Tim Harford The Undercover Economist

Undercover EconomistUndercover Economist

My weekly column in the Financial Times on Saturdays, explaining the economic ideas around us every day. This column was inspired by my book and began in 2005.

Undercover Economist

The topsy turvy logic of Trump’s trade tirades

When the US president attacks Canada’s prime minister as “dishonest and weak”, before staging a love-in with the dictator of North Korea, you know that the journey through the looking glass is complete.

But for economics nerds, the puzzle isn’t that Donald Trump is making concessions to a rogue state while slapping hefty tariffs on the steel and aluminium produced by his allies. It is that the entire debate about trade is upside-down and back-to-front.

Mr Trump complains of “Trade Abuse”, saying that other countries “impose massive Tariffs and Trade Barriers” while “sending their product into our country tax free”. This is narrowly true, broadly false and wholly absurd.

The narrow truth in Mr Trump’s tweet is that there are some unconscionably high tariffs around. Beyond a small quota, Canada’s average tariff on dairy imports is well over 200 per cent. The broad falsehood is the idea that only the US levies low tariffs. American tariffs are indeed low — the World Trade Organisation estimates that its weighted average tariff rate is 2.4 per cent. But at 3.1 per cent, average Canadian tariffs are only slightly higher, as are those of the EU (and therefore France, Germany, Italy and the UK). Japan’s tariffs are lower than the US.

Real obstacles to trade are higher than this, partly because there are regulatory differences that are hard to quantify, and partly because by looking at a weighted average tariff, we put less weight on any trade that has been squeezed by trade barriers. Still, tariffs between rich countries are low and there is nothing obviously unfair about the situation. If Canada’s average tariff of 3.1 per cent is cause for a trade war, it is hard to imagine a victory for either side being anything other than pyrrhic.

Now let us ponder the absurdity, the real topsy-turvy part of the entire argument. Most people — including Mr Trump — intuitively believe that most victims of Canada’s huge dairy tariff are American. They aren’t. They’re Canadian.

Any Canadian who drinks milk or eats cheese pays a higher price because inexpensive dairy imports are being taxed at the border.

And there’s a more subtle cost to Canadians, perhaps best understood by imagining a simplified Canadian economy with only two goods, milk and cars. The more milk these Canadians import, the more cars they will have to export to pay for it. A tariff on dairy imports will have exactly the same effect as a tax on car exports. The economist Abba Lerner proved this in 1936.

In the real world the dairy tariff acts as a tax on Canadian exports of anything from maple syrup to aeroplanes. Intuitively, it seems like an obstacle directed against foreign importers. But it makes just as much sense to see it as the result of an internal power struggle that Canadian dairy farmers have won — and Canadian miners, manufacturers and milkshake drinkers have lost.

The same is true for Mr Trump’s new steel and aluminium tariffs. Ostensibly an attack on perfidious foreigners, the tariffs hurt any American who directly or indirectly uses steel or aluminium, all 327m of them. And by obstructing US imports they obstruct US exports, too.

This simplified analysis leaves out some important facts. It is unclear, however, that the omissions change the argument.

There is the China shock: some US communities were damaged by the inflow of cheap Chinese imports beginning in the late 1990s. The damage was local, but deep and lasting. Still, overall US consumers benefited enormously from these Chinese imports, and in any case it’s hard to blame Canada.

There is the US trade deficit. This is the result of the world’s insatiable desire to invest in US assets, coupled with the American consumer’s preference to spend rather than save. It has little to do with tariffs on milk powder or anything else.

There is a case for “infant industry” protection — using trade barriers to shield a new industry from competition while it finds its feet. The trick is harder than it sounds, and often fails, but some emerging Asian economies have used it to great effect. But what is the infant industry in the US? It is the fading industrial titans, not the infants, that usually manage to lobby for protection.

There is the need for rules to determine what counts as a trade barrier or a subsidy. These rules rely on international institutions and norms. A happy side effect of the institutions is that they help defang lobby groups eager to blame foreigners while picking the pocket of consumers. The US wrote many of these rules. As a lone bully it is just conceivable that it might do better without them, but it is more likely simply to lose less heavily than some.

All these complications are real, but they do not change the fundamental nature of the argument about trade, which was best summarised by the British economist Joan Robinson. In 1937 she pointed out that, except as a narrow negotiating ploy, it made little sense to meet tariffs with tariffs: “It would be just as sensible to drop rocks into our harbours because other nations have rocky coasts.”

 

Written for and first published in the Financial Times on 15 June 2018.

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Football’s minnows demonstrate how poor countries can catch up

Is the rest of the world catching up with the leading countries? That depends. If you are talking about economic productivity, the answer is unclear. If you are talking about football results, that is another story.

Putting aside football for now (it will not be gone for long) let us focus instead on the living standards of everyone on the planet. “Convergence” — the idea that poor countries grow faster than rich ones — is an important idea.

In a very poor country, the return on a few simple investments should be very high. Adding a paved road between two towns makes a bigger difference than adding a new lane to a road that already exists. The same is true for power lines, railways and ports. So capital should flow to poorer countries and they should grow faster than rich countries.

That is the theory, at least, and it seems plausible when one ponders the dazzling growth of postwar Japan and Germany, South Korea in the 1970s and 1980s, China, and oft-overlooked success stories such as Ethiopia.

