Tim Harford The Undercover Economist
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Undercover Economist

Why we need to build more homes

If we were living in a movie, the ash-blackened cage looming over West London would be a metaphor for something. Instead, the Grenfell Tower disaster — so catastrophic that we are told we may never know how many people died — is a distinctly un-metaphorical national disgrace.

The least we can do now is learn the lessons of the fire, as we did not after the Lakanal House fire of 2009, which killed six people. Some of those lessons should emerge from the public inquiry. Grenfell Tower was built in 1974 but had recently been renovated. In a sane world such a renovation should have improved safety standards. Apparently we do not live in such a world.

But beyond the life-and-death details of fire safety rules and enforcement, a bigger picture has long been apparent: the British housing system, particularly in London, is in a shocking state. Decades of policy failure have left us with unaffordable housing. That is why the residents of unsafe housing feel trapped and voiceless, unable to afford to move, and powerless to demand change.

A better politician than Theresa May might have used this tragedy to justify housing reform, announcing a bold plan to build a million new quality homes before 2020. That target is less ambitious than it sounds, merely making up many years of undersupply. Having many more decent homes on the market would lower rents and make other housing policy goals — choice, fairness, quality, safety — easier to achieve. But perhaps that expecting too much of Mrs May. Stronger prime ministers in luckier circumstances have failed to make headway on housing.

What of Jeremy Corbyn, the man who is keen to remind us that he’d be quite willing to run the country? The Labour leader certainly made a better job of appearing prime ministerial after the fire, showing concern where Mrs May seemed distant. But this — the performance part of the job — is not what matters most. Boris Johnson could also have played the necessary role to perfection, but that would hardly qualify him to lead the country.

What we really need from our politicians is a willingness to advocate and execute wise policies. Mr Corbyn, instead, focused on grabbing and redistributing property. “There are a large number of deliberately kept vacant flats and properties all over London,” he told ITV journalist Robert Peston, arguing that these properties should be used to house the victims of the fire. When pressed for detail he added, “Occupy, compulsory purchase it, requisition it, there’s a lot of things you can do.”

This is a telling statement — even leaving aside the use of the word “occupy”, which seems to wink at the idea of breaking into other people’s homes. Since Mr Corbyn’s remarks are often uncharitably interpreted by the British press, let us assume that was not his goal.

Still, there is little ambiguity in the word “requisition”. This reflects a consistent theme in Mr Corbyn’s thinking: that the British public can best be served by forcing others — including international corporations and foreign property investors — to bear most of the cost.

It’s not hard to see why this seems appealing. It taps into the same ideals exploited by Donald Trump and the Leave campaign: that there’s money being left on the table, that foreigners are rigging the game against us. Time to give the “Gnomes of Zurich” a poke in the eye.

Such xenophobia-tinged ideas have taken nations to very dark places in the past, but today it is more likely that they will simply lead to inept policies and bad outcomes. Seizing foreign-owned property in London — even proposing seizure — will reduce the tax base and do yet more harm to the reputation of the UK as a grown-up country. (Perhaps that ship has sailed.)

Rich and apparently wasteful foreigners are an easy scapegoat for the problem of high prices and high rents in London. But they have become a target based on anecdotes. What limited data we have — it is admittedly patchy — suggests that the idea of widespread “buy to leave” is a myth. Wealthy foreign investors did not become so by squandering rental income.

We should be taxing all property, with expensive properties taxed at higher rates, occupied or not, foreign-owned or not. There is no need to be vindictive. And we should be building more. There is still scope in London — to say nothing of the leafy south-east — to build safe, pleasant apartments in high-rise and medium-rise blocks. There are costs of doing so, but the costs of not doing so are far greater.

As for the survivors of the Grenfell Tower fire, plans have been announced to offer them homes in a new local development. Good. Surely the British taxpayer is willing and able to do what is right, and pay from our own pockets to rehouse them swiftly and well. There is no need to requisition anything.

This disaster should provoke a rethink not just of rules on sprinkler systems, but the entire rotten edifice of British housing policy. I am not optimistic; I fear we’re getting the politics — and the politicians — we deserve. But the residents of Grenfell Tower deserved so much better.

 

Written for and first published in the Financial Times on 23 June 2017.

My new book is “Fifty Things That Made The Modern Economy“.

