Tim Harford The Undercover Economist

Undercover EconomistUndercover Economist

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

Undercover Economist

Why opposites shouldn’t attract

‘While it may be natural and familiar, assortative mating also breeds inequality’

Those of you out courting next Friday, do enjoy yourselves – but with a twinge of guilt. Inequality has been rising for a generation in many places, especially the Anglophone countries. Let’s be honest: you and your romantic pursuits are part of the problem.

The issue here is something economists call “positive assortative mating”, a charming phrase that we blame on the evolutionary biologists. It describes the process of similar people pairing off with each other: beautiful people dating beautiful people, smokers dating smokers, nerds dating nerds. All perfectly natural, you might think.

While it may be natural and familiar, assortative mating also breeds inequality. Economists often look at sorting by education level, which is common and easy to measure. If the MBAs and PhDs were sprinkled randomly throughout the population that would spread the wealth around. But, of course, they tend to pair up with other MBAs and PhDs; meanwhile the high-school dropouts tend to end up with other high-school dropouts. Already prosperous people are made more prosperous yet by their marriages.

This is an interesting idea in theory but does it have any practical significance? A recent paper by Jeremy Greenwood and others looks at a large data set from the US Census Bureau through the lens of the Gini coefficient, which is a measure of inequality. It’s 63 in highly unequal South Africa, 40 in the UK and 23 in egalitarian Sweden. It’s 43 in the US Census data set; but if the couples in the data set were randomly paired off, the Gini coefficient would be a mere 34. Assortative mating increases inequality.

But does this pairing-off process matter more than it used to? Does it explain any part of the rise in inequality we’ve seen since the 1970s? The answer, again, is yes – but a guarded yes. Marriage patterns have little or nothing to do with the concentration of earning power in the hands of the richest 1 per cent and 0.1 per cent: women are major breadwinners in the top quarter of the distribution but less so right at the very top – not yet, at any rate.

But assortative mating is having an impact on inequality more broadly. It’s not so much that well-educated people are more likely to pair off – although they are – but that educated women are more likely to earn serious money than a generation ago.

Consider my own mother: she was well on the way to a PhD in biochemistry when I arrived on the scene in the early 1970s. She then dropped out of education and spent most of her time looking after her children. Her academic qualifications had no impact on our household income. Assortative mating has always been with us but it’s only in a world of two-income households that it increases income inequality.

The sociologist Christine Schwartz showed in 2010 that the incomes of husbands and wives in the US are far more closely correlated than they were in the 1960s, and that this explained about one-third of the increase in income inequality between married couples. John Ermisch and colleagues have shown other consequences: in both the UK and Germany, assortative mating substantially explains low social mobility because the children of prosperous parents marry each other.

We should not place too much emphasis on all this. Assortative mating explains only part of the rise of inequality, and perhaps very little at the top of the income scale. The usual remedies for inequality – unionisation, redistributive taxes, minimum wages – still have the same advantages and limitations as ever, even if they need to reflect the reality of the two-income household. It’s a reminder that the most welcome social trends can have unwelcome side-effects.

Happy Valentine’s day.

Also published at ft.com.

Undercover Economist

How to plan for your pension

‘The standard tool is the online pension calculator, of which countless variants exist. There’s only one problem: they leave out almost everything that matters’

Everyone seems to be talking about whether pensioners are vulnerable and poor or living gilded lifestyles. I decided to take a rather self-centred look at that question; I am an economist, after all. I’m 40. Retirement is more than half my working life away. Leaving aside the fate of today’s pensioners, what about my fate? How much cash will I enjoy in my golden years?

The standard tool for such crystal-gazing is the online pension calculator, of which countless variants exist. Type in the basics (age, income, retirement date, current pension contributions, current pension pot) and the calculator spits out the projected size of the eventual pension pot, along with the monthly income it is forecast to generate. More complex varieties allow for all sorts of tweaks – inflation, investment returns, and smoothly rising income and contributions over the years.

There’s only one problem: these calculators leave out almost everything that matters. It is useful, I suppose, to know what one’s income in retirement would be given a particular salary progression, rate of return on a portfolio, inflation rate, annual charges and the annuity rate available on retirement – although simply to list the variables gives a sense of just how uncertain that “knowledge” really is.

