Tim Harford The Undercover Economist

Articles published in May, 2010

Business Life: As if by magic…

First published in Business Life magazine, October 2009

In the late nineteenth century, Buatier De Kolta was mesmerising audiences in Paris with his magical tricks. In one that had his fans and his rivals mystified, he produced huge bunches of paper flowers from an empty roll of paper.
One evening, a gust of wind blew one of the flowers on to the floor in front of the stage. A magician in the audience seized it and ran out. It wasn’t long before De Kolta’s trick was being performed by other magicians.
The story is told by the intellectual property expert Jacob Loshin. His research matters, if somewhat indirectly, because we need to understand how ideas are developed, emulated and protected in a world where those ideas, rather than simple objects, make of much of the wealth that is created.
Intellectual property law – which (as copyright) protects this article, and (as a patent) protects the design of the jet engines that are keeping you aloft – is clearly important. But it does not protect magicians’ tricks, nor is it much help in high fashion or in haute cuisine – all areas that Loshin describes as a “negative space” for intellectual property.
Lacking legal shelter, chefs and conjurors resort to professional norms. Modern-day magicians could hardly imagine the crude theft that De Kolta suffered, because they have developed a professional code of conduct to defend their most valuable property: their ideas.
Magicians’ norms encourage the selective sharing of techniques, limit copying, and credit the re-discoverer of a long-dormant technique with the same rights as the trick’s inventor. Interestingly, very similar norms govern the sharing of recipes among French chefs.
What enforces these rules? Social pressure. One company manufactured tricks that were protected by the magician’s code. This was perfectly legal. But magic journals would not accept the company’s ads and professional magicians would not buy its products. Bankruptcy soon followed.
These informal sanctions work well, but not perfectly, for both chefs and magicians. Magicians, of course, face a problem that chefs do not. Restaurant customers do not care if a chef’s recipe is revealed to the world, nor does his reputation suffer. But reveal a magician’s trick, and he – indeed, the entire profession – suffer from the loss of a little bit of mystery.
A notorious case was a series of 1990s television shows with the self-explanatory title, Breaking the Magician’s Code. They won big audiences by revealing the secrets behind classic illusions – and the television executives were simply immune to magicians’ social sanctions. Legal challenges, of course, did not succeed.
One magician complained that the shows were “peeing in everybody’s cornflakes”. Maybe. It is a reminder of how quirky intellectual property rights can be. Quirkiness is not usually easy for economists to deal with, but if we want to understand the intangible economy of ideas, this is a trick we shall have to master.

30th of May, 2010Other WritingComments off

Does free internet access really exist?

Dear Economist,
While on a brief break in Devon, I was sitting in a coffee shop that provides free wireless internet access. As the lunch hour approached, the proprietor asked me to vacate the table for four because he wanted it to be free for a lunch party. This made me feel as though he didn’t really appreciate my being there – even as a paying customer.

Should the coffee shop offer wireless internet access if it isn’t willing to accept the opportunity cost associated with it?

Jon Upton, Paris, France

Dear Jon,

As a man whose espresso is rarely complete without a laptop alongside it, I sympathise with your plight. But I also sympathise with the difficulties of the café owner. The café, like many businesses, offers free goods and services bundled together with the products it sells. You are charged for your coffee, but not for the use of a cup and saucer. Sugar is free.

The trouble is that sometimes these services can be very costly to provide. At lunchtime the opportunity cost of letting you take up a table for four is substantial. Sometimes restaurants cope with this by charging high premiums for products that go hand in hand with long sittings – wine, starters and desserts. At other times they are forced to be more direct.

The wireless access, cheap to provide at any time, is a side-issue. The difficulty is that people like you take it as an invitation worth abusing. Perhaps the proprietor should switch it off at lunchtime. Perhaps he should forewarn customers with a little sign.

But should that be necessary? There are tacit agreements governing the fair use of these “free” resources. If you had walked off with your cup and saucer, or half a kilo of sugar, the owner would have challenged you, sign or no sign. Would you then have felt unwelcome? You would have been unwelcome for a reason.

Also published at ft.com.

29th of May, 2010Dear EconomistComments off

Everybody wants fair play – shame we can’t agree what it is

Labour’s election slogan, “a future fair for all”, was vacuous. No surprise there, I suppose: it was an election slogan after all. Fairness is one of those ideas that fails a basic test in a slogan or a mission statement – could you imagine anyone campaigning for unfairness? Moreover, fairness means very different things to different people.