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Marginalia

Three great books about getting the important things done

I’ve been thinking a lot, recently, about getting things done, and at the top of my list is Cal Newport’s remarkable book Deep Work. (US) (UK) Newport makes a persuasive case that our success in the world of work is often dependent on the amount of time we can devote to serious, deep thinking. This isn’t true for every job, of course, but it’s true for many. (Management is an obvious exception, an example of a knowledge-economy job that requires decisiveness and judgement rather than depth.)

One thing I appreciated about Newport’s book is that while he’s uncompromising in his belief that deep work is essential both for productivity and for happiness, he’s quite flexible in his understanding of how it’s to be achieved, and gives a variety of examples from Walter Isaacson, who seemed to be able to snatch focused time in twenty-minute chunks, to coder-hermits who shun email and deal with most mail in quarterly.

Another powerful observation – one that hit home for me – is that for many of us, the productivity-sink isn’t watching YouTube videos or gossiping on Snapchat. It’s ostensibly-serious stuff like emails and meetings. Email, in particular, is a severe temptation for me – I find it easy and it feels and looks like work. Swift, decisive email etiquette feels very professional – but all too often it’s just an excuse for avoiding the real work.

Deep Work is a brilliant book and I unreservedly recommend it.

 

For a playful take on related themes, I turned to Robert Twigger’s wonderful little book Micromastery. (US) (UK) Twigger – among other things an explorer, prize-winning poet, and Aikido master – makes the case for mastering many deep-but-narrow skills. Learn how to do an Eskimo roll, or a racing turn, or how to draw a smooth circle by hand. Don’t aim to become a brilliant cook; start instead by mastering the omelette. Twigger offers a cornucopia of little tricks – the kind of thing that you might find in a “how to amaze your friends and win bar bets” book – but far more interesting and compelling is his idea of micromastery, which he sees as empowering (because you remember how to learn and discover), as a source of creativity (because you acquire an ever-larger range of insights) and as a step towards broader mastery (because learning one narrow skill well is a fun, motivating way to begin in a new field). A really fun book – and a wise idea explained well.

Micromastery also bridges an apparent conflict between Deep Work and my own book Messy, which sings the praises of switching from one project to another. Twigger argues that if you want to go deep you need variety: master something narrow, but when you feel yourself getting jaded, switch to something else. Day by day you are focused, but month by month or year by year, your experiences and skills are varied.

 

I could hardly finish this without a shout-out for David Allen’s Getting Things Done. (US) (UK) (Not to be confused with Ed Bliss’s classic of the same name (US) (UK) – a great book too, if somewhat dated.) Allen’s book is inelegantly-written and has always felt wordy – but it’s been a huge success because it works. The central ideas of GTD are: take vague incoming issues (a phone message, an email, a meeting, an idea that pops into your head) and turn then into some specific next action, then write the next action down somewhere where you’re confident you’ll see it when you need it. This stops your subconscious constantly churning over the issue.

That makes GTD sound simple and in many ways it is. But in the messy reality of modern work it’s often easier to appreciate the principle than to make it work in practice. I don’t follow every piece of David Allen’s advice but I follow a lot, because it’s smart, practical and useful stuff.

My new book is “Fifty Things That Made The Modern Economy” – out last week in the UK and coming soon in the US. Grab yourself a copy in the US (slightly different title) or in the UK or through your local bookshop.

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19th of July, 2017MarginaliaComments off
Undercover Economist

Wishful thinking in politics is a recipe for foolishness

Shortly after the hilarious UK election, I had the opportunity to ask a Conservative politician (retired, centrist) what he made of the result. “Good news for a soft Brexit,” was one of his conclusions. That was my impression, too. Since both of us were Remainers, it was a comforting thought.

And then I reflected for a moment. Back when Theresa May was expected to secure a stonking majority, wasn’t that also supposed to be good news for a soft Brexit? I reflected on how I’d felt when Mrs May called the election. My dismay at the political choices on offer was offset a little by the hope that, with a clear victory, Mrs May would be unafraid of the extremist Eurosceptics.

I was forced to admit that I could take almost any scenario and produce a soothing interpretation of it. Wishful thinking is a powerful thing, and common. Recently the data journalist Nate Silver wrote that “Donald Trump is making Europe liberal again” and explored the possibility that Mr Trump’s toxic reputation in Europe was helping to suppress the far-right from Austria’s Freedom party and France’s Front National to Britain’s UK Independence party. Mr Silver made a good case, but I couldn’t help feeling that it was widely shared among my European liberal friends because it’s exactly what they wanted to believe.

