Tim Harford The Undercover Economist

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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

Why going on holiday gives us more memories

Lucky me. I’ve just returned from a family holiday in that most exotic of countries, Japan. So many fresh sights and strange tastes: from flower gardens, temples and communal baths to robots, bullet trains and the Kawaii Monster Café. Although we were there barely more than a week, it’s hard to believe we packed so much in.

While on an adventurous holiday, many people experience that strange sense of time having slowed down in the most pleasurable way, and of conversations that begin, “Was it really only yesterday that we . . . ?”

Ten days in a far-off land produces a richer treasury of detailed memories than 10 weeks back home. But what is behind this phenomenon? And does it teach us something about living a full life?

One answer comes from Claude Shannon, a titan of computer science still under-appreciated outside his field. In 1948, Shannon published one of his two profound contributions, A Mathematical Theory of Communication.

One of the implications of Shannon’s theory is that a message can be compressed to the extent that it is predictable. Anyone who has played the guessing game of Hangman knows that once a few letters are in place, the remainder are usually easy to guess. Similarly: sntnces wth vwls rmvd sty cmprhsbl. Ritualised conversations (“How are you?” “Very well, thank you. How are you?”) can be heavily compressed; poetry, perhaps, less so.

A movie can be compressed because, between cuts, each frame tends to resemble the previous one. A compression algorithm can start with the first frame after the cut and store a series of “diffs” — changes from the previous frame. The faster and more dramatic the movement or transitions, the harder a video is to compress, because the diffs are almost as big as the original frames.

Although the parallel is not exact, much the same thing seems to be going on with our memories of life. The brain is not a video recorder; we recall the gist. Sometimes the gist is very brief. If I get up in the morning at the usual time, eat my customary breakfast and catch my usual train to the office, why should my brain trouble itself to remember this day two weeks after the fact? The diffs are barely worth bothering with. In contrast, fresh experiences defy compression: the diffs are too big.

We could expand this idea to other aspects of life, maximising information content by keeping things unpredictable. Brian Christian, author of The Most Human Human, a book about conversations between humans and computers, speculates that if we’re seeking advice we should ask the person of whose answer we are least certain. If we want to understand a person, we should ask them the question to which we are least sure of their answer.

Perhaps the best newspaper columnist is the one whose columns are the least predictable? That may be going too far: too much novelty is exhausting, and we need an anchor for our expectations. But I well recall a friend saying that her favourite newspaper pandered to her preconceptions so much she didn’t really need to bother reading it; she could just think hard about everything she already held true. We scribblers should hope to do better.

One would not want a life of endless novelty, if only because that would mean a procession of superficial impressions and comparisons. Static, surprisingly, is impossible to compress without losing information, because its randomness makes prediction or interpolation impossible. Yet static is also meaningless. Too many random novelties, too fast, produces a lived experience not unlike static.

One of the virtues of experience is that it can attune us to subtle details and deep connections: “a world in a grain of sand, and a heaven in a wild flower”. (It may also allow us to draw out meaning from a brief allusion to a larger body of work.) But if repeated experience becomes humdrum, and we do not look for the depths, our days will be thin and forgettable.

So if you want a full life, rich with memories, keep searching for new experiences. That is far easier for the young than the old, but it should be possible for anyone. Surprising conversations are always there for the having and, while a holiday on the other side of the world is a costly (if reliable) source of vivid experiences, novelty is affordable for almost anyone in the form of new music, books, even walking an unfamiliar path through your own home town. It is always worth seeking out whatever is excellent — but for vivid memories, the same old excellence is not quite enough. Freshness matters, too.

I suspect that we all know this, yet we fall back on familiar routines. I often eat the same lunch in the same lunch spot, have a favourite library desk, and enjoy particular genres of film and book. In the moment, these habits are convenient and comforting. In the future, they will result in a life more easily compressed in the memory.

In Japan, it was hard to avoid eye-opening sights and attention-grabbing situations. Now I’m resolved to seek out the new and challenging in the UK, just as we did when far from home.

 

 

 
Written for and first published in the Financial Times on 26 April 2019.

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Is Thanos a good model for economists? On balance, no

In a few days’ time, Avengers: Endgame will hit the cinemas, and the universe’s mightiest heroes will resume their battle against the supervillain Thanos. Thanos fascinates me not only because he’s the best bad guy since Darth Vader — but because the muscular utilitarian is an economist on steroids.

Thanos’s claim to the economists’ hall of fame lies in his interest in scarce resources, his faith in the power of logical analysis, and a strong commitment to policy action — specifically, to eliminate half of all life in the universe, chosen at random. He collects some magical bling enabling him to do this with a snap of his fingers.

“It’s a simple calculus,” he explains. “This universe is finite, its resources, finite . . . if life is left unchecked, life will cease to exist. It needs correcting.”

