Tim Harford The Undercover Economist

Articles published in July, 2010

Here’s the (street) party line – you shouldn’t always plan

Provoked, perhaps, by my recent column mentioning that we didn’t know enough of our neighbours, my wife decided to try to organise a street party under the auspices of The Big Lunch. This is an attempt by the Eden Project (best known for gigantic greenhouses in Cornwall) to encourage people to … well, to organise street parties.

She may have been more inspired, of course, when she interviewed Tim Smit of the Eden Project itself. “Britain isn’t broken, it’s just a bit bruised around the edges,” he told her. Smit reckons that people simply need an excuse to overcome their shyness.

I generally prefer to wallow in my shyness rather than overcome it, but even I thought this was a good idea. What really struck me was the simple practicality of my wife’s approach. She arranged for the road to be closed, posted notes through letter boxes with her phone number, and told everyone to turn up and bring food and drink to share if they wanted to.

Sure enough, on the day, half-a-dozen strangers emerged from their houses, set up the barriers kindly provided by Hackney Council, and started tying up bunting and putting out chairs. A BMW pulled up at the end of the street. The driver opened the windows and cranked up the stereo before going to set up a barbecue. A gazebo was swiftly erected. A pot of chilli emerged from a nearby house, accompanied by an ice bucket full of beers. The party truly kicked off when the local church emptied out on to the street after a two-hour service, and one of the stalwarts fired up another barbecue. Three hours later, I really did know my neighbours. Everyone is firmly agreed that we’ll do it again next year.

Next year, of course, everything may be a bit grander. We might have a little committee and perhaps organise live music or games. But the truth is that our big lunch didn’t take a whole lot of organising. My wife’s insight was that the thing didn’t have to be planned like a military campaign – or worse, a wedding. When you have a party right outside everyone’s front door, the number of seats, bottles and helping hands expands to fit the situation.

We don’t naturally think this way about getting things done. We expect them to be organised from the top down: first, Tim Smit would convene a committee to decide on the optimal location for a series of street parties; then local managers such as my wife would be appointed to estimate attendance, order supplies and supervise the menu. This would be superfluous at best, and perhaps disastrous.

Head office is not always surplus to requirements: I wouldn’t want to wage a war without a logistics team. But some problems can be solved from the bottom up, and much more effectively. This is most obviously because local people have the best knowledge of the local situation. It’s also because a decentralised approach moves forward unevenly, step by step, in a way that is sometimes hard for a more hierarchical planner to accept. The next street over didn’t have a street party, and that might seem unfair. Not to worry: they saw what we were doing and perhaps they’ll have one next year.

Markets provide bottom-up solutions: nobody is in charge of the supply of bread to London, but the bread gets there somehow. But some market enthusiasts assume that a full-blown market with prices and products and limited-liability companies is the only bottom-up approach. It isn’t, as The Big Lunch showed recently across the country, and as my wife demonstrated on a sunny little street in Hackney – a street whose residents are a little easier in each others’ company now.

Also published at ft.com.

Supply and demand, yes. But polygamy?

Dear Economist,
I live in a place where polygamy is allowed, but generally avoided. One of my friends has two wives. When asked why, he once quipped “more suppliers means more competition and better service for the customer”. Now I know, both intuitively and through observation, that people with two wives seldom lead “peaceful” lives. As an economist, how would you explain that?
Mohsin, Pakistan

Dear Mohsin,

Your friend is demonstrating the truth of the old saying that the only thing more dangerous than an economist is an amateur economist. He’s right that ex post he potentially enjoys the benefits of competition, but he neglects the question of ex ante bargaining.

The truth is that most people who argue against polygamy simply cannot count. Polygamy does not create extra wives – it just changes the dynamics of who marries whom. A few rich or otherwise attractive men will marry several women each, and other women will therefore be in short supply and in a strong bargaining position. (In a patriarchal society, it will put their fathers in a strong bargaining position instead, but this is not the fault of polygamy itself.) Women get more choice: they can share a millionaire with someone else, or they can take their pick from humbler men, many of whom will never marry and each of whom, presumably, will be very eager to please.