It is worth adding that, over the past 14 years the FTSE 100 index hasn’t risen, even in nominal terms; over the 14 years prior to that, the index roughly quintupled. Stick that in your pension calculator and smoke it. In some ways that’s an extreme case – after all, sensible investors rely on reinvesting dividends and will diversify.

Yet, in other ways, the FTSE’s fate over the past 14 years understates the uncertainty produced by long-term compounding. The relevant time horizon isn’t 14 years but more like 30 – over such a span, a modest 4 per cent rate of return would turn £100,000 into £310,000. A tastier 8 per cent return would compound into £930,000. And an optimistic-but-not-unheard-of 12 per cent return would deliver nearly £2.7m.

Those numbers will surprise some: we underestimate the value of a high rate of compound interest so predictably that behavioural economists even have a name for the condition: exponential growth bias. A reasonable forecast range for a £100,000 investment then, 30 years later, seems to be anything from several million pounds to less than you had when you started.

The uncertainties don’t end there – when we look away from the spreadsheet, at the real world, we realise they are barely beginning. Three big risks simply don’t figure in the tidy world of the calculator: one, that I lose my job and can’t find anything comparable; two, that my wife and I divorce, an expensive business; three, that anything from depression to a slipped disc to cancer renders me too ill to work. Ill health, unemployment and divorce are common and bad for your net worth. (They are also bad for measures of “subjective wellbeing”; more colloquially, they make you sad.)

Then there are the wilder possibilities – I might be defrauded by con artists; I could be sued for libel; my home, which is near a flood plain, may be rendered uninhabitable and unsellable by the weather.

I’m not planning on being sideswiped by any of these misfortunes but, then, who is? A common cause of a penurious old age is not a savings problem as such, but an insurance problem: people who are on track to save enough for a comfortable retirement but are then derailed by “events, dear boy, events”.

My plan for a gilded retirement still involves saving for a pension but I have reinforced it with a number of other tactics: buying disability insurance, keeping fit, being nice to my wife – and hoping that the fates are kind.

Also published at ft.com.

Undercover Economist

What makes us happy?

‘A growing body of research backs the folk wisdom that experiences make us happier than possessions’

It has become a cliché to say that we are made happier by experiences than by material possessions – otherwise the Onion headline, “Executive Quits Fast Track To Spend More Time With Possessions” wouldn’t provoke quite the same chuckle.

But is the cliché true? We are all free to spend our disposable income on what we like. If the experiences we buy tend to make us happier than the possessions we buy, we’re making systematic mistakes. That’s possible – but if so, then why?

Maybe it isn’t a fair comparison. Many material possessions are workaday basics such as saucepans, ironing boards and socks. Many experiences are free, meaning the ones that cost money are treats – no wonder the average possession looks joyless compared with the few special experiences we’ve bought. It doesn’t follow that a windfall should definitely be spent on a spa weekend rather than an iPad.

Another possibility is that causation is backwards. Perhaps happy people buy experiences, rather than experiences buying happiness. A recent study by three psychologists, Ryan T Howell, Paulina Pchelin and Ravi Iyer, gives a sense of how this might be possible: they found that people with a tendency to spend money on experiences were already emotionally appreciative of the world; they also tended to buy more experiences the happier they became.

To complicate matters, the difference between a material possession and an experience is not straightforward. My daughters were given a board game for Christmas. Is the game a possession or an experience? It is certainly no fun if it stays in the box – does that fact count for or against the hypothesis that experiences make us happier?

Then there’s the question of whether only wholesome experiences count. Gambling is an experience anyone can buy, and yet when I read articles extolling the virtues of buying experiences they usually seem to be thinking of a parachute jump. If daytime television and time on the slots don’t count as life experiences, then this comparison is rigged.

All that said, a growing body of research backs the folk wisdom that experiences make us happier. Leaf van Boven of the University of Colorado at Boulder and Thomas Gilovich of Cornell University conducted surveys of how people felt about their possessions and experiences, publishing their findings in 2003. They asked their subjects – who were students – to focus either on “life experiences” or “tangible objects” they had purchased with the aim of advancing their “happiness and enjoyment of life”. The students were asked to describe how happy these purchases had made them.

