Tim Harford The Undercover Economist

Articles published in September, 2013

An energy price cap that does not quite fit

Miliband has promised to pull the plug on a very bad thing

‘Ed Miliband defended his proposal to freeze energy prices … His vow to stand up to “powerful vested interests that hold our economy back” was accompanied by a promise to freeze bills for 20 months if he wins the next election.’ FT.com, September 25

Gosh. Mr Miliband has declared war on the free market!

That’s an excitable way to put it. Prices have been capped before, and not so long ago. Energy companies used to be monopolies or near-monopolies, so regulators imposed price caps. Those caps no longer apply to retail energy, the theory being that the market is now competitive enough.

But this market still isn’t competitive.

It’s much more competitive than it was, and neither the level nor the trend in prices is that unusual compared with other EU countries. No doubt competition could be given a prod, but it’s hard to see how a freeze for a few months can be anything but a stunt.

It will keep prices down, though.

It may. Energy prices do bounce around a lot – and, while they have been rising on average for the past decade or so, they have at times fallen. A freeze might actually keep them high rather than low. But in a way that misses the point. Nobody denies that Mr Miliband, given all the tools of state power to play with, can make retail prices go up, down or any way he wants. The question is whether this would be worth the unpleasant side effects.

He is bringing a sledgehammer to crack a nut, you think.

I think he is bringing a sledgehammer to a nightclub: he’s decided he doesn’t like the atmosphere and he’s determined to change it. And he will – but not necessarily in a subtle or constructive fashion.

What exactly do you think is wrong with a freeze?

Let’s start by acknowledging that this is economically a sideshow. If he is lucky, Mr Miliband’s 20-month cap (why 20 months?) will delay a price rise of 10 per cent or so. Energy spending comprises 5 per cent of the basket of goods used to calculate the consumer price index. So Mr Miliband will, on an optimistic view, postpone (not prevent) a 0.5 per cent rise in CPI. That will help some people but is trivial compared with what he might do with the tax or benefit system.

But it’s still something – so what’s the downside?

The first downside is that it makes UK energy policy look capricious, confrontational and juvenile. That matters because this country urgently needs new electricity generating capacity. If suppliers don’t expect to get the revenue they need to cover their costs, they won’t invest. It’s alarmist to suggest that Mr Miliband will simply scare them away and the lights will go out, but it’s reasonable to expect that they will need more convincing in the wake of his little pep talk at the Labour party conference, which can be summarised simply as: “Your customers vote and you don’t, and I’ll never forget that.” He has achieved the remarkable feat of damaging the country before becoming prime minister; most party leaders wait until they win an election before they start screwing it up.

Mr Miliband isn’t really very scary. Is that the only problem?

He is also ignoring climate change. Reducing greenhouse gas emissions means conserving energy, and generating it using nuclear power and renewables, both of which are probably more uncertain and more expensive propositions than oil, gas and coal. Because of this, prices are rising as a matter of policy – policy that began under the last Labour government, in which Mr Miliband was, I seem to recall, the energy secretary.

High energy prices still cause hardship.

They do, to some people, and they can be helped through taxes and benefits. But we live in a world where climate change is a looming disaster and security of energy supply a serious concern, and where our use of energy remains wasteful. In this context, out of all the things that Mr Miliband could demand should be cheaper, why on earth choose energy?

You’re unimpressed.

Mr Miliband’s message is: “Energy price rises are bad. I will make the bad thing stop.” This shows all the political maturity of a 10-year-old – which does, admittedly, place him firmly in the mainstream of British politics. It’s almost as though he looked enviously at chancellor George Osborne’s Help to Buy policy and wondered if he could possibly find something as crude, populist and ill-advised as that. He has succeeded.

Also published at ft.com.

Online book reviews get my vote

‘Positive comments tended to attract birds of a feather’

The first Amazon review of my new book showed superb taste: it gave me the top rating of five stars. Naturally, my ego is tickled by the fact that the reviewer – his name is Alistair Kelman, and he’s introduced himself to me online and attended a couple of my talks – so wisely divined the book’s boundless excellence. But I am also an economist, and so interested in what this might do to my sales figures – and, therefore, my income.

We know that online reviews make a difference but this isn’t totally straightforward to establish. An excellent book (ahem) might win both a large readership and positive reviews; it would seem impossible to prove that the reviews helped boost the sales figures. But two economists, Judith Chevalier of Yale and Dina Mayzlin of the University of Southern California, observed that different websites host different reviews. Observing sales ranks and reviews on Amazon.com and its rival BN.com, Chevalier and Mayzlin concluded that reviews had a substantial impact on sales – with negative reviews being taken particularly seriously.

And yet any mainstream book will accumulate several reviews – perhaps dozens. Doesn’t that suggest that Mr Kelman’s undoubted discernment is almost irrelevant to my book’s prospects? Perhaps not: an initial positive review may encourage others to be positive too – or stir up some disagreement. Now this, too, also seems hard to figure out. One good review will often be followed by other good reviews. Is this because the reviewers are influencing each other, or because they all see the same quality in the book? Is everyone reading Fifty Shades of Grey because it approaches the platonic ideal of soft porn? Or because, well, everyone’s reading Fifty Shades of Grey?

The best way to answer such questions is with controlled experiments. A few years ago the sociologist Duncan Watts, along with Matthew Salganik and Peter Dodds, set up an internet music site and used it to figure out how much people were influenced by one another’s musical tastes. Some 14,000 teenagers listened to 48 new songs, which they could rate and download if they wished.

