Tim Harford The Undercover Economist

Articles published in May, 2009

St Vince calm in the Storm

The Storm: The world economic crisis and what it means – Vince Cable Atlantic Books £14.99
Review by Tim Harford for Management Today

The chief treasury spokesman for the Liberal Democrats occupies a curious niche in the political landscape. At one time scorned as ‘Dr Gloom’ for his warnings of a debt crisis and a property bubble, Vince Cable has now acquired cult status. One sketch-writer depicted the ‘in-Vince-able tour’ and a crowd of screaming groupies, ‘the Vincettes’ (I should say I am something of a fan myself, having briefly worked for Cable while he was chief economist at Shell.)

Journalists bewildered by the credit crunch developed the habit of turning to Cable, not for a political soundbite but for a neutral and straightforward explanation of what had just happened. That’s exactly what The Storm offers.

The most striking fact about the book is that it is not a political tract; indeed, it betrays few traces of having been written by a politician at all. References to Cable’s political activities are fleeting and, with those excised, I’d defy anyone who does not already know Cable’s reputation to read the book and identify the author’s profession. It seems to be far more the work of an academic with a deft touch than of someone who wants to be chancellor of the exchequer.

All this is a testament to Cable’s intellect and his distaste for cheap populism. Still, at times the neutrality is so studied that one longs for a bit of political knockabout. After pointing out the odd situation whereby the poor Chinese lend money to the rich Americans, he comments: ‘The explanations for this strange phenomenon are several and tend to vary according to whom the author is seeking to blame.’ Just so, yet Cable does not presume to adjudicate. Readers seeking enlightenment about global financial imbalances should be pleased; potential Liberal Democrat voters will be none the wiser about what they’re voting for.

Where Cable espouses political views, they are a study in moderation. He worries about protectionism and anti-immigrant sentiment, and argues that we shouldn’t throw out the open-markets baby with the banking-system bathwater. He expresses these concerns in the most impersonal terms imaginable. ‘There is a middle position – broadly that of the author – which acknowledges that financial markets are subject to repeated bubbles, panics and crashes, and maintains that they should not be confused with markets in goods and services within and between countries. The worry some of us have is that legitimate arguments for re-regulating financial markets become confused with a generalised movement towards dirigisme.’

Even if Cable worries in the third person, he is right to worry. Yet lip service is paid to such views daily, by politicians of all stripes.

The Storm, then, is best judged not as polemic or manifesto but simply as a piece of analysis. The subject is the post-Lehmans world economy, from the credit crunch to the rise of China. The book is wide-ranging, informed, balanced, calm and well-paced. The logic is always clear and the explanations are cogent, even if the writing is not especially gripping. Cable has often been ahead of the curve, but publishing a book in the teeth of a fast-moving crisis does not allow him that position here. Yet his analysis seems up-to-the-minute.

Despite the time he spent sketching possible futures in Shell’s scenario team, Cable’s book is written almost entirely in the past tense. We are told what has happened so far and what experts think about it. There’s not much about what should happen and less still about what will happen, even in the final chapter entitled ‘The Future: A road map’. Such modesty is becoming, but a little disappointing.

The Storm covers the credit crunch in full, explaining what went wrong and sketching out possible remedies. This slim book also devotes about half its space to other big issues in macroeconomics today: the oil shock, food prices, the role of China and India, and the risk of a political backlash. In each case, the argument is solid and wide-ranging.

The best chapter picks apart the way oil markets work. It deftly covers the history of oil, explains the theory of ‘peak oil’ and offers reasons to be sceptical about it – and skewers the popular notion that speculators were responsible for the price spike of 2008. Right on all counts, and a superb primer for anyone wanting to understand this unglamorous but vital slice of the world economy.

This book will not surprise those who have followed the crisis closely, but it should find a receptive audience of people who feel the world economy has changed faster than they can follow, and who are willing to read carefully and think hard to figure it all out. They could do a lot worse than read The Storm.

3rd of May, 2009Other WritingComments off

What smart truckers tell us about the road to success

Aldo Rustichini is a genial Italian economist with a head of hair that seems to have been modelled on Albert Einstein’s. A professor at Cambridge and the University of Minnesota, he quickly transformed my interview with him into a full-blown undergraduate-style tutorial, occasionally asking me questions to check my understanding. Yet this likeable economist has been carrying out work with potentially explosive implications – including the possibility that economic success is genetically transmitted.

