wing government to slash the deficit, scrap investment projects and make a bonfire of labor protection regulations, all of which simply makes the recession worse.

page 121 | location 1845-1848 | Added on Tuesday, 23 December 2014 07:54:33
So that’s the sense in which I semi-jokingly said that Henry Ford invented unemployment. Of course unemployment was with us long before Ford came along, but Ford’s system introduced a new and important source of unemployment. By pioneering efficiency wages, he helped to bring into existence a group of people who want to work but, through sheer bad luck, can’t find jobs. You should keep that in mind the next time someone tells you the unemployed are all work-shy layabouts.

page 124 | location 1893-1897 | Added on Tuesday, 23 December 2014 08:02:20
But we’ve begun to realize that explicitly modeling the process of job search and recruitment is valuable. Unemployment is now routinely modeled as a process of searching for a match between a suitable vacancy and a suitable worker, much like dating and marriage. Christopher Pissarides won the Nobel memorial prize for his work on this topic. He points out that unemployment is the initial condition of economic existence, just as being single is the initial condition of romantic existence—all of us are born unemployed and single, and if we want that situation to change, sooner or later we will have to start looking for a suitable match.

page 130 | location 1984-1987 | Added on Friday, 26 December 2014 00:54:14
There are two ways to fight unemployment. One is to fight recessions—constantly battling to get the economy to the top left of the Beveridge curve, with plenty of vacancies and few unemployed people. But the other is more structural, trying to shift the curve down and to the left, so that for any given level of vacancies, there will be fewer people without work. For the most part, I don’t see any reason why you can’t try both methods at the same time.

page 164 | location 2515-2517 | Added on Wednesday, 31 December 2014 01:10:38
Some degree of aggregation is inevitable, but do also remember that you can measure inflation, inequality, unemployment and GDP without having to produce some amorphous summary of all four of them. All of these measures, and others, are useful in informing your policy priorities. None should monopolize your attention.

page 173 | location 2648-2652 | Added on Wednesday, 31 December 2014 01:25:05
Day reconstruction produces quite different results from the more traditional surveys of life satisfaction. One survey comparing women in France to those in Ohio found that the American women were twice as likely to say they were very satisfied with their lives. And yet it was the French women who spent more of their day in a good mood. Enjoyment as experienced minute by minute is not the same as a once-and-for-all judgment about how satisfying life is. If you really plan not only to measure happiness but also to use it to influence policy, this is a distinction you will have to start taking seriously.

page 198 | location 3027-3028 | Added on Thursday, 1 January 2015 01:57:32
the world’s two most unequal wealthy economies offer a mediocre school education to the masses and an outstanding university education to an elite.

page 199 | location 3051-3055 | Added on Thursday, 1 January 2015 11:43:35
Keynes famously remarked, “If economists could manage to get themselves thought of as humble, competent people, on a level with dentists, that would be splendid!” It’s a good joke, but it’s not just a joke; you don’t expect your dentist to be able to forecast the pattern of tooth decay, but you expect that she will be able to give you good practical advice on dental health and to intervene to fix problems when they occur. That is what we should demand from economists: useful advice about how to keep the economy working well, and solutions when the economy malfunctions.

[Ben Gartland · Rating 5 out of 5]

I really enjoyed the conversational style for this. very entertaining but also informative book on macroeconomics.

[Betsy Gant · Rating 4 out of 5]

Biased but informative. I look forward to reading more by this author.

[Kat · Rating 3 out of 5]

The question-answer format of this book is cringe. But there are some valuable insights here and there.

[Irina · Rating 3 out of 5]

A fun, breezy read that I'd recommend for right before bed (or some other time you need a tiny bit of intellectual stimulation, but not too much). I could have done without the Q-and-A style, but the ideas in this are solid and thought-provoking. I also found myself disagreeing with a bunch of them, and I give kudos to the writer for coming up with innovative stuff in a "basics" book rather than rehashing the familiar.

[Rob · Rating 4 out of 5]

Okay, so there are few books by Tim Harford I have yet to read. By stealth and diligent construction, he has made me become a fan. His is a personable, chatty style, even when entering murky waters and even when bravely deciding not to dumb down his economics. Which makes him a suitable writer of what is - despite its unenlightening title - in effect a primer on economics. Or, if you prefer, a pop economics version of the pop science books that make what was once impenetrable a little more penetrable to the non-specialists among us. Harford's first step is to fashion his text as a kind of 21st century Socratic dialogue, placing us ("you") as the putative decision-makers in our economy and then describing the various things that we can do. This allows him to be chatty even when taking on inflation, deflation and stagflation. He tosses in a little history, some important concepts like sticky prices or output gap or nominal GDP, and he tries to weave some more or less bipartisan common sense through them.

