Tim Harford The Undercover Economist

Undercover EconomistUndercover Economist

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

Undercover Economist

A clever nudge to improve diversity

In the introduction to my book, The Undercover Economist, I invite readers to imagine that, as they leaf through the pages, there’s an economist sitting nearby. Because he’s an economist, he sees things — hidden patterns, curious puzzles — that they might not notice. The book had been out for a decade when a young economist wrote to me. She had a simple question: why was my undercover economist a “he”?

I was reminded of the question this week by the musician David Byrne’s embarrassment. Mr Byrne, formerly of Talking Heads, has just realised that his new album is a string of collaborations with men. He apologised for being “part of the problem”.

It is easy for white men in a white man’s world to do this sort of thing without malice — almost by default. Sometimes we need a nudge to do better. Frances McDormand has just such a nudge in mind. Accepting her second Oscar for best actress on Sunday, she invited every female nominee in the room to stand up. “Look around, ladies and gentlemen, because we all have stories to tell and projects we need financed,” she said. Adding a final enigmatic phrase: “inclusion rider”.

Inclusion rider? The idea was proposed a couple of years ago by media researcher Stacy Smith. Ms Smith observed that minor characters could easily be demographically representative of a film’s setting — which is likely to mean more women, more ethnic minorities and more disabled actors on screen. An A-List celebrity could simply insist on this requirement — an inclusion rider — in his or her contract.

This is a clever nudge. A straightforward demand for “more diversity”, however reasonable, can be evaded. A black Superman or female Gandalf apparently feels too bold for some studio executives. But the inclusion rider clause is specific and straightforward to satisfy; nobody is going to die in a ditch to make sure that straight white men get all the bit-part roles. Off-screen jobs could be covered, too. And it’s easy to imagine Hollywood A-listers throwing their weight around on this point.

There is no doubt that Hollywood movies fail any reasonable test of being demographically representative. The most famous test — imperfect but instructive — is named after cartoonist Alison Bechdel. To pass, a movie must contain two women, who talk to each other about something other than a man. A low bar, it might seem, but a surprising number of movies fail.

Despite some prominent examples of more diverse casting (the recent superhero movies Wonder Woman and Black Panther and the Oscar-winning Moonlight, which ironically fails the Bechdel test) it is not obvious that the situation is improving. Even online reviews are dominated by male reviewers.

We shouldn’t blame Hollywood alone for this. Data scientist Ben Blatt, author of Nabokov’s Favourite Word Is Mauve (UK) (US) conducted a computer-aided analysis both of recent fiction bestsellers and classics of the literary canon. One simple test: how often does the word “he” appear, relative to the word “she”?

In The Hobbit (US) (UK), JRR Tolkien’s adventure story that contains a variety of fairytale protagonists, none of them with wombs, the word “he” is used 1,900 times. The word “she” appears only once, referring to Bilbo’s mother. That is an outlier, but Mr Blatt found that many male novelists wrote about a world in which the opposite sex barely existed. This was far less true for female authors.

The economics profession has a particular problem when it comes to diversity, according to research by economists Amanda Bayer and Cecilia Elena Rouse. In the US, more than 50 per cent of both bachelor’s and doctoral “Stem” degrees — science, technology, engineering and mathematics — are now awarded to women. But, in economics, the proportion is just 30 per cent and shows no sign of improvement. Economics is also behind the curve in including some ethnic minorities.

To the extent this reflects discrimination, or a hostile environment for women, that is a disgrace. And if it is purely, or even partially, that young women don’t find economics appealing, we economists should be asking why not. A monoculture in academia is unfair, and it leads to blind spots, like the significance of unpaid housework.

One recent study is a nice reminder that a more inclusive environment can pay dividends. The Norwegian Defence Research Establishment randomly assigned female recruits into mostly male squads of six. During eight weeks of boot camp, the squad members trained together and shared a single dormitory. The experiment markedly shifted the attitudes of the men, with substantial increases in their evaluation of mixed-gender teams, and more egalitarian views on women and housework. “Gender stereotypes are malleable and can be altered by integrating,” noted the economists who ran the experiment.

There is a vast difference between an eight-week boot camp and the experience of watching a movie or reading a book that reflects our diversity. Still, we make what progress we can. I shall follow the topic of inclusion riders with interest. And the mysterious protagonist of The Undercover Economist? That street-smart enigma is now a “she”.
Written for and first published in the Financial Times on 9 March 2018.

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How referendums break democracies

The Dutch parliament have just agreed to abolish advisory referendums. I don’t blame them. I did not much care for the result of the latest referendum that was held in the UK, so I confess to disliking referendums with the fervour of a sore loser.

The winners no doubt feel more cheerful about the idea but even they may agree with this: the campaigning process was corrosive, and the consequences for the health of British politics have been even worse.

This scepticism might be seen as kicking democracy when it is down. The Pew Research Center found last year that 17 per cent of Americans think military rule would be a good idea, while 22 per cent favoured a strong leader “without interference from parliament or the courts”. The numbers in the UK were fairly similar.

Most of us still believe in democracy, but even its staunchest supporters will admit that it has its flaws. The most obvious of these is that we voters pay little attention to the issues. Consider Jeremy Corbyn’s recent shift; his opposition Labour party now advocates the UK leaving the EU but remaining in the (or “a”) customs union — not to be confused with the single market. This has been roundly agreed to be a significant change in the political landscape. But the now-momentous-seeming distinction between the customs union, the EU and the European single market was obscure to all but the wonkiest of wonks until a couple of years ago (myself included). It surely remains obscure to most voters today.

