Tim Harford The Undercover Economist
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Undercover Economist

Disruption can be a benefit – shame our politicians are giving us the wrong sort

“We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping,” said Richard Thaler recently. He is not alone in expressing such views, although since he had just won the Nobel memorial prize in economics, his comment understandably drew attention.

Money is loose and global economic growth is robust, yet the strength and the stability of the S&P 500 is still puzzling. This week it was the 30th anniversary of Black Monday, the largest-ever one-day crash in US stock prices, and it is eerily quiet.

One explanation of the puzzle is that markets have finally got smart: when behavioural economists turned their attention to financial markets in the 1980s, two key findings were that shares were implausibly volatile and implausibly cheap. They are now much less volatile and much less cheap; perhaps that is simply a long-awaited recognition of the way things should be. Perhaps.

An alternative view is that, while 2017 seems risky, it really isn’t. This is hard to believe. Among the obvious political risks: Donald Trump’s attempts to undermine both the North American Free Trade Agreement and the Iran nuclear deal; the rise of the far right in Germany and Austria, with Marine Le Pen waiting for President Emmanuel Macron to stumble in France; serious unrest in Spain over the Catalan independence movement; a Brexit process that seems as unclear as ever; and of course, the small-yet-conceivable chance of a nuclear war on the Korean peninsula. This is no time to panic, but it hardly seems a time for euphoria either.

There is never a good moment to create uncertainty over the prospects of a nuclear first strike. As the great Thomas Schelling once explained: “If I go downstairs to investigate a noise at night, with a gun in my hand, and find myself face to face with a burglar who has a gun in his hand, there is a danger of an outcome that neither of us desires. Even if he prefers to just leave quietly, and I wish him to, there is danger.” The danger results from mutual uncertainty over what the other person may do.

Other threats are less apocalyptic, but still have the potential to cause serious economic harm. Those who think Brexit will boost the British economy — I am not among them — have begun to acknowledge that the uncertainty is damaging. Business can no longer afford to wait for the British government to finish negotiations with itself and begin serious negotiations with the EU27.

Similar damage is likely to be done by Donald Trump’s attacks on Nafta. As the economist Nuno Limão has shown, unpredictable trade policy is itself a form of trade barrier.

And yet, despite all these political risks, the world economy might benefit from a little more disruption. Whether a more volatile stock market might usefully puncture complacency, in the real economy volatility can be an asset. We should expect old companies to fade and die, being absorbed or replaced by fresh ideas: that corporate failure is the flip side of economic vitality.

For example, a study by Kathy Fogel, Randall Morck and Bernard Yeung — published in 2008 — compiled lists of the 10 largest employers in each of 44 countries across the world. More churn in the list was a sign of a strongly growing economy, and a predictor of fast growth to come, too. The results were being driven by the extinction of corporate dinosaurs more than the rapid ascent of new stars.

The upbeat word to describe this process of success through failure is dynamism. But economic dynamism is at risk. The economist John Haltiwanger has charted a fall since the early 1980s in the rate of start-ups, business exits, job creation and job destruction. It is probably not a coincidence that low-productivity companies are able to limp on rather than disappearing.

Calm waters eventually stagnate. It is time to agitate the real economy. But how? Even acts of economic vandalism such as a train-crash Brexit can have unexpected benefits, much as Tube strikes have been shown to help some commuters discover better routes. Yet overall the costs of chaos seem likely to outweigh the benefits.

There are more positive ways to shake things up: looser planning regulations in the sclerotic UK economy, more infrastructure in much of the western world, and support for small-business finance, would all add much needed fizz to the economic system.

And the authorities could be much more assertive in challenging market power. According to the economist Luigi Zingales, federal antitrust cases in the US were five times more common between 1970 and 1999 than since the year 2000. In a world of high profits and high concentration, that passivity is hard to excuse.

I have little doubt that financial markets will rediscover the knack of panicking in due course, but the real economy may need more help. If only our politicians would stop shaking the nitro-glycerine of geopolitics, and start stirring the cocktail of market forces instead.

Written for and first published in the Financial Times on 20 October 2017.

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Undercover Economist

Richard Thaler: How to change minds and influence people

The best thing about Thaler, what really makes him special, is that he is lazy.” So said Daniel Kahneman, winner in 2002 of the Nobel memorial prize in economics. Prof Kahneman was talking about Richard Thaler, who has emulated that achievement 15 years later. Prof Thaler’s thesis adviser, the economist Sherwin Rosen, put it differently: “We didn’t expect much of him.”