Rustichini’s latest research – with Stephen Burks, Jeffrey Carpenter and Lorenz Goette – studies the behaviour of about 1,000 trainee truck drivers in the US. The researchers gave the truckers IQ tests and asked them to participate in a number of small experiments.

In one experiment, the truckers were asked to choose between gambles and certain payoffs. In another, the choice was between a sum of money now and more money later. A more complex experiment required the truckers to play an anonymous “trust” game. The first player was given $5 and offered the choice of sending it to the second player; the second player had his own $5 and was asked how much he would send to the first player were he to receive $5 from him, and how much if he didn’t. The researchers promised to double the money sent in either direction – meaning that if the players managed to co-operate then each could get $10.

An intriguing pattern emerged. The truckers who scored highest on the IQ test were also more patient and more willing to take calculated risks, rejecting unfair gambles and accepting favourable ones. Their choices revealed a more consistent attitude to risk and a more consistent level of patience, too.

The high-IQ truckers were also better at predicting what other players would do in the trust game, and secured more money overall. When they played second, they were more discriminating, rewarding co-operation and punishing those who would not trust them.

High IQ goes hand in hand with patience, calculated risk-taking and interpersonal judgment, it seems – and this is true after statistically adjusting for age and race.

Nor is any of this limited to the laboratory. Many trainee truckers drop out before completing their first year of work, even though this means they must repay the trucking company their training costs, which run into thousands of dollars. This indicates a lack of patience, an inability to appreciate how much money is at stake or a serious miscalculation in the initial plan to be a truck driver. Whatever the reason, dropping out is correlated with Rustichini’s experimental tests of low IQ, impatience and bad judgment of risk or of other people.

Rustichini puts this in a far more striking way: that the ingredients for prospering in a capitalist society all seem to be present together, or absent together. This is not entirely surprising but neither is it obvious. And therein lies the dangerous hypothesis: if all these attributes go hand in hand, it is much more plausible to suggest that economic success is passed on from generation to generation.

“Such a process could be cultural, genetic or both,” comment the researchers in a footnote, “but the genetic version is the most controversial.” Quite so. But even the cultural transmission of economic success is a provocative notion, and a painful one to most economists, who are predisposed to hope that good policies alone may promote economic growth.

Rustichini is not perturbed. For all his amiability, he is quite content to contemplate unwelcome possibilities.

Also published at ft.com.

2nd of May, 2009Undercover EconomistComments off

Should I embark on an open relationship?

Dear Economist,
My partner and I have well-defined boundaries to our relationship; they are already liberal, and we are now considering permitting liaisons with others. The benefits for my partner are enormous, as she is an attractive young woman interested in men and women alike.
I, on the other hand, am an awkward wallflower of unremarkable appearance, who has trouble attracting women. Or at least I was until I met my partner. In the years we’ve been together, I’ve received a startling amount of unsolicited attention from women who would not have looked at me twice when I was single.
Can economics explain why I’m unappealing as a singleton, but hot property when with a stunning girlfriend? More importantly, will I still be hot property in a non-monogamous setup? As a consumer I seem to be able to have my cake and eat it, but as a commodity, can I both be had and eaten?
Confused, Paradise

Dear Confused,

Your sudden attractiveness does indeed have an economic explanation: your new admirers are rationally inferring information about you from the behaviour of your partner. She is vivacious, beautiful and intelligent, and yet she dates you; ergo you have hidden assets.

I am not sure an open relationship is wise. You are right to point out that your partner has much to gain from such an arrangement. Onlookers would rightly conclude that her commitment to you has few downsides for her, so doesn’t convey much of a signal that you are a hidden gem. There is another risk. Through her experiments, your partner may discover an alternative lover who insists on a monogamous relationship. Monogamy may be a price worth paying, given that she is currently dating “an awkward wallflower of unremarkable appearance”. You currently live in paradise; don’t risk being cast out.

Also published at ft.com.

2nd of May, 2009Dear EconomistComments off