Your friend may have found a way to enjoy his double marriage, although I wonder about that. Wise women will have insisted on binding conditions before entering into a marriage with a polygamist. Your friend must have found a way to wriggle out of these – or he’s hiding his pain. But what is certainly clear is that in reducing the supply of wives for other men, he has placed them at a serious disadvantage. I am not sure why he is still your friend at all.

Also published at ft.com.

31st of July, 2010Dear EconomistComments off

I’m 13 and smart, but my family ignores me

Dear Economist,
You may be surprised to receive a question from a 13-year-old reader of the FT, but I always steal the weekend paper from my father, who is an economics professor.

Everyone in my family is well educated, which is why simple dinner chit-chat usually segues into an exuberant discussion chock full of sarcasm, wit and the occasional clash of opinions. Being the youngest gives me some leeway if I happen to be misinformed. But it also makes it hard to express my opinion on the topics being discussed.

Is there any way I could let myself be heard without having to throw a teenage tantrum?

Abisha Dowla

Dear Abisha,

Dinner sounds wonderful: a privilege to witness, if not so easy to get a word in edgeways. It is much like my life at the FT where I share a corridor with Martin Wolf, Gideon Rachman and Philip Stephens. Perhaps you should simply accept the situation – which could be worse – and soak up the insight. This is what I try to do at the FT. (When I do open my mouth I usually regret it.)

Yet I understand your difficulty. I suspect that your father has been trying to figure out whether you’re worth listening to using an old approach that we economists call “adaptive expectations”. You are 13, but he cannot quite clear his mind of your 12-year-old and even four-year-old predecessors. Still, you might point out to him that he is using an obsolete modelling technique.

An alternative is to recall Charles Caleb Colton’s remark that “the greatest fool may ask more than the wisest man can answer” and phrase your interjections as questions. Begin by asking your father if we will have a double-dip recession, and make a show of taking note of his answer for future reference. He may insist that you do the talking in future.

Also published at ft.com.

24th of July, 2010Dear EconomistComments off

Predict the future? We can’t even say what’s happening now

On New Year’s Eve 2007, the Financial Times, in its customary look at the year ahead, declared that “the US will skate along the brink of recession in early 2008, but should avoid tipping over the brink”. In retrospect, we can ruefully enjoy that forecast not because it proved to be wrong – although it was – but because it was wrong even as it was published. The recession actually began in December 2007, just as the FT was announcing that it wouldn’t begin at all. To modify the old quip, “prediction is very difficult, even when it’s not about the future”.

This is one more reason to pity economists. Weather forecasters can glance out of the window if they want to find out what the weather is doing right now. Economists must wait: it took the National Bureau of Economic Research almost a year to declare that the recession had begun at the end of 2007. Economists on the Fed’s Open Market Committee or the Bank of England’s Monetary Policy Committee have the unenviable job of setting interest rates for an economy at whose current state they can only guess.

There’s no mystery as to why “nowcasting” is difficult. The US economy is, to resort to jargon, very big and very complicated. The ideal nowcast would slurp up data on payroll, invoices and payments received in real time from every business in the country. But that asks too much of businesses which are focused on the more pressing matter of giving their customers what they want. Many small businesses simply have no idea how they are doing until several weeks after a quarter has finished, when they figure out how much they owe the taxman. If the business owner herself doesn’t know whether February was a good month until the end of May, it is quite a lot to ask the economists at the Treasury or the Federal Reserve to be more prompt.

Economists continue to wrestle with the problem. A few days before the credit crunch began – more rueful irony – Domenico Giannone and Lucrezia Reichlin of the European Central Bank, with David Small of the Federal Reserve, published a research paper explaining how “nowcasts” of economic growth could be continuously updated as economic data on unemployment, inflation, credit availability and much else trickled out of the offices of economic statistics. David Hendry of Nuffield College, Oxford has, with several colleagues, been working on a particular aspect of the nowcasting problem: spotting a “structural break” – or sharp change in the way the economic variables interact – very shortly after it has taken place. That sounds simple enough, but it is common for forecasting models to miss these structural breaks and then misfire for months or years afterwards.