I think it’s fair to say that since Thanos first took centre stage in Avengers: Infinity War, he has become the most popular economist around. People love his logic and his utilitarian commitment to maximising happiness. Many were delighted that Thanos succeeded. They accepted his argument that the alternative to the swift, dispassionate and fair-minded elimination of half the universe was the slow and choking death-by-overpopulation of everybody. A discussion board on Reddit, “Thanos Did Nothing Wrong”, acquired hundreds of thousands of members before beginning a mass purge of half of them — randomly chosen, of course.

It seems unlikely that Thanos has ever heard of Robert Malthus, but one suspects his scriptwriters have. Malthus was an English clergyman and economist who published, in 1798, an argument observing that exponential population growth could far outstrip any linear improvement in food production.

Malthus’s “simple calculus” works the same way as that of Thanos, but Malthus was not a believer in catastrophe. While Thanos claims the universe is out of balance, Malthus thought that population was tragically self-balancing, thanks to “a strong and constantly operating check on population from the difficulty of subsistence”. Whenever living standards looked like improving, he argued, population would increase to consume the spare resources, and everyone would be back at subsistence levels once again. Thanos predicts that overpopulation would lead to catastrophe, while Malthus saw population growth as a reliable source of everyday misery.

The two men also differ in their policy recommendations. While Thanos kills trillions, Malthus baulked at the sin of birth control. Yet I feel that Thanos offers us a cautionary tale. His tragedy is that he hasn’t fully thought through the likely consequences of his favoured policy.

Thanos, observing that there were too many people, decided to kill half of them. But this is curiously short-sighted for a man regarded by many as a policy prophet. Any exponential population growth process will soon replace the lost people: that is why exponential growth is such a headache in the first place. For example, if an economy’s resource footprint grows exponentially at a rate of 7 per cent, it doubles in just ten years — meaning that in less time than has elapsed since the first Iron Man movie, we could be back where we started.

The only lasting solution is an economy that uses resources at a sustainable rate. Malthus’s qualms notwithstanding, contraception has been a very good start. The world population growth rate is steadily approaching a very sustainable-sounding zero.

Thanos has convinced himself that’s he’s seen something nobody else can quite understand. The truth is that he sorely needs peer review. Like many powerful people, he regards himself as above his critics, not to mention every sapient being in the universe. He views humans less as free-willed agents capable of solving their own problems, and more like overbreeding rabbits, needing a cull for their own good.

We puny economists lack the snapocalyptic power of Thanos, but some of us share his lack of humility. A friend of mine once invented a Thanos-esque supervillain called “Socio-economist Man” (definitely a man) who would deliberately cause traffic jams, provoke accidents or even plant deadly bombs, because he calculated that the indirect consequences of these actions would promote the greatest happiness of the greatest number.

Not every social scientist has such ruthless confidence in their models. At best, we’ve learned that the economy is a complicated system and unintended consequences abound. But once the data are gathered and the graphs plotted, it can be all too easy to convince ourselves that we understand the system well enough to improve it with drastic changes. We don’t.

The best economist, then, recognises the importance of scarcity and of painful trade-offs, like Thanos. But unlike Thanos, she doesn’t treat everyone as pawns on a chessboard and instead seeks out constructive criticism and advocates gradual action, avoiding irreversible moves. The snapocalypse, by contrast, is not gradual. Neither is it reversible — unless the Avengers have anything to do with it.

 

Written for and first published in the Financial Times on 19 April 2019.

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Why the world needs a carbon tax

You can’t please everyone, it seems. Royal Dutch Shell has announced plans to plant trees in order to absorb some of the carbon dioxide produced when we burn the fossil fuels it sells. What’s more, it plans to invite motorists to chip in at the pump by buying “carbon offsets”: a clever way to help the planet, raise cash, and spread the blame around. Environmental campaigners are sceptical. So am I.

I admit an interest here. I once worked for Shell (with the love-hate relationship that might imply), met my wife at Shell, and have occasionally been paid to return to Shell and dispense pearls of wisdom. Yet, despite a grudging affection for Big Oil that very few people share, I think climate change is far too important a challenge to entrust to oil companies.

The issue is not whether they have benevolent intentions. (I assume Shell’s motives are mixed. Whose aren’t?) It’s that the dramatic reduction in carbon emissions we need isn’t something that is within an oil company’s gift. We’re all involved. If you drive a conventional car, use a gas cooker or boiler, or — green tariff or no — are plugged into a national electricity grid, then you, like me, are part of the problem.

Our instinctive reaction is to guilt-trip each other and big companies into doing something. That is understandable, but falls short. Guilt is too feeble a tool and it is often applied in the wrong place.

Our intuitions about how our daily activities warm the planet are unreliable. Which breakfast contributes most to greenhouse gas emissions: fresh berries flown in from Kenya, toast browned in a toaster powered by coal-fired electricity, or cereal drenched in milk from methane-belching cows? Even if you know the right answer, it’s absurd to expect many others to know — and even more absurd to expect enough of them to care. Voluntarism is not enough to solve climate change.