The story of how a lazy and unpromising man won a Nobel memorial prize is perhaps just as important as what he won the prize for. The Nobel announcement recognised Prof Thaler “for his contributions to behavioural economics”. But there’s another way to describe the way he reshaped economics: he persuaded a large group of successful people with a strongly held view of the world to change their minds.

What was that view? To oversimplify, it was that all of us are Spock-like rational optimisers, able to instantly trade off risk and reward, rebalance a spending plan in the face of a price change, and resist temptations such as chocolate brownies or payday loans.

Of course, no economist has ever quite believed this. But for several decades most economists believed that departures from the world of Spock were small enough, rare enough and random enough that they could be ignored. Humans weren’t quite like Spock, yet when building economic models and formulating economic policies, we could treat them as if they were.

This approach is not as absurd as it might seem. It’s flexible, powerful, and consistent. It is often close enough to reality to be useful. Prof Thaler himself told me: “If you want one unifying theory of economic behaviour, you won’t do better than the neoclassical model.”

Yet the power of the neoclassical approach made it hard to challenge. Prof Thaler wasn’t the first Nobel laureate to operate outside that paradigm — others include Maurice Allais, Herb Simon and Thomas Schelling. Yet all these men, while admired, did not manage to divert the mainstream of economic thought beyond the well-worn channel of rational optimisation. It was Prof Thaler who shifted the norms of how economics is practised, both in academia and in the policy world.

Behavioural economics is now respectable in places from the American Economic Review to the World Bank. Whether or not you think behavioural economics matters, as a feat of persuading people to change their minds this is a case worth studying. So how did he do it? We could all do with knowing, because the world is full of stubborn-minded people who need to be persuaded to change their views about important things.

Part of the story is simple persistence: Prof Thaler’s first behavioural economics paper was published in 1980; he has been banging this drum for a long time. More important was that Prof Thaler fully understood what he was criticising. It is all too easy to attack those with whom we disagree based on the haziest idea of what they think and why they think it. But he grasped perfectly why his fellow economists embraced rationality, and the arguments (good and bad) they used to defend it. Prof Thaler engaged honestly and thoughtfully with the mainstream.

His third technique was to look at the facts — not only clever statistics, but everyday facts about human existence. We find snack food hard to resist. We divide up money into separate mental accounts — rainy-day money, an entertainment budget, money for food, money for clothes. If we find a fine old bottle of port in the attic, we might refuse to sell it for hundreds of pounds, even though we would not dream of spending a three figure sum on a bottle of anything. Having secured agreement on these facts, he then moved to arguing that they might matter.

Finally, Prof Thaler engaged people’s sense of curiosity. His long running series “Anomalies”, published in the widely-read scholarly Journal of Economic Perspectives, would often begin with a puzzle — some piece of behaviour or pattern in the data that simply didn’t make sense from the mainstream point of view. He would then explore the puzzle, extend it, and consider various possible solutions.

Economists would talk about these anomalies in faculty coffee rooms. They would, at Prof Thaler’s invitation, send in their own suggestions. Rather than telling his opponents they were wrong, Prof Thaler would present a conundrum and invite everyone to discuss it together. One of his critics, the great Chicago economist Merton Miller, was reduced to complaining that Prof Thaler’s anomalies were a distraction from serious modelling because they were simply too interesting.

Which brings us back to his laziness. Prof Kahneman thought Prof Thaler’s laziness made him “special” because it meant that he could only be bothered to work on the most fascinating questions. Maybe.

But perhaps the truth is that laziness isn’t special at all. Prof Thaler realised that most of us are lazy. Most of us don’t want to think hard about our beliefs, or challenges to them. His solution was to make sure those challenges were simply too intriguing to ignore.

Written for and first published in the Financial Times on 13 Oct 2017.

My new book is “Fifty Inventions That Shaped The Modern Economy”. Grab yourself a copy in the US or in the UK (slightly different title) or through your local bookshop.

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Marginalia

Some podcasts you should hear

Forgive me not linking, because different people will access their podcasts in different ways, but here are a few feeds I suggest you check out:

Radio 4’s Seriously feed contains two documentaries a week, with a marvellous range of techniques. The US storytelling style is wonderful, but there’s more variety in the Seriously stable, and while it sometimes misfires or is ponderous, when it works it’s glorious. Three recent episodes worth checking out: The Edge of Life (about suicide and suicide prevention), Who’s Looking At You (quite brilliant about the effects of universal surveillance) and The Trainspotter’s Guide To Dracula, featuring Miles Jupp.

