Reading Tim Harford is not very different from picking up a book by PG Wodehouse. Harford’s books are easy to read, feature examples that are fairly predictable as we keep looking deeper at things that we experience but don’t generally notice, have a good dose of wit and, most importantly, leave the reader with a good feeling. His latest book does not disappoint, as he takes us through the labyrinths of macroeconomics this time. The style is the same and he brings in everyday examples to explain difficult situations. This time around, he uses a different approach where there are questions and answers. The questions are also posed in terms of the disbelief, or doubt, that the reader might come across while reading his answers. This adds novelty to the discussion.
He begins with rudimentary concepts and links them together. Starting with recession, he moves over to the concept of money, which leads to inflation as he reconciles the concept of a stimulus with growth and inflation, which we keep reading of. Next, he moves to employment and output, and covers the various definitions of domestic product, including the more abstract concept of theoretical happiness by weaving behavioural economics in the network. While also raising issues on inequality, he talks of management quality in a highly entertaining manner. He reconstructs the age-old classic debate about recession and its solutions, and while Keynes and classical economics form the core of these arguments, he relates them with simple examples to make them comprehendible. He takes the case of a babysitting forum among members of a group, where all parents get points for babysitting other’s kids. These points or scrips, as he calls them, can be used by parents who accumulate them for going out for a party while leaving their kids behind. A classic case of a Keynesian recession comes in when all parents want to accumulate scrips and do not want to go out. This is a case of fall in demand, which can be met by increasing scrips to a prudent extent, because, if there are excess scrips to be had, everyone will want to go out and no one would want to babysit. He, therefore, leads this to the debate on flexibility of prices and inflation. He acknowledges that this idea is borrowed from Paul Krugman, but the difference is that he takes this to its logical conclusion. From the standpoint of classical economics, he explains the case of a recession through what happened in a prisoners of war camp in Germany during the war. Prisoners got stuff such as cheese, blades, beef, etc, from the Red Cross and traded products with each other. But when supplies stopped from the Red Cross, trade ceased. This was a supply-side problem and hence the cure could not be to get people to spend more, which would be inflationary, as was the case during the oil crises when countries misread the situation leading to stagflation.Harford gives such examples to engage the reader. While relating the current financial crisis with Keynes, he explains that for the spending theory to work, based on what Obama did, three factors need to be kept in mind. First, there should be a recession. Second, money should not be spent on, say, French wine, which helps France, not the US. In fact, this point is valid because even when we talk of the quantitative easing programme of the Federal Reserve today, most of these funds have moved to the emerging markets, not the US. So has this really helped? This is worth thinking about. And third, he warns us that we should not get into situations where we allocate money and spend on new projects that would be abandoned and not completed when conditions improved. Working on work-in-progress is a pragmatic option.Speaking on unemployment, he gives a very interesting example: How Henry Ford doubled wages in his factory and lowered the number of hours of work to ensure that the issue of labour became permanent. More importantly, they could not move out due to non-availability of similar wages outside. This reduced costs because Ford had employed more than three times the number required, as few worked for more than three months, and as the labour market was flexible, they could find work elsewhere at the low wages. Higher wages changed this possibility.At one point, which we may not like, Harford is quite harsh on India, where he says we probably have the largest number of badly-run companies, in a chapter titled Bossonomics, simply because of the absence of competition. This should be a takeaway for us. He narrates the story of Accenture Consulting, which was paid by World Bank to carry out an audit on textile firms in India, but got the service free of cost. But most were not willing to get this service for obvious reasons. And their own results showed that when companies were also guided by them to change their strategies, it really helped. The point they make is that Indians are unwilling to take such advice, which comes in the way of their efficiency. The book is obviously worth reading. For the layman, it is a good and easy-to-comprehend book on macroeconomics. For the professional, it is light and some of his anecdotal examples are of interest; though for one familiar with the subject, some pages can be skipped. While the first taste of the undercover economist was obviously engrossing for all, this one could look a bit repetitive to the hardcore professionals. This is a challenge for all authors who have a brilliant first book. But then this may not be meant for the professional or academic who is well past the stage of basic concepts.
He begins with rudimentary concepts and links them together. Starting with recession, he moves over to the concept of money, which leads to inflation as he reconciles the concept of a stimulus with growth and inflation, which we keep reading of. Next, he moves to employment and output, and covers the various definitions of domestic product, including the more abstract concept of theoretical happiness by weaving behavioural economics in the network. While also raising issues on inequality, he talks of management quality in a highly entertaining manner. He reconstructs the age-old classic debate about recession and its solutions, and while Keynes and classical economics form the core of these arguments, he relates them with simple examples to make them comprehendible. He takes the case of a babysitting forum among members of a group, where all parents get points for babysitting other’s kids. These points or scrips, as he calls them, can be used by parents who accumulate them for going out for a party while leaving their kids behind. A classic case of a Keynesian recession comes in when all parents want to accumulate scrips and do not want to go out. This is a case of fall in demand, which can be met by increasing scrips to a prudent extent, because, if there are excess scrips to be had, everyone will want to go out and no one would want to babysit. He, therefore, leads this to the debate on flexibility of prices and inflation. He acknowledges that this idea is borrowed from Paul Krugman, but the difference is that he takes this to its logical conclusion. From the standpoint of classical economics, he explains the case of a recession through what happened in a prisoners of war camp in Germany during the war. Prisoners got stuff such as cheese, blades, beef, etc, from the Red Cross and traded products with each other. But when supplies stopped from the Red Cross, trade ceased. This was a supply-side problem and hence the cure could not be to get people to spend more, which would be inflationary, as was the case during the oil crises when countries misread the situation leading to stagflation.Harford gives such examples to engage the reader. While relating the current financial crisis with Keynes, he explains that for the spending theory to work, based on what Obama did, three factors need to be kept in mind. First, there should be a recession. Second, money should not be spent on, say, French wine, which helps France, not the US. In fact, this point is valid because even when we talk of the quantitative easing programme of the Federal Reserve today, most of these funds have moved to the emerging markets, not the US. So has this really helped? This is worth thinking about. And third, he warns us that we should not get into situations where we allocate money and spend on new projects that would be abandoned and not completed when conditions improved. Working on work-in-progress is a pragmatic option.Speaking on unemployment, he gives a very interesting example: How Henry Ford doubled wages in his factory and lowered the number of hours of work to ensure that the issue of labour became permanent. More importantly, they could not move out due to non-availability of similar wages outside. This reduced costs because Ford had employed more than three times the number required, as few worked for more than three months, and as the labour market was flexible, they could find work elsewhere at the low wages. Higher wages changed this possibility.At one point, which we may not like, Harford is quite harsh on India, where he says we probably have the largest number of badly-run companies, in a chapter titled Bossonomics, simply because of the absence of competition. This should be a takeaway for us. He narrates the story of Accenture Consulting, which was paid by World Bank to carry out an audit on textile firms in India, but got the service free of cost. But most were not willing to get this service for obvious reasons. And their own results showed that when companies were also guided by them to change their strategies, it really helped. The point they make is that Indians are unwilling to take such advice, which comes in the way of their efficiency. The book is obviously worth reading. For the layman, it is a good and easy-to-comprehend book on macroeconomics. For the professional, it is light and some of his anecdotal examples are of interest; though for one familiar with the subject, some pages can be skipped. While the first taste of the undercover economist was obviously engrossing for all, this one could look a bit repetitive to the hardcore professionals. This is a challenge for all authors who have a brilliant first book. But then this may not be meant for the professional or academic who is well past the stage of basic concepts.
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