A more scientific illustration of the same tendency in US politics comes courtesy of the psychologists Ben Tappin, Leslie van der Leer and Ryan McKay. The researchers wanted to tease apart two psychological tendencies that are often conflated: confirmation bias and desirability bias. Desirability bias is wishful thinking: we see what we want to see. Confirmation bias is our tendency to see what we expect to see (now that I’m aware of confirmation bias, I see it everywhere).

A month before the US presidential election, Mr Tappin and his colleagues recruited US-based experimental participants in four categories: Hillary Clinton supporters who expected her to win, Trump supporters who expected him to win, and supporters of each candidate who expected to be disappointed. Then the researchers showed their participants fresh opinion poll data that suggested either that Mrs Clinton was likely to win, or that Mr Trump was.

The research suggested that people seized not upon what they expected to see, but what they hoped to see instead. They tended to focus on encouraging evidence, whether or not it was surprising. They ignored unwelcome evidence. Desirability bias was stronger than confirmation bias.

There is a place in the world for wishful thinking — for example, in business. Without the sunny overconfidence of entrepreneurs few good ideas would ever get off the ground, because the chances of failure are so high.

Even the successes tend to generate more benefits for customers than shareholders. One study, by the great economist Bill Nordhaus, concluded that US companies retained less than 4 per cent of the social value of their innovation. The other 96 per cent went to customers. Given their inability to profit even when things go well, rational entrepreneurs would never quit their day jobs. Business innovation is built on the back of giddy optimism.

Wishful thinking even has its role in politics. The quest for marriage equality, for civil rights, for votes for women and for the abolition of slavery were all once distant dreams. Emmanuel Macron has surfed to success on a wave of optimism that an untested centrist can fix what ails France; I hope he succeeds, but hope alone will not be enough.

In many cases wishful thinking in politics is a recipe for foolishness. Much of Mr Trump’s appeal lay in the idea that the people who said policy was complicated were lying. Solutions were simple if you were strong and smart. It turns out that wishful thinking does not solve problems, but creates them.

Wishful thinking infects the political left, too. Many diehard Democrats seem bewildered that Republicans have had five full months to impeach their own man and still haven’t done it. In the UK, Jeremy Corbyn and his fan base have been enthused by his better than expected performance but seem not to have noticed that he lost the election.

Last year’s Brexit campaign was based on a simple piece of wishful thinking: Boris Johnson’s idea that the UK could have its cake and eat it. How, exactly, was never quite clear, but desirability bias gave a foolish idea more credibility than it deserved. Voters hoped that Mr Johnson was right, and so they began to believe him: it is so much easier to believe what we already wish is true.

That glib optimism stood in stark contrast to what experienced technocrats were saying behind the scenes. They warned that the UK simply didn’t have the time, the people or the expertise we needed to handle the process of leaving and then forging new trade agreements.

Mr Johnson told us that things were easy; the mandarins cautioned that they were difficult. I have my suspicions as to who will be proved correct, but we already know which proposition resonated with the voters. We need to be careful what we wish for.

Written for and first published in the Financial Times on 16 June 2017.

My new book is “Fifty Things That Made The Modern Economy” – out last week in the UK and coming soon in the US. Grab yourself a copy in the US (slightly different title) or in the UK or through your local bookshop.

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Undercover Economist

If your country lets you down, make a new one

Forget Brexit: I’m declaring independence from the rest of the UK. I’ll always have a deep and special connection with the land where I was born and grew up. Nevertheless, I’m taking back control, just as soon as I can figure out what that means.

I also need to choose a name for the divorce process. “Texit” sounds like a fajita laced with pesticide. “Hexit” is better, with something of the evil eye about it. Then there’s just the simple formality of the exit negotiations — if I can find someone in the British government with enough authority to negotiate.

To be clear, this isn’t because of petulance about the election, which did at least give us an amusing twist at the end. Well, it is — but not the result so much as the campaign, and what that campaign revealed. Both Labour and the Conservatives have traditions that I find admirable, but seemed to have concluded that none of those admirable traditions would win votes. The spin-doctors had decided that they could either appeal to me, or the typical British voter, but not both.

