Tim Harford The Undercover Economist

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From the geeks who took over poker to the nuclear safety experts who want to prevent the next banking meltdown, these are my favourite long-form articles.

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How the rich are making sure they stay on top

When the world’s richest countries were booming, few people worried overmuch that the top 1 per cent were enjoying an ever-growing share of that prosperity. In the wake of a depression in the US, a fiscal chasm in the UK and an existential crisis in the eurozone – and the shaming of the world’s bankers – worrying about inequality is no longer the preserve of the far left.

There should be no doubt about the facts: the income share of the top 1 per cent has roughly doubled in the US since the early 1970s, and is now about 20 per cent. Much the same trend can be seen in Australia, Canada and the UK – although in each case the income share of the top 1 per cent is smaller. In France, Germany and Japan there seems to be no such trend. (The source is the World Top Incomes Database, summarised in the opening paper of a superb symposium in this summer’s Journal of Economic Perspectives.)

But should we care? There are two reasons we might: process and outcome. We might worry that the gains of the rich are ill-gotten: the result of the old-boy network, or fraud, or exploiting the largesse of the taxpayer. Or we might worry that the results are noxious: misery and envy, or ill-health, or dysfunctional democracy, or slow growth as the rich sit on their cash, or excessive debt and thus financial instability.

Following the crisis, it might be unfashionable to suggest that the rich actually earned their money. But knee-jerk banker-bashers should take a look at research by Steven Kaplan and Joshua Rauh, again in the JEP symposium. They simply compare the fate of the top earners across different lines of business. Worried that chief executives are filling their boots thanks to the weak governance of publicly listed companies? So am I, but partners in law firms are also doing very nicely, as are the bosses of privately owned companies, as are the managers of hedge funds, as are top sports stars. Governance arrangements in each case are different.

Perhaps, then, some broad social norm has shifted, allowing higher pay across the board? If so, we would expect publicly scrutinised salaries to be catching up with those who have more privacy – for instance, managers of privately held corporations. The reverse is the case.

The uncomfortable truth is that market forces – that is, the result of freely agreed contracts – are probably behind much of the rise in inequality. Globalisation and technological change favour the highly skilled. In the middle of the income distribution, a strong pair of arms, a willingness to work hard and a bit of common sense used to provide a comfortable income. No longer. Meanwhile at the very top, winner-take-all markets are emerging, where the best or luckiest entrepreneurs, fund managers, authors or athletes hoover up most of the gains. The idea that the fat cats simply stole everyone else’s cream is emotionally powerful; it is not entirely convincing.

In a well-functioning market, people only earn high incomes if they create enough economic value to justify those incomes. But even if we could be convinced that this was true, we do not have to let the matter drop.

This is partly because the sums involved are immense. Between 1993 and 2011, in the US, average incomes grew a modest 13.1 per cent in total. But the average income of the poorest 99 per cent – that is everyone up to families making about $370,000 a year – grew just 5.8 per cent. That gap is a measure of just how much the top 1 per cent are making. The stakes are high.

I set out two reasons why we might care about inequality: an unfair process or a harmful outcome. But what really should concern us is that the two reasons are not actually distinct after all. The harmful outcome and the unfair process feed each other. The more unequal a society becomes, the greater the incentive for the rich to pull up the ladder behind them.

At the very top of the scale, plutocrats can shape the conversation by buying up newspapers and television channels or funding political campaigns. The merely prosperous scramble desperately to get their children into the right neighbourhood, nursery, school, university and internship – we know how big the gap has grown between winners and also-rans.

Miles Corak, another contributor to the JEP debate, is an expert on intergenerational income mobility, the question of whether rich parents have rich children. The painful truth is that in the most unequal developed nations – the UK and the US – the intergenerational transmission of income is stronger. In more equal societies such as Denmark, the tendency of privilege to breed privilege is much lower.

This is what sticks in the throat about the rise in inequality: the knowledge that the more unequal our societies become, the more we all become prisoners of that inequality. The well-off feel that they must strain to prevent their children from slipping down the income ladder. The poor see the best schools, colleges, even art clubs and ballet classes, disappearing behind a wall of fees or unaffordable housing.

