Tim Harford The Undercover Economist

Articles published in May, 2005

Economic enlightenment

Dear Economist,

How do economists view things that can’t be valued in money, such as love or peace of mind?

I suspect that many (confused) people strive for these invaluable things through external means, for example by spending money. Please enlighten me.

— Angelique Tsang, by e-mail

Dear Angelique,

You may be wise about the world, but you are not so wise about economics. Money can easily measure peace of mind. Think about it: would you rather have an hour’s peace of mind or $1m?

I asked around and most of my friends would rather have $5,000 than an hour’s peace of mind but, offered just $5, would prefer the inner calm.

In fact, you don’t need to measure value in monetary terms. You could measure it using camels or hot fudge sundaes. How many hot fudge sundaes are worth a summer’s day feeling head-over-heels in love? The answer will be different for different people, but that doesn’t mean there isn’t one.

So let’s not confuse the statement that money can’t measure love with the statement that money can’t buy love. I would agree that you can’t buy an hour’s peace of mind for $5,000, but even if you could, it wouldn’t be great value for money.

As for your claim that many people strive for love or peace by spending money, and that they are confused when they do so, you may be right. Economists can only judge people by their actions. If I see a man working a hundred hours a week in a stressful banking job and spending the money on a Ferrari, I can only speculate that he preferred the Ferrari and the stress to relaxation and spare time.

You and I may prefer our bicycles, but I am not sure whether this shows that we are enlightened, or that we are merely different.

First published at ft.com.

28th of May, 2005Dear EconomistComments off

A new strategy for climate change

Open Democracy are hosting a debate on climate change. I argue here that an auction of emissions permits is not only the most efficient way to reduce emissions, it is also a good political strategy.

24th of May, 2005Other WritingComments off

Why aren’t there more fun economics books?

In a symposium on Steve Levitt over at Crooked Timber, I argue here that economists should learn from the success of Freakonomics that there is an appetite for economics books that aim to do nothing more than show that economics is fun.

23rd of May, 2005Other WritingComments off

Living wills

Dear Economist,
I realise that I may not die a simple death, but I don’t want to lie comatose for years and I don’t want my family to argue about what happens next. Would a “living will” solve the problem?

— Edgar Andrews, Boston

Dear Edgar,

It does seem that a living will, instructing doctors to withdraw treatment if your brain dies, would do the trick. But medical decisions are not black-and-white and cannot be reduced to a set of contractual contingencies. In everyday life, incomplete contracts are accompanied by a bit of give-and-take along the way. In the case of your brain-death, this simply would not be possible.

So somebody should have “residual control rights”, which are the rights to make decisions when the contract is vague or silent. Appoint someone – your wife, say – as your proxy, and she will interpret your wishes.

Of course, if somebody else – your father, perhaps – has a stronger view about what should happen to your body, he will be able to pay your wife to do what he wants. There is no need for the family to argue. Your father can pay your wife a few thousand dollars (or more, if that is what it takes) to secure her agreement.

If she refuses, that indicates that she has the stronger preferences about how to dispose of you.

For the rest of us, the most important thing is that property rights over your body are clear. In the recent case of Terri Schiavo, they were disputed strongly enough to produce enormous transaction costs.

You may not care about such transaction costs. You may be more worried about the prospect of your wife and father striking a deal that does not respect your preferences. But as economist Steven Landsburg observes, in a charming article titled “Imagine Terri were a Toaster.”, if your brain dies, you won’t have any.

First published at ft.com.

21st of May, 2005Dear EconomistComments off

Virginity pledge

Dear Economist,
I am a virgin, but shortly to be married. I am looking forward to our wedding night but I am a little anxious about the risks. My fiance has had previous girlfriends, so I have asked him to take a test for sexually transmitted diseases. He says that he took a virginity pledge as a teenager and so there is no need. Should I accept this?
Yours, Miss M., Virginia

Dear Miss M.,

This so-called pledge doesn’t sound too solid to me. First, it is time-inconsistent. Nobel laureates Finn Kydland and Edward Prescott have explained that certain promises are likely to be broken when the time of trial arises. Time-inconsistency plagues government promises to run sound monetary and fiscal policy, but applies equally to more exciting forms of temptation.

Second, this is a non-verifiable contract under asymmetric information – that is, your fiance knows the truth, and you never will. If he is lying to you, you should be worried, since pledgers are less likely to use condoms if they do break their pledge.

Many pledgers promise to remain “sexually pure until the day I enter marriage”, but what does that mean? This is the third problem: the contract is incomplete. Even if you knew that he had stuck to the letter of his pledge, the risk is that your fiance may interpret “sexually pure” to allow certain practices which carry a high risk of STD infection. All in all, economists were hardly surprised when researchers from Columbia University’s Institute for Social and Economic Research and Policy found that virginity pledgers are as likely to pick up STDs as other teenagers.

You need a credible signal that your fiance is true. This would be an action which he could easily take if faithful, but which is costly if he is lying. His reticence to be tested should already tell you all you need to know.

First published at ft.com.

14th of May, 2005Dear EconomistComments off

The Undercover Economist

Some initial publicity material for ‘The Undercover Economist’ has now appeared on the Oxford University Press website.

12th of May, 2005MarginaliaComments off

Dear Economist arrives in the New York Times

This week’s column made the New York Times here (pdf here). When I find out what’s happening I’ll let you know.

12th of May, 2005Dear EconomistComments off

Exposing eBay evil

Dear Economist,
I recently bought a collectible comic book on eBay. The seller had a perfect feedback rating but the book is in far worse condition than he claimed. I am now inclined to post a negative comment – but maybe this is too harsh. Also, I am afraid of retaliation. What would you recommend?

— Jim Hertz, California

Dear Jim,
Let the world know that this guy is a fraud. As most readers will know, eBay is a vast internet-based boot-sale, where people buy and sell all kinds of goods from each other using auctions. After each transaction the buyer and seller publicly rate each other.
This is supposed to encourage honest behaviour, but perhaps because of the doubts you express, 199 out of 200 ratings are positive.
Economists Patrick Bajari and Ali Hortacsu recently surveyed the economic literature their brethren have produced about eBay. They report that you are right to expect retaliation; nearly half of negative ratings are reciprocated. But are you right to fear it?
As far as we economists can tell, eBay sellers enjoy a premium if they collect hundreds of positive ratings; but one or two negative comments do not cause much harm. This makes some sense: after all, it is hard to fake hundreds of satisfied customers.
Negative comments do have one clear effect, though: they make it more likely that subsequent negative comments will be posted quickly. Apparently, some sellers are behaving badly but nobody wants to be the first to say so. By opening the floodgates you will do other eBay users a favour. And if this really is just a one-off, the seller will not suffer. Meanwhile, his retaliatory comment will not harm your own dealings – unless you have a queue of dissatisfied customers just waiting for an excuse to say so.

First published at ft.com .

7th of May, 2005Dear EconomistComments off

Private Finance: Are Private Loans and Charitable Giving Replacing Aid?

by Tim Harford, Bita Hadjimichael and Michael Klein

Private financial flows to developing countries, such as debt, equity, remittances, and private charitable giving, have increased dramatically over the past 20 years. One commentator has even trumpeted “the privatization of foreign aid.” Since private charitable giving remains small and developing country governments are borrowing more, not less, from official sources, this claim is misleading. But unprecedented sums are indeed flowing to the private sector in developing countries.


Part of the series on The Market for Aid: http://rru.worldbank.org/Themes/AidEffectiveness/

3rd of May, 2005Other WritingComments off


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