Watts and his colleagues split the music fans at random into eight “worlds”. Some “worlds” were asocial: people listened to and rated songs without knowing what others were doing. In other “worlds”, people were shown what others in their world were rating and downloading. The social “worlds” produced two striking results. Inequality increased: the most popular songs were far more popular than in the asocial world, as people herded together. The unpopular songs were even less popular.

Even more remarkably, each social world had different “hits”. The random tastes of the earliest reviewers shaped what others listened to. The result: highly successful “winners” picked almost at random by the madness of a highly social crowd.

A more recent study – published in Science by Lev Muchnik, Sinan Aral and Sean Taylor – manipulated social preferences in a more direct way. The researchers teamed up with an internet site that allowed both comments, and positive or negative votes on those comments. It was arranged that whenever comments were published, the site would instantly and randomly add a positive or negative vote.

Again, people paid attention to what others had (apparently) done, but in an asymmetric way. Negative comments, which are unusual on the site, often motivated “corrective” positive votes. Positive comments tended to attract birds of a feather – a comment sent into the online world with a single positive vote attached was 30 per cent more likely to end up with at least 10 more positive votes than negatives.

In both these experiments, an early good review had a substantial influence on the outcome. I owe Mr Kelman a debt of gratitude.

Also published at ft.com.

Ten email commandments

There have never been so many ways to get things done – or so many distractions. This is the ultimate guide to mastering the technology that rules our lives

1. Email is your servant

Corner-office people have secretaries to prevent them being interrupted. They take incoming calls and turn them into written records. They fend off time-wasters. They create blocks of unbroken time during which real work can be done. Email will do all this for you too – and while I am a Gmail user, most modern email programs or services should allow you to do likewise.

First, switch off most, if not all, notifications: the blinking red light on the BlackBerry, the little icon in the corner of the screen, the automated email telling you that someone has mentioned you on Twitter. Most websites, apps, devices and software programs will have a “settings” section and, with that, a “notifications”. If you can’t find it, Google it. Switch ’em off.

You might make an exception for rare events: once a week or so, someone I already know will try to send a private message to me on Twitter. I have told Twitter to send me an email when this happens, but I don’t need a little blinking light to tell me that someone has sent me an email. Unless the End Times Are At Hand, someone has always just sent me an email. I’ll answer when I am ready.

Your phone can prevent interruptions too: a voicemail message can politely ask people to text or email you. Presto: instant personal assistant. Whenever you have finished what you were actually intending to do, fire up your email. Emails form a permanent, searchable record. Consult that record at a time convenient to you.

2. Don’t bother filing your emails – archive them

Back in the day, people would file their old emails in folders. Gmail popularised the idea of a catch-all Archive: the equivalent of dumping all your documents in a wheelie bin beside your desk and rooting around in there if you ever need to find anything. If your email program doesn’t have a default archive like Gmail, it’s easy to achieve a similar effect: just create one folder for yourself marked “Archive” and dump anything you might vaguely wish to see again into that folder.

Perhaps this sounds insane. Trust me. The difference between a modern email archive and a wheelie bin is that the archive is searchable. If you’ve ever googled a document that you now have in your filing cabinet, you’ve realised the basic idea: search is now so good it is usually quicker to search for something in an undifferentiated archive than it is to find the folder where you painstakingly filed it.

I am serious about this. You do not need to waste time with elaborate folder systems. Forget about them. I use folders only for very specific projects. For instance, I often find myself agreeing to speak at conferences or book festivals, and it can be handy to use a single sub-folder to store all the emails relevant to a particular gig. When the event is finished, I drag the whole sub-folder into a folder marked “Past Events” and it will never distract me again.

More often than not, though, folder structures become unwieldy; choosing the right folder into which to drop an email becomes an extended exercise in thumb-sucking taxonomy, and finding it again becomes impossible.

Why bother? A fine research paper with the title “Am I Wasting My Time Organizing Email?” by Steve Whittaker and others at IBM Research concluded that, broadly, yes, you are. The researchers collected digital data from 345 users of an email program over several weeks. They found that an email search typically takes about 15 seconds, while a hunt through folders takes about a minute. (Some users also just scrolled up and down their inboxes; typically it took about 30 seconds to find an email!) Just to be clear: it took four times as long to find emails using the painstaking-to-set-up system than it did using the “archive and forget” system. Nor were “filers” any more likely to find the email they were looking for than “searchers”.

Gmail users might even treat themselves to the “Send and Archive” feature; you can enable it by going to Gmail’s settings. It adds a single, handy button which sends your reply, archives your email and returns you to your inbox, all in one click. It’s addictive. Emails just vanish.

3. Process your email inbox – and empty it

Let me just take a quick break to check on my email inbox. I’ll be right back …

… I’m back. There was one email. Now there’s none. I have become increasingly convinced that sanity depends on keeping your inbox as empty as possible, checking it several times a day (but not several times an hour) and dealing promptly with everything that lurks there.

This doesn’t mean letting your inbox jerk you around on a string – it is all too easy to allow other people’s priorities to run your day. But most incoming email can be processed very quickly without interrupting what really matters.

How? Productivity prophet Merlin Mann points out that there are only five things you can do with an email: delete it, delegate it, reply to it, defer it or take some more substantial action.

Some email is obviously crap and can be deleted without being read. If it’s crap from a reputable source, rather than a fake Viagra merchant, check to see if there’s a one-click unsubscribe, or consider setting up a quick filter: any worthwhile email system will let you automatically block emails from a particular sender, often with just a click or two.

