Tim Harford The Undercover Economist

Undercover EconomistUndercover Economist

My weekly column in the FT Magazine on Saturday’s, explaining the economic ideas around us every day. This column was inspired by my book and began in 2005.

Undercover Economist

The pillars of tax wisdom

‘The Budget bears not even a passing resemblance to how we economists were taught that taxes should work’

I sometimes feel that seeing the world through the eyes of an economist is like seeing the world through the ears of a bat. We notice a lot that others miss, and we miss a lot that others notice.

The annual rituals of the chancellor’s Budget, and next week’s Autumn Statement — focal points of the British political calendar — are good examples. Tax thresholds are nudged up and down, allowances introduced and withdrawn, and much attention is given to the tax on a pint of beer. None of this performance bears even a passing resemblance to how we economists were taught that taxes should work.

So how would the Budget look if designed by economists? Economists’ ideas about taxation are based on three pillars. The first, developed by Cambridge economist Arthur Pigou in 1920, is that we should tax things that have unpleasant spillover effects on bystanders — “externalities”. The classic example is to tax activities that produce pollution. A few Pigouvian taxes exist in the UK but they are patchy: the tax on petrol is implausibly high, for example, while that on domestic fuel is strangely low.

The second pillar was erected in 1927 by another Cambridge man, Frank Ramsey, shortly before his death at the age of 26. Ramsey showed that taxes should be focused on products that aren’t very responsive to price. This is because a tax on a price-sensitive good will simply destroy demand. The consumer won’t buy the good, the retailer can’t sell the good, and the taxman doesn’t collect any tax. Everyone loses out.

Ramsey’s ideas, too, are patchily implemented. Basic foodstuffs such as rice and bread might look like excellent candidates for high taxes in the pages of a learned journal but less so on the front page of a newspaper.

The third pillar was unveiled in 1971 by James Mirrlees — now a Nobel laureate — who tried to figure out what could be said about optimal income taxation. One of his conclusions, surprising to him as much as anyone else, was that an optimal income tax might impose flat or even falling marginal tax rates.

This counter-intuitive idea requires us to see the difference between the marginal rate of tax — the headline rate, paid on each extra pound earned — and the average rate of tax that an individual pays. The two can be very different: if everyone pays a marginal tax rate at 50 per cent, with a £10,000 allowance, then someone with an income of £10,000 pays no tax; an income of £20,000 will attract a 25 per cent average rate; an income of £1m will attract a 49.5 per cent average rate. Yet while the tax burden is progressive, everyone must give half of any extra earnings to the taxman.

Why did Mirrlees argue that the best marginal rate might be falling or flat, as in the example above? The answer is that high marginal rates on top incomes are almost a pure discouragement for the rich to earn money. But high marginal rates on lower incomes will raise money from lots of people, without discouraging work. If you earn £40,000 and the chancellor raises income tax in the £20K to £30K band, that should encourage you to work harder.

This isn’t conclusive proof that marginal tax rates should fall rather than rise — there are lots of other factors at play — but it was a surprising and powerful argument, and one of the few that politicians did seem to absorb.

These three pillars have been standing for a while. So what’s new in the economics of taxation?

. . .

One answer: better data. The next generation of economists, people such as Raj Chetty and Amy Finkelstein, are drawing on data that the likes of Pigou and Ramsey could hardly have imagined. As a result they are able to blend ideas from mainstream economic theory with the psychological insights beloved of behavioural economists. It’s a pragmatic approach, depending on the problem at hand and what the data tell us.

A few years ago, Finkelstein looked at what happens when tollbooths offer electronic toll collection, allowing drivers to breeze through without fiddling for change. She found persuasive evidence that the electronic toll weighed less heavily in people’s minds — they forgot exactly what the price was and began to ignore it. Toll collectors, quite rationally, respond by raising the toll.

More recently, Chetty and co-authors tried to estimate whether the earned income tax credit (EITC) in the United States, a work-related subsidy paid to parents, encouraged people to work more. With a truly mind-boggling dataset boasting 78 million taxpayers and 1.1 billion income statements, they found that the EITC can work very well — if people know about it. In areas with lots of claimants, new parents tended to be well-informed and to respond to the EITC. In other areas, the EITC was not widely understood, and it was less effective.

Perhaps this new data-driven, psychologically realistic approach to tax will win political support. After all, Finkelstein discovered a tax that works best when concealed, while Chetty found a benefit payment that works best when widely trumpeted. Boasting about the good news and hiding the bad? That is the kind of economic theory that any politician can love.

Written for and first published at ft.com.

Undercover Economist

Nothing to fear but fear itself?

‘It is not clear that the US economy has suffered much from terrorism, even from the enormity of 9/11’

This article was published before the November 13 terrorist attacks in Paris.

On a long-haul flight recently, I was jerked from the usual concerns over legroom and a power socket by a memory. I recalled the flight I had taken a few weeks after watching the Twin Towers of the World Trade Center collapse on television. It was an eerily quiet journey from London to Cape Town. I was in a state of mortal fear. But despite occasional grim reminders that terrorists can kill, my dread then seems foolish to me now.

Every violent death is an awful thing but there are many other ways to die a violent death, even in a rich country. Each year, one in 8,000 Americans kill themselves — and each year an American citizen has a one in 9,000 chance of dying in a motor vehicle accident, and a one in 20,000 chance of being a victim of murder or manslaughter. Even in 2001, the chance of an American being killed by a terrorist was less than one in 100,000. In more typical years the figure is one in 10 million. For Americans, terrorists are about as dangerous as lightning strikes.

