This review is a joint effort with F. A. B. Coutinho and W. B. Tanner
This interesting pedagogical book targets a public with no background in economics, readers who missed Economics 101 in college. Broadly speaking, the text combines outstanding qualities with a weakness. On its bright side, one learns how economic cycles rise and fall and how the US government tries to regulate the economy and walk the line separating substantive inflation from recession. A number of reviews can be found on the web in praise of the clear, good-humored presentation and of the clever analogies constructed to bring the author's points home. We join previous reviewers in applause of such virtues.
The weakness, which by contrast has been overlooked, is disregard for theory. The layperson may be pleased with this aspect of the book. Eager to understand how the Fed interferes with his life, he will be relieved to find no mathematical symbols between the covers. Simplicity, nevertheless, has a price: the reader is likely to end up with the false impression that theory is superfluous and that the only tool in the competent economist's chest is time-series extrapolation. To emphasize this point, we will spell out the only mathematical expression in the book, an unwritten equation discussed in Chapter 1. To write down that expression, we need a few definitions. GDP is a nation's gross domestic product. N is the number of workers, and P is the average productivity, that is, the average amount of goods that a worker produces in one year, measured in dollars. Evidently, GDP = NP, an equality that is almost a definition, easy to understand. The trouble is the complexity of the economic system, which makes N and P interdependent and bound to numerous other variables. To show how N and P depend on those other variables is the object of macroeconomic models, a goal that many textbooks describe very well. True, theories often fail, and a few tumble with thunder, but this is how science plows through the thickets of the unknown. Of course, neither the models, nor their successes or failures are hidden in the equality GDP = NP. Even the most diligent attempt to find the complexity of economics in this simple mathematical expression is bound to fail. That, however, is what Greg Ip does. Not surprisingly, he fails. The stumble may be less than obvious to the inexperienced reader, but a hint is found at the end of the section titled "A recipe for economic growth", in Chapter 1. Here, Ip concludes that if N increases by 1% and P, by 1.5%, then the GDP grows by 2.5%, an inaccuracy that will raise the attentive reader's eyebrows. To be sure, the deviation is minute: 1% over 1.5% is equivalent to 2.515%. Nonetheless, stating that the GDP grows by 2.5%, instead of saying that it grows slightly over 2.5%, proclaims that arithmetic accuracy and mathematical rigor are foreign to economics.
The author belongs to the class of scholars known as Humanists or Social Scientists. Humanists differ from such hard scientists as mathematicians or physicists in the way they acquire and disseminate knowledge. Hard scientists have much to learn from humanists, just as much as the latter would profit from communication with the former. In reference to this point, see the Brazilian Journal of Physics, Volume 44, pp. 125-127 (2014), for a review of two books authored by hard scientists who strive to explain their methods to humanists. The authors will be glad to send reprints to interested readers.
"The Little Book on Economics" focuses on the operation of the American economic agencies and is attractive and harmless to readers with scientific training. The indifference of the text towards theoretical developments may nonetheless be detrimental to others, for it portrays the economist as a modern version of the seventeenth-century physician, a professional who had to decide between the purgative and the leech after feeling the patient's pulse, measuring her temperature, and evaluating her complexion. Controversial as Paul Krugman's writing may be, his articles in the New York Times are much more faithful to the scientific nature of economics. Ip's book merits five stars because it is delightfully clear and offers an enormous amount of information about the committees steering the economy in the US. Make no mistake, however: its fifteen chapters compose no substitute for a crash course on Economics.