I do not mean this as a criticism of the voters. Why should we pay attention? We have other things to do. A decade ago, economist Bryan Caplan’s book The Myth of the Rational Voter (UK) (US) argued that it made sense for us to express our misconceptions, prejudices and tribal loyalties at the ballot box, since doing so was almost costless.

A voter thinking of popping to the polls and then trying out a new pizzeria would be perfectly rational in checking out TripAdvisor, rather than the party manifestos. This is because her vote will almost certainly not make any difference to her life, but her choice of restaurant almost certainly will. We vote because we see it as a civic duty, or a way of being part of something bigger than ourselves. Few people go to the polls under the illusion that they will be casting the deciding vote.

If voters are not paying close attention, then what might we expect from a referendum? The psychologist and Nobel laureate Daniel Kahneman, in Thinking, Fast and Slow (UK) (US), writes, “When faced with a difficult question, we often answer an easier one instead, usually without noticing the substitution.”

The difficult question in a referendum might be, “Should the UK remain in the EU?”; the easier substitution is, “Do I like the way this country is going?”

Another simple heuristic is this: “If one of the options was awful, they wouldn’t be asking, would they?” Except that in the UK’s referendum on EU membership, for reasons of short-sighted political expediency, they did ask.

Of course, any democratic system is weakened by the fact that voters are not paying close attention. But representative democracy provides a line of defence against voter ignorance, by asking us to elect someone to make considered choices on our behalf.

I can’t fix a blocked drain, so I ask a plumber to do it for me. I am not sure whether that blotch on my cheekbone is malignant, so I ask a doctor. And I am, truth be told, a bit vague about the difference between the European Court of Justice and the European Court of Human Rights, which is why I elect an MP who can call on the advice of civil servants and the House of Commons library on my behalf.

I may make the same knee-jerk, tribal decision in an election as in a referendum, but at least I will be assisted by my recognition of longstanding party brands. Just as we recognise brands like Apple, Coke and HSBC, most voters know the difference between Conservative and Labour, or Republican and Democrat. We vote for people who seem to share our instincts and trust them to handle the details.

These brands have another advantage: they provide their owners some modest incentive to tell the truth and keep their promises. The shortlived campaigns that coalesce to fight referendums have no such constraints.

That points to one other disadvantage of a referendum: there is nobody to hold to account after the result. Theresa May campaigned for Remain. Three-quarters of MPs were for Remain. So if the result of the exit process goes badly, who can be blamed? Not them — and we’re certainly not going to blame ourselves. The buck stops nowhere.

No voter can master every issue, and few voters try. Any democratic system must cope with that. Referendums, instead, invite us to ignore the question, give the snake-oil peddlers an edge, concentrate our ignorance into a tightly focused beam, and hold nobody accountable for results. They magnify the vulnerabilities of our democracies and diminish their defences. The Dutch are wise to avoid them.


Written for and first published in the Financial Times on 2 March 2018.

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Zombie companies walk among us

For vampires, the weakness is garlic. For werewolves, it’s a silver bullet. And for zombies? Perhaps a rise in interest rates will do the trick. Economists have worried about “zombie companies” for decades. Timothy Taylor, editor of the Journal of Economic Perspectives, has followed a trail of references back to 1989, noting sightings of these zombies in Japan from the 1990s, and more recently in China.

The fundamental concern is that there are companies which should be dead, yet continue to lumber on, ruining things for everyone. It’s a vivid metaphor — perhaps a little too vivid — and it is likely to be tested over the months and years to come if, as almost everyone expects, central banks continue to raise interest rates back to what veterans might describe as “normal”.

Claudio Borio of the Bank for International Settlements recently gave a speech in which he worried about the tendency of low interest rates to sustain zombie companies. Mr Borio has consistently been concerned about the distorting effects of low interest rates, but the zombie element of his argument adds a new twist.

Researchers at both the BIS and the OECD, the club of wealthy nations, have found evidence that low interest rates seem conducive to the existence of zombies, which they define as older companies that don’t make enough money to service their debts. As interest rates have fallen around the world, such zombies have become more prevalent and have also shown more endurance.

On average, across the US, Japan, Australia and western Europe, the proportion of firms that are zombies has risen fivefold since 1987, from 2 to 10 per cent. The zombies walk among us.

Why should we worry? One obvious answer is that zombies absorb resources. If a zombie retailer occupies a space on the high street, that makes it harder and more expensive for a start-up or a successful competitor to move in. The same goes for any resource from advertising space to electricity, and of course it goes for staff, too.

We would usually expect a thriving company to be able to outbid the walking dead for anything necessary, from a finance director to a unit in an industrial estate. But the status quo always has a certain power, and in some cases, the zombie might be at an unfair advantage.

Consider a zombie bank, propped up by a government guarantee but basically insolvent. Gambling on resurrection, it tries to expand by offering high rates to depositors and cheap loans to creditors. In the late 1980s, Joseph Stiglitz — later to win a Nobel memorial prize in economics — proposed a “Gresham’s law” of savings-and-loan associations based on this tendency: bad associations crowd out good ones.