99% Invisible needs no plug from me but they’re awesome. An ear-catching recent episode discussed the universal basic income not as a piece of economic policy but as a design decision – and 99PI has got me exploring all kind of interesting topics, from barbed wire to Frank Lloyd Wright’s affordable homes.

Jon Ronson’s The Butterfly Effect is clever, curious and surprisingly moving. Series One is about the porn industry, but Ronson talks to all kinds of people and takes the story in a variety of unexpected directions. Bravo.

Just catching on is the After On podcast; free-flowing extended chats with fascinating people such as Ev Williams of Twitter, Blogger and Medium, or Chris Anderson of TED. Well worth a listen.

And finally, Radio 4’s Analysis is back and I particularly enjoyed the episode on the way the Houses of Parliament are falling apart. No, it’s not a metaphor. Except it is obviously partly a metaphor…

And finally finally, Jessica Abel’s book Out On The Wire (UK) (US) spills the beans about how great radio and podcasts are made.

Oh, and finally finally finally, you should of course listen to every episode ever made of Fifty Things That Made The Modern Economyall 52 of them. Details about the book here.

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9th of November, 2017MarginaliaComments off
Other Writing

Review of “The Square and The Tower” by Niall Ferguson

“The world remains a world of squares and towers,” concludes Niall Ferguson, after skipping across 500 years in about as many pages. The square — the town square, the market square — represents social networks, “the structures that human beings naturally form”. The tower represents hierarchical control and secular authority, the top-down approach to social structure.

The study of how networks compete or co-operate with each other and with hierarchies is a hot topic in the social sciences, and it is easy to see why: think of the US military versus Isis; or Russian intelligence trying to exploit the US media; or Facebook and, well, almost anything.

Yet both networks and hierarchies have been around for a long time, as Ferguson is quick to remind us in The Square and the Tower (UK) (US). Networks flourished in the years 1450 to 1790, he writes; hierarchies reasserted themselves until around 1970, and networks have been making a comeback ever since. The book is a history told with the focus on the way networks and hierarchies shaped events.

This approach is engaging but not always helpful. It is unclear that we gain much by describing Pizarro’s conquistadors and their allies as a network opposing Atahualpa’s hierarchical Inca society.

When it does work, however, it works well. German National Socialism is described as a network that then transformed itself into a crushingly powerful hierarchy. Faced with the power of the German state, the network of Jewish business interests that had loomed so large in the Nazi imagination proved helpless. “After all that had been written about the web of Jewish power,” he writes, “the only networks that really mattered were the ones that enabled emigration, and those were often simple family ties.” The analysis is illuminating, chilling and still relevant today.

While National Socialism was a network that infected a hierarchy, the Soviet infiltration of the British old boys’ club between the 1930s and the 1960s shows that hierarchies can infect networks, too.

No book written by a historian of Ferguson’s gifts is likely to disappoint, but The Square and the Tower does have one obvious weakness: it’s not at all clear that the author takes his own premise seriously. That premise, set out in the first 50 pages of the book, is that by adding the formal social science of networks to the informal descriptive practice of history, we can unlock new insights.

This union of history and social science is an exciting prospect with Ferguson in charge. But the early chapters in which he outlines the science and social science of networks are dutiful literature reviews; though he nods to network scholars such as Ronald Burt, Mark Granovetter and Duncan Watts, those names do not resurface later in the book. Ferguson cites an impressive range of social science research papers; he does not always trouble to explain technical terms as a skilled science writer might. One is left with the impression that he is happy to list every tool in the toolkit but doesn’t actually want to pick up a spanner himself.

The impression is reinforced by the way the author uses diagrams. Network diagrams always look good, whether it’s diagram 22, showing the interconnected nodes of the Bloomsbury Group (“it was . . . sexual relationships that defined the network”, we are told) or, over the page, diagram 23 depicting the evolving connections between the great powers in the late 19th century. These diagrams have been reproduced from other sources, but without sufficient labelling. Those lines mean something yet we can only guess what, unless we consult the original sources directly. The network diagrams, like the network research described early on in the book, appear to be largely decorative. That is a missed opportunity.

Yet that same flip of the page takes us from Virginia Woolf and John Maynard Keynes to a theory of the causes of the first world war outlined by none other than Henry Kissinger. There’s a joy in such leaps — from industrial networks in pre-Victorian Britain to the Taiping Rebellion, from Kissinger’s use of networked influence to how the World Economic Forum reshaped Nelson Mandela’s policy of nationalisation.