One response, then, is to demand an ambitious programme of government investment and regulation — the most prominent of which is the Green New Deal, advanced in the US by Ed Markey and Alexandria Ocasio-Cortez, two prominent Democrats. The exciting thing about the Green New Deal is that it has serious political momentum focused at addressing climate change. Yet this momentum has come at a price. The details have deliberately been left vague, and grand aims often win more support than hard practicalities. (See also: Brexit.)

The Green New Deal is also expansive. The resolution not only wants to act against climate change, but to “promote justice and equity . . . repairing historic oppression of indigenous peoples, communities of colour, migrant communities, deindustrialised communities” and many others. Worthy goals these may be, but in mobilising the US government to take action on every imaginable progressive goal, the whole project may become derailed by its own utopianism.

The other risk of a huge centrally planned response to climate change is that of a huge centrally planned response to anything: clumsy megaprojects chosen for their political or bureaucratic acceptability rather than because they deliver the biggest results for the lowest cost.

A planned response to climate change isn’t hopeless, because there are some obvious big wins — tightening rules on the energy efficiency of new buildings, and replacing coal-fired power with renewable alternatives. Yet the best case for the Green New Deal is that even a clumsy response may still be better than none at all.

But there is a better way: a carbon tax (or its close sibling, a carbon permit auction). A broad-based tax on carbon dioxide and other greenhouse gases would be far less expensive than a Green New Deal is likely to be, yet it could motivate action on a scale that is both grander and more precise. Every part of the economy and each decision we make would be shaped by such a tax. A carbon tax would pull billions of different levers in an economy that is both complex and saturated in fossil fuels.

Each one of the billions of different products on sale can be designed, produced, transported and consumed in a way that might increase or reduce carbon emissions. A carbon tax nudges the energy mix to shift in favour of renewables, but also pushes fossil fuels from coal towards gas. It encourages efficiency in the design of cars, homes, any light bulb or any motor, but it also rewards frugality. A lump-sum subsidy can encourage the uptake of electric cars — but a carbon tax will also reward those who cycle instead of driving. Our modern economy reflects countless choices, made by billions of people all over the world. A broad-based carbon price influences them all. Nothing else can.

I fear that, like Buridan’s Ass, the American political system may continue to do nothing rather than choose between different plans for dealing with climate change. I would rather a Green New Deal than inaction, and a carbon tax alone is not the ideal response. But such a tax is the long-overdue, all-embracing response to climate change that America, and the world, badly needs. Everyone who cares about climate change should be advocating for it.

Written for and first published in the Financial Times on 12 April 2019.

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Counting the economic cost and the economic causes of Brexit

“The economy, stupid.” Pinned to the wall, this motto famously reminded Bill Clinton’s campaign staff to stay on message as he ran for the US presidency in 1992. Somebody may want to pin it up in the UK Conservative party’s headquarters, because the party has instead managed to involve the entire country in its bitter little civil war over Europe. But economies can survive some rough handling by politicians. Amid the Westminster turmoil, how is the UK economy doing?

The stiff-upper-lip response is that it’s fine. There were some grim forecasts of the short-term impact of a referendum vote to leave the EU, most prominently a shock scenario presented by the Treasury under George Osborne, and they did not come to pass. The UK economy sailed through the surprise result, demonstrating that Project Fear was nothing more than scaremongering — right?

The truth is not so rosy. As independent experts predicted, the economy has been disappointing since the vote to leave. By “disappointing” I mean relative to pre-referendum forecasts that assumed a vote to remain, relative to other leading economies, to “what-if?” models, and to historical trends.

Alone, each of these comparisons is open to question. Put them all together and they start to look persuasive to anyone with an open mind. The unpredictable Brexit process has created enormous ambiguity for any business dependent on investment or trade across borders, and knock-on uncertainty for other businesses that work with them.

One index of UK policy-related economic uncertainty has a baseline of 100. It hit 500 after the referendum and has exceeded 300 again this year. But we don’t need an index to tell us that the outlook is unclear. This lack of clarity matters. Some businesses are delaying investments while they wait for the fog to lift. Others are choosing countries where things seem more predictable.

Further trouble awaits. Agreeing a variant of prime minister Theresa May’s deal now would resolve uncertainty at the cost of isolating the UK’s service economy from the single market; a long delay offers the hope of stronger connections with the huge European economy, but prolongs the confusion; leaving without a deal would not only cause short-term disruption, it would restart the interminable process of negotiation as we try to figure out the ground rules on pretty much everything.

Yet, like Boris Johnson when foreign secretary, one might simply declare: “f**k business”. Who cares about disloyal corporations when our concern is with ordinary, hardworking citizens? The trouble is that while UK residents are indeed hardworking — the employment rate and the unemployment rate are both breaking the right kind of records — they are not seeing much income in return for their hard work.

As the Resolution Foundation think-tank concluded in February, Brexit has hit living standards even harder than it has hit growth. Annual household labour income has been falling for two years and is around £1,500 lower than it was projected to be before the referendum. (Memorious readers will recall that during the referendum campaign the Treasury predicted that a vote for Brexit would lower household incomes by £4,300 a year by 2030. In this respect, at least, Brexit is slightly ahead of schedule.) Not all the disappointment can be attributed to Brexit, but much of it has been caused by higher inflation as a result of the Brexit-induced drop in the value of the pound.