More recently, the collapse of Carillion, a large British outsourcing and construction firm, showed a similar dynamic. The more Carillion struggled, the more desperate it became to win new business — which meant aggressive bids in competitive auctions, dooming Carillion while starving competitors of business.

Having written an entire book about the importance of failure, I am naturally sympathetic to Mr Borio’s argument. Modern economies have a low failure rate — probably too low.

Still, one should not be too cavalier about this point. To ordinary ears, bankruptcy sounds unambiguously bad. If you spend too much time thinking about zombie firms and economic dynamism, bankruptcy starts to sound unambiguously good.

Cut down those zombies and let highly productive new firms grow in the rich soil, fertilised by those zombie corpses, sounds like — forgive the play on words — a no-brainer.

But should we really be so pleased that so many of the UK’s coal mines, or the auto suppliers of Detroit, have been successfully killed off? If nothing has replaced them, there is nothing to celebrate.

One of the lessons of recent economic research by economists David Autor, David Dorn and Gordon Hanson has been that productive new firms do not necessarily spring up as we might have hoped. Mr Autor and his colleagues have, in a series of influential papers, tracked local areas subject to the sudden shock of competition from imported Chinese products. Their conclusion: recovery is neither quick nor automatic.

Nor is it always easy for laid-off workers to stroll into fresh jobs: if you have worked for several years stitching soft toys, then the obvious next step when the toy factory lays you off is to start stitching shirts or trousers instead. Unfortunately, that is also the obvious next move for the importers, or the robots.

We can make a long list of policies that might help new productive firms to get started and expand: education, infrastructure, flexible regulations, small-business finance and so on. There is some evidence in favour of these policies, but no checklist can guarantee results.

Still, that is where to focus our attention as the zombies start to expire. The easier it is to start a new idea, the more hard-nosed we can be about killing off the old ones. It is necessary that the zombies must die, but that cannot be where the story ends.

Written for and first published in the Financial Times on 23 Feb 2018.

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Oxfam, #MeToo and the psychology of outrage

This week I overheard someone describing Oxfam as “all a bit Jimmy Savile”. When the UK’s most prominent development charity finds itself being compared to the UK’s most infamous sex offender, it’s safe to say that Oxfam has had a bad week.

The allegations are certainly disturbing: that senior Oxfam staff made liberal use of prostitutes in the wake of the catastrophic Haiti earthquake of 2010 — a crime, as well as an abuse of trust — and that Oxfam quietly showed them the door rather than take a blow to its reputation. The blow has landed now, and it is a heavy one. (Oxfam denies there was any cover-up.)

This is hardly the first wave of outrage to break. Before Oxfam there was the Presidents Club dinner — a men-only fundraiser at which waitresses were treated as sex objects. One FT investigation and the organisation was closed within hours.

There was Harvey Weinstein and the emergence of the #MeToo movement from niche to mainstream. There was the UK parliamentary expenses scandal. Then there are campaigns to take Cecil Rhodes’s statue off an Oxford college, and — from a different political direction — campaigns to ban transgender people from using the public bathroom they prefer.

Where does the outrage come from, and why does it seem to emerge so suddenly? Media reporting is often a trigger, but for every hard-hitting investigation that unleashes a sustained storm, a dozen squalls blow over swiftly.

One clue comes from a large research study of jury-style deliberations, conducted by psychologists Daniel Kahneman and David Schkade, along with Cass Sunstein, who has recently been exploring the dynamics of outrage. (Mr Sunstein was a senior official in the Obama administration, co-author with Richard Thaler of Nudge and is a legal scholar at Harvard Law School.)

This study looked at debates over punitive damage awards against corporations. When individual jurors felt a corporate crime was outrageous, the group displayed a “severity shift”. The group’s verdict could be more severe than any individual’s initial impression. The jurors egged each other on.

But juries could also display a “leniency shift”; if individuals thought the crime was trivial the jury as a whole would often feel even less worried. Sometimes we don’t know how to feel until we see how other people feel. We are, rightly, much more relaxed about gay cabinet ministers than we used to be, and this is partly because everyone sees that everyone else feels there is nothing shameful about it.

The severity shift and the leniency shift contribute to outrage being unpredictable. Our initial impressions are reinforced once we see what other people think.

But not all of these shifts are in favour of progressive causes. One experiment — conducted by economists Leonardo Bursztyn, Georgy Egorov, and Stefano Fiorin — examined people’s willingness to support an apparently xenophobic organisation. In 2016, people often wanted anonymity before they were willing to back the xenophobes.

US president Donald Trump changed that. When people were reminded that Mr Trump was leading in the polls in their state, anonymity no longer mattered. When the experiment was rerun after his election victory, the result was the same: some people were xenophobes and some were not, but in the Trump era, nobody kept their xenophobia in the closet.

The force of these jolts to public opinion is amplified by several other factors. Over the past year, it has become safer to speak out about sexual harassment, but it has also become riskier to make light of it. This reinforces the trend.

And the sudden salience of an issue may bring further problems to light. One woman tells her story of sexual assault at the hands of a famous man, and other women come forward to say that he’s done the same thing to them.

Or, since everyone is now concerned about sexual exploitation by Oxfam staff in Haiti, where else has this happened? How often? Journalists ask questions that could not have been asked a decade ago. Regulators open investigations. Other charities scramble to get ahead of the story.