“By choice, I am more of a networks guy”, Ferguson tells us early on, and he is convincing in his claim that networks have been playing an important role for centuries. Yet at the end of his freewheeling history, he yearns for someone to take charge: “The lesson of history is that trusting in networks to run the world is a recipe for anarchy.” At best, the Illuminati take control; more likely, the Jacobins.

 

Written for and first published in the Financial Times on 11 October 2017.

My new book is “Fifty Inventions That Shaped The Modern Economy”. Grab yourself a copy in the US or in the UK (slightly different title) or through your local bookshop.

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8th of November, 2017Other WritingComments off
Undercover Economist

Monty Hall and the game show stick-or-switch conundrum

Forget Fermat’s last theorem. The most vexing challenge in mathematics just might be the Monty Hall problem. Monty Hall — born Monte Halparin — presented nearly 5,000 episodes of Let’s Make a Deal, the US game show that inspired the puzzle.

It is an onion of a conundrum; layer after layer, and guaranteed to make you cry. The puzzle is this: a contestant faces three doors. Behind one of them is a big prize such as a Cadillac. Each of the other two doors conceals a booby prize such as a goat.

The contestant chooses a door, hoping to win the grand prize. But just as the door is about to be opened, Hall steps in and halts proceedings. He opens one of the other two doors instead, revealing a goat. Then he turns to the contestant. Would they like to switch to the other closed door? Or would they prefer to stick with their original choice?

The problem was initially posed in The American Statistician in 1975, by Steve Selvin, but achieved national prominence when Marilyn vos Savant wrote about it in Parade in 1990. She suggested that it pays to switch doors. Her reward was a mailbag full of letters assuring her she was wrong — some from prominent mathematicians. John Kay’s inbox also overflowed when he addressed the problem in 2005 in the Financial Times.

What should the contestant do? Mathematically, it seems not to matter: there are two doors now, so surely they face a 50-50 proposition. And as it happens, many people prefer to stick. They have made their choice and would regret switching if it did not work out.

More careful analysis, however, reveals that the contestant should switch. One way to think of the problem is to notice that their chance of picking the grand prize was initially one in three.

Hall’s intervention does not change that, but it does guarantee that if they failed to pick the correct door initially then they will definitely get the prize by switching. Two times out of three, switching will win the prize.

A second way to think about the problem is to exaggerate the underlying process. Imagine 100 doors, but still only one grand prize. The contestant picks a door, probably not the correct one. Hall then opens 98 other doors, revealing no prize.

Should we really conclude that we have learnt nothing about the other door? The first door was picked at random but the one that Hall has left closed was selected with great care. With probability of 99 per cent, switching will win the prize.

A third way to attack the puzzle is to run an experiment. It will quickly reveal what intuition does not: the contestant should switch. In Ms vos Savant’s experience, many mathematicians changed their minds only on the basis of empirical evidence — which is revealing, since the underlying proof, using Bayes’ theorem, is not especially technical.

Some people will find these explanations persuasive, and others will not. Over the years I have concluded that there is something about the Monty Hall problem that makes it wonderfully resistant to our intuitions.

And there is a twist in the tale, too: after Ms vos Savant brought the problem to national attention, the journalist John Tierney visited Hall himself and they began to play the game repeatedly at his dining-room table, with car keys representing the grand prize and a pack of raisins serving as the goat. At first, things went as Mr Selvin and Ms vos Savant had explained: switching won the prize far more often.

Then, suddenly, things changed. At the beginning of a game, Mr Tierney pointed to one of the options. “Too bad,” said Hall, immediately. “You’ve just won a goat.”

He did not offer Mr Tierney a chance to switch. He did not always make such an offer in the game show — why should he make it now?

Hall’s change of approach turns a probability puzzle into what we might call a cheesecake bet. In the musical Guys and Dolls, Nathan Detroit offers Sky Masterson a bet that Mindy’s sells more strudel than cheesecake. Sky is sceptical, and rightly so, since Nathan already knows the answer. For much the same reason, a contestant in Let’s Make a Deal should ask themself: “If it is really such a good idea to switch, then why has Hall offered me the chance?”

I have great respect for the way Ms vos Savant faced down a posse of contemptuous mathematicians. But we must be careful not to confuse a precise mathematical description of a game for the vagaries of reality itself, something Nassim Nicholas Taleb has named the “ludic fallacy”. Rigorous mathematical thinking can be invaluable, or it can leave you blinkered and on the wrong side of a cheesecake bet.