For instance, if Sue earns £20,000 and Jane earns five times as much, £100,000, what’s the fair burden of tax? An extreme libertarian view is that all tax is armed robbery from the biggest gangster of all, the government. An extreme utilitarian view is that as long as Jane’s post-tax income is greater than Sue’s she has less need of the money and should be the first port of call for any extra taxation. It would be perfectly fair, under this view, for Jane to pay 75 per cent tax and Sue to pay nothing, and the only objection would be the practicalities.

I have a grudging respect for both sides of this argument. But in reality, we fudge a middle ground. Most people seem to think that it’s reasonable for Jane to pay a higher percentage of her income as tax than Sue does. But some would say that if Jane pays £10,000 and Sue pays £3,000, Jane has contributed more than her fair share, even if the average tax rate she faces is lower. Further confusing the issue are taxes on fuel, cigarettes, air fares and other items which are correlated – imperfectly – with a particular level of income.

Greg Mankiw, a Harvard economist, author of a bestselling textbook and a former adviser to George W. Bush, has published an essay arguing that the utilitarian viewpoint, even in a mild form, is wrong. He thinks most people would agree with him once they thought about the implications. One such implication is that the US should www.medsforhairloss.com impose a heavy tax on all its citizens and send the cash to much poorer people in the developing world. Mankiw is right to think that few Americans would support such a policy; he’s wrong to regard this as a strong argument against utilitarianism. It might equally be an argument against treating casually held moral intuitions too seriously.

“Fairness”, in Mankiw’s view, is not about distribution, but about people getting what they deserve. But that naturally raises other questions. I’m not convinced by Mankiw’s various arguments, but another Harvard academic, the late Robert Nozick, produced a much better one: the famous “Wilt Chamberlain” thought experiment.

Imagine, said Nozick, a “fair” distribution of income. After the government somehow imposes that distribution, then imagine that a million people are willing to pay 25 cents each to see basketball games featuring Wilt Chamberlain, a star of the day. Each is now 25 cents poorer and Chamberlain is a quarter of a million dollars richer. Everyone has been made happier by this voluntary set of transactions. How, then, can we say that the original distribution was “fair” and the new distribution is “unfair”? Leaning on this logic, Nozick argued that fairness must be more a matter of fair processes rather than fair shares.

The difficulty with both the Wilt Chamberlain argument and Mankiw’s vaguer claim that people should get what they deserve is that people have different starts in life. Chamberlain had talent. Others have expensive educations, or the good fortune to be born in the right country. All these things have real economic value. Do any of them mean that the lucky winners deserve more?

The lesson I draw from Nozick’s argument is not that redistribution is always unjust. It is that the earlier in life all talents can be nurtured, the less we will have to worry about spreading the wealth around later.

Also published at ft.com.

Can I press my char into ironing for free?

Dear Economist,
My ironing lady – housebound and bored – has taken to phoning me up and begging me to bring round my bed linen for ironing. As I return to pick it up again, proffering a pair of crisp £20 notes, I quip: “But Sheila, aren’t I providing occupational therapy and shouldn’t you be paying me?” She laughs, pocketing the banknotes, and glows with satisfaction as I take my pile of pillowslips. It is my social duty to continue this relationship, but why do I feel I am the one being flattened?
Flora Fortis, London

Dear Ms Fortis,

You are indeed providing great satisfaction to a vulnerable woman. But don’t feel too smug. You seem to be imagining that you could demand free ironing, or even charge your ironing lady for the loan of sheets that she wants to iron. I rather doubt this.

Naive game theory suggests that since Sheila enjoys ironing so much, you can threaten to withhold your custom and she will agree to iron for nothing. But to analyse the situation properly you must consider Sheila’s outside options. There are many dirty sheets in London, and she will not find it hard to secure other customers. You, on the other hand, will have to travel a long way before you find another ironing lady so cheerful.

Sheila’s satisfaction with her job is surely not unique. I know we talk of work as a terrible chore, something we do only for cash. Yet in reality, many people enjoy their jobs and get paid to do them. The leisure time “enjoyed” by the unemployed is not enjoyable at all. It is a crushing experience, especially on top of the loss of income.

In a world where rumpled linen is in plentiful supply, Sheila’s enjoyment of ironing is simply her good fortune. It is not something you will be able to parlay into cheap laundry services.

Also published at ft.com.

