Tim Harford The Undercover Economist

Articles published in January, 2007


Dear Economist,

My wife knows that my conference-going activities enable me to carry on a long-standing affair. Now she has the opportunity to exact her revenge: I am continuing the dalliance at a conference abroad, but my wife says she plans to bring some girlfriends to holiday in the same place. It would be a catastrophe if she were to make a scene by introducing them to my mistress, which is clearly her intention. I cannot hide. My mistress will demand to be taken out, and there are only one and a half decent restaurants in the town. Can you assist?

Yours sincerely,

“Mr Smith”, London

Answer at ft.com, subscription free

27th of January, 2007Dear EconomistComments off

Keep it real – Undercover Economist

It stands to reason that distance is dead. Electronic communication is better and cheaper than it’s ever been. Sitting on the sofa just now, I used a cheap laptop computer to log on to my neighbour’s wireless network and order a free quad-band mobile phone that – I am told – will let me make calls and send e-mails from almost anywhere in the world.

More to the point, nobody would be remotely surprised to hear it. Virtual worlds, BlackBerries, video-conferencing from the local Starbucks – it has all become so easy, and so commonplace, so quickly.

Intuitively, that should mean that geography becomes less important. E-mail and video-conferencing mean fewer flights. No more business conferences or meetings at Davos. Telecommuters don’t need to clog up the roads, and property prices in London and New York should slide as people carry out their investment-banking responsibilities from Anglesey or Iowa.

It doesn’t take a genius to figure out that there’s something wrong with this argument. Despite the ease of communication and the fall in the cost of transporting goods, for most people geography seems to be as important as ever. People haven’t stopped flying for meetings and conferences; the World Economic Forum meetings are now a round-the-calendar circus in more than 10 countries. New York is one of the few places in the US where the property market isn’t stuttering. In the US, a few hotspot cities are sucking in ever-larger concentrations of young educated workers.

So what is happening? To some extent, the same thing that happened to the paperless office…

Continued at ft.com, subscription free

Tap into America!

The US paperback edition of The Undercover Economist is out on January 30th, and to celebrate the event, my publishers are flying me all over North America.

If you would like to avoid me, please steer clear of the following venues. If you would like to attend, snoop around and find out more, because some events require tickets:

  • Tuesday 30 January – Seattle
    5:30 PM
    Greater Seattle Chamber of Commerce
  • Thursday 1 February – New York City
    6.30 PM
    Barnes & Noble, Citigroup Center
    160 E 54th Street (at 3rd Avenue)
  • Friday 2 February – Chicago
    11:30 AM
    Union League
    65 West Jackson Blvd.
  • Monday 5 February – Washington DC
    11.30 AM
    Library of Congress
    Washington, D.C. 20540
  • Tuesday 6 February – Toronto
    12 Noon
    Toronto CFA Society
    Toronto Hilton
26th of January, 2007MarginaliaComments off

El Economista Camuflado

El Economista Camuflado

The Spanish edition of “The Undercover Economist” is now out – one of 21 translations currently in progress.

25th of January, 2007MarginaliaComments off

Review: The Soulful Science, Diane Coyle

Those who were not paying attention could be forgiven for thinking that popular economics writing began in 2005 with the publication of the wildly successful Freakonomics. At one stage last year, Freakonomics and my own offering were exchanging first and second place on the Amazon.co.uk ratings. Nobody, I think, was more surprised than I and the “freakonomists” Steven Levitt and Stephen Dubner.

Diane Coyle did not think much of Freakonomics, which she attacked for its sensationalism, and The Soulful Science is not interested in making economics sexy. Dr Coyle has a very different ambition: she wants to make economics likeable.

Dr Coyle’s previous book, Sex, Drugs and Economics, was excellent on the economics but the title was misleading: this reader never got the sense that her heart was in the sex and drugs. In The Soulful Science, she is on more comfortable territory. Duly liberated from the need to hype up a subject that she feels needs no hyperbole, she has produced a better, more confident book.

The simple aim of The Soulful Science is to describe what economists do, how the field has changed in the past 10 years or so, and why you should care. It succeeds admirably.

The book is split into three parts: the first on economic growth, the second on human behaviour, and the third an attempt to bring the two together. The chapters are peppered with vignettes of economists – “passionate nerds”, she affectionately calls them – but at its core, each chapter is a review of the economic literature. Each chapter explains simply what the key questions are, shows the relevance of apparently esoteric debates, puts all the ideas into context and sums up neatly.

The opening chapters on growth and development are essential reading if you want to understand much of what is going on in the newspapers. If you want to understand whether there was a “new economy” in the 1990s, you need to understand how growth is measured and how previous technological innovations affected the economy. And if you want to understand the claims and counter-claims in an impassioned debate about the effectiveness of foreign aid, you should read the chapter on “How to Make Poverty History”.

We then move on to the hot topics of behavioural economics – that is, the study of how and why we do not act the way economists think we should – and the economics of happiness. Behavioural economics is a fascinating subject that could easily fill a book in its own right. Happiness economics is also intriguing, although far thinner: so far, it consists mostly of statistical correlations, asking whether people are more likely to say they are happy if they are rich, married or if the sun is shining.

Dr Coyle covers all this sympathetically but with an appropriate scepticism. Yes, happiness guru Lord Layard was happy growing up in a house with icicles on the inside of the windows, and Paradox of Choice author Barry Schwartz finds it agonising to choose between all the jeans on offer at Gap. But Dr Coyle likes designer shoes and dislikes icicles and would rather make her own choices than have Profs Layard and Schwartz decide for her.