We should remember that all of this occurred while the international economy has been buoyant. The consensus now is that the world is due some sort of slowdown. That isn’t going to help, except perhaps to make the UK look a little better by comparison. Alas “better by comparison” does not pay the bills.

Of course, the news hasn’t all been bad. The UK’s jobs market remains genuinely impressive. Given what we know about the depressing effect of unemployment, even low-paid, low-productivity jobs are better than no jobs at all.

Another bright spot has been the public finances: the deficit is under control and tax receipts have outperformed (modest) expectations, albeit because of a surge in the incomes of the richest 0.1 per cent of taxpayers. It is worrying that inequality may be starting to increase. Still, revenues are revenues, as well as being a reminder that high earners do have their uses.

The awkward truth that Remainers and Leavers alike need to face is that the UK’s economic performance was disappointing long before the referendum. Measured by gross domestic product per head, many regions were worse off in 2015 than in 2007. London’s growth, while modest, was far better than the slump in Wales, the north of England, and particularly Northern Ireland.

And overall, in the wake of the financial crisis, the UK suffered a decade without growth in average earnings — the worst performance since the 1860s, according to Paul Johnson of the Institute for Fiscal Studies.

In brief, then: the chicken of economic weakness produced the Brexit egg, from which further economic woe is hatching. As problematic breakfasts go, this one is the Full English.

 

 

Written for and first published in the Financial Times on 5 April 2019.

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3rd of May, 2019Undercover EconomistComments off
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Political change can feel elusive, until the dam bursts

Deus ex machina was the ancient Greek theatrical convention of resolving the unresolvable by crane-lifting a god on to the stage to make everything better again through divine fiat. Right now, a bit of deus ex machina sounds pretty sweet.

Many people hoped that special counsel Robert Mueller’s Russia probe would play that role in the US. Its conclusions would be so damning as to sweep away the knotty problem of Donald Trump without the grinding task of finding support for a different president next year. But it was never likely that congressional mathematics would allow impeachment, nor even that Mr Mueller’s report (assuming we ever get to see it) would contain anything to sway anyone either way. We all, surely, know what we think about Mr Trump by now.

In the UK, some Remainers have been hoping the divine plot twist would be supplied by a record-breaking petition. Almost 6m people have demanded that the UK revoke Article 50 and walk out of the Brexit tragedy before the final act. On Tuesday, the government gave its response: get lost, Citizens of Nowhere. (I paraphrase.) Perhaps the following day’s “indicative votes” in parliament would resolve things? They were indicative of something, at least: gridlock.

Still, change can happen, and sometimes with astonishing speed. A few years ago, the project of Brexit was the pipe-dream of a few obsessives. The percentage of Britons naming EU membership as the most important issue was in the low single digits. Now Brexit is the official goal of the two largest political parties, albeit one they are finding it rather hard to hit.

Similarly, the changes that Mr Trump has wrought upon American and global politics are too numerous to list. True, most of them are changes for the worse — but it is hard to make the claim that stasis is inevitable.

What explains this curious sense that we are somehow dealing with chaotic change and futile stasis all at once? One explanation — offered in Cass Sunstein’s recent book, How Change Happens (UK) (US) — is what he calls “partyism”. The name deliberately echoes vices such as racism and sexism; Professor Sunstein argues convincingly that many of us now dismiss entire groups of people on the basis of their political affiliation.

For example, views of interracial marriage have become dramatically more tolerant. Yet cross-party marriage is now beyond the pale for many. Prof Sunstein reports that in 2010, about 49 per cent of Republicans and 33 per cent of Democrats would feel displeased if their children married outside their political party — up from about 5 per cent in 1960. A similar trend has taken place in the UK.

Political scientists Shanto Iyengar and Sean Westwood used a common (if controversial) measure of subconscious bias, the “implicit association test”, to examine partyism. They found party affiliation produced stronger measures of implicit bias than did race.

One might argue that there is nothing intrinsically wrong with partyism. Rather than unjustifiably judging people based on their gender or ethnicity, we justifiably judge them for the choices they have made. Still, an environment where parties command unswerving support from their own base and unswerving loathing from the opposition is not one conducive to rational discussion. That, perhaps, accounts for the feeling of stasis: we feel that nobody is listening and nobody wants to compromise.

Despite the sense of gridlock, it is clear that dramatic change is possible. A hostile takeover of an existing party structure can turn partyism from a force for inaction into a force for radical change. The Brexiters have managed it, as has Jeremy Corbyn, the leader of the Labour party, and, most spectacularly, Mr Trump.

Existing political parties aren’t the only agents of change. In countries where the voting system permits it, new parties have surged forward. Even in the UK, where the electoral system gives an enormous advantage to large established parties, Leave and Remain have become stronger sources of political identity than traditional parties.