The solution to the formal Monty Hall problem is counterintuitive and incontrovertible. But the right approach in the game show depended on what Hall himself was trying to do in offering the choice. Was he benevolent, malevolent, or simply aiming for great television?

Alas, we can no longer ask him. Hall died in September. But the Monty Hall problem will live on.

 
Written for and first published in the Financial Times on 6 October 2017.

My new book is “Fifty Inventions That Shaped The Modern Economy”. Grab yourself a copy in the US or in the UK (slightly different title) or through your local bookshop.

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Marginalia

The best books about failure

I wrote Adapt: Why Success Always Starts With Failure (UK) (US) several years ago, but I’ve not stopped thinking and talking about the idea. So often we’re told to “learn from our mistakes” or “fail forward”, but the truth is that this advice isn’t easy to take: failure is painful and denial is common.
Here are a few of my favourite books on the topic:

I encountered Little Bets (UK) (US) by Peter Sims just as Adapt was coming out, and loved it. Peter had come to similar conclusions but had a totally different range of examples (from Chris Rock to Frank Gehry, if I recall correctly) and a winning, informal style.

Kathryn Schulz’s Being Wrong (UK) (US) is beautifully written (Schulz later won a Pulitzer prize) and a fascinating discussion of the history and psychology of wrongness.

To go deeper into the psychology of wrongness, try Mistakes Were Made (But Not By Me) (UK) (US) by two academics, Carol Tavris and Eliot Aronson. (Aronson was a research assistant on one of the most famous studies of wrongness, Festinger’s When Prophecy Fails.) The book is highly accessible and full of interesting testaments to the power of denial.

And for a more recent synthesis, try Matthew Syed’s Black Box Thinking (UK) (US), which focuses in particular on the importance of examining and learning from our errors (as with an aeroplane black box).

Happy failing!

My new book is “Fifty Inventions That Shaped The Modern Economy”. Grab yourself a copy in the US or in the UK (slightly different title) or through your local bookshop.

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31st of October, 2017MarginaliaResourcesComments off
Undercover Economist

The pendulum swings against privatisation

Political fashions can change quickly, as a glance at almost any western democracy will tell you. The pendulum of the politically possible swings back and forth. Nowhere is this more obvious than in the debates over privatisation and nationalisation.

In the late 1940s, experts advocated nationalisation on a scale hard to imagine today. Arthur Lewis thought the government should run the phone system, insurance and the car industry. James Meade wanted to socialise iron, steel and chemicals; both men later won Nobel memorial prizes in economics.

They were in tune with the times: the British government ended up owning not only utilities and heavy industry but airlines, travel agents and even the removal company, Pickfords. The pendulum swung back in the 1980s and early 1990s, as Margaret Thatcher and John Major began an ever more ambitious series of privatisations, concluding with water, electricity and the railways. The world watched, and often followed suit.

Was it all worth it? The question arises because the pendulum is swinging back again: Jeremy Corbyn, the bookies’ favourite to be the next UK prime minister, wants to renationalise the railways, electricity, water and gas. (He has not yet mentioned Pickfords.) Furthermore, he cites these ambitions as a reason to withdraw from the European single market.

That is odd, since there is nothing in single market rules to prevent state ownership of railways and utilities — the excuse seems to be yet another Eurosceptic myth, the leftwing reflection of rightwing tabloids moaning about banana regulation. Since the entire British political class has lost its mind over Brexit, it would be unfair to single out Mr Corbyn on those grounds.

Still, he has reopened a debate that long seemed settled, and piqued my interest. Did privatisation work? Proponents sometimes mention the galvanising effect of the profit motive, or the entrepreneurial spirit of private enterprise. Opponents talk of fat cats and selling off the family silver. Realists might prefer to look at the evidence, and the ambitious UK programme has delivered plenty of that over the years.

There is no reason for a government to own Pickfords, but the calculus of privatisation is more subtle when it comes to natural monopolies — markets that are broadly immune to competition. If I am not satisfied with what Pickford’s has to offer me when I move home, I am not short of options. But the same is not true of the Royal Mail: if I want to write to my MP then the big red pillar box at the end of the street is really the only game in town.

Competition does sometimes emerge in unlikely seeming circumstances. British Telecom seemed to have an iron grip on telephone services in the UK — as did AT&T in the US. The grip melted away in the face of regulation and, more importantly, technological change.

Railways seem like a natural monopoly, yet there are two separate railway lines from my home town of Oxford into London, and two separate railway companies will sell me tickets for the journey. They compete with two bus companies; competition can sometimes seem irrepressible.

