THE UNDERCOVER ECONOMIST STRIKES BACK
How to Run - or Ruin - an Economy
Tim Harford
Little, Brown
307 pages; Rs 599
Some of the initial responses centred around pressing into action the crisis management plan perfected during the Great Depression of the 1920s and 1930s - the grand Keynesian formula. Clearly, that has not worked, since the world economy has changed in many ways in the past 80 to 100 years. What has also changed is the fundamental relationship between some critical variables that were assumed to be rather linear and simplistic, such as unemployment and inflation. Plus, economic theory has also moved on to accommodate some of the momentous changes in the global economy.
In effect, this has forced many economists to revisit their textbooks and their key assumptions, and to question their understanding of extant theory. The babble of voices emerging from different ivory towers - Paul Krugman versus Gregory Mankiw, for example - has further confused the layperson, who, apart from being scared out of her wits, fervently wants stable growth back, and hopes the current insecurity over jobs and this period of uncertainty will end. She doesn't understand the nuances that are being sliced, diced and debated ad nauseam by economists from different pulpits - Keynesian, neo-Keynesian and monetarist are some of the vocal camps.
It is against this background that Tim Harford, in his new book, tries to provide some understanding of the underpinnings behind the current economic policies being pursued by central banks and governments across the world - how Abeconomics in Japan is a desperate attempt to steer the country out of its decades-old deflationary morass; why the United States Federal Reserve wants Americans to spend now rather than hoard the money; how a Greek tragedy was waiting to happen.
Mr Harford, who is accustomed to playing agony uncle to Financial Times readers facing economic problems, has chosen a question-and-answer format for explaining the complexities of the current economic impasse, and how it differs from the Great Depression. This format makes the subject accessible - and that much more real.
This reveals two traits. The first involves Mr Harford springing a surprise. His Financial Times column is usually steeped in microeconomic theory, primarily because the questions mostly deal with individual choice. In this book, though, he wades through the domain of macroeconomics with great aplomb.
But before he concludes the book, he knocks down macroeconomists from their lofty perch. The shortcomings of modern-day macroeconomics are evident from the fact that nobody saw this crisis looming large on the horizon. One of the reasons for this short-sightedness is that macroeconomists force themselves into intellectual isolation and move far away from reality. The other reason is that macroeconomic theory has failed to incorporate three important developments: the importance of banks in the economy, behavioural economics, and complexity theory. On the other hand, Mr Harford claims that some of the more "exciting, innovative" work today is being conducted in the field of microeconomic theory by influential economists such as Alvin Roth, Paul Milgrom, Hal Varian and Paul Klemperer.
The second attribute is a reaffirmation that Mr Harford is probably the best popular writer on economics today. It's not an easy task; there have been many attempts to simplify what's seen as an arcane science, not to speak of its "dismal" temperament. The choice of the book's title, however, is perplexing as well as misleading. It's a feeble attempt at once again milking the success of Mr Harford's first book, The Undercover Economist. Even the subtitle is disingenuous. A simpler name - perhaps "Macroeconomics for dummies" - might have been strikingly effective.
How to Run - or Ruin - an Economy
Tim Harford
Little, Brown
307 pages; Rs 599
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People first thought that this was going to be a simple and transitory indisposition, a blink-and-you-will-miss kind of decontamination, resulting in a brief but necessary downtime for the economy. All it needed was some minor ministrations from governments and central banks, and everything would be back to normal soon. How mistaken those optimists have been. The ruinous effects of the global financial crisis are still with us, and efforts by some of the best economists and central bankers to nudge the economy out of its languor do not seem to be having any effect.
Some of the initial responses centred around pressing into action the crisis management plan perfected during the Great Depression of the 1920s and 1930s - the grand Keynesian formula. Clearly, that has not worked, since the world economy has changed in many ways in the past 80 to 100 years. What has also changed is the fundamental relationship between some critical variables that were assumed to be rather linear and simplistic, such as unemployment and inflation. Plus, economic theory has also moved on to accommodate some of the momentous changes in the global economy.
In effect, this has forced many economists to revisit their textbooks and their key assumptions, and to question their understanding of extant theory. The babble of voices emerging from different ivory towers - Paul Krugman versus Gregory Mankiw, for example - has further confused the layperson, who, apart from being scared out of her wits, fervently wants stable growth back, and hopes the current insecurity over jobs and this period of uncertainty will end. She doesn't understand the nuances that are being sliced, diced and debated ad nauseam by economists from different pulpits - Keynesian, neo-Keynesian and monetarist are some of the vocal camps.
It is against this background that Tim Harford, in his new book, tries to provide some understanding of the underpinnings behind the current economic policies being pursued by central banks and governments across the world - how Abeconomics in Japan is a desperate attempt to steer the country out of its decades-old deflationary morass; why the United States Federal Reserve wants Americans to spend now rather than hoard the money; how a Greek tragedy was waiting to happen.
Mr Harford, who is accustomed to playing agony uncle to Financial Times readers facing economic problems, has chosen a question-and-answer format for explaining the complexities of the current economic impasse, and how it differs from the Great Depression. This format makes the subject accessible - and that much more real.
This reveals two traits. The first involves Mr Harford springing a surprise. His Financial Times column is usually steeped in microeconomic theory, primarily because the questions mostly deal with individual choice. In this book, though, he wades through the domain of macroeconomics with great aplomb.
But before he concludes the book, he knocks down macroeconomists from their lofty perch. The shortcomings of modern-day macroeconomics are evident from the fact that nobody saw this crisis looming large on the horizon. One of the reasons for this short-sightedness is that macroeconomists force themselves into intellectual isolation and move far away from reality. The other reason is that macroeconomic theory has failed to incorporate three important developments: the importance of banks in the economy, behavioural economics, and complexity theory. On the other hand, Mr Harford claims that some of the more "exciting, innovative" work today is being conducted in the field of microeconomic theory by influential economists such as Alvin Roth, Paul Milgrom, Hal Varian and Paul Klemperer.
The second attribute is a reaffirmation that Mr Harford is probably the best popular writer on economics today. It's not an easy task; there have been many attempts to simplify what's seen as an arcane science, not to speak of its "dismal" temperament. The choice of the book's title, however, is perplexing as well as misleading. It's a feeble attempt at once again milking the success of Mr Harford's first book, The Undercover Economist. Even the subtitle is disingenuous. A simpler name - perhaps "Macroeconomics for dummies" - might have been strikingly effective.