Outside the realm of traditional politics, consider the #MeToo movement — a catalyst for a dramatic and overdue reassessment of what behaviour society will tolerate from powerful men.

These changes are so sudden because we are social beings. We often don’t know how we feel until we see that other people are taking a stand. It seems that nothing is changing and nothing will ever change until a critical threshold is reached, and the dam bursts. Issues that were ignored become salient. We go from shrugging our shoulders to marching in the streets. These changes are unpredictable, and we often mislead ourselves after the fact into thinking that they were inevitable all along.

This, then, is the process of political change: long periods of stasis, sudden bursts of activity, and a good deal of luck. Behind it all, a long slog of persuasion, mobilisation and frustration — less a glorious pilgrimage than an endless treadmill. No wonder most of us would prefer divine intervention.

 

Written for and first published in the Financial Times on 29 March 2019.

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Alan Krueger, a master-economist for our age

Written for and first published in the Financial Times on 22 March 2019.

At the start of John Maynard Keynes’s obituary of Alfred Marshall comes a question: why is it so hard to be a good economist? Keynes’s answer was that “the master-economist must possess a rare combination of gifts . . . no part of man’s nature or his institutions must lie entirely outside his regard.”

This week the profession is mourning another great economist. Alan Krueger killed himself last weekend at the age of 58. What would be a bewildering blow under any circumstances is heavier still because the professor was an authority on happiness and pain.

He discovered, for example, that prime-age men who had quit the labour force were twice as likely as employed men to take painkillers. He studied how unemployed people spend their hours, and showed that actively searching for work was an intensely sad task.

With Nobel laureate Daniel Kahneman, he collected evidence on happiness that remains my benchmark for social scientists’ ability to shed light on wellbeing. Prof Kahneman once warned me that expert advice can go only so far. Much happiness and sadness is genetically determined: “We shouldn’t expect a depressive person to suddenly become extroverted and leaping with joy.” Those words are much on my mind this week.

Yet Krueger’s life invites us to reflect on what economists at their best can achieve. The most obvious fact to note about his career is its breadth. He studied pollution, inequality, social mobility, terrorism, the gig economy, and the music industry.

This is a vivid illustration of the versatility of the economist’s tools, but Krueger used them to make a lasting mark. The most famous example, with his colleague David Card, was a study of the impact of minimum wages on jobs. It stands to reason that every increase in a minimum wage will destroy marginal jobs, hurting some of the most vulnerable people in the workforce.

Profs Card and Krueger, however, weren’t content to stick with the theory. They wanted to know how big the effect was. This is a tough problem. While minimum wages might cause unemployment, a booming job market might influence politicians to raise the minimum wage, so cause and effect are tangled together. Their research, therefore, looked at fast-food industry jobs in two neighbouring states: New Jersey and Pennsylvania, only one of which had raised the wage floor. They found the rise hadn’t dented employment at all.

Not every economist was convinced, and by itself that result might have been a fluke. But the pair had developed a powerful method that could — and would — be repeated. Economists are now far more willing to allow that minimum wage increases can make sense.

Perhaps just as important, economists now believe that evidence can complement or even overturn theory. Economics was once theory-driven for a reason: the data was patchy and controlled experiments were rare. It was almost unheard of to produce evidence that was credible enough to outweigh theory.

Krueger was at the heart of what became known as the credibility revolution in economics: the idea that evidence could be powerful enough to make a difference — and that economists should gather and analyse it with that aim in mind. In a tweet last year, he declared: “The idea of turning economics into a true empirical science, where core theories can be rejected, is a BIG, revolutionary idea.”

However, while voraciously curious, Krueger had no interest in clever studies for their own sake. (Even his whimsical investigation of the music business, fuelled by personal enthusiasm, teaches broader economic lessons. “I think Taylor Swift is an economic genius”, he said.) In general, he wanted to answer the big questions about human wellbeing.

His work on the gig economy is a case in point. With the rise of companies such as Uber it became clear that many workers were putting in highly irregular hours. He promptly started surveying workers about whether they relished the flexibility or suffered from the insecurity. He showed that these contingent work arrangements weren’t new — the Uber workforce was the new tip of a long-hidden iceberg. He chased down the answers to questions other people were only beginning to ask.

“He wouldn’t speculate,” says Betsey Stevenson, who, like Krueger, is a labour economist who held senior positions in the Obama administration. “He would gather the data.”

That data could then be used to influence policy, as he showed during three stints working for the US government, including as the chairman of President Obama’s Council of Economic Advisers. He was also admired as a generous mentor of other economists: his influence goes well beyond his publications.

Were Keynes to be writing about the “master-economist” today, his list of requirements might have changed little: intensely curious about the human experience; energetic in gathering the data; willing to let the evidence change his or her views; a persuasive writer; determined to influence policy to improve the world. Nobody could have matched up better than Alan Krueger.

 

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Superstar companies lose their lustre

Everyone seems to agree that we live in a “superstar economy” — one in which the leading companies (the likes of Apple, Amazon and Alphabet) are making dramatic strides both in productivity and in profitability. In response to this conventional wisdom the only question is: how should regulators respond?

