Tim Harford The Undercover Economist

Dear Economist

The only problem page in the world where your personal dilemmas are “solved” with the latest economic theory. Please send your questions.

How to rid yourself of excess baggage – and friends

Dear Economist,

Me and my friends are a pickle. Twelve of us have agreed to go on holiday in July. Everything is sorted apart from one thing. We originally planned to take hand luggage to save money – we’re all 18 and flying budget. That seems fine – as the apartments we are going to (one of which my parents own) have almost everything we could need bar clothes.

But now certain members of the group say that 10kg of luggage simply isn’t enough, and want to pay an additional £26 for their bags. This would be fine, except that means an early check in and starting at 3.30am instead of 5.30am – unfair to the parents who have volunteered transport.

I’ve been trying to think of a fair way to impose an additional cost on these people to either discourage them or compensate everyone else. Any suggestions on how I could increase the private costs so they reflect social costs? Obviously these people are my friends, so I don’t want to be too harsh on them.

Yours,

F.M.

Dear F.M.

I am surprised your parents haven’t resolved this conundrum for you already – they seem to have laid out everything else on a plate.

No matter. I have a big bag of political philosophy right here to sort you out. Your problem is your Marxist insistence on collective burden sharing. Take a free market approach instead: if your friends Imelda Marcos and co. want to get up two hours earlier, let them. If they can persuade their parents, fine. Otherwise they can pay for the cab. The rest of you should travel seperately, enjoy the comparative lie-in, and avail yourselves of the free transport.

Oh, and if one of them suggests buying your holiday drinks in rounds – tell them to go first, and ask for champagne.

21^st of May, 2011 • Dear Economist • 4 comments

How long to wait for the perfect espresso?

Dear Economist,

I just popped out of my office to grab a coffee from the best local place, a minute’s walk away. When I got there I found a sign saying “Back in ten mins”. It’s quite cold, and since I hadn’t expected to be out for more than a few minutes, I’m not wearing a coat. There are several alternative coffee vendors close by, some of which experience shows produce bad coffee, and some of which are untried, but don’t normally have a queue that suggests greatness. There’s nothing useful to do while I wait.

How long should I have waited before defecting to an alternative vendor?

Yours Sincerely,

-Tom

Dear Tom,

Let’s get the maths out of the way first. If the barista really knew he would be absent for 10 minutes when putting up the sign, you’re equally likely to have arrived just after he leaves, or just before he returns. You’d expect to wait five minutes on average.

The barista may have been cleverer than that, however: knowing that most customers would not arrive immediately after he skived off, he might have given himself extra slack. Perhaps he plans to be absent for twenty minutes, leaving your expected wait at an unacceptable ten.

These seem to be your regular haunts, so in future I advise that you immediately try somewhere else. If the coffee is better – even if that is unlikely – that knowledge will be something you can use every day. If not, at least you will have kept warm.

And if you do decide to stand and wait, make sure you try for a free coffee when the absent proprietor returns.

First published in “Mens Health”

5^th of May, 2011 • Dear Economist • 7 comments

Should I save on a shave?

Dear Economist,

I was thrilled, like many men, with the arrival of three-blade shaving razors. But, of late, I feel that the cost of shaving with the three-blade is high compared with the value derived from it.

Do you think it would be better to shift to a twin-blade razor which will certainly save costs and might also give the desired shaving results?

Regards,

R Sriganesh

Dear R Sriganesh,

Hang on, “thrilled” is putting it a bit strongly, isn’t it? I don’t know anyone whose pulse was set racing by the arrival of the Mach 3. It was, at best, mildly intriguing. Don’t get me wrong, it’s a decent razor. But let’s be clear, the main innovation wasn’t the progress from two to three blades, was it? It was from no blades at all to one. That’s really where the shaving revolution started. It’s what we economists call diminishing returns.

It may help you to note that razors are sold in a classical two-part pricing scheme: the razor itself is cheap, perhaps even subsidised, and the blades themselves are expensive. The same is true of printers and printer ink. All this means is that you can try out an alternative, two-blade or one-blade razor without undue expense.

And if you decide that after slumming it with a Bic disposable that you really need the seven-blade razor which plays music and gets rid of unwanted lipstick stains on your collar – I am sure the razor manufacturers will be “thrilled” to oblige.

First published in “Mens Health”

5^th of April, 2011 • Dear Economist • 9 comments

The economics of urinal cakes

Dear Economist,

Whenever I go to the gentlemen’s toilet in a pub, I’m unsure how to behave. The question is: Should I urinate on the urinal cakes or not? At first, I think that if I urinate on them I’ll help to finish them earlier, thus making the publican purchase more of them, and helping the economy.

But then I think, while I’m urinating, that if the publican has to buy more tablets, eventually he will probably have to raise the price of the beer, to my huge disappointment. So the question is, where should I urinate in the gentlemen’s toilets in the pub?