The idea of a free, market-based society is that everyone can reach his or her potential. Somewhere, we lost our way.

The Undercover Economist Strikes Back’ by Tim Harford is published this month in the UK and in January in the US.

First published in the Financial Times, 16 August 2012.

Highlights

Cory Doctorow has Lunch with the FT

Illustration by James Ferguson of Cory Doctorow

Portrait by James Ferguson

Cory Doctorow should be too busy for lunch. He’s co-editor of, and a prolific contributor to, one of the most influential blogs in the world, Boing Boing. Over the past decade the Canadian-born writer has published 16 books, mostly science fiction novels. He campaigns vigorously on the politics of the digital age. His speaking schedule for the two months following our lunch requires three return trips from his home in east London to North America. He has almost 300,000 followers on Twitter. He is an impeccably prompt email correspondent.
More remarkable to me than any of this is that he claims to prepare for himself, his wife and five-year-old daughter “a three-to-four-course, hot/cold tailor-made breakfast every morning, in 20 minutes flat, with handmade coffees”. And although I arrive at Hawksmoor 10 minutes early, he’s there already, sipping sparkling water at the bar and reading a book. He’s wearing thick-rimmed spectacles worthy of Eric Morecambe, a Disney “Haunted Mansion” T-shirt, and a jacket; he’s 41 but looks younger. Did I mention that I have a tiny crush on Cory Doctorow?

As we’re shown to our table at the window, I feel compelled to ask about the breakfasts. How does he do it? After reading about this quotidian feat of fatherhood, I had tried to make my wife a fancy breakfast in bed, with eggs and honey-drizzled yoghurt and other trimmings. It took long enough that well before I was finished she had surfaced to investigate what was going on. I ask Doctorow for tips, confessing that I can scarcely produce a gourmet breakfast for my family once a fortnight.

