Tim Harford The Undercover Economist

Articles published in 2006

Post-Christmas presents

After the success of Freakonomics, 2007 looks like being a bumper year for popular economics books. Five to look out for:

  • Immigrants: Your Country Needs Them by Philippe Legrain (UK)
  • The Soulful Science by Diane Coyle (UK US)
  • More Sex is Safer Sex by Steven Landsburg (UK US)
  • (As yet untitled) by Tyler Cowen

and, um,

  • The Undercover Economist, paperback edition (UK US)

With the exception of Tyler’s book, which I expect to be excellent but have not read, I have enjoyed them all. I won’t say too much more here because I hope the FT will ask me to review a few of them. But read, and enjoy – the publication dates are even spread across the year to assist you in delaying your gratification without the need for a commitment mechanism.

Merry Christmas to all!

22nd of December, 2006MarginaliaComments off

Forbes: A beautiful theory

A revolution in the social sciences began in the 1920s, when the man Time magazine called “the best brain in the world” decided he would work out how to win at poker. John von Neumann’s quicksilver genius accelerated the development of the atomic bomb by a year, and he was one of the fathers of the computer. He also spawned dozens of stories about his prodigious mathematical ability: In one, he turned down funding for an early supercomputer designed to solve a mathematical problem–and instead came up with a solution using pencil and paper.

Von Neumann was only interested in poker because he saw it as a path toward developing a mathematics of life itself. He wanted a general theory–he called it “game theory”–that could be applied to diplomacy, war, love, evolution or business strategy. But he thought that there could be no better starting point than poker: “Real life consists of bluffing, of little tactics of deception, of asking yourself what is the other man going to think I mean to do. And that is what games are about in my theory.”

Read the rest at Forbes.com, as part of a survey on “Games”.

I found William Poundstone’s biography of Von Neumann, “Prisoner’s Dilemma“, helpful in writing this piece, but Forbes couldn’t make space for a link. Check the book out.

13th of December, 2006Other WritingComments off

Latest Dear Economist letters

The latest Dear Economist letters are:

They are all available on the Financial Times website, free of charge. There is even an RSS feed so that you can subscribe.

25th of November, 2006Dear EconomistComments off

The latest Undercover Economist columns

The latest Undercover Economist columns are:
Think inside the box – October 25th
My boss is 65 and pregnant – November 4th
Cereal killers – November 11th
Yule be sorry – November 18th
Patience, patience – November 25th

They are all available on the Financial Times website, free of charge. There is even an RSS feed so that you can subscribe.

Bastiat Prize winners

Just back from a trip to New York where, I’m delighted to report, a distinguished panel of judges agonized over whether to give the Bastiat Prize for journalism to me or to the excellent Jamie Whyte for so long that they had to give it to us both. Check out some fantastic essays byJamie, Ila Patnaik, Gabriel Rozenberg and the other shortlisted writers.

4th of November, 2006MarginaliaComments off

Bikini Waxing

The FT forgot to post this piece online, so here it is in full:

Dear Economist,
Bikini waxes: boyfriends seem to like the results, but they hurt. What would you say were the costs and benefits?
Yours,
Sylvia, via email

Dear Sylvia,
Thank you for sharing your concerns. I have never had a bikini wax myself and prefer not to comment on the aesthetic qualities of the practice. Nevertheless I believe there is an important economic insight to take on board: you are making what economists would call a “relationship-specific investment”, and such investments have consequences.
Admittedly, getting a bikini wax is not as serious a business as having a child, or indeed a prominent tattoo reading “Sylvia for Tim”.
Still, it is something that only one boyfriend is likely to enjoy; should he prove insufficiently appreciative, your depilation is not something you will be able to advertise to other admirers unless you have an unusually frank flirtation technique, or a career as a pole dancer.
When businesses install equipment or learn techniques to satisfy the requirements of a particular customer, they usually do so only when protected by cost-sharing arrangements or a long-term contract; sometimes the client will even merge with its supplier. Those who do not risk being exploited: once the one-sided commitment has been made and the costs have been sunk, they find the other side reneging on the deal.
You should learn the same lessons. Cost-sharing might be a fancy weekend away; a long-term contract might specify that your boyfriend does the washing up. (Get it in writing.) And as for a merger? Marriage, of course, or an engagement assured by a suitably expensive rock.
Whatever it is you want from your boyfriend, make sure you get it before you make your own painful investment. You need to understand when your bargaining power is waning or – ahem – waxing.

Latest Dear Economist letters

The latest Dear Economist letters are:

They are all available on the Financial Times website, free of charge. There is even an RSS feed so that you can subscribe.

21st of October, 2006Dear EconomistComments off

Recent Undercover Economist columns

The latest Undercover Economist columns are:
Student boozing – September 23rd
Why are kids fat? – September 30th
Why we’re all selfish – October 7th
The economics of ghettos – October 14th
In praise of bounty hunters – October 21st

They are all available on the Financial Times website, free of charge. There is even an RSS feed so that you can subscribe.

RSS feed of Undercover Economist

This will be the last reminder for a while: Undercover Economist columns are now available free on the FT site, with an RSS feed here. I’ll continue to post other articles here.

30th of September, 2006MarginaliaComments off

Forbes: The economics of Trust

Imagine going to the corner store to buy a carton of milk, only to find that the refrigerator is locked. When you’ve persuaded the shopkeeper to retrieve the milk, you then end up arguing over whether you’re going to hand the money over first, or whether he is going to hand over the milk. Finally you manage to arrange an elaborate simultaneous exchange. A little taste of life in a world without trust–now imagine trying to arrange a mortgage.