22nd of May, 2010Dear EconomistComments off

In search of hard facts about media bias

In the last days of the British election campaign, The Sun depicted David Cameron in the style of Shepard Fairey’s iconic image of Barack Obama, and claimed that Labour would, if elected, ban topless models on page three. (The topless models problem was doubtless just about to rise to the top of Labour’s agenda after 13 years.) The Mirror showed the Conservative leader in the costume of the quintessential posh-boy society, the Bullingdon Club, with “his chum Boris Johnson and all the other yahoos of the tuck shop”. The Times chose a photograph of Cameron looking wise, wistful, strong yet compassionate. The Guardian, which endorsed the Liberal Democrats, nevertheless handed a chunk of its front page to columnist Polly Toynbee, who in reporting Gordon Brown’s last-gasp revival with “a whisper of hope, a prayer” thoroughly erased the distinction between her emotions and those of the Labour party faithful she was interviewing.

In short, it was a typical election for the newspapers, each one setting out its political stall in its own style. (The Financial Times endorsed the Tories for the first time since 1987, although the newspaper aspires to keep its opinions firmly separated from its news reporting.) But why do newspapers take strong political positions? And while entirely unbiased reporting is an impossible dream, why don’t readers insist that their newspapers try harder to stick to the facts?

The obvious explanation is that proprietors use papers as political tools, pulling the strings until we puppets tick the right box. An alternative view is that readers do not want a determinedly unbiased reporting of dry facts, but wish to be entertained and to have our biases confirmed.

The economists Matthew Gentzkow and Jesse Shapiro have studied this question in the US. First, they tried to produce a way of measuring bias: not just endorsements, but the language used in the newspaper. Electronically, they trawled congressional records to identify phrases used disproportionately by Republicans or Democrats. (“Death tax”, “war on terror”, and “stem cell” would identify this column as staunchly Republican, if I did not add “estate tax”, “Medicaid cuts” and “cost of the war”.)

Gentzkow and Shapiro then assumed that newspapers were slanted towards Democrats or Republicans depending on how often they echoed the language of the politicians themselves – an imperfect but objective method. They measured the political slant of each newspaper’s potential readers by looking at votes cast in the 2004 presidential election by zip code within a newspaper’s market, as well as the geographical distributions of campaign contributions.

They found something fascinating: the biases of newspapers closely reflected those of their potential readership, neither pushing to the extremes nor pulling to the centre. The identity of a newspaper’s owner, in contrast, explained very little of the paper’s content. This is exactly what one would expect from a newspaper which cared more about profitability than election results.

This is not to say that newspapers have no influence on readers. It’s just that the influence runs both ways. Readers of The Guardian and The Daily Telegraph are offered news which reinforces the way they look at the world, but such newspapers are careful to listen to their readers, too. Commercial survival depends on it.

Having moonlighted for the BBC during the election, I’ve witnessed its serious-minded attempts to be impartial. It’s not easy, but political neutrality is admirable and, as a journalist, rather addictive. But in a world full of left- and right-leaning customers, perhaps impartiality is a luxury a commercial newspaper can ill-afford.

Also published at ft.com.

Is it worth trying to get a good degree?

Dear Economist,
After years of hard work I am about to finish my degree in economics. Maybe I shouldn’t say “years of hard work”. I skipped quite a lot. Now I’m worried that in the middle of a recession, I’m going to graduate with a lousy degree. Will reading “The Undercover Economist” get me through? Or should I be in the library?
George, London

Dear George,

Flattery will do you no good: I shall give my usual frank advice. You should be worried about graduating in the middle of a recession. I’ve written before about the research of Till Marco von Wachter, who estimates that graduating in a recession depresses your earnings for many years thereafter. You should also be worried about graduating with a bad degree, but not for the reasons you think.

Researchers have known for a long time that graduates with first-class degrees are more likely to end up with a job or a postgraduate place than graduates with third-class degrees. The question is whether this is because of the degree class itself, or because both employers and examiners are independently picking up the same traits. It’s hard to say, because employers – with access to references and interim test results – may have much more information than researchers do.

New research by Giorgio Di Pietro looks at data from an unnamed UK university. Di Pietro compares candidates with identical – or very similar – test scores, but who (because of the arbitrariness of the dividing line, or because of the discretion of the board of examiners) are awarded a different class of degree.

The good news is that once your underlying scores are taken into account, your degree class seems to make no difference to your chance of a job or further place. The bad news is that no matter how hard you work from now on, your fate has probably been sealed already.

Also published at ft.com.

