Other Writing

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.

Crisis confessions of the Undercover Economist

Illustration by Ingram Pinn

Anniversaries are a time for reflection and, as the third anniversary of the credit crunch approaches, I have been doing some reflecting on where I went wrong as an economist. My own errors, of course, are of particular interest only to me, but I fear that they are fairly representative of the economics profession. Continue →

A sunlit Keynesian uplands awaits our grandchildren

Illustration by Ingram Pinn

It says a lot about the talents of John Maynard Keynes – and just as much about the shortcomings of modern macroeconomics – that when the financial crisis struck, policymakers instinctively reached not for their fancy models, but for the Keynesian idea of fiscal stimulus. These pages have been filled with eminent thinkers arguing over whether it is time to bring the stimulus to an end.

Perhaps we should turn the question around: if stimulus were to be the solution, what would be the problem? The problem would be that too many of us wanted to save money or pay off debts; that is, we wanted others to pay for our services but weren’t so keen on paying for theirs right now. Simple arithmetic suggests this would leave slack in the economy. In addition, the problem would be that businesses, pessimistic about prospects for recovery, didn’t harness all the spare savings floating around and plough them into new investment projects. The slack would stay slack, possibly for a long time. If that was the problem then government stimulus would be the solution.

And the above paragraph doesn’t seem to be a bad description of the US or UK economy, which suggests the case for stimulus is strong. True, the patience of the bond markets is surely not boundless (and say what you like about kowtowing to the markets, if we’d like them to lend us money we have good reason to care whether they are willing to lend it). And there already is an awful lot of stimulus spending going on right now, so it’s not absurd to suggest we could get by with less as the economy bounces back. I realise that I am sitting on the fence here, but it’s part of my new maxim, which is never to stand in the middle of a fight between Paul Krugman and Niall Ferguson.
Fiscal multipliers are certainly fun. If the fiscal multiplier is 0.5, we’re getting government projects at half price: the government project draws half its resources away from private-sector activity, but the other half is just soaking up slack. If the fiscal multiplier is 1.6, as President Barack Obama’s Council of Economic Advisers has estimated, we get a free government project and a larger private sector. And if the multiplier is 2.5, as Keynes believed of the US economy in the 1930s, government spending soaks up slack like a sponge, and also catalyses the private sector into a frenzy of action. (I beg your indulgence while you picture a slack-soaking catalytic sponge; patent pending.)
The quality of government spending still matters. If you think the multiplier is 2.5 then you can gladly follow Keynes’s suggestion of burying banknotes down mineshafts and leaving it “to private enterprise on well-tried principles of laisser faire to dig the notes up again”. If you think it is 0.5 or zero, you might want government projects chosen with more care. And as Keynes himself remarked, no matter what the multiplier, “it would, indeed, be more sensible to build houses and the like” if only politics would allow.
Keynes’s General Theory may well be a work of genius, but I have always been more attracted to his short 1930 essay, Economic Possibilities for Our Grandchildren, in which, in the teeth of the Great Depression, Keynes reminded us that the long-run trend was inexorable growth. “I would predict that the standard of life in progressive countries one hundred years hence will be between four and eight times as high as it is to-day,” he wrote. After 80 years, a world war, and a depression, citizens in the US and western Europe are about five times richer than when Keynes was writing. We seem to be on track.
Keynes’s essay explored something his modern disciples often ignore, namely what would happen when “the economic problem” was solved. By the standards of the 1930s, this problem has been solved. But our response has not been what Keynes expected. He acknowledged that human beings had an insatiable desire to feel superior to each other, and that some people would always blindly pursue wealth. But he felt that most of us would adjust, albeit grudgingly, to a life of plenty. We would work less and amuse ourselves in other ways. We have not, and civilisation continues to depend on the production, purchase, consumption and disposal of the kind of stuff you can see anywhere from the shelves of Walmart to the pages of How To Spend It. One of the multiple causes of the crisis, after all, was that so many people wanted to borrow more than they could repay.
It is true that we do choose to work a little less. According to the economists Mark Aguiar and Erik Hurst, despite a large increase in women’s participation in the workforce, in the US they have at least four hours a week of extra leisure compared with 1965. Men have at least six extra hours. And there is the time we spend studying and travelling before our careers, or in early retirement, to say nothing of the many hours spent goofing off at work and looking at Facebook. But if you want to work a three-day week, your boss and colleagues will assume it is because you are caring for a baby or studying for a PhD, rather than because the weather is lovely at this time of year.
So while the debate of the day is rightly about how quickly and how severely governments should tighten their belts, I hope that when the crisis is over we will remember to come back to Keynes’s long-run forecast. Keynesianism may be about trying to maintain full employment, but Keynes understood that full employment could mean everybody who wanted a job working up to three hours a day, at which frenetic pace we should still have twice the wealth of Keynes’s generation. It was in this future paradise that Keynes famously imagined that the economics profession might be thought of as “humble, competent people, on a level with dentists”. We economists have a way to go yet.

