Articles published in September, 2010
All good things must come to an end, and this is the last “Dear Economist” to be published in FT Magazine, after a more-than-decent run of over seven years. That’s the bad news.
However, there’s also good news.
Second, “Dear Economist” shall not die. I shall be taking my place alongside Will Self in Men’s Health. (Neither Will nor I will be displaying a washboard stomach.) The column will be published every month with a couple of letters, and we’ll see how it goes. The first appearance will probably be in the January edition, and after a decent interval I shall post the columns on timharford.com. (There’s an RSS feed at http://timharford.com/feed/ and you can always keep up to date on Twitter.)
Third, I’ll be writing more features in the new-look FT Magazine. It’s out next week, and my first feature will be coming soon.
My old university tutor often complains when he has to write references – they take up a lot of his time, and he doesn’t get paid for them. Since he’s doing my prospective employer a service, he thinks they should pay him. However, that means he’s motivated to write me a bad reference, because then I won’t get the job, and I’ll ask him to write me another one – so he gets paid again. Of course, we could say that he only gets paid if I get the job – so he writes me an overly gushing reference. How can we motivate my tutor to write a fair and accurate reference, and compensate him for his time?
Phil C, Aylesbury
I am not as concerned as you that your tutor will be tempted into hustling for extra reference-writing work. If he wanted to be paid for mass-mailing hyperbole, he’d have taken a job in public relations.
But there is a deep problem here: your tutor has useful information about you and no particular reason to tell the truth. I am not sure what to suggest. Economists call the problem “mechanism design” and despite a number of recent Nobel prizes and some formidable mathematical theorems, I’ve seen nothing to suggest that I can solve the problem perfectly.
However, one approach is to ally your tutor’s interests with those of your prospective employer. Perhaps he could be awarded a commission: 0.1 per cent of your salary, for as long as you have the job. A couple of hundred successful candidates placed and the sums involved start to build up. If he over-eggs the reference and places you in the wrong job, you won’t last long and he’ll miss out on years or decades of future commission.
I don’t know if this would work, but it has a nice side-effect. It encourages your tutor to teach you something useful: he’ll be getting a cut of the proceeds.
Also published at ft.com.
When Venetia first tried to set up a café on Chatsworth Road in Hackney, east London, she encountered an unexpected obstacle: she couldn’t find a landlord who believed that she’d be good for her rent. The problem was that the kind of café Venetia imagined – one that served good pastries and excellent cappuccino – wasn’t the kind of café anyone had ever tried before on Chatsworth Road. The local property owners figured that if nobody had ever tried it, it probably wouldn’t work.
Once a sufficiently optimistic landlord had been located, Venetia’s Coffee Shop went through the usual growing pains of any small business: the trouble with staff; the groping towards a profitable mix of food and drink at a price that customers are willing to pay; the difficulty, in 2007 and 2008, of finding an accommodating bank. But the business has survived it all and appears to be around for the long haul, much to the delight of this particular columnist.
Earlier this month, a crêperie opened a couple of doors down from Venetia’s. It is the latest in a growing cluster of businesses catering to the area’s new middle class. There’s the fancy deli, displaying French cheeses and Spanish meats. The Chatsworth Kitchen offers home-style cooking for the crowd who might favour trendy London restaurants such as Moro or Ottolenghi. The toy shop sells mostly wooden toys, and there is also some kind of juice bar, which I view with scepticism but am told is excellent.
Five businesses have not turned Chatsworth Road into Knightsbridge, surrounded as they are by betting shops, pound stores and laundrettes. But it is interesting that the higher-end shops didn’t come sooner. Property prices had long since pushed Islington wannabes out to Stoke Newington and then to unfashionable corners of Hackney. The customers were there, but not the businesses to serve them. Given the restaurants, cafés and delis which line Stoke Newington Church Street a mile or so away, it might have seemed obvious that it was possible to run similar businesses on Chatsworth Road. But somebody had to demonstrate that it could be done.
Successful businesses often operate in clusters – whether the theatres of the West End and the jewellers of Hatton Garden in London, or the marine engineers of Cowes. Sometimes this is a matter of tapping into local expertise; at other times it’s all about creating a destination for customers. That is partly the lesson of the gentrification of Chatsworth Road.