“That’s your problem,” he says, in a bright, brisk Toronto accent. “You don’t do it often enough. If you did it every day, you’d get very good at it. It would become a habit, and habits are free.” His own breakfasts are prepared the night before – porridge measured out, yoghurt and berries mixed, served and in the fridge, eggs in the saucepan ready to be boiled. It’s obsessive, precise, carefully optimised – and, it seems, highly effective.
The waiter arrives to discuss steak with us. Hawksmoor is a hipsterish steakhouse near Spitalfields market, all dark wood and brick. The menu is unconventional, with steaks priced by the gramme and particular weights of pre-cut steak chalked up on the board. Doctorow – who had sent me a list of places he’d be happy to eat – seems to be a regular, and quizzes the waiter about when the meat is delivered and why, when he comes in the evenings, certain cuts have already been crossed off. The waiter assures us that the meat is delivered fresh every day and never frozen, even though it’s harder to carve the steak in an unfrozen state.
“Unless you have a laser,” offers Doctorow, at which point the waiter, rather curiously, begins to discuss whether certain cuts cooked rare present a risk of food poisoning.
“We’re not really supposed to talk about food poisoning,” admits the waiter. “You’ve got to come up with another name for food poisoning,” suggests Doctorow. “Like, er, ‘exotic gut flora experience’.”
I explain to Doctorow that he can choose whatever he likes and the FT will pay, but the world gets to see the bill. “That’s a very funny little bit of behavioural economics,” he replies.
Some of the steaks are sized for two, and I indicate that I’m willing to share one. Doctorow selects a large porterhouse for us, and we’re persuaded for reasons of flavour rather than safety to go for medium rare rather than rare. Doctorow chooses bone marrow and onion to start, with creamed spinach to accompany the steak. I start with a Caesar salad, and order triple-cooked chips. I press him to order some wine and he reluctantly agrees to drink half a glass, but refuses to choose.
I express surprise that he claims to know nothing about wine although he is obsessive about, for example, coffee. “I specialise,” he explains, adding that he rarely drinks much. I choose two glasses of the cheapest red. It’s not bad, and he downs his swiftly.
. . .
Doctorow’s fiction champions technology, while warning of how easily it can be used by repressive states or corporations. His own life provides an example of how to live with freedom in a technological age – he’s a man with no particular title, no hierarchical authority, no corner office and no secretary, who somehow manages to keep the plates spinning. Is it the same relentless, nerdy optimisation that gets those breakfasts on the table? He quotes from Brian Eno’s collection of not-quite-aphorisms Oblique Strategies , “Be the first to not do what nobody has ever thought of not doing before.”
Boing Boing, a marvellously eclectic blog, is a case in point – it’s a stripped-down vision of a 21st-century media outlet. Founded in 1988 as a print magazine, it went digital in the mid-1990s, and became one of the first blogs to attract a mass audience. Doctorow started writing for it as a favour for the blog’s founder Mark Frauenfelder, who was going on holiday, and never stopped. It’s incorporated as a business and is funded by sponsors, advertising and merchandise. It has a wide reach and yet, by the standards of a newspaper, is produced by a tiny team, with four main writers, three of whom live in California.
“We are spectacularly lean,” says Doctorow. “We have one phone call a year if we need it. We have one meeting a year.” He’s saving on air fare by tacking this year’s editorial meeting – in Los Angeles – on to a pre-existing trip. It’s usually at the Magic Castle, a private club for magicians. This is a typical touch of whimsy; Doctorow is also seriously smitten by Disney theme parks (his first novel, Down and Out in the Magic Kingdom (2003), imagines what Walt Disney World might be in the 22nd century).
Is this “spectacularly lean” operation the future of newspaper publishing, I ask? “It’s a future of publishing. One of the things that newspapers obscured was that they weren’t a medium, they were a collection of media bodged together.” Newspapers are like books, he says, a format that encompasses “anything from actuarial tables to Mein Kampf”.
But I haven’t quite tired of the topic of getting things done. Doctorow says he’s published 16 books in the past decade. How?
“I figure out how much time I have to write a book. I figure out how many words I need to write. I convert that into a daily rate and I write that many words every day come hell or high water.” Before I can raise the question of quality, he goes on to explain that there’s very little correlation with what he thinks is good writing while he’s at the keyboard, and what later turns out to be good writing – and so he might as well just get the words down and sort it all out later. Lest that process sound like pure hackwork, Doctorow novels have won or been nominated for most of the science-fiction awards that count.
The “write it now and fix it later” approach sounds perfectly reasonable to me, but then Doctorow pushes it to an extreme. “For instance, I wrote Homeland [2013] while I was touring Germany to publicise Little Brother [2008]. I had a translator, we’d visit lots of schools, and so I’d be speaking English half the time and he’d be speaking German half the time, and I’d write the book while he was speaking German.”
I point out that he is describing a superpower. Didn’t people wonder what he was doing as he sat in front of an audience tapping away on his computer while his translator spoke?
“Yes, but that was fine. At the end of the talk someone would say,” – and Doctorow assumes a gentle German accent – “‘Herr Doctorow, what are you doing with your computer on the stage?’ and I’d explain that I was writing my next book. They’d love that.”
