After The Crisis, An Economist Reconsiders Cappuccino : Planet Money A cup of cappuccino represents the wonder of the free market -- and the complexity of the problems the market has created.
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After The Crisis, An Economist Reconsiders Cappuccino

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After The Crisis, An Economist Reconsiders Cappuccino

After The Crisis, An Economist Reconsiders Cappuccino

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  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
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Now, ever since the financial crisis, our Planet Money Team has been searching for economists whose core beliefs have been shaken - searching without much luck.

But today, our David Kestenbaum has the story of one economist who is rethinking the very first chapter of his book and rethinking a cappuccino.

DAVID KESTENBAUM: The economist, his name is Tim Harford. His book is called "The Undercover Economist."

Mr. TIM HARFORD (Economist; Author, "The Undercover Economist"): I like coffee. So my story started with a cappuccino.

KESTENBAUM: The first chapter has Harford staring into the steam of a hot cappuccino and pondering the amazing fact that it exists.

Mr. HARFORD: It seems like such a simple object. And then you realize there's actually nobody in the world who, from scratch, could make a cappuccino.

KESTENBAUM: Cappuccino's got milk. So to make a cappuccino from scratch, you'd have to know about raising cows and getting milk from them.

Mr. HARFORD: It comes in a cardboard cup.

KESTENBAUM: So you'd need to know how to cut down trees, how to make paper.

Mr. HARFORD: So you'd have to know how to grow coffee and roast coffee. It's made with an espresso machine, which itself involves rolled steel and electricity. And now that's like kind of a complicated thing, as well.

KESTENBAUM: Plastic lid, possibly a petroleum product. You'd need crude oil.

Mr. HARFORD: So if you're really going to start from scratch, from all the basic components, there is not a person in the world who could make a cappuccino, and that's a really important lesson about the way world economy works.

KESTENBAUM: Now, before you hear how Harford's view of the cappuccino has changed, you have to understand that this story is something economists have told in one form or another for a long time. In the 1950's, there was a famous essay about the miracle of a pencil - at the time, trying to making the point that capitalism was better than communism.

(Soundbite of TV broadcast)

Mr. MILTON FRIEDMAN: (Nobel Economist): This is the only prop I have for this TV show. As you can see, it's a plain, yellow pencil.

KESTENBAUM: That is Nobel economist Milton Friedman in 1978, doing the pencil thing. The pencil, the cappuccino, both are stories about how free markets can self-organize. When you pay a nickel for a pencil, Milton Friedman continues, a tiny part of that is going to the thousands, maybe millions, of people who played a role in its creation.

(Soundbite of TV broadcast)

Mr. MILTON: They've all done it, why? Because each one of them thinks he's better off in this transaction. And somehow or other, I've done it because I think I'm better off. Everybody has benefited. There's been no central direction. These people have cooperated with one another, don't speak the same language. They're people of all different religions. They may hate one another.

KESTENBAUM: And yet, the pencil, the cappuccino. So that's the standard line. Now, back to Tim Harford and his cappuccino.

Mr. HARFORD:: I see the story very differently now.


Mr. HARFORD: Well, at the time, I was telling a very optimistic message. It was all about how amazing the market was. And I still believe that. But is the world perfect? I don't think so. You look at climate change. You look at the banking system.

KESTENBAUM: Sometimes people get together and make a cappuccino and it all works out fine. Sometimes people make super-complicated financial derivatives, and everything blows up.

Mr. HARFORD: There are complex problems that we face. Economic development - a lot of very poor people in the world. Those are really, really hard problems. Those are really hard problems. So, yes, the pencil, the cappuccino, they're a wonderful symbol of what the market can achieve. But they're also a symbol of how complicated the society is that we've created the economies that we've created, and how difficult it will be to make changes if we see something that needs fixing - what an incredibly hard problem it is, what a complex problem it is.

KESTENBAUM: These problems are, in some ways, the product of the same self-organizing system that made the cappuccino. Still, Tim Harford thinks the market can be enlisted to help. Climate change? You could fix that with a tax on carbon. Poverty? People are becoming less poor, in fact, by making the very things that go into pencils, t-shirts and computers. But when he looks at that morning coffee? His feelings now, they're a little more complicated.

David Kestenbaum, NPR News.

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