When poor countries grow quickly, people escape from poverty and global inequality tends to fall. So if convergence was the natural state of affairs it would be good news. Alas, in the words of economist Dani Rodrik: “empirical work has not been kind to this proposition”. The crude historical fact is that the world economy sharply diverged between 1820 and 1990, with today’s rich nations expanding their share of world income from 20 per cent to 70 per cent.

That trend has been sharply reversed since then, says Richard Baldwin, an economist and author of The Great Convergence (UK) (US). But, as Prof Baldwin notes, the catch-up is highly concentrated. Between 1970 and 2010, six major industrialising countries, China, Korea, India, Poland, Indonesia and Thailand, expanded from having close to zero to more than one-quarter of world manufacturing output. The G7 has slipped from two-thirds to 50 per cent. The rest of the world has been treading water.

So economists have largely abandoned the idea of convergence as a universal phenomenon. They speak instead of “conditional convergence”. Convergence will not save Venezuela nor North Korea from catastrophic governments, but it will happen if you get the right combination of policy, institutions and economic pixie dust. Quite what that combination is and why some nations struggle to achieve it remains the trillion-dollar question.

Prof Rodrik has found evidence that unconditional convergence does happen, not for economies as a whole but for specific manufacturing sectors in those economies, such as “macaroni and noodles” or “knitted or crocheted apparel” or “plastic sacks and bags”.

If such a sector is well behind the global cutting edge, it can expect labour productivity to grow by 4-8 per cent a year, enough to double every decade or two. This tendency holds regardless of what else might be happening in the economy. Why?

The likely answer is that such manufacturing sectors get drawn into global supply chains. They can learn quickly, and must do so to respond to the incessant threat of competition. They will be doing business with suppliers and customers who can provide swift feedback and instruction. In the modern global economy, certain kinds of know-how travel fast, small tasks are unbundled, and part-finished goods and components shuttle back and forth across borders. Any enterprise plugged into this process will improve quickly. It may be more closely integrated into global supply chains than its own local economy, which might not keep up.

All of which brings us back to football. Two economists, Melanie Krause and Stefan Szymanski, decided to examine whether the unconditional convergence hypothesis holds for international men’s football, as it does for manufacturing sectors. (Prof Szymanski is the co-author, with the Financial Times’s Simon Kuper, of Soccernomics. (UK) (US)) Football, after all, offers a long data set and some clear measures of performance. International football’s governing body, Fifa, has more members than the UN.

Sure enough, Profs Krause and Szymanski found that the strength of international football teams is converging. The minnows are acquiring bite, and the old cliché, “there are no easy games in international football”, is far truer today than it was in 1950.

Perhaps we should not be surprised. As with manufacturing, the standard of competition is fierce, performance metrics unforgiving, and the very best ideas will be copied. As an additional spur to progress, elite football offers a global labour market: a strong player from a weak national team will spend most of his time at a top club side in the company of world-class dietitians, trainers, and teammates. His home nation will enjoy the benefits.

It is tempting to draw grand conclusions from all this, about the increasing importance of knowledge in globalisation; about the bracing effects of robust international competition; about the benefits of being open to international migrants. But perhaps it is better to just watch the football. In an age of distressing reality-TV politics, here, at least, is a competitive spectacle we can all enjoy.

 

 
Written for and first published in the Financial Times on 22 June 2018.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) are out soon in paperback – feel free to pre-order online or through your local bookshop.

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The progressive case for auctions for everything

Korean pop sensations BTS are coming to London in October, which means the Undercover Economist spent a morning recently with multiple browser tabs open, trying in vain to secure tickets from a variety of websites that were claiming to sell them. Grey-market tickets of unknown provenance are now available at high prices.

The struggle for BTS tickets is hardly unique. The World Cup is coming up, and then there’s Wimbledon, and don’t even get me started on Hamilton.

Economists have had a solution to such frustrations for so long that it is becoming our cliché. The problem is that a limited supply of BTS tickets is priced too cheaply relative to demand. Auctioning off the tickets to the highest bidders would fix that problem, and all but eliminate touts and scalpers: if true BTS fans have already submitted their highest bids in the auction, there is little profit left for re-sellers.

Of course, some people find auctions distasteful, and BTS may not want to be tainted by that. But leaving such qualms aside, the auction design problem itself is more intriguing than it might appear.

What seems at first to be a single commodity — concert tickets — is actually a cluster of related products. Standing, seated, on Wednesday, on Thursday, far back, close up, two tickets for the diehard fans among us or five for the whole family — different combinations of these products might have appealed, depending on their absolute prices and their prices relative to each other. And BTS might have been willing to perform an extra show on the Tuesday, too, if there was enough demand.

Elizabeth Baldwin and Paul Klemperer, economists at Oxford university, have designed auction software that can easily accommodate such complexity. I could have submitted a bid for tickets along the lines of: “Five tickets at up to £50, or two tickets at up to £100, an extra £5 if it’s Thursday rather than Wednesday and up to £20 a head more for the VIP package.”

Looking at hundreds of thousands of such bids, aggregated by a computer, BTS could sell tickets to the keenest bidders, but could also adjust the mix on offer by installing some seats in an area previously reserved for standing, or arranging an extra tour date. It could easily allow favourable terms for fans with proven loyalty.