But if combining official data in new ways is one approach, another is to look for unofficial data sources – such as trending topics on Twitter or the terms most searched for on Google – which are updated much more quickly.

Researchers from Google, including its chief economist Hal Varian and the then head of Google.org, Larry Brilliant, have published research using Google Trends to “nowcast” the spread of influenza, tourist visits to Hong Kong, sales of cars and houses, and unemployment benefit claims. Two economists affiliated with the Bank of Italy, Francesco D’Amuri and Juri Marcucci, have also been tapping into Google data and conclude that it dramatically improves the quality of unemployment “nowcasts” and forecasts – particularly in Italy, where official unemployment data takes two months to arrive.

Real-time data from activity on the web is not perfect, but it’s available almost instantly. I confidently forecast that economists will use more of it in the future. Perhaps they already are.

Also published at ft.com.

A sunlit Keynesian uplands awaits our grandchildren

Ingram Pinn illustration

Illustration by Ingram Pinn

It says a lot about the talents of John Maynard Keynes – and just as much about the shortcomings of modern macroeconomics – that when the financial crisis struck, policymakers instinctively reached not for their fancy models, but for the Keynesian idea of fiscal stimulus. These pages have been filled with eminent thinkers arguing over whether it is time to bring the stimulus to an end.

Perhaps we should turn the question around: if stimulus were to be the solution, what would be the problem? The problem would be that too many of us wanted to save money or pay off debts; that is, we wanted others to pay for our services but weren’t so keen on paying for theirs right now. Simple arithmetic suggests this would leave slack in the economy. In addition, the problem would be that businesses, pessimistic about prospects for recovery, didn’t harness all the spare savings floating around and plough them into new investment projects. The slack would stay slack, possibly for a long time. If that was the problem then government stimulus would be the solution.

And the above paragraph doesn’t seem to be a bad description of the US or UK economy, which suggests the case for stimulus is strong. True, the patience of the bond markets is surely not boundless (and say what you like about kowtowing to the markets, if we’d like them to lend us money we have good reason to care whether they are willing to lend it). And there already is an awful lot of stimulus spending going on right now, so it’s not absurd to suggest we could get by with less as the economy bounces back. I realise that I am sitting on the fence here, but it’s part of my new maxim, which is never to stand in the middle of a fight between Paul Krugman and Niall Ferguson.
Fiscal multipliers are certainly fun. If the fiscal multiplier is 0.5, we’re getting government projects at half price: the government project draws half its resources away from private-sector activity, but the other half is just soaking up slack. If the fiscal multiplier is 1.6, as President Barack Obama’s Council of Economic Advisers has estimated, we get a free government project and a larger private sector. And if the multiplier is 2.5, as Keynes believed of the US economy in the 1930s, government spending soaks up slack like a sponge, and also catalyses the private sector into a frenzy of action. (I beg your indulgence while you picture a slack-soaking catalytic sponge; patent pending.)
The quality of government spending still matters. If you think the multiplier is 2.5 then you can gladly follow Keynes’s suggestion of burying banknotes down mineshafts and leaving it “to private enterprise on well-tried principles of laisser faire to dig the notes up again”. If you think it is 0.5 or zero, you might want government projects chosen with more care. And as Keynes himself remarked, no matter what the multiplier, “it would, indeed, be more sensible to build houses and the like” if only politics would allow.
Keynes’s General Theory may well be a work of genius, but I have always been more attracted to his short 1930 essay, Economic Possibilities for Our Grandchildren, in which, in the teeth of the Great Depression, Keynes reminded us that the long-run trend was inexorable growth. “I would predict that the standard of life in progressive countries one hundred years hence will be between four and eight times as high as it is to-day,” he wrote. After 80 years, a world war, and a depression, citizens in the US and western Europe are about five times richer than when Keynes was writing. We seem to be on track.
Keynes’s essay explored something his modern disciples often ignore, namely what would happen when “the economic problem” was solved. By the standards of the 1930s, this problem has been solved. But our response has not been what Keynes expected. He acknowledged that human beings had an insatiable desire to feel superior to each other, and that some people would always blindly pursue wealth. But he felt that most of us would adjust, albeit grudgingly, to a life of plenty. We would work less and amuse ourselves in other ways. We have not, and civilisation continues to depend on the production, purchase, consumption and disposal of the kind of stuff you can see anywhere from the shelves of Walmart to the pages of How To Spend It. One of the multiple causes of the crisis, after all, was that so many people wanted to borrow more than they could repay.
It is true that we do choose to work a little less. According to the economists Mark Aguiar and Erik Hurst, despite a large increase in women’s participation in the workforce, in the US they have at least four hours a week of extra leisure compared with 1965. Men have at least six extra hours. And there is the time we spend studying and travelling before our careers, or in early retirement, to say nothing of the many hours spent goofing off at work and looking at Facebook. But if you want to work a three-day week, your boss and colleagues will assume it is because you are caring for a baby or studying for a PhD, rather than because the weather is lovely at this time of year.
So while the debate of the day is rightly about how quickly and how severely governments should tighten their belts, I hope that when the crisis is over we will remember to come back to Keynes’s long-run forecast. Keynesianism may be about trying to maintain full employment, but Keynes understood that full employment could mean everybody who wanted a job working up to three hours a day, at which frenetic pace we should still have twice the wealth of Keynes’s generation. It was in this future paradise that Keynes famously imagined that the economics profession might be thought of as “humble, competent people, on a level with dentists”. We economists have a way to go yet.

