Tim Harford The Undercover Economist

Articles published in March, 2008

Electoral college study

Dear Economist,
I’m an American. As you know, the primary elections are heating up here, and in a few months we’ll have the real thing. Eight years ago I caught flak from my wife for not voting; I tried pointing out the minuscule impact of a single vote (mine). She responded that if everyone thought as I did, no one would vote. However, I don’t make decisions for everyone, just myself. Is it rational for me to vote, considering only the effect of my vote on the outcome of the election, and leaving out (for once) my wife’s lowered opinion of me?

Dear P.B.,

I accept that your vote has almost no chance of deciding the outcome. Even in the infamous Bush-Gore contest in Florida in 2000, the chance that a single Florida voter could have changed the outcome seemed minuscule at the time. With hindsight it was zero, since the official margin of victory was more than one vote.

For this reason, nobody votes hoping that his vote will change the outcome. We vote instead because we like to feel involved, out of a sense of duty, or – importantly – to avoid being criticised by our friends and loved ones. These motives are enough to get about half of us out to the polls, but not enough to persuade us to engage in pointless research into the details of each candidate’s policy platform. All of which explains why many people vote, but few do so in an informed fashion.

None of this changes the fact that democracy is useless without a decent number of voters. That is why your wife is right to put you under pressure. It should go without saying that ignoring her would be highly irrational.

Also published at ft.com.

29th of March, 2008Dear EconomistComments off

Green lite

I recently discovered that I am entitled to an occasional tax-free breakfast, because I cycle to work. (The UK government advises that “Under general principles such meals are a taxable benefit in kind but regulations exempt them from tax, as long as they are provided on designated ‘cycle to work’ days.’’) Good to know – and a reminder that the idea of using the tax system to promote environmental goals has taken a wrong turn somewhere.

The basic idea behind green taxes is sound. Since people usually respond to financial incentives, whenever something is taxed they tend to do less of it. Usually, that is a problem. When the government taxes income, we slack off. When the government taxes moving house, we may stay in the wrong size house on the opposite side of town from our new job. What’s more, whenever the tax dissuades someone from earning income or moving house, the tax office loses out as well.

But when the government levies a “green tax’’ – that is, a tax on some polluting activity – these vices become virtues. If the tax does not dissuade the polluters, they pay through the nose, funding public spending or tax cuts on the rest of us. And if the tax does dissuade the polluters, all the better, because pollution will fall.

All very well in theory, but the practice has been shameful. Green taxes have been fussy and poorly-targeted, by turns too stringent and too lax. For fussiness, one need only point to the tax break on occasional breakfasts for bicycling commuters. It is hard to imagine that the environmental benefits outweigh the red tape, but no doubt some minister was able to burnish his or her green credentials with the hare-brained scheme.

As for the evidence of inept targeting, simply contrast the two most significant features of the UK’s green tax “system’’. On the one hand, fuel for domestic heating is effectively subsidised, attracting VAT of 5 per cent instead of the usual 17.5 per cent. On the other, the tax on petrol, which raises far more money than any other green tax in the UK, is a lot higher than can reasonably be justified on environmental grounds and was raised still further in the recent budget.

That conclusion comes from the environmental economists Ian Parry and Kenneth Small, who tried to estimate the appropriate gasoline tax in the US and the UK, taking into account congestion, pollution, and the fact that gasoline tax revenue would allow other taxes to be cut. They concluded that US gasoline tax should be more than doubled, while UK gasoline tax should be roughly halved. Green taxes are a good thing – but we all know that you can have too much of a good thing.

What are we to make of a government that is so confident of its omniscience that it will subsidise my breakfast on environmental grounds, yet at the same time cannot get the most basic decisions right, setting petrol tax far too high and tax on domestic fuel far too low?

I realise that I am complaining that gas-guzzlers are taxed too much and pensioners in fuel poverty are taxed too little. Fine. I’ll contribute my tax-free breakfasts to the pensioners and recommend that the government use its much-vaunted winter fuel payments to deal with the problem. But holding domestic fuel taxes low, thus encouraging the entire nation not to bother with double glazing, is a clumsy way to help the vulnerable.

But I am not holding my breath waiting for sensible green taxes.

This government – like most governments – likes to use the tax system as a way of expressing its moral views: hooray for pensioners, down with Jeremy Clarkson. Cheap politics for them, less so for the taxpayer.

Also published at ft.com.