The result: life experiences do indeed make students happier. A wider poll suggested that was true more broadly, although less so for low-income respondents; poorer people seem to enjoy material possessions perfectly well.

Yet if the effect is real, then why don’t we shift our disposable income to buy extra experiences and fewer possessions? Or work fewer hours to free up time to enjoy experiences? Two suggestions. One is that experiences grand enough to count as “life experiences” are often social. We wear our new watch alone but go on holiday with friends. Recent work by Peter Caprariello and Harry Reis suggests that what really underpins the happiness brought by experiences is this social element.

Perhaps, too, our fondness for experiences is a function of the way we remember them. The irritations of the weekend mini-break or the boring bits of the opera trip are quickly forgotten: only the rosy glow remains. In contrast, our possessions do not gracefully withdraw into memory. We experience the once-fashionable cardigan not as nostalgic recollection but as an object that occupies wardrobe space while starting to bobble, shrink and fade.

Also published at ft.com.

Undercover Economist

There are no new ideas – only remixes

‘The elements that encourage people to appropriate a previous work are, alas, not conducive to originality in the new work’

Ninety-seven years ago, a young French artist walked across Manhattan into 118 Fifth Avenue, an outlet for J L Mott Iron Works. Perhaps tickled by the prank he was about to play, Marcel Duchamp purchased a Bedfordshire urinal. Returning to his studio, he signed it on the rim, “R. Mutt 1917”, and gave it a title: “Fountain”. The date – a day late, perhaps? – was April 2.

Duchamp’s “Fountain” vanished almost immediately; perhaps thrown away, perhaps smashed to pieces by the outraged committee at the Society of Independent Artists, which had opened an exhibition to all comers only to find Duchamp calling its bluff. Yet as we know, the story does not end there.

“Fountain” was copied: 15 replicas adorn art galleries, each endorsed by Duchamp. But more interesting are the transformations of “Fountain” that produce something new – for instance, Andy Warhol’s “Campbell’s Soup Cans” or Pablo Picasso’s “Bull’s Head”, to say nothing of the idea that a work of art could be just that: an idea.

It has become fashionable to assert – as the writer and director Kirkby Ferguson has done in his films – that “everything is a remix”. All creative acts, he says, copy, combine and transform earlier ideas. It’s a convincing thesis. Gutenberg’s printing press was inspired by a wine press, while Apple’s Macintosh borrowed from Xerox’s Alto, Nirvana’s “Smells Like Teen Spirit” transforms a riff from Boston’s “More Than A Feeling” and George Lucas’s Star Wars owes a debt to Akira Kurosawa’s The Hidden Fortress.

But what is it about an idea that makes it remixable? It’s worth distinguishing between an idea that provokes lots of derivative work, and one that inspires something new and exciting. “Fountain” did both but perhaps there’s a trade-off between fecundity and the ability to inspire original successors. “Apache” by the Incredible Bongo Band has been much sampled but hardly inspired a generation in the way that the Velvet Underground did.

Andrés Monroy-Hernández, now a researcher at Microsoft, and Benjamin Mako Hill, a hacker and researcher at the University of Washington, have conjectured that there may be a “remixing dilemma”: the elements that encourage people to appropriate and adapt a previous work are, alas, not conducive to originality in the new work.

Mako Hill and Monroy-Hernández suggest that an idea that is fairly simple, that comes from an already-famous creator, and that is itself a remix, will tend to spawn many imitators. But these are precisely the qualities – moderate simplicity, notoriety and being part of a chain of remixes – that might reduce the originality of further derivative work.

Mako Hill and Monroy-Hernández have tested their hypotheses in one particular setting, Scratch, a child-friendly programming language with a strong community. Scratch programmers are encouraged to share their programs and to use those of others as a basis for further work. A rich data set is available, allowing the researchers to compare the complexity, popularity and (to some extent) the originality of programs shared on the site.

In Scratch, there does seem to be a remixing trade-off: more famous community members find their work remixed a lot – often in trivial ways; the same is true for already-remixed projects. But the trade-off is less apparent on the important metric of complexity. More complex programs are remixed more often, yet also with more originality, than simple ones. This is surprising given the conventional wisdom in open-source software that it is best to release simple, early versions to encourage the community to improve on them.

