The one-sentence summary
Economic incentives drive everything.
- This book claims to offer the hidden story behind the forces that shape our everyday lives – it’s like spending the day wearing x-ray goggles and suddenly understanding the economic incentive that drives everything.
- In theory economics can illuminate every aspect of the world ewe inhabit – if it is explained clearly enough.
- This covers, among other things, why the gap between rich and poor nations is so great, why it’s so difficult to get a foot on the property ladder, or why you can’t buy a decent second-hand car.
- Supermarkets have price targeting down to a fine art: walk 500 metres in Liverpool Street and you can save 15 per cent on pretty much everything. Coffee shops are the same, but who would walk that distance to save 30p?
- Price targeting in products goes to extremes: IBM have to put an additional chip in their low-end printer to slow it down and justify the lower price.
- Pricing strategies encounter snags when they ‘leak’ – either when rich customers buy cheap products, or when products leak from one group to another.
- Group price targeting is inefficient because it takes products away from customers who are willing to pay more, and gives them to those who pay less.
WHAT’S GOOD ABOUT IT
- Perfectly competitive markets result in four main components:
1. Companies who make things the right way
2. Companies who make the right things
3. Things that are made in the right proportions
4. Things that are going to the ‘right’ people
- Some markets suffer from asymmetric information, where one negotiator knows more than the other. In second-hand cars, people won’t pay over the odds for one that has a 50/50 chance of being a peach rather than a lemon.
- Equally, insurance policies are based on mutual ignorance – neither side knows what will happen.
- Smart, diligent people can prove they are just by going to the trouble of getting a degree, and employers will pay them accordingly.
WHAT YOU HAVE TO WATCH
- Compared to other economist writing, this is a breeze, and flows along nicely. However, in relation to bite-size business writing, this remains fairly heavy duty. Towards the end, the economist’s perspective can wane somewhat.