But clusters are also about demonstrating that something can be done. Venetia proved to the local property owners that it might indeed be worth letting to a posh business they didn’t understand; she proved to the banks that such businesses could succeed, and she demonstrated to other entrepreneurs that success was possible.
Government plans often assume that business clusters can only be created by the designs of the planner. Free-market fans sometimes make the opposite error, and assume that if there’s a gap in the market, the gap will be filled, and quickly. Reality is more complicated. Venetia made a lot of things possible on Chatsworth Road.
We tend to think of innovators as people who create wondrous new technologies. But that word should also include people who see that a café works in Islington and wonder if it might work in an unfashionable corner of Hackney. Such people take great risks, but the rewards are shared with many other people. We are lucky that they exist.
Also published at ft.com.
Today’s More or Less looks at “welfare scroungers” – what’s the evidence that people go on benefits as a “lifestyle choice”? How many? What happens when the government tightens up the rules?
Also, our age- and sex-adjusted half-marathon race between 28 year old Lucy and 52 year old David. Who won the Great North Run?
Why did a scientist get death threats for trying to figure out whether cats kill a lot of birds?
And we unveil a new measurement scale: the PMI. What’s your PMI – and is it bigger than David Cameron’s which is exactly 1?
Today at 1.30 BST on Radio 4; repeated Sunday at 8pm, and online at bbc.co.uk/moreorless.
Frequent-flyer programmes are very popular here in Australia, where people often travel long distances for work and can subsequently be rewarded with large perks by selecting their preferred airline ahead of cheaper offers from other carriers – and to the detriment of their employers.
I am sure the airlines must benefit from all of this, but what about the rest of the economy? Are we encouraging an inefficient market by signing up to loyalty programmes?
Oliver Jones, Perth, Western Australia
One justification for frequent flyer programmes is that when an airline has spare seats, it would ideally find some way of filling them. Slashing prices across the board destroys profits; slashing prices selectively, for the spare seats only, may be hard to achieve (although they try); giving the seats away as frequent flyer rewards offers a benefit to the customers without cannibalising too much business.
Yet the effect seems pernicious. Frequent flyer miles typically give employees an incentive to favour particular airlines; the employer pays the price but does not reap the benefits. In other contexts, we’d call this a bribe or a kickback. For frequent flyers, it’s not only legal but a topic fit for discussion in polite society.
Frequent flyer programmes also artfully create what economists call “switching costs”, by offering employees an incentive to stick with an individual airline. This is a serious problem, because if Kickback Airways has bribed its customers to stay loyal, then AirBribe has little incentive to compete on price. AirBribe may even raise prices; and this makes it easy for Kickback Airways, too, to raise prices. Even if you have nothing to do with the whole business, you’ll still pay more for your flight. It makes you wonder how airlines ever contrive to lose money.
Also published at ft.com.
A “Dear Economist” correspondent once asked me why people post clips of classic comedies on YouTube, or go to the trouble of writing online reviews, given that there seems to be nothing in it for them. A textbook economics model would say that people would not, in fact, post online reviews or contribute to YouTube. And my answer, in brief, was that they don’t. Far more people read books than write reviews of them, and far more watch YouTube videos than post them. As a broad defence of rational economic man, my answer wasn’t too bad; but as a way of understanding online volunteering, it was useless.
Economic theory is not entirely helpful, either. “Public good provision” is the economists’ name for installing a solar hot water system for the sake of the planet, or endowing a library, or contributing a paragraph to Wikipedia. The trouble is not that economics has no explanation for such contributions, but that it has too many. Perhaps people are pure altruists, motivated by the joy of others. Perhaps they enjoy the process of contributing, whether or not it actually produces something of value. Or perhaps they enjoy the good reputation that comes with being acknowledged as a Doer of Good Deeds.
Until now, most of our understanding of the question has come from laboratory experiments. Given the importance of social context, these experiments may well be giving precise answers to the wrong question.
But a new study by two economists, Xiaoquan Zhang and Feng Zhu, has cast light on this problem. Zhang and Zhu look at the Chinese version of Wikipedia. Wikipedia keeps track of all the changes every registered user has ever made to the site, when the edits were made, and what they were. It also hosts user pages, where individual users can talk to each other and discuss the changes they’ve been making.