But the truth is that competition has often failed to bloom, even when one might have expected it. If I run a bus service at 20 and 50 minutes past the hour, then a competitor can grab my business without competing on price by running a service at 19 and 49 minutes past the hour. Customers will not be well served by that.

Meanwhile electricity and phone companies offer bewildering tariffs, and it is hard to see how water companies will ever truly compete with each other; the logic of geography suggests otherwise.

All this matters because the broad lesson of the great privatisation experiment is that it has worked well when competition has been unleashed, but less well when a government-run business has been replaced by a government-regulated monopoly.

A few years ago, the economist David Parker assembled a survey of post-privatisation performance studies. The most striking thing is the diversity of results. Sometimes productivity soared. Sometimes investors and managers skimmed off all the cream. Revealingly, performance often leapt in the year or two before privatisation, suggesting that state-owned enterprises could be well-run when the political will existed — but that political will was often absent.

My overall reading of the evidence is that privatisation tended to improve profitability, productivity and pricing — but the gains were neither vast nor guaranteed. Electricity privatisation was a success; water privatisation was a disappointment. Privatised railways now serve vastly more passengers than British Rail did. That is a success story but it looks like a failure every time your nose is crushed up against someone’s armpit on the 18:09 from London Victoria.

The evidence suggests this conclusion: the picture is mixed, the details matter, and you can get results if you get the execution right. Our politicians offer a different conclusion: the picture is stark, the details are irrelevant, and we metaphorically execute not our policies but our opponents.

The pendulum swings — but shows no sign of pausing in the centre.

Written for and first published in the Financial Times on 29 September 2017.

My new book is “Fifty Inventions That Shaped The Modern Economy”. Grab yourself a copy in the US or in the UK (slightly different title) or through your local bookshop.

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Marginalia

Was Luca Pacioli overrated?

One of my favourite chapters in Fifty Things That Made The Modern Economy (UK) (US) is on double-entry bookkeeping. You can read a briefer adaptation of the chapter on the BBC website. Luca Pacioli, Renaissance mathematician admired by the likes of Leonardo da Vinci, is one of the stars of my story. I have read in various places that Pacioli invented double-entry bookkeeping (I won’t embarrass the authors by naming names) but this isn’t true, as I write:

Pacioli is often called the father of double-entry bookkeeping, but he didn’t invent it.

Why, then, give Pacioli a starring role? Because of his grand treatise:

Summa de Arithmetica, Geometria, Proportioni et Proportionalita was an enormous survey of everything that was known about mathematics – 615 large and densely typeset pages. Amidst this colossal textbook, Pacioli included 27 pages that are regarded by many as the most influential work in the history of capitalism. It was the first description of double-entry bookkeeping to be set out clearly, in detail and with plenty of examples…. His book enjoyed a long print run of 2,000 copies, and was widely translated, copied, and plagiarised across Europe.

Pacioli, then, did not invent double-entry bookkeeping but we can trace its influence to his work. Or can we?

Professor Jacob Soll, author of The Reckoning (UK) (US) writes to suggest that I dig deeper. For one thing, was a 2000-copy print run really so impressive? Accounting caught on in England and Holland, but was Pacioli the source? Prof. Soll writes in an email:

The accounting section was extracted and transcribed, but often changed and not attributed to him.  It is more likely than Jan Ympyn’s book was the actual version that fell into the hands of Englishmen and Germans who went to Holland to literally learn complex capitalism. When industrial capitalism rears its head in Britain around 1706, the British manuals are the ones that are the basis of the revolution.  Did they come from Pacioli?  Possibly, a little?  By that time there were so many Dutch manuals and the great accounting teachers were Dutch and then low Churchmen…  It was only later, as historians tried to date these things, that Pacioli is named the father of the tradition.

Richard Dafforne’s English-language guide to accounting, from 1636, credits the Dutch as his influence.
Moving on from Pacioli to the foundation of management accounting techniques, another loyal reader, Greg Finch, writes:

I hadn’t previously been aware that Josiah Wedgwood used his accounts as a basis for improving his business. However, now I become one of those correspondents who -perhaps irritatingly- disputes one of your points. Doubtless many did follow what they saw Wedgwood doing but I don’t believe management accounting started with him. In Northumberland merchants turned lead miners/processors were using unit cost analysis drawn from their accounts to decide on where to locate smelting mills and to seek cheap sources of ore at least as early as 1680, and had already put in place quantitative ‘KPIs’ they expected managers to report on regularly. I don’t claim this was where it started either -though I am finding Newcastle and the north-east was an interesting hotbed of developing business practice at the time…

My sources included Jane Gleeson-White’s Double Entry (UK) (US), the BBC’s ten-part Brief History of Double-Entry Bookkeeping (which alas is not currently available), and William Goetzmann’s Money Changes Everything (UK) (US). Professor Soll points me towards an authoritative source that I had missed, B. S. Yamey’s Scientific Bookkeeping and the rise of Capitalism.  One of the joys of this project is that I keep on learning.