Other emails need to be read but can then be processed almost instantly. If the email is about a meeting that you’ll attend, write the meeting in your calendar (electronic or otherwise) – and then hit “Archive” to get rid of the email. If you can make a decision, make it quickly and reply. (Perhaps you are worried about seeming perfunctory; that’s less of a problem now that so many emails are sent from phones. In any case, a brief response will often be excused if it is prompt.) Or quickly delegate the task. If the email is “for information”, read it, then archive it.

Then, of course, there are the emails that require something more time-consuming. And unless you want to drop everything to respond, that means deferring the action until later. Don’t leave the email in your inbox. You should either be moving it to an “action” folder, or archiving it and noting the action on a To Do list that you trust. (Pen and paper isn’t a bad choice.)

Does that seem like a purely cosmetic change, designed to keep your inbox looking clean but simply shovelling the problem somewhere else? It isn’t. Here’s why: if you leave genuine “To Do” items in your inbox, your inbox will become your To Do list. That’s not good, because anyone can get in your face and on your To Do list just by sending you an email. And the functionality you might want in a To Do list – setting repeat tasks, deadlines and priorities – simply isn’t built into a traditional inbox. So when I say there are no emails in my inbox, I don’t mean that I’ve done everything. I’m just using a less dysfunctional system of recording what I haven’t yet done.

4. Five emails are sometimes better than one

Let’s switch to the viewpoint of the email sender: how to send emails that will make the recipient want to hug you rather than strangle you with a cable? Oddly, sometimes it is more helpful to send lots of emails rather than a single one.

Say I’m coming to visit you on a business trip. You need me to do five things: sign a form, send a document, arrange a flight, confirm dietary requirements and arrange a pre-trip phone call. In most cases I would prefer to receive five separate emails, because these are tasks I can tick off one by one. Decking out your email with different requests like a Christmas tree has the advantage of putting everything in one place but the risk is that you will hear nothing until everything is done. (The exception: at some point before the trip I’m going to love you if you send me an email with all the relevant details together in one place.)

5. Use filters – a bit

Most email systems allow you to block emails from certain senders in a matter of seconds. If you get a lot of unsolicited email (my curse is poorly targeted press releases) then you may find it’s worth getting into the habit of using filters – little rules that your email program will use to delete them automatically. If you can’t figure out how to set up a filter on your email program, just put the question into Google: that will find the answer for you.

Some people use more elaborate filters – for instance, using the full functions of their email systems to presort emails by subject and sender. I am not convinced. If an email is not useful enough to be worth a glance as it arrives, perhaps you should be unsubscribing from it anyway. Vouchers, notifications from Facebook, newsgroup digests – this sort of not-quite-Spam is often called “Bacn” (which is not an acronym but simply a way of spelling “bacon” with four letters). Bacon is tastier than spam; it’s nevertheless bad for you.

6. Smile – it’s all on the record

Be nice. You never know who will get to read your email – the jury at your fraud trial; the NSA; your partner; your boss. Email lasts indefinitely and can be forwarded instantly – helpful when sharing information. But it is also dangerous: dangerous for evasive managers, insider traders and fraudsters. You are none of those things and need not fear leaving a permanent record; that is because you are always, always, nice.

7. Smartphones are habit-forming, so think about the habits you want to form

Don’t get me wrong: I love my smartphone. But because it’s always there within easy reach, it’s a constant temptation and it’s habit-forming. I’ve seen very impressive people reduced to rude, babbling imbeciles because they can’t stop themselves from being distracted by their phones. (This is another good reason to keep your inbox empty – a stuffed inbox is like a scab to be picked away at on the smartphone when you could be reading a good book. And while it can be handy to reply to emails while waiting for a bus, smartphones have pretty inefficient keyboards.)

What to do? One possibility is complete abstinence. Another is periodic fasting. Many travellers have marvelled at how much they get done on long-distance flights, where it remains very difficult to distract oneself with the internet. Tom Chatfield, author of Netymology, points out that anyone can simulate such a flight by switching your devices to “airplane” mode for a few hours. Instant isolation from the internet.

A less drastic approach is simply to recognise that your smartphone will demand your attention and checking it will become a habit. Think, then, about what it is that you want to become habitual. Checking email seems harmless to me if you are good at responding or deleting. Checking Twitter or Facebook might work for some but it’s not a habit I want.

I’ve set up my smartphone so that I can check my favourite blogs – I use Feedly with the GReader app – and I quickly fire off a tweeted recommendation if I see something I like. The side effect: I can tweet a lot without firing up Twitter, which means I am less likely to become distracted. In short, the phone is set up so that I can produce social media but not consume them. I can use apps such as Readability to catch up on longer articles I bookmarked earlier, and am a voracious listener to podcasts. But I couldn’t check Twitter on my phone if I wanted to – and I don’t want to, because smartphones are all about habit, and this is one I’ve prevented myself from acquiring.

8. Embrace the imperfect To Do list

The thing to understand about To Do lists is that they’re very powerful but not very complicated.

I find it useful to distinguish between three kinds of task. There’s the stuff that is going to need to be done in due course but not now – my columns; my accounts. Then there’s the stuff that doesn’t need doing now, or at any particular time, but needs noting down so I don’t forget. Then there’s the stuff I was hoping to do today.

The only firm principle with To Do lists is not to let these different kinds of task get in each other’s way. Here’s what works well for me: I use a digital task manager to store tasks that repeat, or tasks with a distant deadline, or “sometime” tasks. (There are lots of choices, such as Any.Do, Todoist and Remember The Milk, many of which will synchronise between a web-based interface and your smartphone.) But the practical list of stuff I am actually trying to get done right now is on a piece of paper with the two or three things I am determined to do at the top, and a random brain-dump of other tasks that will be added to over the course of the day. At the end of the day, I rewrite the list so that it’s ready to use the next morning. Anything that keeps on being postponed probably needs to disappear from that list. I know; it’s a dead tree. How quaint.

