The Undercover Economist

For engineers or other technical profession, we are often labelled as poor managers or are out of tune with the real world. This is true because most of the time technical people are so engrossed in their areas of expertise that they view other knowledge especially social science, economics, etc. as the lesser knowledge and couldn't be bothered about it. In time, they will be living in their own world and they usually ignore the rest of the world and couldn't care less about what others think. In my opinion, to be a good manager (especially people manager), one have be in-tune with people, knowing about their feelings, their fear, their wants, etc., i.e. to be in touch with the human side. Therefore, I have also included books on economics as part of my reading list outside of technical subjects (hey, technical subjects cannot be ignored as it is my core expertise - remember management lessons about not ignoring one's core expertise?). For an easy read especially for someone without formal training in economics, the series of book by Tim Harford is recommended. Tim Harford's books on economics are written in such simple language that it will make anyone appreciate economics and how it affects our decisions. For my review on books by Tim Harford, I will start with "The Undercover Economist" which changed my perception on economics and how I look at the world.

As usual, I will summarise some key points/concepts which I gathered from the book and hope that you will find it as insightful as I am:

1) On coffee bars - The willingness to pay top whack for convenient sets the high rent, and not the other way around. (Usually, we thought that it is because the high rent which results in expensive coffee but it is not.)

2) In the United Kingdom, teachers' wages are low in spite of the fact that there is a shortage of qualified teachers. This is because the government, the single employer, has massive bargaining power. Ordinarily, when there is shortage of workers, competition between employers would bid up wages. Only a monopoly employer could possibly maintain a situation where there is serious shortfall of teachers but salaries does not rise to respond. The teachers have some strength from scarcity, but in this case the government has more. (This drives an important point. It is all about supply and demand but eventually, it depends who holds the cards in the bargaining table).

3) It did not matter whether the economy was changing, because the economy will never change so much that companies with no scarcity power become highly profitable. (Companies or perhaps individuals have to constantly ask themselves what is their scarcity power. Is what they are doing easily copied by others? If the answer is yes, it is likely that the business cannot remain profitable in the long run. This is because competitors will emerge which will provide the same services and this will results in price competition. This is why it is so important for companies to have strong culture and innovation to stay ahead of competition. The same applies to individuals!)

4) .......remember that long-lasting profitability for a company comes from having some capability that others cannot match: a powerful brand in a conservative market - think of Durex condoms; control of a standard like Microsoft's; or simple superior expertise, like General Electric. (Have you think of what is your company's capability that others cannot match? Unique products that cannot be easily replicated, e.g. Apple? Strong technical expertise via strong human resource development culture or system? Have you put in measures to ensure this competitive edge is maintained in the future? For example, a company may start out with great leaders and technical expertise and thus giving them competitive edge but are they able to produce equal or better leaders to lead the company in the future? I guess a company is similar to an empire or kingdom. If the next king is as strong as the founder, the empire will flourish but if the next generation is too comfortable, the empire will surely crumbles.)

5) Economists specialising in game theory argued that the allocation of public assets, from the right to drill oil to the right to use radio spectrum, ought to be determined by methods similar to those that determine a game of poker. In order to sift out competing companies' cheap talk and empty promises, the government had to impose high stakes and, to use an old phrase, force each negotiator to 'put his money where his mouth is'. (Similar in life, cheap talk and empty promises are easy. To test whether a person is genuine or not, we need to force the person to 'put his money where his mouth is')

6) In addition to the central claim that auctions really do raise more cash, the paper finally focused the attention of auction theorists on what should have been obvious; if you want a successful auction, you need plenty of serious bidders. (This is quite obvious isn't it. For example, some governments may tender out highly profitable government rights or public projects but as informed public, we should scrutinise the list of tenderers to see whether there are enough serious bidders in the tender)

7) Comparative advantage is the foundation of the way economists think about trade. (Tim Harford gives very good explanation on the concept of comparative advantage in the book but in very simple terms, it simply means we should always do what we do best! Again, this seems like a recurring theme in the books which I have reviewed so far. Companies and individuals should always do what they do best, i.e. stick to their core and it has been proven that it makes sense economically)

The summaries which I have provided here are rather short compared to some of my earlier postings simply because most of the insights from the book cannot be summarised in a few sentences. It requires the reader to read through the book (which is very easy to read) and to understand the concept presented through the many examples and stories in the book.