Tim Harford The Undercover Economist

Articles published in March, 2007


Dear Economist,

I’ve fallen in love with my best friend. Whenever we go out, we have the best of times but for a reason I seem to unable to comprehend, she has not clearly indicated that she feels the same for me as I do for her. I see a risk of alienating her as a friend if I tell her how I feel for her. Quite an exposure in my view.
Any suggestions?
F, Austria

Answer at ft.com, subscription free.

10th of March, 2007Dear EconomistComments off

Start with the end in mind when it comes to marriage

FT Comment, 5 March 2007

For most of us, the most important contract we will ever enter into is marriage. It is a shame that nobody really seems to know what the contract says, and for obvious reasons it is considered poor form to ask.

These issues will be richly illustrated this week when the latest big-money divorce case reaches the UK Court of Appeal. The multi-millionaire insurance underwriter John Charman is arguing that his ex-wife Beverley, to whom he was married for 30 years, should receive £20m ($39m) rather than the £48m he has been ordered to pay her.

With children grown and provided-for, £20m is more than Mrs Charman needs but £48m is substantially less than half of the assets built up during the marriage. In this sometimes-yawning gulf between an equal division and what the poorer spouse needs lies the zone of uncertainty in which divorce lawyers are gambolling, while politicians avoid the subject.

The judges are trying to make sense of it all as they go along. That is a shame. Their decisions do not simply affect the unhappy couple in front of them, but the incentives of others. It is often said that if divorce is a blank cheque for the poorer spouse, the rich will fear marriage with the less wealthy altogether. But it is also true that if divorcees expect no extra money as a result of their partner’s entrepreneurial efforts they will offer lacklustre support. Mr Charman has complained that his wife hesitated to let him use their home as collateral for a big business loan. Perhaps she realised that she might not enjoy all the rewards if the gamble paid off.

Every divorce is different. Should the length of the marriage matter? Or the extent to which the wealth was accumulated before the marriage began? Or who filed for the divorce?

It is possible to make a reasonable argument for many different positions and Mr Charman claims that he has paid lawyers on both sides of the argument almost £5m to do just that. But while it is hard for ordinary mortals to suppress their schadenfreude when the super-rich go through messy divorces, this uncertainty is unnecessary and counter-productive for us all.

Marriage is a market. There is a supply, there is a demand. Markets work better when contracts work too. Economists know perfectly well that one of the many reasons why marriage has always been popular is that it is economically efficient. It is based on the division of labour, Adam Smith’s pin factory and all that. One man straightens the pin, another whitens it. The Chinese make the fridges, the Americans make the software that designs them. So, too, in a traditional marriage: one spouse brings home the bacon, the other cooks it. It is a joint effort, an efficient one – and one under serious threat if the contract is ambiguous.

Life is full of arguments about who should get what. Contracts are a wonderful way to help solve them. There are arguments for “he gets it all” and there are arguments for “she gets it all”, but I do not find any of them nearly so compelling as those for “both get whatever they agreed to when the marriage began”.

Unfortunately, the British courts do not recognise pre-nuptial agreements. Perhaps engaged couples are presumed incapable of making big decisions.

But that is a strange position. The ideal time to think about divorce is before the marriage. At that stage, each should enjoy a similarly powerful negotiating position. If the man feels he is in a stronger position, why is he settling for the woman in front of him? Paul McCartney presumably felt the equal of Heather Mills when they were married. If he felt superior, perhaps he should have married Madonna instead.

A good pre-nuptial agreement should be able to specify one of the many reasonable ways in which things will be resolved if the marriage does not work out. If she is a financial powerhouse and he is a toy boy, marriage need not be beyond them: the pre-nup can fix compensation arrangements, by the hour if necessary. It is not romantic but neither is a messy divorce.

I will admit that it might be tricky to draw up a sensible pre-nuptial agreement. The government could at least supply us with a choice of three: equal division, fair needs, or everyone for him or herself. I can see all three possibilities having some takers. There should be no default option. Couples should have to choose. If they are not willing to discuss these awkward questions before they commit to a “lifetime” together, what responsible government would recognise their marriage?

