Tim Harford The Undercover Economist

Articles published in January, 2014

Unequal societies in a more equal world

Global poverty and rich-world inequality are separate issues, writes Tim Harford

‘The richest 85 people on the globe – who between them control as much wealth as the poorest half of the global population put together – could squeeze on to a single double-decker.’ theguardian.com, January 20

A single double-decker bus? Is that different from a double single-decker?

Oh, don’t be unkind. This snippet comes from The Guardian, which credits global development charity Oxfam, which in turn cites a report from the bank Credit Suisse – and I should probably make clear that neither Oxfam nor Credit Suisse have anything to say about buses. I think that’s what we in the trade call a “scoop of interpretation”.

A striking image, though.

Yes, but a distorted one. In the same vein, here’s a surreal image of my own: my toddler controls more wealth than the poorest one and a half billion people on the planet.

Does he have a rich uncle?

No, but he has no debts. That puts his wealth at zero. The poorest people have more debts than assets; their wealth is less than zero. It’s difficult to know exactly how many people are in that boat – understandably, the data are patchy. Still, James Davies, Anthony Shorrocks and Rodrigo Lluberas, academics who worked on the Credit Suisse report, have suggested elsewhere that the poorest 10 per cent have significant net debt.

This sounds like your usual sophistry.

The sophistry isn’t mine. Oxfam and The Guardian are clearly very keen to draw attention to how rich the very rich are. But something has gone awry when the same reasoning leads you to conclude that my son is richer than the poorest 1.5bn put together. On this measure, he’s also richer than an indebted graduate of Harvard Business School. As Credit Suisse points out, “human capital” or earning power isn’t included in the analysis.

OK, so the single double-decker story is daft. But it points to an important truth: economic inequality is growing sharply.

That’s where Oxfam’s interest in all this is curious. The thrust of Oxfam’s argument is that in a lot of countries, the gap between the incomes of the rich and poor is widening, which is true. They say this is both caused by and causes rent-seeking behaviour – elites shaping the rules to suit themselves. This is very plausible. If you want to make a lot of money in the world, it helps to have a friendly government give you a monopoly.

So Oxfam is right!

Except it’s not clear this is a pressing global development issue. Looking at the world as a whole, income inequality does not seem to be rising and is perhaps even falling a little. Exact details depend on how you measure things but the basic story is that some middle-income or poor countries with large populations – Brazil, India and China, but also the likes of Turkey, Indonesia and Nigeria – have been growing faster than rich countries. This offsets the effect of increasing inequality within countries.

So it’s possible for inequality to be increasing in every country in the world and yet global inequality to be falling.

Not only is it possible, it’s actually not far from the truth. Which is why it’s so baffling that Oxfam has jumped in here feet-first. There are two big trends. One is that there’s a lot of good news in the world of economic development. Poverty rates have fallen and indicators such as infant mortality have been moving in the right direction. The other trend is this sharp rise in the income share of the rich, particularly in the US, the UK and other anglophone countries. It’s misleading to present this as evidence that the plight of the world’s poorest is getting worse.

So what should be done?

Oxfam thinks the answer is for the super-rich to promise to be good: no tax havens, no lobbying, support universal healthcare, support progressive taxation.

What about philanthropy?

Not mentioned.


That puzzled me, too.

And what would you do about rising inequality in rich countries?

I think something needs to change but I am at a loss as to what. Universal high-quality education seems to have played an important role in limiting inequality in Scandinavia. But that pushes the problem down the line: how do we get universal high-quality education?

So increasing inequality is real and you don’t know what do to about it.

Quite so; sorry. Maybe Oxfam’s suggestion of asking the plutocrats to play nicely isn’t such a bad idea.

Also published at ft.com.

What makes us happy?

‘A growing body of research backs the folk wisdom that experiences make us happier than possessions’

It has become a cliché to say that we are made happier by experiences than by material possessions – otherwise the Onion headline, “Executive Quits Fast Track To Spend More Time With Possessions” wouldn’t provoke quite the same chuckle.

But is the cliché true? We are all free to spend our disposable income on what we like. If the experiences we buy tend to make us happier than the possessions we buy, we’re making systematic mistakes. That’s possible – but if so, then why?

Maybe it isn’t a fair comparison. Many material possessions are workaday basics such as saucepans, ironing boards and socks. Many experiences are free, meaning the ones that cost money are treats – no wonder the average possession looks joyless compared with the few special experiences we’ve bought. It doesn’t follow that a windfall should definitely be spent on a spa weekend rather than an iPad.

Another possibility is that causation is backwards. Perhaps happy people buy experiences, rather than experiences buying happiness. A recent study by three psychologists, Ryan T Howell, Paulina Pchelin and Ravi Iyer, gives a sense of how this might be possible: they found that people with a tendency to spend money on experiences were already emotionally appreciative of the world; they also tended to buy more experiences the happier they became.

To complicate matters, the difference between a material possession and an experience is not straightforward. My daughters were given a board game for Christmas. Is the game a possession or an experience? It is certainly no fun if it stays in the box – does that fact count for or against the hypothesis that experiences make us happier?

