Tim Harford The Undercover Economist

Articles published in August, 2016

Are universities worth it?

Last week the British university system offered a record number of places. That sounds like good news — but do we really need more people to go to university? For that matter, does the world need more universities?

 The answer feels like it should be yes. Education is good, is it not? But everything has a cost. Education takes time. We could insist that everyone study full-time until the age of 45 but that would surely be too much. And if that’s too much, perhaps half the population studying until they’re 21 is also too much. As for universities, they consume financial and intellectual resources — perhaps those resources might be better spent elsewhere.

My own personal bias is strongly in favour both of going to university, and of simply having universities around. Since the main skill I learnt at university was to write about economics, and I use that skill every day of my professional life, even an abstract education seems practical to me.

But these are samples of one. Many people do not find themselves using the skills and knowledge they accumulated at university. And Oxford’s dreaming spires aren’t terribly representative of global universities as a whole. New York University is a fine institution but, according to TripAdvisor, it’s the 263rd most interesting attraction in New York City. (Nine of Oxford’s top 10 attractions are university-related.) If the London School of Economics were to be bulldozed and replaced by a hotel and apartments, social science would feel a grievous loss but I am not sure that many Londoners would notice the difference. Warwick University is a superb seat of learning but it attracts no visitors to Warwick, since it is neither attractive nor in Warwick.

So the case for building more universities needs to rest on more prosaic grounds. A recent research paper by Anna Valero and John Van Reenen of the LSE takes a statistical look at universities around the world, asking whether they seem to boost their regional economies. (Examples of a “region” include Quebec, Illinois, Wales, and New Zealand’s North Island.)

There are several reasons that they might. Universities produce well-qualified young people, many of whom stay in the area when they have finished their studies. Universities often produce useful inventions. Some innovations are borderless — penicillin was discovered in London, developed in Oxford and is available anywhere — but many research ideas stay local, at least for a time. Silicon Valley grew up around Stanford, and it hasn’t moved. And there’s the simple fact that universities funnel central government money through staff salaries, student loans and other sources of local spending.

Valero and Van Reenen find that universities do indeed seem to boost the income of their region. Double a region’s count of universities — say from five to 10 — and GDP per person can be expected to rise by 4 per cent. Double the university count again, from 10 to 20, and that’s another 4 per cent on GDP per person. Neighbouring regions also benefit. This is not a trivial effect.

Valero and Van Reenen are fairly confident that causation doesn’t run the other way — it’s not simply that regions build universities because they expect future growth. But they can’t be sure that there isn’t some third factor at play: perhaps, for example, strong and capable regional governments produce both prosperity and universities.

A more sceptical view comes from Bryan Caplan, an economics professor who, ironically, is the author of a forthcoming book The Case Against Education. Caplan points out — not unreasonably — that many students seem to learn nothing of any obvious relevance to the workplace but, on graduation, they’re rewarded with much better career prospects than non-graduates. Why?

Caplan’s answer is that education is a signal. If employers have no way to tell who is smart and diligent, a student can prove that she fits into that category by excelling in, say, Latin. The Latin is like a peacock’s tail: costly and useless in its own right but a necessary investment.

To the extent that Caplan is right, undergraduate degrees have no value to society: they enable employers to pay higher wages to smarter workers, but lower wages to everyone else — and in order to enjoy these higher wages, smart people must waste time and money going to the trouble of acquiring a degree. Everyone might be better off if the whole business was abandoned.

Who is right? My heart is with Valero and Van Reenen. But Caplan strikes an important note of discord. Collectively, we have allowed university admissions and examiners to become gatekeepers for a successful career. Is that really wise?

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Some good books

I recently re-read Marc Levinson’s modern classic, “The Box” (US) (UK) – a history of how the shipping container made the modern world. Scholarly yet very readable. Levinson has a new book “An Extraordinary Time: The End of the Postwar Boom and the Return of the Ordinary Economy”. (US) (UK)

As a not-very-good photographer married to a very good photographer, I’ve been loving “Why It Does Not Have To Be In Focus”. (US) (UK) Witty and accessible guide to modern photography.

