How economics lightened up

Until recently economics was considered a subject without much popular appeal, but a new generation

The Logic of Life: Uncovering the New Economics of Everything
Tim Harford, Little Brown 288pp, £18.99

"An economist is a man who states the obvious in terms of the incomprehensible," said Alfred A Knopf, a leading American publisher of the early 20th century. Even today, Knopf is not alone in his contempt for the profession of economics. After all, how much have the endless lists of equations, the reams of simulation results and the mountains of volume upon volume of economic journals added to our understanding of society and policy? In The Logic of Life, however, Tim Harford uncovers the true essence of economics, not as a set of policy prescriptions but as a toolkit for understanding how most people make decisions in a world of uncertainty. To turn the quotation on its head, Harford manages to explain some of life's most incomprehensible occurrences in rather obvious terms.

The Logic of Life is the latest addition to the growing body of work attempting to popularise the subject of economics. One of the earliest examples of what many call "pop economics" was Steven E Landsburg's book The Armchair Economist. He recalls how "in 1991, when I first approached publishers, my covering letter began thus: 'When lawyers or executives meet for lunch, they more often speculate about economics than about evolutionary biology. Yet bookstore shelves are well stocked with books on evolution and almost empty of economics.' Nobody could say the same thing today. Dozens of good writers have stepped in to explain the economic way of thinking to a wider audience."

Indeed, the pop economics phenomenon has intensified since the 2005 publication of the hugely popular Freakonomics by Steven D Levitt and Stephen J Dubner. This new genre is different from the more established variety of accessible writing on economics, represented by the likes of Paul Krugman, Joseph Stiglitz and Martin Wolf. The distinction is in the choice of topic.

The old-school pop economists, for want of a better label, tackle the big issues most people think about when they hear the word "economics": monetary policy, international trade, development, fiscal policy, financial markets. The new-generation practitioners of pop economics (or "gadget economics" or "cute-o-nomics", depending on one's regard for the genre) apply the tools of the pro fession to a much wider range of situations. Just look at the subtitles of some of these books: A Rogue Economist Explores the Hidden Side of Everything, Economics and Everyday Life, Uncovering the New Economics of Everything. And the reading public loves it. To paraphrase Richard Nixon, we are all freakonomists now.

In fact, Harford is probably one of the most representative members of the movement. His bestselling first book, The Undercover Economist, which stemmed from his column of the same name in the Financial Times, was followed by various radio and television efforts, such as Trust Me, I'm an Economist on BBC2.

Harford's new book is overwhelmingly about one concept: rationality. He offers a simple and attractive definition: rational people will make decisions based on the costs and benefits of a specific choice, the effect on their total budget, and the future consequences of their actions. But he is quick to warn us of the usual simplifying assumptions made by economists. First, people are motivated by all sorts of emotions: "I do not suggest that people are wholly self-interested or obsessed with money." Second, he acknowledges that people are not "blessed with the omniscience or perfect self-control" often assumed in economic models: "I do not deny that humans have irrational quirks and foibles." Finally, he rejects the idea that economic agents are constantly calculating supercomputers that consider every possible outcome: "When we act rationally, we often do it unconsciously, just as when someone throws a ball for us to catch, we aren't conscious of our brain solving differential equations to work out where it's going to land."

Early in the book he illustrates his definition of rational behaviour with a few, truly eye- opening examples. He writes about how recent worries in the US of an "oral sex epidemic" among teenagers are misplaced: young people are simply deciding to avoid the increased costs of disease/pregnancy associated with penetrative sex, which they have been taught about in sex-education lessons. In another example, crime rates among teenagers react to changes in the severity of the youth justice system across different US states. In the Mexican town of Morelia, prostitutes calculate the costs and benefits of having unprotected sex with their clients, and charge them accordingly. Even laboratory rats, when given the choice of two drinks - root beer or tonic water - react rationally to changes in the "price" of their least favourite option. Most importantly, these are not just simple intuitions. In all cases, in arriving at his intuitive conclusion, Harford refers to published economics research that uses changes in laws, differences across regions or economic experiments.

