Tim Harford The Undercover Economist

Articles published in August, 2012

Hey! You! Get off of my cloud…

I received an interesting email recently. I use a computer at the BBC when working on Radio 4’s More or Less, and a BBC colleague got in touch to inform me that his computer was automatically downloading all my personal documents: tax returns; letters to my wife; photographs; the manuscript of a book I’m working on – everything. He hadn’t perpetrated some clever hack. His computer was being force-fed my files like a fattened goose.

A possible cause was Dropbox, a cloud computing service that copies designated folders on your computer and stores them remotely, so that you can access the files from anywhere. You can have copies of these folders on other computers, and if you save or change a file on one of them, all your computers will synchronise. It’s an utterly brilliant idea – provided that some computer somewhere doesn’t decide that not only does it need to keep your office computer in sync with your laptop, but it should also keep your colleagues in sync too.

I called Dropbox, and they protested that it was not their fault – apparently the files had somehow migrated across the BBC’s internal network, and my colleague’s Dropbox account was simply reacting to the fact that my files had arrived on his network drive. It transpires that my colleague had logged on to a computer where I had been sitting; it appears this act of hot-desking gave his Dropbox account access to my files.

It would seem odd for the BBC to set up hot desks that way. And if Dropbox seems to have a decent excuse in my case, the company has suffered two publicised security lapses, one recent and one last summer. But whatever the cause, the sudden appearance of my personal files on my colleague’s iPad and iPhone is hardly reassuring. The whole point of Dropbox, and similar systems, such as iCloud, SkyDrive and SugarSync, is to keep several computers in sync, and many people will – as I do – want to synchronise their computer at home with the computer in their office. Discovering that office IT systems and cloud computing may have an allergic reaction to each other is not entirely a surprise, but it’s a bit of a blow.

This is just one front in a battle that has been intensifying of late – the war between corporate and personal computing. Ten years ago, I was using a decent laptop supplied by my employer and was simply grateful for the free hardware. I think this was common enough. Now I am desperate to avoid the clunky corporate offerings, which are heavy, ugly and slow compared with my smartphone, my tablet and my ultrabook. I want to do my day job on my beautiful toys. Collectively, the Samsung phones, the iPads and the MacBooks of all the other silicon narcissists like me must be a corporate IT nightmare.

But it takes two to make a dysfunctional relationship. I may have been fussily wanting to use my personal technology to do my job, but my employer has joined me in this bungled embrace, elbowing its way into my home. The FT subsidised my purchase of an iPad – which is great for understanding the digital future of journalism, but just wait until you try to log the thing on to the office network. The FT has also embraced the Gmail interface for its email system. This would be terrific if it didn’t cause a conflict with the personal Google account I already rely upon.

I’m spoiled, I know. I am old enough to remember working in offices where there was no wireless, where laptops were prohibitively expensive, and where if you wanted to carry a file around, you saved the little blighter on to a floppy disk. Life was a lot less convenient.

Still, when the man on the other side of the open-plan office can peruse my tax returns and my family photographs, I confess to feeling a little nostalgia for the way things used to be.

First published in FT Magazine.

I think to myself, what a complex world

John Maynard Keynes once wrote – in an obituary of Alfred Marshall, although I suspect with a hint of self-congratulation – that a master economist needed to be “mathematician, historian, statesman, philosopher – in some degree. He must understand symbols and speak in words. He must contemplate the particular, in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man’s nature or his institutions must be entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood, as aloof and incorruptible as an artist, yet sometimes as near to earth as a politician.”

I had Keynes’s unachievable wish-list in mind when reading Complex New World: Translating new economic thinking into public policy, a new collection of essays published by the Institute for Public Policy Research. Here’s the challenge for policy makers: real economic policy problems are defined by networks in which each agent influences other agents, by imperfect rationality, and by a constant turmoil in which there is never a settled equilibrium. But the methods of economics – and perhaps more seriously, the basic tenets of the subject – are designed to analyse equilibrium, not disequilibrium, and to model non-networked, rational agents.