But as a wise man once sang, it seems like I’m not alone in being alone. Many people feel like strangers in their own country. Many Scots would rather not be British citizens; there are secessionists in California; and of course, the now-familiar threats of American liberals that they will move to Canada. (In a poetic display of trolling, Emmanuel Macron responded to Donald Trump’s rejection of the Paris agreement by inviting Americans to come to France to work on climate change.)

Such woes are felt across the political spectrum. Many Leave voters felt that Britain was being dragged away from them by a strange coalition of Brussels bureaucrats, the Westminster establishment and a gang of Lithuanian fruit-pickers. Any referendum result that would have pleased me would have left them feeling more alienated than ever. No result could have made both sides happy.

Still, that’s democracy for you: everyone has a vote, and if most people don’t see things your way, you just have to take it on the chin. Or do you? That’s not how things work in other parts of life. If you don’t like the coffee at Starbucks, go elsewhere or brew a cup at home. If your boyfriend is a slob, dump him and find someone better.

So if you don’t like the turn your country has taken, why not join another country — or even start up your own? I live in Oxford, surrounded by people who ride bicycles, marry foreigners and voted Remain. I don’t agree with my neighbours about everything but we do seem to be on the same wavelength. An Ivory Tower city state? Or maybe we could carve out a larger independent nation: London, Oxford, Cambridge, Brighton. Maybe Bristol, too. I love Bristol. And since the rest of the UK never seemed to like London much, maybe it’s best all round if we separate.

Of course, I’m not very serious about this idea. But then Brexit was never a very serious idea either. It’s going to happen, nevertheless.

A more flexible breakaway nation would float. Libertarian Patri Friedman — grandson of economist Milton and protégé of PayPal co-founder Peter Thiel — champions the idea of “seasteading” (UK) (US), setting up ocean-going colonies, powered by waves, wind and the fresh air of freedom. If you don’t like the way your particular floating city is going, unplug and find another one. It’s an intriguing alternative to traditional democracy. If you can’t live with the decisions of your fellow citizens, find some new fellow citizens.

Cory Doctorow’s new dystopian novel Walkaway (UK) (US) explores what happens when some people decide they’d rather fend for themselves than accept life in a default corporate world. It turns out that scavenger drones and 3D printers can get you a wonderful quality of life — until someone powerful doesn’t like what you’re doing and calls an air strike.

This is awkward. Being small makes you vulnerable. Ask Qatar. Oxford doesn’t have much of an air force; I don’t think we even have any tanks. I’m not sure what we’d do if Milton Keynes invaded.

Still, Iceland, Monaco and Singapore all seem to be surviving. Globalisation and peace does make it easier to be small. If the typical nation has a stiff border tariff and 10 infantry divisions, it pays to be one of the big boys. Yet as trade barriers fall, micro-nations become viable. Two decades ago the economists Alberto Alesina, Enrico Spolaore and Romain Wacziarg pointed out that there was a clear negative correlation between the average tariff rate and the number of independent countries in the world. Economic integration allows political disintegration.

There’s a cruel irony in all this. Small nations rely on being able to plug into a liberal global economy shielded from protectionists, pirates and week-long waits to clear customs. The very forces that make people like me worry for our own nations — nationalism, illiberalism and xenophobia — also make the world a more difficult place for breakaway states.

On reflection, perhaps it would be better to stay and try to sort things out. But the predicament is harder to swallow than a pesticide-laced fajita.

Written for and first published in the Financial Times on 9 June 2017.

My new book is “Fifty Things That Made The Modern Economy” – out now in the UK! If you want to get ahead of the curve you can pre-order in the US (slightly different title) or through your local bookshop.

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Publication Day!

50things-hb-uk-205x300
For those of us who aren’t J.K. Rowling, publication day is a slightly soft concept. None of this opening bookstores at midnight, or releasing at 3.35pm in order not to disrupt school – alas.
Still, it’s always a good day for the hard-working author, and sometime around now copies of “Fifty Things That Made the Modern Economy” will be available on the UK Amazon website and in your local bookshop – if you live in the UK. You may also wish to come along to one of the talks I’m giving.
I loved writing this book and I hope you love reading it. Thanks!

6th of July, 2017MarginaliaComments off
Other Writing

Books about calling statistical bullshit

A friend recently emailed to ask me for books that might help navigate a world full of statistical bullshit. Here are some recommendations.

I can’t think of a better science writer than Ben Goldacre, who burns with righteous mischief. His Bad Science (UK) (US) isn’t always about statistics, but it’s excellent throughout and an essential read for anyone who wants to understand some of the faults of modern health and nutrition journalism. Wonderful book.