Science fiction is often a way of exploring issues of contemporary relevance, and Doctorow’s work is no exception. In For the Win (2010), a novel aimed at the “young adult” market, he describes a battle between internationally mobile capital and the attempts of the trade union movement to mobilise “virtual sweatshop” workers across international boundaries. The action moves between India, where anything goes in a deregulated environment, and China, where the state is powerful but allied with the corporations in suppressing workers’ rights. The book manages to explore some complex economics in the context of a well-paced thriller.
Doctorow is clearly fascinated by economic issues, and points out that most science fiction and fantasy economies make no logical sense. The exception, he declares, is when Marxists write science fiction or fantasy. Take the recent Hobbit movie, for example. “How can the goblins have a mine that’s so inefficient?” he laughs, as he pauses from ripping the soft flesh from the marrowbones on his plate with his bare hands.
The porterhouse steak arrives, pre-sliced. It’s very good, charred on the outside but soft and pink beneath the surface. Doctorow has asked for horseradish while I am dipping my steak and chips into béarnaise sauce. The conversation is animated enough to slow our progress, and neither of us raises an eyebrow when a waiter noisily drops something fragile on the other side of the dining room.
So, I ask, if only Marxists get economics right in their novels, does that make Doctorow a Marxist? There’s a tension there, somehow – he’s a successful player in the market economy and fluently speaks the language of business; of profit, marketing reach, margins, and price discrimination. But his political activism seems squarely on the left – pro-labour, pro-equality, pro-rights.
“Marxists and capitalists agree on one thing: they agree that the economy is important. Once we’ve agreed on that we’re arguing over the details,” he says. But no, he’s not a Marxist. “I always missed the explanation of how the state is supposed to wither away.” In his novels and his blogging, the ruthless abuse of state power is just as much of a theme as the grasping amorality of large corporations.
Before long we’re talking about automation, and whether the rise of robots and algorithms is a threat to middle-class jobs. Doctorow’s next book will explore that territory in a suitably dystopian form, and he is keen to pick my brains about how things might play out. We discuss possible scenarios and I recommend an essay by John Maynard Keynes, “Economic Possibilities for our Grandchildren”. (Within hours he’s found it, read it and tweeted a recommendation.)
. . .
We’ve been making sufficiently slow progress through the meal that both of us have room for dessert. In fact, Doctorow effectively orders two – a crumble with cornflake ice-cream on the side. I order peanut butter caramel shortbread. After we both ask for double espresso, he pulls out a small plastic bottle that once contained mineral water. It’s half-full of a pale brown liquid. “I nearly forgot. I brought you some cold brew coffee.” I sniff at the concoction, the product of Doctorow’s latest coffee experiments. It’s made by steeping coffee in cold water overnight, and it smells sweet. When I try it later, the taste is mild but the caffeine jolt is fierce.
As we wait for dessert, I ask him about his recent speeches at technology conferences discussing the “war on general purpose computing”. He runs through the argument with practised fluency. Computers are by nature general-purpose machines. It’s impossible to make a computer that does all the kinds of things we want computers to do yet is somehow disabled from making copies of copyrighted material, or viewing child pornography, or sending instructions to a 3D printer to produce a gun.
“Oh my God, that’s good,” says Doctorow after his first mouthful of crumble. My peanut butter shortbread is fantastic too, if absurdly calorific. We are interrupted only by another waiter dropping a tray of glasses.
He continues with the argument. The impossibility of making limited-purpose computers won’t stop governments or corporations trying to put on the locks, or changing laws to try to make those locks effective. But the only way these limits can possibly work is subterfuge: computers therefore tend to contain concealed software that spies on what their users are trying to do. Such software is inevitably open to abuse and has often been abused in the past.
Digital rights management systems intended to prevent copying have been hijacked by virus-writers. In one notorious case, the Federal Trade Commission acted against seven computer rental companies and the software company that supplied them, alleging that the rental companies could activate hidden software to grab passwords, bank account details and even switch on the webcam to take photos of what the FTC coyly calls “intimate activities at home”. As computers surround us – in our cars, our homes, our pacemakers – Doctorow is determined to make people realise what’s at stake.
We polish off our coffee and desserts, and the conversation rolls on, covering digital media strategy, the future of book publishing, and Rupert Murdoch’s chances of keeping control of News Corp. I ask him about the FT’s business model. He approves of the use of the standard web language HTML5 in the FT app, which makes it less dependent on Apple or any single tablet format. “That’s a good idea,” he says. Then again, he adds, “selling a product that is well-liked by people who are price-insensitive is never a bad thing.”
We’ve been in the restaurant for three hours and are the only customers left. The staff wipe the tables around us and patiently bring flasks of tap water without being prompted. Yet another glass breaks, somewhere on the edge of my vision. “It’s not a good day for gravity,” says Doctorow.
I feel embarrassed that I’m the one who has to call things to a halt, but I’m going to be late for my next appointment. We admire the size of the bill, shake hands, and Doctorow heads off to the pool for a long swim.
That evening, I send him an email. His response is immediate.