There is a case that we should let the superstars keep doing what they do. Enjoy the fruits of their creativity. The smartphone! Internet search that works! Next-day delivery of next week’s landfill! For now, the superstars are innovative and efficient. In due course new monopolists will arise, motivated to seize the crown.

This case is not absurd, although my own instincts point the other way. Profit-minded monopolists can be innovative, but all too often they fail to adapt. More often markets deliver because they support a messy, pluralistic process of trial and error.

If that view is right, government intervention may be necessary to prevent the monopolies of today choking off the innovations of the future. One possibility is to break up the largest companies. Regulators might rule that a company cannot simultaneously own a platform while also offering products on it. This is the position taken in an artful argument published last week by US presidential hopeful Elizabeth Warren.

An alternative approach, set out this week by the UK’s Digital Competition Expert Panel, is to regulate the behaviour of the big digital groups rather than to change their structure. Regulators could insist on standards for data sharing and interconnection with established players, allowing smaller competitors to grow on or around the existing platforms.

I’m sympathetic to both approaches, although worry that it is easy for regulators to do more harm than good. Ms Warren’s rousing call to arms might easily lead to fruitless antitrust trench warfare. But set aside for a moment the argument about how to respond to the superstars and ask a different question. What if they are actually economic white dwarfs, dense but dim and fading?

That seems a strange conjecture. It appears to contradict the problem of laggard companies: research from the OECD suggests that many companies are far less productive than those at the frontier of their industrial sector, and that this gap is getting bigger. This suggests that superstars are blazing hot and the problem lies with the rest of the economy.

But much depends on what we mean by superstar companies. The OECD research focuses on highly productive concerns. Many of them are surprisingly small, with revenues in the tens of millions rather than the tens of billions.

Another alternative is to look at the most valuable 20 companies in the US economy, and the most valuable four in each of 60 or so different sectors, whether or not they are digital and whether or not they are highly productive. This is the approach taken by Germán Gutiérrez and Thomas Philippon, economists at New York University, in a new working paper. This perspective casts doubt on the very idea that the superstars of the US economy are particularly large or productive by postwar standards.

Compared with their forebears, these companies are unremarkable in both their sales and their employee numbers. They have a larger economic footprint than the leaders of 20 years ago, but smaller than 40 years ago. Alphabet, Amazon and Apple are impressive companies, but so were Intel, Microsoft and Walmart 20 years ago, or General Electric, General Motors and IBM before them.

Any large group contributes to the productivity of the economy as a whole in two ways: directly, by producing output, and indirectly, by drawing in resources from less productive players. Messrs Gutiérrez and Philippon reckon that the direct contribution of the leading companies is smaller than it used to be, while the indirect contribution has not increased by enough to compensate. Overall, they calculate that the contribution of the star companies to labour productivity growth in the US has fallen by 40 per cent since the year 2000.

This is a surprising result. Part of the explanation may lie in measurement: it is never easy to measure productivity, particularly in services and even more so in services provided free of charge in exchange for data and attention. But the “fading star” result may well be real, and surprising only because we often let the big digital groups stand as symbols of scale and market power. There is more to the US economy than Silicon Valley.

The US economy does seem to have a monopoly problem: concentration is increasing in most industries. Companies make money less by becoming more efficient, and more by exploiting their pricing power.

There is plenty for US antitrust authorities to get their teeth into. Perhaps they should take a look at Europe, where competition policy is more robust and politically independent, while EU markets have become more competitive and less profitable than those in the US. That may not be a coincidence.

Written for and first published in the Financial Times on 15 March 2019.

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Undercover Economist

Black holes in data affect health and wealth

Nearly seven decades ago, the noted psychologist Solomon Asch gave a simple task to 123 experimental subjects: to pick which one of three quite different lines was the same length as a “reference” line. Asch had a trick up his sleeve: he surrounded each subject with stooges who would unanimously pick the wrong line. Confused, the experimental subjects were often — not always — swayed by the error of those around them.

I’ve written before about these experiments, but there’s something I neglected to mention: not a single one of the stooges nor the experimental subjects was female.

If Asch had conducted all-women experiments, he would have discovered that women tend to conform to the group more often than men. Perhaps this omission doesn’t matter. Retellings of the Asch experiment have tended to exaggerate the conformity that was demonstrated, while glossing over the fact that it was an all-male study. The two biases may cancel each other out.

Still, it is a lesson in how easy it is to ignore important data — or to assume that they are comprehensive, when in fact they omit half the planet.

Invisible Women (US) (UK) a new book by Caroline Criado Perez, explores countless cases in which everything from the height of the top shelf to the functionality of an iPhone is predicated on the assumption that the user will be male. (Apple once released a “comprehensive” health app that could track your selenium intake but not menstruation.)

Much of this imbalance has nothing to do with data, but some of it does — and this “gender data gap” is particularly important because good statistics are one of the only windows we have into the lives of an entire population, rather than just a handful of friends.