15th of May, 2010Dear EconomistComments off

Why small parties can punch above their weight

I am writing this column on the morning after the general election. Much is unclear, but I strongly suspect that when you read it, people will still be talking about the subject of electoral reform.

The election did not produce the astonishingly perverse outcome that recently seemed possible: Labour achieving the largest number of seats while coming third in the share of the popular vote. The perversity is of the more humdrum kind: that the Liberal Democrats have 23 per cent of the vote but only 8 per cent of the seats.

But before the Liberal Democrats complain, they should realise that in fact they have been treated with perfect fairness by this system. It is the Labour party that has been disadvantaged.

That might seem a bizarre statement, given that Labour has five times as many seats as the Liberal Democrats despite being just a few percentage points ahead in the poll. But my point is that there is no straightforward link between the number of MPs a party has and its influence – 10 per cent of the votes in parliament does not mean 10 per cent of the voting power.

Imagine a small parliament in which there are 12 members and four parties. The Blues have five members, the Reds have four, the Yellows two and the Greens have one. Do the Reds have more power than the Yellows? No. Either the Reds or the Yellows could ally with the Blues to produce a majority, or the Reds and Yellows could form an alliance to deny the Blues that majority. In neither case does it help the Reds that they have twice as many MPs as the Yellows.

More sophisticated ways to think about voting power use similar calculations. The economists Martin Shubik and Lloyd Shapley, pioneers of game theory in the 1950s, imagined each party joining a coalition in random order and counted the proportion of times in which that party’s arrival turned the coalition into a majority.

A similar method, separately advanced by Lionel Penrose, John Banzhaf and the sociologist James Coleman, produces somewhat different results. The Banzhaf method asks how often a party’s vote will prove pivotal, assuming that all the other parties each toss coins to decide how to vote.

Both the Banzhaf and Shapley-Shubik methods make it clear that there is no simple mapping between the size of a voting bloc and the voting power it commands in practice. A small party can be as powerful as a much larger one, or utterly powerless, depending on how the coalitions fit together.I plugged the election results into a Shapley-Shubik calculator on the website of Dennis Leech, a professor at the University of Warwick. The Conservatives, with 307 likely seats, have 39 per cent of the power having received 36 per cent of the votes. Labour and the Liberal Democrats each have 23 per cent of the voting power, because they are swing voters in the same circumstances. By coincidence, 23 per cent is also the Liberal Democrat share of the popular vote.

The Banzhaf method gives marginally less influence to the three big parties, but again, finds that Labour and the Liberal Democrats have identical voting power (22 per cent).

These voting power algorithms adopt a blank-slate approach to voting and coalition building, and there is much that they leave out, notably ideology. Any argument on electoral reform must consider other issues: local accountability; the need to empower each voter; and the problem of extremist parties.

But let’s not fool ourselves into thinking that the chief argument for proportional representation is that it gives each party influence in proportion to its share of the vote. That is simply not how the numbers add up.

Also published at ft.com.

Are shoes an inelastic fashion accessory?

Dear Economist,
We need shoes come rain or shine and the more shoes we have, the better prepared we are for the unpredictable circumstances we face in our daily lives. Because of this, we should buy shoes no matter how much they increase in price, because their demand will always exist – we can’t walk around barefoot. Perhaps I’m just trying to convince myself that £60 on a pair of shoes is a solid investment.
Shoe-shopper

Dear Shoe-shopper,

I am unschooled in The Way of the Shoe and hesitate to offer my usual unambiguous advice, but I draw the line at the use of the politician’s favourite euphemism, “investment”. I regard my lunch money as well spent, but let’s not pretend that my lunch is a hundred shares in General Electric, shall we?

To answer your question, shoes are “income inelastic” if you do not cut back much on shoes when your income falls. They are “price inelastic” if you do not cut back much on shoes when their price rises. Something tells me you think shoes are inelastic in both respects.

I would argue that a more pertinent term here is “diminishing marginal utility”. The first pair of shoes protects your feet. All subsequent pairs of shoes are merely variety. I write without fear of contradiction when I suggest that the more shoes any one person has, the more time each pair will spend at home in the shoe cupboard.

In short, whether you are wise to spend £60 on new shoes rather depends on whether you now have no shoes (the scenario you gesture towards) or whether you have a spare bedroom full of them, which I fear may be the truth.

Let’s face it, you don’t want advice from me. Why don’t you look to Carrie Bradshaw, the Sex and the City character who once explained: “My new shoes shouldn’t be punished just because I can’t budget.”

Also published at ft.com.

