Tim Harford The Undercover Economist

Articles published in November, 2019

The weakest link theory that explains our economic woes

My new podcast, “Cautionary Tales“, launches tomorrow with two episodes – one about what we can learn from an oil tanker that was too slow to change course, and another about why we fall for cons. I’m very excited about the show, and proud of it. Do please subscribe and have a listen! [Apple] [Spotify] [Stitcher]

Now, on with this week’s column…

I was delighted to see Abhijit Banerjee, Esther Duflo and Michael Kremer announced as winners of the Nobel memorial prize in economics. By championing the use of randomised controlled trials in development projects, they have added large and useful doses of rigorous evidence to a discipline that can be overfond of reasoning from a comfortable armchair.

The spotlight this week has understandably been on Prof Duflo. She is a superb economist, highly charismatic and the youngest winner by far. She is also only the second woman to win the prize, after Lin Ostrom in 2009. Since Prof Ostrom was a political scientist, and not as well known in the economics profession as she should have been, Prof Duflo is arguably the first female economist to win the prize. That has huge symbolic importance for a profession that continues to struggle with diversity.

All three winners have made major contributions beyond the championing of randomised trials that won them the prize. Prof Kremer, in particular, has made an unusual series of insights. With Seema Jayachandran, he proposed a way to constrict funding to oppressive or corrupt regimes. An international court could declare that their borrowing was “odious” and need not be repaid by a successor government. This declaration would dissuade banks from lending in the first place.

With his wife, Rachel Glennerster, now chief economist of the UK’s Department for International Development, he set out the case for an “advanced market commitment” to fund the development of vaccines and medicines that the market would otherwise be unlikely to provide. That proposal later took shape as a $1.5bn fund to pay for a pneumococcal meningitis vaccine that did not yet exist. Several hundred million children have since received the vaccine.

Then there’s Prof Kremer’s O-ring Theory of Development, which demonstrates just how far one can see from that comfortable armchair. The failure of vulnerable rubber “O-rings” destroyed the Challenger space shuttle in 1986; Kremer borrowed that image for his theory, which — simply summarised — is that for many production processes, the weakest link matters.

Consider a meal at a fancy restaurant. If the ingredients are stale, or the sous-chef has the norovirus, or the chef is drunk and burns the food, or the waiter drops the meal in the diner’s lap, or the lavatories are backing up and the entire restaurant smells of sewage, it doesn’t matter what else goes right. The meal is only satisfactory if none of these things go wrong.

Once you start to think about O-ring problems, you see them everywhere. A bank is useless if you can’t trust it to keep your money safe from hackers. The most stylish and comfortable car is worth nothing without reliable brakes. You can build a sophisticated factory in a jungle but your efforts will be in vain if you can’t keep the road to it open.

What’s less obvious is that the logic of O-ring problems dramatically changes the way an organisation — or an entire economy — works. Because a single failure can doom an entire project, several things follow. The first is that like attracts like: the best chef does his or her best work with the best suppliers and the best waiters in the best kitchen. It is pointless to ask the best waiter to serve poisonous slop made by an incompetent chef, and pointless to ask the best chef to prepare meals into which an incompetent waiter will sneeze. To spread out the talent is to squander it.

(Prof Kremer’s own career offers an example: he was a research assistant for a paper co-authored by Larry Summers, future US Treasury Secretary. Another assistant was Sheryl Sandberg, future Facebook chief operating officer. High performers seek out high performers.)

The second implication is that inequality is endemic. Since the most skilled workers have the most skilled colleagues and the best equipment, they are vastly more productive than others who are only fractionally less skilled. A modest variation in skills leads to a huge variation in wages. This is why blue-chip companies recruit only from elite colleges and universities. Why take a chance on someone whose face doesn’t fit? Policymakers trying to create a more equal society must find some way to swim against this tide.

Third, O-ring economies are self-perpetuating. If an economy has undrivable roads, unreliable electricity, impassable queues at customs, corrupt courts, and untrained workers . . . well, where is progress to come from? Improve the roads and you’ll still be foiled by the electricity; train the workers and the crooked legal system will still take you down.

For an individual, the question is how much education should I try to acquire? It depends on how much skill others have. If I can’t reach a job market full of highly competent people, there is little point in wasting time and effort developing skills that will be wasted.

The O-ring model is merely a simple way of thinking about how an economy might work — albeit one that seems packed with insight. Prof Kremer didn’t stay in his armchair for long. He and this year’s other winners have been demonstrating just how much economics, wisely used, can deliver.

 

Written for and first published in the Financial Times on 18 October 2019.

My new podcast is “Cautionary Tales” [Apple] [Spotify] [Stitcher]

Free email updates

(You can unsubscribe at any time)

Hug your enemy rather than wrestling the pig

Brexit has already taken quite a toll on the British economy, and worse may be lying in wait. But the political damage seems graver. Lies, threats and insults have become ubiquitous. So has open contempt both for the opposite side and for once-respected institutions. As for the situation in Northern Ireland, or diplomatic relations between the UK and the rest of the EU, let’s not even think about it. (The English usually don’t.)