Dr Coyle usually chooses her subjects well, picking research areas that are frequently over-embellished by others and giving them the fresh, unbiased treatment they are crying out for. But her final chapter, “Why Economics has Soul”, is less satisfying. What begins as a defence of economics turns into a laundry list of cool things that economists do. It is interesting enough but not a particularly satisfying way to conclude the book. Since the final chapter is supposed to defend the subject, perhaps it is unfair to complain that it sounds defensive. The rest of the book is defence enough.

Even if economists have been claiming that economics can be fun for many years, publishers have recently begun to pay much closer attention. The Soulful Science will not be the only popular economics book of 2007. One notable attraction is Steven Landsburg, an American economics professor who wrote the now-canonical The Armchair Economist. He will be back in April with More Sex is Safer Sex. Having seen a copy, I can confirm that Prof Landsburg seems keener to write about sex than Dr Coyle is.

The contrast in styles is striking. Dr Coyle is the “passionate nerd”, an enthusiastic teacher, convinced that a brightly presented review of contemporary economics should be accepted on its own merits. Prof Landsburg is more of a subversive figure, tempting readers to the dark side with an eagerness to contradict conventional wisdom at every step. He is keen to shock: at one point, he asks us to compare coma victim Terri Schiavo to a toaster to better comprehend his argument. Still, the devilish fun of it all is undeniable.

Dr Coyle is keen to make friends for economics and Prof Landsburg, it seems, is happy to make enemies. How encouraging that popular economics writing has matured to the point where we have the choice between these contrasting approaches. My advice would be to read both.

22nd of January, 2007Other WritingComments off

Five minutes fast

Dear Economist,

I have the habit of setting my watch five minutes fast. This fools me into avoiding being three minutes late for meetings, or the train – well, more often than not – and instead being two minutes early. But if I am a rational economic agent, how do I succeed in fooling myself so systematically?

Yours (in haste),

Mark, Oxford

Answer at ft.com, subscription free

20th of January, 2007Dear EconomistComments off

January Dues – Undercover Economist

January was traditionally a good time to pick up bargains, on the stock market as well as anywhere else. This “January effect” was that US stocks rose much more in January than in any other month. Sidney Wachtel discovered the phenomenon in the 1940s, but it wasn’t until the 1970s that anybody took much notice. Subsequent researchers have made refinements and produced ingenious explanations, but the main interest in the January effect is as a challenge to the efficient markets hypothesis.

This hypothesis suggests you can’t beat the market without inside information. That’s because all publicly available information is taken into account in the market price. A rule which says “buy on 31 December and sell on 31 January” shouldn’t yield spectacular returns. But it has.

A simple way to understand the efficient markets hypothesis is to think about the problem of finding the shortest queue at the checkout. I never bother. The way I see it, if there were an obvious shortest queue, other people would have gone to stand in it already and it wouldn’t be the shortest anymore. Similarly, cheap shares have been snapped up and are no longer cheap.

But taken to extremes, the efficient markets hypothesis must be false. If it were impossible to beat the market then nobody would try, and if nobody tried it would be easy to beat the market. In other words: if nobody bothers to look for ₤50 notes dropped on the pavement, there will be more than enough lying around to justify the effort of doing so.

Yet the efficient markets hypothesis is much more convincing than it looks at first glance…

Continued, subscription free, at ft.com

Student fridges

Dear Economist,

I live in a student house with six others. All of us drink milk, some a lot, and some a little. Only three of us buy milk, and we buy three different varieties, meaning my preferred type can quickly run out.

Worse, my variety (semi-skimmed) seems to be the second preference of everyone else.

Free riding is common, but I don’t want to spoil the atmosphere with strict rules and enforcement mechanisms. What course of action would you recommend?

Haakon, Oxford

Answer at ft.com, subcription free

13th of January, 2007Dear EconomistComments off

Big salaries are not so potty – Undercover Economist

This column deals graphically with two distasteful subjects: excessive executive pay, and potty training. You have been warned.

Let me start with the elder Miss Harford, who this week demonstrated that she is well capable of controlling her bodily functions. She peed on the floor five times in quick succession in an attempt to divert her mother from feeding the younger Miss Harford.

Fine. She knows how to use the potty, so all that is now required is the right incentive. Chocolate coins turn out to be the sort of currency a two-year-old understands. Successful use of the potty earns such a coin. It works, and is money well spent.

Yet two days into the contract, problems are emerging. What is “successful use of the potty”? She doesn’t always make it there in time. But at this early stage, we choose to accentuate (and reward) the positive. In a month’s time I will be less impressed, but can we really move the goalposts then?

Even straightforward incentives can be manipulated. The great pole vaulter, Sergei Bubka, repeatedly broke the world record by a centimetre – and earned a cash bonus every time. I have visions of the near future in which Miss Harford empties her bladder one drop at a time in order to scoop bagfuls of chocolate coins.

As we are discovering, apparently black-and-white matters of performance can quickly become shades of grey.

Continued, subscription free, at ft.com

Latest Undercover Economist columns

Happy New Year, everyone!

Doctor Feelgood, December 2nd 2006
A spot of Rinkmanship, December 9th 2006
Check this out, December 16th 2006
Trials and error, January 6th 2007

(There was a break over Christmas.)



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