Thank you,

Massimo J.

Italy

Dear Massimo,

When I read the first sentence of your letter, I was wondering where you were going with this. Not to worry: your question is easily answered. The 19th century French economist and essayist Frederic Bastiat anticipated it with his famous “broken window fallacy”. A broken window seems good for the economy because it creates work for the glazier. But Bastiat pointed out that the money that the window-owner pays to the glazier is money he can’t spend on something else. The glazier is richer, but the tailor or the restaurateur or the escort girl is poorer. The broken window hasn’t stimulated the economy at all.

In short, don’t think you’re doing anyone a favour by aiming squarely at the urinal cake in front of you. And don’t even think about aiming at the urinal cake in front of someone else.

First published in “Mens Health”

5^th of March, 2011 • Dear Economist • 21 comments

Dear Economist: an announcement

All good things must come to an end, and this is the last “Dear Economist” to be published in FT Magazine, after a more-than-decent run of over seven years. That’s the bad news.

However, there’s also good news.

First, I’ll now be writing “Outside Edge” roughly once a month. Here’s today’s offering on robo-trading. Here’s one from a couple of weeks back on match-fixing in cricket.

Second, “Dear Economist” shall not die. I shall be taking my place alongside Will Self in Men’s Health. (Neither Will nor I will be displaying a washboard stomach.) The column will be published every month with a couple of letters, and we’ll see how it goes. The first appearance will probably be in the January edition, and after a decent interval I shall post the columns on timharford.com. (There’s an RSS feed at http://timharford.com/feed/ and you can always keep up to date on Twitter.)

Third, I’ll be writing more features in the new-look FT Magazine. It’s out next week, and my first feature will be coming soon.

25^th of September, 2010 • Dear Economist • Marginalia • One comment

How can I guarantee a good reference?

Dear Economist,

My old university tutor often complains when he has to write references – they take up a lot of his time, and he doesn’t get paid for them. Since he’s doing my prospective employer a service, he thinks they should pay him. However, that means he’s motivated to write me a bad reference, because then I won’t get the job, and I’ll ask him to write me another one – so he gets paid again. Of course, we could say that he only gets paid if I get the job – so he writes me an overly gushing reference. How can we motivate my tutor to write a fair and accurate reference, and compensate him for his time?

Phil C, Aylesbury

Dear Phil,

I am not as concerned as you that your tutor will be tempted into hustling for extra reference-writing work. If he wanted to be paid for mass-mailing hyperbole, he’d have taken a job in public relations.

But there is a deep problem here: your tutor has useful information about you and no particular reason to tell the truth. I am not sure what to suggest. Economists call the problem “mechanism design” and despite a number of recent Nobel prizes and some formidable mathematical theorems, I’ve seen nothing to suggest that I can solve the problem perfectly.

However, one approach is to ally your tutor’s interests with those of your prospective employer. Perhaps he could be awarded a commission: 0.1 per cent of your salary, for as long as you have the job. A couple of hundred successful candidates placed and the sums involved start to build up. If he over-eggs the reference and places you in the wrong job, you won’t last long and he’ll miss out on years or decades of future commission.

I don’t know if this would work, but it has a nice side-effect. It encourages your tutor to teach you something useful: he’ll be getting a cut of the proceeds.

Also published at ft.com.

25^th of September, 2010 • Dear Economist • Comments off

Do loyalty schemes damage the economy?

Dear Economist,

Frequent-flyer programmes are very popular here in Australia, where people often travel long distances for work and can subsequently be rewarded with large perks by selecting their preferred airline ahead of cheaper offers from other carriers – and to the detriment of their employers.

I am sure the airlines must benefit from all of this, but what about the rest of the economy? Are we encouraging an inefficient market by signing up to loyalty programmes?

Oliver Jones, Perth, Western Australia

Dear Oliver,

One justification for frequent flyer programmes is that when an airline has spare seats, it would ideally find some way of filling them. Slashing prices across the board destroys profits; slashing prices selectively, for the spare seats only, may be hard to achieve (although they try); giving the seats away as frequent flyer rewards offers a benefit to the customers without cannibalising too much business.

Yet the effect seems pernicious. Frequent flyer miles typically give employees an incentive to favour particular airlines; the employer pays the price but does not reap the benefits. In other contexts, we’d call this a bribe or a kickback. For frequent flyers, it’s not only legal but a topic fit for discussion in polite society.

Frequent flyer programmes also artfully create what economists call “switching costs”, by offering employees an incentive to stick with an individual airline. This is a serious problem, because if Kickback Airways has bribed its customers to stay loyal, then AirBribe has little incentive to compete on price. AirBribe may even raise prices; and this makes it easy for Kickback Airways, too, to raise prices. Even if you have nothing to do with the whole business, you’ll still pay more for your flight. It makes you wonder how airlines ever contrive to lose money.

