Tim Harford The Undercover Economist

Articles published in July, 2007

Network worth

Dear Economist,

I am a senior political figure who has just left office. I always believed that I could make up for years of badly paid public service by advising a major company for a fat retainer. I know nothing about business, yet my network of contacts would be invaluable.

But somebody has just shown me a thing called “Facebook”, which they say is being used by lots of new graduates. I have been told that the economic value of my “network” is not what it was. What is going on?

Yours, T.B.

Dear T.B.,

Perhaps you were busy contemplating international affairs when the dot-com bubble burst?

You seem to be thinking of a simplistic model of networks, in which size is everything. One fax machine can do nothing, two can talk to each other, and because each new machine can connect to the entire network, each new machine adds more value than the last. Ditto for mobile phones, eBay and Facebook: twice as big is much more than twice as valuable. Venture capitalists therefore pay big bucks for large networks, no matter how shallow.

Yet this simple arithmetic ignores an offsetting effect: diminishing marginal returns. The first mobile phones were used to conduct multi-million-dollar deals. One more mobile phone today is one more source of classroom text messages. Many people who sign up to Facebook quickly find they have no use for it.

So do not despair that your network is smaller than your son’s list of Facebook friends. He may share the latest U2 single, but you have Bono’s phone number. There should be no trouble monetising that sort of access. Don’t fritter away your retirement leisure on Facebook.

First published at ft.com.

28th of July, 2007Dear EconomistComments off

Abroad consensus

If I don’t finish this column today, I’m in big trouble: I’ll be writing it on holiday, and my wife is likely to club me to death with a rolled-up copy of the FT’s glossy ‘How to Spend It’ magazine. She’s always telling me that I work too hard, and she may well be right. But what would happen to the economy if we all took life a little bit easier?

The simple answer is that we’d all produce less, which would mean more time to relax and fewer material goods to enjoy. The economy, as measured by gross domestic product, or GDP, would shrink. That would be just fine, of course.

GDP measures the total financial value of all the goods and services produced in an economy over the course of one year. Evidently, therefore, it leaves a lot out. For instance, sex in the context of a loving relationship is generally regarded as a good thing. Yet it would not show up in the GDP figures; sex with a prostitute would do just that, at least in principle. For such reasons, I often see proposals for superior measures of national welfare that allow adjustments for many things, ranging from environmental degradation and arms trading to time spent commuting.

I find such proposals very odd.

When a hatter measures the circumference of your head, he’s trying to work out what size of hat would fit you. It’s true that he has failed to gauge accurately your intelligence, but if you made that complaint he’d be puzzled. He’d be even more puzzled if you started proposing various adjustments. The same with GDP: it was only ever intended to measure economic transactions and there’s not much point in accusing it of failing to measure something else.

But if GDP leaves out so much that matters, why do my fellow economists lavish so much attention on the latest quarterly GDP growth figures?

Continued at ft.com, subscription free.

Professional killers

The attempted terrorist attacks in London and Glasgow three weeks ago surprised many people for two reasons: that the suspects were all educated medical professionals rather than desperate, uneducated vagrants; and that the job should have been botched so badly.

That educated professionals might turn to terrorism should not, by now, be much of a surprise. My colleague Gideon Rachman has reminded us that Osama bin Laden is an engineer who comes from a fabulously wealthy family and his deputy is a doctor.

The economist Alan Krueger, author of a new book called What Makes a Terrorist?, explores this phenomenon with a systematic study of the evidence. He concludes that terrorists, political extremists and those who commit hate crimes are often relatively well-to-do.

This is a difficult thing to prove, not least because each of those categories is controversial and there is a world of difference between, say, Northern Ireland and Sri Lanka. Krueger dips into different sources of data, each one imperfect, trying to build up a compelling picture from opinion polls, biographies of terrorists and broader studies.

Opinion polls from Gaza and the West Bank, conducted in December 2001, show that students and professionals are more likely than the unemployed or labourers to say that terrorism can be justified, and more likely to deny that a suicide bombing in a Tel Aviv night club should be described as “a terrorist act”…

Continued at ft.com, subscription free.

Umbrellas for all?

Dear Economist,

I am an immigrant who has lived in England long enough to know that I should never leave home without an umbrella. Many of my colleagues lack my foresight, which means that I often find myself bumping into them in the rain.

I always offer to share my umbrella and have noticed a pattern. Foreigners always accept. Indeed, one New Yorker actually links her arm with mine as we walk. But those whose families have lived here for generations prefer getting soaked.

A cost-benefit analysis would seem to suggest my umbrella is the better option. Yet fear of intimacy appears to trump self-interest. Can you explain?

Cosmo, London

Answer at ft.com, subscription free.

21st of July, 2007Dear EconomistComments off

Analysis: Repugnant Markets

I recently made a radio program about Al Roth’s concept of “Repugnant Markets”, with the excellent Richard Vadon as producer. The transcript stays up permanently.
The show includes Al Roth, Virginia Postrel, Bishop Lee Rayfield, Tom Shakespeare, Robin Hanson, Naomi Pfeffer and Andrew Oswald. I’m very pleased with it.