Then there’s the question of whether only wholesome experiences count. Gambling is an experience anyone can buy, and yet when I read articles extolling the virtues of buying experiences they usually seem to be thinking of a parachute jump. If daytime television and time on the slots don’t count as life experiences, then this comparison is rigged.

All that said, a growing body of research backs the folk wisdom that experiences make us happier. Leaf van Boven of the University of Colorado at Boulder and Thomas Gilovich of Cornell University conducted surveys of how people felt about their possessions and experiences, publishing their findings in 2003. They asked their subjects – who were students – to focus either on “life experiences” or “tangible objects” they had purchased with the aim of advancing their “happiness and enjoyment of life”. The students were asked to describe how happy these purchases had made them.

The result: life experiences do indeed make students happier. A wider poll suggested that was true more broadly, although less so for low-income respondents; poorer people seem to enjoy material possessions perfectly well.

Yet if the effect is real, then why don’t we shift our disposable income to buy extra experiences and fewer possessions? Or work fewer hours to free up time to enjoy experiences? Two suggestions. One is that experiences grand enough to count as “life experiences” are often social. We wear our new watch alone but go on holiday with friends. Recent work by Peter Caprariello and Harry Reis suggests that what really underpins the happiness brought by experiences is this social element.

Perhaps, too, our fondness for experiences is a function of the way we remember them. The irritations of the weekend mini-break or the boring bits of the opera trip are quickly forgotten: only the rosy glow remains. In contrast, our possessions do not gracefully withdraw into memory. We experience the once-fashionable cardigan not as nostalgic recollection but as an object that occupies wardrobe space while starting to bobble, shrink and fade.

Also published at ft.com.

A cap on bonuses is of little benefit

Rewards must be aligned with credible performance measures, says Tim Harford

‘George Osborne will face more pressure over bank bonuses on Wednesday, as Labour demands that he blocks state-backed Royal Bank of Scotland (RBS) from paying bonuses to senior staff worth twice their salaries’, Financial Times, January 14

What are the chances that this is going to work out well?

Pretty slim. First, it’s about bankers, so you know for sure that there is going to be a lot of yelling and not a lot of thinking about the subject. Second, this rule about bank bonuses comes from the EU. So as far as George Osborne and his Conservative allies are concerned, that means even more yelling and even less thinking. And finally there is the Ed Miliband factor – he somehow thinks that this issue is all to do with what he keeps calling the “cost of living crisis”.

He talks about that a lot, doesn’t he?

Everything reminds Ed Miliband about the cost of living crisis. And everything reminds me of hamburgers but I try not to bore people about the topic in public. (Apologies to Robert Solow.)

But what exactly is the argument about?

The EU has ruled that if a bank wants to pay senior staff a bonus larger than the basic salary – that is, more than doubling pay – then explicit shareholder permission must be granted. Regardless of permission, the rule also states that a bonus cannot be more than twice the basic salary. Mr Osborne is challenging this in the courts. But Mr Miliband wants to raise a separate but connected issue: whether Mr Osborne’s Treasury, in its role as majority shareholder at RBS, will approve these larger bonuses.

So the question is whether Osborne will give permission for RBS to squeeze through a loophole in a rule he opposes anyway. How big are the bonuses that RBS proposes to pay, then?

This is it: officially RBS has not asked the Treasury for permission, so the entire discussion is political theatre.

It’s not entirely political theatre: there is the question of whether bonus caps are a good idea.

They aren’t.

That’s surprisingly decisive for an economist.

Trust me, I’ll sit on the fence shortly. But the crude EU cap is pretty daft – and when I say “crude” I have the support of Mark Carney, governor of the Bank of England. It is the equivalent of trying to limit alcohol consumption by saying your consumption of beers cannot exceed the number of tequila shots you downed at the beginning of the evening. For a committed binge drinker, that sort of rule is not going to help. And wanting to abolish it would not make one an irresponsible puppet of the drinks lobby.

So the EU rule is just as likely to jack up salaries as to reduce bonuses?

Quite. And just because the Conservative party unthinkingly lashes out at anything that comes from Europe does not mean that the EU is always right. In this case, the EU rule is crazy and Mr Osborne is right to challenge it. By the way, it seems quite plausible that of the bankers paid well enough for the rule to apply, more work in London than in rest of the EU put together.

So Miliband is wrong?

Here’s where I climb back on the fence, because while Mr Miliband is engaging in ridiculous posturing, there is a serious point to consider. Banks like paying bonuses rather than salaries because bonuses carry fewer side perks and can more easily be cut in tough times. So, as Mr Carney says, a crude cap is counterproductive. It is in any case being sidestepped by “cash allowances”– which seem to be like bonuses except, you know, they are not called that. But one of the contributing factors to the financial crisis – one that was so clear that even we economists spotted it – was that bonuses were encouraging bankers to take risks on a “heads I win, tails the shareholders, and taxpayer, lose” basis.

So the government should mess around with RBS bonuses after all.

