Tim Harford The Undercover Economist

Articles published in December, 2014

What if we abolished Christmas?

One possibility is that the economy would be just fine. This is the classic view of macroeconomics, writes Tim Harford

In 1939, Lew Hahn, the head of the Retail Dry Goods Association in the US, noticed something that gave him cause for concern: Thanksgiving would fall on November 30 that year, the latest possible date. Since it was thought poor form to start hawking Yuletide goodies before Thanksgiving was over, this would mean a brief Christmas spending season.

Hahn was concerned that consumers would spend less, damaging an already weak economy, to say nothing of the prosperity of the members of the Retail Dry Goods Association. And so he had a word with the secretary of commerce, Harry Hopkins, who had a word with President Franklin D Roosevelt, who had a word with the nation. He explained that as Thanksgiving was a federal holiday it was the president’s job to select the date — and he was choosing November 23 instead.

The move was controversial. Alfred Landon, the Republican who had been defeated by Roosevelt in the presidential election of 1936, compared FDR’s high-handedness to that of Adolf Hitler, thus beginning a hallowed tradition in US political commentary. For a couple of years, half the country celebrated on the old Thanksgiving date while the other half marked the new “Franksgiving” instead; a couple of states sat on the fence and made both days a holiday.

All this raises a deeper question: what are the macroeconomic consequences of Christmas? The answer depends on your politics. Economic conservatives, from Rick Santorum to Alf Landon to George Osborne, believe Christmas has little effect on the health of the economy; liberals, from Ed Balls to Franklin Roosevelt to Paul Krugman, believe Christmas is macroeconomically invaluable.

I should emphasise that I am making assumptions here. I have not approached any of these people to ask their opinions about Christmas. But the views I am speculating that they hold seem a logical extension of their views on government stimulus spending.

Allow me to explain. Imagine that this Christmas day, the Queen, the Pope and even Oprah Winfrey announced that Christmas would be a purely religious occasion from 2015 onwards. There would be no presents and no feasting. If people respected this declaration, about $75bn-$100bn of extra consumer spending in the US alone would simply not materialise next December. What then?

One possibility is that the economy would be just fine. This is the classical view of macroeconomics: nothing significant would change after the abolition of Christmas. We would retain the same labour force and the same skills, the same factories and the same power stations, the same financial sector and the same logistics networks. The capacity of the economy to produce goods and services would be undiminished, and after a period of adjustment, during which tinsel factories would be retooled and Christmas tree plantations replanted, all would be well.

What would replace nearly $100bn of seasonal consumer spending? Nothing noticeable, but the replacement would happen just the same. The productive capacity freed up by the disappearance of Christmas could be turned to other uses; prices would fall just enough to tempt us to spend our money at other times of the year. Indeed, cancelling Christmas might even provide a modest boost to our prosperity in the longer term, as bunching up all that spending into a few short weeks strains factories and supply chains. Smoothing out our spending would be more efficient.

This classical view of how the economy works is also the view taken by Mr Osborne, the UK chancellor, and by Republicans in the US. Their view is that government stimulus spending does not work; cut it back, they argue, and the economy would adjust as the private sector took up the slack.

On the other side of the debate stands Mr Balls, the UK’s shadow chancellor, as well as American stimulus proponents such as Mr Krugman and Lawrence Summers. Mr Krugman once commented that panic about an attack from aliens would help the economy because it would get the government spending money again. Since aliens are not available, Santa Claus will have to do.

This Keynesian view of how the economy works differs from the classical view in one crucial way: it argues that supply does not always and automatically create demand. When Christmas is abolished (or a financial crisis devastates people’s confidence and their spending power), consumers will plan to spend less. And if consumers plan to spend less, price adjustments may not induce them to change their minds; the price adjustments may not even happen. If Christmas spending disappears, it may take many years for the economy to replace it. Those factories will still be there and the workers will remain available — but they will stand idle.

Who is right? I should confess a bias. I am sceptical about the efficiency of many government spending programmes and of many Christmas purchase decisions. In both cases, too much attention is lavished on appearances and too little on what the recipient might truly want. In the long run, then, I should hope both for a smaller state and for a smaller Christmas.

But that is a matter for the ghost of Christmas yet to come. Despite my own biases, I have to acknowledge that this Christmas interest rates are still close to zero. Until that changes, the liberals will have the better of the argument. Stimulus spending remains effective, regardless of whether the stimulus comes from the Treasury — or from the North Pole.

