Tim Harford The Undercover Economist

Articles published in July, 2009

Look on this toaster, ye mighty, and despair!

The electric toaster seems a humble thing. It was invented in 1893, not long after the light bulb and long before the microchip and the laser. This century-old technology is now a household staple, and reliable, efficient toasters are available for a few pounds. Nevertheless, Thomas Thwaites, a postgraduate design student at the Royal College of Arts in London, discovered just what an astonishing achievement the toaster is when he embarked on what he called “The Toaster Project”. Quite simply, Thwaites wanted to build a toaster from scratch.

The difficulty of the task began to become clear. To obtain the iron ore, Thwaites had to travel to a former mine in Wales that now serves as a museum. His first attempt to smelt the iron using 15th-century technology failed dismally. His second attempt was something of a cheat, using a recently patented smelting method and a microwave oven – the microwave oven was a casualty of the process – to produce a coin-size lump of iron.

Further short cuts were to follow. Plastic comes from oil, but despite launching a charm offensive against BP, he never did make it out to an oil rig. His attempts to make plastic from potato starch were foiled by hungry snails. He settled for scavenging plastic from a local dump, melting it and moulding it into a toaster casing.

Copper he obtained via electrolysis from the polluted water of an old mine in Anglesey. Nickel was even harder; he cheated and bought some commemorative coins, melting them with an oxyacetylene torch. These compromises were inevitable. “I realised that if you started absolutely from scratch, you could easily spend your life making a toaster,” he explained to me.

An ordinary toaster has more than 400 components and sub-components, made from nearly 100 different materials. Thwaites’s home-made toaster is a simpler affair, using just iron, copper, plastic, nickel and mica, a ceramic. It looks more like a toaster-shaped birthday cake than a real toaster, its coating dripping and oozing like icing gone wrong. “It warms bread when I plug it into a battery,” he says, brightly. “But I’m not sure what will happen if I plug it into the mains.”

What should we make of the Toaster Project? Free-market fans point out the wonderful way in which, for no effort and very little money, we can buy a toaster and enjoy the global efforts of an uncounted workforce, and the accumulated knowledge of the centuries that the toaster embodies. The more churlish among them have grumbled that Leonard Read made such a point in an elegant 1958 essay, “I, Pencil”.

Anti-globalisation types fret about the vast and impersonal industrial forces that have been mobilised beyond our vision, leaving us ignorant of any harmful effects on the planet or the poor, and impotent to do anything about them.

Both sides have a point. The modern market economy is mind-bogglingly complex, producing billions of products, many vastly more complex than a toaster. The complexity of the society we have created for ourselves surrounds us so completely that, instead of being dizzied, we tend to take it for granted.

Yet as we celebrate our good fortune to be born at a time of such astonishing material wealth, the toaster should give us pause for thought. It is a symbol of the sophistication of our world, but also a symbol of the obstacles that lie in wait for those who want to change it. Whether attempting to deal with climate change, social deprivation, economic development or healthcare, improving faults in such a complex system is a task best approached with humility.

Also published at ft.com.

What’s a girl to focus on – looks or brains?

Dear Economist,
My 15-year-old is disinclined to work for her GCSEs, saying her time is better spent preening herself in preparation for assignations with her delightful, diligent, privately educated, moneyed boyfriend. She insists the money spent on nail-painting, hair-colouring and the like is an investment and will be more than repaid when he marries her. Is she deluding herself?
A curious mother

Dear Curious Mother,

Surprising as this may seem in the 21st century, your daughter’s strategy is not unusual. Evidence on speed-dating gathered by the economists Michèle Belot and Marco Francesconi shows that women are attracted by rich men, while men focus more on a woman’s physical appearance. Lena Edlund, another economist, has found that in the areas of her native Sweden where the wealthiest men live, women of prime marriageable age are over-represented.

However, your daughter is only 15; for Edlund, “prime marriageable age” is 25-44. Your daughter is either going to have to get her hooks into this chap unusually early, or she is going to have to keep him on the boil for another decade – a lot of nail-painting.

Not only is she concentrating her investments into a single asset by abandoning her education, but she may even be making her main goal harder to achieve. Belot and Francesconi discovered that a strong social trend towards “assortative mating” means that although educated, high-achieving men are not interested in marrying a rich woman, they do like educated high-achieving women, rather than shallow girls with shiny nails.

Your daughter should learn to work hard and look good at the same time. Not only will it advance her immediate goals, it will also – sadly – stand her in good stead for the rest of her life.