A wholehearted recommendation for my colleague John Kay’s “Other People’s Money”. (US) (UK) John is trying to imagine what banking and finance would look like if we had the chance to redesign from scratch. This is a wise and witty book – angry too, as only someone who truly understands what’s going on can be angry. Strongly recommended.

Ed Yong’s brilliant debut “I Contain Multitudes” (US) (UK) will tell you all you need to know about the microbiome and all that jazz.

Then there’s Peter Sims’s “Little Bets” (US) (UK) – a book that was published about the same time as “Adapt” with the same philosophy, but some different and brilliant examples and case studies. I remember distinctly reading through it and thinking “exactly right!” and “I wish I’d put it like that…”

And if that’s not enough for you, you could always pre-order my new book, “Messy“. (US) (UK) More about that to follow soon…

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30th of August, 2016MarginaliaComments off

Does hosting the Olympics make us happier?

The Rio Olympics close this weekend. Have they been worth it? Financially, surely not — as I wrote in June, host cities tend to pay handsomely for the privilege of providing the Olympic Games, and receive limited benefits in terms of infrastructure and reputation.

But not every expenditure needs to turn a profit. Many of us have just returned from our holidays, without any concern about whether they were financially rewarding. If they were relaxing, engaging or fun, that ought to be enough. Perhaps Rio could justify the expense of hosting the Games in a similar way.

It is not such a strange idea; an opinion poll conducted for The Guardian in the closing days of the London Olympics found that a clear majority of Britons felt that the Games had been “well worth” the price tag. But did the respondents really comprehend what the price tag implied? (It was around £150 per British resident.) And would they have felt differently had the question been asked a few months later?

In itself, that’s not much of a test because people might be having a good time anyway: the Games are held at the height of summer, when the sun tends to shine and people are on holiday. So the researchers tried to adjust statistically for factors such as the weather, which is known to have a large effect on people’s answers to questions about their wellbeing.

An aside: happiness researchers have long known that a bit of rain is enough not only to dampen your mood but also to trigger a gloomy re-evaluation of your entire path in life. A bit of sunshine makes everything better. This basic truth about the ephemerality of our emotions is all too easy to forget.

As well as adjusting for the weather and other factors, the happiness researchers made some important comparisons. They compared the feelings of Londoners with those of the residents of two other big European cities, Berlin and Paris. Berlin might be thought of as a neutral observer, having not bid to host an Olympics since the 1990s. Parisians might compare themselves with Londoners more sharply; having lost out to London for the 2012 Olympics and to Beijing four years earlier, Parisians could be forgiven for being sore losers — or perhaps relieved to have been spared the hassle. And the researchers first approached their survey subjects in summer 2011, repeated the survey with the same people in summer 2012, and again in 2013.

Gratifying as it would be to report an astonishing and counterintuitive result, the central finding of the paper is much as one might expect: Londoners really enjoyed hosting the Olympics but the buzz did not last long. During the Games — relative to Berlin and Paris, and also relative to the same time period in 2011 and 2013 — Londoners felt more satisfied with their lives, although also more anxious. After the Games, the feelings of life satisfaction ebbed away, and Londoners became more likely to feel that their own day-to-day activities were less worthwhile.

This makes sense: Londoners felt proud of hosting a successful Games, a little nervous that something might go wrong on or off the track, and were eventually left contemplating their own navels, buried all too deeply in folds of flab. In short, the Olympics were not much different to any of the other ways one can party and then nurse a hangover.

The findings are more broadly consistent with the developing science of happynomics, which has tended to produce insights that are interesting but often less than astonishing: money tends to buy happiness but good health and good relationships matter more; unemployment is a miserable experience; people do not like commuting but they enjoy having lunch and having sex.