Written for and first published at ft.com.

24th of December, 2014Other WritingComments off

You really, really, shouldn’t have . . . 

There is a vast discrepancy between how we see the world when giving gifts and when receiving them

The Harford girls have given Father Christmas two very different challenges this year. Miss Harford Senior typed a charming yet professional letter, illustrated with clip art, specifying a number of expensive gifts that would be greatly appreciated. Miss Harford Junior hand-wrote a short note saying that she had tried to be good this year and would like a surprise.

The girls raise two questions. Are surprise gifts better than something specifically requested on a wish list? Are expensive gifts a good way to express affection?

Father Christmas might seek guidance from a set of studies conducted by Gabrielle Adams and Francis Flynn of Stanford, and Harvard’s Francesca Gino.

Gino and Flynn surveyed married people, asking some to reflect on wedding gifts they had received, and others to think about wedding gifts they had given. Gift givers assumed that gifts chosen spontaneously would be just as welcome as those chosen from a wedding registry. Recipients felt otherwise: they preferred the gifts that had been on the wedding list. Such lists seem charmless but they work.

Gino and Flynn found similar results from a survey about birthday presents: again, givers thought that gifts they’d chosen themselves were more appreciated but recipients preferred the gifts that they’d specifically asked for. The lesson: you might feel that it’s awkward and unnecessary to ask what gift would be welcome but the recipient of the gift sees things differently and would prefer that you asked rather than guessed.

Gino and Flynn conducted a third study in which people created wish lists. Other participants were asked to choose an item on the list to be sent as a gift; a third group were asked to peruse the wish list but then to choose some other present of equivalent value. It’s not surprising to discover that recipients preferred the items from their wish list — but what’s remarkable is that they felt the wishlist gifts were more “personal” and “thoughtful”. We think that picking an item from a wish list is lazy and impersonal but the person receiving that item doesn’t see it that way at all.

For good measure, a fourth study by Gino and Flynn found there was one thing people appreciated even more than an item from their own wish lists: money.

There’s more. Adams and Flynn surveyed newly engaged couples about engagement rings. The givers assumed that more expensive rings were more appreciated. The recipients felt differently. A similar result came from asking people to think about a particular birthday present they had received or given: recipients were just as happy with inexpensive gifts, to the surprise of givers.

In short, there is a vast discrepancy between how we see the world when giving gifts and when receiving them. The gift giver imagines that the ideal present is expensive and surprising; the recipient doesn’t care about the money and would rather have a present they’d already selected. We should spend less than we think, and we should ask more questions before we buy.

All of this makes good sense in light of “The Deadweight Loss of Christmas”, a scholarly piece of research conducted by Joel Waldfogel and published in a leading academic journal, the American Economic Review. It celebrates its 21st birthday this month. (Congratulations, Joel.)

Waldfogel’s work on Christmas is well known to readers of this column but here is a quick summary for those who have forgotten. After surveying his students about gifts they had received over the holiday season, he found that most gifts were poorly chosen relative to what the students would have selected themselves. Gifts from friends and lovers tended to be better chosen than gifts from elderly relatives but, on average, the waste attributable to poorly chosen seasonal gifts was between 15 and 20 per cent of the purchase price of the gift — that’s well over $10bn wasted in the US alone every Christmas. This is a vast squandering of time, energy and valuable raw materials.

The usual response to this is that economists have, yet again, failed to appreciate the true meaning of Christmas. But to me this simply suggests that economists have managed to acquire a toxic brand in matters of human relations.

Were a priest to counsel against materialism at Christmas, nobody would accuse him or her of missing the point; the same message from an economist seems foolish and emotionally stunted.

Coupled with the findings from Adams, Flynn and Gino, the conclusion is plain: there is no need to stop buying Christmas presents but we should spend less and pay more attention to what the recipients might actually want.

So what should Father Christmas conclude when faced with my daughters’ letters? Miss Harford Senior is wise to specify exactly what she wants and Father Christmas should take heed.

Miss Harford Junior is taking a risk asking for a surprise — but at least Father Christmas knows that the last thing he should do to compensate for his ignorance is desperately spend more money.

Tim Harford’s latest book, “The Undercover Economist Strikes Back”, makes a superb seasonal gift.

Written for and first published at ft.com.