These dry statistics do not diminish the anguish of those who have lost a loved one to a terrorist attack. Terrorism is no trivial thing; but losing a daughter to suicide or a son in a motorcycle accident is not trivial either, and it is something many more people must endure.

There are other costs to terrorism, deftly surveyed in Alan Krueger’s 2007 book, What Makes a Terrorist. In 2003, economists Alberto Abadie and Javier Gardeazabal published an estimate of what Eta’s terrorist campaign — which at the time had killed 800 people — might be doing to the economy of the Basque Country. Abadie and Gardeazabal estimated that the attacks had, over time, reduced the gross domestic product of the region by 10 per cent. A year later, Zvi Eckstein and Daniel Tsiddon applied a different method to a different country — Israel — but produced the same estimate of the costs: GDP down by 10 per cent because of terrorist attacks. If correct, these are very large costs. (Even the suspicion of an attack on a Russian passenger plane over Egypt — still unconfirmed as I write — is damaging the tourism industry in Sharm el-Sheikh.)

But it is less clear that the US economy has suffered much from terrorism, even from the enormity of 9/11. Official estimates were that the attack on Manhattan destroyed more than $13bn of office space and damaged almost $17bn more. Perhaps 75,000-100,000 jobs were lost in the immediate wake of the attack, particularly in travel and tourism. Yet the received wisdom — summarised in a 2005 book, Resilient City — is that New York bounced back rapidly, recovering the obvious economic losses within about a year. Rebuilding physical infrastructure took longer but in a city such as New York, buildings are demolished and replaced all the time. In the interim, people squeezed into tighter spaces, or companies rented space in suddenly empty hotels while things were sorted out. New York adapted.

This is encouraging and should not be entirely surprising. Natural disasters such as earthquakes can do far more damage, and economies recover from them, too. The classic study here is economist George Horwich’s analysis of the impact of the earthquake that devastated Kobe, Japan, in 1995. The earthquake destroyed 100,000 homes and made 300,000 people homeless. Yet 15 months after the disaster, Kobe’s manufacturing output was back to 98 per cent of pre-quake levels.

The recovery was not complete: there was no serious effort to resurrect industries that were already under pressure from foreign competition, such as the plastic shoe business. But many of the industries that were flourishing before the disaster were flourishing again in time.

Perhaps the true impact of terrorism is psychological — the clue is in the name. A few months after 9/11, a small plane flew into the Pirelli Tower in Milan. The news that this was not a terrorist attack provoked widespread relief. That relief (which I shared) is strange. The Pirelli crash killed three people; knowing that the crash was an accident does not make them any less dead. But it makes their deaths less unsettling.

. . .

There have been attempts to measure the psychological impact of terrorism. One plausible finding, from a team led by psychologist Roxane Cohen Silver, is that 60 per cent of Americans suffered some symptoms of anxiety in the weeks immediately following the 9/11 attacks — but that figure soon ebbed to 30 per cent within two months and 10 per cent within half a year. The attack seems to have had the same effect on the American psyche as it did on the New York economy: a severe but transitory impact.

Despite all the evidence that even the most grotesque acts of terrorism have a transitory effect, it remains a popular tactic. The reason for that is perhaps best summarised in Eric Frank Russell’s 1957 novel, Wasp, about a terrorist. The title refers to the tale of a tiny wasp, armed with a sting it does not even use, causing the deaths of four people. They’re in a car; the driver, agitated by the wasp, crashes and kills them all.

The terrorists’ best hope lies in provoking an overreaction. Too often, they succeed.

Written for and first published at ft.com.

Undercover Economist

When wishful thinking becomes wasteful

‘The simplest explanation for lengthy disputes? That people misperceive their chances of winning’

From a purely rational perspective, costly arguments are puzzling. A divorce case that goes to court, an industrial dispute that leads to a strike, even the extreme case of a war — all these things are, to put it in the mildest possible terms, a waste.

Of course, there will always be conflicts — but logical people should resolve them quickly. Consider a simplified model of this process. Two people, Amy and Ben, are arguing over how to divide a baked Alaska, the centre of which is gradually melting. First Amy makes an offer. Ben may accept it or propose a counter-offer. Amy, in turn, may accept that or make a counter-counter-offer. Each time an offer is rejected, the delicious dessert shrinks by 10 per cent. Amy and Ben have opposing interests because each would prefer to have the entire dessert to eat alone. But they also have one thing that they can agree on: given the situation, both would be wise to shake hands on a deal promptly and start eating.

A similar logic suggests that an industrial dispute should never lead to a strike. Instead, employers and unions should see that a strike will cost them both dearly, and find some way to resolve their differences. Civil litigants should always agree a settlement before having to go through costly legal proceedings. Often, this is what happens — but not always. Why?

Economists have a few ideas. One cynical suggestion is that some people are playing a different game. Perhaps a belligerent politician or union leader would find his or her position strengthened by a strike. A general might desire a war. Lawyers might profit from urging their clients to go to court.

Another possibility is that people need to signal their willingness to fight in battle after battle. Imagine a large company is being sued by a small competitor for some transgression. If it settles out of court, other competitors will scent blood and dart in like piranhas, so it fights a costly case to scare other would-be litigants away.

But the simplest explanation is that people misperceive what is fair and also their chances of winning.