The self-reinforcing dynamics mean that unpredictability is a feature of the outrage system. They also suggest that we need to learn two lessons.

The first is that we should ask ourselves, is there anything that happens in my profession, industry or community that is taken for granted, but that the wider world might view with sudden outrage? The in-crowd may lure each other into viewing transgressions with a leniency-shifted forgiveness. When everyone else pays attention, the leniency shift may flip to a severity shift.

The second is to beware tribalism. Outrage may be unpredictable, but once it has grown it is easy to manipulate for political ends, whether noble or reprehensible. Surrounded as we are with people who share our sense of outrage, it is easy to wonder why some other group just doesn’t seem to feel the same way.

Righteous outrage is a powerful weapon, and one that has smashed many barriers of injustice. We should pull the trigger of that weapon with care, not with abandon.

Written for and first published in the Financial Times on 16 February 2018.

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A sloth’s guide to surviving market volatility

This piece was published on 9 February 2018, about the rollercoaster ride of the stock market that week. The fact that it’s published with a month’s delay feels particularly appropriate, given the article’s argument. – TH

What happened in the markets this week? That depends on how often you were looking. It was a brutal Monday — the S&P 500 was down more than 4 per cent, the worst day on the market for more than six years.

Tuesday continued the rout — at least at first. But anyone who had paused for a leisurely coffee on the way to the office might have wondered what all the fuss was about: by 9.25am on Tuesday morning, New York time, the S&P 500 was up 2 per cent from the opening plunge. After various adventures, Tuesday ended up the best day in more than a year.

Twenty-five minutes for coffee is a very long time in the life of a high-frequency trading algorithm, with trades timestamped with an accuracy of one-ten-thousandth of a second. A casual investor, though, can blink and miss it.

A few months ago, my wife asked me for advice about where to invest some money on behalf of her family. I was concerned that stocks seemed rather expensive and advised caution. My words of warning rang true this week, when it has felt like a time to be cautious — but the truth is that over a six-month timescale my advice cost her money.

Most investors should operate closer to that six-month timescale than to the frenetic fast-twitch world in which a coffee break lasts an eternity. Given the choice between investing fast or slow, the slower the better.

This is partly for the sake of sanity. The concept of “loss aversion” was developed by two founding figures in behavioural economics, Daniel Kahneman and Amos Tversky. Their experiments showed that we tend to find a modest loss roughly twice as painful as an equivalent gain. (Ponder the annoyance of losing £10 against the pleasure of finding £10 and you may agree.)

If you check the market every day, you will find it is down very nearly as often as it is up, and the pain of the downs will tend to outweigh the joy of the ups. But if you check less frequently you will have more reason to smile: unlike good days, good years are almost three times more likely than bad ones. Slow investing feels better.

Slow investing may also be more lucrative, at least for those of us who lack the technology to compete at the microsecond level. One laboratory study — by Mr Kahneman, Tversky, Alan Schwartz and last year’s Nobel laureate economist Richard Thaler — invited participants to make investment allocation decisions over 200 “turns”, each meant to simulate a few weeks of real investment. Some were allowed to reallocate every turn after observing what had just happened. Others had to wait and decide whether to reallocate after seeing the accumulated return over either eight or 40 turns, simulating months or years without peeking at the portfolio.

Those who were forced to evaluate and decide at a slow pace were — like real investors — less likely to witness losses. As a result, they were not intimidated by short-term fluctuations. They chose less conservative investments and could expect bigger profits.

Research into the behaviour of real-world investors has reached similar conclusions. One study, by Brad Barber and Terrance Odean, looked at the investments of 65,000 ordinary retail investors in the early 1990s, a time of sharply rising markets. Messrs Barber and Odean found that the less retail investors traded, the better able they were to keep up with the market as a whole. Active traders underperformed by six percentage points a year because trading costs eroded their profits. Lazy investors made more money.

There may be a broader lesson in this. Sometimes we have a clearer view of the world when we stand back from it. In 1965, two Norwegian sociologists, Johan Galtung and Mari Holmboe Ruge, pointed out that the speed of the news cycle affects what we see as news: “To single out one murder during a battle where there is one person killed every minute would make little sense.”

A newspaper that was published once every 50 years — an idea proposed by Max Roser, an economist at Oxford university — might give us a much clearer perspective of what has gone right and wrong since 1968 than a stack of daily papers. The latest headlines: the world population growth rate has roughly halved and continues to fall. In 1968, nearly one in five children died before their fifth birthday; the rate is now lower than one in 20. Annual carbon-dioxide emissions have nearly tripled. Meanwhile the financial page reports that, over the past 50 years, the S&P 500 has delivered a total post-inflation return averaging almost 6 per cent per year — a 17-fold gain.

Perhaps we slow investors should adopt a mascot. I suggest the sloth. Hanging upside-down, moving at a few metres a minute, is much like trading infrequently: it saves the costs of doing things more quickly. Sloths take almost two months fully to digest each meal — which is handy, given that they eat mildly toxic leaves that would poison them if absorbed too quickly.

Investors are reminded, all too often, that the financial world is lush with toxic get-rich quick products. A slower approach to finance makes market movements a great deal more digestible.



Written for and first published in the Financial Times on 9 February 2018.

