Tim Harford The Undercover Economist

Dear EconomistDear Economist

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Dear Economist

Dear Economist – Should I avoid round-robin Christmas letters?

Dear Economist,
Christmas cards are starting to drop through the letterbox and many contain infuriating round-robin newsletters from people I barely know. This is no substitute for real friendship. Why do people send junk mail instead of a proper letter?
Tom, Lancaster

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Dear Tom,
You say that people send newsletters “instead of” a proper letter, but I wonder if this is true. Newsletters are subject to extreme economies of scale: the first copy is time-consuming to produce but the rest take just seconds. The likely result is that many people receive newsletters who might otherwise get nothing at all, or only a card reading “best wishes, Brian”, leaving you to wonder who on earth Brian might be.
That is no consolation if it is really preferable to receive nothing at all than to receive a newsletter. But that seems unlikely: economists talk of “free disposal”, a theoretically convenient assumption that would not apply to a half tonne of manure on the doorstep, but surely describes the marginal cost of throwing away Brian’s newsletter along with his card. If you are so certain that these newsletters contain nothing of interest, waste no time in reading them.
You have evidently not discovered the work of economists Jess Gaspar and Ed Glaeser, who show that the new communication technologies – mobile phones, e-mail, word-processors – are not substitutes for traditional human interaction but complements to it. These newsletters, like e-mails and weblogs, help keep friendships alive and actually increase the number of old-style face-to-face meetings.
If you are finding that despite all these newsletters you still have no real friends, I don’t think you should blame the newsletters.

First published – FT Magazine, 8 December 2006

Dear Economist

Dear Economist – Are early Christmas decorations efficient?

Dear Economist,
The Christmas decorations seem to go up earlier and earlier every year. It infuriates me, but do you think this is efficient?
Yours sincerely,
Toby Kerrell, Birmingham
…………………………..
Dear Toby,
I’m a bit of a traditionalist myself: I think decorations should go up a few days before Christmas (some say on the last Sunday of Advent, others say on Christmas Eve) and then stay up for the full 12 days.
To me, this means that Christmas starts with a bang and then lingers briefly but pleasantly, rather than being a long slog to an inevitable anticlimax, whereupon the tree is thrown out on Boxing Day.
If Christmas was a private affair, more like a birthday, that would be easy to arrange. The party balloons would be blown up exactly when I wanted them. I have not subjected my hypothesis to an econometric test, but casual empiricism suggests that when people do put up birthday decorations, they tend to linger for a few days at most and, importantly, go up on the day itself, not in advance. I suspect that this is the efficient strategy for putting up party paraphernalia.
Alas, because it is a collective celebration, Christmas is one big market failure. The worst culprits are the shops, who obviously wish to generate a festive mood before Christmas Day, not afterwards, so that they can sell things.
Consumer power is all very well, but the garish displays affect passers-by as well as customers. Whatever collective disgust we have for the sound of Bing Crosby in October, it is clearly not enough to dissuade them.

First published, FT Magazine Dec 1 2006

Dear Economist

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.
Dear Economist

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”

Dear Economist

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”
Dear Economist

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”

Dear Economist

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.

Dear Economist

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.

Dear Economist

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.

Dear Economist

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.

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