The IPPR essays set out to address this gap, and they ask the right questions. But the ghost of Keynes is not far away: there are few answers, despite an impressive roster of contributors, including Eric Beinhocker, Paul Ormerod and John Kay. No wonder: it is almost impossible to do this stuff well.

The main message for public policy of taking complexity seriously is, “it’s complicated”. Environmental taxes have unpredictable effects once networks of social influence are taken into account. Financial regulations can backfire. Political revolutions, such as the Arab Spring, can flare up. This is all true, but a little unsatisfying. Is there anything we can do other than throw up our hands?

A few things suggest themselves. The first is that policy makers need a dose of humility. If the world is complicated, better to acknowledge that there is much we don’t know than to march confidently in the wrong direction. Alas, few people in positions of power got there because of their humility. The second lesson is that in a complex world, it is often worth trying different policy options and evaluating them rigorously – using randomised trials if possible in schools, policing and road safety. Randomised trials are catching on, and many objections boil down to a single point: how can we justify trials when we already know the answer? But we often know less than we realise. In a complex world, it’s rare that we can figure out answers by sitting in an armchair and thinking hard.

Amid the excitement about complex networked systems, it’s possible to lose sight of the fact that boring old mainstream economics has some useful tricks up its sleeve. Jim Watson, an energy expert at the University of Sussex, worries that economists put too much emphasis on carbon pricing when dealing with the problem of climate change. When consumers are influenced by what others do, and when there are bottlenecks in the innovation system, there’s no reason to expect carbon pricing to be a panacea – but it’s a little soon to write off carbon pricing when it has been so patchily implemented. Social networks and innovation bottlenecks don’t alter the fact that people respond to incentives, and a high carbon price would be a good incentive.

I hope economists continue to take complexity more seriously. But economic problems won’t yield to complexity analysis alone, any more than they will yield to any other methodological problem. Keynes was right: good economics requires a rare combination of skills.

First published in the FT Magazine.

Don’t judge a book by its cover price

A book tagged at $23m is a long way from the dream that the internet would usher in an era of price transparency

Last spring, a young biologist tried to buy a copy of a common but out-of-print reference work, Peter Lawrence’s The Making of a Fly. Amazon offered 15 used copies at reasonable prices – and two new copies, the cheapest of which was $1,730,045.91, plus $3.99 shipping.

Michael Eisen, an evolutionary biologist at UC Berkeley, heard the tale and tried to figure out what was going on. It can’t have been a prank – there were two sellers involved, both with thousands of satisfied customers. Eisen heard that many prices on Amazon were set by computers, and suspected this might be the reason.

The next day, both prices had risen to around $2.8m. By the end of the day, the higher-priced copy was on offer for $3,536,675.57. Eisen began to figure out what was happening. One seller, profnath, would set its price to fractionally undercut the best price available, once per day. The other seller, bordeebook, would discover this after a few hours and reset its price to be 1.270589 times higher than profnath’s price. Over time bordeebook would keep raising its price and profnath would shadow the price rises, always undercutting them. Eventually, the spiral stopped – presumably a human intervened – but not before bordeebook was offering The Making of a Fly for a mere $23,698,655.93, plus $3.99 shipping.

Profnath presumably had a copy of the book and was trying to offer the highest price it could, consistent with undercutting everyone else. Bordeebook is more puzzling, but Eisen has an ingenious theory. He thinks bordeebook didn’t have the book at all. Instead, it was trying to generate interest from buyers who didn’t mind paying a bit more for dealing with a reputable seller (bordeebook had more than 100,000 satisfied customers on record).

The only trouble was, if somebody ordered the book, bordeebook had to get hold of it – hence the reason for charging the prevailing market price plus mark-up.

Of course $23,698,655.93, plus shipping, is a lot to pay for a book – a long way from the dream that the internet would usher in an era of perfect price transparency, in which consumers would discover the cheapest products and prices would inevitably fall to the cost of production. (Not everyone making this case in the dotcom-bubble era realised that it was inconsistent with the other touchstone principle of the time, that internet companies would be insanely profitable.)

