Tim Harford The Undercover Economist

Articles published in June, 2005

Off the backs of the poor?

Dear Economist,

I entered the lottery for tickets to see the “Live8” concert and I was lucky enough to win. Unfortunately I won’t be able to make the concert. Is there any moral objection to my selling the tickets to someone else?

– Suzy Taylor, Cardiff

Dear Suzy,

Even though “Live8” is designed to raise awareness of African poverty, rather than cash, some have criticised the organisers for not charging market value for the tickets in the first place. This criticism is misplaced. The lottery, which you could enter as many times as you wanted for £1.50 a pop, was likely to be revenue-maximising for the charity since people are happy to enter lotteries at irrationally long odds. However, it would have been more attractive if multiple prizes could be won and resold.

Having won your prize, are you under any obligation not to dispose of it as you wish? By selling the tickets you will be better off, and whoever buys the tickets will also be better off. It is very hard to see how anyone else will be harmed by your transaction.

Those are the facts – what about the ethics? Economists rarely offer ethical advice, but there is one clear exception: Pareto improvements are a good thing. A Pareto improvement is any action that makes at least one person better off and harms nobody. You would think that the moral appeal of this is surely clear enough, even to a musician.

However, the organisers of “Live8” disagree. Spokesman Bob Geldof has attacked the reselling of tickets as “sick profiteering”. Perhaps his opposition to Pareto improvements stems from a belief that when the cause is grave (and there is no graver cause than extreme poverty) then nobody should benefit from an associated event. If so, make sure that if you watch a recording of the concert you take no pleasure from it.

Published on ft.com

25th of June, 2005Dear EconomistComments off

Doing Business in the Middle East – Euromoney

With Michael Klein.

This Euromoney op-ed (with some figures) argues that Middle Eastern countries have much to gain from more sensible business regulation, and that the poorest and most vulnerable people would gain most.

20th of June, 2005Other WritingComments off

Martin Wolf on ‘The Undercover Economist’

Most people think economics is boring, difficult and irrelevant. In fact, economics is fascinating, comprehensible and highly relevant. As Tim Harford demonstrates brilliantly in this enjoyable book, the powerful underlying ideas of economics can, in the hands of the right person, illuminate every aspect of the world we inhabit.

Martin Wolf, Chief Economics Commentator, Financial Times; author of Why Globalization Works

In the United States, The Undercover Economist will be published by Oxford University Press in November; in the UK, by Little, Brown in early 2006.

Irish coffee

Dear Economist,

I recently travelled by train from Galway to Dublin to attend a meeting where my concentration was required. The train left early so there was no time to make my usual high-quality Arabica espresso coffee, and the espresso machine at Galway railway station was out of order. At Athenry, I was joined by a fellow academic, who provided a distraction from the early stages of caffeine withdrawal.

Half way through the two-and-a-half-hour trip, the hot-drinks trolley came into view. We were faced with a dilemma: should we have a coffee now, notwithstanding that it would be awful, simply to provide the necessary caffeine hit? Or should we wait to get a vastly superior one at Heuston station, but run the risk of missing our place in the taxi queue? After all, there would be coffee, though again of mediocre quality, at our meetings.

— Professor Roy Green, Galway, Ireland

Dear Professor Green,

A compelling yarn, and your journey must have been delayed all the more by the need to travel via County Cork to kiss the Blarney stone. Fortunately, the answer is simpler than the question…

…no sign of this one on ft.com, I’m afraid. What better excuse to buy the Financial Times print edition? Meanwhile, you can check out some old favourite Dear Economist columns here.

18th of June, 2005Dear EconomistComments off

Sebastian Mallaby, Steve Radelet – The Market for Aid, book launch

Sebastian Mallaby, columnist for the Washington post and author of The World’s Banker will be joining Steven Radelet, senior fellow at the Center for Global Development, and Michael Klein, IFC’s Chief Economist, at a book launch for The Market for Aid on Thursay 16th June.
Venue: IFC Auditorium, 2121 Penn Avenue Washington DC (K-street entrance)
Time: 2pm – 3pm Thursday 16th June

13th of June, 2005SpeechesComments off

Three new notes on the Market for Aid

The series on The Market for Aid continues (you can buy the book here). The last three notes in the series are:

Aid and the Resource Curse: How Can Aid Be Designed to Preserve Institutions?
Many studies have found that countries with abundant natural resources grow more slowly than those without—a phenomenon often known as the “resource curse” or the “curse of oil.” Some development specialists are concerned that foreign aid may also cause a resource curse. Recent research is not conclusive, but certainly does not rule out the possibility. This Note suggests ways to avoid this risk and urges more attention be devoted to it.