Nevertheless, the field has promise. Consider the provision of goods such as light-rail systems or community playgrounds. A free-market system isn’t well suited to supplying such goods; but if left to governments, it’s hard to have much confidence that public money is being wisely spent. Of course people like it when their children can play safely, and they like brief and reliable commutes — but how much do they like them? Careful surveys of wellbeing are an important tool in figuring out the wisest way to spend public money.

Some philosophers tell us that nothing in life is valuable unless it adds to the sum of human happiness. Perhaps, and perhaps not. But some projects cannot be evaluated as good or bad unless we ask, carefully, whether they have made us happier. The Olympic Games are only the most prominent example.

Written for and first published in the Financial Times.

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The meaning of trust in the age of Airbnb

I am on holiday in Bavaria, where, in between the beer and schnitzels, I have been contemplating the nature of trust. A rather old-fashioned guest house happily took our reservation and let us run up a bill of nearly €1,000 without ever demanding more than a signature. Not for the Bavarians the pre-authorised credit card. Our room keys were stored in an unlocked cabinet in a quiet corridor, along with the keys of every other guest in the place. It made me wonder why anyone was bothering with keys in the first place. Nevertheless, our belongings were not stolen and we paid our bill when we left. The trust had been justified.

Since Germany is one of the most successful economies in the world and Bavaria is one of the most successful economies in Germany, the thought did cross my mind that trust might be one of the secrets of economic success. Steve Knack, an economist at the World Bank with a long-standing interest in trust, once told me that if one takes a broad enough view of trust, “it would explain basically all the difference between the per capita income of the United States and Somalia”. In other words, without trust — and its vital complement, trustworthiness — there is no prospect of economic development.

Simple activities become arduous in a low-trust society. How can you be sure you won’t be robbed on the way to the corner store? Hire a bodyguard? (Can you trust him?) The watered-down milk is in a locked fridge. As for something more complex like arranging a mortgage, forget about it.

Prosperity not only requires trust, it also encourages it. Why bother to steal when you are already comfortable? An example of poverty breeding mistrust comes from Colin Turnbull’s ethnographic study The Mountain People (US), about the Ik, a displaced tribe ravaged by Ugandan drought in the 1960s. If Turnbull’s account is itself trustworthy (it may not be), in the face of extreme hunger, the Ik had abandoned any pretence at ethical behaviour and would lie, cheat and steal whenever possible. Parents would abandon their own children, and children betray their own parents. Turnbull’s story had a horrific logic. The Ik had no hope of a future, so they saw no need to protect their reputation for fair dealing.

One of the underrated achievements of the modern world has been to develop ways to extend the circle of trust by depersonalising it. Trust used to be a very personal thing: you would trust your friends or friends of friends. But when I withdrew €400 from a cash machine, it was not because the bank trusted me but because it could verify that my bank would repay the money. This is a cold corporate miracle.

Over the past few years, people have been falling in love with a hybrid model that allows a personal reputation to work even between strangers. One example is Airbnb, which lets people stay in the homes of complete strangers, a considerable exercise of trust on both sides. We successfully used it on another stop in our Bavarian holiday. Airbnb makes personal connections but uses online reviews to keep people honest: after our stay, we reviewed our host and he reviewed us.

To enthusiasts for “collaborative consumption”, the next step is to develop systems that allow users to take the reputation they have built up as a generous and conscientious Airbnb host, and to use it to convey that they are also a prompt and careful Lyft driver or a reliable and honest eBay seller.

But designing such a system is problematic. Science fiction writer Cory Doctorow posited a purely reputational currency in his novel Down and Out in the Magic Kingdom (US). Such currencies, he says, are easily manipulated by con artists and extortionists. We’re misunderstanding the reason that eBay and Airbnb work, says Doctorow. It’s not because of the brilliance of the online reputation system but “because most people aren’t crooks”, an idea any Bavarian hotelier would understand.

Personalised trust has never been fairly distributed. When Harvard Business School researchers Benjamin Edelman, Michael Luca and Dan Svirsky (pdf) conducted field experiments on Airbnb, they found that both hosts and guests were discriminating against racial minorities. Other researchers have found evidence of discrimination in places from Craigslist to carpools. New online tools are giving us the ability to treat faraway strangers as though they were neighbours — and we do, in good ways and in bad.