Consider that melting baked Alaska again. The obvious division is a 50/50 split, and in laboratory experiments that is usually what Amy and Ben will agree, and quickly. (The sophisticated equilibrium of this game is not quite 50/50 because Amy has the advantage of moving first, but it’s close.) But what if the disagreement was more complex? For example, what if Amy preferred the meringue topping, which was not melting, and Bob preferred the ice-cream centre, which was? This complication introduces doubt as to what the intuitive split should be. Ben may still see 50/50 as the logical split, while Amy may feel that she is in a stronger position and should get more. Each side may believe that the division that happens to suit them is objectively fairer — a self-serving bias. And indeed, in laboratory experiments players usually fail to reach a swift agreement in such circumstances.

In a more realistic setting, such as an industrial dispute or a legal case, there will typically be several ways of seeing the problem and several different settlements that could be justified as fair. When the disputants fixate on different settlements, agreement may be derailed.

To test this idea, Linda Babcock and George Loewenstein, behavioural economists at Carnegie Mellon University, once asked experimental subjects to ponder the facts of a real tort case from Texas. A motorcyclist had been injured after a collision with a car and sued the driver of that car for $100,000. The subjects were randomly given the role of the motorcyclist or the driver and asked to role-play negotiating a pretrial settlement, to proceed to court if no settlement could be agreed. The experimental pay-offs mimicked the structure of the real case, including a reward for reaching a pretrial deal.

The subjects were also asked to make a guess as to what damages the judge awarded in the real case — with a cash bonus if their guess was accurate. Despite this bonus for accuracy, the “motorcyclists” guessed that the judge had awarded almost $15,000 more than the “drivers” guessed. Their entire view of the case had been biased by their own self-interest. No wonder that plaintiffs and defendants sometimes fail to reach a settlement.

Wasteful conflicts may also occur because of wishful thinking about the outcome. Strikers may assume that an employer will soon cave in to pressure. Litigants may overrate the strength of their case and the competence of their lawyer.

A few years ago, Guy Mayraz, who is now a behavioural economist at the University of Melbourne, conducted a test of wishful thinking. He divided experimental subjects into “farmers”, who benefited from high wheat prices, and “bakers”, who profited when wheat was cheap. Then he showed them historical charts of wheat prices and asked them to make forecasts. Mayraz paid a bonus for accuracy, yet the farmers systematically predicted higher prices than the bakers. This is wishful thinking in its purest form. Whether engaged in a tough negotiation, or simply trying to predict the future, we find it hard to distinguish between what is true, and what we wish was true.

Written for and first publiched at ft.com.

Undercover Economist

The robot takeover: not so fast . . . 

‘It is one thing to imagine such a future . . . It is another to have confidence that it is approaching’

Are we nearing a dramatic moment in economic history? Before humans developed agriculture, the world population — and thus the world economy — doubled in size roughly every 250,000 years. After acquiring the power of agriculture, the world economy doubled in size roughly every 900 years. After the industrial revolution, growth accelerated again, and since the second world war the world economy has been doubling in size roughly every 15 years. These numbers have been collated by Robin Hanson, an economist at George Mason University in Virginia; they are based on educated guesses by various economic historians.

If another step change of a similar scale were to happen, the world economy would double in size between now and Christmas. That is hard to imagine but, before the industrial revolution happened, it too would have been hard to imagine. And a small band of believers, not short on imagination, look forward to an economic “singularity”. Hanson is one of them, and the computer scientist Ray Kurzweil, author of The Singularity Is Near, is perhaps the most famous.

The singularity would be a point at which, rather than humans developing new technologies, the new technologies developed themselves. They would do so at a rate far beyond our comprehension. After the singularity, our civilisation would be in the hands of cyborgs, or brains uploaded into the cloud, or genetically enhanced superbeings, or something else able to make itself smarter at a tremendous rate. The future economy might consist of rapid interactions between artificial intelligences. The idea that it might double in size every few weeks no longer seems quite so unimaginable.

But it is one thing to imagine such a future. It is another thing to have confidence that it is approaching. Many economists point out that productivity growth has been sluggish for a long time, which hardly seems to be a precursor to a transformative economic take-off. Growth in advanced economies, far from accelerating, seems to require extraordinary stimulus to prevent it from stopping altogether. Other economists are more bullish, reminding us of a basic fact about the rapid exponential growth in computing power: if it continues, then by definition growth in the future will dwarf growth in the past.

Recently, the economist William Nordhaus published a research paper that aims to adjudicate on this debate. Nordhaus proposes a series of tests that we could use to spot an imminent singularity, looking for evidence that either the productive forces of the economy, or the goods that we enjoy consuming, are being transformed by computing.

Nordhaus’s first test is on the demand side. Is it likely that singularity-prone products such as games, films and computers will eventually absorb most of our spending?

So far, the answer seems to be no. The proportion of spending on such products is falling because their price is collapsing. If this trend continues, limitless digital goods will be the intricate icing on a stodgy economic cake. Our economy will move at the pace of the slowest sectors, and we will be chained to productivity improvements in mundane products such as food, shelter and transportation. After all, we cannot eat smartphone apps.

Perhaps, instead, computing will revolutionise how we produce these mundane products. An obvious second test, then, is to ask whether US productivity is accelerating. It isn’t.

Other tests look at the importance of investment goods in the economy. If the singularity is approaching, one might expect them to become very cheap and to dominate economic output. Are the average prices of investment goods — which include computers and software but also buildings and machinery — falling relative to wages at an accelerating rate? The answer, again, is no. What about the stock of capital relative to US economic output — is it rapidly rising? No.