Women (still) don’t win prizes

‘Something about the culture of UK schools is nudging young women away from economics’

It’s no secret that women have long faced an uphill battle both to achieve success and be recognised for that success. The Nobel Prizes tell the story as well as anything: 860 people have been awarded prizes (including the unofficial Nobel Memorial Prize in economics) but only 5 per cent of them were women. The imbalance is worse still in stereotypically male subjects: only six Nobels for physics or chemistry have been awarded to women, fewer than 2 per cent of the total. Marie Curie won two of them; her daughter Irène won another.

Economics is another subject with a masculine reputation. It does not seem to be a happier hunting ground. The economics prize in memory of Alfred Nobel was launched in 1969 but it wasn’t until 2009 that Elinor Ostrom became the only woman so far to win it. “I won’t be the last,” was her characteristically practical comment.

Ostrom won the Nobel in economics despite not being an economist — her application to study for a PhD was turned away by UCLA’s economics department because she didn’t have the maths. “I had been advised as a girl against taking any courses beyond algebra and geometry in high school,” she commented. This particular piece of sexism ultimately worked in her favour: she became a political scientist instead and ended up approaching economic problems from a fresh perspective.

Curie faced a more immediate form of discrimination: in 1903 the Nobel physics committee planned to award the prize to her husband Pierre and to Henri Becquerel, overlooking Marie’s central role in studying radiation. Pierre insisted that his wife should receive the credit that she deserved. Not every husband of a brilliant wife has been quite so enlightened.

The two stories show the range of possibilities for discrimination to occur. Ostrom’s career path was shaped by negative stereotypes more than 60 years before she eventually won her prize; Curie nearly had the prize snatched away at the moment of triumph.

These are old wounds, and we have made a great deal of progress since then. But gender imbalances remain. In the US, the National Science Foundation’s survey of earned doctorates is not a bad place to look for the state of play. In 2012 women earned 46 per cent of all doctorates, up from 32 per cent three decades earlier. No great cause for alarm there. And women heavily outnumber men in social sciences such as psychology, sociology and anthropology.

Yet economics is a different beast: more than two-thirds of economics doctorates are awarded to men. (There is a similar story to tell in physics, chemistry, computing and engineering.) Since nobody under the age of 50 has won the Nobel Prize in economics, one can expect this imbalance in economics PhDs today to ripple through the upper echelons of the profession for many years to come.

There are also hopeful signs. The proportion of economics doctorates earned by women has been growing. The John Bates Clark medal, a prestigious award for economists under the age of 40, was exclusively male until Susan Athey won in 2007, but two other women have won the award since then. That is a sharp shift.

Is the lesson that all we need to do to attract more women to economics is wait? That is doubtful. In the UK, the proportion of undergraduate economists who are women is 27 per cent and falling. This isn’t a problem that will fix itself. So what can be done? The answer to that question depends on where we think the source of the imbalance lies — are we facing Marie Curie’s problem, or Lin Ostrom’s, or something else?

The school environment seems as significant today as it was for Ostrom. A recent study by Mirco Tonin and Jackie Wahba of the University of Southampton examines enrolment in undergraduate economics degrees in the UK. The gender imbalance in successful applicants is much more pronounced among UK applicants than those applying to UK universities from overseas. That suggests that something about the culture of UK schools is nudging young women away from economics.

. . .

That something may well be mathematics. This subject, a vital foundation for economics, is studied by more boys than girls at A-Level. Such a gender gap in advanced high-school mathematics disappeared in the United States 20 years ago.

As for women who already have their PhDs and are looking for careers in academia, the situation in the US is not entirely encouraging. A recent detailed study by a team of economists and psychologists (Stephen Ceci, Donna Ginther, Shulamit Kahn and Wendy Williams) looked at women in US academic sciences and concluded that while “gender discrimination was an important cause of women’s under-representation in scientific academic careers, this claim has continued to be invoked after it has ceased being a valid cause of women’s under-representation”. The playing field, they suggest, is much more level than it once was; a modern Marie Curie wouldn’t need her husband to fight her corner.

But Ceci and colleagues note an exception — one maths-intensive subject at which well-qualified and productive women somehow find it hard to win academic promotions. It’s economics. For some reason, the dismal science remains heavy with the scent of testosterone.

Written for and first published at ft.com.