A more important (and likely) use of such a “product mix” auction would be a treasury raising money from the bond markets. How much money might be borrowed, and at what maturities, would depend on the demand. It is more efficient to combine several separate bond auctions into a single process.

The Bank of England has used “product mix auctions” to inject liquidity into the banking system. They could be used in most situations where a range of similar goods might be bought or sold in different mixes, depending on relative prices.

I confess to having a soft spot for auctions; I wrote a thesis on the subject two decades ago, and Prof Klemperer was my supervisor. But even I hesitate at the radicalism of some economists — such as Eric Posner and Glen Weyl, authors of a new book, Radical Markets. (UK) (US)

One of several eye-catching ideas in the book is, in effect, that everyone’s big possessions — your car, your house — should be up for auction all the time. I would put a price on my car — say, £5,000. It would go into a searchable public register, and if you thought the price was attractive, you could buy it. Having named the price, I would have no right to refuse.

If my car had a sentimental value, I could put a higher price on it to ensure that I kept it. (£5,000 is several times its value already.) But I would hesitate to name a crazy price like £5m, because under Messrs Posner and Weyl’s system, my taxes would be determined by the self-declared value of my assets.

This system has enormous potential — simple, fair, progressive taxes and a more dynamic economy. It would be much easier to develop new infrastructure, build new homes, buy your neighbour’s garden, and pour concrete all over twee villages to build monorails or airport runways.

I once tried to buy a scrap of underused backyard in Hackney. The owner agreed a price, then on reflection, tripled it, and the deal fell through. Neither of us will ever know whether a good trade was scuppered by our posturing.

Under Messrs Posner and Weyl’s system, such questions would not arise: mutually beneficial trades would not be derailed. And compulsory purchase would no longer be a piece of contested bureaucratic coercion: homeowners would name their price (and thus their tax bill) and the developers of Heathrow airport, the Hyperloop, or the latest stunt skyscraper would decide whether or not to pay it.

Not everyone would see these as advantages; I do. But the idea of posting a public selling price for all my property makes even an auction fan like me a little squeamish.

It is not necessary to go so far to ensure a more dynamic economy. Before we consider an auction for villages, kidneys, immigration visas, or my garden shed, I hope that we will at least get round to auctioning off tickets to see BTS.

 

Written for and first published in the Financial Times on 8 June 2018.

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A simple way for computers to improve our economic forecasts

I am not one of those clever people who claims to have seen the 2008 financial crisis coming, but by this time 10 years ago I could see that the fallout was going to be bad. Banking crises are always damaging, and this was a big one. The depth of the recession and the long-lasting hit to productivity came as no surprise to me. I knew it would happen.

Or did I? This is the story I tell myself, but if I am honest I do not really know. I did not keep a diary, and so must rely on my memory — which, it turns out, is not a reliable servant. In 1972, the psychologists Baruch Fischhoff and Ruth Beyth conducted a survey in which they asked for predictions about Richard Nixon’s imminent presidential visit to China and Russia. How likely was it that Nixon and Mao Zedong would meet? What were the chances that the US would grant diplomatic recognition to China?

Professors Fischhoff and Beyth wanted to know how people would later remember their forecasts. Since their subjects had taken the unusual step of writing down a specific probability for each of 15 outcomes, one might have hoped for accuracy. But no — the subjects flattered themselves hopelessly. The Fischhoff-Beyth paper was titled, “I knew it would happen”.

This is a reminder of what a difficult task we face when we try to make big-picture macroeconomic and geopolitical forecasts. To start with, the world is a complicated place, which makes predictions challenging. For many of the subjects that interest us, there is a substantial delay between the forecast and the outcome, and this delayed feedback makes it harder to learn from our successes and failures. Even worse, as Profs Fischhoff and Beyth discovered, we systematically misremember what we once believed. Small wonder that forecasters turn to computers for help.

We have also known for a long time — since work in the 1950s by the late psychologist Paul Meehl — that simple statistical rules often outperform expert intuition. Meehl’s initial work focused on clinical cases — for example, faced with a patient suffering chest pains, could a two or three-point checklist beat the judgment of an expert doctor? The experts did not fare well.

However, Meehl’s rules, like more modern machine learning systems, require data to work. It is all very well for Amazon to forecast what impact a price drop may have on the demand for a book — and some of the most successful hedge funds use algorithmically-driven strategies — but trying to forecast the chance of Italy leaving the eurozone, or Donald Trump’s impeachment, is not as simple. Faced with an unprecedented situation, machines are no better than we are. And they may be worse.

Much of what we know about forecasting in a complex world, we know from the research of the psychologist Philip Tetlock. In the 1980s, Prof Tetlock began to build on the Fischhoff-Beyth research by soliciting specific and often long-term forecasts from a wide variety of forecasters — initially hundreds. The early results, described in Prof Tetlock’s book Expert Political Judgement (UK) (US), were not encouraging. Yet his idea of evaluating large numbers of forecasters over an extended period of time has blossomed, and some successful forecasters have emerged – as described in Tetlock’s later book, Superforecasting (UK) (US).

The latest step in this research is a “Hybrid Forecasting Tournament”, sponsored by the US Intelligence Advanced Research Projects Activity, designed to explore ways in which humans and machine learning systems can co-operate to produce better forecasts. We await the results.