Business Life: Quiz kids

First published in Business Life Magazine, November 2007

I remember Saturday evenings when I was a boy, curled up in a towel after bath time to watch game shows such as “The Price is Right”. Little did I know it, but those Saturday evenings were preparing me for life as an economist.
Economists have theories about how people behave, but those theories are hard to test in the muddle of the real world. And laboratory experiments may be no better, because the stakes are too trivial to see how people act under pressure.
That is where the game shows come in. Like real life, game shows are often played for high stakes. But like the laboratory, the rules are simple and the experiment is repeated over and over again.
In one early piece of game show research, economists Jonathan Berk, Eric Hughson and Kirk Vandezande showed that contestants in “The Price is Right” made transparent mistakes but learned from them.
Four contestants would in turn name a price for some household object such as a toaster. The contestant who got closest to, but not over, the correct retail price would win. The other contestants would get another chance.
If you’re smarter than the average contestant you’ll see that the fourth person to bid has an advantage. Since you want to be closest, but not too high, the best strategy is to guess just one pound higher than one of the other contestants (or zero, if you think they’re all too high). Not many contestants did this, but once somebody figured it out, the others were more likely to use the tactic in later rounds.
The economics of quiz shows hit the big time with Steven Levitt, now famous as the co-author of Freakonomics. Levitt tried to understand what was behind discrimination in the job market: did people simply dislike ethnic minorities or the elderly? Or did they believe them to be less competent?
For the answer, he looked to “The Weakest Link”, in which contestants vote for other contestants to be excluded. The best approach is to vote off weak players early on, because they’re costing everyone money – but later, to vote off strong players, because they are the most dangerous competition.
Levitt showed that elderly players tended to be voted off at any stage, suggesting a pure dislike for them. Hispanic players were likely to be voted off early but kept on later in the game, implying that other contestants thought they weren’t very smart.
The game show boom in economics is still going. I’m aware of eight economists who’ve studied “Deal or No Deal”. If only I’d been thinking like an economist when I was younger, I could have beaten them all to it.

28th of March, 2008Other WritingComments off

Home Economics

Dear Economist,
My fiancee is moving in with me. We’ve lived together before, and we hate housework. Before, we didn’t do work in retaliation for housework not done by the other. This led to a suboptimal equilibrium of dirty floors and resentful cohabitants. This time I want to create an incentive scheme to keep our house clean and us happy. I am reluctant to assign monetary value to chores, as this can backfire. Weekly rewards, such as choosing a Friday night restaurant, seem gimmicky. But I can’t think of a better idea. I have racked my brain and time is running out! Help me, Undercover Economist, you are my only hope.
Home Alone

Dear Home Alone,

If this were a holiday fling, the outcome would be clear: each of you would prefer the other to wash the champagne flutes and make the bed in the mornings, but lacking any mechanism to enforce co-operation you might both slack off and feel resentful. It is often the case that brief encounters can be mutually exploitative.

Yet economic theory, experiment and practical experience all suggest that in the most unpromising situations, the bitterest adversaries find a way to get along when they are stuck with each other. Reciprocity seems to be the key. Soldiers in the trenches of Flanders practised “live and let live” when the generals were not looking. The cold war did not end in mutual annihilation.

I venture to say that if this time you and your fiancee can’t even match the grudging co-operation of Khrushchev and Kennedy, you will at least be warned before the wedding day that housework is the least of your worries.

Also published at ft.com.

22nd of March, 2008Dear EconomistComments off

Eternal enigma

Friends of mine, husband and wife, once argued over the price of a branded packet of lemon slices bought at some convenient corner shop or petrol station. She complained that the slices weren’t worth the price she had paid. He pointed out that she had bought them – albeit grudgingly – knowing exactly how they tasted, and that therefore they had to be worth what she had paid. No prizes for guessing which of them is an economist.

We economists know a lot about pricing, but we tend to be baffled by the way the rest of humanity thinks about it. The package holiday offer, “Kids go free to Disneyland”, is, to an economist, a profitable attempt to charge more to couples with two incomes and no children, who are likely to have more cash to burn. To everyone else, it is an idea waved through unquestioningly.

How a pricing policy is presented clearly matters – which is disconcerting to economists, who can translate all the pricing into mathematical equations and make the presentation irrelevant. It seems to be acceptable to charge a higher mark-up for fair trade coffee, organic bread or lower-emission petrol. It is not acceptable for businesses to say, “we are such fans of exploitative coffee, pesticide-laced loaves and dirtier petrol that we’re willing to discount them and accept a lower profit margin.” Underneath the gloss, the pricing policies are, nevertheless, identical.