Also published at ft.com.

18^th of September, 2010 • Dear Economist • Comments off

Is the stock market the way to go green?

Dear Economist,

As an economics graduate from Hong Kong, I wonder whether we are doing enough to protect Mother Nature. I have considered donating money to Greenpeace. Then I had a better idea. Why don’t we donate shares of polluting companies to Greenpeace? By doing so, at least some part of these companies’ profits could be directed to environmental organisations through dividends. In some extreme cases, Greenpeace could acquire enough shares to push the companies to transform into a more “environmentally friendly” corporation.

What do you think?

Cloud Yip

Dear Cloud,

Leave aside the fact that if Greenpeace want cash, they can sell the shares you give them, and if they want shares they can buy them with your cash donations. Leave aside, too, the question as to whether environmental organisations would enjoy the irony of collecting dividends from oil and mining companies.

I am still unconvinced.

You say polluters will pay for their damage, but this is not true. Dividends are payments related to profits, not to environmental pollution. Regulation and tradeable pollution permits discourage pollution; buying shares does not. Worse, if your idea caught on, it would lower the cost of capital of polluting companies and enable them to invest in more marginally profitable projects, although I suspect this effect would be tiny.

As for Greenpeace itself, it could indeed use a shareholding to make a fuss at annual meetings. But most shareholders seem to have little influence on the decisions corporate managers take. I suspect campaigning organisations are more effective outside companies than in.

Also published at ft.com.

11^th of September, 2010 • Dear Economist • Comments off

Why is a bag of weed always $10 (man)?

Dear Economist,

I have been a client of weed dealers in North America since the mid-1980s and no matter who the vendor, the price has remained $10 a gramme. I don’t think anything in 25 years has stayed fixed in price like weed has.

Dealers might have some power to increase prices, as it’s illegal, and there are some significant barriers to entry, such as getting arrested. But if I don’t like the prices, it’s pretty easy to grow some on my own, because it “grows like a weed”, even if it might not be as good as the dealer’s Cannabis sativa.

So how did we end up at $10 a gramme?

Sebastian

P.S. I meant to email this sooner, but was pretty baked and forgot to hit send …

Dear Sebastian,

The nominal price rigidity you describe is remarkable and unusual. If the price of weed had increased in line with US consumer price inflation, you’d be paying $20–$25 a gramme now. So I agree, it is a puzzle.

My guess is that the illegality of the market gives a push towards the price stickiness you have encountered. Buying and selling cannabis is hazardous and there must be a benefit to a situation where nobody haggles over the price.

Still, the nominal price wouldn’t stick like that unless supply and demand were at least roughly in balance at $10 a gramme. And I confess, I am perplexed. My own research, which has been purely academic, suggests that prices vary between £20 and £250 an ounce in the UK, roughly £1 to £10 a gramme. Since the price stability you describe is not matched in other markets, could it be purely fortuitous?

Whatever the reason, this could be a handy discovery. In hyperinflationary times, people turn to tobacco or coffee as more stable currencies. If quantitative easing gets out of hand, you have found a stable currency for the 21st century.

Also published at ft.com.

8^th of September, 2010 • Dear Economist • Comments off

What’s your approach to picking toilet stalls?

Dear Economist,

When I travel I am faced with a difficult choice: which of the toilet booths to use in offices or hotels. I always try to guess which one is the least used. Probability theory should tell me that all the booths should be equally used, but perhaps human psychology plays a part in this. My boyfriend believes the last one is the least used – contrarily, I believe the opposite. Perhaps this proves that, on average, all are equally used. Which one do you use?

Jan Lucan, Prague

Dear Jan,

The efficient market hypothesis says that stock and bond traders will swoop on underpriced assets, driving their prices up. If so, an ignorant investor may pick and choose at random, knowing that her selections will be priced as keenly as any others.

Let us assume that everyone, like you, wishes to use the stall less travelled. Can we apply the hypothesis to public lavatories? If so, you may pick any stall you wish.

But the efficient market hypothesis is not universally accepted even in financial markets, and in public toilets it is less convincing. After all, there are no highly paid “toilet traders” engaging in arbitrage – or if there are, the term conventionally applies to a different profession altogether. So perhaps there are systematic errors to exploit.

Internet research uncovers one poll that suggests that many people, like your boyfriend, head to the farthest cubicle. Another site claims that the nearest stall is the least used.

But all this is a little puzzling. Your stall-picking strategy reminds me of Warren Buffett’s comment that “diversification is a protection against ignorance”. Presumably you just want a clean toilet with some paper. Would it kill you to do a little research and check a couple of stalls? That’s what I do.

Also published at ft.com.

28^th of August, 2010 • Dear Economist • Comments off