The Christmas card network

‘It is not clear new technologies are expanding our number of genuine friends’

Is the Christmas card obsolete? I suppose the answer depends on what function you think the Christmas card is intended to serve, if any at all. Surely it is no longer intended to convey information. Email and social networks do a more efficient job, and including a Christmas newsletter or family photograph (I do both) will earn you only scorn from any self-respecting British snob.

Some believe that the Christmas card list, where we keep track of old favours and slights, is a sort of passive-aggressive vendetta. There is truth in this. Late in 1974, two sociologists, Phillip Kunz and Michael Woolcott, posted more than 500 Christmas cards to people they did not know. Some of them were “high status” cards, using expensive materials and signed “Dr and Mrs Phillip Kunz”. Others were from “Phillip and Joyce Kunz” or used cheaper stationery or both.

The Kunz family received, along with a complaint from the police, some rather touching replies: “Dear Joyce and Phil, Received your Christmas card and was good to hear from you. I will have to do some explaining to you. Your last name did not register at first . . . Please forgive me for being so stupid for not knowing your last name. We are fine and hope you are well. We miss your father. They were such grand friends.”

But what is most striking is that more than 100 strangers felt obliged to send a signed card in response. That is the power of reciprocity. (Response rates were particularly high if “Dr Kunz” had written on a fancy card to a working-class household. That is the power of status.)

If this is what Christmas cards are all about — mindless reciprocal obligation coupled with some social climbing — then I think we can all agree on two things: we could do without them; and we’ll never be rid of them. Thomas Schelling, a winner of the Nobel Memorial Prize for Economics, once advocated a bankruptcy procedure — wiping clean the list of people to whom we “owe” a Christmas card. If only.

But perhaps the Christmas card also serves other purposes. Consider the exchange, “How do you do?”, “How do you do?” This is phatic communication. It conveys no detailed information but it acknowledges others and implies that there is nothing much to report. “I’m OK, and you’re OK, and lines of communication are open if that changes.”

A Facebook “poke” could achieve the same thing at much lower cost. But perhaps the expense and the hassle is part of the point. If someone invites you for dinner and you say “thank you” as you leave, you may still wish to follow up with a thank-you note to show that you have enough invested in the relationship to take the trouble. If relationships weren’t hard work, they would not be relationships.

There’s a thing called the “social brain” hypothesis: it states that humans evolved large and energy-intensive brains not to do hard sums or design clever tools but because they needed them to navigate the complexities of dealing with other people. Back in 1992, Robin Dunbar — an anthropologist and psychologist now based at the University of Oxford — published a fascinating addendum to that idea. Dunbar had been looking at the social group size and the brain size of different primates, and found that primate species with larger neocortices had grooming relationships with larger social groups. Extrapolating to humans, he produced what has become known as Dunbar’s Number. If our brains are any guide, we’re built to handle a social network of about 150 people.

Dunbar’s Number is both more uncertain and more complex than popular presentations would have you believe. Dunbar himself argues that social networks are nested, following rough powers of three: five people to whom we might turn for substantial emotional or financial support in a moment of true crisis; 15 intimate friends; 50 friends; 150 rather casual friends, and so on.

Social networking tools let us reach more people, more quickly, and in some detail if we so choose. I can reach 90,000 followers on Twitter but — how can I put this tactfully? — they are not my friends. These new technologies are a great convenience but it is not clear that they are allowing us to expand the number of genuine friends that we have. A recent study by Bruno Gonçalves, Nicola Perra and Alessandro Vespignani examined 25 million conversations between Twitter users, and found that the network with whom people might actually have several reciprocal conversations was between 100 and 200 — Dunbar’s number again. As for close friends, women engage in two-way communication with around six people on Facebook; men with just four.

Much like primate grooming, a Christmas card requires effort, time and expense. An up-to-date Christmas list requires some thought about who matters to you, for reasons noble or ignoble. And a few years ago, two researchers carefully examined how big Christmas cards lists tended to be, once allowing for the fact that a single card could reach several members of a household. The researchers were Russell Hill and Robin Dunbar. And the number of people reached by a typical British Christmas card list? 154.

Written for and first published at ft.com.

Learn from the losers

Kickended is important. It reminds us that the world is biased in systematic ways

Can there be an easier way to raise some cash than through Kickstarter? The crowdfunding website enjoyed a breakthrough moment in 2012 when the Pebble, an early smartwatch, raised over $10m. But then a few months ago, a mere picnic cooler raised an extraordinary $13m. Admittedly, the Coolest cooler is the Swiss army knife of cool boxes. It has a built-in USB charger, cocktail blender and loudspeakers. The thundering herd of financial backers for this project made it the biggest Kickstarter campaign to date, as well as being a sure sign that end times are upon us.

