Other WritingArticles from the New York Times, Forbes, Wired and beyond – any piece that isn’t one of my columns.
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 →
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.
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 →
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.
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.
Illustration by Ingram Pinn
We are sometimes admonished: “Don’t shoot the messenger.” Since there is rarely a logical reason to shoot messengers, such advice should not be needed. But it is, because bad news hurts, and organisations find it difficult to deliver such news to the person in charge.
Andrew Rawnsley’s account of Gordon Brown’s premiership has received attention for its claims that Mr Brown was abusive and physically threatening to his staff, grabbing lapels, stabbing upholstery with his pen and causing his advisers to cower for fear of violence. If true, that is disturbing – but few people will have found it surprising. High-status men sometimes do abuse that status.
I am worried not so much that Mr Brown may be beastly, but that he is cutting himself off from good advice. Mr Rawnsley describes Mr Brown’s fateful decision to pull back from a widely trailed snap election in late 2007. His inner circle waited until he was out of the room before agreeing that such a course would be disastrous. When the prime minister reconvened the meeting, however, this was not conveyed: “No one expressed a clear view. No one wanted responsibility for the decision.”
This is a more significant anecdote than any tale of flying spittle. Any leader needs frank advice, and the biggest obstacle to receiving it is often the leader himself. Even a polite and level-headed boss will be tempted to cut naysayers out of the loop. Knowing this, sensible juniors will avoid expressing criticism or grim tidings if at all possible.
“If you deliver bad news, you’re disempowering yourself,” says Professor David Sims of Cass Business School. “You’re less likely to be listened to in the future.” For some ambitious subordinates, this is a far worse fate than the threat of being thumped.
A new reality television show, Undercover Boss – which has migrated to the US after airing on Britain’s Channel 4 last summer – tries to tap into the dissonance between bosses and front-line staff by filming as a senior executive works incognito in the trenches. It is a delicious premise.
When bosses must don a disguise to learn about how their organisations really work, trouble is in store. Continue →
First published in Business Life, May 2009
Office life may not be a game, but it is a tournament. Economists use the word “tournament” to describe situations where the winner – or a few winners – walk off with the rewards. A race to develop a patent for a new drug is a tournament. Fund managers scoop the lion’s share of customers by beating the market, rather than delivering objectively excellent returns. And many offices promote or pay bonuses to those who outperform their peers. Sometimes the competition is subtle and implicit, at other times brashly celebrated – but it’s all a tournament.
Tournament pay makes sense from the point of view of employers, and goes some way to explaining the frustrations of office life. (Some key predictions of tournament theory: when there is more luck involved, bonuses have to be bigger to have a motivational effect; bosses need to be paid vast and largely unearned bonuses to motivate their underlings; and when the incentives are sharp enough, workers will deliberately sabotage each other. Is it all starting to make sense?) But one interesting question is hard to answer: how does tournament pay affect the risks that people take? This is a tough question because it is generally hard to observe risk-taking directly.
Two economists, Christos Genakos of Cambridge and Mario Pagliero of Turin, have discovered an exception: professional weight-lifting contests. Because weightlifters announce in advance the weight they will attempt, it’s possible to observe people taking risks by lifting heavier weights. With data from 17 years of competition, the researchers are also able to track individual weightlifters across time and see whether they behave differently in different situations.
They conclude that more prestigious tournaments, such as the Olympic games, encourage more risk-taking. They also conclude that people take more risks when close to but outside a medal position. Tournament leaders play it safe, and so do those completely out of contention. Competitors lying in sixth place are most likely to go for broke.
This finding is a lot more potent given the context of a banking crisis which is blamed in part on a bonus culture that encouraged bankers to take too many risks. While popular anger is focused on the sheer scale of bankers’ bonuses, many economists are concerned that naïvely-designed bonuses may have contributed to the crisis.
As Genakos and Pagliero comment, “tournaments can be too successful in encouraging risk-taking… while this may be ideal in sport, in which suspense and extraordinary performances are what the spectators want, it may not be so desirable in firms”. Ouch.
This Christmas, will you buy your loved ones presents that they may not like? Or will you slip them some cash instead? Neither option has much appeal. A gift of money, unless to a much younger relative, looks lazy and even patronising. Yet many people are incompetent present-buyers: Continue →
First published in Business Life, April 2009
Deciding how much to charge customers is a crucial decision for most businesses, and many devote huge effort to complex pricing schemes. Not all, though: some businesses turn the whole task over to customers. “Pay what you want” seems to be a new business fashion – but is it taking customer sovereignty too far? And is the model sustainable?
Pay what you want has two clever features. The novelty attracts customers and publicity, too. And affluent or price-insensitive customers tend to pay more. Any well-run business will try to offer low prices only to customers who demand them, not to every customer; pay what you want might achieve the same result without the fuss.
The Achilles heel of pay what you want is, of course, blindingly obvious: what if people don’t want to pay anything at all? No wonder the model has caught on in two very specific contexts: digital goods such as music files, software or blogs; and cafés or restaurants. With digital goods, the cost of providing an extra copy is close to zero, and collecting real money is difficult thanks to piracy and a customer base that is used to getting what it wants without paying. Inviting contributions is better than nothing. In a café, customers are used to tipping staff and find it hard to accept service from a smiling waitress and then pay little or nothing. Honour – or guilt – can be a powerful motivator. So can social norms: Americans, well used to tipping, were reported to have paid much more than others when invited to pay what they wanted to download Radiohead’s album “In Rainbows”.