So far there is not much sign of a singularity in the data. But a couple of tests do point in that direction. For example, the share of US national income accruing to capital rather than labour is increasing, albeit at a modest pace. That is what one might expect as the robots march into human affairs. And within the capital stock, the share of information assets such as software and intellectual property is increasing, although it is still only 6 or 7 per cent of the total. Nordhaus argues that these two tests suggest a singularity is many decades away; his other tests all point in the wrong direction entirely.

At this point the pro-singularity crowd might complain that conventional economic statistics do a poor job of measuring some of the new products and services. A mobile phone, for example, comes bundled with dozens of free products — a flashlight, satnav, an alarm clock and much more.

All this Nordhaus acknowledges — he is, it so happens, one of the world’s leading authorities on measuring the value of goods that conventional statistics miss. He ponders various back-of-the-envelope measures — for example, the amount of time that people spend consuming digital goods such as email. But none of these efforts suggests anything transformative yet.

Perhaps this is complacency. In the movies, the robot takeover tends to be rather sudden. Perhaps cyborgs have kidnapped the real Nordhaus and are using his name to spread disinformation. It is more likely, though, that the singularity is not near.

Written for and first published at ft.com.

Undercover Economist

The real benefits of migration

‘The supposed costs or benefits of immigration always omit one crucial group: the migrants themselves’

Woman with the guts to tell the truth over migrants,” applauded the Daily Mail. “All the compassion of stage 4 bone cancer,” sneered a columnist in The Guardian. It’s no surprise that when UK home secretary Theresa May gave a speech about migration that was designed to polarise opinion, she succeeded.

Among policy wonks and fact-checkers, one statement in the speech found the spotlight: “The evidence . . . shows that while there are benefits of selective and controlled immigration, at best the net economic and fiscal effect of high immigration is close to zero.” (Translation: immigration costs us nothing but we want to reduce it anyway.)

Is May’s summary of the evidence correct? Probably not, although there is room for reasonable people to disagree. What is clear is that the recent large and uncontrolled rush of working-age immigrants from the European Union has undoubtedly been positive for the public finances, unlike British natives, who have been a huge drain on the public finances for some time.

But there was a far bigger lacuna in May’s speech, and most commentators have missed it: the fact that these supposed costs or benefits always omit one crucial group. That group is the migrants themselves. They prosper hugely from being allowed to migrate yet that prosperity hardly ever figures in debates about immigration.

This is odd. I would not expect schools to fare well on a cost-benefit analysis if we ignored any gains to the under-18s. Nor would hospitals look like a good investment if we counted only the advantages to non-patients. Yet it seems that migration may still be mildly beneficial even after disqualifying any benefit to the people most likely to gain — the migrants. That is remarkable.

Of course, one might make the case that because migrants are foreign nationals, we are entitled to make their welfare a lower priority. My colleague Martin Wolf is one of the few commentators to bother asserting this openly; most simply seem to assume that foreigners count for nothing. In a world where we rightly abhor racial and sexual discrimination, discriminating against people because of their nationality is widely accepted. It is also a legal obligation for UK employers.

The assumption that foreigners don’t count is hard to square with the UK’s foreign aid budget of around £12bn. And as I hinted in last week’s column, being open to migration from poor countries is perhaps the best anti-poverty programme that rich countries can offer. Several economists have estimated the economic impact of radically liberalising immigration rules and allowing anyone to move anywhere — a typical estimate is that the world economy would roughly double in size.

Whether foreigners should count as sentient beings in a British cost-benefit analysis is something I’ll leave to the philosophers. Let’s accept for a moment that they do count, and thus that more open borders would greatly reduce global poverty. Yet an objection immediately arises: the “brain drain”, where the concern is not about migrants arriving in rich countries but about migrants leaving poor ones and denuding them of their skills.

Concerns about a brain drain are not new. In 1972, the Indian economist Jagdish Bhagwati argued for an extra income tax on skilled immigrants in rich countries, levied under the auspices of the UN to compensate the poor countries they had left. Nelson Mandela, the British Medical Association and the Royal College of Nursing have all worried about a brain drain since.

But how real a problem is this brain drain? Michael Clemens of the Center for Global Development argues that there are so many other factors at work in determining a country’s pool of skilled workers that the brain drain hardly comes into it.

“The most important reason that there are few physicians and scientists in Niger and Laos,” writes Clemens, “is that those countries have few physicians and scientists anywhere.” The idea that there is some vast pool of highly-trained Laotian expatriates working in the United States or Europe is, unfortunately, a myth.

Where developing countries do train large numbers of skilled workers — as with the Philippines, a world centre for nursing and midwifery — they also manage to keep a reasonable number of them at home. And those who leave may still be helping their home countries. Migrant remittances to developing countries total almost half a trillion dollars — that is three times as much as is sent in official development assistance. Migrant networks can help make trade flow smoothly too.

Then there is the simple matter of respecting individual liberties. We would not dream of telling young people from Hull that they couldn’t move to London because Hull needs them more. Nor would we insist that the UK’s National Health Service should refrain from recruiting British nurses because those nurses might do more good if they went to work in India. It is unfair to insist that foreigners should obey moral rules that we would find absurd to apply to ourselves.

If we have gained anything from the harrowing images of desperate refugees, it is an appreciation that they are human. Economic migrants are human too. They are not pheasants to poach; nor brains to drain.

Written for and first published at ft.com.

Undercover Economist

Development needed? Just give cash

‘A stack of research papers concludes that an excellent cure for poverty is simply to give poor people money’

Is this the most effective development programme in history?” asks Chris Blattman, a political scientist at Columbia University. He adds, “I think it’s a contender.”