Also published at ft.com.

25th of July, 2009Dear EconomistComments off

Why giant technological leaps aren’t always the answer

The Apollo 11 moon landing, whose 40th anniversary is celebrated this week, is still unsurpassed as a symbol of technological achievement. Visitors to Washington DC’s National Air and Space Museum can see the command module up close, and visitors to the Science Museum in London can see the very similar Apollo 10 version. Being this near to the spaceship defies belief: it looks more like a contraption from the steam age than the space age. Did this thing really go around the moon and come home again?

Forty years on, we have our own technological challenges, from finding vaccines for malaria and HIV to producing cheap, effective ways to generate energy without pumping carbon dioxide into the atmosphere. If we can put a man on the moon, why can’t we achieve those goals?

More to the point: Neil Armstrong walked on the moon thanks to government management, government money and one of the most famous of all government ambitions. That was President Kennedy’s 1961 declaration that, “I believe that this nation should commit itself to achieving the goal, before this decade is out, of landing a man on the moon and returning him safely to earth. No single space project in this period will be more impressive to mankind, or more important in the long-range exploration of space.”

Shouldn’t, then, the world’s governments get over their fear of trying to “pick winners” and put some serious effort behind our more modern goals? It’s a tempting conclusion. I think the Apollo missions offer a more subtle lesson.

The most important contemporary benefit of the space race has been the satellite, and the obvious way to launch a satellite is the way that the Apollo lunar modules were launched, by using a set of rockets that blast off from the ground. This remains the dominant satellite launch technology to this day, and why not? Once Kennedy decided to head for the moon, rockets were the way to do it, so rockets have been the focus of government investment.

But ground-launched rockets are not the only way to get a satellite into space. One other obvious possibility is to build a much smaller rocket and carry it into the upper atmosphere using an aeroplane. This isn’t a new idea: the US X-15 plane piggybacked on a B-52 bomber and its first flight predated Apollo 11 by a decade. The X-15 flew at more than 350,000ft, over 106km; 100km up generally being regarded as the beginning of “space”. Neil Armstrong was one of the test pilots. But despite being a promising approach for launching satellites, it was no good for putting a man on the moon, and the technology was sidelined.

Air-launch technologies have been making a comeback thanks to private innovators. The Ansari X Prize for the first privately funded space flight was won by an air-launch system, White Knight One and SpaceShipOne. Virgin Galactic, which has teamed up with White Knight’s designers to develop a system to put tourists into space, has also expressed a hope that the system can be used to launch small satellites. And Orbital Sciences Corporation has been using an air-launched system, Pegasus, to put satellites into orbit for nearly 20 years. Such systems are more flexible – they can fly to where the good weather is, for instance – and may turn out to be cheaper in the long run.

It is too simplistic to say that Apollo was a dead end, but nor is it obvious that the project really was a giant leap in the exploration and exploitation of space. Inspirational it may have been, but Apollo also reminds us that in our urge to achieve magnificent goals, we should not overlook less glamorous alternatives.

Also published at ft.com.

How can it be selfish to split the bill?

Dear Economist,
In your books and columns you have claimed that when people split the bill equally in restaurants they tend to take advantage of each other by ordering expensive dishes. I wonder if this is really true. Wouldn’t friends be more considerate of each other?
Considerate restaurant-goer, London

Dear CRG,

The “diner’s dilemma” you describe is a kind of prisoner’s dilemma, and in theory people should behave exactly as I have described. But many laboratory experiments suggest we are not as selfish as economists’ models claim. So you are right to ask for more evidence.

The economists Uri Gneezy, Ernan Haruvy and Hadas Yafe have been looking into this. They seated various groups of six diners at a nice restaurant in Haifa, Israel, and noted how they responded to different payment schemes. Some ate for free, and they ordered a lot. Others paid for their own order, and they ordered sparingly. Between those two extremes were those who split the bill with the other five diners: they took advantage of their fellow diners, as I would have expected.

Perhaps they were somewhat inhibited by the embarrassment of free-riding, though? It seems not. When the experimenters, in a further trial, told diners that they would pay one-sixth of their individual bill only, they faced the same costs of over-ordering as in the “split the bill” case, but if they made extravagant choices their dining companions did not suffer. Yet they ordered much the same as in the “split the bill” case, suggesting that saving money for fellow diners was not much of a consideration.

It’s worth emphasising that this experiment seated strangers together, not friends. Perhaps people are more generous when it comes to friends. Or perhaps they are simply more careful about their reputations.