My concern is that when the novelty wears off, pay what you want will collapse as a model, at least for restaurants and cafés. Not only will the free publicity ebb away, but there is every reason to suppose that customers will start to exploit the offer. The economists John List and Uri Gneezy have carried out an experiment that sheds light on this tendency. They hired temps to perform various tasks, and paid some of them well above the hourly wage that had been agreed. The question was whether the workers would put in extra effort out of guilt or simple gratitude. The answer: yes, but the effect wore off in a matter of hours. Selfish exploitation of the generous wage became the norm by lunchtime on day one. I suppose if the same thing happens to restaurant owners, they can always install a cash register.
Superfreakonomics: Global Cooling, Patriotic Prostitutes and Why Suicide Bombers Should Buy Life Insurance
By Steven D. Levitt and Stephen J. Dubner
Allen Lane £20, 288 pages
For fans of the multimillion-selling pop-economics book, Freakonomics, all that needs to be said is that the sequel’s title is an accurate description. This book is a lot like Freakonomics, but better.
The original, a runaway hit, had its genesis in Stephen Dubner’s masterful New York Times Magazine profile of “rogue economist” Steven Levitt. “Rogue” may be stretching it a bit, because Levitt is, in fact, a garlanded and hugely influential professor at the University of Chicago.
He has applied his statistical techniques, now much emulated, to unconventional topics such as the link between abortion laws and crime, or whether sumo wrestlers cheat (they do, he concludes). The 2005 book that resulted was wide-ranging, fascinating and above all, likeable – however, it showed signs of haste, and it was never clear whether it was supposed to be a book by Steven Levitt or about him.
Book cover of ‘SuperFreakonomics’ by Steven D Levitt and Stephen J DubnerSuperFreakonomics offers much the same range and amiability, but is more polished. The book’s chapters cover prostitution; data analysis in healthcare and counter-terrorism; altruism; innovation; and geo-engineering. The reader may not guess the central topic from the chapter titles or the opening pages, however, which betray a fondness for springing surprises and putting twists in the storytelling.
Detours are all part of the style; an afternoon reading SuperFreakonomics is like one of those thrilling and occasionally frustrating conversations where ideas tumble out so quickly that they keep interrupting each other. In short, the book’s organisation is deliberately on the freaky side, but if you simply resolve to read it from cover to cover you are guaranteed a good time.
My favourite chapter describes the research of John List, a colleague of Levitt’s, as he zaps some of the most famous results in behavioural economics. In the “dictator” game, well-known in economic circles, player A is given $10 by the experimenter and told they can keep it all. Alternatively they can give some to anonymous player B. Many players do, indeed, hand over money, a finding that troubles conventional economic theory.
List thinks many researchers have embraced this finding too easily, however. “What is puzzling”, he comments, “is that neither I nor any of my family of friends (or their families and friends) have ever received an anonymous envelope stuffed with cash”. The lab experiments, in which large numbers of students display a preference for sending cash to anonymous strangers, need to be questioned more closely. Yet List showed that with small modifications to the dictator game, experimental subjects could be persuaded not only to curb their generosity, but to confiscate cash from others.
There is much more here, and all is told with verve and care. Levitt and Dubner have a gift for explaining precisely how a researcher discovers something. Their epilogue, on Keith Chen’s attempts to introduce currency to a monkey society, is a model of how to tell a gripping story of scientific research without compromising on accuracy.
The most eye-catching chapters in the book are the first, on prostitution, and the last, on global warming. The chapter on prostitution flits from academic research into street prostitution, carried out by Levitt and sociologist Sudhir Venkatesh, to an engaging profile of a high-end escort and various digressions into the economics of gender and other topics.
One of these asides provides the book’s best moment: when the authors demonstrate that a prostitute gets more money through the use of a pimp than a homeowner gets through the use of a realtor, or estate agent. The financial impact of a pimp is greater than that of a realtor, “Or, for those who prefer their conclusions rendered mathematically, PIMPACT > RIMPACT.”
Those with a prurient curiosity (I am guilty), will find some of the descriptions of what prostitutes do all day rather coy. Those with an interest in the economic angle (guilty, again), will find some questions unanswered.
“The real puzzle isn’t why someone like Allie becomes a prostitute, but rather why more women don’t choose this career,” Levitt and Dubner write. Do tell, thinks the reader, but they don’t, even though literature on the puzzle does exist. The leading research on the question is written by two women, not two men, a fact that some people will find relevant.
The analysis of street prostitution is based on careful academic work. The account of high-end prostitution is merely a journalistic profile of a single successful and intelligent woman. But Levitt and Dubner seem to have decided that while data-driven discoveries are generally wonderful, you can have too much of a good thing.
The authors claim to prefer data to “individual anecdote”, but part of the secret of their success is that they like a good story more than anyone.
As for the final chapter on global warming, it is a striking discussion of geo-engineering, surveying various schemes for cooling down the planet rather than trying to prevent climate change by cutting carbon emissions. This is a strong story, but it is also one-sided, portraying the geo-engineers as brilliant iconoclasts, dismissing the objections to geo-engineering as the knee-jerk reaction of the unreflective, and failing to convey the views of a single credible geo-engineering sceptic. A well-deserved swipe at Al Gore does not really count.
According to this chapter, the only reason everyone is making so much fuss about carbon dioxide is that they’ve never heard of geo-engineering, or are the kind of stubborn Luddites who think technology never solved anything. I have some sympathy with that view but the section nevertheless needed more balance.
In the end, a book such as SuperFreakonomics stands or falls on its entertainment value. And on that count, there’s no doubt: it’s a page-turner.
More revealing, though, was that I’d folded over at least a dozen pages, resolving to go back, follow up the references, and find out more. This is a book with plenty of style; underneath the dazzle, there is substance too.
First published at ft.com.
