Tim Harford The Undercover Economist

Articles published in June, 2007

Will Power

Dear Economist,

I like the idea of smoking; people who do it seem to get a lot of pleasure from it. But I don’t want it seriously to curtail my longevity. So at what age could I sensibly start smoking in order to achieve sufficient pleasure to make the shortening of lifespan worthwhile?

Peter, London

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30th of June, 2007Dear EconomistComments off

Tote that vote

“Put your money where your mouth is.”

The old taunt reflects a deep economic principle: talk is cheap, but if someone is willing to risk money, it means they’re serious. Put the principle into action and you realise that electoral forecasters should pay as much attention to the betting odds as to the opinion polls. That is because when money is on the line, informed people, perhaps including insiders, have an incentive to turn their knowledge into cash by making big bets. In the process they make the odds more accurate. And of course, there are several reasons to lie to pollsters but no reasons to make a money-losing bet.

Or are there? Imagine you’re a candidate in the US presidential primaries. One of the big selling points is electability: “If you choose me, I’ll beat the other party’s candidate.” It might be worth placing a few money-losing bets if they made you look electable.

This may be more than a hypothetical scenario. The economists Justin Wolfers and Eric Zitzewitz have pointed out that Hillary Clinton’s chances of becoming president, as predicted by one betting market, InTrade, started to climb dramatically mid-May, topping 40 per cent after months of fluctuating between 20 and 30 per cent. Her odds of winning the Democratic nomination stayed around 50 per cent, implying that if nominated, her chance of then winning the presidency would be about 80 per cent. You can’t get much more electable than that.

So is someone in Hillary’s camp trying to boost her chances by manipulating the market into a self-fulfilling prophecy? Or is it a rival candidate trying to make her look like a manipulator?…

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El Economista Camuflado!

I was in Barcelona on Thursday to promote the Spanish edition of The Undercover Economist, which has to my surprise been making frequent visits to the bestseller lists since its launch in February. Here are my minders, Ruth and Felipe of Spanish publishers Temas de Hoy.

Undercover Economist has now sold 500,000 copies worldwide. I thought that was pretty good, although of course someone is doing even better – congratulations, chaps!

30th of June, 2007MarginaliaComments off

Film Violence

Dear Economist,

I am concerned at how violent films are these days and I think the censors should be much stricter in cutting out scenes of explicit violence. I was wondering if there is any support in economic theory for my view.

A concerned parent, Kent

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23rd of June, 2007Dear EconomistComments off

The true cost of smoking

England’s smokers are about to be banned from lighting up in pubs, restaurants and offices. The ban will be convenient for me: I don’t smoke, and I don’t like smoky pubs. Sadly, the government has not formally adopted a policy of formulating law for my personal convenience. The smoking ban is justified instead using fancy-sounding economic arguments about the ”externalities” of smoking.

I like economic arguments as much as anyone, but in this case they do not point in quite the direction that most people seem to think. An ”externality” seems a simple enough concept: it’s a harm suffered or benefit enjoyed by some third party that isn’t reflected in a market transaction. Pollution is the classic example. The idea is important, because even pro-market types believe that externalities are a market failure potentially justifying the government’s involvement.

Yet the only credible arguments for restricting smoking have nothing to do with economics. The damage caused by second-hand smoke in pubs is not an externality. Neither is the cost to the National Health Service of treating smokers. An ”externality” is not just any old cost or benefit; it has to lie outside a market transaction.

In the case of pubs and restaurants, the market could hardly be more obvious…

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Diplomacy and treason

Dear Economist,

I am a regular player of Diplomacy, a Risk-type game where several players fight to gain control of the European map. The principle is that two allied players will beat a single player, but, in the end, only one can win – so treason is part of the game.

Can economics suggest a strategy? Maybe quitting the game, due to the time lost in talking through the alliances and intrigues?

Michele, Italy

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16th of June, 2007Dear EconomistComments off

A perfect pitch?