First published at ft.com

21st of July, 2010HighlightsOther WritingComments off

Why we still love board games

The board game Carcassonne

In a sprawling convention centre in Essen, western Germany, the busiest day in the German board games calendar – Saturday at “Spiel” – is about to begin. Hall after hall of stands are piled high with board game boxes, most eschewing the garish graphics of the toy shop for evocative paintings of lands far off and times long ago.
A few minutes before the official start time of 10am, the doors are thrown open. There’s a rumble and then a roar as thousands of gamers surge into the hall, breaking and swirling around the stands, sweeping into the farthest corners of the halls, seeking out rare second-hand products or the hottest of the 500 new games being launched, or simply a good place to sit and play. The biggest stands resemble pavement cafés whose patrons grab games instead of coffee: they are filled with tables, each just big enough to seat four players and a board. Before long, the spaces in between the tables are colonised, too, with gamers sitting cross-legged around their boards.
Beyond the sheer number of enthusiasts, the striking thing is that they look, well, normal. The convention centre boasts nearly as many mothers with prams as heavy-metal-T-shirted, body-pierced teens. In one of the farthest halls, Dungeons and Dragons merchandise is on sale, and I counted more than one person wearing a sword and a cloak. But for the most part, the convention centre’s population wouldn’t look out of place on any German high street.
“If you go to a games convention in the UK, you’re generally surrounded by fat, smelly people with bad social skills,” says Martin Wallace, a British game designer at a boutique games publisher called Warfrog. “That’s not true here.”
Wallace recalls an occasion when a group of his gaming friends were too embarrassed to admit their identities to a pretty waitress back home in the UK. “One of us told her that we were stamp collectors. I thought: great. We’re lower than stamp collectors.” But in Germany, if the leading game designers travel incognito, it is to avoid being surrounded by admiring fans.
A queue of autograph hunters forms at the Kosmos company’s stand: Klaus Teuber has arrived. Teuber, once a manufacturer of dental supplies, is an unlikely star. He is an avuncular man in his fifties with a hairless pate and a perfect trapezoidal moustache that fans out to the corners of his mouth. But for four days in Essen, he is the biggest name of all: the designer of the multimillion-selling blockbuster board game, The Settlers of Catan. Learn More

17th of July, 2010HighlightsOther WritingComments off

So, are we all racists? Let’s play a little game and find out

It is a truth grudgingly acknowledged that mixed ethnic communities are not as mixed as they appear. In the school playground I find myself talking to the other white middle-class mums and dads, in spite of the fact that in a Hackney school there are plenty of parents who are neither. We know the white couple at number four but have had little contact with the African family at number two. It’s not something I am proud of, but there it is.