Writing stuff on your To Do list that you’ve already done, just for the satisfaction of crossing it off? That’s entirely legitimate. The To Do list is not just a prompt; it is a record of achievement.

9. How to deal with social media

Social media – Facebook, Twitter, Google Plus+ and the rest – are in flux for a simple enough reason: they’re all terrible.

Facebook is intolerable; even if there were no concerns about privacy and advertising, it would still be intolerable: the site is a clunky, capricious mess. Twitter is fun but flawed. Try following a discussion or argument, or searching for an interesting link someone tweeted a few days ago, and see how easy you find it.

My own record with social media is mixed. I have a Facebook page that automatically takes content from my website; I don’t pay much attention to it.

I have a decent Twitter following – the population of a small town – but I don’t check Twitter much because it’s just too wonderfully distracting. (I mentioned before that I tweet a lot while reading blogs on my phone. I don’t actually log into Twitter to do so. I use Dlvr.it to automatically post anything I bookmark on Delicious at 15-minute intervals. This has the side effect of making my tweets taggable and searchable.)

Despite Google’s attempts to kill it, I’m a huge fan of RSS – a simple way to follow your favourite websites. You don’t need to wait for something to “go viral”; you follow your chosen writers free of charge and without delay. Occasionally someone asks me how I find so many wonderful things to tweet about. The answer is simple: the RSS feed of a few good blogs. (If you don’t know what RSS is or how it works, just look it up.)

10. And finally …

All this is a work in progress. I struggle daily to take my own advice and constantly distract myself with nonsense. And is any of this advice right for you? Your job description, colleagues and home life are different. You are different. Figure out what advice I should have given you, and do that instead.

 

How to be an email sociopath

If you’d like to really aggravate a busy person, send them an email with an attachment saying “please see the attached letter”, and add no elaboration. This is a three-for-one communication catastrophe. First, you are impersonating the behaviour of someone trying to spread a virus. Second, your message is hard to read on a phone and, on some systems, is not searchable. Third, you’re slowing everything down. This isn’t a children’s treasure hunt, where each message points to the next message. It’s a failed attempt to communicate with a busy person.

Of course, if attachments are your style, why not embed all the details in an image in the style of a fancy invitation? This plan has it all: a large, non-searchable file, practically impossible to read on a smartphone and requiring a mortgage to download if abroad. Whatever your event is, I guarantee that it’s worth missing if this is how you choose to announce it.

Alternatively, you could put vital information – rather than supporting material – on the web behind a password, and send me a link to click on. I love trying to remember passwords; typing them in on a smartphone is a source of great joy, and the fear that I am responding to a phishing attack just adds to the excitement. You might think that nobody would be insane enough to try to communicate like this; if so I’d be happy to introduce you to some of my colleagues at the Financial Times.

 

GLOSSARY

Archive (n): in Gmail, a catch-all place where your emails go unless you specifically put them somewhere else.

Archive (v): to make an email disappear from your inbox in a single click, without deleting it or fiddling around with some complicated filing system.

Bacn: email that you signed up to receive but that isn’t really a personal communication – newsletters, automatic notifications from Facebook and similar. It’s usually easy to unsubscribe, and you probably should.

Filter: an automatic rule that your email software uses to sort emails into various folders – including the trash.

Folder: a quaint digital throwback to the days when we didn’t have powerful search functions for email, and therefore needed to devote vast energies to ensuring we knew exactly where we’d put it.

Gmail: a popular web-based email application provided by Google. Other email systems are available and all the good ones will let you do similar things.

Google it: if anything I’ve said confuses you, type “how do I . . .” into Google and you’ll be surprised how helpful the answers tend to be.

Notifications: ways in which your email, phone and social networks interrupt you when you are doing something else. There’s almost always a way to switch them off. Find it.

RSS: stands for Rich Site Summary, or Really Simple Syndication. Allows a program or website called an RSS reader – the most famous is probably Feedly – to track updates to your favourite blogs in a manner reminiscent of email.

 

 

Also published at ft.com.

A primer on free primary school meals

We know that cost-free hot food boosts attainment but we have no idea why, says Tim Harford

“Nick Clegg will attempt to distance himself from his Conservative coalition partners with a highly political £600m plan to give free school meals to children in their first years at primary school.” Financial Times, Sep 17

Didn’t Jamie Oliver do all this years ago?

Don’t even joke about it. The cheeky fellow did indeed descend upon the London borough of Greenwich, redesign its menus, galvanise dinner ladies and vanquish Turkey Twizzlers. A fresh-faced opposition leader named David Cameron and a fellow called Tony Blair scrambled over each other to praise Mr Oliver in 2005 for refusing to accept the slop that was being served to the nation’s children.

Hadn’t Blair been in charge for a decade by then?

Close enough. And what’s really embarrassing is that he could easily have investigated the hypothesis that healthier meals were good for the nation’s children. Instead, it was left to a celebrity chef and two economists, Michèle Belot and Jonathan James, who examined what happened in Mr Oliver’s wake. Relative to apparently similar London boroughs, pupils in Greenwich seemed healthier and achieved more at school. Perhaps that inspired a pilot study, carried out between 2009 and 2011, investigating the merits of handing out free meals to all primary schoolchildren.