The programme is simple enough to explain: give cash handouts of $50,000 to aspiring Nigerian entrepreneurs. Yes, you read that last sentence correctly — but more about the Nigerian cash drop in due course. It is merely the most eye-catching in a stack of research and policy papers to conclude that an excellent cure for the problem of poverty is simply to give poor people money.

That idea seems almost naive. Instinctively, we tend to feel that victims of famines and earthquakes need food and shelter rather than inedible cash. We may feel, also, that cash will be wasted — stolen, spent on drink, frittered away on treats or siphoned off by grasping relatives. Even if the money is well spent, will it generate self-sustaining economic growth? Yet an increasing number of development policy types are reaching the conclusion that cash beats many of the alternatives.

Ponder the most obvious objection first: that poor people will waste the money. David Evans and Anna Popova of the World Bank surveyed 19 randomised trials across the world studying cash transfers. Not one of them found evidence that spending on alcohol or tobacco had increased by a statistically significant amount. Poor people have better things to do with the money and often spend it well or even invest it successfully.

Blattman and his colleagues conducted what one might regard as a test-to-destruction of the “just give cash” policy. They handed out $200 at a time to homeless thieves and drug dealers in the slums of Liberia as part of a larger randomised trial. One could hardly think of a cash injection more likely to be squandered. And yet, on average, just $8 was spent on drinking or drugs; the rest was spent on rent, food, clothes and “business investments”. The most successful of these was a barrel full of strong drink that was resold by the cupful on the street.

What about the rather different idea of handing out cash in emergency situations — after earthquakes or famines or to refugees? (It is now possible to do this electronically through an ATM card or mobile phone.)

Clearly there will be times when cash is useless because there is nothing to buy. But if refugees have money, entrepreneurs will scramble to solve logistical problems and supply them with things to spend the money on. Except for a few cases, such as vitamins and vaccines, refugees are likely to understand their own needs best.

And while cash can be stolen, it is easier to keep electronic cash transfers secure than to ship food long distances through hostile terrain, with each warlord along the way extracting a cut.

Donor agencies are starting to experiment with cash transfers in humanitarian crises. A commission chaired by Owen Barder of the Center for Global Development recently made its recommendations to the UK’s Department for International Development. The first one: “Give more unconditional cash transfers. The questions should always be asked, ‘Why not cash?’ and ‘If not now, when?’”

So what about those Nigerian entrepreneurs? We already knew that small business grants could have big impacts. A few years ago I reported on an experiment conducted by David McKenzie, Suresh de Mel and Chris Woodruff in Sri Lanka after the catastrophic tsunami of 2004.

They gave out modest grants of around $100 to $200 to business owners, and found that on average these cash injections were invested with very high returns — around 10 per cent a month. But these were tiny one-person businesses.

Now David McKenzie has conducted this Nigerian trial of much larger handouts, with the aim of producing larger businesses with the potential to create jobs. The trial examined a business-plan competition — a policy wonk’s version of Dragons’ Den — that was funded by the Nigerian government and run by the World Bank and the Department for International Development. Several hundred applicants won outright but several hundred more were chosen by lottery from the runners-up. By comparing the lottery winners and the lottery losers, McKenzie could see the impact of the cash grant. It was large: three years on, the lucky winners were almost twice as likely as the losers to be running a business, and three times as likely to be employing more than 10 people. Such employers are exceedingly rare in Nigeria but a third of the lottery winners were among their ranks.

Of course, $50,000 is a lot of money and one might expect it to do some good — but McKenzie estimates that the cost per job created compares very favourably with popular entrepreneurship programmes such as mentoring or training. The truth is that while entrepreneurs in Nigeria and other poor countries are held back by corruption, red tape, poor roads and patchy electricity, they are also constrained by a lack of the funds needed to get their ideas off the ground. That is a solvable problem.

But does McKenzie agree with Blattman that he may have discovered the most effective development programme in history? No, he tells me with a chuckle. The most effective development programme, he says, is to let people move to another country. Now that’s a topic for another day.

Written for and first published at ft.com.

Undercover Economist

Should we trust the young Turkers?

‘MTurk may be something of an unknown quantity but it is more diverse than the traditional study pool’

Everyone knows that Amazon turns industries on their heads, from books and ebooks to cloud computing. But most people do not realise that Amazon is also upending social science research, thanks to a service called Amazon Mechanical Turk — often known as MTurk or Turk.

MTurk is an online labour marketplace, originally designed to recruit people to do small tasks that computers couldn’t manage — for example, training a spam filter by categorising emails, deciding whether a photograph matched its description, transcribing audio recordings or flagging adult content. Thanks to MTurk, an employer can hire freelancers to work cheaply on a wide variety of computerised tasks.

Psychologists, behavioural economists and political scientists have now realised that it is potentially far cheaper to pay MTurk workers — “Turkers” — to answer questionnaires and participate in activities than it is to assemble a bespoke online panel or to conduct the research in a laboratory filled with student participants sitting at computers. For just a few dollars and at very short notice, economists can look at competition and co-operation, psychologists can examine the way memory works and political scientists can investigate how our ideology skews our logic. The opportunities are vast and have been swiftly embraced.

“The majority of papers presented at the conferences I go to now use Turk,” says Dan Goldstein, a cognitive psychologist at Microsoft Research. Goldstein, an academic who has also worked at London Business School and Columbia University, has used MTurk in his own research, for instance, into the impact of distracting online display ads.