Then again, Duchamp’s idea could hardly have been simpler – and nobody could suggest that subsequent artists have ignored it.

Also published at ft.com.

Undercover Economist

What price supply and demand?

‘Recessions might be shaped by our desire for prices that move in line with ethical norms’

I recently had cause to visit Ambleside – a pleasant tourist-trap at the head of England’s largest lake and a perennial parking nightmare. I drove at a crawl once around the town and twice around the town’s largest car park without success. Finally I found a spot in a privately owned parking lot. I trudged to the ticket machine through the rain and on seeing the price, my first thought was not economically rational. It was, “That’s a rip-off.”

We have a complicated emotional relationship with prices. To the rational utility-maximiser of the economics textbook, a price is an exchange rate between different possible products. Outside the textbook a price can be a signal of quality (“reassuringly expensive”) or a desperate bid for attention (“FREE shipping”).

A price can also feel like a slap in the face. The simple logic of supply and demand suggests that front-row seats for the Wimbledon final should be expensive. So should bottled water after a hurricane, snow shovels after a blizzard and Ambleside parking spaces over the Christmas holiday. And yet a vendor who tries charging a price high enough to eliminate the shortages will be accused of despicable greed.

That is why the latest electronic gizmos tend to sell out when first launched. Demand is high, supply isn’t infinitely flexible and the logical solution – sell at a high price, then discount once the rush is over – causes outrage. Technology companies conclude they would rather ask their customers to queue or wait than ask them to pay the market-clearing price. Evidently most parking providers in Ambleside have adopted the same policy. The one that did not received my ingratitude.

The psychological wing of the economics profession has known this for a while – Jack Knetsch, Richard Thaler of Nudge fame and Nobel laureate Daniel Kahneman researched the issue in 1986. They found people strongly objected when wages or prices shifted sharply, even if the market logic behind the shift was clear to see.

There are obvious microeconomic consequences of this pigheaded insistence on the appearance of fairness: ticket touts, empty supermarket shelves in unseasonal weather and restaurants at which one cannot get a seat.

But what is less obvious is that the course of recessions and booms might also be shaped by our desire for prices that move in line with accepted ethical norms rather than the laws of supply and demand.

If prices adjusted swiftly and smoothly, “Say’s Law” would always hold true. The gnomic law, named after a Napoleonic-era French economist, is that “supply creates its own demand”. The implication is that recessions can only be due to supply shocks, not simple lack of demand, as Keynesians claim. Prices and wages should adjust to ensure that supply and demand are always equal. In the world of Say’s Law, monetary policy should have little or no effect. Quantitative easing would be of scarcely more significance than a new set of commemorative postage stamps.

Yet prices and wages sometimes fail to adjust. Occasionally this is for psychological reasons; at other times the hassle of changing the price tags, reprinting the menus and so on can delay price adjustments. The price of parking in Ambleside was painted on to a metal sign, after all, and it did not vary by season or (much) by the time of day. Of such inflexibilities are born substantial economic fluctuations – the intellectual descendants of John Maynard Keynes often look to price rigidities to explain why recessions happen at all.

It might seem absurd that consumer irritation at a price hike, or the cost of repainting a sign, could add up to enough price rigidity to cause a recession – and not every economist buys the idea – but it is possible, and an influential school of thought. Economic frictions, just like real friction, may seem trivial. They are not.

Also published at ft.com.

Undercover Economist

How can we outwit our lazier selves?

‘Be careful what you resolve to do in 2014 – and how irrevocably you resolve it with commitment strategies’

What do the cold war, expiring gift vouchers, the euro and New Year’s resolutions have in common?

A hunt for the link begins with Thomas Schelling, the only person in history to have run war games for Henry Kissinger, won a Nobel memorial prize in economics and served as a script consultant for Stanley Kubrick’s Dr Strangelove.

The film featured the Soviet doomsday device: “When it is detonated, it will produce enough lethal radioactive fallout so that within 10 months, the surface of the earth will be as dead as the moon!” The point about the doomsday machine is that no sane person would ever trigger it, so it is set up to explode automatically in the event of the war. It is thus the perfect deterrent.