Many people fear that ethnic diversity can bring out the worst in us. Most famous is the American political scientist Robert Putnam, author of Bowling Alone, who in 2006 published a study of ethnic diversity and community trust in the US. He told the Financial Times that “the effect of diversity is worse than had been imagined. And it’s not just that we don’t trust people who are not like us. In diverse communities, we don’t trust people who do look like us.”

But while many people will agree with Putnam, few of us ask precisely why ethnicity and co-operation might be connected. Macartan Humphreys, an Irish political scientist at Columbia University, offered me a list of possibilities as to why we seem to get things done more easily in homogenous communities.

First, there are explanations based on preferences. Perhaps “coethnics” want to help each other; or simply like the same things; or perhaps, even if they don’t like the same things, they like working together for its own sake. A second group of explanations suggests that “coethnics” work together more effectively because they understand each other better or can ostracise shirkers.

So far, so imponderable. But Humphreys and three co-authors of a new book, Coethnicity, have been conducting an ambitious series of game theory experiments, not in the psychology labs of the Ivy League but in a neighbourhood of Uganda’s capital, Kampala, which is home to members of many different tribes. The games were designed to distinguish between these explanations. Some are staples of the literature in behavioural economics, others are new. (My favourite is “Lockbox”. First, one subject was trained to open a combination lock, which is an unfamiliar technology in Uganda. The game paired a trained subject with an untrained one and gave the pair 10 minutes to get the lock open without the trained player touching it.)

The results are fascinating. There was good evidence that people from the same ethnic group worked together more effectively (although not at Lockbox, alas) but no evidence that their preferences differed from other ethnic groups or that they harboured any distaste for working with them.

The most striking result came from “dictator” games, in which a player decides whether to assist others who have no way of responding with either reward or revenge. And here’s the remarkable thing: in an anonymous dictator game, people seem to treat those of their own tribe in exactly the same way that they treat people of other tribes. It was only when the researchers lifted the veil of anonymity that people’s behaviour changed and they treated coethnics more generously.

Coethnics, it seems, co-operate in part because that is what they have come to expect from each other – just as the British expect each other to drive on the left – and they are aware of the unpleasant consequences if they do otherwise.

What is true in Kampala may not be true in Hackney – or Jerusalem. But the research is encouraging. It suggests that if we struggle to do business with people who look different, that may not be because we dislike them, but because we simply don’t know quite how to begin.

Also published at ft.com.

Should I risk the fine and travel first class?

Dear Economist,

My daily journey requires a change of train at Mumbai station, which is extremely crowded. One day I was in a hurry and jumped into first class without a ticket.

As luck would have it, the inspector arrived. I admitted I did not have a ticket and paid Rs258 (£3.60) as a fine – hefty compared with an Rs8 one-way ticket.

I have always been a risk taker – I’m an economics student – and now I do not fear the inspector or the fine. I decided I would travel ticket-less for a further 15 days, by which time I would have received all the journeys which I could have bought for Rs258. Should I continue to travel in this way? Do fines work as a deterrent?

Ela Bodas

Dear Ela,

You are channelling the spirit of Gary Becker, winner of the Nobel memorial prize in economics for his application of economic reasoning to non-financial questions. One of Becker’s moments of inspiration came when running late to examine a doctoral student. He realised that he could save time if he parked illegally, quickly estimated the chances and consequences of being caught, and did the deed. His first question to the student was to ask him to sketch a theory of rational crime and punishment. The student passed, and Becker did not get a ticket.

Ethics aside, your actions do seem rational. You save time in queues and receive personal attention from inspectors instead. You save money, and the uncertainty of when you must pay a fine seems not to disturb you. You will make a good economist, if not a good citizen.

I interviewed Gary Becker some years ago, and his first act was to park in a 15-minute space for a two-hour lunch – on the grounds that nobody checked very carefully. You are following in august footsteps.

Also published at ft.com.

17th of July, 2010Dear EconomistComments off

Why do I suddenly have six job offers?

Dear Economist,

For the past year I’ve been looking for a new job in banking. No matter what I did or to whom I talked, there were no opportunities and I received nothing but rejections.