The Chinese government has a habit of blocking access to Wikipedia. Zhang and Zhu study a particular episode in October 2005 during which contributors who lived on the Chinese mainland couldn’t reach the site, but contributors from outside could.
The researchers painstakingly isolated 1,707 contributors who had access to Wikipedia during the block. In most cases, the evidence for this was that those contributors had made at least one change to the site while mainland users couldn’t get to it. They found that while the block was in force, contributions from these unblocked users plummeted by more than 40 per cent.
This finding contrasts with some economic models of public good provision, which say that the larger the group, the larger the free rider problem, because any individual contribution will be spread across a large number of people. (An imprecise analogy: you might bring expensive wine to a dinner party because at least you’ll get a glass. You wouldn’t bring it to a house party, where you’re unlikely to get a sip.)
Chinese Wikipedia contributors, on the other hand, got coy when nobody was watching. When a large number of potential readers were cut off from the site, many writers who could have continued to contribute stopped bothering. The most sociable editors – those with active user pages – were the ones most likely to be discouraged.
So now I have a slightly better answer for my Dear Economist correspondent: people are posting those videos on YouTube because they’d really like you to watch them.
Also published at ft.com.
Today’s More or Less asks who is more underpaid and hard-done-by, public sector workers or private sector workers? We ask whether our trousers are lying to us with “vanity sizing”, how many Catholics really go to mass, and in preparation for the Great North Run, how to handicap a long-distance race between a 28 year old woman and a 52 year old man.
1.30 BST on Radio 4, repeated on Sunday at 8pm, and online at bbc.co.uk/moreorless.
According to my esteemed colleague Gideon Rachman, economists should be swept off their thrones by historians. Economists have had far too strong a stranglehold on the levers of power, he claims. They think they are scientists. They think they can foretell the future. They are wrong: “pseudo-scientists”, “peddling brash certainties”. Historians such as Gideon and Professor Niall Ferguson, hitherto relegated to backwaters such as the FT’s op-ed page, should at last be paid a bit of attention.
In pondering how to respond, I suffered an acute shortage of brash certainty. Gideon is quite right about the importance of history. When it comes to economics, however, the chief source of brash certainties appears to be Gideon, who wouldn’t know an economic model if it paraded down a catwalk at him.
I know as little about history as Gideon knows about economics, but no doubt he is right to suggest that an important role of the historian is to emphasise the knotty particularity of time and place, and the difficulty of producing sweeping scientific laws that accurately describe a complex social world. Economists, sociologists, psychologists and anthropologists should appreciate this just as keenly. The best do. Many do not and, sadly, they are over-represented in the media. Perhaps this is the reason Gideon misunderstands the task and the methods of economics.
He argues that while economic edifices are always collapsing, “buildings constructed according to the laws of physics seem to stand”. This is an odd statement. Buildings constructed according to the laws of physics have a habit of falling down. Henry Petroski, engineer and author of Success through Failure, observes that structural engineers tend to learn by constructing ever more ambitious structures. When one of them falls down or wobbles, engineers figure out what was wrong with their models. Sometimes the results are tragic: when the innovative Malpasset dam cracked thanks to inadequate geological modelling, nearly 400 people died. Sometimes they are delicious: the award-winning Kemper Arena collapsed, with no loss of life, just 24 hours after hosting the American Institute of Architects Convention. From his riverside eyrie, I think Gideon can just see the famous wobbly bridge across the Thames. Is this really a damning indictment of the laws of physics?
But, of course, our grasp of the laws of physics is not to blame. The trouble is the difficulty of modelling them in a world with snowdrifts, clay seams and error-prone contractors. In short, buildings, like economic institutions, stand up not because of our grasp of the laws governing them, but because they have survived a process of trial and error in a complex world.
Economic institutions are more complicated and unique than any building. No wonder that progress is so difficult. But Gideon is too quick to dismiss “models and equations”. I agree that macroeconomic models have proved fairly useless. I also agree that economists, like historians, sociologists, political scientists and newspaper columnists, make terrible forecasters. But few academic economists bother to try, and forecasting models represent a small slice of the mathematics deployed by economists.