It’s tempting to obsess about the tone of politics, but that is a trap. If we spend our time wringing our hands over the form of the political conversation, it leaves little space to think about the content. Remember the lesson of the lie on the bus: a fact-checking dispute about the UK’s contributions to the EU successfully consumed all the oxygen in the 2016 referendum, leaving no breathing space for a discussion of the issues involved. The exact claim didn’t matter: what mattered was that in order to dominate attention it had to be palpably false.

This season’s versions of the lie on the bus are the insult and the threat. Boris Johnson specialises in the insult. A freshly coined one this week was “uncooperative crusties”, although his crass responses to MPs reminding him of Jo Cox’s murder will live longer in the memory. The prime minister’s adviser Dominic Cummings prefers the threat — recall his infamous clash with the MP Karl Turner, who complained, “I’ve had death threats overnight”, to which Mr Cummings retorted, indefensibly, “Get Brexit done”.

Yet it was Mr Turner who started the altercation, with camera in tow. It added to the bitter circus, while distracting from the absurdity of demanding that anyone “get Brexit done” — which makes as much sense as telling a pregnant woman “get the child done”. Mr Cummings will have been pleased enough with that distraction.

A no-deal Brexit would be the beginning of a bitter negotiation about what comes next. Agreeing on a deal would require previously undiscovered capacity for compromise and, again, would begin further discussion. Even revoking Article 50 and calling the whole thing off, presumably after a bitterly fought referendum, would hardly end the matter. There is no “done” here — just a long journey ahead.

Wherever that journey may lead, we need to find a way to get along with each other along the way. So here are three ideas. First, we should do ourselves and each other the favour of engaging with the issues. From the Irish border to the sense of hopelessness in some British towns, there are problems to solve. Next time you’re faced with someone whose politics who dislike, you may get along better if you discuss what can be done to help Blackpool or Merthyr Tydfil rather than which politician is the most despicable.

Second, we should try to avoid scorning people who seem — to us — underinformed. That’s partly because it behoves us to show humility: most of us know less than we think about how the world around us really works. How many of us can honestly say we’d thought through the difference between the single market and the customs union until after the referendum? How many can honestly say we fully understand it now? But it’s also because sneering at someone’s ignorance is a missed opportunity to explore an issue together. Most people we meet have something to teach us, and we have something to teach them.

Third, and most important, we need to remember that the people on the other side of the debate are still people — and usually people who, like us, want the best for themselves and the country. In response to the times we live in, my wife, a portrait photographer, has taken to asking people if they’re willing to be photographed hugging somebody who disagrees with them. Of course, the politicians refuse: Andrew Adonis and Nigel Farage had no interest in cuddling for her camera.

But what has been striking is that nobody else wants to hug across the political divide either. The request is not to hug Messrs Farage or Corbyn or Trump, but to hug an ordinary acquaintance with whom you disagree. As a Remainer, would you be willing to hug a Leaver, or vice versa? People hate the idea. Hugs are nice. But hug one of them? Never.

Fine. Perhaps the hug is too much for we emotionally reserved Brits. But if not a hug, might we at least hope for a handshake and a respectful conversation, rather than ostracism or shouting?

At the moment, everyone seems to agree that half the people in the country are ignorant, wicked or both. The only disagreement is over which half. A few people — some in politics, some in the media — find fertile ground in this outrage. It’s barren for the rest of us. We can do better.

One starting point is the old proverb, “Don’t wrestle with a pig. You get dirty and the pig enjoys it.” There’s truth in that. We just need to find a version that doesn’t dismiss our opponents as pigs.

Written for and first published in the Financial Times on 11 October 2019.

My new podcast is “Cautionary Tales” [Apple] [Spotify] [Stitcher]

Free email updates

(You can unsubscribe at any time)

Cautionary Tales…

Exciting news – I have a new podcast series ready to burst out upon an unsuspecting world. It’s called Cautionary Tales – true stories of catastrophe and fiasco, sparkling with top acting talent, with the aim of making you wiser with every word. I’m writing and presenting the series and will be adding a soupcon of social science to the narrative. [Apple] [Spotify] [Stitcher]

While you wait for the first episodes to drop on November 15th, I thought I’d share a few of my favourite books about making mistakes.

I received Nigel Blundell’s The World’s Greatest Mistakes as a Christmas gift when I was a child – a strange and compelling array of catastrophes, from famous air crashes and military blunders to amusing vignettes such as the bride who accidentally married the best man. The stories seemed well researched (although no list of references) and were briskly told. That book is long out of print, but I suspect that Blundell’s new book A Century of Man-Made Disasters will have similar qualities.