Strategic commitments need not be so cartoonish: a public declaration can serve as well, by making it awkward to retreat. Consider John F. Kennedy’s televised address from the Oval Office in which he declared that West Berlin would be defended, and “an attack upon that city will be regarded as an attack upon us all”. Schelling, whose ideas also informed Kennedy, was widely regarded as the authority in the use of such commitments.

In the 1970s, Schelling turned his attention to what we would now call behavioural economics. He was fascinated by what he described as “the intimate contest for self-command” – our efforts to quit smoking or learn Mandarin in the face of stubborn inertia. And Schelling felt that commitment strategies could help us outwit our lazier selves.

The New Year’s resolution can be supplemented with a commitment strategy: paying in advance for a year’s gym membership or betting with friends that we’ll stop smoking. Announcing on Facebook that we’ll be running a marathon in April isn’t quite JFK, but the declaration serves the same purpose.

Commitment devices can work but Schelling raised two awkward questions. The first is, whose side should we take in the intimate contest for self-command? If part of me wants to quit smoking and part of me doesn’t, most of us hope the quitter will win. People tend to eat too much, exercise too little and not save for retirement. But some people eat too little, exercise too much and hoard when they should be spending. It is possible to worry too much about the future.

A second challenge from Schelling: what if the commitment backfires? Many people pre-pay their gym membership as an attempt at strategic commitment, and then don’t go to the gym. This is the worst of both worlds: we fail to keep our resolutions and, in addition, pay the costs of the failed commitment. Spoiler alert: the doomsday machine in Dr Strangelove does not deliver the hoped-for permanent peace.

Some research by Suzanne Shu and Ayelet Gneezy, professors of marketing, suggests that commitment strategies may work with Christmas gift vouchers: a voucher with an imminent expiry date induces urgency and is more likely to be spent than one that expires later. (Similarly: tourists see sights that the locals never get round to visiting.) And yet in Shu and Gneezy’s study, the majority of vouchers expire unused. This is hardly an unmitigated success.

Commitment strategies are now cool in macroeconomic policy. An independent central bank with an inflation-busting mandate is a commitment strategy. So is a fiscal watchdog such as the Office for Budget Responsibility. Bank of England governor Mark Carney’s “forward guidance” is too. But the most ambitious attempt at macroeconomic commitment was the euro. It was a doomsday machine in more ways than one.

So be careful what you resolve to do in 2014 – and how irrevocably you resolve it.

Also published at ft.com.

Undercover Economist

Casinos’ worrying knack for consumer manipulation

The spread of machine gambling offers a portent of other economic developments

What if the future of capitalism is not to be found in Shenzhen, Abu Dhabi or the Massachusetts Institute of Technology Media Lab – but in the Nevada desert? Natasha Dow Schüll, an anthropologist, has spent 15 years conducting field research in Las Vegas, culminating in a disturbing book, Addiction by Design. We are used to thinking of Vegas as a city of gaudy spectacle and the green baize of poker, blackjack and roulette tables. It is now a city of slot machines, which have grown like weeds because they are fantastically profitable. And the spread of machine gambling offers a worrisome portent of developments elsewhere in the economy.

Three slot-machine innovations stand out: first, confusion by design; second, addictiveness by design; third, the use of play money. All have been made possible by the digital automation of the machine itself, which in Las Vegas as elsewhere eliminates the skilled service jobs of croupiers and replaces them with highly paid jobs in interface design and low-paid work as a security guard or waitress.

Consider, first, confusion by design: Las Vegas casinos are mazes, carefully crafted to draw players to the slot machines and to keep them there. Casino designers warn against the “yellow brick road” effect of having a clear route through the casino. (One side effect: it takes paramedics a long time to find gamblers in cardiac arrest; as Ms Schüll also documents, it can be tough to get the slot-machine players to assist, or even to make room for, the medical team.)

Most mazes in our economy are metaphorical: the confusion of multi-part tariffs for mobile phones, cable television or electricity. My phone company regularly contacts me to assure me that I am on the cheapest possible plan given my patterns of usage. No doubt this claim can be justified on some narrow technicality but it seems calculated to deceive. Every time I have put it to the test it has proved false.