Consider the UN Sustainable Development Goals, admirable targets to improve the lives of 7.5bn people. Yet as development economists Mayra Buvinic and Ruth Levine have pointed out, while one of these goals is gender equality, we lack much of the data on whether that goal is being achieved.

Some missing numbers — for instance, on sex-trafficking — are obvious. Others are more subtle, such as the ubiquitous choice to measure the income not of individuals but of households. Does that household income come from a man, a woman or both?

We shouldn’t assume that the balance between “wallet and purse” is irrelevant. Economist Shelly Lundberg and colleagues studied what happened when in 1977, child benefit in the UK was switched from being a tax credit (usually to the father) to a cash payment to the mother. That measurably increased spending on women’s and children’s clothes relative to men’s. The UK’s new universal credit is payable to a single “head of household”; that curious decision may well favour men. Given the data we have, it will be hard to tell.

The story is often told of the accidental discovery of sildenafil (Viagra). Intended as a treatment for angina, the clinical trial revealed a side-effect: magnificent erections. Had the original trial included women, we might have fortuitously discovered a treatment for severe period pain. As it was, men got their miracle drug but women are still waiting. We can’t confidently prescribe sildenafil as a safe and effective treatment for period pain because, as Ms Criado Perez reports, only a small and suggestive trial has yet been funded.

There are many data gaps out there — statistician David Hand calls them “dark data”. There are the unpublished studies that produce less interesting or lucrative results than published ones. There are the voters who are coy about confessing their voting intentions to pollsters — the “shy Tory” effect. There are the psychology experiments that study only “WEIRD” subjects — Western, Educated and from Industrialised Rich Democracies.

We have plenty of statistics on shares and currencies, but not much on debt and derivatives. What Gillian Tett called the submerged iceberg of financial markets got less attention, until it turned out to have holed the entire financial system below the waterline in 2007.

There is no simple way to shine a light on all this dark data. There is a reason why it is easier to collect statistics in a rich country than a poor one, and why fluent speakers of English are more likely to fill in the UK census form. Collecting data on who bears the burden of “life admin” is harder than collecting that on primary paid occupations. But what we count and what we fail to count is often the result of an unexamined choice. We can make better choices, both by involving ordinary citizens in survey design, and by trying to get more women and minority groups into economics and statistics.

It is hardly encouraging that the Office for National Statistics has just been found wanting in a sexual discrimination case, but there is hope. The president of the Royal Statistical Society, the managing director of the International Monetary Fund and both heads of the UK Government Economic Service are all women. Still, plugging data gaps takes time, and considerably more thought than I once gave to Solomon Asch’s curious experimental line-up.

 

Written for and first published in the Financial Times on 8 March 2019.

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Why happiness is easy to venerate, hard to generate

In 1972, the teenage king of Bhutan, Jigme Singye Wangchuck, declared that “gross national happiness is more important than gross domestic product”. The sound bite has been echoed approvingly down the years, although the king may just have been making excuses. Bhutanese GDP per person was then the grinding poverty of about a dollar a day. If I were king of such a country, I’d be tempted to change the subject, too.

Clearly he had a point. Most of us would rather be poor and happy than rich and depressed. If so, gross national happiness seems a fine goal. But it is one thing for a monarch to announce that happiness is important. It’s quite another to make people happy. Shangri-La does not move from fiction to reality just because we desire it.

Bhutan has not always lived up to its own hype. Same-sex intercourse is illegal, which suggests a country with a less-than-expansive view of whose happiness matters. Three decades ago, around 100,000 of the Nepali-speaking Lhotshampa minority fled Bhutan to escape military persecution during a campaign of ethnic cleansing on a colossal scale. One-sixth of the entire population of Bhutan ended up in refugee camps in Nepal.

Even setting aside this enormity, it’s hard to see that Bhutan paid much more than lip service to gross national happiness. They hosted conferences, but according to a recent IMF working paper, nobody in the government collected systematic indicators on happiness until 2005. The World Happiness Report ranks Bhutan at 97th out of 156 countries, down from 84th a few years ago. Happiness is easy to venerate, but hard to generate.

Perhaps I am doing a disservice to a small kingdom wedged between sparring regional powers. It can’t be easy. And Bhutan has a lesson to teach us all — maybe we should think a little less about over-arching goals and a little more about specifics.

Consider some of the issues that are notoriously bypassed by GDP, the most common measure of economic activity: digital services are hard to value, while by design GDP omits any consideration of inequality or environmental damage. Unpaid work — of which men do a great deal, and women a great deal more — is also left out.

But if our aim is (for example) to reduce carbon emissions, we don’t achieve it by moaning about GDP. We achieve it with specific policies such as carbon taxes and investments in public transport and a renewable-friendly electric grid. Neither gender equality nor respect for unpaid work would be automatically improved by any change in the way national income accounts are computed.

And when Bobby Kennedy movingly commented that GDP “does not include the beauty of our poetry or the strength of our marriages”, he was quite right. Nevertheless I fail to see how any solution follows, whether for connubial harmony or American verse.