In fact, it’s far from obvious why price transparency would lead to lower prices. The problem was studied by the 19th-century French mathematician J.L.F. Bertrand. Bertrand realised that with two competitors offering identical goods with transparent prices, all customers would flock to the cheaper offering. Each company could capture the entire market by undercutting by a penny, and the process of undercutting would only stop when prices fell to the cost of production.

Like any economic model, Bertrand’s is an oversimplification. And a small tweak turns his prediction on its head: simply repeat the process indefinitely. The competitors will benefit hugely if they can find a way to raise prices; not to $23m, perhaps – but to the level a monopolist would charge. And price transparency, which seemed to be the customer’s best friend, becomes her worst enemy.

Here’s why: with two competitors charging monopoly prices as part of an understanding, there is no incentive for either to cut prices. None. The price cut will be instantly observed and matched by the competitor. Far from inexorably lowering prices, transparency can ensure they stay high.

The only thing that will bring prices down is a new entrant. And in many industries breaking into an established market is not easy. Transparency can be excellent for lowering prices – but it is not wise to take that for granted.

Also published at ft.com.

The random side of riots

We talk as if we understand why civil disorder happens, rather than recognising the unpredictable processes at play

Around this time last year, I stood at the threshold of my home in Hackney, with a week-old baby asleep inside and two helicopters overhead tracking the looters outside. As far as I could figure out there was trouble about 100m to the south, and more trouble about 300m to the north. I didn’t venture far, I’m afraid; my paternal instincts were stronger than my journalistic ones.

A neighbour, holidaying in Scotland, called to advise me to get my family out of London. He was concerned that civilisation was about to collapse. I wasn’t, but I admit that during those bizarre few days it didn’t seem absurd to entertain the possibility.

Why did the riots happen? Every pundit had an explanation, from government cuts to soft policing. But there’s a very different way to look at last summer.

Consider the following simple model of a potential riot, based on an idea published in 1978 by the sociologist Mark Granovetter. There are 1,000 people in a crowd of protesters, and all of them have some underlying tendency to embark on a looting spree. We might reckon that an outbreak of rioting might be triggered by insensitive policing, or by the poverty of the crowd, or the opportunities for theft or for violent protest. But for simplicity let’s assume that the only thing everyone in the crowd cares about is what everyone else in the crowd is doing. Some people will start looting without much company. Others will hang back until the riot is well under way.

Let’s put a number on this riotous tendency. One anarchic lunatic has a threshold of zero: he requires nobody else’s encouragement to start throwing bricks at the police. Another person has a threshold of one: he needs someone else to get things kicked off, but then he’s happy to join in. Then there’s a person with a threshold of two and another with a threshold of three, all the way up to the wallflower of the crowd who has a threshold of 999 – he’ll join in only when there’s literally nobody else standing back.

As you no doubt appreciate, this crowd will display a domino-like tendency to riot: the first person encourages the second; that pair draws in a third; then a fourth and a fifth, until everyone is on the tear.

An interesting lesson quickly emerges from this simplistic model. Imagine that, say, the fourth person in an otherwise identical crowd doesn’t have a threshold of three but of four. This second crowd will behave itself: after the first two troublemakers start acting up, there is no third person willing to join them. The outcomes could hardly be more different – and certainly there would have been no national and indeed international media frenzy if the 2011 riots had consisted of two yobs causing trouble on the fringes of a protest in Tottenham, and nobody else joining in.

Yet we know, because we constructed the examples, that these utterly different results emerged from all but indistinguishable initial conditions. One person out of 1,000 had a fractionally different inclination to riot (by one-tenth of 1 per cent of the observed range). As Duncan Watts points out in his book Everything Is Obvious Once You Know the Answer, the two crowds would seem identical to any survey or statistical test you might care to deploy. The same tendency for apparently identical conditions to produce utterly different outcomes also appears in field experiments carried out by Duncan Watts, and in recent models based on more realistic networks of influence.

Nevertheless, we persist in talking as though we understand why riots happen, rather than recognising the random self-reinforcing processes at play. Social influence can work that way. Last year it was arson and assault across English cities. This year it is buying Fifty Shades of Grey.

Also published at ft.com.

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