The Undercover Economist

An interview with Tim Harford, and economist at the World Bank, a columnist with the Financial Times, and author of "The Undercover Economist: Exposing Why the Rich Are Rich, the Poor Are Poor--and Why You Can Never Buy a Decent Used Car!" talks about his experience in economics and how bringing down trade barriers can help the world's poor and help you the consumer.

It really is a fascinating interview. I'm not sure if I agree with his emphasis on environmental implications of trade barriers nor his assumption that bureaucracies can be successful, but he does make some excellent observations on basic economics and ways that can affect you and the third world producer.

One particularly interesting bit is about what Tim calls, "Price Targeting," but what economists call third Degree Price discrimination:

There are some coffee chains in the U.K. who are charging markups of about 20 cents on a fair trade cappuccino. And the natural assumption of the customer is that that 20 cents is going to go to some poor farmer in Guatemala.

But actually hardly any of it does. It's not because the company is stealing the money. It'’s because there is just not that much coffee in a cappuccino. And while the farmer is getting much more money for his coffee, most of that 20 cents is markup. Just pure extra profit that goes to the cappuccino seller.

So I'm not saying don'’t buy fair trade coffee. I'’m just saying the reason they offer fair trade coffee is not because they support fair trade. It is because it maximizes their profits.

And it is a similar thing with organic food. A lot of people like to buy organic food for various reasons. Some people say it is better for the environment. And some people say it is better for their health. Some people say it tastes better. I don'’t have a strong opinion on any of this. I have not studied the evidence. What I do know is that the markup is higher on organic food. Substantially higher.

Organic food is more expensive to produce. But most of the costs of getting something on the supermarket shelves -- staff time, electricity, rent, distribution costs -- they are not actually the raw cost of the produce. And I argue that in many supermarkets you will see organic food priced with much more substantial markup. And it is deliberately separated away from the conventional food because that would make the price comparison too obvious, too sobering.

And so I went to my local health foods store with a clipboard taking all kinds of notes. And one of the things I noticed was you can get your conventional bananas and you can get your organic bananas. You get your conventional apples and you get your organic apples. You'’ll never see them next to each other.

You might see the organic garlic next to the conventional onions and the organic bananas next to the conventional apples. You won't see the organic apples next to the conventional apples.

Another interesting facet he talks about is his work with the World Bank and a project called "Doing Business." This program ranks countries on how easy it is to do business within them. They count how many signatures it takes to sell or move goods, or how easy it is to seek capital, or sell good abroad. Their website is here.

The article is fascinating and goes into a number of economic areas. I might have to check into this book further. Read the inteview and let me know what you think.