The Inadvertent Philosopher, a review of 'The Undercover Economist'.

Written by British financial journalist Tim Harford this interesting and accessible book assumes no prior experience of economics and gently lifts the mind of the ignorant to that peculiarly late twentieth century form of enlightenment called 'understanding free markets', very much the Zen or the Tao of economic theories. A previously muddled subject, economics has come on in leaps and bounds since F.A. Hayek emerged from the great intellectual milieu of Vienna that existed from the late 19th century till the disaster of the Second World War. Although it took decades for the message to get through, Hayek and his mentor Ludwig von Mises, had slain Communism and perhaps many of its offshoots such as Cooperativism, Market Socialism, and left-Anarchism before that war began. The sword was what had once been dismissively called 'the dismal science' by Carlyle, yet now is almost the sword of Justice itself - and the scales and the peephole in the blindfold too.

Indeed if Harford is representative then economists have become as conceited as philosophers have often been. Perhaps in future the maxim will be 'the life ignorant of free market economic theory is not worth living', Socrates take note. Nevertheless some of this new 'theory of everything' still keeps contact with embarrassing relatives. Harford is self aware enough to observe in the first chapter "that economics itself is a tool for objective analysis doesn't mean that economists are always objective". Alas what the book shows is that economics is very far from being an objective, neutral tool because its axiomatic assumptions about reality are so easily and convincingly contestable - criticisms that really should have been dealt with a long time ago.

The impression that economics is a value free medium seems to have been obtained by Harford through simply avoiding as many moral questions as possible. They can be ignored because at the end of the day, as von Mises and Hayek demonstrated, free markets work and alternatives don't so that's the end of the matter. However this attempt at avoidance is, as will be shown, rather like avoiding oneself, and if contra Harford, you can't avoid yourself, free markets require more limits than he recommends.

For instance, in the process of rubbishing the claims of the often teenage anti-globalisation movement by pointing out how developing countries need foreign investment and foreigners are prepared to make that investment only if they get something cheaper for it, he overlooks the fact that although as he says this situation is better than there being no investment at all the fact is that many of the foreigners involved seem to be making vast profits whilst paying these people bugger all to work in death traps, which would strike most people as immoral. But for free market economists profit making of any magnitude is just, even dubiously, although it isn't explained why, so economics becomes objective here by simply not acknowledging where it obviously isn't. Ah but you see these companies aren't making huge profits like we think. Coffee chains for instance pay most of the money they make for rent on premium locations as Harford explains. Given they charge uniform prices regardless of location those premium locations must be extremely expensive indeed. And that doesn't explain other companies and their apparently huge profits.

Free markets are not just morally pure, they are inherently truth producing, they in fact constitute "the world of truth" (page 60):

'...although prices sometimes seem unfairly high, you hardly ever have to pay them...in free markets people don't buy things worth less to them than the asking price...the reason is simple: nobody is forcing them to...'(Ibid.)

But surely if we want to live somewhere and we don't want to live somewhere else, necessarily, we must pay the price? And don't we often feel ripped off by paying that price, especially with house prices? Furthermore there is a large body of work in legal theory and philosophy on the nature of coercion much of which argues that coercion is as much a product of situations or offers that can't be refused as much as it is of direct threats. The only way he can say that prices correspond with what is true or real, or that our freedom is not compromised by our different situations, is by ignoring the issues raised here, and quite possibly there are more. At one point he writes that a "philosophy degree itself does not improve the candidate's productivity at all" (page 120) however it clearly provides a number of abilities desperately needed in economics.

It would also bestow the ability to conclude that
    
"...the same popular opinion that despises the DVD industry for trying to sell their products at different prices in different markets also believes that the big pharmaceutical companies should supply drugs to poor countries at discounted prices. Confusingly, our moral intuitions seem to be sending us contradictory messages...", (page 53)

which is actually an argument that says:

Premise 1: selling DVDs at different prices in different places to exploit different incomes is wrong.

Premise 2: selling drugs at different prices to help the poor is right

Conclusion:  these moral intuitions are contradictory

is no argument at all and is in fact nonsense and, furthermore, that there is no reason to suppose these moral ideas are intuitions instead of the assertion of conclusions of prior moral reasoning.

Free market economists believe in global free trade, Harford argues for it by pointing out that if all imports are banned

"...all of the export industries will quickly shrivel and die. Why? Because who would want to spend time and money exporting goods in exchange for foreign currency if nobody is allowed to spend the foreign currency on imports?..."(p.210)

But presumably currency is convertible and can be spent at home? And presumably it would be possible to just ban imports of goods already domestically produced? This would seem to have some worth as a moral idea rather than banning all imports which would just be stupid and self-punishing. But apparently

"...a tax on imports is exactly equivalent to a tax on exports. Lerner's theorem tells us that restricting imports of Chinese televisions to protect British jobs in television manufacturing makes as much sense as restricting exports of British made drills to protect British jobs in televisions manufacturing..."(page 211)

In the absence of an explanation as to why this is so, and the suspicion that if what we are dealing with is a theorem rather than a proof (presumably he is aware there's a distinction) it may well be of questionable veracity, I find this assertion difficult to accept.

Referring to another old complaint about economics Harford says: "There is much more to life than what gets measured in accounts. Even economists know that" (page110). However the book attests to the contrary by translating human understandings of the world into terms of calculation: "Perhaps we are outraged to see the poor denied drugs that cost pennies to produce, not because that is unfair (many things are unfair) but because it is also so wasteful of life"(p.57). Note the use of 'wasteful', surely 'inhumane' or 'cruel' would have been the appropriate term? Another, related, complaint is the way economics explains any action you care to choose as due to the motive of economic self-interest. This may function well as a postulated axiom for economic models but is only one of a number of possible motives for action in the real world. Harford does this a few times, a glaring example is how he explains the policy of total isolationism by the ruling class of feudal Japan in the years from the arrival of the first Europeans to the late 19th century as being about their desire to have the society organised to serve their interests (page 230). This may be part of the explanation but is just too simple a model of real-world human motivations, surely they also feared European military imperialism, the loss of their identity, and, though Harford would abhor it as wicked, economic competition against the common people and the destruction of their unique society through economic change. It must also be asked in this particular case what significance there is in the fact that the old feudal rulers of Japan simply converted themselves from clans in to corporations such as Mitsubishi when Japan was opened up to trade by military force.

Perhaps the most significant error in the thought of free market economists such as Harford is that they spend so much time criticising the unexpected consequences of government action that they fail to notice when the consequences of the market lead to equally absurd outcomes and when therefore government regulation is required. For instance the U.K domestic construction industry has seen such a decline in the quality of product thanks to lack of government control that new homes are not expected to last for more than 50 years and those years will be cramped and full of the noise admitted by the plasterboard walls. Regulation might lead to undesirable and unforeseen consequences but this does not mean we should do nothing about an obviously unsatisfactory situation.

Despite all this there are some genuinely intelligent and effective market solutions to various problems in this book that policy wonks should pay attention to. For example he points out that because the U.K. school system allocates places by the area the child's home is in this just needlessly pushes up house prices and condemns others to inferior education they would otherwise avoid. On which note the left-wing Fabian Society has recently come up with the idea of taxing private school fees in the U.K. which have apparently increased greatly over recent years, in coincidence with greater numbers of parents fleeing the state sector, in an effort to make it harder for them to do just that. Harford would point out that the 'world of truth' indicated here is that parents don't want to send their children to state schools. Why? we might ask. Snobbishness perhaps.

Tim Harford's 'The Undercover Economist' is published in the U.K. by Abacus.

A B Joicey

All content © For/Against 2007