If the computers do produce some insight, it may be because they can tap into data that we could hardly have imagined using before. Satellite imaging can now track the growth of crops or the stockpiling of commodities such as oil. Computers can guess at human sentiment by analysing web searches for terms such as “job seekers allowance”, mentions of “recession” in news stories, and positive emotions in tweets.

And there are stranger correlations, too. A study by economists Kasey Buckles, Daniel Hungerman and Steven Lugauer showed that a few quarters before an economic downturn in the US, the rate of conceptions also falls. Conceptions themselves may be deducible by computers tracking sales of pregnancy tests and folic acid.

Back in 1991, a psychologist named Harold Zullow published research suggesting that the emotional content of songs in the Billboard Hot 100 chart could predict recessions. Hits containing “pessimistic rumination” (“I heard it through the grapevine / Not much longer would you be mine”) tended to predict an economic downturn. His successor is a young economist named Hisam Sabouni, who reckons that a computer-aided analysis of Spotify streaming gives him an edge in forecasting stock market movements and consumer sentiment.

Will any of this prove useful for forecasting significant economic and political events? Perhaps. But for now, here is an easy way to use a computer to help you forecast: open up a spreadsheet, note down what you believe today, and regularly revisit and reflect. The simplest forecasting tip of all is to keep score.

 

 
Written for and first published in the Financial Times on 1 June 2018.

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The best way to solve problems is to wait for a century or two

In 1928, an anonymous donor resolved to clear the UK’s national debt and gave £500,000 with that end in mind. It was a tidy sum — almost £30m at today’s prices — but not nearly enough to pay off the debt. So it sat in trust, accumulating interest, for nearly a century.

The trust now contains £400m, and we have decided we are no longer willing to wait. The British government has gone to court to get the money now, a move that eloquently captures the payday-loan mood it is displaying in its Brexit negotiations. No gain is too small, no price too great, as long as the bill comes later.

What might we achieve if only we were willing to play the truly long game?

That anonymous trust fund suggests an instructive thought experiment. Let us assume that it grows 3 per cent a year faster than the UK economy — not inconsistent with what Thomas Piketty has measured in the long run. At that rate, the trust fund will double as a proportion of gross domestic product every 25 years. In just three centuries, it will have grown 4,000-fold relative to the economy as a whole.

As long as the debt stays roughly in proportion to national income — not an outrageous assumption — then the trust fund would be sufficient to pay off the debt a mere four centuries after the original bequest.

Perhaps that is too optimistic. No matter. If four centuries are not enough, why not five? It is surprising how many problems will simply solve themselves if we wait long enough.

This analysis is glib, I admit. Over such a long time horizon there is always a risk that bad luck strikes and the trust fund is wiped out entirely. If the fund falls to zero at any point, all the compound interest in the world is useless after that.

A wise investor may be able to avoid such an outcome: in 1956, John L Kelly, a mathematician at Bell Labs, derived a formula we now know as the Kelly criterion. It was designed to allow an investor or gambler with a known edge to maximise her compound rate of return, while avoiding the risk of bankruptcy.

Yet even Kelly’s criterion only works if the risks are correctly understood. Kelly himself survived a plane crash as a Navy pilot, only to die of a brain haemorrhage at the age of 41. The world is full of risks. Can anyone guarantee that over the next 300 years both the UK trust fund and country will survive asteroid strikes, thermonuclear war or a deliberately engineered pandemic?

Perhaps we are getting ahead of ourselves. The imminent threat to the trust fund is the British government itself, which has decided that a tiny advantage is worth seizing now, since the costs will fall to someone else. (You may supply your own analogy at this point.) All democratically elected governments struggle to see past the next election, but this one struggles to see past next Tuesday. In fairness, it often feels as if the next election may come sooner than that.

And it is hard to take a truly long-term perspective, whether contemplating the future of human life or the prospect of cheesecake. The Astronomer Royal Sir Martin Rees wrote a book titled Our Final Century, warning of the existential threats arising from complex, interconnected modern systems. The book was renamed Our Final Hour in the US, perhaps because a century seemed like too much time to kill.

Economists and moral philosophers argue among themselves over how to account for the interests of future generations. The answer is far from obvious. It turns out to be crucial in pondering a rational response to slow-burning disasters such as climate change — assuming that anyone cares about a rational response, which seems a forlorn hope.

The Chinese are sometimes admired as fabulously long-term thinkers, although sometimes I wonder whether that is merely the mythologising of westerners. (Zhou Enlai impressed many in 1972 when as Chinese premier he said that it was “too early to tell” about the consequences of the French Revolution. He was under the impression that the question was about the student uprising in Paris in 1968.)

No, those who genuinely show patience are rare. There is Warren Buffett, of course — his favourite holding period, “forever”, has served him well. And the Long Now Foundation, based in San Francisco and founded in the year “01996”, which supports ideas such as a modern Rosetta stone designed to preserve languages through time and ­catastrophe.

I am pleased that a few souls are willing to take the long view. Perhaps the champion is Anders Sandberg, a researcher at Oxford university’s Future of Humanity Institute. Dr Sandberg points out that since computation requires far less energy at ultra-cold temperatures, an advanced civilisation could get much more done with the resources available if it first waited a few trillion years for the entire universe to approach absolute zero.

This resolves the famous Fermi paradox: since the universe is so big, why haven’t aliens appeared from somewhere? The answer: they’re quietly having a trillion-year siesta, waiting for the cool of the twilight of the cosmos.