This stampede to MTurk has made some researchers uneasy. Dan Kahan of Yale Law School studies “motivated reasoning” — the way our goals or political opinions can influence the way we process conflicting evidence. He has written a number of pieces warning about the careless use of the Amazon Turk platform.

The most obvious objection is that Turkers aren’t representative of any particular population one might wish to examine. As an illustration of this, two political scientists hired more than 500 Turkers to complete a very brief survey on the day of the 2012 US presidential election. (Tellingly, the entire survey cost the researchers just $28 and the results arrived within four hours.) The researchers, Sean Richey and Ben Taylor, found that 73 per cent of their Turkers said they had voted for Barack Obama; 12 per cent had voted for “other” — compared with 1.6 per cent of all voters. Mitt Romney polled vastly worse with the Turkers than the US public as a whole. Relative to the general population, Turkers were also more likely to vote and be young, male, poor but highly educated. Or so they claimed; it is hard to be sure.

Another objection is that Turkers chat with each other on message boards about the work they’re doing. If a piece of research involves some sort of trick question, they may compare answers. If it measures the ability of workers to co-ordinate without communicating, that communication may be happening anyway through back channels. Researchers may pose clever questions designed to measure personality traits or to probe for logical lapses, not realising the Turkers have seen these questions before and yawn when they roll round again.

Kahan wants academic journals to show more scepticism of MTurk research, and to require researchers to justify their methods in some detail. MTurk may be cheap, says Kahan, but sitting at your desk and thinking through a thought experiment is even cheaper. It doesn’t make either method valid.

Other researchers evidently disagree — perhaps because, in a more purely psychological study, what matters is that Turkers are representatives of the human race rather than of a particular rainbow of American political opinion. Many familiar results from psychology have been replicated on MTurk without trouble.

There’s pragmatism at work here too. After all, the traditional piece of psychological research has been conducted on a small number of undergraduates at Ivy League universities. (Historically, such undergraduates were typically white and male, into the bargain.) MTurk may be something of an unknown quantity but it is more diverse than the traditional study pool. Research can be conducted on a much larger group of subjects, and quickly — no more must researchers wait for students to return after the summer break.

For Dan Goldstein, the downsides are manageable and the advantages enormous. The speed of the research means far more rapid progress and, because MTurk is so cheap, much larger samples can be used. He thinks it’s a big improvement on what went before.

“I think it is one of the most important and beneficial innovations in the history of psychology,” he says, before adding the obvious caveat that like any research tool, it must be wielded with skill.

The original Mechanical Turk was an 18th-century chess-playing “robot” that, in reality, concealed a human chess player. There is something of the Wizard of Oz about the idea — and after a few decades of creating wonderment, the Turk was eventually exposed as nothing more than a clever and seductive trick. For Turk-sceptic Dan Kahan, the analogy is delicious. Having been fooled by a Mechanical Turk once, he says, we should be ashamed to be fooled again.

Written for and first pblished at ft.com.

Undercover Economist

Copyrights and wrongs

‘Why don’t we see a more sensible system of copyright? Two words: Mickey Mouse’

“Happy Birthday to You” has long been a focal point for anger about copyright. The publisher Warner/Chappell Music has been making serious money by charging fees to use the song commercially on the stage, in films or on birthday cards. Legal scholar Robert Brauneis estimates those fees at $2m a year. And why not, if it owns the rights?

The trouble is that a US federal judge recently ruled that Warner/Chappell does not own the lyrics to “Happy Birthday to You” — nor the melody, which was penned in 1893 and has been in the public domain for decades.

Activists are delighted at the ruling. A simple song sung by and for children, “Happy Birthday” always seemed a jarring candidate for profiteering. Joel Bakan’s documentary The Corporation (2003) rails against corporate power by showing a child’s birthday party in silence, as though Warner/Chappell was putting the squeeze not only on documentary producers but on the children themselves.

But while the schadenfreude is real, the decision itself changes nothing important. This case was simply a dispute about whether Warner/Chappell owned the copyright at all. It was a murky question for the simple reason that copyright terms are so absurdly long that the relevant facts are poorly documented and many decades old.

The more important question is whether there’s a rational case for any prewar creative work to still be under copyright. The answer is no.

It’s worth remembering the purpose of copyright. Copyright is justifiable because it is very hard to write The Lord of the Rings but easy to copy it once Tolkien has written it. Copyright gives authors and other creators some ability to stop copycats, and thus it gives them an incentive to do the creative work in the first place. The longer intellectual property rights last, the greater that incentive is.

But there is a sharp trade-off here. In a world without copyright, creative works could be widely shared. New ideas could be adapted, remixed and improved. All this ensures a rapid spread of good ideas. The longer copyright lasts, the longer that spread will be delayed.

Because copyright terms are so long, few creative works are in the public domain. Some are — from the works of Shakespeare, Chaucer and Milton, to Victorian pornography or the earlier adventures of Sherlock Holmes. Even work with little commercial value in its original form can have a valuable afterlife as illustration, inspiration, cut-up, mash-up and sample. For example: Alan Moore’s League of Extraordinary Gentlemen pitched Dr Jekyll and Captain Nemo against Moriarty and Fu Manchu. Such remixed creativity is vastly easier when the original material is no longer under copyright.

A recent study commissioned by the UK’s Intellectual Property Office examined the value of the public domain, looking at the popularity of Wikipedia entries or Kickstarter projects that drew on art and writing in the public domain. That value is large and if more recent work entered the public domain, it would be far larger.

So, bearing in mind that this is a pragmatic question, how long should copyright last? The current answer is 70 years after the death of the author — typically about a century. That is absurd.

