Other Writing

The Art of Economic Complexity – New York Times Magazine

New York Times Magazine – 15 May 2011 – Graphic by CÉSAR A. HIDALGO and ALEX SIMOES

These diagrams are the early fruits of a new approach to the most important unsolved problem of the last century: how to make a rich country out of a poor one. Development economists have many theories about how the trick is done but few proven answers. A compelling solution would be useful closer to home, too: understanding the process of economic development would help us work out whether it matters that service jobs are replacing manufacturing ones or whether there is anything the government can and should do to stimulate new industries like biotechnology or green energy.
Strip away the mathematical language of economists, and conventional theories of economic growth are rather crude. Economies produce “stuff,” and if you want more stuff to come out of the process, put more stuff in (like human capital, say). Yet economies do not produce stuff so much as billions of distinct types of goods — perhaps 10 billion, according to Eric Beinhocker of the McKinsey Global Institute — ranging from size 34 dark stonewash bootcut jeans to beauty therapies involving avocado. The difference between China’s economy and that of the United States is not simply that China’s is smaller; it has a different structure entirely…

Continued on NYTimes.com

Commissar Osborne grits his teeth

FT Comment – 13 May 2011
Higher inflation and lower growth: the Bank of England’s latest economic forecasts, delivered one day before the UK coalition government’s first anniversary, cannot have been a terribly welcome gift. Like any well brought-up recipient of a hideous hand-knitted cardigan, George Osborne, the chancellor of the exchequer, smiled through gritted teeth and pronounced himself well pleased. Faced with this troubled economy, what should the coalition do next?
Politically, I have no idea: the British are not used to coalitions government, and they have not looked kindly on its junior partners. Having handcuffed himself to David Cameron, the Liberal Democrat leader Nick Clegg has found the prime minister walking safely on the political pavement while he trudges sadly through the gutter, splattered by the muck of every controversy. It seems only a matter of time before the leader of the Lib Dems is flattened by a metaphorical bus. Continue →

Failure: It’s everywhere

I wrote this essay for the Freakonomics blog.

In 1982, the management consultants Tom Peters and Robert Waterman published In Search of Excellence, a colossally popular business title. The book aimed to learn lessons from the world’s best companies, and Peters and Waterman produced a list of 43. But just a couple of years after In Search of Excellence had been published, BusinessWeek ran a cover story with the simple title: “Oops! Who’s Excellent Now?” Almost a third of the companies singled out for praise by Peters and Waterman were in financial trouble.

My aim isn’t to mock Peters and Waterman, but to point out that the rise and fall of business models is an unavoidable part of economic growth. In a complex world, things fail – a lot. Continue →

George Osborne, an unlikely Robin Hood

George Osborne, we were told, would be offering a “Robin Hood” budget. It is a bold piece of branding, ranking alongside Jeremy Clarkson’s heartfelt environmentalism. In most ways after all, the chancellor with his privileged upbringing is an unlikely Robin Hood.

But Mr Osborne is trying to tap into something rather deep in the nation’s psyche: the idea that the country is stuffed full of super-rich bankers, tax-evading multinationals and Lear-Jet-riding non-doms, and that he, Mr Osborne, is keen to rob from them to give to the rest of us.

Movements such as UK Uncut argue that if only Mr Osborne had the courage to play Robin Hood, the deficit could be banished without the need for cuts or tax rises for ordinary voters. About £80bn a year should do the trick. But are £80bn a year of easily harvested tax revenues simply sitting there, begging for Mr Osborne to collect them? Continue →

Board gaming with the FT: Michael Lewis

“This game is going to end up like the tortoise and the hare,” Michael Lewis declares, halfway through his inaugural game of Saint Petersburg. Lewis’s green wooden pawn is well ahead on the board, but he’s already picked up enough of the game to realise that – to paraphrase one of the characters he describes in his book The Big Short – he’s about to get his eyeballs ripped out.

It is hard to understand quite why Lewis has agreed that I will teach him an obscure modern German board game while he is interviewed. Poker would have seemed the obvious choice. Liar’s Poker, Lewis’s description of the surreal Wall Street world he inhabited for two years as a bond trader at Salomon Brothers, was definitive of an era and, to some extent, of Lewis’s own career as a narrative writer. But Lewis isn’t interested.