My recent book is “Fifty Inventions That Shaped The Modern Economy”. Grab yourself a copy in the US or in the UK (slightly different title) or through your local bookshop.

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Like great coffee, good ideas take time to percolate

Monmouth Coffee opened on Monmouth Street in London in 1978. It serves wonderful coffee and the queues often stretch out of the door. That is what makes what happened next so surprising.

What happened next was: nothing. Monmouth had few imitators, either upmarket or downmarket. Starbucks did not arrive in London for another 20 years. A handful of gourmet cafés serving New Zealand-style coffee only began to open in 2005. They’re very good, although I still prefer Monmouth. It’s now possible to get good coffee in several spots in London, but it is hardly ubiquitous. It is even more elusive outside the capital.

This is a puzzle. Monmouth may not be a global titan like Starbucks, but it appears to be a highly successful business: the coffee is priced confidently and it is popular. So why has such an obviously good idea been so slow to spread?

Even if you don’t much care about London’s coffee scene, this is an important question. William Gibson, science fiction author, observed that the future is already here — it’s just not evenly distributed. In that respect, it is much like good coffee. Economics agrees with Mr Gibson — which is fortunate, since he is little short of a prophet.

The data show that just because good ideas emerge does not mean that they spread quickly. Researchers at the OECD have concluded that within most sectors (for example, coal mining or food retail) there is a large and rising gap in productivity between the typical business and the 100 leading companies in the sector. The leading businesses are nearly 15 times more productive per worker, and almost five times more productive even after adjusting for their use of capital such as buildings, computers and machinery.

These are not small gaps. If there were some way to help good ideas to spread more quickly, more people would have good coffee and much else besides. One natural approach is for a laggard company to seek advice — perhaps from management consultants. A decade ago, economists at Berkeley, Stanford and the World Bank conducted a randomised trial in which the bank paid for some textile factories in Mumbai to receive consulting advice from a global company. These factories tended to have utterly chaotic systems, so help with modern inventory management made a big difference. The factories saw their productivity transformed.

More recently, those economists revisited the experiment. How much of the good advice had lasted? Had any of it spread? There was good news and bad news. The good news was that within companies that owned several factories, some of the good ideas first used in a single factory had been adopted across the company. But the bad news was that these proven management processes had not been copied by rival businesses.

This is a reminder of how slow good ideas can be to spread, even when they are straightforward to grasp. In his classic textbook, The Diffusion of Innovations (UK) (US), Everett Rogers points out that many inventions have to cross a cultural divide: the person preaching the good idea is often quite different to the person being preached to. Rogers would probably not have been surprised to see that “not invented here” was a barrier to good practice spreading in the Mumbai textile industry.

So good advice can work, but even good advice wears off. And we can all be resistant to new ideas. The status quo is comfortable, especially for the people who get to call the shots.

An extreme example of resistance to change lies behind the quip that “science advances one funeral at a time”, based on an observation from the physicist Max Planck. A team of economists has studied the evidence from data on academic citations, and found that Planck seems to have been right: the premature death of a star scientist opens up his or her field to productive contributions from outsiders in other domains. People can be so slow to change their minds that we literally have to wait for them to die.

There is an analogy in the marketplace: sometimes old businesses have to die before productivity improves, although that can mean desperate hardship for the workers involved. But sometimes bracing competition does not kill companies, but makes them stronger.

For example, when iron ore producers in the Great Lakes region found themselves exposed to cheap competition from Brazil in the 1980s, the century-old industry faced a crisis. The response — as tracked by economist James Schmitz Jr — was a dramatic surge in productivity, unleashed by changes in work practices. Other economists have found similar responses to trade shocks elsewhere.

And for all the talk of relentless change, there is evidence that US industry is becoming less dynamic: there are fewer shocks, and companies respond less to them. The OECD research, too, suggests that the productivity laggards tend to be further behind in markets that are over-regulated or otherwise shielded from competition.

All too often, we don’t pick up good ideas willingly. We grasp for them, in desperation, only when we have no choice.

Written for and first published in the Financial Times on 2 February 2018.

My recent book is “Fifty Inventions That Shaped The Modern Economy”. Grab yourself a copy in the US or in the UK (slightly different title) or through your local bookshop.

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Should the government try to maximise happiness?

“Money can’t buy me love,” sang The Beatles, although it is doubtful that this was a rigorous empirical claim. Still, nobody disputes that there’s more to life than money and a new book, The Origins of Happiness (UK) (US) argues that happiness should be a guide to government policy.

Two years ago this would have been part of the zeitgeist: one of Barack Obama’s senior advisers, the economist Alan Krueger, was a noted expert in “subjective wellbeing” (happiness to you and me), while former UK prime minister David Cameron also championed the idea. It now seems strangely out of step with the times: whatever you think is driving Britain’s current PM Theresa May or US president Donald Trump, it seems unlikely to be surveys of life satisfaction.

Still, it is easy to sympathise with Thomas Jefferson’s remark, shortly after he stepped down as US president, that “The care of human life & happiness, & not their destruction, is the first & only legitimate object of good government.”

The question is what that means for government policy — and whether the academic study of wellbeing can help. The five authors of The Origins of Happiness, including Professor Richard Layard of the London School of Economics, focus on answers to the question “Overall, how satisfied are you with your life these days?” on a scale of 0-10.