8th of May, 2010Dear EconomistComments off

Why anti-sweatshop campaigns might just do it after all

When my book The Undercover Economist was published five years ago, I would occasionally be asked whether I was in favour of sweatshops in developing countries. Not at all, I would reply. But I could see where the question was coming from, because I was certainly worried as to whether campaigning against them would do any good.

My argument had a logic that will be familiar to economists. Unless sweatshop workers are literally slaves, they are presumably working long hours in horrible conditions for low pay only because the alternative ways of making a living are worse.

When a well-meaning group of activists launches a campaign against sweatshop labour among, say, Nike suppliers in Indonesia, the obvious risk is that the sweatshops are closed, workers are tossed out on to the street, and the work is shifted to computerised sewing machines in Osaka. This is surely not the aim. The only alternative is economic growth: while it may be frustratingly slow, it finishes off sweatshops by producing far more attractive jobs.

But while the logic is straightforward enough, it is not watertight. A successful multinational may be profitable enough to be able to afford wage increases, and may prefer to take wage increases on the chin rather than move its business around. Economic growth itself can increase the demand for child labour as well as reducing the supply.

So I was intrigued to discover two new pieces of research addressing these questions. One is an article in March’s American Economic Review, written by Ann Harrison of the University of California, Berkeley, and Jason Scorse of the Monterey Institute. Harrison and Scorse study data from Indonesia. In the 1990s, Indonesia was the focus of anti-sweatshop campaigns that persuaded the US government to put pressure on its Indonesian counterpart, and encouraged US consumers to boycott companies such as Nike. (An influential study in 1989 had found that Nike’s suppliers paid lower wages than other companies in the export sector.) Harrison and Scorse look at the footwear, textile and clothing sectors and compare regions with lots of brand-name suppliers to regions with lower-profile businesses.

If my argument is correct, Harrison and Scorse would have found a slump in employment in export factories in the brand-name regions. There is little sign of this. Profits do fall, and so does investment. Some small plants closed. But few, if any, jobs seem to have been lost.

The minimum wage in Indonesia more than doubled between 1989 and 1996, after inflation, and this did depress employment. But there seemed to be no additional effect in the districts with lots of brand-name suppliers, despite the fact that wages in those regions outpaced wage increases elsewhere by almost a third.

The second paper was presented in draft form at the Royal Economic Society meeting in Guildford at the end of March. This research, by Nigar Hashimzade and Uma Kambhampati of the University of Reading, shows that economic growth – at least in the short-term – is not enough to reduce child labour. Complementary policies to strengthen schools and the incentive to attend them seem to be necessary.

Neither piece of research is the last word, and neither discounts the long-term effectiveness of economic growth in improving working conditions. But I am having to think again about anti-sweatshop campaigns. At least I am in good company. John Maynard Keynes is reported to have quipped, “When the facts change, I change my mind. What do you do, sir?”

Also published at ft.com.

8th of May, 2010Undercover EconomistComments off

How can we get big wedding presents?

Dear Economist,
My partner and I are ready to register for gifts and we are seeking the most efficient way to do it. Most registries allow any gift to be returned to the store for cash. Additionally, one can often find 20 per cent coupons for this store (meaning that one can return a gift worth $100 and then buy it back with a coupon for $80). Which gifts should we register for? I am worried that if we register for lower-priced gifts, then people who have a higher willingness to pay will take advantage of the consumer surplus and buy a cheaper gift. Or should we just register for the gifts we want because the opportunity cost spent returning gifts and buying new items will be too high?
Meir, New York

Dear Meir,

Many congratulations! Not on your nuptials of course, which I presume are imminent –although you do not mention them – but on your single-mindedness. Weddings can be expensive, and it’s important to focus if you are to stand any chance of turning a profit.

You’re missing a trick with this coupon business. You need to circulate coupon details along with your demands. That way, someone willing to spend $80 will have to buy a $100 gift – because they know, and know you know, that the coupon was available. You can then parlay the $100 into a $125 gift if you wish.

As for the price range you choose for these gifts, best to offer a broad selection. This will maximise the extraction of consumer surplus from your guests, who will have varying willingness to pay. This is one splendid occasion when people will not try to secure a bargain: you can be sure they will buy the flashiest gift their budget allows.

My only puzzlement is at this talk of opportunity cost. Enjoy yourself! Is there any more enjoyable part of a wedding than squeezing money out of the guests?

Also published at ft.com.

1st of May, 2010Dear EconomistComments off
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