First published at ft.com

Why we still love board games

In a sprawling convention centre in Essen, western Germany, the busiest day in the German board games calendar – Saturday at “Spiel” – is about to begin. Hall after hall of stands are piled high with board game boxes, most eschewing the garish graphics of the toy shop for evocative paintings of lands far off and times long ago.
A few minutes before the official start time of 10am, the doors are thrown open. There’s a rumble and then a roar as thousands of gamers surge into the hall, breaking and swirling around the stands, sweeping into the farthest corners of the halls, seeking out rare second-hand products or the hottest of the 500 new games being launched, or simply a good place to sit and play. The biggest stands resemble pavement cafés whose patrons grab games instead of coffee: they are filled with tables, each just big enough to seat four players and a board. Before long, the spaces in between the tables are colonised, too, with gamers sitting cross-legged around their boards.
Beyond the sheer number of enthusiasts, the striking thing is that they look, well, normal. The convention centre boasts nearly as many mothers with prams as heavy-metal-T-shirted, body-pierced teens. In one of the farthest halls, Dungeons and Dragons merchandise is on sale, and I counted more than one person wearing a sword and a cloak. But for the most part, the convention centre’s population wouldn’t look out of place on any German high street.
“If you go to a games convention in the UK, you’re generally surrounded by fat, smelly people with bad social skills,” says Martin Wallace, a British game designer at a boutique games publisher called Warfrog. “That’s not true here.”
Wallace recalls an occasion when a group of his gaming friends were too embarrassed to admit their identities to a pretty waitress back home in the UK. “One of us told her that we were stamp collectors. I thought: great. We’re lower than stamp collectors.” But in Germany, if the leading game designers travel incognito, it is to avoid being surrounded by admiring fans.
A queue of autograph hunters forms at the Kosmos company’s stand: Klaus Teuber has arrived. Teuber, once a manufacturer of dental supplies, is an unlikely star. He is an avuncular man in his fifties with a hairless pate and a perfect trapezoidal moustache that fans out to the corners of his mouth. But for four days in Essen, he is the biggest name of all: the designer of the multimillion-selling blockbuster board game, The Settlers of Catan. Continue →

FT Comment: Political ideas need proper testing

Illustration by Ingram Pinn

I don’t recall it myself, but like most babies born in 1973, I apparently slept face down in my cot. This was the standard advice, made famous by Benjamin Spock in 1948. We now know that for many unlucky families, this well-meaning advice was fatal. According to research published in 2005, putting babies to sleep on their fronts has led to about 60,000 cot deaths.

The story is a favourite of Sir Iain Chalmers, a campaigner for better standards of evidence in medicine and beyond. Because it is possible to do so much unwitting harm in medicine, many medical interventions are now subjected to a randomised controlled trial. Austin Bradford Hill performed the first properly controlled clinical trial in 1948, although he had predecessors, including James Lind, who used a randomised trial to show that citrus fruit prevented scurvy. There’s even a controlled trial in the Bible (Daniel 1:8). Such trials have proved the effectiveness of countless treatments, and the dangers of countless others.
It is a shame, then, that there is so little appetite from politicians for the same standards of evidence outside medicine. In fact it is more than a shame – it’s a scandal. While randomised trials are not going to tell us when to raise interest rates or get out of Afghanistan, there are many policies that could and should be tested with properly controlled trials. Is Jamie Oliver right to emphasise healthy school meals? Run a trial. Should young offenders be sent to boot camp, or to meet victims of crime? Run a trial. What can we do to persuade households to use less electricity? Run a trial.
Yet such trials are not common in the US, and downright rare in the UK. There is no financial, ethical or practical excuse for this. Trials are cheap. (Even if they were expensive, solid practical knowledge is well worth paying for.) This is not a question of carrying out dangerously speculative crank experiments, but simply adding the essential ingredient of randomisation to a standard pilot project that would have happened anyway. Randomising is often what distinguishes proper evidence from statistical mush, by removing biases in the setting of experiments – such as running pilots only in the most needy areas.