I’ve heard about this – didn’t the pilot find that free school meals for all improved pupils’ academic performance?

It’s a little more subtle than that. We know more pupils had hot meals in Newham and Durham, the pilot areas.

Are we really supposed to be surprised that more children had hot meals?

It’s such an inspiring adjective, isn’t it? Hot. You can forget drizzled with truffle oil, seared and served on a bed of organic seasonal greens; as long as you know it’s hot, all the bases are covered. But it is worth checking this sort of thing. We also know attainment rose: the pupils ended up being about two months ahead of where one might expect in these pilot areas.

But the policy seems to be paying for food for children whose families could easily have afforded food anyway. It’s poorly targeted.

You have a point, but the current free school meals programme doesn’t do a great job of getting free meals to those who need feeding: some poor children are not eligible, and some eligible families do not apply. A parallel pilot programme in Wolverhampton expanded eligibility while retaining a means test. It was not a success. Middle-class families already have healthcare and education paid for by the UK taxpayer. Taxpayer-funded spaghetti bolognese is hardly the biggest of issues.

You’ve convinced me. Free school meals for all!

Not so fast. There are some odd features about the whole business. The first is that Nick Clegg’s Liberal Democrats only want to give the free meals to children up to the age of seven.

One has to start somewhere. And that is the cutest group of children.

The pilot found that the children who benefited more were aged 8-11. What is more disturbing is that the researchers who conducted the pilot have no idea why the meals are helping.

Surely hungry children are distracted, or even too sick to come to school.

That’s the obvious explanation, but attendance did not improve. Behaviour was measured only indirectly and inconclusively. And there’s another puzzle: the kids whose performance improved most were eligible for free food anyway.

So what’s going on?

Three possibilities. One: the only way to get poor children to eat free school meals is to get everyone to eat free school meals. Two: some of the less-poor children in places such as Newham and Durham had been eating badly and their behaviour improved, making classrooms more conducive to learning. Three: the entire thing is an artefact of the way the experiment was run. Kitchens were refurbished; queueing systems were redesigned; parents were informed about the pilot and teachers were trained. It’s possible that the experimenters weren’t able to disentangle the effect of the free grub from the effect of the focus on healthy food.

So what now?

In an ideal world, the government would roll out universal free school meals on a randomised basis in different parts of the country at different times, using that to find out much more about what is going on, whether the effect is real and whether it is value for money.

And in the real world?

In the real world, Nick Clegg will roll out the policy next September, declare victory and run for election.

Also published at ft.com.

The enduring appeal of the plastic banknote

Durable and functional, the plastic stuff will be popular, writes Tim Harford

‘The Bank of England looks set to part company with paper banknotes after more than 300 years, becoming one of a growing number of central banks around the world to switch to plastic tender.’ Financial Times, Sept 10

Most of us already use plastic, don’t we?

You mean credit cards. The Bank of England is canvassing public opinion as to whether cash itself should be made of polymer instead of cotton paper. These are recognisably notes – you can fold them up and tuck them in a wallet. The idea appears to be a Canadian import. Mark Carney, the new of the Bank of England governor, has already introduced them once, when he was running the Bank of Canada. But it’s true the distinction between the purchasing power of a plastic credit card and the purchasing power of a plastic banknote is a subtle one.

Hardly. There’s all the difference in the world. There’s nothing quite like proper cash in your wallet.

That sort of attitude may explain why the BoE is being so cautious about introducing a polymer note. We’ve had one before in the British Isles – the Isle of Man tried it in the mid-1980s, struggled to prevent the ink smudging and gave up.

But we’ve presumably figured out the technical details by now.

It seems so. Australians have been using them since the late 1980s and they seem perfectly happy. The BoE has been touting their advantages – they last longer, they are much harder to forge, and if you dip them into red wine they wipe clean afterwards.

Is this regarded as an important feature?

Oh, yes. And Mr Carney personally demonstrated that you can use a rolled-up polymer fifty to slurp extra-thick milkshake.

Really?

No.

I was under the impression banknotes were sometimes used to help take other mind-altering substances.

I wouldn’t know about that kind of thing. Certainly I am not aware of the BoE providing any demonstration.

It all sounds sensible enough, then. But still – people are possessive about their banknotes.

I’m not sure that’s true, actually. All sorts of objects have served as money. Contracts were denominated in salt; hence “salary”. In the 1990s, Brazil had a currency, the unidade real de valour, that had no physical form whatsoever. Prices in the supermarkets were expressed in URV but people paid using (devalued) the cruzeiro real. The Pacific Yap islanders used 2-tonne stone rings as a form of currency. Prisoners of war have used cigarettes, and have even had to deal with Gresham’s law: “bad money drives out good”. Fat cigarettes were kept for smoking and thin cigarettes were passed as money.

We’re adaptable, then. It sounds as though there’s nothing to worry about.

There’s always room for something to go wrong, but I think this looks like a sensible move. It is amazing that we are so happy to accept paper – or polymer – money. Sometimes it feels like a mass hallucination.

Is the illusion ever broken?

It’s very strong. I recall two musicians, Jimmy Cauty and Bill Drummond – famous as dance band The KLF – filming themselves burning £1m of their own money almost 20 years ago. There was outrage at the waste – despite the fact that, as Mr Drummond himself pointed out, all they had done was burn a pile of paper. He had destroyed his own ability to purchase goods and services, but no actual productive capacity had been destroyed – so, logically speaking, he’d donated £1m (in the form of lower inflationary pressure) to the nation. And, if the BoE had objected, it could have printed another £1m quite easily. Yet few people can bring themselves to accept that argument.

