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Wednesday, August 20, 2014

Book Review: The Undercover Economist Strikes Back

The Undercover Economist Strikes Back (How to Run - Or Ruin - An Economy) by Tim Harford is an interesting popular introduction to macroeconomics. Tim Harford has written previous popularisations about microeconomics; in this book he takes a stab at trying to explain macro. The book is well written for its target audience, but it glosses over the theoretical divide within the field.

I am interested in writing about a few of the topics he covers within the book in later articles, and so I will keep this review fairly short.

Book Description

The book was first published in 2013. The book is written in an informal  question & answer format, which seems effective.Since it is a popular work, it is not burdened too much with the details of the development of macro theory.

The book is organised with one main topic per chapter, although the history of Bill Phillips is woven as a human interest piece throughout the text. His personal history is discussed, as well as the development of his hydraulic economic computer and the famed Phillips Curve. The chapters are mainly about macroeconomic theory, but some microeconomics worked its way in.

The chapters are:
  1. The Economy: A User's Manual
  2. The Babysitting Recession (the story of the Capitol Hill babysitting cooperative as a simplified monetary economy, a story that Paul Krugman wrote about).
  3. Money, Money, Money (the inevitable chapter about money).
  4. Just Enough Inflation (inflation targeting; nominal GDP targeting gets a mention).
  5. Stimulus (Ricardian Equivalence rides again).
  6. The Prison Camp Recession (analogy between WWII prison camp economy and real business cycle models).
  7. Output Gaps (what they are).
  8. The Invention of Unemployment (how raising wages creates reservation unemployment).
  9. Boss-onomics (what is the impact of better management on the economy).
  10. The Sirens of Macroeconomics (hooray for rational expectations).
  11. The Cult of GNP (what GNP/GDP is, why it is not a measure of well-being).
  12. Happynomics (the attempt to measure national happiness, and how it relates to the economy).
  13. Can Growth Continue Forever? (economics versus Peak Oil).
  14. Inequality (a much shorter discussion of inequality than Piketty; but this book is pre-Piketty, so his work is not covered).
  15. The Future of Macroeconomics (notes some critiques of macro, and possible ways forward).
Tim Harford is a visiting fellow at Oxford (in microeconomics), has two columns for the Financial Times (and elsewhere), and has previously written The Undercover Economist (plus other books).  

My Mixed Reaction

The book is well-written and interesting, and probably would be one of the better introductions to macroeconomics for readers without a background in the area. He does a very good job explaining the orthodox (mainstream) view of macroeconomics, and he does do a reasonable job of alerting the reader to the political divisions that exist within macroeconomics.

However, my feeling is that he has followed the mainstream line too closely, and there are a few statements he makes that I have my doubts about.  (As one might guess, some were in the chapter on fiscal policy.) I realise that a book that attempted to keep Marxists, Post-Keynesians, Austrians, "New Keynesians" and Real Business Cycle economists happy would be a spectacular muddle, and so I would not expect him to try. He does have reasonable political balance by contrasting free market "classical" economists versus "Keynesian" views, but the reality is that those are two branches of mainstream economics.

It is likely that the parts that I found questionable would not be picked up my readers who are just beginning to learn about macroeconomics. Correspondingly, I do not want to go further into this topic, other than noting that readers should understand that macro theory has even greater divisions than the text indicates.

Varied Content

The chapters are not just focussed on explaining the last crisis, rather they are a mix of topics. Some are extended examples, such as the story of how activity in a babysitting cooperative, which used a private "currency" collapsed due to a lack of demand. Others are more like primers, such as the explanation of what an output gap is.

I liked his chapter on whether growth can continue forever. A number of physicists have looked at energy consumption trends, as well as things like Peak Oil, to (correctly) argue along the lines that "exponential growth" cannot continue forever. However, the growth that they are looking at is for the consumption of real resources. Tim Harford points out the GDP is not a measure of the consumption of real resources, rather it is a measure of human activity. It is entirely possible that economic growth (as measured by GDP) can continue to grow, even if resource extraction goes into reverse. This is an interesting subject, and I expect to write about it in another article shortly.

Concluding Remarks

I would recommend the book to someone beginning to learn about macroeconomics, but with the caution that the field is more divided than the book suggests.

Finally, the book is available at The Undercover Economist Strikes Back: How to Run— or Ruin— an Economy (affiliate link).

 (c) Brian Romanchuk 2014

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