Levy and Salvadori’s modern classic Why Buildings Fall Down is a skilfully illustrated and fascinating way to learn about structural engineering by studying what happens when it all goes wrong.

For books about human error you could take a look at my list of my favourite behavioural economics books but try also Kathryn Schulz’s beautiful meditation on error, Being Wrongand Tavris and Aronson’s excellent Mistakes Were Made (But Not By Me) James Reason’s more technical quasi-textbook Human Error.  

And for the all-important intersection of the maths-comedy-error Venn diagram, Matt Parker’s delightful Humble Pi

 

Free email updates

(You can unsubscribe at any time)

The risks in raising the minimum wage

You can have too much of a good thing. Somebody should mention this to Sajid Javid, the UK’s new chancellor of the exchequer. This week he announced an increase in the minimum wage to two-thirds of the median wage, bringing it to around £10.50 per hour. His plans are to come to fruition in 2024, assuming there are no unforeseen events in British politics in the interim.

The US House of Representatives has the same deadline in mind for a plan to raise the federal minimum wage from $7.25 to $15. After the 2020 election, they may get their way.

I fear that we are creeping towards a serious mistake — maybe not now, but soon. And it isn’t too late to correct it. There are three elements to the mistake. The first is the scale of the changes afoot. When the minimum wage was first introduced in the UK in the late 1990s, only a few hundred thousand workers were paid it. Last year, 2m workers received the minimum wage. And according to the Resolution Foundation, a think-tank that has been strongly supportive of increases in the minimum wage, if it had been at two-thirds of median income last year, nearly 5m workers would have been covered — rather than 2m. Mr Javid’s proposal is a dramatic expansion in the number of people whose wages are set by the government rather than by supply and demand. The proposals in the US are even more seismic. This is a bigger idea than most people realise; let us hope it is also a good one.

The second element of the mistake is to politicise the minimum wage. That is old news in the US, where it see-saws up and down according to the whims of Congress. Over the decades it has been as low as $4.17 and as high as $11.55 in today’s money. The last sharp increase was in 2007-2009 — that is, in the teeth of the great recession. Most countries use a formula or a technocratic committee to set the minimum wage. The UK was among them, until 2015, when one of Mr Javid’s predecessors, George Osborne, decided there might be some fleeting political advantage in sidelining the committee and claiming credit for raising the minimum wage. Mr Javid has done likewise. British politics, after all, has had enough of experts.

This is unwise because the judgment of where to set the minimum wage is essentially a technocratic one. There is a trade-off. When we forbid an employer to pay less, we hope that low-paid workers will get a pay rise, but fear that they will simply get the sack. The trade-off requires evidence to assess. What’s more, the trade-off is asymmetric. Any rise in the minimum wage earns immediate praise, while the jobs lost are lost gradually, as firms ponder new hires or buy labour-saving machines. When benefits are immediate and costs are delayed and hidden, it is best for everyone’s sake to delegate the decision to someone who isn’t running for re-election.

Nor is it easy to undo a mistake. Once a minimum wage rises too far, and the new machine is installed or the factory is moved offshore, reversing the policy will not easily bring the old jobs back.

The third element of this potential mistake is the rebranding of the minimum wage as a “national living wage”. This is a serious conceptual error. A minimum wage should be set with reference to the trade-off between better pay and fewer jobs. That is true whether it is half what anyone could live on, or 10 times as much.

I’m all in favour of everyone having enough income to live on — and in a rich country such as the UK or the US, “enough to live on” should mean much more than just food, clothes and shelter. But if a decent living wage is higher than a minimum wage that would destroy jobs by the million, that is not a problem that minimum-wage legislation can solve. Instead, it requires the government to provide some kind of basic income or tax credit. Mr Osborne’s rebranding of the minimum wage was coupled with reductions in tax credits; it was the perfect smokescreen. In the longer term, a minimum wage needs to be bolstered by investment in education, infrastructure and other productivity measures that allow every worker a chance to earn a good wage. If workers don’t have an environment in which they can be productive, higher pay cannot simply be wished into existence.

I don’t mean to strike a tone that is too apocalyptic. In the UK, increases in the minimum wage have eaten into the problem of low pay with no apparent impact on employment and only a small sign of an impact on hours worked. The international evidence is mixed: on balance it suggests that minimum wages can and do destroy jobs for the low-skilled, but perhaps not as dramatically as we economists once feared.

It’s possible, but not certain, that further rises will bring further benefits. Yet it is dangerous to view the minimum wage as a free lunch, something to be dished out by politicians without pondering either the evidence or the risks. It is more like a strong medicine with serious side effects. It should be prescribed with caution and under expert supervision — not mixed with sugar and downed in one gulp.

 

Written for and first published in the Financial Times on 4 Oct 2019.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

Free email updates

(You can unsubscribe at any time)

Elsewhere

  • 1 Twitter
  • 3 RSS
  • 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

Free Email Updates

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

Join 176,074 other subscribers

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