The most common puzzle of all, to an economist, is why prices so rarely rise in the face of a shortage. There was a shortage of Wii games consoles last Christmas, Xbox 360s in 2005, PlayStation 2 consoles before that, and so on, yet the retail price remained the same. To secure tickets for a hot concert, you will usually need to go to a ticket tout, because the regular concert promoters wouldn’t dare charge a price that might bring demand down to the level of supply. And when US oil companies raised gasoline prices after Hurricane Katrina, there were howls of outrage – despite the fact that the refining infrastructure was badly damaged and it was self-evidently impossible to supply everyone at the customary lower price.

I have pondered before the very clever explanations economists produce to explain why prices do not rise to equalise supply and demand. Perhaps ticket prices are kept low to encourage a memorabilia-buying younger crowd. Perhaps popular restaurants like to have a waiting list for reservations because it adds to the cachet. Even I am starting to feel that these explanations sound strained: are these side-benefits really enough to outweigh the lost revenue from higher prices?

The intuitive explanation, of course, is that we irrationally object to high prices even when the alternative is rationing, long queues, and uncertainty over whether we can buy what we really want.

That is discomfiting for economists, but we might at least take solace in the idea that even though there is no immediate logic to a belief in the right price, there is at least an evolutionary logic. David Friedman – son of the late Milton Friedman, and a superb communicator of economics – has argued that our ancestors evolved in an environment where most transactions were one-on-one bargains. A hard-wired refusal to accept something other than the customary price would, in such a setting, be an advantage. Anyone who reacts to a price rise with irrational rage turns out to be a strong negotiator.

Our stubborn preference for a just price evolved in a setting that is no longer common; but evolution does not respond quickly, which may be why we still shriek with outrage at price hikes. It would also explain why ticket touts still make a living.

Also published at ft.com.

Sweet Justice

Dear Economist,
A single Milky Way costs 20p in my local corner shop. A twin pack costs 47p. I’ve made a habit of checking the prices in other shops and a twin pack invariably costs more than two singles. What could be the cause of this apparent madness?
The madness in pricing, that is, not the madness of a twenty-something compulsively checking the price of children’s sweets.
Kendrick Curtis, via e-mail

Dear Kendrick,

I am composing this reply overseas, far from the British corner shops where I can check your story, but what you say rings true. In my own travels around shops with a clipboard – a sure way to make the staff twitchy – I have often discovered products with an unexpected mark-up. One example was the medium-sized pack of washing powder priced at rather more per 100g than the small or the large.

All shops want to offer competitive prices to customers who demand them, while charging more to customers who do not much care. Random mark-ups will do the trick: they are easily avoided by bargain hunters but will often snare the unwary.

You are right that it does feel mad for a twenty-something to check the price of children’s sweets; that is why the pricing you describe is clever. I am confident that many adults do not consider the price of confectionery, and that most children do. If I am right, the mark-up on a twin pack is likely to be aimed with pinpoint accuracy at greedy, careless grownups. The children will find the cheaper deal – if they want two Milky Ways, they can buy two singles. Adults, their wallets overstuffed and the days of saving for penny chews long forgotten, will grab for a twin pack and pay more. It seems to me like sweet justice.

Also published at ft.com.

15th of March, 2008Dear EconomistComments off

Moments of truth

The three most familiar economic statistics are all measures of change: inflation, the growth of gross domestic product, and the daily rise or fall in the price of shares. Even so, they do not begin to capture the mad churn of the economy: the growth and bankruptcy of companies; the millions of sackings and hirings, which unemployment statistics barely summarise; the movement of goods and services around the world and the ebb and flow of consumer fads. Under the circumstances, it is strange that economists do not have a satisfactory way of talking about change; yet we do not.

As any undergraduate student of economics knows, both microeconomists and macroeconomists tend to describe change in the same way that an advertisement for washing powder does: “before” and “after”. When oil cost $20 a barrel the economy looked like this; now oil costs $100 a barrel, the economy looks like that. Quite how the process of change occurred – or how quickly – is a problem glossed over in the textbooks and most journals.

That is worrying. Perhaps it does not even make sense to compare two static “before” and “after” states; perhaps “during” is everything. In fairness, economists are not blind to this problem. Back in 1923 John Maynard Keynes warned that “Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.” He was not the only one with reservations. Yet identifying the problem is easier than solving it, at least using the mathematical tools with which economists are familiar.