Economists tend to study ”the market” in the abstract, but some markets are anything but abstract. The Aalsmeer auctions in the Netherlands burst with the colour of more than 20m flowers a day, while Tokyo’s early-morning Tsukiji fish market is enthralling enough to compete for tourist attention with the nightclubs of Roppongi. (The stink of alcohol in the tourist pens of Tsukiji suggests that many visitors have combined both experiences to make a night of it.)

These celebrated markets deserve attention from economists as well as tourists. A lot of economics assumes away the details of how market transactions actually work. That is a shame; the late John McMillan, an economist at Stanford, argued that markets will only work well if they are well designed. The whole idea of a market is to allow gains from trade to take place; a badly thought-out market will often fail.

There is more than meets the eye even to a simple transaction such as buying fish.

The economist Kathryn Graddy once spent a month shadowing a trader at the Fulton Fish Market in New York, rousing herself in the early hours and paying protection money to park her car in a safe spot near the market. She discovered that market traders appeared to charge different prices to different ethnic groups – in particular, Asian buyers tended to win keener prices than white buyers. The likely explanation was that the Asian buyers had more price-sensitive customers in Chinatown.

Still, this was a surprising result.

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Apologetic economics

Dear Economist,

My mother-in-law can be extremely aggravating, and on a recent visit she managed to wind me up so badly that I made an unprintable remark to her. The fact that she fully deserved my outburst does not seem to carry much weight with her, nor my beloved wife. So things are now a little tense. I suppose I should apologise, but I don’t want to encourage her nagging, nor acknowledge that she was right (she wasn’t). Can economics provide a solution?

James, north London

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9th of June, 2007Dear EconomistComments off

Arrested development

When you’re lost and running late, it is frustrating to stop and figure out the lie of the land. Nevertheless, that has to be better than speeding off in the wrong direction, however fleetingly satisfying the illusion of activity may be.

Few problems are more urgent or important than that of desperate poverty.

Aid can feed the starving, heal the sick, educate young children before they grow too old for school. But Abhijit Banerjee, an economist at the Massachusetts Institute of Technology (MIT), is one of a growing band who believe that the development industry nevertheless needs to stop and work out whether it is moving in the right direction.

In Making Aid Work, a slim new book that deserves an audience, Banerjee cites a recent World Bank report as recommending a cornucopia of initiatives, including but not limited to ”computer kiosks for villages; cell phones for rural areas; scholarships for girls attending secondary schools; school-voucher programs for poor children; joint forest-management programs; water-users’ groups… ” The problem is that while this stuff sounds sensible, we don’t really know how much of it works. Whether and when aid works at all remains a hotly debated subject, which tells you something about the quality of the research devoted to working out whether it does.

In fairness, that is not an easy job. Economists are well aware that correlation isn’t the same thing as causation – emergency aid goes hand in hand with earthquakes but does not cause them – and it is hard to figure out whether some improvement happened because of an aid programme or despite the aid programme.

Banerjee argues that there is a solution…

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Shock of the new

Alfred Chandler, the great business historian, died in May. One of his many achievements was to highlight the way technology influenced the organisation of corporations. Chandler realised that ”the railroad and the telegraph, the steamship and the cable” had made it possible for companies to grow to a vast scale. That in turn meant handing control of the corporations over to professional salaried managers in place of owner-entrepreneurs.

Naturally, the story did not end with the railroad and the telegraph. Economists believe that technology and business performance shape each other. If history is any guide, the impact of the latest technologies on business organisation is likely to be vast; it is also likely to be more gradual than the rolling hype of the last decade suggests.

Paul David, an economic historian at Stanford, presented a brief, prescient research paper to the American Economic Association back in 1990, titled ”The Dynamo and the Computer”. Professor David’s aim was to persuade economists that the history of the electric dynamo would tell them something about the ongoing information revolution.

Electric light bulbs were available by 1879, and there were generating stations in New York and London by 1881. Yet a thoughtful observer in 1900 would have found little evidence that the ”electricity revolution” was making business more efficient…

Continued at ft.com, subscription free.