Sunday, January 28, 2007

Pg. 69: "The Undercover Economist"

Tim Harford is the author of The Undercover Economist: Exposing Why the Rich Are Rich, Why the Poor Are Poor--And Why You Can Never Buy a Decent Used Car!

I asked Tim to put his book to the "page 69 test." Here is what he reported:
Like any author, I face the page 69 test with trepidation. It turns out that page 69 covers the bit of my book that the professional economists most admired. Other readers were more interested in tales of my travels in Cameroon, or my explanation of what an economist sees when looking at the Starbucks menu board. So, professional economists read on and everyone else, close your eyes and think about coffee.

"Instead of focusing on the enormous complexity of a real economy, think of a very simple one-dimensional human challenge: the 100-meter sprint. The fastest sprinter will win the race. If you wanted all the sprinters to cross the line together, you could just change the rules of the race, ordering the fast runners to slow down and everyone to hold hands as they crossed the line. Or you could move some starting blocks forward and some starting blocks back, so that although each sprinter was running as fast as he could, obeying the usual rules and objectives of sprinting, the fastest had to cover enough extra ground that he would end up breaking the tape neck-and-neck with the slowest.

Economist Kenneth Arrow demonstrated that the same approach could work when trying to balance the excesses of competitive markets: instead of interfering with the markets themselves, the trick is to adjust the starting blocks by making lump-sum payments and levying one-time taxes.

An example of a lump-sum tax would be the government taxing everybody eight hundred dollars; or alternatively, taxing everyone over the age of sixty-five eight hundred dollars; or alternatively, taxing everybody whose surname of the birth certificate starts with H eight hundred dollars. The point is that unlike an income tax or a sales tax on coffee, a lump-sum tax doesn't affect anybody's behavior, because there is nothing you can do to avoid it. So unlike the sales tax, it doesn't lead to an efficiency loss. Similarly, an example of lump-sum redistribution would be the give eight hundred dollars to everybody whose name starts with H, a policy for which I would be happy to vote.

In the 100-meter sprint, lump-sum taxation is like moving the starting blocks back a few paces. Income tax and sales tax are like asking the best runners to run backwards. Both would have the effect of ensuring a more equal finish, but moving the starting blocks around doesn't slow anybody down.

In the context of a sprint, it fairly obvious that one of the ways to get a close result is to give the slower runners a head start. In the context of an economy, with literally billions of different goods, desires, raw materials and talents, the head start theorem is a much bolder claim. But it's true: you can allow the competitive economy to use every skill and every raw material, take advantage of every opportunity to trade, cooperate, educate, or invest... but still get a fair outcome by moving around the starting blocks and letting perfect markets do the rest.

The implication is that in a world of perfect markets, the only thing needed to ensure both fairness and efficiency is a "head start" strategy: a program of appropriate lump-sum taxes and subsidies that puts everyone on equal footing. The perfect markets then find every possible opportunity to make everybody better off from their revised starting points. The question is, can this be done in practice?"

The page 69 test is fun, but as a neutral party I'd have to say that to really verify the quality of a book like The Undercover Economist you need to read the whole thing. Fortunately, the book is about to get a lot cheaper because the paperback edition is coming out on January 31st.
Many thanks to Tim for the input.

Read an excerpt from The Undercover Economist.

Among the praise for the book:
"This is a book to savor."
--Richard Lowenstein, New York Times

"A worthy and often entertaining attempt to render 'the dismal science' considerably less dismal."
--Warren Bass, Washington Post Book World

"The Undercover Economist is a rare specimen: a book on economics that will enthrall its readers. Beautifully written and argued, it brings the power of economics to life. This book should be required reading for every elected official, business leader, and university student."
--Steven D. Levitt, Professor of Economics, University of Chicago, and author of Freakonomics: A Rogue Economist Explores the Hidden Side of Everything

"If you need to be convinced of the ever-relevant and fascinating nature of economics, read this insightful and witty book by Tim Harford. Using one interesting example after another, The Undercover Economist demonstrates how economic reasoning -- often esoteric and dull, but totally accessible in Harford's hands -- helps illuminate the world around us. Indeed, Harford's book is a tour de force."
--Jagdish Bhagwati, Professor of Economics, Columbia University; author of In Defense of Globalization
Harford spoke with Robin Young on the NPR show Here & Now.