Trust is as unfairly granted in Bavaria as anywhere else. While browsing for shades in Garmisch-Partenkirchen, I warned my young son not to play with the merchandise: a sign forbade children to touch the sunglasses.

The shopkeeper bustled over and reassured me that the rule did not apply to my son. “It’s for the Arab kids,” she told me, beaming. “They just drop the sunglasses on the floor.”

Ah. My son is adorably blond but he is as capable of snapping a pair of designer sunglasses as any other four-year-old. Trust is sometimes given to people who do not deserve it. And it is often withheld from people who do.

Written for and first published at FT.com

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Summer reading 2016

A few recent recommendations – and old favourites.

CityAM asked me to recommend an economics book – any economics book. So I went for “Thinking Strategically” (UK) (US), which is an all-time favourite of mine.

I wrote, “It’s the book that first attracted me to economics and one that I find myself recommending over and over again. Thinking Strategically is a guide to using game theory to succeed in business and in life. And what is game theory? Game theory was devised by the economist Oskar Morgenstern and John von Neumann, one of the great mathematical geniuses of the twentieth century. It’s a way of thinking through problems where you are competing or cooperating with others: how should Andy Murray decide whether to serve to the backhand or forehand? Where should you try to rendezvous in New York if you’ve lost your friend and your phone is out of battery? When faced with a competitor, should you raise your prices or lower them? Dixit and Nalebuff produced a fun and fascinating guide to a fun and fascinating topic.”

If you want to know more about Von Neumann and the history of game theory, you could do much worse than William Poundstone’s excellent book, “Prisoner’s Dilemma” (UK) (US). (Poundstone has a new book out, “Head in the Cloud” (UK) (US).)

I enjoyed Manu Saadia’s “Trekonomics”, but would have enjoyed it more if I was really into Star Trek. It’s smart but I think it’s best suited to real Trekkies who want to learn new economics, rather than economists who want to learn about Star Trek. (UK) (US)

I read a lot of books about improvisation while researching my new book “Messy“. There’s Keith Johnstone’s classic, “Impro” (UK) (US) but the book I enjoyed the most was Patricia Ryan Madison’s short, simple and wise “Improv Wisdom” (UK) (US). If you’ve any interest at all, try them both.

Finally, a boardgame recommendation: “Thunderbirds” (UK) (US). Great cooperative game, by the designer of and inspired by Pandemic. But of course it’s better, because it has Thunderbird Two in it.

Or if you fancy reading one of my books, try The Logic of Life.

 

 

 

13th of August, 2016MarginaliaComments off

An algorithm for getting through the To Do list

Can computer scientists — the people who think about the foundations of computing and programming — help us to solve human problems such as having too many things to do, and not enough time in which to do them?

That’s the premise of Algorithms to Live By (US link) a book by Brian Christian and Tom Griffiths. It’s an appealing idea to any economist. We tend to think of everyday decisions as a branch of applied mathematics, which is what computer science is.

To be clear, using computer science is not the same as using computers. Computer scientists have devoted decades to problems such as sorting information, setting priorities and networking. Many of the algorithms they have developed for computers can also work for human beings. An algorithm, after all, is not a computer program. It’s a structured procedure, a kind of recipe. (Algorithms are named after a 9th-century Persian mathematician, Al-Khwārizmī, but they predate his work by thousands of years.)

So, what is the optimal recipe for working through the to-do list? Perhaps it is simpler than you think: do all the jobs on the list in any order, as it will take the same amount of time in the end. There is a touch of brilliance in this advice but it also seems to show that computer science will never shed light on the stress and wheel-spinning that we feel when we have too much to do.

