Tim Harford on "The Undercover Economist Strikes Back"

Transcript

Tim Harford: The new book is called 'The Undercover Economist Strikes Back: How to Run Or Ruin an Economy' and the first book, 'The Undercover Economist,' was all about what we call in the jargon, microeconomics, it is all about how Tesco’s or Starbucks set their prices, for instance, and how we respond to those incentives.

The new book is called "The Undercover Economist Strikes Back: How to Run or Ruin An Economy." And the first book, "The Undercover Economist" was all about what we call in the jargon - microeconomics. It's all about how Tesco or Starbucks set their prices, for instance, and how we respond to those incentives. The new book is about macroeconomics.

So macroeconomics is stimulus, austerity, unemployment, inflation, all the stuff that Robert Peston and Stephanie Flanders have been talking about for years. And the slippery thing about macroeconomics is it's this gigantic system and it all fits together. And everything you point to as an example of something, there's something else going on behind your back and it's all connected by these hidden pulleys and so on, which makes it fascinating. It also makes it really hard to personalize it.

And so in the end, what I realized, the way I had to do it, was to say, well look, imagine you are the Governor of the Bank of England, or imagine you are the Chancellor of the Exchequer. Imagine you're running the thing. What are you gonna do? Who do you turn to for advice? What is it that you're supposed to be looking at? What are the levers that you can pull and how do they work?

Well, the difficult thing about macroeconomics is common sense leads us astray, very often. So, for instance, let's say I take a typical left-wing talking point and I say, oh, what the government should do is spend money, hire people to build something, and that will stimulate the economy.

Or I could take a right-wing talking point and say the government should cut taxes to stimulate the economy. And they both kind of sound quite plausible actually. Actually, it seems reasonable that if you hired a lot of workers that would stimulate the economy, wouldn't it? If you cut taxes, that would stimulate the economy.

And then you have to start actually thinking through all of the reactions to that. So if you hire the workers, well, where are you gonna hire them from? Are you gonna hire them from the unemployment queues, or are you actually gonna hire them away from the private sector? How are you gonna pay for those workers? Or, if for instance, you cut taxes, well, that means the deficit's gonna go up. Well, how are people gonna respond to that? People know that that money's gonna be paid off in the end. And then how do the international markets respond? And how does the Bank of England respond, printing money? You know, all of these interconnections. And it could be very, very tricky to keep all of these things in mind.

And so what I've done is to try to look at very simple economies. So I talk about a babysitting co-op, which is quite a famous example. I also talk about a recession that took place in a World War II prison camp. And the idea is, well, not because it's some kind of catchy stunt, but because actually there's something about those very simple economies that tells us something about our own economy. And if you can track what was happening to prices in the prisoner-of-war camp, or if you can track what was happening to the economy in the babysitting co-op, you can actually start to understand a bit about how our own, far more complicated economies work.

Popularly, when we think about the workplace, which of course is a major part of the economy, we think about management, we think about "The Office", Dilbert cartoons, David Brent. I mean, the quality of bosses seems really important, but it doesn't really figure in economics at all, until recently. And one of the reasons I wanted to write a chapter called Bossenomics was because there is this very cool new research that looks at the quality of management. And it turns out management quality, it's not just about, you know, people feeling happy and rewarded in the workplace. It makes an absolutely huge difference to the productivity of workplaces. And the one fascinating study I looked at of firms in India was effectively a sort of randomized controlled trial of management consulting firms, and whether giving free management consultancy to these Indian textile firms would make a difference. It made an absolutely enormous difference. And I think, as it turns out, it's probably one of the key differences between rich countries and poor countries, is simply the quality of management. So, you know, it's not just David Brent. There's really a lot of money and a great deal of productivity here at stake.

If I was trying to explain how an economy worked, with three simple points, it's really tricky, but I'll have a go. The first is inflation. I would say people have to constantly ask what prices are doing after inflation, what their wages are doing after inflation. You know, very often we see it reported that wages rose. They didn't, they didn't rise, 'cause actually they rose more slowly than prices, so they fell. So, just habitually, I mean, I know we are aware of inflation, but habitually adjusting for inflation in everything that we do, that would... that's very, very important.

The second thing is, the government is not a family, the country is not a family. And so when we talk about paying off the nation's credit card, the government's been very keen to use that sort of slogan, it doesn't work like that. Governments can run deficits for a very, very long time. And it's not the same as a family borrowing incessantly for a very long time. It works totally differently.

The third thing is, just a simple point, there are different kinds of recessions. It's not just about the severity of the recession. There are recessions that come from problems in supply, like whole industries are becoming obsolete, they're losing out to foreign competition, or the technological change. And there are recessions that come from demand. The factories are there, they're ready to produce, they're efficient, but people don't wanna buy. And the difference between a demand recession and a supply recession, it's not talked about in the media. It's really central, because how you treat those recessions, what you do about those recessions, is very different. And actually, the whole argument we've had about austerity and about the appropriate policies in the wake of the banking crisis has really been, even though people don't put it like this, it's really been an argument about are we in a supply recession or a demand recession? And you won't hear that discussed on the evening news, but that is absolutely fundamental to the way we understand how an economy works.

Well, economics is the most amazing subject. Keynes once said that, "the master economist has to be a historian," and he has to be a mathematician, and he has to be able to think about the abstract, and he has to look at the concrete, and he has to be able to forecast, and he has to be able to look back, and communicate with mathematics, and communicate with words. And, you know, just all kinds of different challenges. And we're basically studying how modern human societies work, fundamentally, because modern human societies are inextricably linked with economies. 10 years ago you'd have been justified in saying, oh, it's all so dry, it's all mathematical, it's all confusing, and it doesn't matter. And now it's not dry, it's not confusing, and we can all see that it matters.

About Tim Harford

Tim Harford is one of a new breed of economists who are serving up the once-maligned subject of economics in a fresh and accessible way. Harford has a distinguished pedigree as an author, columnist and speaker. He writes for the Financial Times and presents the popular Radio 4 programs More or Less, Pop Up Economics and Pop Up Ideas. Published in 2013, "The Undercover Economist Strikes Back" is a follow-up to Tim's 2007 bestseller, "The Undercover Economist." While The Undercover Economist delved into the subject of microeconomics, "The Undercover Economist Strikes Back" tackles macroeconomics. You can find out more about Tim Harford and his work at http://timharford.com/.