The American Enterprise Institute posted video to their website of a panel discussion of The Undercover Economist with Harford, Tyler Cowen of Marginal Revolution and Sebastian Mallaby of The Washington Post (the link to the video is in the upper right box).

John Reeves of The Motley Fool, an investment advice website, interviewed Tim in October 2005. Tim shared his thoughts on how he would invest his money, and provided his analysis specifically of GM, Apple and the U.S. real estate market. By my reckoning, as of January 2007, he got two out of the three right--which, if you can do it all the time, should make you a very rich person.

"The Undercover Economist" appears regularly in Slate; Tim's latest column is "Why the Stock Market Rises in January … And why it shouldn't."

He is also writes about economics for the Financial Times, including its "Dear Economist" column which "answers readers' personal problems with the tools of Adam Smith." A recent example:
Dear Economist,
Bikini waxes: boyfriends seem to like the results, but they hurt. What would you say were the costs and benefits?
Yours, Sylvia
Read Tim's answer.

Previous "page 69 tests:"
William Landay, The Strangler
Kate Holden, In My Skin
Brian Wansick, Mindless Eating
Noria Jablonski, Human Oddities
Ruth Scurr, Fatal Purity
Neal Pollack, Alternadad
Bella DePaulo, Singled Out
Steve Hamilton, A Stolen Season
Eric Klinenberg, Fighting for Air
Donna Moore, ...Go to Helena Handbasket
Louis Bayard, The Pale Blue Eye
Neal Thompson, Riding with the Devil
Sherry Argov, Why Men Marry Bitches
P.J. Parrish, An Unquiet Grave
Tyler Knox, Kockroach
Andrew Rehfeld, The Concept of Constituency
Laura Wiess, Such a Pretty Girl
Jeremy Blachman, Anonymous Lawyer
Andrew Pyper, The Wildfire Season
Wendy Werris, An Alphabetical Life
Laura Lippman, What the Dead Know
Meghan Daum, The Quality of Life Report
Scott Reynolds Nelson, Steel Drivin' Man
Richard Aleas, Little Girl Lost
Paul Collins, The Trouble With Tom
John McFetridge, Dirty Sweet
Michael Kazin, A Godly Hero
Bill Crider, Murder Among the OWLS
Zachary Shore, Breeding Bin Ladens
Rolf Potts, Vagabonding
Matt Haig, The Dead Fathers Club
Lawrence Light, Fear & Greed
Simon Read, In The Dark
Sandra Ruttan, Suspicious Circumstances
Henry Ansgar Kelly, Satan: A Biography
Alison Gaylin, You Kill Me
Gayle Lynds, The Last Spymaster
Jim Lehrer, The Phony Marine
Julie Phillips, James Tiptree, Jr.
Debra Ginsberg, Blind Submission
Sarah Katherine Lewis, Indecent
Peter Orner, The Second Coming of Mavala Shikongo
William Easterly, The White Man's Burden
Danielle Trussoni, Falling Through the Earth
Andrew Blechman, Pigeons
Anne Perry, A Christmas Secret
Elaine Showalter, Faculty Towers
Kat Richardson, Greywalker
Michael Bess, Choices Under Fire
Masha Hamilton, The Camel Bookmobile
Alex Beam, Gracefully Insane
Nicholas Lemann, Redemption
Jason Sokol, There Goes My Everything
Wendy Steiner, Venus in Exile
Josh Chafetz, Democracy’s Privileged Few
Anne Frasier, Pale Immortal
Michael Lewis, The Blind Side