5th of March, 2007Other WritingComments off

Dating advice for Tyler Cowen

I’ve been reading an early copy of Tyler Cowen’s hugely enjoyable “Discover Your Inner Economist“. Full of small steps towards a much better life. Here’s Tyler in an art gallery:

In every room ask yourself which picture you would take home — if you could take just one — and why. This forces us to keep thinking critically about the displays. If the alarm system was shut down and the guards went away, should I carry home the Cezanne, the Manet, or the Renoir?

And on self-deceit:

How many of us would enjoy hearing a two-hour debate — Oxford style with formal rules — on the relative prominence of our virtues and flaws? Let’s say – just to be generous – that the “Virtue” side would win the debate.

Marvellous. He doesn’t get it all right, though:

A pure “hard to get” strategy fails to satisfy what signaling theorists call – forgive the nerdspeak – “a separating equilibrium.” In other words, it does not sort (or “separate”) the winners from the losers. “Hard to get” is too easy for the losers to mimic… I’ve played “hard to get” with Salma Hayek for years, yet this reticence paid few dividends, not even a courtesy email or party invitation.

No, Tyler. “Hard to get” isn’t a signal, it’s a screen. When Salma finally turns up on your doorstep, you’ll know for sure that she’s serious about you.

4th of March, 2007MarginaliaComments off

Checks and Balances – Undercover Economist

My eye has been caught recently by the contrast between two stories the FT has been covering. Burberry, the luxury goods manufacturer, is to close a factory near Treorchy, South Wales, and expand production in Spain and China where rents and salaries are lower. This decision has drawn condemnation from everyone from the local MP to Charlotte Church. In other news, Glasgow has been persuading companies such as JP Morgan to move jobs away from London. Two of Glasgow’s attractions are said to be, well, lower rents and lower salaries.

One of these stories is widely regarded as good news, and the other as a disaster. But the motives of Burberry and JPMorgan seem very similar: they are profitable businesses, aiming to stay profitable. The effects look similar too. Some people in the poorer of the areas (China is poorer than Wales, Glasgow is poorer than London) will get better jobs. Some people in the richer areas will lose theirs. Prices will adjust too: the richer areas will become just a tiny bit more affordable. When the new jobs go to Glaswegians, all this appears to be acceptable, but when the new jobs go to foreigners it is regarded as appalling.

The queue of celebrities eager to hitch themselves to the Burberry backlash seem to have entirely missed the xenophobia inherent in their views, but that is the risk of allowing the debate on globalisation to be carried out by Charlotte Church and Sir Tom Jones. Yet more sensible observers also seem a little confused. Several people have complained that when jobs move from Britain to lower-wage countries, this just goes to show the need for stronger global regulations, even a global government to protect exploited workers in both Wales and in China.

But a lack of appropriate regulations doesn’t seem to be the problem in this case…

Continued at ft.com, subscription free.

Carwash extravagance

Dear Economist,

Why should I wash my car? It will be dirty again tomorrow!
Chris Smith,

Answer at ft.com, subscription free.

3rd of March, 2007Dear EconomistComments off

Forbes: The Achievement Gap

Why aren’t African-Americans achieving all that they could? American blacks are twice as likely to be in poverty as non-blacks, according to the U.S. Census Bureau, and they make nearly $5,000 a year less, on average. What exactly is standing in their way? That’s not an easy question, but some compelling and controversial answers are coming from an unexpected source: economics.

Economists who studied racial inequality were once viewed with skepticism, even by other economists. In the 1970s, Glenn Loury’s Ph.D. classmates at the Massachusetts Institute of Technology joked that his economics thesis began: “This dissertation is concerned with the economics of racism. I define racism as a single-valued, continuous mapping….”

The joke is now on them, as economists have dug up insight after insight in the field. Now Loury’s young co-author, Harvard’s Roland Fryer, is attracting attention for his study of “acting white,” where black kids who work hard at school are said to be ostracized by their peers. Despite a lot of talk about the problem–Barack Obama raised it in his famous speech to the Democratic National Convention–some academic researchers weren’t convinced that it existed…

The full article is on the Forbes site, subscription-free.

2nd of March, 2007Other WritingComments off


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