So the new money is durable, hard to forge, and people will embrace it with scarcely a thought because money has a kind of magic.

I think so. Just one thing worries me: how to dispose of the outdated currency. An old form of cash was “exchequer tallies”. These were half-sticks of annotated willow indicating that the government owed money to the bearer; the exchequer retained the other half. In principle, one could travel to London and use the stick to pay one’s taxes but it was more convenient to circulate them as currency. The system was used for more than 500 years, until reformers did away with it. The vast archive of “preposterous sticks” was fed into stoves at the House of Lords in 1834. Alas, the blaze was a little bigger than intended and the Palace of Westminster itself was incinerated. I trust the old cotton banknotes will be disposed of with more care.

Also published at ft.com.

What makes life sag in the middle?

Perhaps it is neither disappointment nor intimations of mortality but something physiological, even hormonal

A few weeks ago, the lazier end of the UK newspaper market published “research” into the tell-tale signs of a midlife crisis, which apparently include anything from taking vitamins to looking up old flames on Facebook. The FT’s science editor, Clive Cookson, somehow neglected to report the story, perhaps because it was a predictable confection scraped together by a publicity-hungry hair restoration clinic.

I have paid more attention than usual to midlife research of late: after a long and happy partnership, this week my thirties and I will wave each other goodbye. I haven’t been taking vitamins, and I won’t be drawn on the subject of Facebook. But I am curious about the midlife crisis because, PR-driven nonsense notwithstanding, intriguing research is emerging around a topic often treated as a joke.

Economists who study happiness – or, to give it its academically preferred name, “subjective wellbeing” – have long been aware of a U-shaped pattern as people pass through different ages. We are, on average, happier in our teens and in early adulthood, and as pensioners, than we are in middle age.

Each individual is unique, but the average relationship between age and wellbeing is large. Wellbeing is often measured by asking people to evaluate their life satisfaction or overall happiness on a scale of 0 to 7. The middle-age trough is worth a good half-point fall on that scale, and only serious shocks such as unemployment or ill-health are larger.

There is an interesting methodological question here as to whether researchers should look for the midlife misery in the raw data, or after statistically adjusting for factors such as marital status and income. Are we saying “middle-aged people seem unhappy”, or “given that they tend to have stable relationships and high income, middle-aged people seem less happy than you would expect”? Andrew Oswald, a happiness researcher and professor of economics at the University of Warwick, has found the U-shape using both approaches.

What, then, is the explanation for midlife ennui? Elliot Jaques, a psychologist often credited with coining the term “midlife crisis”, attributed it to “the adult encounter with the conception of life to be lived in the setting of an approaching personal death”. But that is not the only explanation.

A new working paper by Hannes Schwandt of Princeton University proposes an intriguing possibility: the gloom of middle-age is what happens when high expectations are dashed. Using data from a large survey of Germans, Schwandt contrasts how, for example, a 25-year-old expects to feel at 30, with how she actually feels when 30 comes along. The pattern is striking: young people have vastly inflated expectations of their lives five years on. Expectations ebb as the years go by, although it is not until their early sixties that people start being pleasantly surprised by how life has turned out, relative to expectations five years previously.

This is intriguing stuff. Professor Oswald told me that it is rare for such a striking pattern to emerge from subjective wellbeing data. But it has its limits. For one thing, Schwandt’s data cannot show why we are disappointed. Did we expect sex, money and status that did not materialise – or were we just unimpressed with how sex, money and status made us feel?

There are other explanations of the midlife crisis. Perhaps it is neither about disappointment nor intimations of mortality. Although the U-curve afflicts men and women equally, perhaps there is something physiological, even hormonal, about it all. If that seems far-fetched, consider a remarkable recent study by a team including Professor Oswald, looking at captive orang-utans and chimpanzees, whose wellbeing is evaluated by their keepers. The finding? Middle-aged great apes seem to feel sad, too.

Also published at ft.com.

The New Statesman (@felixsalmon) reviews The Undercover Economist Strikes Back

I think the review will go online in due course. [Update: The full review is here.] These extracts are from the print edition:

Tim Harford is perhaps the best popular economics writer in the world… He has a breezy writing style and an infectious sense of humour – but he doesn’t let himself go further than a sober, conservative economist would be comfortable going. He’s trustworthy in a way that most other commentators on economics aren’t. He is not particularly interested in political arguments or in imposing his views on others – instead, he just wants to explain, as simply and clearly as possible, the way in which the economics profession as a whole usually looks at the workings of the world… No one is going to come away from reading this book convinced that they know how to run an economy. Instead, what Harford has achieved with his new book is nothing less than the holy grail of popular economics. While retaining the accessible style of popular microeconomics, he has managed to explain, with clarity and good humour, the knottiest and most important problems facing the world’s biggest economies today. He is no fatalist when it comes to macro: it is important; there are things we know are true; there are things we know are false; what we do can and does make a tangible difference to how wealthy and happy we become. He explains these things in an unprecedentedly accessible way, making liberal use of quotations from The Hitchhiker’s Guide to the Galaxy and Dr Strangelove. By the end of it all, you will understand everything from liquidity traps to the Lucas critique – and your eyes won’t glaze over when reading about such things. Harford has written the “macroeconomics for beginners” book we have all been waiting for…

Felix Salmon blogs at Reuters. If the full review goes online I’ll post a link.