Of course you should subscribe to the More or Less podcast, but you could also enjoy The Tiger That Isn’t (UK) (US). This is the unofficial book of the series, written by More or Less founders Andrew Dilnot and Michael Blastland. A highly readable guide to making sense of numbers in the wild.

Also very good – with more US examples – is Stat-Spotting (UK) (US) by Joel Best. Best’s book has given me some of my favourite examples of bad stats, but it currently seems a bit overpriced on Amazon, alas.

The classic of the field is, of course, Darrell Huff’s How To Lie With Statistics (UK) (US). There’s a sad coda that will tarnish your view of Huff; but this is still a terrific book.

Brand new book by the very splendid Evan Davis is called Post Truth (UK) (US) – haven’t yet read much but looks good.

And finally try Naked Statistics (UK) (US) by Charles Wheelan, who with wit and clarity wrote the similarly excellent Naked Economics (UK) (US).

Best, Dilnot, Huff and Wheelan all cover quite similar ground. If I was picking just one of them I’d go for Dilnot for a UK audience and Wheelan in the US.

My new book is “Fifty Things That Made The Modern Economy” – coming very, very soon and available for pre-order. Grab yourself a copy in the US (slightly different title) or in the UK or through your local bookshop.

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26th of June, 2017Other WritingComments off
Undercover Economist

Donald Trump and Theresa May Give U-Turns A Bad Name

A few weeks ago Donald Trump set a record that I assumed was unassailable; Theresa May has since sailed past it with ease. The leaders of the US and the UK have become so proficient at changing direction that “U-turn” no longer seems adequate. Donald and Theresa are spinning policy doughnuts.

Mr Trump has a notoriously flexible approach to his own pledges. He has reversed course on issues as diverse as whether he will put Hillary Clinton in jail (yes, then no), whether he would force a vote on healthcare reform (yes, then no) and whether it was wise to attack Syria (no, then yes).

His most dizzying day, in mid April, included U-turns on a bewildering array of substantial policy issues: Nato (“I said it was obsolete; it’s no longer obsolete”), whether China was a currency manipulator, a hiring freeze on federal workers, closing the US Export-Import bank and whether he might reappoint Janet Yellen as head of the Federal Reserve.

It was an impressive record — but surely a record no longer. Over the past year Mrs May has changed her mind on everything from Brexit to a bill of rights, energy pricing to nuclear power. She reversed a 2015 manifesto commitment, reversed the reversal, and has now taken the unprecedented step of tearing pages out of her own manifesto just days after launching it. She offers a “strong and stable” slogan, a weak and wobbly reality, and a rich seam of irony.

What most concerns me about all this is that Mr Trump and Mrs May are tarnishing the very idea of changing one’s mind. U-turns can be valuable, but they already have a poor reputation, reflecting a lazy journalistic trope. The U-turn is a gift to the journalist in a hurry: either the policy was wrong before, or it is wrong now. Little more need be said.

Of course there is something to be said for being consistent. Stubbornness in negotiations is risky but can be an advantage. Foreign policy requires that allies and enemies know where they stand. When politicians promise something to voters, they should make an effort to deliver.

But it is easy to take consistency too far. The most straightforward solution to many a grave policy error is to stop and do something else. This is something the Conservative party would be well advised to do with a damaging limit on immigration that it has promised three times and never come close to delivering.

Discarding what does not work is an essential part of progress in almost any sphere of life. Designers and engineers make prototypes. Programmers debug. Writers edit. Medical researchers use randomised trials to figure out whether a treatment works or is worthless. Evolution works through survival of the fittest. In each case, there’s a way to evaluate and discard what is failing.

Economic growth is built on trial and error, with good ideas spreading and bad ones disappearing. Agile businesses reinvent themselves, but often the market does the job for them through the bankruptcy courts.

Policymaking needs the same mechanism, and often lacks it. Because governments can levy taxes, dole out subsidies, and alter the rules of the game, they can do a great deal of good — but they can also prop up bad ideas indefinitely.

This is true even in democracies; in dictatorships, the pet projects of the powerful can squander money almost without limit. The Soviet Union was ruined, in part, by the inability of anybody to criticise and modify failing projects. And China began to move away from poverty when Deng Xiaoping allowed first farmers, then industry managers, to experiment with new ideas and shut down old ones.