24th of October, 2017MarginaliaComments off
Undercover Economist

Fatal Attraction of Fake Facts Sours Political Debate

He did it again: Boris Johnson, UK foreign secretary, exhumed the old referendum-campaign lie that leaving the EU would free up £350m a week for the National Health Service. I think we can skip the well-worn details, because while the claim is misleading, its main purpose is not to mislead but to distract. The growing popularity of this tactic should alarm anyone who thinks that the truth still matters.

You don’t need to take my word for it that distraction is the goal. A few years ago, a cynical commentator described the “dead cat” strategy, to be deployed when losing an argument at a dinner party: throw a dead cat on the table. The awkward argument will instantly cease, and everyone will start losing their minds about the cat. The cynic’s name was Boris Johnson.

The tactic worked perfectly in the Brexit referendum campaign. Instead of a discussion of the merits and disadvantages of EU membership, we had a frenzied dead-cat debate over the true scale of EU membership fees. Without the steady repetition of a demonstrably false claim, the debate would have run out of oxygen and we might have enjoyed a discussion of the issues instead.

My point is not to refight the referendum campaign. (Mr Johnson would like to, which itself is telling.) There’s more at stake here than Brexit: bold lies have become the dead cat of modern politics on both sides of the Atlantic. Too many politicians have discovered the attractions of the flamboyant falsehood — and why not? The most prominent of them sits in the White House. Dramatic lies do not always persuade, but they do tend to change the subject — and that is often enough.

It is hard to overstate how corrosive this development is. Reasoned conversation becomes impossible; the debaters hardly have time to clear their throats before a fly-blown moggie hits the table with a rancid thud.

Nor is it easy to neutralise a big, politicised lie. Trustworthy nerds can refute it, of course: the fact-checkers, the independent think-tanks, or statutory bodies such as the UK Statistics Authority. But a politician who is unafraid to lie is also unafraid to smear these organisations with claims of bias or corruption — and then one problem has become two. The Statistics Authority and other watchdogs need to guard jealously their reputation for truthfulness; the politicians they contradict often have no such reputation to worry about.

Researchers have been studying the problem for years, after noting how easily charlatans could debase the discussion of smoking, vaccination and climate change. A good starting point is The Debunking Handbook by John Cook and Stephan Lewandowsky, which summarises a dispiriting set of discoveries.

One problem that fact-checkers face is the “familiarity effect”: the endless arguments over the £350m-a-week lie (or Barack Obama’s birthplace, or the number of New Jersey residents who celebrated the destruction of the World Trade Center) is that the very process of rebutting the falsehood ensures that it is repeated over and over again. Even someone who accepts that the lie is a lie would find it much easier to remember than the truth.

A second obstacle is the “backfire effect”. My son is due to get a flu vaccine this week, and some parents at his school are concerned that the flu vaccine may cause flu. It doesn’t. But in explaining that I risk triggering other concerns: who can trust Big Pharma these days? Shouldn’t kids be a bit older before being exposed to these strange chemicals? Some (not all) studies suggest that the process of refuting the narrow concern can actually harden the broader worldview behind it.

Dan Kahan, professor of law and psychology at Yale, points out that issues such as vaccination or climate change — or for that matter, the independence of the UK Statistics Authority — do not become politicised by accident. They are dragged into the realm of polarised politics because it suits some political entrepreneur to do so. For a fleeting partisan advantage, Donald Trump has falsely claimed that vaccines cause autism. Children will die as a result. And once the intellectual environment has become polluted and polarised in this way, it’s extraordinarily difficult to draw the poison out again.

This is a damaging game indeed. All of us tend to think tribally about politics: we absorb the opinions of those around us. But tribal thinking pushes us to be not only a Republican but also a Republican and a vaccine sceptic. One cannot be just for Brexit; one must be for Brexit and against the UK Statistics Authority. Of course it is possible to resist such all-encompassing polarisation, and many people do. But the pull of tribal thinking on all of us is strong.