Aid Effectiveness: Can Aid Agencies Be Smarter Than the Invisible Hand?
Private financial flows such as foreign direct investment seem to encourage economic growth and relieve poverty in part because they create excellent incentives for transferring know-how and in part because they are subject to a stern market test that ensures they are allocated and monitored carefully. For aid flows, not automatically subject to these disciplines, it is difficult to be as effective. This Note argues that aid agencies, by learning what makes private flows so effective, can bring better aid to the poorest.

The Market for Aid: Understanding Aid by Looking Forward and Looking Back
The market for aid is changing. These days donors use a far greater array of instruments than in the past, and operate in a context of far larger private financial flows. Poor countries are growing richer, but there are legitimate doubts about whether the aid industry deserves credit. Measurement of the effectiveness of aid has not yet produced some of the results that would really help, such as credible ratings of aid agencies or rigorous randomized trials of specific programs. This information might pull the aid debate away from minimizing the costs of aid competition and toward trying to maximize the benefits: widespread experimentation and innovation.

All three notes are written by Tim Harford and Michael Klein.

13th of June, 2005Other WritingComments off

The quintessential blank slate

Dear Economist,
I find that increasingly my decisions are being made based on “rankings” of a sort. I choose recipes from epicurious.com based on the number of forks each recipe has received. I check my books on Amazon.com to see how many stars they received. But I’m worried that these rankings are self-perpetuating. How can I choose better recipes and read better books?

— Tim Bartlett, New York

Dear Mr Bartlett,

Your trust in other people’s taste is touching, and may occasionally be sensible. James Surowiecki’s recent book, The Wisdom of Crowds, has made famous the fact that some problems, such as guessing the weight of an ox, are better solved by averaging the guess of a large number of people than by asking a farmer.

The wisdom of crowds applies only to common-value problems, where the answer is an objective truth. Collective wisdom about a recipe means nothing unless we are all questing after the Platonic form of a recipe for ratatouille; but if so, the more opinions we seek, the closer we will get.

Unfortunately, as you recognise, a recipe may be popular simply because people choose from the ranking tables. A better ranking system would not allow people to see the list of popular items until they had made their own choices, and would discount heavily any choices then made by clicking on the “most popular” charts.

Otherwise, the wisdom of crowds is obscured by “herding” behaviour: when you log into Amazon.com you decide that whatever your prior beliefs about the virtue of Harry Potter might be, 18 billion fans can’t be wrong. Because you rely on the opinions of others, your choice reveals no new information and the rest of us do not get to benefit from whatever insight you might have had. Since you are evidently the quintessential blank slate, this may be no great loss.

Published on ft.com.

11th of June, 2005Dear EconomistComments off

Heads you win, tails you win too

Dear Economist,

I am planning to buy a new house in a year or two. My old house has gone up 50 per cent in price since I bought it. Everyone tells me it will be unfortunate if prices fall by the time I sell. Yet I am convinced I will be lucky if prices fall. My new, more expensive house will cost me less and, on the whole, I will be better off. Who is right?

— Vladimir Gorelov, Bournemouth

Dear Vladimir,

Your problem is that you and your friends are confusing money with utility. As a matter of arithmetic, if both houses fall proportionately in value, your plans will be less expensive to execute. But I do not understand why you would stick to those plans regardless of what happens to house prices.

Consider what will happen if house prices rise. Then you can make different choices, cashing in your expensive house, buying somewhere smaller, and spending the proceeds on other pleasures that have become relatively cheaper.

In fact, economist David Friedman proposes the following paradox. You are better off if house prices rise, but also better off if they fall, and for exactly the same reason: the change in house prices gives you new options. If they rise you have the option to consume less housing by buying somewhere smaller, and you will be better off. If prices fall, housing becomes cheaper and you should consume more of it by trading up. Again, you will be better off.

In either case, you could stick with what you had and be no worse off, but your new options almost certainly offer some improvement. Friedman’s reasoning is impeccable. You may find it confusing or unsatisfying because you lack the imagination to work out your response to changing prices. My advice is to stop the dinner party prattle about the housing market and start making contingency plans.

Published on ft.com.

Addendum: This one made the New York Times again – read the full version here.

4th of June, 2005Dear EconomistComments off

The Market for Aid


My new book with Michael Klein, The Market for Aid, arrived from the printers today. It smells good! You, too, can be the proud owner – just follow the link to Amazon. Be warned, it’s not hardback as specified but a convenient little paperback.

Addendum: Here’s what the World Bank says about the book.
In an accessible style Michael Klein and Tim Harford analyze some of the hot topics in the aid industry today. They argue that the aid industry is changing, old models of aid are under pressure, and both donors and recipients will ask more and more of aid agencies in the future. The chaos of competition and the search for new ideas are frightening to some and risk harming the people whom the industry is supposed to benefit. Yet at the same time there is a tremendous opportunity for harnessing competition to improve performance and find better ways of helping the poor. Klein and Harford argue for rigorous methods of evaluation and creative use of the private sector to produce a more effective aid industry in which new experiments are encouraged.

4th of June, 2005Other WritingComments off

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