Or so I thought. Then I read a 1970 paper by the computer scientist Peter Denning, which describes a problem that computers can have when multitasking. Most computers do not literally multitask; instead, like humans, they switch rapidly between one thing and another. A computer will flit between updating your screen with a Pokémon, downloading more videos from the internet, and checking to see if you have clicked the keyboard or moved the mouse, among many other processes. But even a computer cannot do an unlimited number of tasks and, at a certain point, disaster can strike.

The problem stems from the use of readily accessible “caches” to store data. To understand caches, imagine a pianist playing from two or three sheets of music in front of her. Those sheets are in the fastest cache. There are other sheets behind them, accessible in a few moments. Then there are larger but slower caches: music in the piano stool; more up in the attic, and yet more in a music shop. There is a trade-off between the volume of information and the speed with which it can be accessed.

This set-up is no problem if the pianist only plays one complete piece at a time. But if she is asked to switch every minute or so, then some of her time will be taken retrieving a piece of music from the piano stool. If she must change every few seconds, then she will be unable to play a note; all her time will be taken switching sheet music between the stand and the piano stool.

It is the same with a computer cache: there will be a hierarchy — from super-fast memory in the microprocessor itself all the way down to a hard drive (slow) and offsite back-up (very slow). To speed things up, the computer will copy the data it needs for the current task into a fast cache. If the tasks need to be switched too often, the machine will spend all its time copying data for one task into the cache, only to switch tasks, wipe the cache and fill it with something new. At the limit, nothing will ever be achieved. Denning described this regrettable state of affairs as “thrashing”.

We’ve all had days filled with nothing but thrashing, constantly switching focus from one task to another but never actually doing anything. Can we borrow a solution from the computers? The most straightforward solution is to get a bigger cache; that is easier for a computer than for a human, alas.

The obvious alternative is to switch tasks less often. Computers practice “interrupt coalescing”, or lumping little tasks together. A shopping list helps prevent unnecessary return trips to the shop. You can put your bills in a pile and deal with them once a month.

But we often find it difficult not to flit from one task to another. Computer science says there’s a reason for the pain: there is a trade-off between being swiftly responsive and marking out chunks of time to be productive. If you want to respond to your boss’s emails within five minutes, you must check email at least once every five minutes. If you want to go off-grid for a week to work on your novel, your response time must slow to a week.

Any solution should acknowledge that trade-off. Decide on an acceptable response time and interrupt yourself accordingly. If you think it’s perfectly fine to answer emails within four hours — fine by most standards — then you only need to check your email once every four hours, not once every four minutes. As Christian and Griffiths advise, decide how responsive you want to be. If you want to get things done, be no more responsive than that.

Written for and first published at FT.com

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Two new radio series

Simon Evans Goes to Market

The second episode of the four-part Simon Evans Goes To Market airs Thursday 4 August at half past six UK time, on BBC Radio 4. This series, Simon and I are looking at the economics of big life stages – birth, coming of age, marriage and death. I love working on this series – Simon and the writing team are very funny, yet also actually interested in the economic ideas. Check it out (and you can catch up online).

Also: the summer series of More or Less on Radio 4 has also started. Every Friday afternoon at half past four, with a repeat (plus bonus material – it’s slightly longer) on Sunday evenings at 8pm. Or you can subscribe to the podcast feed.

Enjoy!

3rd of August, 2016RadioComments off

Fossil fuels have had an aeon’s head start

Will we ever stop using fossil fuels? The question matters because fossil fuels are the largest contributor to climate change. Although finding better ways to produce cement, combat deforestation or even reduce the flatulence of cows and sheep would all be welcome, our only hope of dramatically cutting greenhouse gas emissions is by finding cleaner methods of generating power.

This won’t be easy. Coal, gas and oil are wonderfully concentrated sources of energy, neatly synthesising aeons of solar radiation. The late Professor David MacKay, author of the remarkable Sustainable Energy — Without the Hot Air (2008), underlined that truth with the book’s pointed dedication “to those who will not have the benefit of two billion years’ accumulated energy reserves”. The concentrated nature of fossil fuels means that alternative energy sources are competing against a formidable head start; the head start is lengthened by the fact that our entire existing energy system revolves around fossil fuel.