——————————————-
Hawksmoor
157 Commercial Street
London E1 6BJ
Bone marrow & onions £7.00
Doddington Caesar £7.50
Porterhouse 900g £76.50
Triple-cooked chips £4.00
Creamed spinach £4.50
Béarnaise £3.00
Apple crumble £6.75
Peanut butter shortbread £7.00
Cornflake ice-cream £3.00
Double espresso x2 £6.00
Sparkling water x2 £7.00
Moulin de Gassac x2 glasses £12.00
Total (incl service) £162.28

First published in the Financial Times, 13 July 2013

Highlights

The astonishing life of Bill Phillips

This is the latest video from the recording of my my radio series, “Pop Up Economics“. (Alternative link to watch.)


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Thomas Schelling, Henry Kissinger, and Dr Strangelove

The full video of the latest episode of Pop Up Economics (free podcast here). Enjoy and please spread the world. (You can also watch here.)



3rd of February, 2013HighlightsRadioVideoComments off
Highlights

How to support innovations that matter

That was the topic of the first episode of “Pop Up Economics“, and here’s the video!

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How to nurture innovations that matter – Tim Harford live at Wired 2012

Here’s my talk at Wired late last year. It was a really fun event. Enjoy!

(Note, incidentally, that Matt Parker has now moved from cycling to rugby.)

 

5th of January, 2013HighlightsSpeechesComments off
Highlights

“The Undercover Economist” – a free chapter

The second edition of The Undercover Economist was published last year in the UK, and recently as an eBook in the US.

The biggest change from the first edition was a new chapter about the financial crisis. Lots of people have written to ask whether they can get this chapter without buying the entire book again. That seems only reasonable, and you can now download it here or as a backup, here. Enjoy.

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PopTech talk: Preventing Financial Meltdowns

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TEDTalk – Trial, Error and the God Complex

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Regrets? I’ve had a few

Can failure really be a spur to success? By Tim Harford and Emma Jacobs
First published in FT Magazine 4 June 2011

One June evening in the summer of 2002, the Shubert Theatre in Chicago played host to a new ballet/musical, Movin’ Out. The show was an unlikely collaboration between Twyla Tharp, a dynamic and challenging choreographer, and the songwriter Billy Joel. It was scheduled to open on Broadway that October, but the critics hated it, offering reviews varying from “stupefyingly clichéd and almost embarrassingly naive” to “pile-driving and ill-conceived”.
So enthusiastic was the criticism that the New York paper Newsday broke with tradition to reprint one of the choicer reviews, well in advance of the Broadway opening. It was left to Twyla Tharp, who had dreamed up the project and directed and choreographed it, to somehow fix the multi-million-dollar mess.
Tharp’s experience, as related in her book The Creative Habit, exemplifies the textbook response to failure: she took the criticism on board, made the necessary changes to her show, and opened on Broadway to glowing reviews. The show won two Tony awards, one for Tharp’s choreography.
The story of Movin’ Out is striking not just because it offers an inspiring narrative of adversity and triumph, but because this sort of transformation is unusual. The idea that one should bounce back from failures is an old one. King Robert the Bruce’s eventually successful war against the English is said to have been inspired by a persistent spider spinning a web in the cave where he was hiding. This was eight centuries ago, yet suddenly the idea seems fashionable – perhaps because there is a lot of failure to go round these days.
In the abstract, learning from your mistakes is an easy and uncontroversial idea. In practice, the whole, facile concept is shot through with difficulty. Who is to say that a mistake has been made? Are the lessons to be learnt really so obvious?
We approached public figures – entrepreneurs, artists, politicians and, of course, bankers – associated with spectacular setbacks of one form or another, asking them to explain what effect the failure had had on them. There were few takers, and one of the refusals – from the former chief executive of a failed bank – was particularly colourful. It seems that these redemptive stories of “learning from mistakes” are less inspiring from the wrong end of the steamroller. Continue →

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