“I haven’t played poker since I was in high school,” he says. “It would be false to portray me as a gambler. It bores me. It’s always bored me.”

Was that why he left Salomon Brothers to become a writer? “No. It was fun gambling with other people’s money. I liked that.”

In a small meeting room in a Mayfair hotel, the logistics are awkward: I can’t take notes and it’s hard even to talk because we’re concentrating on the board. Even a simple game can be baffling to a first-timer, and Saint Petersburg is not a particularly simple game. It describes the building of the city by Peter the Great and his minions (but the theme is very loose: the artwork depicts Czarist Russia).

Players buy cards which provide a flow either of roubles – the currency to buy more cards – or of victory points, which advance the player’s pawn and bring victory closer. There are four types of cards: aristocrats, who supply money and victory points and a bonus at the end; buildings, which supply victory points; peasants, who supply money; and upgrades, which improve the other three types. Returns on investment are very high, but there are never enough roubles to buy all the bargains on offer.

I am about to offer some opening hints when Lewis cuts me off. “Don’t tell me tactics. You don’t have to tell me. I’ll screw up. I’d rather just get beaten, and learn that way.”

We play in fits and starts, for the first half hour talking only about the game and its rules, before switching to Lewis himself while the game is forgotten for a while.

I’ve been reading The Big Short, his account of the men who bet against the subprime bubble, and express my baffled admiration at his ability to get inside the heads of his characters. One, the hedge fund owner-manager Michael Burry, gave him access to every e-mail he had ever sent. “God’s gift to the narrative writer was Michael Burry’s e-mail trove. He lived his life via e-mail.”

But how does he persuade people to give him such access?

“I never really thought about it. I’ve had so many people enter into the spirit of the arrangement. It starts with the relationship before it becomes a literary engagement. It’s a very long-term investment.”

The only time he’s had someone pull out after beginning such a relationship was with George Soros, whom he had accompanied on a private plane all over eastern Europe in 1994. Lewis published a magazine piece which suggested that Soros’s qualities as a philosopher were overrated.

“He was furious with the piece. It just said what I thought. Is it my turn?”

“Your turn.”

Lewis is fascinated at the revelation that Germany is the world’s board-game heartland. “This game is all about trade-offs … it’s made for the Anglo-Saxon Protestant work ethic. The Greeks would never appreciate it.” He tries to persuade me to write a piece about the German response to the euro crisis, using board games as a motif.

Although I am building a winning position, producing a flow of roubles that will in due course allow me to buy what I need to overtake Lewis, he understands what is going on. He knows why he’s going to lose. After I reap a particularly profitable investment, Lewis expresses alarm.

“Sorry,” I offer.

“That’s OK.”

Talk turns to Lewis’s upbringing in New Orleans. His father had a largely hands-off philosophy, but begged Lewis not to turn down Princeton in favour of a life in New Orleans with his high-school sweetheart. “He went white and said, ‘I’ve never told you what to do, but don’t do this.’”

Lewis followed his father’s advice. “It was the right decision. But I really was in love with that girl, and it ended up ending our relationship. And I always felt I violated something in me, making that decision.” When the time came to quit Salomon, he steeled himself against any further paternal entreaties.

. . .

Explaining his decision to leave Salomon, he casually compares the $40,000 book contract to the $250,000 salary and potentially millions more – big sums in the late 1980s. But he insists that money does not motivate him.

“I grew up with a mother who came from a pretty wealthy family – in fact a very wealthy family by New Orleans standards – and my father was kind of a poor boy.” By the age of nine he’d abandoned any sense that money brought fulfilment, because “my father’s family was so happy and my mother’s family so miserable”.

Although there is outrage in Lewis’s descriptions of high finance, it is muted by the fact that he seems to regard much of life on Wall Street as risible. His former tutor at the London School of Economics, a certain Mervyn King, didn’t always see the funny side.

“Four or five months after I got the job at Salomon, the head of the London office comes over to me and says, ‘We’ve got this guy in the lobby. He’s the academic adviser to the new FSA, and he’s been sent in to see how the markets really work and nobody wants to sit with him. Could you sit with him?’ It was Mervyn.”

After three hours “listening to me selling people stuff”, King asked what Lewis was paid.

“It was two-and-a-half times what they were paying him to teach me at LSE. And he was, ‘This is just criminal, this is outrageous.’ He couldn’t believe it.”