It’s not an absurd question, but if a group of academics proposed reforming a nation’s economic institutions and industrial strategy on the basis of answers to the question, “Overall, how rich do you think you are these days, on a scale of 0-10?” we might reasonably object that our evidence base was too fuzzy to provide much guidance.

Nor is it clear whether someone moving from three to four on the scale is enjoying the same boost to happiness as someone moving from seven to eight. And what does “10” really mean? Is it literally impossible to become happier from there — or, Spinal Tap-style, should there be room to go up to 11?

These questions might trouble only the philosophers, except that Lord Layard and his co-authors write of a “revolution in policymaking” based on findings such as “an extra year of education directly raises your own happiness by 0.03 points on average throughout life”. This suggests a confident policy swagger that I confess to lacking myself.

Still, a meagre kind of knowledge is better than no knowledge at all, and it would be wilful to ignore what people tell us about how they are feeling. So what do we learn?

First, we have a love-hate relationship with our jobs. We know from panel data (interviewing the same people more than once over time) that being unemployed is miserable and stays miserable for many years. This is a good argument in favour of policies that promote low unemployment — something Japan, Germany, the UK and the US have managed to do, and France, Italy and Spain have not.

But while unemployment is depressing, work itself is no paradise. Self-employed people are happier than employed people by the same margin that unemployed people are less happy. And Mr Krueger and Nobel laureate psychologist Daniel Kahneman have shown that of all the day-to-day activities we engage in, commuting and work are the least enjoyable — while of all the people we spend time with, colleagues are bad and bosses are worse.

The answer, of course, is more jobs, and better jobs, please. And for that matter, it seems that more time in satisfying romantic relationships would also help — but I prefer to leave the government out of that.

Lord Layard and his colleagues argue in general for evaluating government spending using “a method of cost-effectiveness in which the benefits are measured in units of happiness”. Some policies — such as providing ready-mix concrete floors to poor households in Mexico — pass this test easily. Others do not.

Lord Layard has long been an advocate of devoting more resources to treatment for depression and anxiety. He is right. Even a modest success rate would go a long way here. But beyond that, much depends on the capacity of government to deliver what matters. Better schools, we’re told, improve the emotional wellbeing of children, which is an excellent investment in happiness. Fine, but nobody is in favour of worse schools and the researchers confess to knowing very little about what features of a school are correlated with happy pupils.

There is much in the idea of an activist happiness policy to amuse or horrify anyone with laissez-faire instincts. But to the extent that we think governments can sometimes bodge their way into bettering the human condition, there’s a case to look at what people say makes them happy with their lives.

As a cautionary note, however, I offer Adam Smith’s warning against the person who “seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chessboard”. Whether a politician seeks to maximise national income or national happiness, Smith’s critique rings just as true.

Written for and first published in the Financial Times on 26 January 2018.

My recent book is “Fifty Inventions That Shaped The Modern Economy”. Grab yourself a copy in the US or in the UK (slightly different title) or through your local bookshop.

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Undercover Economist

The case for ending Amazon’s dominance

It should not be difficult to love Amazon. To consumers, it offers choice and convenience. Countless internet ventures have relied on its cheap, flexible cloud computing services to start and scale up. Amazon makes titans such as Walmart work hard for their revenue, offers a shopping search engine that is Google’s only serious rival, raises the bar for television networks and sells tablet computers at a price to make Apple loyalists stop and think.

Amazon is also giving the US economy what it needs. Two economists, Germán Gutiérrez and Thomas Philippon, have argued that corporate America is underinvesting. One reason is that companies are impatiently funnelling cash to investors and executives rather than take a long-term view.

If that is a worrisome state of affairs — and it should be — then Amazon is the shining counterexample. The online retailer’s strategy is driven not by short-term profit but by investment, innovation and growth. If only there were a few more companies like Amazon, capitalism would be in a happier spot.

But there’s the rub: there aren’t more companies like it. It’s unique, and an increasingly terrifying force in online commerce. Should regulators act? If so, how? It’s worth first disposing of a bad argument: that Amazon must be challenged because it makes life miserable for its competitors, some of which are plucky mom-and-pop operations. However emotionally appealing this might seem, it should not be the business of regulators to prop up such businesses.

Regulators have a tendency to slip into the role of protecting incumbents with surprising ease. Marc Levinson’s history of container shipping, The Box (UK) (US), describes Malcom McLean — the entrepreneur behind containerisation, a risk-taking visionary reminiscent of Amazon’s founder Jeff Bezos. When McLean tried to expand his operations, one of his largest obstacles was the Interstate Commerce Commission in the US, which regulated US railways from 1887 and interstate trucking from 1935.

The ICC, writes Mr Levinson, had to approve each new route, every new commodity and any new price schedule. When McLean wanted to start a trucking route at a low price, he had to hire lawyers and argue his case at the ICC, while his competitors protested bitterly — “unfair and destructive”, said the railways. He did not always get his way.

Antitrust authorities should not be in the business of making life easy for incumbents. What, then, should they do? There are two schools of thought. One is to focus on consumers’ interest in quality, variety and price. This has been the standard approach in US antitrust policy for several decades. Since Amazon makes slim profits and charges low prices, it raises few antitrust questions.