I recently cancelled a contract with a different provider after some gizmo broke. The company first told me the whole thing was my problem, then at the last moment offered me hundreds of pounds to stay. When your phone company starts using the playbook of an emotionally abusive spouse, this is not a market in good working order.

Another example is the way the pension providers charge for their services. Between the pensioner and the financial assets they are acquiring, it is almost impossible to figure out who is being charged for what. Even when annual charges are transparent, few people begin to grasp the vast sums such charges may cost them over the life of the product.

Now consider addiction by design. What is not understood about modern slot machines – certainly not by the UK’s Labour party, which recently tried to spark a moral panic on the subject – is that they do not try to drain your money away quickly. They do so slowly, by maximising “time on device”. The machines are cheap to run: what is the hurry? Machine gamers do not even play to win: they play to play. The aim of the machine is to deliver constant reinforcement – for instance, the “false win”, where a player is treated to fanfares and flashing lights after betting $3 and winning 60 cents.

Here, the natural analogy is with Facebook, Twitter and Google. These companies, ultimately, are selling one thing: our attention. Nothing about Facebook makes sense until you view it as a well-honed system for persuading you to check Facebook one more time.

Finally, consider the arrival of play money. A cutting-edge slot machine will not bother with a slot: the player will be attached umbilically via a casino charge-card on an elastic cord. This is partly a logistical matter: feeding machines with money, summoning a cashier to make change and cashing out jackpot wins all take time and interrupt a player’s flow.

But the substitution of cash for “credits” has a psychological effect too. Behavioural economists have shown that cash seems to have a bracing effect on our ethics and our judgment. Dan Ariely has found that we are willing to cheat for poker chips convertible into cash but less willing to be dishonest for naked cash itself. Drazen Prelec and Duncan Simester discovered a much higher willingness to pay for a good of uncertain value if the payment was made by credit card.

I would not wish to be too gloomy about all this. Most people do find a way to navigate through the maze of shopping malls and phone bills and loyalty cards and easy credit – the research of the economist Eugenio Miravete often shows people finding satisfactory deals against what look like insuperable odds. And the free market continues to deliver valuable products.

Nor is the right regulatory intervention always clear. Slot machines could be banned, I suppose – no doubt with unintended consequences – but the Vegas-isation of the everyday economy is not easily curbed with the stroke of a legislator’s pen.

Yet it is hard for a free-market enthusiast like me to look unblinkingly at Las Vegas, at row upon row of machines, designed by an elite and needing little human intervention, drawing in consumers, soothing them, entertaining them and eating their money – and not to feel that the invisible hand has slipped.

Also published at ft.com.

Undercover Economist

It’s who you hardly know that counts

‘Your family won’t get you a job or pay your bills … By contrast, distant contacts are sometimes surprisingly useful’

This may be a statement of the obvious at Christmas, but our families can sometimes let us down. Evidence comes from a little-noticed survey published by the US Census Bureau in September. The findings are conveyed in a sad and simple graph. It reports a survey of “households experiencing hardship” in 2011 – and who helped them when times were tough. What counted as tough times? Having a phone disconnected, missing utility bill payments, falling into rent or mortgage arrears, or not seeing a doctor or dentist when needed.

More than half of such households expected help from family members, as did almost half from friends. Rather fewer – about a fifth – hoped for help from a social agency, charity or church.

The overwhelming majority were disappointed. It was rare for family members to provide help with rent arrears – about one time in six – and it was rarer still to receive financial help from other sources or for other purposes.

In short, hard-up Americans were confident of help in need from those close to them – and that confidence was misplaced. (If you’re looking for an explanation of the popularity of payday loans, this finding isn’t a bad start.)

An optimistic reading of this research is that there are plenty of people whose families or friends did help them and thus never featured in the sample. Perhaps. But as the economist Timothy Taylor comments, enough people experience disappointment to leave “lasting shadows”.

This dispiriting stuff reminded me of Mark Granovetter’s work on “the strength of weak ties”, published in 1973. Granovetter, a sociologist, brought together two disparate strands of work: a survey of how people with professional or managerial jobs had found those jobs; and a theoretical analysis of the structure of social networks.