The specifics matter when it comes to happiness, too. Broad research into the causes of national happiness has tended to produce banal conclusions: we tend to compare ourselves to others, unemployment makes us miserable, and we hate being ill. There is nothing here to suggest that we need to overhaul commonplace policies such as redistributive taxation, the avoidance of recessions, and support for public health.

Just as with GDP itself, it is only when we move to the specifics that gross national happiness becomes useful. Richard Layard, one of the leading happiness researchers, argues that mental illness is a leading cause of misery, and that it can be treated very cost-effectively. That seems useful enough to me.

What is not useful is the sense that measuring GDP is the problem, and measuring gross national happiness is the solution. Few societies have ever really focused on either. We should all be happy about that.

 

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

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Just because you’re paranoid, doesn’t mean the algorithms aren’t out to get you

If you do not like the price you’re being offered when you shop, do not take it personally: many of the prices we see online are being set by algorithms that respond to demand and may also try to guess your personal willingness to pay. What’s next? A logical next step is that computers will start conspiring against us. That may sound paranoid, but a new study by four economists at the University of Bologna shows how this can happen.

The researchers allowed two simple artificial intelligence algorithms to compete against each other in a setting where they simultaneously set prices and reaped profits accordingly. The algorithms taught themselves to collude, raising prices from the cut-throat competitive level towards what a monopolist would choose. Price cuts were met with price wars, after which collusion would return. Just because you’re paranoid, it doesn’t mean the computers are not out to get you.

This is not a surprising result for anyone who — like me — squandered their youth studying the theory of industrial competition. Robert Axelrod’s book The Evolution of Cooperation (US) (UK) published in 1984, described a tournament in which computers played a “prisoner’s dilemma”, a scenario analogous to two competing sellers. The best approaches used the threat of punishment to sustain co-operation. They were also simple: not something that a machine-learning system would struggle to discover.

An obvious question is, who — if anyone — should be prosecuted for price fixing when the bots work out how to do it without being told to do so, and without communicating with each other? In the US, where the Federal Trade Commission has been pondering the prospect, the answer seems to be no one, because only explicit collusive agreements are illegal. The bots would only be abetting a crime if they started scheming together. Tacit collusion, apparently, would be fine.

This is a reminder that algorithms can misbehave in all kinds of intriguing ways. None of us can quite shake the image of a Skynet scenario, in which an AI triggers a nuclear war and then uses Arnold Schwarzenegger as the model for a time-travelling robot assassin on a mission to suppress human resistance. At least that strategy is refreshingly direct. The true scope of algorithmic mischief is much subtler and much wider.

We are rightly concerned about algorithms that practice racial or sexual discrimination, by accident or design. I am struck by how quickly tales of racist algorithms have gone from novelty to cliché. The stories may fade but the issue is not going away.

Algorithms that simply magnify human errors now appear almost quaint. In 2012, the Financial Times had a headline, “Knight Capital glitch loss hits $461m”; those were innocent times.

Then there were those T-shirts selling on Amazon a few years ago, offering offensive slogans such as “Keep Calm and Hit Her”, and bizarre ones such as “Keep Calm and Skim Me”. Hundreds of thousands of slogans were assembled by an algorithm and, if any appealed, the vendor would print them on demand. “We didn’t do it, it was the algorithm,” was a weak defence in 2013, but at least it was novel. That is no longer true.

We are also realising that the algorithms can amplify other human weaknesses — witness recommendation engines on YouTube and Facebook that seem to amplify disinformation or lead people down the dark tunnels of conspiracy thinking or self-harm.

By no means are all malevolent programs an accident; some are designed with mischief in mind. Bots can be used to generate or spread misinformation. Jamie Bartlett, author of The Dark Net (US) (UK), warns of a future of ultra-personalised propaganda. It is one thing when your internet-enabled fridge knows you’re hungry and orders yoghurt. It’s another when the fridge starts playing you hard-right adverts because they work best when you’re grumpy and low on blood sugar. And unless we radically improve both our electoral laws and our digital systems nobody need ever know that a particular message was whispered in your ear as you searched for cookies.

Obviously, both the law and regulators must be nimble. But ponder, too, the challenges for corporate public relations and social responsibility departments. The latter is about being a good corporate citizen; PR is about seeming to be so. But who takes corporate responsibility for a harmful or tasteless decision made by an algorithm?

It is not an entirely new problem. Before there was tacit collusion between algorithms, there was tacit collusion between sales directors. Before companies blamed rogue algorithms for embarrassing episodes, they could blame rogue employees, or their suppliers. Can we really blame the bank whose cleaning subcontractor underpays the cleaning staff? Or the sportswear brand opposed to sweatshop conditions, whose suppliers quietly hire children and pay them pennies?

The natural answer is: we can and we do, but subcontracting is a source of both deniability and complexity. Subcontracting to algorithms complicates matters, too. But we are going to have to figure it out.

 

Written for and first published in the Financial Times on 22 February 2019.

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