14th of July, 2007RadioComments off

Diary Management

Dear Economist,

My diary is back-to-back meetings from 9am to 6pm almost every day. These are not meetings I can avoid, and often I am double and triple booked. As well as this, I have real work to do. Having delegated everything I can to my team, I still find it difficult to leave the office before 8pm most days. This has gone on long enough! What should I do to get back control of my diary?

PM, via e-mail

Answer at ft.com, subscription free.

14th of July, 2007Dear EconomistComments off

Stakes in Kidneys

Economics is all about realising gains from trade, but sometimes our qualms get in the way. For example, most of us have a spare kidney that – since kidneys tend to fail in pairs – is not terribly useful to us. A few – over 6,300 on the UK waiting list – could have their lives transformed if they could get hold of a compatible kidney. The few have so much to gain; the rest of us, not that much to lose. Donating a kidney is not risk-free: it kills three out of 10,000 donors, which is three times the death rate from pregnancy. The logic of economics is that there is a cash price at which both donor and recipient would walk away smiling.

Of course, it isn’t legal to complete this transaction – unless you happen to live in Iran, where recipients are allowed to provide cash compensation to donors. From a utilitarian cost-benefit viewpoint, the prohibition doesn’t make much sense. But then, neither did the outrage over the Dutch Big Donor Show, in which three desperately ill patients competed for the kidney of a terminally ill donor. In the end, of course, the show turned out to be a hoax; the patients were in on the stunt and the donor was an actress. At the awful news that none of these sick people would receive a cure, the world breathed a puzzling sigh of relief.

Since kidney trades are illegal, it’s hardly surprising that there is a severe shortage of kidneys. Four hundred Britons die each year while on the waiting list for an organ transplant. The shortage is getting worse as diabetes and hypertension damage more kidneys.

All is not lost. While most people feel queasy at the idea of exchanging a kidney for, say, £20,000, they are happy with the idea of exchanging a kidney for another kidney.

In such a kidney exchange, two pairs of friends agree a swap in search of more compatible kidneys: I donate a kidney to your friend if you donate a kidney to my friend.

Continued at ft.com, subscription free.

Should people pay for new organs?

Last month, 20-year old David Lomas donated over half of his liver to save the life of his father, Stephen. It was an inspiring sacrifice.

There aren’t enough donors to go around, and 400 people die each year in the UK while on the waiting list for an organ transplant.

So what about a bit of basic economics here: if we want more live organ donors, shouldn’t we pay people for their trouble?

To many people, the very idea is offensive. But is our disgust reasonable, or is it costing lives?

Our notions of what should be bought and sold have changed over time.

Life insurance, for example, was considered ghoulish until the early 20th century.

Now it is regarded as something that every responsible person should buy.

Yet there are still many transactions – anything from sex to a kidney transplant – that are viewed as beautiful in the context of a loving relationship, but corrupted by a cash payment.

So what should we make of a market for organs?

Continued at news.bbc.co.uk, subscription free.

12th of July, 2007Other WritingComments off

Good investments?

Dear Economist,

George Soros sets aside a proportion of the profits from his financial gambles to fund educational foundations and other good works. In a humble way, I do the same. My modest five-figure portfolio of shares has performed well, and I give my adult children and the local church an occasional £500 out of the profits.

I had imagined I was doing good, but my satisfaction was recently www.buyambienguide.com punctured by an article in a left-wing journal which suggested that every successful mega-deal made by Soros is necessarily set off by an equivalent loss divided between a multitude of innocent little punters further down the line. In other words, he harms more people than he helps.

Is this correct? Am I also a hypocrite and a bad man?

John, Germany

Answer at ft.com, subscription free

7th of July, 2007Dear EconomistComments off

Criminal interest

Even I do not get terribly excited by the typical economics paper (a recent example picked at random: “Consumption and Labour Supply with Partial Insurance: An Analytical Framework”). But a couple of recent titles grabbed me and, much as I wanted to, I couldn’t look away.

One was “An-arrgh-chy: The Law and Economics of Pirate Organization”, while the other was the more sobering “Weaponomics: The Global Market for Assault Rifles”. Very different pieces of research, but both inhabit the tiny niche of the economics of crime.

Economists are interested in crime, of course: it’s big business and has a big impact on ordinary people. The trouble is that the conventional tools of empirical economics are usually brought to bear on publicly available price data, company accounts and national statistics. Inconveniently, Mafiosi rarely file statements of quarterly earnings.

An alternative economic approach is to look closely at everyday life and think about what you see. I try to follow this advice myself, and it is elegantly demonstrated in a wide-ranging new book from Robert Frank, The Economic Naturalist. And yet neither I nor, to my knowledge, Frank, have spent much time buying crack cocaine or observing human resources policy in the local street gang.

In case you’re wondering why, just think back to those images of Michael Dukakis in a tank or William Hague in a baseball cap, and you’ll get a sense of how badly an economist would blend in with a gang of racketeers.

Continued at ft.com, subscription free.

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