When the UK government recently introduced the “synthetic phonics” method of teaching young children to read, they were told by Carole Torgerson, an evaluation expert at the University of York, that they could easily bolster the slim evidence base by randomising which schools joined the programme first. They didn’t. (More encouragingly, Ms Torgerson has been commissioned to evaluate maths teaching.)
Some people feel queasy at talk of “experimentation” in the classroom, prison or benefit office – but politicians experiment on us all the time with their latest policy wheezes. We learn little or nothing because the experiments are badly designed.
What is missing is the political demand for tests of what really works. Too many policies on education, welfare and criminal justice are just so much homeopathy: cute-sounding stories about what works leaning more on faith than on evidence. Politicians and civil servants, faced with some fancy new idea, should get into the habit of asking for a proper randomised trial. And we, as citizens, should be equally demanding.
It’s no coincidence that one of the few fields of social policy to feature more than 100 robust trials is the study of how to get voters to turn out in elections. Politicians seem perfectly happy to turn to scientific method if it will get them elected. They are less interested in using it for the good of the people they govern.
It is embarrassing even to have to make the case for randomised trials in social policy. For medical researchers, such trials are just the start. Realising that inconvenient – or just plain boring – trial results are less likely to appear in print, medical journals now refuse to publish trials that were not logged before they started in a register of trials. Such registers ensure embarrassing results cannot be made to disappear. This is vital in medicine, and just as important in social policy.
Trial registers also feed into systematic review bodies such as the Cochrane Collaboration, which is an international offshoot of a National Health Service initiative. In less than two decades, the Cochrane Collaboration has published 4,000 systematic reviews of medical treatments, digging up data from unpublished trials, and providing the information to save many lives. A parallel body for social policy has far fewer trials to evaluate.
The Cochrane Collaboration has become a byword for a fair and comprehensive review of a treatment – the latest word (never the last word) about what works. We need the same shorthand in policy, a quality kite-mark that tells us politicians have actually done some homework before they roll out their latest brainchild. We’ve had FairTrade coffee – what about FairTest policies? Most voters don’t know much about randomisation or trial protocols, but they’ll know when they see the FairTest logo that a policy has had a proper, scientific test to see if it works.
Many social, educational and economic policies are the modern equivalent of Dr Spock’s advice that babies should sleep face down: well-meaning, authoritative – and wrong. No doubt it would be awkward to see the wisdom of experts punctured and the pet policies of politicians discredited on a regular basis. But if politicians really cared about those they represent, they would insist on more randomised trials and more systematic reviews of what works. Honest policy mistakes, quickly reversed, should embarrass nobody. As voters, we should demand more such mistakes.

First published on ft.com

Gain from the pain of failure

From a series of 10 ideas for business, FT Magazine

Failure has always been a fundamental part of a market economy. When markets work, they do so because new ideas are constantly being tried out. Most fail. Those that succeed cause older ideas to fail instead. In the US, about 10 per cent of businesses disappears each year. This is an awkward insight – but trial and error could be starting to take its rightful place as a business technique, rather than the dirty little secret of capitalism.

There are some hopeful signs. Stefan Thomke of Harvard Business School has argued that advances in computation have made it possible to experiment on new products as a matter of course, trying many things and expecting many failures. It is now easy, for example, to experiment with changes in the layout of a website, showing different configurations to different visitors and tracking results in real time. Google, meanwhile, routinely launches new products with a “beta” label on them. And academic superstars such as Steven Levitt, co-author of Freakonomics, have been teaching executive courses in business experimentation.

We are also starting to learn more about the psychology of learning from mistakes. Richard Thaler, the behavioural economist behind Nudge, coined the phrase “hedonic editing” to describe our habit of lumping small losses together with larger gains in order to mask the pain of the loss. Sugar-coating is human, but it’s also a recipe for failing to learn from failure. Thaler, with colleagues, even studied the behaviour of contestants on Deal or No Deal. He discovered that people who had made unlucky choices then started to take reckless risks, which often compounded the error.

It’s hard to learn from failure if it briefly robs us of our judgment. As we start to understand why trial and error is so painful a process, we may be able to use it more constructively. The financial crisis has made us aware that a system that cannot tolerate a bit of failure is a dangerous one. The idea that an institution was “too big to fail” used to sound reassuring. Not any more.