Written for and first published in the Financial Times on 25 May 2018.

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Bread, Brexit, and the power of the third option

Written for and first published in the Financial Times on 18 May 2018.

Imagine that you sell bread-making machines. Your task is complicated by the fact that most people have only a hazy grasp of what a bread-making machine does, let alone the joys and sorrows of owning one.

Nevertheless, there is a simple trick that will help these machines to fly off your shelves: next to what seems to be a perfectly adequate $150 bread-maker, place a $250 bread-maker with a long list of bewildering extra functions. Customers will think to themselves: “I don’t need all that nonsense. The cheaper, simpler bread maker is the better option.” Some of them will buy it, even though they would not have otherwise.

Itamar Simonson, a marketing professor at Stanford University, attests that the kitchenware company Williams-Sonoma doubled their sales of bread-makers in the early 1990s using this sort of technique. Mr Simonson, along with Amos Tversky, one of the fathers of behavioural economics, demonstrated similar preference reversals in a laboratory setting.

Mr Simonson and Tversky showed that when people are wavering between two options, you can change what they choose by offering a third, unattractive option. A $1,000 camera might seem extravagant unless there’s a $5,000 camera sitting next to it. The grande sized cup at Starbucks seems restrained when put next to the venti, a Brobdingnagian vat of flavoured warm milk.

All this brings us to Brexit. What we voters feel about different flavours of Brexit (hard, soft, train-crash) depends in part on facts, in part on propaganda, and in part on our prejudices. But it also depends on the comparisons that come readily to mind.

That means that the re-appearance of the European Economic Area is an intriguing development in the debate. The House of Lords recently voted to keep the UK in the EEA, and therefore the single market, after leaving the EU. This “Norway option” seems a popular enough plan: a BMG opinion poll in January found 52 per cent of people in favour of staying in the single market, and only 14 per cent of people against. In these polarised times that is as decisive a margin as one might expect for anything. Nevertheless, both prime minister Theresa May and the leader of the opposition, Jeremy Corbyn, have rejected the single market option, making it unlikely.

This might seem illogical. Why not go for a popular compromise that respects both the close vote and the fact that the Leave campaign won the referendum? But, remembering the tale of the bread-maker, it makes perfect sense that Mr Corbyn and Mrs May, both Euro-sceptics, should fear the Norway option being placed in front of voters.

To most voters, the EU is like a bread-maker: we don’t really understand what it does and we don’t know what to think about it. The Norway option clarifies matters in a way that does not help Leavers. It is very much like being in the EU, except just a little bit worse. If it becomes a salient possibility, it makes staying in the EU look rather attractive by comparison.

A hard Brexit will probably go quite badly for the UK, but it does have the merit of being a very different path to remaining in the EU. A Norway-option Brexit might well work out smoothly, but it is almost guaranteed to underperform the option of not leaving at all. No wonder Brexiters — so cavalier about having their cake and eating it before the vote — are now determined to ensure that the Norway option is taboo. They realise that if the British public decides that staying in the single market is a plausible plan, they might eventually reach the conclusion that staying in the EU itself would be even wiser.

This sort of preference reversal can occur in other circumstances, too. A hard Brexit offers temptations to many voters: control over immigration; an independent trade policy; no more membership fees to Brussels. It also offers obvious risks: leaving the largest single market in the world; damage to the political settlement in Northern Ireland; setbacks to scientific and diplomatic collaboration. Staying in the EU merely offers business as usual.

Do we tend to find a mix of stark risks and clear rewards appealing? That depends on whether the costs or the opportunities seem more salient. During the referendum campaign, the opportunities opened by Leavers seemed expansive, while the costs (“lower GDP by 2030!”) were vague and dull. During the negotiation process, it is the opportunities that are starting to seem vague while the costs are becoming vivid, at least to the small number of people who are paying attention.

None of this makes it likely that Brexit will be reversed. The simple fact that Leave won the referendum is likely to be proof against all sorts of psychological subtleties. Yet these seem to be nerve-racking times for the Brexiters.

It was always clear that asking an absurdly simple question about an absurdly complicated decision was unlikely to work out well. There is one ironic consolation: however befuddled our referendum decision might have been, the divided cabinet is now doing its best to make us, the great British public, seem like philosopher kings by comparison.

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Why it’s important to gather the evidence – but easy to forget it even then

Written for and first published in the Financial Times on 11 May 2018.

It is hard to know which is more frustrating: last week’s announcement that over the past nine years, 450,000 British women were accidentally not invited for breast cancer screening; or the widespread indifference of a howling media to the evidence that such screening is of doubtful benefit anyway. Mammograms lengthen the lives of some women and shorten the lives of others: they allow the early detection and treatment of dangerous tumours, but they also produce many false positives, leading to the unnecessary and risky treatment of tumours that would never have caused any problems.

The best evidence we have, after weighing up several high-quality clinical trials, is that the harms and the benefits are finely balanced. When UK women are offered breast screening, they are sent a leaflet explaining the advantages and the risks so that they can make an informed choice. That choice should not have been denied to them by an administrative blunder. Still, we should be grateful that the error did not disrupt cervical cancer screening instead, which has convincingly been shown to save lives.

