All Economics Is Local
Copyright 2006, Jandos Rothstein
Originally Published in Washington City Paper, February 17, 2006
The Undercover Economist: Exposing Why the Rich are Rich, the Poor are Poor—
You will be delighted to know, despite your suspicions to the contrary, that a gallon of orange juice costs no less at the Soviet Safeway than it does at the far more glamorous Whole Foods Market a few blocks away.
Yes, your forays into the spiffier organic grocery store, with its imported cheeses, its free-range chicken, and its premarinated kabobs, may make a bigger dent in your wallet, but that’s because you are buying different products than you would at Safeway. If your taste runs to Tropicana Premium, you’ll actually pay less at Whole Foods, because there it’s pegged at the low end of the OJ-quality spectrum. (At Safeway, it’s a luxury good.)
Tim Harford, a British expat now working at the World Bank and living in D.C., finds many such examples in the neighborhoods of our city for his book, The Undercover Economist: Exposing Why the Rich are Rich, the Poor are Poor—and Why You Can Never Buy a Decent Used Car! In the early chapters, D.C. swirls with basic economic principles. He discusses not only the vicissitudes of supermarket pricing in the greater Dupont Circle area but also his favorite barista—the apparently beguiling Maria—at the Starbucks at the Farragut West Metro station.
How can Starbucks get away with charging $2.50 for 25 cents’ worth of coffee and cardboard? Harford explains that it’s all location, location, location: For example, the Farragut North Starbucks provides the only cup of joe available to the steady stream of customers pouring out of the station at rush hour. But the choice locale comes at a steep price: The scarcity upon which its monopolization of customers depends is owned not by the coffee giant but by the landlord, so rent swallows most of the markup. Scarcity value explains Tropicana, too. The Safeway and the Whole Foods are equally convenient (or have equal access to customers), so both charge what the same market will bear for the same product.
Harford’s pop-ec book is the latest sign that we’re living in the decade of economics. In the ’60s and ’70s, a lot of cocktail chatter focused on psychology. In the ’80s and ’90s, it was physics. Now it’s economics’ turn. In recent years, Steven D. Levitt, co-author of the best-selling Freakonomics: A Rogue Economist Explores the Hidden Side of Everything, has gained recognition for using economic principles to determine such counterintuitive factoids as that children living in a household with a swimming pool are at far greater danger than those living with a handgun.
Where Freakonomics delved into the outer realms of economics’ explanatory powers, applying economics to exegeses of crime rates and real-estate-agent terminology, The Undercover Economist is a general survey of mainstream economic applications. That, these days, includes discussions of “asymmetrical information”—buying a used car sucks because the seller knows if a car’s a lemon and you don’t —and looking at how “human nature” affects money and markets. Harford, for example, returns to Starbucks to discuss what the selection of drink size and type communicates about the customer. Purchasing a “venti” cappuccino can mean “I’m greedy” just as much as it means “I’m thirsty.”
For its part, The Undercover Economist does what a pop survey should: It’s a fun, fast read, and, while it largely covers the same territory as Econ 101, it provides an entertaining Cliffs Notes version of the field for those of us with a growing fear that we won’t be allowed in polite company unless we can passably discuss it. And, Washingtonian or not, Harford’s localized examples—in D.C. and across the world—make the material more engaging and accessible, if also less creditable at times.
When he departs from his breezy takes on everyday transactions, such as in the subtitle’s promised explanation of why the rich are rich and the poor are poor, the results are less convincing. Illustrating points with anecdotes is charming when they reference the Soviet Safeway but seems shallow when they’re used to explain away hundreds or thousands of years of history. Looking mostly at Cameroon, Harford uses narratives to diagnose its troubled economy. Cameroon’s problems are partly due to obvious culprits—poor infrastructure and low education—but the greater problem is a corrupt government and flawed social structures that provide no incentives for investment, hard work, or honesty. He dwells on the “shocking waste” of an incompetently constructed school building, decaying though only 4 years old:
It’s all too tempting for the visitor in Cameroon to shrug his shoulders and explain Cameroon’s poverty by presuming that Cameroonians are idiots. The library looks like good evidence, but Cameroonians are no smarter or more foolish than the rest of us. Seemingly stupid mistakes are so ubiquitous in Cameroon that incompetence cannot be the adequate explanation we’re looking for.
This is perhaps a fair representation of Cameroon’s current plight, but it does nothing to explain why wealth-increasing institutions developed in some places and corrupt, untenable governments developed in others. Coming on the heels of Napoleon’s quote that one should “[n]ever ascribe to conspiracy that which is adequately explained by incompetence,” these contentions, along with Harford’s certainty that the system that provides the most goods is the best system, can’t help but sound like an indictment of societies that don’t fully embrace Western values.
Harford jumps across thousands of miles and hundreds of years to contrast Cameroon with the 15th-century village of Bruges, located in what is now Belgium. Bruges was an economic powerhouse for 200 years until the Zwin River, upon which its ability to trade its excellent locally produced cloth depended, silted up. The town’s economy dried up along with the river. Harford’s conclusion is that the solution to poverty is to trade with other nations. Perhaps—but while trade allows a middle class to develop, it certainly does not cure poverty; Harford need travel no farther than a dozen or so blocks from the Soviet Safeway to see that. And the comparison of two towns separated by time, space, and culture raises a litany of exceptions and chicken-and-egg questions that a blind faith in globalization can’t answer. Does Cameroon produce less because it trades less, or does it trade less because it produces less?
Still, in his international section, Harford performs a real service when he dismantles a favorite political straw man: the dangers of trade imbalance. Currency, no matter how much Scrooge McDuck might have liked swimming in it, is really just pieces of paper. And when the value it represents is traded to someone overseas for goods or services, they will eventually trade it for something they can actually use, meaning the tens of billions of dollars that we send to Japan every year eventually come back.
Toward the end of the book, Harford remembers the famous Ronald Reagan quip about the Trival Pursuit game for economists. (Punch line: It has 100 questions and 3,000 answers.) Like psychology and postquantum physics, the uncertainty of economics is part of what makes it so alluring to nonexperts. Anyone’s drunken theory, it seems at times, is potentially as true as anyone else’s. Harford is an honest enough writer that he doesn’t pretend that this uncertainty isn’t a factor in the professional and academic fields, as well. When he rolls out his final assault on globalization’s critics, the best he can muster is to focus on the “near universal” opinions that “nearly all” economists can agree on—that trade is good, tariffs are bad, and taxes “distort” market behavior. But if that’s the limit of the consensus, you have to wonder: How many more explanations are there for why you can never buy a decent used car?