Also published at ft.com.

18th of July, 2009Dear EconomistComments off

Carbon footprinting: time to pick up the pace

Euan Murray grew up on a sheep farm in southern Scotland; now he is in charge of “carbon footprinting” for corporate clients of the Carbon Trust. “If I ask my old man, ‘What’s the carbon footprint of a sheep?’ he looks at me as though I’m mad,” he explains. “But he can tell me the stocking density, what he feeds the sheep, and he can answer those questions as part of running his business.”

Quite so. Carbon footprinting, the study of how much carbon dioxide is released in the process of producing, consuming and disposing of a product, is all about the specifics. This is a refreshing change from the politics of climate change, which is all about the generics. We hear promises from our leaders of big change in the future, without any credible plans right now.

I first approached Murray to ask him about the climate change impact of a cappuccino. Loyal readers may recall that a year and half ago, I wrote about the question, pointing out that meeting any of these grand targets in a sensible way would require billions upon billions of small decisions. The cappuccino’s climate change impact depends on whether the café is double-glazed, the decisions the staff and I take to get there, the diet of the methane-producing cow that produced the milk and the source of power for the espresso machine. Last week I pointed out that there are around 10 billion products in a modern economy; that means that the problem of reducing carbon dioxide emissions is “simply” the problem of reducing carbon dioxide emissions from a cappuccino, 10 billion times over.

In the case of the cappuccino – or at least, a typical, generic cappuccino – the climate change impact probably comes from the milk. I say “probably” because we don’t know for sure. Murray’s best guess was based on his work on milk chocolate. Milk makes up one-third of a chocolate bar by mass, but is responsible for two-thirds of the climate-change impact of the entire production and consumption process. Switching to espresso might be in order; so, too, might a different diet for the cows. It is hard to make generic recommendations, though: even the particular soil on which the grass grows on which the cows feed alters the climate change calculus.

The carbon-footprinting process often produces surprises. An environmentally conscious consumer in the crisps aisle of the supermarket will probably be thinking about packaging or “food miles”. The Carbon Trust reckons that about 1 per cent of the climate impact of a packet of crisps is from moving potatoes around. The largest single culprit is the production of the nitrogen fertiliser, and half of the climate impact in general takes place at the agricultural stage. The point is not that agriculture is always the problem, but that it is very hard for a well-meaning consumer to work out what the green purchasing decision actually is. For this reason, the Carbon Trust has a carbon labelling scheme. The trouble is that many consumers simply do not care enough to pay more or choose a less enjoyable product simply because of the low carbon label.

A government role is necessary, then, but it is even harder for governments to regulate such fine details. All this is why economists continue to advocate some kind of carbon price, which would give an incentive to everyone involved in these complex supply chains to trim carbon dioxide emissions. A modest and credible price for carbon is slowly becoming the conventional policy wisdom. It is a shame we still don’t have it.

Also published at ft.com.

How can I rescue a botched fake tan?

Dear Economist,
It’s that time of year when hemlines get shorter and legs get browner … I am having difficulty in achieving an even tan, yet everyone else (bar none!) has a perfect pair of tanned pins. I know they’re not natural.

As most men are unfamiliar with the fake tan ritual, let me fill you in. After one has showered, one applies the cream. The substance comes out of its tube as a cream, not the colour of “tan” it will decide to be.

The question is one of when to stop. The tan won’t own up for another four to six hours, so it’s a while before I learn whether the gamble has paid off. When it emerges, it’s patchy and streaky and my knees are two satsumas. Do I reapply blindly in a bid to colour in the gaps, risking more streaky satsumas? Or do I wear trousers?

Dear N.M.

Maybe the whole fake tan business is a game of pure luck, with winners displaying their bronzed legs and unlucky buyzithromaxonlinemed.com losers resorting to the trouser option. This biased sampling would create the appearance of a world where the ability to apply fake tan is universal.

If this explanation is correct, you must just keep trying and resort to the trousers whenever you fail. But this seems a counsel of despair, and, for reasons that are not purely selfless, I advise against the trousers. You might do better to consult a central banker such as Mervyn King. Extreme monetary policy, such as printing money to buy other assets, is much like applying fake tan. It is all but impossible to know whether you are doing it right at the time, you must wait some time for the results to be apparent, and it is easy to overdo it. I have never seen Mr King’s legs up close, but perhaps he is a dab hand with the fake tan. If he is a master of quantitative easing, he may also have perfected quantitative squeezing.