We should draw two lessons from the affair, beyond the obvious, which is that British institutions need to get a grip. The first lesson is that it pays to collect the best evidence that we can. The second is that having the best evidence is seldom enough.

Still, the evidence is a start. The world is full of sensible-seeming ideas that disappoint — along with some odd-seeming ideas that turn out to work. Among the latter is the idea that lemon juice prevents and cures scurvy, a disease so debilitating that ships could lose half their crews. In 1747, James Lind, a Scottish doctor, conducted one of the most celebrated early clinical trials proving the efficacy of lemon juice. This is not what common sense might have suggested. The mechanism was obscure: a chemical in lemons — later dubbed “vitamin C” — makes the difference between life and death in tiny doses.

Randomised trials have finally become entrenched in medicine as the obvious way to assess what works — as, just as importantly, have reviews that systematically assemble, evaluate and summarise all the available trials in one place. This did not happen easily, since few senior doctors enjoy being embarrassed by an unexpected trial result.

Such trials have also become an important way to assess ideas in education, criminal justice and economic development. Their use is far more patchy and more controversial but is still yielding dividends.

A new book, Randomistas (UK) (US), by Andrew Leigh, an Australian economist turned politician, gives plenty of examples. One — notorious in geek circles — is “Scared Straight”, a programme designed to deter juvenile offenders by taking them to prison to be bullied in short bursts by terrifying inmates. Scared Straight was so fashionable in the late 1970s that a documentary film about the policy won an Oscar; randomised trials showed it to be counterproductive.

That is often the way. Three decades ago the sociologist Peter Rossi quipped that the more rigorously a social programme evaluation was designed, the more likely it was to show a net benefit of zero. Unfortunately, Mr Rossi may well have been right — but showing which ideas do not work is one of the most important roles of high quality trials.

And not every idea fails. While the evaluations of Scared Straight showed that it made matters worse, a randomised trial of police protocols for domestic violence in Minneapolis in 1981 demonstrated that the police needed to be tougher on domestic abusers, arresting them rather than having a quiet word, if they wanted to prevent future assaults.

Randomised trials of cash transfers to entrepreneurs in developing countries have shown some excellent results, including a spectacular trial in which some Nigerian entrepreneurs with high-quality business plans were randomly chosen to receive $50,000 to realise their ideas.

This research is useless, however, if the people making the decisions are not aware of it. The academic’s cliché, “more research is needed”, is not necessarily true. Often all the necessary research has been done, but it has not been assembled and systematically reviewed. Or — as in the case of breast screening — it has been systematically reviewed, but not enough people have noticed.

Lind’s trial of lemon juice is instructive here. As early as 1601, James Lancaster of the East India Company had demonstrated in an informal trial that lemon juice was proof against scurvy. It took two centuries for the Royal Navy to make it part of sailors’ rations — and longer still for other navies to catch on. Yet as voyages grew shorter, and still lacking a convincing theory for why lemon juice vanquished scurvy, we simply forgot. In 1911, 300 years after Lancaster’s demonstration, Robert Scott’s expedition to the South Pole — including a Royal Navy surgeon — did not know how to prevent scurvy. They suffered grievously as a result. Knowledge can be gained; it can also be ignored, or forgotten.

 

My book “Messy: How To Be Creative and Resilient in a Tidy-Minded World” is now available in paperback both in the US and the UK – or through your local bookshop.

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Undercover Economist

Cheap innovations are often better than magical ones

Written for and first published in the Financial Times on 4 May 2018

If you type “technology indis…” into Google, you are instantly directed to a webpage discussing Arthur C Clarke’s third law: “any sufficiently advanced technology is indistinguishable from magic”. The science fiction writer’s aphorism was published in 1962, at a time when a demonstration of Google’s autocompleting search engine would indeed have seemed like sorcery.

There are plenty of other examples: electricity, the aeroplane and the telephone would all have seemed miraculous and inexplicable to earlier generations. Each of them exemplified what a technological breakthrough is supposed to look like, deservedly winning attention as they appeared.

We need to be careful, however, not to overlook much simpler technological advances. The lightbulb is a safer and more controllable source of artificial light than the candle or the oil lamp, but what really makes it transformative is its price — the cost of illumination has fallen approximately 400-fold in the past two centuries.

Supercomputers and space travel get all the press. Merely being cheap doesn’t. But being cheap can change the world. Consider barbed wire (cheap fencing), the shipping container (cheap logistics), or the digital spreadsheet (cheap arithmetic). Ikea gave us cheap furniture, and the same principles of simple modular assembly are giving us cheaper solar panels, too.

My favourite example is paper: the Gutenberg press radically reduced the cost of producing writing, but it was of little use without an accompanying fall in the cost of a writing surface. Compared to papyrus, parchment or silk, one of paper’s most important properties was that it cost very little.

With all this in mind, what are today’s technological advances that we may be overlooking or misunderstanding because they are cheap rather than magical? The obvious answer: sensors. We are surrounded by inexpensive sensors — in our phones, increasingly in our cars — continually taking in information about the world.

A new book suggests a different, albeit related, answer. Prediction Machines (UK) (US) by Ajay Agrawal, Joshua Gans and Avi Goldfarb argues that we’re starting to enjoy the benefits of a new, low-cost service: predictions. Much of what we call “artificial intelligence”, say the authors, is best understood as a dirt-cheap prediction.