I realise that Lewis has been hoping to overtake me, banker-style, by scooping a big bonus score at the last gasp, but he has missed a subtlety of the scoring and gets less than he hoped. He is, in any case, too far behind for any bonus to help him. The final score – 197 to 147 – is a comfortable win for me, but no disgrace to my pupil. We’ve been playing and talking for two hours.

“How do you feel?” he asks me.

“Pretty scummy, actually.”

“No that’s alright, that’s alright. I learned.”

…………………………………………..

Also published at ft.com.

What we can learn from a nuclear reactor

Hinkley Point B is an ageing power plant overlooking the Bristol Channel. The location was once designed to welcome visiting schoolchildren, but is now defended against terrorists by a maze of checkpoints and perimeter fencing. At the heart of the site, which I visited on a mizzling, unseasonable day in late July, looms a vast grey slab of a building containing a pair of nuclear reactors.

Hinkley Point B began operating shortly before the doomed TMI-2 reactor at Three Mile Island in Pennsylvania, US, and is due to be decommissioned after 40 years of service in 2016. As parts of the plant are showing the industrial equivalent of crow’s feet, it runs at 70 per cent capacity to minimise further wear and tear. But when I asked EDF Energy, a subsidiary of one of the world’s largest nuclear energy companies, whether I could visit a nuclear facility to talk about safety, Hinkley Point B was the site they volunteered.

It might have seemed a strange choice on their part, but I was on a strange mission. I hadn’t come to Hinkley Point B to learn about the safety of nuclear energy. I’d come because I wanted to learn about the safety of the financial system. Continue →

Happiness: A measure of cheer

‘The welfare of a nation can … scarcely be inferred from a measure of national income.’
So the US Congress was warned in 1934 by Simon Kuznets, who thus continued a long tradition of pointing out that there is more to life than money. But the economist’s comments broke particular ground: they were attached to the first serious attempts to produce national income accounts – the tally of all that a country produces and earns – for the US. Kuznets and his small research team had built them, and he knew their limits.
Where Kuznets led, others have followed. From the upper echelons of the administration of President Barack Obama to the offices of Nicolas Sarkozy, his French counterpart, to David Cameron, UK prime minister, the goal of gauging a nation’s well­being has captured the imagination of policymakers. They join less likely countries such as Bhutan, whose mission to measure “gross national happiness” has made the Himalayan mountain kingdom a trendsetter.
Mr Cameron was the most recent to take up the cause, saying Britain needed to look for alternative measures that would show national progress “not just by how our economy is growing, but by how our lives are improving; not just by our standard of living, but by our quality of life”. While some analysts suspect each politician has his own motives – appearing nice to electors, flattering the economy and so on – the result has been to create a sense of momentum behind happiness economics. Continue →

Call no man happy until he is a government statistic

How to be financially literate

Read the whole column here. The answer is below… Continue →

Models tell us more than hindsight

According to my esteemed colleague Gideon Rachman, economists should be swept off their thrones by historians. Economists have had far too strong a stranglehold on the levers of power, he claims. They think they are scientists. They think they can foretell the future. They are wrong: “pseudo-scientists”, “peddling brash certainties”. Historians such as Gideon and Professor Niall Ferguson, hitherto relegated to backwaters such as the FT’s op-ed page, should at last be paid a bit of attention.

In pondering how to respond, I suffered an acute shortage of brash certainty. Gideon is quite right about the importance of history. When it comes to economics, however, the chief source of brash certainties appears to be Gideon, who wouldn’t know an economic model if it paraded down a catwalk at him.

I know as little about history as Gideon knows about economics, but no doubt he is right to suggest that an important role of the historian is to emphasise the knotty particularity of time and place, and the difficulty of producing sweeping scientific laws that accurately describe a complex social world. Economists, sociologists, psychologists and anthropologists should appreciate this just as keenly. The best do. Many do not and, sadly, they are over-represented in the media. Perhaps this is the reason Gideon misunderstands the task and the methods of economics.