There are defences against the dead cat strategy. With skill, a fact-check may debunk a false claim without accidentally reinforcing it. But the strongest defence is an electorate that cares, that has more curiosity about the way the world really works than about cartoonish populists. If we let politicians drag facts into their swamp, we are letting them tug at democracy’s foundations.
Written for and first published in the Financial Times on 23 September 2017.

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Undercover Economist

Echoes of a bygone age show Britain losing its sense of direction

“It’s that 1970s vibe again,” a senior colleague tells me. This being the Financial Times I presume he is picking up echoes of a bygone economic and political milieu, rather than gleefully anticipating the re-emergence of flares or X-rated movie theatres. Either way, it is hard to venture a firm opinion on the matter: as late as the 1990s, I was still at school. My recollection of James Callaghan is pretty hazy, and I know Edward Heath only through a charming book of Christmas carols that he compiled after leaving office. (Millennials and foreigners confused by the direction this column is taking may be interested to know that both men were UK prime ministers.)

There certainly are parallels: now, as then, politics is dominated by the two big parties; the nation is led by a weak minority government; and Jeremy Corbyn’s views seem politically relevant. There is even an economic echo: the unemployment rate, at 4.3 per cent, is back down to the levels last seen in 1975, when I was in nappies.

But in other ways it feels absurd to compare today’s economy with that of 40 years ago. The uptick in inflation that has attracted some attention this week — to 2.9 per cent on the consumer price index measure — is a molehill compared with the Himalayan peaks of yesteryear, with retail price index inflation rarely slipping below 10 per cent per year and sometimes exceeding 25 per cent. With inflation at 25 per cent, prices double every three years; with inflation at 2.9 per cent the doubling would take a generation. Bank of England base rates then shuttled breathlessly between 5 and 15 per cent — whereas they sit today, as they have done since 2009, at record lows. The price of oil remains of interest not because it has spiked but because it has halved.

And rather than joining the European Economic Community in a desperate attempt to save the British economy, we are now leaving in a desperate attempt to . . . well, I am still trying to figure that one out.

But those are the dry numbers. What of the zeitgeist, the more ineffable spirit of the times? That is a curious question. Dominic Sandbrook, a leading British historian of the 1970s, reminds us of the words of Callaghan to his Labour party colleagues in 1974: “Our place in the world is shrinking: our economic comparisons grow worse, long-term political influence depends on economic strength — and that is running out . . . If I were a young man, I should emigrate.”

Callaghan’s mournful diagnosis cuts deep today. Much of the country knows how he felt. But the curious thing is that half of them believe that the UK was doing just fine until we voted for a once-in-a-generation act of self-harm last June. The other half were as gloomy as Callaghan until the Brexit vote gave them hope. Say what you like about the 1970s, at least their grimness is a fact that we can agree on.

Then, national humiliation was inflicted by the need to approach the International Monetary Fund for help — and everyone could agree that this was not an encouraging development. Now, national humiliation is in the eye of the beholder and we have either broken free of decades of subjugation to Brussels — or voted to make ourselves a laughing stock. I hope the rest of the world is enjoying the joke, at least. Our foreign secretary is Boris Johnson, our prime minister is “strong and stable”, our foreign policy is built on the steadfastness of President Donald Trump, and our back-up plans include Mr Corbyn and the Conservative member of parliament Jacob Rees-Mogg.

Economically, our 2017-era service industries and just-in-time supply chains are highly unlikely to survive a hard Brexit unscathed, despite the gung-ho cheerleading of a few economists who seem to think nothing much has changed in international economics since David Ricardo outlined the principle of comparative advantage in 1817.

Jill Lepore, a Harvard history professor, commented not long ago that she was wary of glib historical comparisons: “Trump is like Andrew Jackson”; “Cryptocurrencies are like the tulip bubble”. Rather than squashing together the past and present like an accordion, she advocates expanding the instrument, “stretch it open as far as you can, so you can see the distance”.

So if we stretch the accordion out, what do we see? A country that becomes more open, liberal, tolerant, wealthy and confident but also more economically unequal. The rise in inequality largely took place in the 1980s, but only became politically salient after the banking crisis of 2007. But also, perhaps, a country that now, as then, has lost a sense of direction. What ever you think of the journey, we travelled a long way under Margaret Thatcher and Tony Blair. But we have been becalmed now for a decade. Where exactly are we going? Ponder again this week’s unemployment and inflation numbers, which reinforce the picture of the UK economy that has become familiar: plenty of jobs, but not a lot of money.
The nation, like its government, is working flat out and going nowhere.

Written for and first published in the Financial Times on 15 September 2017.

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