The alternative view — which harks back to an earlier era of antitrust during which Standard Oil and later AT&T were broken up — argues that competition is inherently good even if it is hard to quantify a benefit to consumers and that society should be wary of large or dominant companies even if their behaviour seems benign. The collapse of companies from Lehman Brothers to construction services business Carillion reminds us that size can be a problem when a company is weak as well as when it is strong.

The narrowing in antitrust thinking is described by Lina Khan in a much-read article, “Amazon’s Antitrust Paradox”. Ms Khan berates modern antitrust thinking for its “hostility to false positives”, arguing that it has become incapable of saying anything insightful about modern tech companies.

Unlike Ms Khan, I share modern antitrust’s hostility to false positives; there is a real cost to cumbersome and unnecessary meddling in a dynamic and rapidly-evolving marketplace. Donald Trump’s history of publicly attacking Mr Bezos is worth pondering too: do we really want the US government to have more discretion as to who is targeted, and why? We should not wish to return to a world in which a plucky new competitor must beg regulators — over the objections of incumbents — for permission to cut prices. We should be grateful that Mr Bezos did not face in the 1990s the regulatory obstacles that Malcom McLean dodged in the 1950s.

Yet for all this, I am deeply uneasy about Amazon’s apparently unassailable position in online retail. Yes, customers are being well served at the moment. Yet the company has acquired formidable entrenched advantages, from the information about customers and the suppliers who sell through it, to the bargaining power it has over delivery companies, to the vast network of warehouses. Those advantages were earned, but they can also be abused.

Antitrust authorities face a difficult balancing act. Regulate Amazon and you may snuff out the innovation that we all say we want more of. Punish it for success and you send a strange message to entrepreneurs and investors. Ignore it and you risk leaving vital services in the hands of an invincible monopolist.

There are no easy options, but it is time to look for a way to split Amazon into two independent companies, each with the strength to grow and invest. If Amazon is such a wonderful company, wouldn’t two Amazons be even better?

Written for and first published in the Financial Times on 19 January 2018.

My recent book is “Fifty Inventions That Shaped The Modern Economy”. Grab yourself a copy in the US or in the UK (slightly different title) or through your local bookshop.

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Undercover Economist

Lessons from history in how to spot a bubble

Here are three noteworthy pronouncements about bubbles.

“Prices have reached what looks like a permanently high plateau.” That was Professor Irving Fisher in 1929, prominently reported barely a week before the most brutal stock market crash of the 20th century. He was a rich man, and the greatest economist of the age. The great crash destroyed both his finances and his reputation.

“Those who sound the alarm of an approaching . . . crisis have somewhat exaggerated the danger.” That was a renowned commentator who shall remain nameless for now.

“We are currently showing signs of entering the blow-off or melt-up phase of this very long bull market.” That was investor Jeremy Grantham on January 3 this year. The normally bearish Mr Grantham mused that while shares seem expensive, historical precedents make it plausible that the S&P 500 will soar from present levels of around 2,700 to more than 3,500 before the crash occurs.

Mr Grantham’s speculation is striking because he has tended to be a savvy bubble watcher in the past. But as any toddler can attest, it is not an easy thing to catch one before it bursts.

There are two obvious ways to diagnose a bubble. One is to look at the fundamentals: if the price of an asset is unmoored from the cash flow it is likely to generate, that is a warning sign. (It is anyone’s guess what this implies for bitcoin, an asset that has no cash flow at all.)

The other approach is to look around: are people giddy with excitement? Can the media talk of little else? Are taxi drivers offering stock tips?

At the moment, however, these two approaches tell a different story about US stocks. They are expensive by most reasonable measures. But there are few other signs of speculative mania. The price rise has been steady, broad-based and was hardly the leading news of 2017. Given how expensive bonds are, it is hardly a surprise that stocks also seem pricey. No wonder investors and commentators are unsure what to say or do.

It seems all so much easier with hindsight: looking back, we can all enjoy a laugh at the Extraordinary Popular Delusions and the Madness of Crowds, to borrow the title of Charles Mackay’s famous 1841 book, which chuckles at the South Sea bubble and tulip mania. Yet even with hindsight things are not always clear. For example, I first became aware of the incipient dotcom bubble in the late 1990s, when a senior colleague told me that the upstart online bookseller Amazon.com was valued at more than every bookseller on the planet. A clearer instance of mania could scarcely be imagined.

But Amazon is worth much more today than at the height of the bubble, and comparing it with any number of booksellers now seems quaint. The dotcom bubble was mad and my colleague correctly diagnosed the lunacy, but he should still have bought and held Amazon stock.

Tales of the great tulip mania in 17th-century Holland seem clearer — most notoriously, the Semper Augustus bulb that sold for the price of an Amsterdam mansion. “The population, even to its lowest dregs, embarked in the tulip trade,” sneered Mackay more than 200 years later.

But the tale grows murkier still. The economist Peter Garber, author of Famous First Bubbles, points out that a rare tulip bulb could serve as the breeding stock for generations of valuable flowers; as its descendants became numerous, one would expect the price of individual bulbs to fall.

Some of the most spectacular prices seem to have been empty tavern wagers by almost-penniless braggarts, ignored by serious traders but much noticed by moralists. The idea that Holland was economically convulsed is hard to support: the historian Anne Goldgar, author of Tulipmania (US) (UK), has been unable to find anyone who actually went bankrupt as a result.