Most books, films and albums enjoy a brief window of sales. Both author and publisher will have reckoned on making whatever money is to be made within a few years. Some works, of course, are blockbusters that continue to be valuable for decades. In such cases a century of copyright is valuable — yet redundant for the purpose of encouraging innovators. (The cases where works lie undiscovered for decades before finally finding a vast audience are too rare to shape any rational rules on copyright.)

The truth is that 10 years of copyright protection is probably sufficient to justify the time and trouble of producing most creative work — newspapers, films, comic books and music. Thirty years would be more than enough. But we’re moving in the opposite direction, with copyright periodically and retroactively extended — as though Antoine de Saint-Exupéry or James Joyce could ever have been motivated by the anticipation that, long after their deaths, copyright terms would be pushed to yet more ludicrous lengths.

Why don’t we see a more sensible system of copyright? Two words: Mickey Mouse. That is an oversimplification, of course. But the truth is that a very small number of corporations and literary estates have a lot to gain from inordinately long copyright — and since it matters a lot more to them than to the rest of us, they will focus their lobbying efforts and get their way. Mickey Mouse will enter the public domain in 2024 — unless copyright terms are extended yet again. Watch this space.

So, a modest proposal: copyright should last a more-than-generous 30 years, and no longer. The Lord of the Rings would have been in the public domain in 1986, 13 years after Tolkien’s death. He would have been fine and his great trilogy would still have been written. Mickey Mouse would have been in the public domain in 1959. The Undercover Economist, my own first book, which continues to sell nicely enough, would enter the public domain in 2036. (I’d cope.)

A tiny minority of wealthy creators would be somewhat poorer under such a scheme. But our culture would be vastly richer.

Written for and first published at ft.com.

Undercover Economist

Peer-to-peer pressure

‘Are these new players providing a valuable new service or are they merely an arbitrage play?’

Peer-to-peer markets used to be simple: there was eBay. If you had a broken laser pointer you wanted to sell, eBay was the place to find a buyer. Then came the local marketplace Craigslist and, before long, peer-to-peer markets were linking buyers and sellers in every market imaginable: crafts (Etsy); chores (TaskRabbit); transport (Uber); accommodation (Airbnb); consumer loans (Zopa); and even booze (Drizly).

It was exciting, for a while, to realise that you could actually get a car home on a Saturday night in San Francisco, or make money renting out your attic, but the backlash has been simmering for some time. That backlash mixes two complaints, elegantly exemplified when a group of taxicab owners and drivers sued Uber in Atlanta a year ago.

“Uber has been operating in Atlanta with little concern about the safety of their passengers and zero concern for the laws that protect them,” said one of the plaintiffs in a statement to The Atlanta Journal-Constitution. “Our incomes have steadily dropped since Uber started and legally licensed drivers are leaving the business.”

In other words, peer-to-peer services such as Uber are said to be hazardous, and they are also unwelcome competition for incumbents. (Several studies have supported the common-sense conclusion that these new competitors threaten the revenue of existing players.)

These might seem very different issues. It’s one thing to worry about signposting fire exits when you let out a spare room on Airbnb. Protecting the profit margins of fine upstanding local hoteliers is another matter.

Yet the two questions are inevitably tangled up, because both touch on the way incumbents are regulated. One would hope that regulators protect consumers, employees and the public by making it more difficult for drunks and sexual predators to drive cars, for firetraps to host unsuspecting tourists, and for employers to exploit workers. But some regulations seem designed more to protect insiders than to protect consumers.

Consider the New York taxi medallion system: you can’t drive a taxicab without one, and they’ve been million-dollar assets at times, often owned by investors and leased to drivers at a rate of $100 or more a day. New kids Uber and Lyft not only compete for passengers, they compete for drivers too, who may prefer to pay commission to these new players than the flat fee to the medallion owner.

Taxi medallions are a scarce asset created purely by a stroke of the regulator’s pen, and you don’t need to be a hardcore libertarian to conclude that, in this case, the regulator is motivated by protecting the value of this asset. Nor does it take a free-market fundamentalist to believe that if consumers think that taxicabs provide a safer service, they will pay for that safer service.

It may help to approach the debate from a different direction. Are these new players providing a valuable new service or are they merely an arbitrage play, using technology to sidestep taxes that others must pay, and to limbo-dance under regulatory hurdles that rivals must jump?

If the economic value is real, then it is up to the regulators to figure out how to unleash that value rather than trying to legislate it out of existence.

A new study of peer-to-peer markets by economists Liran Einav, Chiara Farronato and Jonathan Levin argues that the economic value is there all right. Peer-to-peer markets make two things possible that were previously hard to imagine.

The first is to make arid markets lush and fertile. The quintessential example is eBay, enabling buyers and sellers of the quirkiest products to find each other and gain by trading. Etsy fits the eBay mould, with sellers who will knit you a cuddly toy designed to resemble a dissected frog, a product that seems unlikely to find a niche on the high street.

The second peer-to-peer trick is to introduce part-timers into the market to meet surges in demand. It’s inefficient to build hotels just to cope with the summer rush, or taxis to cope with New Year’s Eve but, if the demand is there, peer-to-peer markets can pull in a bit of extra supply. As a result, it should be easier to get a cab at 11pm on a Friday, and prices for hotel rooms should be more reasonable during school holidays.

Peer-to-peer markets are well worth having. The challenge for regulators, then, is to catch up. How should Airbnb landlords who let a room for 10 nights a year be placed on a level playing field with regular bed-and-breakfast landlords? Are Uber drivers employees (as a California labour commissioner recently ruled)? Or freelancers using Uber’s software to help them do their jobs (as Uber insists)? Or something else?