To give you an idea:

"-It feels like what you’re saying is that I should run my economy like a tough bastard right-winger during a boom, and like a bleeding-heart left-winger during a recession.
-That’s not such a bad idea. A boom is a great time to trim spending, pay off debt and try to make markets function better by reducing unnecessary regulations. These are all right-wing hobbyhorses. A recession, however, is a terrible time to do those things. It’s better to keep spending, run up debt and launch big infrastructure projects. Unfortunately, it seems we tend to get the opposite: in booms, we feel like we can afford to elect left-wing governments to improve labour protection and launch big public-sector projects, often running up debt in the process; then when trouble hits, we elect a right-wing government to slash the deficit, scrap investment projects and make a bonfire of labour protection regulations, all of which simply makes the recession worse."

The result is an engaging book which offers some intelligently-displayed basics. Given that economics where the more you know sometimes the worse your decisions, it should not be underestimated that more people understanding enough to realise just how shoddy many of the so-called drivers of the economy really are on its fundamentals could lead to a more critical response to some of the woollier ideas being put out there. Unfortunately, recent elections seem to suggest that there is less knowledge around rather than more, and some people are actively turning from practitioner/academic to the salesperson - literally in many cases - and being more accepting of brazen lies. But well, somewhere within us we have the capacity to take heed. Perhaps too late, perhaps just in time to watch our species nosedive, but at least realising we knew something could make for a more appealing final second than knowing we were merely puffed-up and deeply ignorant.

[Rick Yagodich · Rating 3 out of 5]

Tim Harford rarely disappoints. Unfortunately, this book – which starts off strong – eventually veers in that direction.

It's written in an almost playful voice and set up as a conversation between Harford and the reader, with mostly-pertinent questions being supplied on the reader's behalf. And in this respect, it does a good job of explaining why macroeconomics is such a tricky subject. (The references to political leaders of the day, all of whom are now gone, does date it somewhat.)

The two major shortcomings are ones I haven't seen Harford engage in elsewhere.

First, the latter half of the book basically says that macroeconomics is so complex, and there's so little data to work from, that we shouldn't hold it against the macroeconomists when they get it spectacularly wrong. After all, they're flying about as blind as the rest of us. Yet, for some reason, despite the lack of ability to provide anything useful, we need them.

Second, he doen't address the role of the financialisation industry with respect to macroeconomics. Setting aside the slightly shaky foundation of his claim that growth is fundamentally good, he fails to call out that most of the so-called growth is now the fake value of money circulating through the financial system (where a single transaction creates two positive-value-accounted assets, even though one must eventually be revealed a liability). Now, based on Harford's overly trite defense of economists, and their prominent role in promoting the financialisation industry, the failure shouldn't be too much of a surprise, though I thought he was better than that…

[Eric · Rating 4 out of 5]

This was one of the most readable works on economics (macro, specifically) that I have had occasion to listen to. The author used an interesting device of posing a story, then having his muse inject a question in a Socratic sort of way, followed by his answer. His explanation of Keynesian and classic responses to recession and the why of which is likely more appropriate are extremely helpful. Probably most helpful is that he admits that even the very smartest of the lot often get it wrong. This should probably be required reading for every voter - then they can know why their favorite pol is probably clueless as to what he/she ought to do next.

A second reading (the first in Sep 2015) was as much fun as the first. The supply and monetary models of recession as described by way of a babysitting service and a POW camp were very relevant simplifications to help with complex theories.

[Dave Morris · Rating 5 out of 5]

Full disclosure: Tim Harford is a very good friend of mine. And yet I think I can objectively explain why you might like this book. A basis of our friendship is that we are both curious, discursively argumentative, enthusiastic Gedankenexperiment types. One of the things I look forward to is a lively discussion with Tim over coffees, and that's exactly what reading this book is like. Ah, you may say, but surely there is no discussion here as you don't get to talk back? Well, Tim has that covered too.

[Teresa Fung · Rating 2 out of 5]

It definitely is not as good as the first undercover economist. The dialogue between a supposed reader and the writer was just silly and the concepts explored and explained were difficult to understand even for someone who had studied first year uni of economics and years of business. However, on the positive side, there are a good source of reference material provided from the footnotes for those that are more interested in areas covered which is good and informative. There were indeed some points worth knowing and provokes food for thought.