It is easy to laugh at the follies of the past, especially if they have been exaggerated for the purposes of sermonising or for comic effect. Charles Mackay copied and exaggerated the juiciest reports he could find in order to get his point across.

Then there is the matter of his own record as a financial guru. That comment, this time in full, “those who sound the alarm of an approaching railway crisis have somewhat exaggerated the danger”, was Mackay himself, writing in the Glasgow Argus in 1845, in full-throated support of the idea that the railway investment boom of the time would return a healthy profit to investors. It was, instead, a financial disaster. In the words of mathematician and bubble scholar Andrew Odlyzko, it was “by many measures the greatest technology mania in history, and its collapse was one of the greatest financial crashes”.

Oddly, Mackay barely mentions the railway mania in subsequent editions of his book — nor his own role as cheerleader. This is a lesson to us all. It’s very easy to scoff at past bubbles; it is not so easy to know how to react when one may — or may not — be surrounded by one.

Written for and first published in the Financial Times on 12 January 2018.

My recent book is “Fifty Inventions That Shaped The Modern Economy”. Grab yourself a copy in the US or in the UK (slightly different title) or through your local bookshop.

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Undercover Economist

Why Microsoft Office is a bigger productivity drain than Candy Crush Saga

A few weeks before Christmas, an impish chart appeared on the Bank of England’s unofficial blog. It compared plunging productivity with the soaring shipments of smartphones. Typical productivity growth in advanced economies had hovered steadily around 1 per cent a year for several decades, but has on average been negative since 2007. That was the year the iPhone started to ship.

Nobody really believes that the iPhone caused the productivity slowdown — a more obvious culprit would be the global financial crisis — but it is hard to find people who think that their phones are an unalloyed blessing. If in 1968 an economist or computer scientist had been told that 50 years later we would all be carrying wirelessly networked supercomputers in our pockets, he or she would have been staggered at the potential. I doubt they would have realised quite how much time we would spend liking Instagram posts, playing Pokémon Go and sending each other digital interruptions.

The costs of this distraction are starting to become apparent. I wrote recently about the research of Gloria Mark of the University of California, Irvine. Prof Mark argues that reorientating yourself after an interruption tends to take between 20 and 25 minutes. We all know how a moment’s inattention can turn into a clickhole of distractions. She also points out that once we get used to being interrupted by others, we start interrupting ourselves, twitchily checking email or social media in the hope something interesting might turn up.

Yet digital devices slow us down in subtler ways, too. Microsoft Office may be as much a drag on productivity as Candy Crush Saga. To see why, consider Adam Smith’s argument that economic progress was built on a foundation of the division of labour. His most celebrated example was a simple pin factory: “One man draws out the wire, another straights it, a third cuts it, a fourth points” and 10 men together made nearly 50,000 pins a day.

In another example — the making of a woollen coat — Smith emphasises that the division of labour allows us to use machines, even “that very simple machine, the shears with which the shepherd clips the wool”.

The shepherd has the perfect tool for a focused task. That tool needs countless other focused specialists: the bricklayer who built the foundry; the collier who mined fuel; the smith who forged the blades. It is a reinforcing spiral: the division of labour lets us build new machines, while machines work best when jobs have been divided into one small task after another.

The rise of the computer complicates this story. Computers can certainly continue the process of specialisation, parcelling out jobs into repetitive chunks, but fundamentally they are general purpose devices, and by running software such as Microsoft Office they are turning many of us into generalists.

In a modern office there are no specialist typists; we all need to be able to pick our way around a keyboard. PowerPoint has made amateur slide designers of everyone. Once a slide would be produced by a professional, because no one else had the necessary equipment or training. Now anyone can have a go — and they do.

Well-paid middle managers with no design skills take far too long to produce ugly slides that nobody wants to look at. They also file their own expenses, book their own travel and, for that matter, do their own shopping in the supermarket. On a bill-by-the-minute basis none of this makes sense.

Why do we behave like this? It is partly a matter of pride: since everyone has the tools to build a website or lay out a book, it feels a little feeble to hand the job over to a professional. And it is partly bad organisational design: sacking the administrative assistants and telling senior staff to do their own expenses can look, superficially, like a cost saving.

But it is also that some of these jobs are a pleasant diversion from the key task at hand. Even filling out expenses may be soothing to some, and designing your own PowerPoint presentation can be quite fun for the presenter, if not for the hapless audience.

Smith worried that repetitive work would make us “as stupid and ignorant as it is possible for a human creature to become”. That risk remains. Technology can unbundle tasks, leaving human workers with grimly narrow duties.

But for other workers, general-purpose computers push back against Smith’s concern. Design a pretty graph, search the internet for cartoons for a presentation, use a price-comparison site to book some travel, craft an eloquent post on LinkedIn, and office life starts to look mildly entertaining — even if there isn’t much time left to do the jobs for which we’re paid. Setting games and social media aside, there are plenty of ways for workers to use their computers to do their jobs less efficiently while having more fun, perhaps without even meaning to.

I suspect this is but a small part of the productivity slowdown. And I feel ambivalent about it. A day full of distractions is rarely satisfying. On the other hand, I would not wish to spend each hour sharpening 5,000 pins.

Written for and first published in the Financial Times on 5 January 2018.

My new book is “Fifty Inventions That Shaped The Modern Economy”. Grab yourself a copy in the US or in the UK (slightly different title) or through your local bookshop.

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