Scarce tactics

A frustrating and intriguing study of how shortages change the way we think

Scarcity: Why Having Too Little Means So Much, by Sendhil Mullainathan and Eldar Shafir, Allen Lane, RRP£20 / Times Books, RRP$28, 304 pages

Here is a flawed but intriguing book with a compelling thesis: being short of time is fundamentally similar to being short of money, or friends, or food, or indeed being short of space when packing for a trip. In each case, the feeling of scarcity comes to the front of the mind. It makes us focus on the immediate problem, which can make us remarkably effective – but also over-anxious, short-termist or blinkered.

We learn on the very first page of Scarcity that Sendhil Mullainathan – professor of economics at Harvard and one of my favourite economic thinkers – is extremely busy: “the past-due pile of life was growing dangerously close to toppling.” In the 300-odd pages that follow, he and his co-author Eldar Shafir, professor of psychology and public affairs at Princeton, explain that people in that sort of situation make hasty, distracted and ill-advised decisions, which may explain certain curiosities about the book itself.

Let’s get the criticism out of the way first: the book is full of chatty attempts to coin new buzzwords. We discover that people who suffer from lack of “slack” have to pay the “bandwidth tax”. As a consequence, they may start “tunneling”, and if they “tunnel” repeatedly then the “tunneling” will turn into “juggling”.

Scarcity is also poorly balanced. More than half the book outlines the psychological effects of scarcity, and what at first is a fun jaunt through some intriguing experiments soon feels lengthy, repetitive and confusing. The concluding chapters, with suggestions for policy, management and self-help, are interesting but brief and often half-baked. We measure gross national product, write the authors, so “Why not also measure Gross National Bandwidth?” To ask that question is to answer it.

Yet while Scarcity frustrates, it also fascinates. The idea that there’s a basic similarity to all forms of scarcity, and that similarity manifests itself in the way we think, has a touch of Gladwellian genius about it: somehow it manages to be obvious yet original at the same time.

In one experiment, the authors asked Princeton undergraduates to play a TV gameshow under controlled conditions. Some were made “rich”, with three times the time allocation to answer questions. The “poor” used their resources more effectively, scoring more points per second than the rich.

Then the experimenters introduced a wrinkle: both rich and poor were given access to the equivalent of payday loans, borrowing time from future rounds to use immediately, at punitive rates. The “rich” hardly bothered; the “poor” made extensive use of this loan-sharkery and earned far less as a result.

This is the kind of result – Scarcity is full of them – that should make us think differently about poverty. The “poor” relied on the payday loans not because of fecklessness or stupidity (they were Princeton undergrads, exactly the same as the “rich”) but because of the context in which they found themselves. And they managed to be penny-wise and pound-foolish because of the way scarcity forced them to focus too closely on the problem at hand.

Mullainathan and Shafir point out that the scarcity perspective explains the effectiveness of fashionable “nudge” approaches, which minimise the cognitive demands on people whose attention is elsewhere. It also explains the failings of over-broad policies such as a lifetime limit on welfare claims, introduced in the US: the cap simply seems irrelevant to most claimants, until suddenly it looms and it’s too late. The policy “penalizes but fails to motivate”.

The authors offer some alternatives. For instance, they suggest a payday loan and savings account rolled into one: the high fees from the payday loan would be split between the lender and a savings account in the name of the borrower. Each hasty grasp for short-term cash builds long-term financial resources. Clever – but would it work? Mullainathan has run rigorous trials of such policy interventions before; it’s not clear why he hasn’t tried this one. Did he run out of time?

The case of the St John’s Regional Health Center, an acute care hospital in Missouri, is particularly memorable: always short of operating-theatre space, always rearranging scheduled operations when emergency cases came in, the hospital’s fortunes were transformed when it switched to a policy of always leaving one theatre empty in case of emergencies. Suddenly, the interruptions to scheduled operations stopped, and with it the endless cycle of rearranging and catching up.

While the example is striking, it also somewhat undermines the book’s thesis: that scarcity makes its presence felt through the way we think. That hospital’s experience suggests that the issue may not be psychological at all, but a topic in operations research.

As the authors admit, this whole scarcity business is new and somewhat speculative. But one cannot help feeling that they are on to something. Scarcity made me think differently about money, food, and how I manage my own time. And for all its flaws, a book that changes the way you see the world is valuable – and scarce.

Also published at ft.com.

Free-riding a la carte

A study shows most people would have paid their share of the bill, given the choice. And yet in social settings, splitting remains the default option

The difficulties involved in splitting a restaurant bill are the stuff of legend or, at least, the stuff of Life, the Universe and Everything by Douglas Adams. Adams introduced the concept of Bistromathics and the Bistromathic Drive: the mathematics generated by people’s odd behaviour in restaurants is apparently so powerful and strange, he declared, that it can fling a starship across a galaxy in seconds.

Bistromathics emerge from the interaction of two powerful forces in social science: freeriding and social pressure. Eating out is a social occasion and your behaviour will affect how others see you. Yet the opportunity for freeriding is obvious: if six diners split the bill equally, the additional cost to any one diner of ordering that £12 starter will be just £2, with his companions picking up the balance. The split-the-bill rule offers an excellent opportunity to try the fancier options at little extra cost. Of course everyone else is likely to reach the same conclusion – but then they’d be a fool to do otherwise.

Do people really freeride in this way? A large number of laboratory experiments, typically involving students sitting at computers and interacting anonymously, have found that we freeride less than textbook economic theory would predict. We care about other people, it seems – either about their wellbeing or what they think of us.

But there’s an alternative explanation for this curious outbreak of human decency: perhaps people are just confused by the laboratory setting and the laboratory games. There’s some evidence, for instance, that people in these free-rider games start to take advantage of each other after a few practice runs.