For many government policies, it’s important to have an emergency stop to prevent bad ideas getting worse. But Mr Trump and Mrs May are like train passengers who hit the emergency stop because they’re having a nice chat on the phone and don’t want to be interrupted by a tunnel. There should be a penalty for misuse — and perhaps there will be.

I have no objection to bad ideas being reversed, but the problem here is that the reversals have been so nakedly political.

A wise policymaker changes course thus: “We had a promising idea, we tried it out on the smallest practical scale, we gathered data, we expanded our pilot programme, and then once the evidence was in, we decided that the idea wasn’t working. We’ve learned a lesson and will stop.”

Such changes of direction are what grown-ups do — and any well-run country should expect to see them regularly. Unfortunately there is no sense that either Mr Trump or Mrs May have changed direction on anything because they have been moved by new evidence on whether it works. Instead, they promised what seemed popular, and flinched at the first glimpse that it may not be popular at all.

The rest of us, meanwhile, conclude that politicians are inconstant liars who will say anything to win votes. Where did we get such a preposterous notion?

Written for and first published in the Financial Times on 26 May 2017.

My new book is “Fifty Things That Made The Modern Economy” – coming soon! If you want to get ahead of the curve you can pre-order in the US (slightly different title) or in the UK or through your local bookshop.

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Other Writing

What are the best books about the history of technology?

I’ve had such fun working on the book and radio series, Fifty Things That Made the Modern Economy – and along the way I’ve had the opportunity to read some great books about the history of economics, finance, innovation and technology. Here are some of my favourites.

Alison Wolf The XX Factor (UK) (US) – Fun yet rigorous exploration of women’s participation in the workforce, and how and why it’s been changing over the years.

David Edgerton The Shock of the Old (UK) (US) – An appreciation of the humbler innovations in life, and a reminder that old technologies often stay with us a long time.

Felix Martin Money: An Unauthorised Biography (UK) (US) – Well-argued alternative history of money, packed with great stories.

Frank Trentmann Empire of Things (UK) (US) – An epic history of retail and consumerism.

Marc Levinson The Box (UK) (US) – The nerd-history to end all nerd-history. Levinson loves shipping containers and after reading this book, you will too.

Mark Kurlansky Paper (UK) (US) – I loved this book. Paper is even more underrated than shipping containers.

Mark Miodownik Stuff Matters (UK) (US) – Also good on paper – and concrete, and all sorts of miraculous materials we take for granted.

Robert Gordon The Rise and Fall of American Growth (UK) (US) – Magisterial history of technology and productivity. Closely-argued with lots of data but still feels rich and alive.

Steven Johnson How We Got To Now (UK) (US) – Stylishly-told history of six key innovations. You can’t fail to enjoy technological history the way Johnson tells it.

Steven Levy Hackers (UK) (US) – A modern classic, essential reading on the origins of modern computing.

William Goetzmann Money Changes Everything (UK) (US) – Like Gordon’s book, this is another academic read whose rich storytelling transcend the rigorous foundation. Great book.

Not the only sources for Fifty Things That Made the Modern Economy – but important ones. Enjoy!

 

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19th of June, 2017Other WritingComments off
Undercover Economist

The age of the Microsoft and Amazon economy

One of my first economics lessons contrasted perfect competition, which was judged to be a good thing, with monopoly, which was not. There are worse places to begin than by being shown the difference between championing the miracle of the free market and favouring the depredations of dominant businesses.

But monopoly power has often seemed like yesterday’s issue. Standard Oil was broken up in 1911; AT&T in 1984. To the extent that we economists worried about companies being too big, we were thinking about the systemic risks from banks that were too big to fail. But we are starting to notice again the risks not of corporate failure but of corporate success.

The most obvious examples are the big digital players: Google dominates search; Facebook is the Goliath of social media; Amazon rules online retail. But, as documented in a new working paper by five economists, American business is in general becoming more concentrated.

David Autor and his colleagues looked at 676 industries in the US — from cigarettes to greeting cards, musical instruments to payday lenders. They found that for the typical industry in each of six sectors — manufacturing, retail, finance, services, wholesale and utilities/transportation — the biggest companies are producing a larger share of output.