David A. Bell, The First Total War
Brett Ellen Block, The Lightning Rule
Rosanna Hertz, Single by Chance, Mothers by Choice
Jason Starr, Lights Out
Robert Vitalis, America's Kingdom
Stephen Elliott, My Girlfriend Comes To The City And Beats Me Up
Colin McGinn, The Power of Movies
Sean Chercover, Big City, Bad Blood
Sigrid Nunez, The Last of Her Kind
Stanley Fish, How Milton Works
James Longenbach, The Resistance to Poetry
Margaret Lowrie Robertson, Season of Betrayal
Sy Montgomery, The Good Good Pig
Allison Burnett, The House Beautiful
Stephanie Coontz, Marriage, A History
Ed Lynskey, The Dirt-Brown Derby
Cindy Dyson, And She Was
Simon Blackburn, Truth
Brian Freeman, Stripped
Alyson M. Cole, The Cult of True Victimhood
Jeff Biggers, In the Sierra Madre
Jeff Broadwater, George Mason, Forgotten Founder
Alicia Steimberg, Andrea Labinger (trans.), The Rainforest
Michael Grunwald, The Swamp
Darrin McMahon, Happiness: A History
Leo Braudy, From Chivalry to Terrorism
David Nasaw, Andrew Carnegie
Leah Hager Cohen, Train Go Sorry
Chris Grabenstein, Slay Ride
David Helvarg, Blue Frontier
Marina Warner, Phantasmagoria
Bill Crider, A Mammoth Murder
Robert W. Bennett, Taming the Electoral College
Nicholas Stern et al, Stern Review Report
Kerry Emanuel, Divine Wind
Adam Langer, The Washington Story
Michael Scott Moore, Too Much of Nothing
Frank Schaeffer, Baby Jack
Wyn Cooper, Postcards from the Interior
Ivan Goncharov, Oblomov
Maureen Ogle, Ambitious Brew
Cass Sunstein, Infotopia
Paul W. Kahn, Out of Eden
Paul Lewis, Cracking Up
Pagan Kennedy, Confessions of a Memory Eater
David Greenberg, Nixon's Shadow
Duane Swierczynski, The Wheelman
George Levine, Darwin Loves You
John Barlow, Intoxicated
Alicia Steimberg, The Rainforest
Alan Wolfe, Does American Democracy Still Work?
John Dickerson, On Her Trail
Marcus Sakey, The Blade Itself
Randy Boyagoda, Governor of the Northern Province
John Gittings, The Changing Face of China
Rachel Kadish, Tolstoy Lied
Eric Rauchway, Blessed Among Nations
Tim Brookes, Guitar and other books
Ruth Padel, Tigers in Red Weather
William Haywood Henderson, Augusta Locke
Jed Horne, Breach of Faith
Robert Greer, The Fourth Perspective
David Plotz, The Genius Factory
Michael Allen Dymmoch, White Tiger
Patrick Thaddeus Jackson, Civilizing the Enemy
Tom Lutz, Doing Nothing
Libby Fischer Hellmann, A Shot To Die For
Nelson Algren, The Man With the Golden Arm
Bob Harris, Prisoner of Trebekistan
Elaine Flinn, Deadly Collection
Louise Welsh, The Bullet Trick
Gregg Hurwitz, Last Shot
Martha Powers, Death Angel
N.M. Kelby, Whale Season
Mario Acevedo, The Nymphos of Rocky Flats
Dominic Smith, The Mercury Visions of Louis Daguerre
Simon Blackburn, Lust
Linda L. Richards, Calculated Loss
Kevin Guilfoile, Cast of Shadows
Ronlyn Domingue, The Mercy of Thin Air
Shari Caudron, Who Are You People?
Marisha Pessl, Special Topics in Calamity Physics
John Sutherland, How to Read a Novel
Steven Miles, Oath Betrayed
Alan Brown, Audrey Hepburn's Neck
Richard Dawkins, The Ancestor's Tale

--Marshal Zeringue