The point of this exercise is not to teach us that rats prefer root beer to tonic water (though they do, by the way). When I asked Harford about his view on rationality, he put it like this: "Clearly we are not selfish supercomputers, but few economic models need to assume that we are. For me, both our selfishness and our ability to subconsciously weigh costs and benefits are a question of evidence, and the evidence shows that we respond to changing costs and benefits in unexpected situations - sex, marriage, crime, as victims of bigotry - and more coolly than you might think."

The Logic of Life proceeds in an incremental manner, gradually tackling bigger and bigger portions of our everyday life, sometimes within the space of a single chapter. There is a very interesting exposition of game theory, the economic study of interactive decision-making. Harford starts by going behind the scenes at the World Poker Championship in Las Vegas. He illustrates the rational logic of the competitors with the life story of Chris Ferguson, the computer science academic-turned-poker champion. This moves on to the seminal 1944 contribution to game theory in economics by John von Neumann, whose theories were later used by the Nobel laureate economist Thomas Schelling to advise John F Kennedy during the Cuban missile crisis. This in turn leads to a discussion of addiction and the use of focal points and tactical taboos as techniques to abstain. The further one reads, the clearer it becomes that this sort of decision-making applies in our own lives.

A good example is the story of the experiment where subjects are given the choice of snack: either chocolate or a healthy alternative such as fruit. When the snack was to be consumed immediately, a large majority chose chocolate; when the snack was to be had in a week's time, the majority chose fruit. This, in short, is nothing but another rational choice, but one that weights long- and short-term benefits differently.

There is almost no situation that Harford cannot dissect with his sharp economist's tools. "Since I see economics around me every day, it is more of a pleasure than a challenge. Translating economic jargon and especially mathematics into plain English is a bit more of a headache. It's a dirty job, but someone has to do it."

Among other things, he explores the idea of a marriage market, using research from speed-dating events; he looks at how workplaces provide incentives to employees to work harder, using data on the number of items scanned by supermarket checkout operators; he examines the costs and benefits of living in cities rather than the countryside; and he discusses the monetary value of the right to vote in an election.

The Logic of Life also benefits from Harford having spent time with some of the most radical economic thinkers of recent times. He peppers his journey through the rational landscape with anecdotes of meetings with Nobel prizewinners and influential academic economists.

However, Harford is well aware of the limits to rational behaviour. He shows this in his chapters discussing rational racism, the result of employers trying to recruit with imperfect information, and community segregation in cities, the result of only mild individual preferences for homogeneous communities. As he explained recently on Radio 4's Start the Week, "Just because people are behaving rationally, it doesn't mean that the result is a socially happy outcome - and there is a lot that governments can do." But he ends on a good note. His final chapter, "A Million Years of Logic", offers an entertaining and powerfully optimistic defence of rational behaviour as a means to improve society and the planet.

What does Harford's contribution mean for the phenomenon of pop economics? It seems that there is still more of it to come - especially given that Levitt and Dubner are planning a follow-up to Freakonomics. Crucially, people like it. As Harford told me: "Done well, it's fun and it helps people understand the world." Or, in Steven Landsburg's words: "The challenge is to raise questions ('Why is popcorn so expensive at the movie theatre?'), to explain why the obvious answers ('monopoly power') are wrong, to tease out better answers, to draw general morals, and to make the whole thing fun."

Will pop economics help remedy the profession's reputation? Harford thinks that "we should wear the badge of 'the dismal science' with pride. It was given to us not by Malthus - as most people seem to think - but by Thomas Carlyle, who attacked John Stuart Mill and his fellow political economists for their 'dismal' support for emancipation, and their insistence that former slaves, women, even the Irish, were all equal. I think that basic respect for individual dignity is fundamental to economics, however strange that might sound."

Successful writers of pop economics have benefited greatly from the vast body of research produced by academic and professional economists. Perhaps it is time these economists learned from authors such as Harford how to make their work more relevant and accessible. Some may disagree, but one thing is clear: economics has never been this cool.

This article first appeared in the 18 February 2008 issue of the New Statesman, Naughty nation