James Surowiecki, writing in The New Yorker, recently argued for “something else”, and called for a regulatory overhaul to give “gig-economy workers a better balance of flexibility and security”. That sounds like an admirable aim, although achieving it isn’t straightforward. Giving pensions, vacation rights or unemployment insurance to Uber drivers or TaskRabbit “taskers” would require both clever rules and clever admin systems.

Peer-to-peer markets may once have been simple; now there is more at stake than the occasional broken laser pointer.

Written for and first published at ft.com.

Undercover Economist

What cities tell us about the economy

‘In 1667 the Dutch ceded Manhattan to the British, thinking sugar-rich Suriname was a better bet’

The economic indicators that surround us are familiar, as are the criticisms they attract. The consumer prices index doesn’t fully capture the boon of new products; unemployment figures do not count workers who have given up the job hunt in despair; gross domestic product (GDP) includes bad things if they have a market price, and excludes good things if they don’t.

But there is one fundamental flaw in all these statistics that is rarely discussed: they are almost always applied to countries. It is not impossible to find educated guesses about the GDP of Cambridge, or the inflation rate in Mumbai, and there is nothing conceptually troubling about trying to calculate either. Yet most economic statistics describe the nation state.

This is odd, because the nation state is a political unit, not an economic one. Policy does influence the economy, of course — national authorities can impose a common interest rate, tax rates and regulations. But, as the unorthodox thinker and writer Jane Jacobs used to argue, the natural unit of macroeconomic analysis is not a nation state at all. It is a city and its surrounding region.

Aberdeen, Cardiff, Glasgow and Manchester are subject to some similarities by virtue of their shared participation in something we call “the British economy” but economically they are quite different. Their relative fortunes fluctuate because they are pushed and pulled by different forces.

In her book Cities and the Wealth of Nations , Jacobs zooms in still further, looking at “Shinohata”, a pseudonymous Japanese hamlet a hundred miles north-west of Tokyo. (She relies on a rich description of Shinohata by sociologist Ronald Dore.) Shinohata was initially a subsistence economy, supplemented by woodland foraging and a little silk farming. In the 20th century, the villagers gained some time thanks to improved agricultural techniques, and they used it to produce more silk cocoons. After the war, Tokyo’s expansion pulled Shinohata into its economic orbit. The booming Japanese capital became a market for Shinohata’s fresh fruit and wild oak mushrooms; Tokyo’s government paid for bridges and roads; its capitalists built a factory; its labour market lured young men and women from their village existence. The tale is intricate and unpredictable; Japan’s economic miracle, as recorded in the national statistics, was actually the sum of countless unrecorded stories of local development.

Jacobs is not the only person to argue that economic development may be profitably studied through a magnifying glass. A new research paper from three development economists, William Easterly, Laura Freschi and Steven Pennings, offers “A Long History of a Short Block” — a Shinohata-style tale of the economic development of a single 486ft block of Greene Street, between Houston and Prince Street in downtown Manhattan.

Easterly, a former World Bank researcher, is well known in development circles for his scepticism about how much development can ever be planned, and how much credit political leaders and their expert advisers deserve when things go well.

“Here’s a block where there is no leader; there’s no president or prime minister of this block,” he explained to me. Greene Street, he suggests, offers us a perspective on the more spontaneous, decentralised features of economic development.

Greene Street’s history certainly offers plenty of rapid and surprising changes to observe. The Dutch, who had colonised Manhattan in 1624, decided in 1667 to cede what is now New York to the British, in exchange for guarantees over their possession of what is now Suriname in Latin America. The Dutch thought sugar-rich Suriname was a better bet but New York City’s economy is now more than a hundred times larger than Suriname’s.

In 1850, Greene Street was a prosperous residential district with several households who would be multimillionaires in today’s terms. Two large hotels and a theatre opened nearby, and prostitutes started to move in. By 1870, the middle classes had fled and the block was at the heart of one of New York City’s largest sex-work districts.

In the late 19th century, perhaps because property values in the red-light area were low, entrepreneurs swooped in to build large cast-iron stores and warehouses for the garment trade. Greene Street’s fortunes waned when the industry moved uptown after 1910, and property values collapsed. In the 1940s and 1950s, urban planners suggested bulldozing the lot and starting again but a community campaign — famously involving Jacobs herself — fought them off. Property values were revived as artists colonised Greene Street in the 1950s and 1960s, attracted by the large, airy and cheap spaces. None of these changes could easily have been predicted; some are rather mysterious even in retrospect.

The lessons of Greene Street? Getting the basic infrastructure right — streets, water, sanitation, policing — is a good idea. Aggressive planning, knocking down entire blocks in response to temporary weakness, is probably not. Predicting the process of economic development at a local level is a game for suckers. Most importantly, even a tremendous development success — the United States and, within it, New York City — is going to show some deep wrinkles to those who get in close.

Written for and first published at ft.com.



  • 1 Twitter
  • 2 Flickr
  • 3 RSS
  • 4 YouTube
  • 5 Podcasts
  • 6 Facebook


  • The Undercover Economist Strikes Back
  • Adapt
  • Dear Undercover Economist
  • The Logic of Life
  • The Undercover Economist

Search by Keyword

Subscribe to TimHarford.com

Enter your email address to receive notifications of new articles by email.

Tim’s Tweets

Do NOT follow this link or you will be banned from the site!