And who could forget this summer’s Kickstarter appeal from a fellow by the name of Zack “Danger” Brown? Brown turned to Kickstarter for $10 to make some potato salad; and he raised $55,492 in what must be one of history’s most lucrative expressions of hipster irony.

I’m sure I’m not the only person to ponder launching an exciting project on Kickstarter before settling back to count the money. Dean Augustin may have had the same idea back in 2011; he sought $12,000 to produce a documentary about John F Kennedy. Jonathan Reiter’s “BizzFit” looked to raise $35,000 to create an algorithmic matching service for employers and employees. This October, two brothers in Syracuse, New York, launched a Kickstarter campaign in the hope of being paid $400 to film themselves terrifying their neighbours at Halloween. These disparate campaigns have one thing in common: they received not a single penny of support. Not one of these people was able to persuade friends, colleagues or even their parents to kick in so much as a cent.

My inspiration for these tales of Kickstarter failure is Silvio Lorusso, an artist and designer based in Venice. Lorusso’s website, Kickended, searches Kickstarter for all the projects that have received absolutely no funding. (There are plenty: about 10 per cent of Kickstarter projects go nowhere at all, and only 40 per cent raise enough money to hit their funding targets.)

Kickended performs an important service. It reminds us that what we see around us is not representative of the world; it is biased in systematic ways. Normally, when we talk of bias we think of a conscious ideological slant. But many biases are simple and unconscious. I have never read a media report or blog post about a typical, representative Kickstarter campaign – but I heard a lot about the Pebble watch, the Coolest cooler and potato salad. If I didn’t know better, I might form unrealistic expectations about what running a Kickstarter campaign might achieve.

This isn’t just about Kickstarter. Such bias is everywhere. Most of the books people read are bestsellers – but most books are not bestsellers. And most book projects do not become books at all. There’s a similar story to tell about music, films and business ventures in general.

Academic papers are more likely to be published if they find new, interesting and positive results. If an individual researcher retained only the striking data points, we would call it fraud. But when an academic community as a whole retains only the striking results, we call it “publication bias” and we have tremendous difficulty in preventing it. Its impact on our understanding of the truth may be no less serious.

Now let’s think about the fact that the average London bus has only 17 people riding on it. How could that possibly be? Whenever I get on a bus, it’s packed. But consider a bus that runs into London with 68 people at rush hour, then makes three journeys empty. Every single passenger has witnessed a crammed bus, but the average occupancy was 17. Nobody has ever been a passenger on a bus with no passengers but such buses exist. Most people ride the trains when they are full and go to the shops when they are busy. A restaurant may seem popular to its typical customers because it is buzzing when they are there; to the owners and staff, things may look very different.

. . .

In 1943, the American statistician Abraham Wald was asked to advise the US air force on how to reinforce their planes. Only a limited weight of armour plating was feasible, and the proposal on the table was to reinforce the wings, the centre of the fuselage, and the tail. Why? Because bombers were returning from missions riddled with bullet holes in those areas.

Wald explained that this would be a mistake. What the air force had discovered was that when planes were hit in the wings, tail or central fuselage, they made it home. Where, asked Wald, were the planes that had been hit in other areas? They never returned. Wald suggested reinforcing the planes wherever the surviving planes had been unscathed instead.

It’s natural to look at life’s winners – often they become winners in the first place because they’re interesting to look at. That’s why Kickended gives us an important lesson. If we don’t look at life’s losers too, we may end up putting our time, money, attention or even armour plating in entirely the wrong place.

Written for and first published at ft.com.

Elsewhere

  • 1 Twitter
  • 2 Flickr
  • 3 RSS
  • 4 YouTube
  • 5 Podcasts
  • 6 Facebook

Books

  • Fifty Inventions That Shaped the Modern Economy
  • Messy
  • The Undercover Economist Strikes Back
  • Adapt
  • Dear Undercover Economist
  • The Logic of Life
  • The Undercover Economist

Search by Keyword

Tim’s Tweets

Free Email Updates

Enter your email address to receive notifications of new articles by email (you can unsubscribe at any time).

Join 157,543 other subscribers

Website Malware Scan
Do NOT follow this link or you will be banned from the site!