Predictions are everywhere. Google predicts that when I type “technology indis…” I am looking for information about Clarke’s third law; Amazon makes a prediction about what I might buy next, given what I have bought already, or searched for, or placed on my wishlist. A prediction may literally be a forecast about the future, or more generally it may be an attempt to fill in some blanks on the basis of limited information.

Not all such predictions are very good, but not all of them need to be. The tiny keyboards on our smartphones turn out to be quite serviceable when combined with modestly accurate predictions — from suggesting an entire one-phrase email reply (“I agree with you”) to subtly expanding the “H” and shrinking the surrounding keys on a touchscreen if the phone thinks that “H” is the more likely target for a fat-thumbed typist.

Errors in predictive text tend to be trivial and easy to correct, so a high error rate does not matter much. Clumsy text predictors can be released into the world so that they may learn. A high error rate in a self-driving car is not so easy to forgive.

As Mr Agrawal and colleagues point out, sufficiently accurate predictions allow radically different business models. If a supermarket becomes good enough at predicting what I want to buy — perhaps conspiring with my fridge — then it can start shipping things to me without my asking, taking the bet that I will be pleased to see most of them when they arrive.

Since good predictions reduce uncertainty, we may also see less demand for things that help us deal with uncertainty. If that conspiratorial fridge can arrange just-in-time delivery of meal ingredients by predicting my requirements, it can be much smaller as a result.

Another example is the airport lounge, a place designed to help busy people deal with the fact that in an uncertain world it is sensible to set off early for the airport. Route-planners, flight-trackers and other cheap prediction algorithms may allow many more people to trim their margin for error, arriving at the last moment and skipping the lounge.

Then there is health insurance; if a computer becomes able to predict with high accuracy whether you will or will not get cancer, then it is not clear that there is enough uncertainty left to insure.

All this seems a useful way to look at the fast-changing world of machine learning — more useful than pondering Clarke’s most famous creation, the murderous computer HAL 9000. Some automated predictions are already marvellously good, but many are changing the world not because they are omniscient, but because they’re good enough — and cheap.

 

More on all this in my recent book, “Fifty Things That Made The Modern Economy” – now out! Grab yourself a copy in the US (slightly different title) or in the UK or through your local bookshop.

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Undercover Economist

How much would I have to pay you to quit Facebook?

Written for and first published in the Financial Times on 27 April 2018.

How much would I have to pay you to give up Facebook? What about email? Or access to search engines? I found myself asking these questions of myself during my recent trip to China, where several familiar services are blocked. But the answers to those questions have a lot to teach us, both about how the economy is doing and about how we might regulate these new digital services.

A new research paper from three economists — Erik Brynjolfsson, Felix Eggers and Avinash Gannamaneni — attempts to measure exactly what services such as Facebook are worth to us. They offered various experimental subjects (adult US residents) the possibility of a cash payment if they quit the social media network for a month, observing which offers were rejected or accepted.

Twenty per cent of the site’s users were willing to quit for as little as a dollar; raise the monthly price to $48 (in 2016) or $38 (in 2017) and half of Facebook’s US users would happily jump ship. No robust data are yet available to show us how the Cambridge Analytica scandal has changed our preferences.

Mr Brynjolfsson and his colleagues used a more informal survey to estimate the value for other services. Their rough-and-ready conclusion is that the typical person would have to be paid about $17,500 a year to do without internet search engines, $8,500 to abandon email and $3,500 to quit using digital maps. Video streaming through sites such as Netflix and YouTube is worth over $1,150 a year; ecommerce $850, and social media just over $300. These numbers vary quite a bit depending on the survey method, but the overall ordering doesn’t change much.

My own experience in China echoed these rankings: it was annoying to lose Google Maps, and it felt essential to replace Gmail and Google search with alternatives (fortunately such alternatives are readily available). There was no alternative to Twitter and Facebook — not unless I fancied rebuilding my social network from scratch — but neither did I mourn their loss. Quitting Twitter for a fortnight felt like quitting alcohol for January. And I didn’t miss Facebook for a second.

The first lesson from this research is that some of these new digital goods have a huge and unmeasured benefit to consumers — “consumer surplus”, in the lingo. This is not entirely news: the economist William Nordhaus has estimated that during the second half of the 20th century, innovative companies generally managed to capture as profits just 3.7 per cent of the social value they created; the other 96.3 per cent went to others, largely consumers.

For example, penicillin saves lives for pennies. Another example: the indoor lavatory. Messrs Brynjolfsson, Eggers and Gannamaneni found that indoor toilets were valued much more highly than any internet service. Lavatories are not expensive, so they produce a huge consumer surplus.

Still, many digital goods are free — and if internet search really is worth $17,500 per person each year, that is equivalent to one-third of US gross domestic product. So perhaps unmeasured consumer surplus is larger than in the past — that, says Mr Gannamaneni, “is still an open question”.

But there is a second important lesson here. Access to email seems to be worth almost 30 times more than access to social media; a good search engine is worth twice as much again. Yet the key suppliers of email and search — Alphabet, Apple and Microsoft — are not worth 50 times more than Facebook, which dominates social media through its own site and its subsidiaries Instagram, Messenger and WhatsApp. If they were, they would be $20tn companies.