For example, in the early 1980s the largest four players in any given US manufacturing industry averaged 38 per cent of sales; three decades later the figure was 43 per cent. In utilities and transportation the typical market share of the biggest four companies rose from 29 per cent to 37 per cent. In retail, overshadowed by Walmart and Amazon, the rise was dramatic: 14 per cent to 30 per cent.

This is surprising. As the world economy grows, one might expect markets to become more like the perfectly competitive textbook model, not less. Deregulation should allow more competition; globalisation should expose established players to pressure from overseas; transparent prices should make it harder for fat cats to maintain their position. Why hasn’t competition chipped away at the market position of the leading companies? The simplest explanation: they are very good at what they do. Competition isn’t a threat to them. It’s an opportunity.

What Professor Autor and his colleagues call “superstar firms” tend to be more efficient. They sell more at a lower cost, so they enjoy a larger profit margin. Google is the purest example: its search algorithm won market share on merit. Alternatives are easily available, but most people do not use them. But the pattern holds more broadly: superstar firms have grown not by avoiding competitors but by defeating them.

This is not entirely bad news. But it’s not entirely good news, either. The superstar firm phenomenon is the best explanation we have of a little-noticed but worrisome trend: since 1980, in the US and many other advanced economies, workers have been getting a steadily smaller slice of the economic pie (the distribution of this labour income also became much more unequal during the 1980s and 1990s).

Workers, from shelf-stackers to chief executives, have seen their total share of economic value-added fall from about 66 per cent to about 60 per cent in the US since 1980. This decline in “labour share” is often blamed on international trade making life harder for workers and easier for footloose capital. Prof Autor and his colleagues find little evidence for this idea.

Superstar firms, instead, seem to be the cause. The story is simple. These businesses are highly productive and achieve more with less. Because of this profitability, more of the value added by the company flows to shareholders and less to workers. And what happens in these groups will tend to be reflected in the economy as a whole, because superstar firms have an increasingly important role.

All this poses a headache for policymakers — assuming policymakers can pay attention to the issue for a long enough. The policy response required is subtle: after all, the growth of innovative, productive companies is welcome. It’s the unintended consequences of that growth that pose problems.

Those consequences are not easy to predict, but here are two possibilities. Either the US economy ends up like Amazon, or it ends up like Microsoft. The Amazon future is one of relentless competition, a paradise for consumers but a nightmare for workers, and with the ever-present risk that dominant businesses will snuff out competition as the mood takes them.

The Microsoft future epitomises the economist John Hicks’s quip: “the best of all monopoly profits is a quiet life”. Microsoft in the 1990s became famous as a once-brilliant company that decided to pull up the drawbridge, locking in consumers and locking out competitors.

In either scenario ordinary people lose out, unless they can enjoy returns from capital as well as returns from working. In the very long run a superstar economy could become a technological utopia, where nobody needs to work for a living. That would require quite a realignment in our economic system; I wouldn’t bet on such an outcome happening by chance.

 
Written for and first published in the Financial Times on 19 May 2017.

My new book is “Fifty Things That Made The Modern Economy” – coming soon! If you want to get ahead of the curve you can pre-order in the US (slightly different title) or in the UK or through your local bookshop.

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Marginalia

I’m giving some talks. Come along!

50things-hb-uk-205x300A few upcoming talks, mostly about my new bookFifty Things That Made the Modern Economy. (UK) (US). Do come along if you can!

Interviewing Owain Service at Waterstones Piccadilly on 20 June 2017, 7pm. (Owain’s book, “Think Small“, is great.)

The UK launch of  Fifty Things That Made The Modern Economy at HowTo Academy, Conway Hall, 5 July 2017, 7pm.

Talking about Messy at OffGrid, Osea Island, 10 July 2017.

In conversation with the very smart Rohan Silva at Second Home, 19 July 2017, 7pm.

Talking about Messy and Fifty Things at the Edinburgh International Book Festival7.15pm 22nd August.

Talking about “What We Get Wrong About Technology” (inspired by Fifty Things) at the FT Weekend Festival, Kenwood House, London 2 September 2017.

Opining on “Fifty Things That Made the Modern Economy” at the Cheltenham Literature Festival at 5.30pm, Friday 6 October 2017. (details tbc)

The US editionFifty Inventions That Shaped the Modern Economy, will be out in late August. I’ll keep you posted!

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12th of June, 2017MarginaliaSpeechesComments off
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Tim Harford is an author, columnist for the Financial Times and presenter of Radio 4's "More or Less".
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