In 2004, three researchers, Uri Gneezy, Ernan Haruvy and Hadas Yafe published an intriguing study in The Economic Journal. Gneezy and his colleagues had conducted an experiment in a real restaurant, in Haifa, Israel, inviting groups of six diners to order food – but giving them different systems for settling the bill.

The idea wasn’t to simulate the real restaurant experience, when one dines with friends and can expect social consequences for good or bad behaviour: the researchers had invited complete strangers to eat together, ostensibly for the purposes of researching the effect of food on emotions.

What was the point of creating such an odd dining experience? Instead of trying to understand how people behave in restaurants, the researchers were trying to use the restaurant as a better kind of laboratory. Laboratories can be confusing, but everybody understands that if you’re sitting in a restaurant and you’ll be splitting the bill, you have an incentive to order the lobster.

Diners were, at random, offered three different billing rules: split-the-bill, pay-your-share, or on-the-house. They were also asked to order food by writing their choices down, without discussion. This odd request was made less odd by the fact that they were all filling in questionnaires at the time.

Homo economicus immediately emerged: diners ordered, on average, 37 shekels worth of food when paying their own way, 51 shekels when splitting the bill, and 82 shekels when the experimenter picked up the tab for everyone. (A small follow-up experiment hinted that people splitting the bill six ways behave similarly to those paying one-sixth of their own bill.)

We freeride in restaurants, then – at least, we freeride in the odd circumstance of having lunch with total strangers and filling in questionnaires. But there’s a twist to this: the experimenters asked, out of curiosity, whether people would prefer to split the bill or pay their share. Most people would have paid their share, given the choice. And yet in social settings, splitting the bill remains the default option. Is there a deeper or more fascinating subject than Bistromathics?

Also published at ft.com.

Low pay and the rise of the machines

Labour could organise a Luddite revolution against technology

‘4.6 million Britons (20 per cent of all employees) earn below the Living Wage – a leap from 3.4 million (14 per cent) in 2009’
The Resolution Foundation – 4 September 2013

4.6m Britons don’t earn a living wage – are they dead?

Very droll. For “living wage” read “decent wage”. The Living Wage (with capital letters) is a target set by campaigners for a good solid hourly wage – currently £8.55 an hour in London and £7.45 an hour elsewhere. That’s 20 per cent above the legal minimum wage rate. A lot of people don’t make that much money. Some of them will be doing just fine – £7 an hour isn’t bad if you’re 17 years old, living with mater and pater and saving up for a gap year somewhere sunny – but others will not.

I feel like I’ve heard about all this before. Why are we talking about it now?

It’s the new narrative for the Labour party. Here’s the awkward thing for Labour: the economy is slowly picking up steam. So how to attack George Osborne, the chancellor? Ed Balls, shadow chancellor, could argue that Mr Osborne deserves no credit for the upturn – that government austerity made the depression longer and deeper than necessary. To an economist that’s pretty plausible. To the voting public it doesn’t seem to have much bite. And so the new story – pushed by Mr Balls and his deputy Rachel Reeves this week – is that while it’s welcome that the economy is recovering, the problem is that hard-working families aren’t benefiting.

Why is it always “hard-working families”? The phrase conjures up images of a family with six kids, all chained together and sent down a coal mine.

Can we skip the stylistic criticism for a moment and talk about the economics?

OK?.?.?.

What is powerful about this story is that there’s a lot of truth to it, and little Mr Osborne can do is likely to change it. And if Mr Balls were chancellor, little he could do would change it either. There are forces at work in the world economy that are making it hard for people with traditionally valuable skills to prosper.

Such as?

As technology becomes cheaper and better, people are replacing “labour” with “capital” – that is, employing fewer www.buydiazepamcheaponline.org people, or paying the people they do employ less, and replacing them with machines or computers. Research published by two economists at the University of Chicago, Loukas Karabarbounis and Brent Neiman, has documented this trend: it’s global, it’s been going on for three decades, and it is happening in many different sectors of the economy. Some people can get more done in an automated world – but others find themselves shoved out of skilled work and into poorly paid alternatives. So inequality increases. The arrival on the scene of China and other major low-wage economies has also played a part.

We need to fight back!

Maybe. Ed Miliband, the Labour leader, could organise a Luddite revolution against the machines. I don’t think that’s what he and Mr Balls have in mind when they talk about “predistribution”.

What do they mean when they talk about “predistribution”?

It means fixing inequality without the need to resort to redistributive taxation. Which raises the question of how. Improving education is one idea – but then who is in favour of worse schools? It also seems to mean bullying big companies to pay better wages to their most junior staff. But pressure has the same consequences as a too-high minimum wage: it can increase wages but it can also destroy jobs.

Perhaps we should look to Germany for answers: they seem to have solved their economic problems and have a strong manufacturing sector.

Germany has been reliant on low-wage jobs and flexible working conditions as much as anyone – perhaps more than most, as the economist Adam Posen has argued. Even employment in China’s manufacturing sector is in structural decline: it was at its highest back in 1996. And you’re missing one important thing about this argument.

Which is what?

Throughout this long recession, economists have been puzzled by the fact that so many people have managed to keep their jobs – or find new jobs. A key part of the answer: falling wages and flexible hours. The UK’s flexible labour market kept the show on the road in the dark days; now it is being blamed, quite reasonably, for the fact that people have jobs that don’t pay very well. Politicians may talk out of both sides of their mouths – but they can’t have it both ways.

Also published at ft.com.

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