Being able to trust people might seem like a pleasant luxury, but economists are starting to believe that it’s rather more important than that. Trust is about more than whether you can leave your house unlocked; it is responsible for the difference between the richest countries and the poorest.

“If you take a broad enough definition of trust, then it would explain basically all the difference between the per capita income of the United States and Somalia,” ventures Steve Knack, a senior economist at the World Bank who has been studying the economics of trust for over a decade. That suggests that trust is worth $12.4 trillion dollars a year to the U.S., which, in case you are wondering, is 99.5% of this country’s income. If you make $40,000 a year, then $200 is down to hard work and $39,800 is down to trust.

How could that be? Trust operates in all sorts of ways, from saving money that would have to be spent on security to improving the functioning of the political system. But above all, trust enables people to do business with each other. Doing business is what creates wealth.

Of course, as Mr. Knack admits, this loads a lot onto a short word. So it’s worth trying to get under the surface of trust in rich countries. Economists distinguish between the personal, informal trust that comes from being friendly with your neighbors and the impersonal, institutionalized trust that lets you give your credit card number out over the Internet.

The two types of trust are correlated with each other, because we are more willing to trust people if we feel that, ultimately, we can call the police or get a fair hearing in court.

“The reason why the U.S. is richer than Somalia is mostly not because of culture. The great thing about formal systems, when well designed, is that they make a little bit of public spirit, altruism or professionalism go a long way,” says Paul Seabright, an economics professor at the University of Toulouse.

Formal or institutionalized trust sounds cold and unpleasant, but it is just as useful as the personal variety, perhaps more so. Our parents might have enjoyed a line of credit from the friendly owner of the local grocery store. We don’t get the same personal service, but we get something much more useful–we can run a line of credit pretty much anywhere, from a hotel in Shanghai to a diner in Memphis to a supermarket in Berlin. Those places don’t actually trust us enough to lend us money, but Visa or American Express will, and that will do just as well.

This matters. Adam Smith, the father of modern economics, argued that wealth was built on the division of labor. He gave the famous example of the pin factory in which one worker drew out the pin wire, another cut the wire, a third added the pin head, a fourth sharpened the pin to a point and so on. But the pin factory achieves nothing if the workers can’t trust each other, and a modern global economy relies on a division of labor and the accompanying trust that spans the continents many times.

Seabright’s book, The Company of Strangers, makes this point with reference to the author’s shirt: “The cotton was grown in India, from seeds developed in the United States; the artificial fiber in the thread comes from Portugal and the material in the dyes from at least six other countries; the collar linings come from Brazil, and the machinery for the weaving, cutting and sewing from Germany; the shirt itself was made up in Malaysia.” It’s just a shirt, and even then it is far too complex a product to be facilitated merely by a network of people who know and trust each other personally.

Yet in a place like Somalia, personal trust is all that is available. It is a war-torn country in the horn of Africa which lacks anything we would recognize as a government, and entrepreneurs have to rely on much more local, primitive and less effective forms of trust. Somalis often rely on clans to settle disputes. That can work well if you’re arguing with someone from the same clan, but cross-clan disputes are often messy and unfairly resolved. (Anybody who thought Somalia’s poverty had to do with a lack of natural resources might take a look at resource-rich Nigeria, a country which is nearly as poor, and then at resource-poor Singapore, one of the richest countries in the world.)

That is a reminder that institutionalized trust might be even better than the touchy-feely type, which simply isn’t available to everyone. Personal trust can be benign, but it can also be embodied by the old-school-tie network, political patronage or a criminal mafia.

“Factors which increase trust in society are not necessarily a good thing, because they can increase the bonds between gang members, whose main economic success comes from extorting or coercing other people,” explains Seabright.

Trust can also be denied to ethnic minorities: the credit card companies may not be entirely blind to race, sex, color and creed, but I am willing to bet they are much closer than the local bank manager in the 1950s.

Economists Kerwin Charles and Patrick Kline have tried to put their fingers on the arbitrariness of personalized trust by looking at car pooling and race. They argue that car pooling is a good measure of trust: can you trust your fellow travelers not to be late, drive badly or murder you and leave your body in a ditch?

Charles and Kline predict that, for example, African-Americans will find it easier to car pool if they live in an area with lots of other African-Americans. The statistics seem to bear them out. Trust matters, and if you live in an area full of people who look like you, you will enjoy more of it. Perhaps the institutionalized version of trust is not so bad after all.

Meanwhile, experimental research by economists Ed Glaeser, David Laibson and Bruce Sacerdote shows that the way people trust each other simply isn’t fair. The researchers organized a “trust game.” Two students met ahead of time to size each other up socially, then they played the game. The first student could give up to fifteen dollars to the second student; the experimenters doubled the gift, and then the second student had to decide how much to give back. The game is a measure of trust because the first player has the power to double the size of the pie, but only at the risk of getting nothing back from the second player. What was striking is how much social factors such as race and status encouraged the second player to be trustworthy.

“If the first player has a sexual partner, the second player will send back 17% more than they otherwise would have done,” observes David Laibson, a professor at Harvard. Since the second player doesn’t know about the existence of a boyfriend or girlfriend, Professor Laibson thinks that it’s a proxy for charm, status and social capacity.

The second student will also send more money if the first student drinks more beer–suggesting sociability–or if he or she is of the same race. Pure status matters too. Students who have fathers with a college degree, or who don’t have to work to fund their studies, receive significantly more money.

“And America is supposed to be a classless society,” comments Professor Laibson. Trust matters, but if you really want to bask in its effects, make sure you start at the top of the heap.

First published at Forbes.com

25th of September, 2006Other WritingComments off
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