What is Economics: Harford’s Know-It-All

If you are a regular reader of my blogs, then you should know by now that I write mainly on subjects related to economics. But, I haven’t written anything on what economics is really about. If you would have noticed, all my writings come down to one thing: how something will affect your life. And economics is all about that. It is about how society works. As Steven D. Levitt says, “Economics is about what people do.”

From years now Tim Harford has tried to break down complex looking topics of economics, something which most of the economist doesn’t do. His explanations are so lucid and fun that I completed reading his book The Undercover Economist in no time. The book starts by asking some simple but intriguing questions like ‘Who really makes money from your coffee payments in a restaurant?’ and then gradually goes away from the individuals to answer questions like ‘Why poor countries remain poor?’ These stories and Harford’s researches are awesome. The book attempts to add more sense in our lives. Sample this – all the supermarkets have two options: either they lower down the prices of their products to attract more customers or they can keep the prices high to get more money on each product sold. Now, what do they do? Most probably, they will try both at the same time. A very common example is that organic food (a synonym for expensive food) will be kept next to the conventional food, but not next to the similar kind of food (organic bananas will be kept next to conventional garlic and not with conventional bananas). Those who think that organic food is safe, and are willing to pay the high prices would buy it. While, the price conscious ones will go for the cheap conventional food. But, isn’t the organic food more expensive; given that it costs more to produce it and a variety of other reasons? Harford writes, “[To give you an example], in the UK, organic milk commanded a premium at the farm gate of just three pence a litre in 2008; as a shopper, you’ll pay around fifteen pence a litre extra.” This is one of the price targeting policies supermarkets follow to target both price insensitive (believers of organic food in this case) and price sensitive people. The reason why organic bananas will not be kept along with conventional ones is because even the price insensitive fellows would see the sobering difference in their prices which would persuade them not to buy the organic food.

Another price targeting policy (I would see the menu card like this next time I take it in my hand.)

After brilliant stuff such as this Harford also writes about the role economists play. He writes, “The economist can explain how such a system works, how companies will try to exploit it and what you as a customer can do to fight back… This breadth of interest is reflected in the eclectic tastes of the Nobel Prize Committee… More often, it (Nobel Prize) has been awarded for insights less obviously connected with what you might have thought was economics: human development, psychology, history, voting, law and even esoteric discoveries such as why can’t you buy a decent second- hand car.”

I would say Harford’s books are a good introduction to economics. Even someone like me, who is just starting to read this vast subject, can comprehend them easily. There is a popular belief that economics is something very complicated with tangled and boring theories, which is totally false. On the contrary, its correlation with what we do daily is what attracted me towards it. From now, if anyone asks me what economics is Harford will surely get a place in my answer.

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