Start with the theoretical observation first: the most irreplaceable social connections, paradoxically, are often rather weak or distant ones. A family group or clique of close friends all tend to know each other and know similar things at similar times. Their social ties are strong but also redundant, in the sense that there are many different paths through which information could pass from one member of that group to another.

By contrast, “weak ties” between one social cluster and another are valuable precisely because the social contact is unusual. Information passed along a weak tie will often be totally new – and if it doesn’t arrive through the weak tie, it is unlikely to arrive at all.

Granovetter then supplemented this theoretical idea with his survey, showing that it was very common for people to find jobs – especially managerial jobs and jobs with which they were satisfied – through personal contacts. The old saw is true: it’s not what you know, it’s who you know. Or as Granovetter put it in his book Finding a Job, what matters most is “one’s position in a social network”.

But this is not because of crude nepotism: the key contacts who helped jobseekers find jobs were typically distant rather than close friends – old college contacts, perhaps, or former colleagues. Granovetter’s analysis made this finding make sense: it’s the more peripheral contacts who tell you things you don’t already know.

More recent research – for instance, a “big data” analysis of millions of mobile phone records conducted by Jukka-Pekka Onnela, Albert-László Barabási and others – has backed up Granovetter’s argument that the weaker ties are the vital ones.

It’s a disappointing message to deliver at Christmas: your family won’t get you a job or pay your bills – count yourself lucky if they serve you a slice of turkey. By contrast, distant contacts are sometimes surprisingly useful: no wonder we send Christmas cards to people we barely remember.

Also published at ft.com.

Undercover Economist

The gross distortions of GDP

‘Are we doomed to live in a commercial society distorted by a concept which leaves out so much that really matters?’

Call it the Christmas paradox. Our seasonal festival is the occasion both for a colossal consumerist blowout and for reflecting on the importance of things money can’t buy: family bonds, friendship, anticipation and nostalgia.

So as the mince pies bake and the sherry flows, whither GDP? GDP – or gross domestic product – measures the size of the economy by adding up all income earned, or all money spent, or the monetary value of everything produced: the three should be equivalent. But they are not, notoriously, equivalent to some deeper measure of what all this stuff is really worth to us.

As the economist Diane Coyle points out in her forthcoming book GDP: A Brief But Affectionate History, the idea that GDP would measure wellbeing was sidelined in the 1930s. Simon Kuznets produced the first serious estimates of US GDP in 1934, and wanted to adjust his calculations to reflect “the elements which, from the standpoint of a more enlightened social philosophy than that of an acquisitive society represent disservice rather than service”. It was a political battle that Kuznets lost: America was focused on ramping up production to escape the Depression and prepare for war.

Why not, then, replace GDP with a measure of what really matters: happiness? This suggestion just won’t go away, despite the fact that happiness is already widely measured. And while the measures of it look useful and are inexpensive to collect, they’re surely too crude for macroeconomic purposes. Imagine calculating national income the same way we do happiness, by asking everyone, “How much money do you make, on a scale of one to seven?” and then averaging the result. I’m not sure we’d learn a great deal.

Yet GDP is problematic, and increasingly so. We seem to have no convincing measure, for example, of what contribution financial services make to the economy. In the wake of the recession, Andrew Haldane of the Bank of England pointed out that according to the UK’s national accounts, this contribution grew at the fastest rate on record in the fourth quarter of 2008 – the quarter that began a fortnight after Lehman Brothers collapsed.

Or consider what appears to be an opposite error. According to the economist Erik Brynjolfsson of MIT, the information sector of the economy (software, telecoms, publishing, data processing, movies, TV) has scarcely grown over the past 25 years as measured by GDP. This seems bizarre but it’s easy to see the logic: GDP measures the price paid for goods and services, but many valuable digital services are free or cheap. Brynjolfsson and co-author JooHee Oh reckon that every year consumers in the US are enjoying an extra $100bn of services online they don’t have to pay for.

There are plenty of other knotty problems too – from how to measure the losses caused by distracting Facebook posts to how to calculate the gains from antibiotics and super-efficient lighting.