One month ago, it began to turn. As of this week, I have five job offers – as well as one internal opportunity. How could this happen? Yes, the economic situation has improved, but can that explain the leap from zero to six offers? If so, aren’t employers completely irrational in their hiring policies? As my supply is completely inelastic, their increased demand means that they now have to pay a significant mark-up compared with six months ago. Are employers just bad at planning or is there another reason why my dry spell has come to such a sudden and inflationary end?

In Demand

Dear In Demand,

Congratulations, but I think you’re making a common mistake, which is to confuse your own situation with that of the economy in general. (As the old joke goes: a recession is when my neighbour loses his job, but a depression is when I lose mine.) For example, data from Lindsey Macmillan at Bristol University shows that at the end of the British recession of the early 1990s, many households were richer than at its beginning. Others were much poorer. The variation between households was far greater than the difference between booms and recessions. Your experience is unique.

Many jobs are all about finding a good match between the job and the person who fills it. An applicant who is well matched – or can talk as if she is – will succeed. So my guess is that you have simply become a polished interviewee. My only concern is that you may have learnt to fake professionalism so well that you land up with a job that is too much for your abilities. But you’re in banking, so at least you’d have company.

Also published at ft.com.

10th of July, 2010Dear EconomistComments off

When it comes to research, we live in interesting times

From The Tipping Point to Nudge, the rise of pop-social science has been a noticeable feature of the past decade in publishing. Not everyone is impressed. I recently interviewed a professor of education who is an expert in policy evaluation. She lamented the fact that politicians tend to get their facts from popular social science books containing innacuracies. A couple of hours later, I interviewed a politician who was fizzing with excitement about a popular social science book. If only I’d been able to introduce them, the explosion would have been something to see.

I think the professor was right to worry about ministerial exposure to authors such as Malcolm Gladwell, Dan Ariely, Richard Thaler and even Tim Harford – but not for quite the right reasons. The problem is not that such authors are inaccurate. I’m not sure that they are. Gladwell has plenty of critics, but I find him a careful reporter. Ariely is a respected academic; Thaler – also a professor – is widely tipped for a Nobel prize. And what can we say about Tim Harford? I am told he is all but infallible.

Yet infallibility is not enough. It’s perfectly possible for an author to do nothing but weave together credible, peer-reviewed research and yet produce a highly partial view of reality. Different pieces of research invariably point in different directions. Dan Ariely’s Predictably Irrational is full of examples of irrational behaviour. My own Logic of Life is full of examples of rational behaviour. Occasionally I am asked to explain the contradiction, but if there is a contradiction, it is a subtle one.

If Ariely describes a rainy day and I describe a sunny one, we are not really contradicting each other. We each offer our spin, but it’s really about whether most people expect sunshine or rain: Dan says that it’s rainier than we tend to think, while I say the sun shines more often than anyone would credit. A serious review of this metaphorical evidence would count up the rainy days and the sunny ones. It might describe different climates in different parts of the world, the degree of variability, and whether there was any way to forecast rain.

For real policy questions, such reviews exist. They are called systematic reviews. They are increasingly standard practice in medicine, although they are new and scarce in social policy. They should be the first port of call for anyone wanting to understand what works. But they are not exactly bestsellers in airport bookshops.

Quite apart from the fact that nobody wants to read all the evidence, there is a deep problem with the way evidence is selected throughout academia. Even a studiously impartial literature review will be biased towards published results. Many findings are never published because they just aren’t very intriguing. Alas, boring or disappointing evidence is still evidence. It is dangerous to discard it, but let’s not blame Malcolm Gladwell just because he doesn’t stick it on page one.

There’s a hierarchy of evidence here. The systematic review tries to track down unpublished research as well as what makes it into the journals. A less careful review will often be biased towards results that are interesting. A peer-reviewed article presents a single result, while a popular social-science book will highlight a series of results that tell a tale. The final selection mechanism is the reader, who will half-remember some findings and forget the rest.

Those of us who tell ourselves we are curious about the world are actually swimming in “evidence” that has been filtered again and again in favour of interestingness. It’s a heady and perhaps toxic brew, but we shouldn’t blame popularisers alone for our choice to dive in.

Also published at ft.com.

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