In other words, Facebook is more effective at turning consumer surplus into profit. This is no surprise, since all your friends are on Facebook. The only serious alternative is not to use social media at all. By contrast, it is easy to find an alternative email provider.

We urgently need a way to turn social media into something more like email — a portable profile that can be taken seamlessly from one provider to another, just as we can take our phone numbers with us from network to network, and dial any other number in the world.

Various proposals now exist: web pioneer Tim Berners-Lee is pushing a system called “Solid”, which enables web users to control their own data and release it to digital services on a need-to-know basis. The Italian MP and tech entrepreneur Stefano Quintarelli has been trying to introduce enabling legislation in Italy.

One final lesson emerges from another research paper — from the economists Susan Athey, Christian Catalini, and Catherine Tucker. Ms Athey and her colleagues asked what value MIT students place on their own private data, and the data of friends. The answer was nothing terribly coherent: students would make very different choices in response to small nudges, and would gladly hand over private data in exchange for a pizza.

The value we place on services such as email and search is clear. The value we place on our own privacy is not. The current mess is hardly a surprise.

 

My book “Messy: How To Be Creative and Resilient in a Tidy-Minded World” is now available in paperback both in the US and the UK – or through your local bookshop.

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The world is not as gloomy, or wonderful, as you may think

Written for and first published in the Financial Times on 20 April 2018.

Is the glass half full, half empty, or laced with cyanide? Last week I wrote about “statistics, fast and slow” — the gap between the world as we intuitively perceive it, and the world as described in spreadsheets. Nowhere is this gap more obvious than when we are invited to reflect on whether things are going well, or badly.

With some telling exceptions, the situation is this: the world is getting better in many of the ways that matter, but we simply don’t realise that this is true. Population growth has slowed dramatically. Most of the world’s children have been vaccinated against at least one disease. Girls are rapidly catching up with boys in their access to education. The world is full of flaws, but progress is not only possible — it is happening.

A new book, Factfulness (UK) (US), by Anna Rosling Rönnlund, Ola Rosling and the late Hans Rosling, describes this knowledge gap, which is at times grotesque: two-thirds of US citizens believe the global proportion of people living in extreme poverty has doubled in the past couple of decades; it has halved. As Hans Rosling used to say, we don’t become this ignorant by accident.

Nor are our misperceptions limited to global development. Surveys by the polling company Ipsos Mori show that citizens of the developed world are also ignorant about our own countries. Most people vastly overestimate the prevalence of crime (which in the UK is dramatically down since the 1990s) and teenage pregnancy (which affects fewer than 1 per cent of 13-15 year old girls). We also seriously overestimate the size of the Muslim population in the west, which suggests that the concerns of tabloid newspapers loom large in our imaginations.

This is not just a statistical phenomenon — it’s a political and psychological puzzle. How worried should we be about unemployment, vandalism, immigration, litter, bad hospitals, or drug dealing? There is no objective answer, but there is a strong tendency for people to be concerned about these issues for their nation, but more relaxed about their local area. We don’t see a serious problem where we live, but we feel strongly that trouble is all around us, just over the horizon. The economist Max Roser — creator of Our World in Data — calls this “local optimism and national pessimism”.

The mismatch is particularly stark when people are asked about their own happiness. Almost all of us are reasonably content: in the UK, 92 per cent of us are “rather happy” or “very happy” with our lives. But we believe that fewer than half of our fellow citizens are in the same cheery situation. The UK is typical in this respect: full of happy people who believe they are surrounded by misery.

This generalised pessimism seems powerful. The one global question that people reliably get right, despite ferocious misinformation campaigns, is the one where the news is bad: do climate experts believe the planet will get warmer over the next century?

So it would be tempting to conclude that we are all systematically too pessimistic about everything except our own experience. That is not quite true. The FT’s chart doctor, Alan Smith, tells me that Saudi Arabians are far too sanguine about the prevalence of obesity: they think a quarter of the nation is overweight or obese, but the true figure is closer to three-quarters. Most people in most countries also underestimate wealth inequality; it’s worse than we think, although, here, the UK is an exception to this belief.

The optimists are not right about everything. Angus Deaton, Nobel laureate in economics, has found that we are too optimistic about our own futures: almost everywhere, people tend to feel that they will be living a strikingly better life in five years’ time. We are doomed to disappointment. Life satisfaction is already high, does not tend to move much, and if anything tends to fall as mid-life approaches.

This misplaced optimism about ourselves is a striking contrast to an equally misplaced despair about our children: across Europe and North America, according to the Pew Research Center, twice as many people believe their children will be worse off financially than they are, rather than better off. Given the past decade of recession and slow recovery, that is not impossible. But economies do tend to grow over the long term, so it is a remarkably grim forecast.

What should we conclude from all this? One plausible hypothesis is that we form many of our impressions about the world from the priorities of the mass media. That would explain why we are pessimistic about most things, but not about obesity, since television loves skinny people.

A second conclusion is that many of us — citizens, the media and mainstream politicians — need to take more interest in the way the world really is. I hardly need to list the political movements that have travelled from the lunatic fringe to positions of power by reinforcing people’s worst fears. But when your policy platform is built on misperceptions, little good is likely to come of it. Optimism and pessimism both have their merits, but right now the world needs a dose of realism.

My book “Messy: How To Be Creative and Resilient in a Tidy-Minded World” is now available in paperback both in the US and the UK – or through your local bookshop.

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