Coyle argues that GDP collection needs to be reformed but not replaced. I agree. But where does that leave Christmas? Are we doomed to live in an increasingly commercial society that’s distorted by a concept which leaves out so much of what really matters?

Perhaps crass commercialism is our fate. But let’s not blame GDP (or its close cousin GNP, gross national product) for that. In 1968, Bobby Kennedy famously declared that GNP “counts napalm and … nuclear warheads and armoured cars for the police to fight the riots in our cities. Yet [it] does not allow for the health of our children … the beauty of our poetry or the strength of our marriages”.

Indeed, it does not. But divorces don’t begin at the Office for National Statistics; nor did the Bureau of Labor Statistics start the Vietnam war. GDP has its flaws – but if you give, or receive, a costly, unwanted gift this Christmas, please don’t blame the statisticians.

Also published at ft.com.

Undercover Economist

Fairness is shared by our environment

‘The idea that hard work needs to be rewarded is a farmer’s view. The claim that “we’re all in this together” is hunter-thinking’

In the early 1980s, the anthropologist Hilly Kaplan visited Paraguay to study a hunter-gatherer tribe called the Aché. He found a moral code that, by western standards, seemed too good to be true: Aché hunters shared with open hands, giving away 90 per cent of their meat and 80 per cent of the grubs and fruit they gathered. The Aché believed that a hunter who ate his own kill would be cursed.

As the years passed, Kaplan saw this sharing culture disappear. The rainforest was being hacked back, so the Aché found that foraging would no longer sustain them. They put down roots – literally – and began to farm. And as they started farming, they stopped sharing.

This sad story makes perfect sense. Hunters have enormously volatile incomes: one day they may catch more than they can possibly eat; the next day, nothing. Kaplan discovered that Aché hunters came home empty-handed slightly more often than not. At such a strike rate a hunter would expect to do without food for an entire week about once every year.

Even a skilled hunter is largely at the mercy of good or bad luck – but others in the tribe may have better luck on the same day. It’s easy to see why a strong tradition of sharing might have arisen.

Farmers, by contrast, are less exposed to individual luck. Bad weather will probably affect neighbouring farms too, so there’s less to be gained from pooling risks. And there’s much to be lost: insurers invented the term “moral hazard” to describe cases where people are lazy or careless because they know they’re insured. Sharing encourages scroungers.

So maybe views of fairness are shaped by the environment in which we find ourselves. Hunters value sharing; farmers value self-sufficiency through hard work. Both are admirable virtues and both are appropriate to the situation.

Kaplan teamed up with other researchers, including Vernon L Smith, a winner of the Nobel memorial prize for economics, to test this idea. They concluded that sharing accompanies “unsynchronized variance in resource availability” – researcher-speak for “You never know who’ll be next to bag a monkey.”

Megan McArdle, in her fascinating forthcoming book The Up Side of Down, observes that modern societies can’t make up their minds whether to adopt the morality of farmers or of hunters. The idea that hard work needs to be rewarded is a farmer’s view of fairness. The claim that “we’re all in this together” is hunter-thinking.

Mostly, we seem to think like farmers. The government does tax and redistribute but spending on roads, police or the army isn’t redistribution. The National Health Service is probably the most prominent, beloved and well-funded expression of hunter morality we have – after all, anyone can fall sick without warning. But an Aché-style tax rate of 80 or 90 per cent for all seems unimaginable.

Economic success in the modern world requires tenacity and talent. It also requires luck. Perhaps it’s not surprising, then, that our moral intuitions straddle the fence between farmer and hunter.

But there’s something different about 21st-century luck – it tends to last far longer than a day. Accidents of parentage are important. So is timing: people who graduate during a recession experience years of depressed earnings after missing the perfect window to step on to the career ladder. Experimenters have sent thousands of CVs to prospective employers and shown that “farmer virtues” – a high-quality degree or relevant business experience – seem less important than your skin colour or the length of time you’ve been unemployed.

The importance of luck in the modern economy might push us towards the fair-shares-for-all morality of the hunter. But if the lucky know they can stay lucky for a lifetime, why share at all?

Also published at ft.com.

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