What, for instance, of the famous contention by the economist Steven Levitt and his co-author, John Donohue, that legalised abortion in the US reduced the crime rate about 18 years later? This is a hypothesis about history, but one that no historian is well-qualified to judge. Instead, the hypothesis has been tested statistically with some ingenuity; the statistical models themselves have been contested, pulled apart, found wanting in some respects, double-checked using alternative data and tested against the experience in other countries. The debate continues. Is this process “science”? I am not sure. But it certainly isn’t idle banter.
No doubt economists can learn from historians, but the search for economic regularities should not be abandoned. It is not limited to traditional economic approaches. We know much more about economics thanks to the work of Robert Axtell (computer scientist), Cesar Hidalgo (physicist), Duncan Watts (sociologist), Esther Duflo (an economist who runs the kind of controlled experiments which, according to Gideon, don’t happen in economics) and Daniel Kahneman (psychologist). All of them use those pesky “models and equations”. Are mainstream economists receptive enough to such invaders? The best ones are. The majority are not, but that is a fact about academia, not economics.
At least Kahneman has been rewarded for his efforts with a Nobel memorial prize. (Or as Gideon would put it, a “fake Nobel”. The Nobel Memorial Prize in Economics was established in 1968, long after the dynamite magnate’s death, unlike the rigorously scientific Nobel Peace Prize awarded to Henry Kissinger, or the rigorously scientific Nobel Prize for Literature denied Leo Tolstoy.)
My own supervisor, Paul Klemperer, is presumably the kind of economist Gideon despises: a game theorist who tries to understand the world through mathematical models. How quaint and arrogant. But my clearest recollection of Paul’s teaching is a series of classroom demonstrations calculated to undermine predictions of game theory and to open his students’ minds to the likelihood that the models lacked something important.
Paul used those models to help design an auction that raised £22.5bn for the British government, and then helped the Bank of England design an auction that would help them to inject liquidity into banking. Paul can’t forecast the future, but the auctions have – like many buildings – stood up well so far.
Historians deal in hindsight. It is a wonderful thing. But it is not the only thing. I wonder whether Gideon, intoxicated with a heady brew of Niall Ferguson and Herodotus, has forgotten that.
Gideon Rachman responds:
In his spirited and learned defence of his beloved economists, Tim Harford makes a mistake that is a characteristic of the profession that we both really belong to – journalism. That mistake is to rest too much of his argument on a couple of anecdotes. The story about the collapse of the Kemper Arena is indeed delightful. The implication Tim seems to draw is that the laws of physics and engineering are no more reliable than the “laws” of economics. They are all just hypotheses, which are gradually improved by trial-and-error in the real world. But it is my perhaps lazy impression, that the hard sciences have established a body of settled, scientifically-testable knowledge that economics simply cannot lay claim to. Is Tim really saying that ain’t so?
Tim also admits that macroeconomic models have proved “useless” at forecasting but suggests that this is a minor matter, since few academic economists “even bother to try”. But the starting point for my piece was Joseph Stiglitz’s suggestion that “the failure of much of the economics profession to see the crisis coming should be a cause of great concern.” And Professor Stiglitz is a winner of the Bank of Sweden prize for economics – sometimes referred to as the Nobel prize.
Also published at ft.com.
As an economics graduate from Hong Kong, I wonder whether we are doing enough to protect Mother Nature. I have considered donating money to Greenpeace. Then I had a better idea. Why don’t we donate shares of polluting companies to Greenpeace? By doing so, at least some part of these companies’ profits could be directed to environmental organisations through dividends. In some extreme cases, Greenpeace could acquire enough shares to push the companies to transform into a more “environmentally friendly” corporation.
What do you think?
Leave aside the fact that if Greenpeace want cash, they can sell the shares you give them, and if they want shares they can buy them with your cash donations. Leave aside, too, the question as to whether environmental organisations would enjoy the irony of collecting dividends from oil and mining companies.
I am still unconvinced.
You say polluters will pay for their damage, but this is not true. Dividends are payments related to profits, not to environmental pollution. Regulation and tradeable pollution permits discourage pollution; buying shares does not. Worse, if your idea caught on, it would lower the cost of capital of polluting companies and enable them to invest in more marginally profitable projects, although I suspect this effect would be tiny.
As for Greenpeace itself, it could indeed use a shareholding to make a fuss at annual meetings. But most shareholders seem to have little influence on the decisions corporate managers take. I suspect campaigning organisations are more effective outside companies than in.
Also published at ft.com.