Articles published in September, 2006

Dear Economist

A friend of mine was recently in Mumbai where many pirated books from the west were on sale on the street. Along with Harry Potter, there was The Undercover Economist, priced at 3.95 rupees.

It was clearly a counterfeit - it is printed on inferior paper and smells rather gratifyingly of printer’s ink. Knowing that it was a breach of copyright, should my friend have bought the book, thus aiding and abetting a criminal act and depriving you of your royalty? And after my friend had bought it, should I have accepted the gift? And having accepted and read it, should I send you your royalty payment? I have the book and cannot find the chapter which answers this.

Christopher Hird, London

Encl: photograph of counterfeit book

Dear Mr Hird,

Faced with this kind of illegal competition, the publishers tend to move upmarket, offering higher prices and higher quality and presuming that they will not be able to beat the counterfeiters on price. (The illicit copy cost about five pence - less even than my miserly royalty.) Those with scruples lose out, as do I and the publishers.

But that can hardly be your concern. Even though the cheap version is inferior, it is a similar product. You did not, for instance, miss out on the “official” discussion of piracy because it’s not in the legal edition either. So you and your friends cannot be blamed for breaking the law and buying the illicit version…

Continued at ft.com

The Undercover Economist - FT Magazine

Young Miss Harford is finally asleep, and I’ve had a hearty supper, but instead of chatting to my wife or curling up on the sofa with The New Yorker, I am sitting at the computer writing this article. My wife is working too. I don’t recall my father working in the evenings very often and I’m sure that his father did nothing of the sort. Strange, then, that economists believe we are enjoying more leisure time than ever.

Thanks to the washing machine and the electric iron, the microwave and dishwasher, we are much more productive at home than our grandparents, and similarly much more productive (and thus richer) at work. Pure economic theory tells you little about what that might mean for our leisure time. It is true that we do not need to work as hard to earn the same income or wash the sheets, but higher productivity can also tempt us to work more. Before washer-dryers, few people would have dreamt of washing their clothes after wearing them for just one day, while part-timers at Goldman Sachs are sacrificing more money than part-timers at McDonald’s.

So economists have turned to data instead, generally based on surveys asking people to describe how they spent the previous 24 hours. There has been a vast outpouring of research on the subject, which the American economist Mark Aguiar helped me untangle. And out of the mass of information there are some clear trends.

First, the typical American works less than he or she used to and has more leisure time. This is a long-standing trend that runs back a couple of centuries or so. Men work fewer hours than they did in 1965 and enjoy six to eight hours more leisure per week. Women also do much less housework than they did, and although they are more likely to have jobs, the typical increase in leisure time is still four to eight hours a week.

My wife might disagree with that last point, but so will many other readers. That is perhaps because FT readers are not typical. The people enjoying all this extra leisure are the couch potatoes at the bottom of the heap economically and educationally. “Enjoying” might well be the wrong word, since two-thirds of the extra leisure time for men is spent by men who have no jobs at all and might well wish they did.

At the top of the pile things are different: economists Peter Kuhn and Fernando Lozano find that skilled, salaried workers are increasingly likely to work more than 50 hours a week in their main job. FT readers who think their jobs are tougher than those of the previous generation are probably right…

Continued at ft.com

My young children, aged five and eight, are driving me insane. I try to discipline them, but they can be so wilful. At times I lose my temper and spank them. Is this wrong?

What else can I try?

Yours,

Gill Harnsley, Chelsea

Dear Ms Harnsley,

Children are rational utility maximisers, but they have a high discount rate and therefore a short time horizon. Small immediate punishments and rewards are the most efficient way to give them the right incentives to behave.

Parents have trouble making credible promises of future punishments. Rational children know they can ignore threats of punishment if you have a record of bluster.

These two facts together argue for the time-honoured tradition of a chart with stars and black marks. The immediacy of the reward or punishment outweighs the fact that it is, after all, just a mark on a bit of paper. The chart can be reinforced by tying pocket money to the number of stars minus the number of black marks. This is an objective, transparent policy framework that will make it harder for you to renege on your threats: if the black marks are there on the chart, you can hardly cough up the allowance at the end of the week.

There is no need to spank your children unless you are poor. This is not to hold poor parents to different standards, simply to recognise that if a family is not rich enough to pay a generous allowance, then there is no financial threat available. The main alternative to withdrawing pocket money is spanking, which is free…

Continued on ft.com

First published, BBC Online.

It should go without saying - but never does - that your boss is overpaid and underworked, while you and your colleagues toil long hours for peanuts.

But beyond the fact that life is cruel, is there a rational explanation for this?

An economist called Ed Lazear has one. He noticed that in a sporting tournament - say, Wimbledon - players are paid for winning rather than for trying.

But they try anyway.

Lazear thinks the same is true of office life. Nobody thinks that Roger Federer’s cheque at Wimbledon is supposed to be his payment for turning up at the next tennis match.

They realise it’s a reward for his past victories and a motivation for every other player to go away and practise, so that next year they will play better.

Your boss’s easy lifestyle and “fat cat” salary are just the same.

They are not supposed to be a motivation for him, they are supposed to be a motivation for you and me and all the other workers who are struggling to get to the top of the heap.

In fact, the more egregious his salary the more hard work it should squeeze out of everyone else who wants it.

Lazear and his fellow economists call this “tournament theory”.

That explains a lot about why office politics can be so endemic - one way for you to win the tournament is for your colleague to lose.

Using a tournament to encourage hard work can backfire if employees decide it’s easier to sabotage each other than try to shine themselves.

But why do companies have to reward their workers in such a strange way? Why not simply pay people according to their objective performance rather than set them against each other?

Unfortunately, it’s not that simple.

It will always be easier to say that Jill is a better worker than Jack than it will be to give some objective performance measure for either of them.

Companies can rely on apparent measures of performance, like profit-sharing or stock options, but profits and share prices will bounce up and down in response to recessions, bad weather, terrorist threats or unexpected competition.

They are risky for workers without really encouraging them to work harder. A tournament makes better sense.

The real problem is that it’s tough for a company to work out who’s talented and who’s not, who’s hard-working and who is a layabout.

The boss is in the same position as the buyer of a second-hand car. The car might look good on the garage forecourt, and the eager young salesman might seem good in an interview or a performance review, but what’s really the truth?

That isn’t just a problem for the boss. It’s a problem for the workers too.

If you’re talented and hardworking, how can you prove it so that you can get a job or get a pay rise? It can be tough to get a foot through the door at all.

Economists argue that one way forward is to do something that a lazy person simply wouldn’t or couldn’t do - a degree in philosophy, for instance.

After all, people with philosophy degrees generally make more money than people with no degrees at all.

Can that really be because philosophy degrees are great training? Surely not.

It’s all about proving yourself. Philosophy is hard work and requires you to be brainy. And getting that philosophy degree isn’t about learning to be productive, it’s about proving that you already are.

This view of education - called “signalling theory” - was developed by an economist called Michael Spence, who eventually shared the Nobel prize in economics.

Spence’s first degree? Philosophy.