Several popular books have argued that economists could learn about dynamics from approaches developed in the sciences. Malcolm Gladwell, a journalist, wrote an entire book – The Tipping Point – devoted to the idea that innovations, fashions and other ideas spread through society in much the same way as a disease does. Philip Ball, a science writer, attacked economics more directly in his book, Critical Mass, arguing that economists should learn from physicists’ understanding of dynamic processes, such as phase transitions. (An example of a phase transition is when cold water suddenly turns to ice. It turns out that, for example, traffic flows can exhibit phase transitions.) Still others advise economists to look to models of evolutionary dynamics.

This is all sage advice, but the details matter. Duncan Watts, who studies dynamic processes on networks, has discovered that neither Ball nor Gladwell has the whole story. Ideas can spread through an economy like a disease or like a phase transition – it all depends on how the social networks along which the ideas flow are connected.

In The Tipping Point, Gladwell focused attention on highly connected individuals – the “connectors” or the “influencers” – who were able to spread anything from a fashion trend to a new software release. He was influenced by epidemiologists who already knew that diseases often spread through such “connectors”. But Watts points out that ideas can flow along many more connections than diseases do. That implies that the epidemiological model does not apply, and a new trend will either ripple through the economy like a near-instantaneous phase transition, or it will ripple nowhere at all because it never gets started. And in either case, the “connectors” will be irrelevant, because we’re all so interconnected anyway.

My guess is that it is just a matter of time before economists embrace methods from other disciplines in an effort to understand dynamic processes better than we do.

But it would be a shame if we looked only to physicists, chemists and biologists for advice; something would be missing if we did. Duncan Watts, after all, is a sociologist.

Also published at ft.com.

In-law Society

Dear Economist,
My extended family is very important to me, and I try to make the time to visit them. Unfortunately my husband doesn’t see things the same way. He works very long hours, and says he is tired after work and prefers to stay at home with me. (Actually, he usually watches television.)
Recently, he has been invited to apply for a job that will mean shorter working hours. Should I encourage this? Will he join in more with the social activities that are important to me?
Worried Wife, Cirencester

Dear Worried Wife,

What you seem to be asking is whether shorter working hours encourage social interaction outside the home. It’s a hard question to answer; some studies suggest that people who work long hours spend more time socialising and joining societies or clubs: work hard, play hard, that kind of thing. But that may just be because they are ambitious people with lots of energy and little need for sleep.

There is one study, by economists Henry Saffer and Karine Lamiraud, that might throw some light on your question. They looked at what happened when France reduced the working week from 39 hours to 35. The law came into force in 2000 for companies with more than 20 employees, and in 2002 for smaller businesses and for the civil service, creating a natural experiment for the researchers to study.

Their conclusion: hours of work did indeed fall, but few people used their extra free time either to visit relatives or to join a book club. I am sorry to disappoint you, but my guess is that if your husband wanted to hang out with your mother, he would already be doing so.

Also published at ft.com.

8th of March, 2008Dear EconomistComments off

Meltdown economics

So much hot air has been spouted over climate change it is a wonder the ice caps haven’t melted already. At first the debate was whether climate change was happening, and if so whether it was humanity’s fault. Far too late for the tastes of most economists, the debate then started to encompass other important questions, such as whether the costs of responding to the threat outweighed the benefits. Learn More

Exit strategy

Dear Economist,
I am amazed by people who stand outside in front of the opening doors of trains and lifts knowing full well that the people inside will have to exit before they can enter. Obstructing the Exiters will only delay them, and the Enterers seem to be in such a rush that this is surely not in their best interests. What is astonishing is that this is a universal phenomenon. Explain!
Nazir Kazi

Dear Nazir,

I, too, have observed this phenomenon with trains but more rarely with lifts, and I think that suggests an explanation.

It is true that by obstructing people who are leaving the train, people may delay it by a few seconds.

A few seconds delay to everyone on the train is an appreciable social loss, but scarcely matters to the selfish individual in question.

True, a delay is a delay.

But you have misinterpreted what such people are aiming to do. They are not trying to hasten the departure of the train; they are trying to get a seat. That means being the first into the carriage just as seats are being vacated, which in turn means standing in front of the opening doors and generally getting in everybody’s way.

It is a classic prisoner’s dilemma: everyone would be better off if everyone hung back, but each individual does better for himself by pushing forward.

It is not surprising that this behaviour is more unusual when it comes to lifts. Lifts do not have seats, and usually have room to accommodate everyone who is waiting.

The behaviour you describe is selfish, but it is not irrational.

Also published at ft.com.

1st of March, 2008Dear EconomistComments off


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