Also published at ft.com.

11th of July, 2009Dear EconomistComments off

Michael Jackson: ticket or refund?

Dear Economist,
Having just read the chapter on game theory in your book, The Undercover Economist, I discovered that Michael Jackson fans (circa 800,000 of them) are being offered the chance to receive their concert tickets as a memento, in place of a refund. I presume the future value of any one ticket will depend almost exclusively on the choices of the other 799,999 fans. To the non-nostalgic fan, who wishes only to see the best financial outcome, what would be your advice based on a game theory analysis?
Patrick Hudson

Dear Patrick,

I think it is safe to assume that if 799,999 fans take the memento ticket, the remaining fan would be better off taking the refund, while if 799,999 fans take the refund and one fan takes the ticket, the ticket will be very valuable. (We must also assume that the concert promoters will not then flood the market with the other 799,999 unwanted tickets.)

From a game www.trendingdownward.com/med/ theorist’s perspective, the equilibrium solution is clear. Let us say that memento and refund are equally valuable if 100,000 take the memento and 700,000 take the refund. In that case, each fan should independently adopt a “mixed strategy” with a one-eighth probability of taking the memento. (A nerdy hint: roll three dice; there is a one in eight chance that the total is exactly 10.) Every fan will be happy to randomise, because every fan will know that either way, he or she will get something of equivalent value.

I realise all this sounds implausible, and it is. Game theory makes demanding assumptions about human rationality that may not apply to grieving fans. I would pay closer attention to research in economic psychology that suggests people are very unwilling to part with an item once they feel a sense of ownership. A non-nostalgic fan should go for the refund.

Also published at ft.com.

4th of July, 2009Dear EconomistComments off

Why getting complicated increases the wealth of nations

One of the defining characteristics of the modern economy is that it’s awfully complicated. Even a fairly humble product such as a shirt might incorporate cotton from west Africa, oil from Indonesia to make the polyester in the button (manufactured in China), and designs sketched out by an Italian using American computer software. Then there is the sheer number of products: Eric Beinhocker, author of The Origin of Wealth, reckons there are probably 10 billion distinct products and services available in a modern economic environment such as London, Tokyo or New York. It’s a guess, but a fairly educated one. Beinhocker also estimates that for a traditional hunter-gatherer society, the number is closer to 300.

This would probably not have surprised Adam Smith, who emphasised the importance of specialisation as a source of the wealth of nations. Specialisation and complexity are closely linked: an economy with more specialists is one that requires more teamwork and more distinct interactions between individual activities.

Leaving aside a few complexity theorists such as Beinhocker, this is not the way that most economists think about what makes countries rich. It is not that they disagree, simply that they tend to focus on more easily measurable aggregates, such as the total stock of capital and labour.

Actually trying to measure economic complexity is a tricky business, but it is not impossible. César Hidalgo, a young physicist specialising in the mapping of networks, and Ricardo Hausmann, a development economist, are both researchers at Harvard’s Center for International Development, where they have been grappling with the problem. One obvious measure of complexity is how many types of product a country exports in significant quantities, from a list of more than 770 categories. Exports are a meaningful indicator because if you export a product it means someone else is willing to pay for it. A further measure of complexity is whether a country’s exports are uncommon (many countries export T-shirts; few export aircraft parts).

Hidalgo and Hausmann discovered a striking pattern: countries that export only a few products tend to export fairly commonplace stuff, while those that export a large range also make the kind of specialised products that few others produce.

It is possible to zoom in further. Malaysia and Pakistan seem, at first glance, equally complex, each exporting 104 product types. But many of Malaysia’s exports are also exported by mighty Japan, whereas Pakistan’s exports have very little in common with those of Japan. In general, Malaysia tends to export some of the products that very complex, diversified countries export, suggesting that it has a more complex economy than Pakistan. A mathematical application of such methods produces the top six most complex economies: Japan, Germany, Sweden, the UK, Finland and the US. Malawi, Cameroon and Western Samoa bring up the rear. Intriguingly, it seems that economies that are more complex than their level of income would suggest have a tendency to catch up with a spurt of fast growth; the complexity may indicate potential that is easily unlocked. Hidalgo cites South Korea as an example.

Development economists may find themselves paying more attention to such issues in future. We know very little about how to encourage an economy to become more complex and acquire new product capabilities. That may explain why we still have so much to learn about how to make poor countries rich.

Also published at ft.com.


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