Despite all this, there are two obvious scenarios in which we might replace fossil fuels with alternative energy sources for purely commercial reasons. The first is grim: we begin to run out of fossil fuels and they become too expensive to use as a source of bulk energy. The second, more benign possibility, is that alternative energy sources become so cheap as to outcompete coal, gas and oil at almost any price; as the former Saudi oil minister Sheikh Yamani once commented, the Stone Age did not end because we ran out of stones.

The grim scenario is unlikely, because we are unlikely to run out of fossil fuels any time soon. According to the BP Statistical Review of World Energy, we have used up all the proven oil reserves that existed in 1980, yet have more than we started with. Gas reserves aren’t falling either. (Coal reserves are but from immense levels.) This shouldn’t be too surprising: “proven reserves” are resources that have been identified, measured, and look profitable. As old reserves are exhausted, new reserves are sought to replace them, and so far we have had little trouble in finding more fossil fuels whenever we wish to.

Another way to observe this is to look at economic behaviour. If the supply of oil was limited and known, owning an oilfield would be like owning any other investment. Producers would have to decide when exactly to sell their finite barrels of oil, and the only logical path for the oil price would be a gentle upward trend, matching the rate of return on other assets such as shares or bonds. (Any other price-path would be self-defeating: a lower price tomorrow would provoke a rush to sell immediately; a sharply higher price tomorrow would mean no oil was sold today.) This well-known theory, demonstrated by the economist Harold Hotelling in 1931, is, of course, in contradiction to the actual behaviour of oil and gas prices: fossil-fuel producers are clearly not treating oil and gas as though they were non-renewable resources.

But the cheerier scenario, in which low-carbon energy sources become very cheap, may be unlikely too. At first glance the signs seem promising — Denmark, Germany and Portugal have all reported occasions this year when their entire electricity grid was fuelled from renewable energy sources. And photovoltaic solar power, in particular, has become dramatically cheaper, largely for the simple reasons that China has over-subsidised production of the panels, which now come in easy-to-install kits.

But it is too soon to declare victory. On a commercial basis, renewable energy sources must do more than outcompete fossil fuels on price. Solar and wind deliver power when the sun shines or the wind blows. Fossil fuels deliver power when people need it. That is a big advantage.

And because fossil fuels pack a lot of energy into a small space, they’re ideally suited for transport. Electric cars are not competitive. A recent survey in the Journal of Economic Perspectives by the economists Thomas Covert, Michael Greenstone and Christopher Knittel estimates that current fuel cells would only be cheaper than gasoline at an oil price of $425 a barrel, eight times current levels. Fuel cells will fall in price, of course, but that figure gives a sense of the scale of the challenge.

And nuclear energy? Economist Lucas W Davis, again in the Journal of Economic Perspectives, concludes that there is little prospect of a nuclear renaissance because nuclear power stations simply cost too much to build. It would require a large upward shift in the price of fossil fuels, not to mention a change in the political winds, to see the technology return at scale.

Overall, there is little prospect of running out of fossil fuels, and it seems unlikely that alternative energy sources will outcompete them. And yet we must make the shift, or risk catastrophic climate change. Our reserves of fossil fuels may be no constraint but the atmosphere’s capacity to safely absorb carbon dioxide is.

There is some space for optimism. Renewable energy sources are no longer impossibly costly. Nor is nuclear power, even though the costs have moved in the wrong direction. We cannot wait for the market to make the switch unaided — but the gap is no longer so wide that sensible policy cannot bridge it. The centrepiece of such a policy would be to raise the price of carbon dioxide emissions, using internationally co-ordinated taxes or their equivalent. Such a tax would make renewable energy sources more attractive — as well as encouraging energy efficient technologies and behaviour. Market forces can do the rest. Low carbon energy is not free — but it is worth paying for.

Written for and first published on FT.com.

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  • Fifty Inventions That Shaped the Modern Economy
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