He argues that while economic edifices are always collapsing, “buildings constructed according to the laws of physics seem to stand”. This is an odd statement. Buildings constructed according to the laws of physics have a habit of falling down. Henry Petroski, engineer and author of Success through Failure, observes that structural engineers tend to learn by constructing ever more ambitious structures. When one of them falls down or wobbles, engineers figure out what was wrong with their models. Sometimes the results are tragic: when the innovative Malpasset dam cracked thanks to inadequate geological modelling, nearly 400 people died. Sometimes they are delicious: the award-winning Kemper Arena collapsed, with no loss of life, just 24 hours after hosting the American Institute of Architects Convention. From his riverside eyrie, I think Gideon can just see the famous wobbly bridge across the Thames. Is this really a damning indictment of the laws of physics?

But, of course, our grasp of the laws of physics is not to blame. The trouble is the difficulty of modelling them in a world with snowdrifts, clay seams and error-prone contractors. In short, buildings, like economic institutions, stand up not because of our grasp of the laws governing them, but because they have survived a process of trial and error in a complex world.

Economic institutions are more complicated and unique than any building. No wonder that progress is so difficult. But Gideon is too quick to dismiss “models and equations”. I agree that macroeconomic models have proved fairly useless. I also agree that economists, like historians, sociologists, political scientists and newspaper columnists, make terrible forecasters. But few academic economists bother to try, and forecasting models represent a small slice of the mathematics deployed by economists.

What, for instance, of the famous contention by the economist Steven Levitt and his co-author, John Donohue, that legalised abortion in the US reduced the crime rate about 18 years later? This is a hypothesis about history, but one that no historian is well-qualified to judge. Instead, the hypothesis has been tested statistically with some ingenuity; the statistical models themselves have been contested, pulled apart, found wanting in some respects, double-checked using alternative data and tested against the experience in other countries. The debate continues. Is this process “science”? I am not sure. But it certainly isn’t idle banter.

No doubt economists can learn from historians, but the search for economic regularities should not be abandoned. It is not limited to traditional economic approaches. We know much more about economics thanks to the work of Robert Axtell (computer scientist), Cesar Hidalgo (physicist), Duncan Watts (sociologist), Esther Duflo (an economist who runs the kind of controlled experiments which, according to Gideon, don’t happen in economics) and Daniel Kahneman (psychologist). All of them use those pesky “models and equations”. Are mainstream economists receptive enough to such invaders? The best ones are. The majority are not, but that is a fact about academia, not economics.

At least Kahneman has been rewarded for his efforts with a Nobel memorial prize. (Or as Gideon would put it, a “fake Nobel”. The Nobel Memorial Prize in Economics was established in 1968, long after the dynamite magnate’s death, unlike the rigorously scientific Nobel Peace Prize awarded to Henry Kissinger, or the rigorously scientific Nobel Prize for Literature denied Leo Tolstoy.)

My own supervisor, Paul Klemperer, is presumably the kind of economist Gideon despises: a game theorist who tries to understand the world through mathematical models. How quaint and arrogant. But my clearest recollection of Paul’s teaching is a series of classroom demonstrations calculated to undermine predictions of game theory and to open his students’ minds to the likelihood that the models lacked something important.

Paul used those models to help design an auction that raised £22.5bn for the British government, and then helped the Bank of England design an auction that would help them to inject liquidity into banking. Paul can’t forecast the future, but the auctions have – like many buildings – stood up well so far.

Historians deal in hindsight. It is a wonderful thing. But it is not the only thing. I wonder whether Gideon, intoxicated with a heady brew of Niall Ferguson and Herodotus, has forgotten that.

Gideon Rachman responds:

In his spirited and learned defence of his beloved economists, Tim Harford makes a mistake that is a characteristic of the profession that we both really belong to – journalism. That mistake is to rest too much of his argument on a couple of anecdotes. The story about the collapse of the Kemper Arena is indeed delightful. The implication Tim seems to draw is that the laws of physics and engineering are no more reliable than the “laws” of economics. They are all just hypotheses, which are gradually improved by trial-and-error in the real world. But it is my perhaps lazy impression, that the hard sciences have established a body of settled, scientifically-testable knowledge that economics simply cannot lay claim to. Is Tim really saying that ain’t so?

Tim also admits that macroeconomic models have proved “useless” at forecasting but suggests that this is a minor matter, since few academic economists “even bother to try”. But the starting point for my piece was Joseph Stiglitz’s suggestion that “the failure of much of the economics profession to see the crisis coming should be a cause of great concern.” And Professor Stiglitz is a winner of the Bank of Sweden prize for economics – sometimes referred to as the Nobel prize.

Also published at ft.com.