In principle, yes. The issue is whether bonuses are really well aligned with credible, long-term measures of performance. This seems much easier to achieve with a single large shareholder, able to pay attention to the details. Research by the economists Marianne Bertrand and Sendhil Mullainathan shows that the pay of chief executives is linked much more tightly to sensible performance measures when at least one substantial shareholder exists to act as policeman.

Do you think the Treasury will play that policing role well with politicians yelling in their ears?

I think that is a question that answers itself.

Also published at ft.com.

There are no new ideas – only remixes

‘The elements that encourage people to appropriate a previous work are, alas, not conducive to originality in the new work’

Ninety-seven years ago, a young French artist walked across Manhattan into 118 Fifth Avenue, an outlet for J L Mott Iron Works. Perhaps tickled by the prank he was about to play, Marcel Duchamp purchased a Bedfordshire urinal. Returning to his studio, he signed it on the rim, “R. Mutt 1917”, and gave it a title: “Fountain”. The date – a day late, perhaps? – was April 2.

Duchamp’s “Fountain” vanished almost immediately; perhaps thrown away, perhaps smashed to pieces by the outraged committee at the Society of Independent Artists, which had opened an exhibition to all comers only to find Duchamp calling its bluff. Yet as we know, the story does not end there.

“Fountain” was copied: 15 replicas adorn art galleries, each endorsed by Duchamp. But more interesting are the transformations of “Fountain” that produce something new – for instance, Andy Warhol’s “Campbell’s Soup Cans” or Pablo Picasso’s “Bull’s Head”, to say nothing of the idea that a work of art could be just that: an idea.

It has become fashionable to assert – as the writer and director Kirkby Ferguson has done in his films – that “everything is a remix”. All creative acts, he says, copy, combine and transform earlier ideas. It’s a convincing thesis. Gutenberg’s printing press was inspired by a wine press, while Apple’s Macintosh borrowed from Xerox’s Alto, Nirvana’s “Smells Like Teen Spirit” transforms a riff from Boston’s “More Than A Feeling” and George Lucas’s Star Wars owes a debt to Akira Kurosawa’s The Hidden Fortress.

But what is it about an idea that makes it remixable? It’s worth distinguishing between an idea that provokes lots of derivative work, and one that inspires something new and exciting. “Fountain” did both but perhaps there’s a trade-off between fecundity and the ability to inspire original successors. “Apache” by the Incredible Bongo Band has been much sampled but hardly inspired a generation in the way that the Velvet Underground did.

Andrés Monroy-Hernández, now a researcher at Microsoft, and Benjamin Mako Hill, a hacker and researcher at the University of Washington, have conjectured that there may be a “remixing dilemma”: the elements that encourage people to appropriate and adapt a previous work are, alas, not conducive to originality in the new work.

Mako Hill and Monroy-Hernández suggest that an idea that is fairly simple, that comes from an already-famous creator, and that is itself a remix, will tend to spawn many imitators. But these are precisely the qualities – moderate simplicity, notoriety and being part of a chain of remixes – that might reduce the originality of further derivative work.

Mako Hill and Monroy-Hernández have tested their hypotheses in one particular setting, Scratch, a child-friendly programming language with a strong community. Scratch programmers are encouraged to share their programs and to use those of others as a basis for further work. A rich data set is available, allowing the researchers to compare the complexity, popularity and (to some extent) the originality of programs shared on the site.

In Scratch, there does seem to be a remixing trade-off: more famous community members find their work remixed a lot – often in trivial ways; the same is true for already-remixed projects. But the trade-off is less apparent on the important metric of complexity. More complex programs are remixed more often, yet also with more originality, than simple ones. This is surprising given the conventional wisdom in open-source software that it is best to release simple, early versions to encourage the community to improve on them.

Then again, Duchamp’s idea could hardly have been simpler – and nobody could suggest that subsequent artists have ignored it.

Also published at ft.com.

The WSJ reviews The Undercover Economist Strikes Back

“A chatty, witty guide to inflation, gross domestic product and the rest of the economic big picture.” says Roger Lowenstein:

Tim Harford is a brave man to write a book about macroeconomics for the lay person; luckily, he is also a funny man. It is faintly embarrassing to reveal that I giggled in bed while reading “The Undercover Economist Strikes Back: How to Run—or Ruin—an Economy.” But though his perky style and chatty asides keep us grinning, it would be wrong to call him a pop economics writer. His quarry isn’t the freakish or bizarre—it is stuff you will see in textbooks.

His hope is to explain what makes the economy tick. He isn’t out to identify cialis villains in the financial crisis (a welcome respite), and he doesn’t fault economists for failing to predict it. We should think of economists like dentists, he says: When something is wrong, they try to fix it.

Mr. Harford, a columnist for the Financial Times, has a knack for posing questions the average reader will have wondered about. (In fact, he frames the book as a dialogue between himself and a policy-curious bureaucrat.) Why couldn’t government solve unemployment by creating useless work? Why is money that is merely paper valued?

The full review is here; you can read other reviews and buy the book here.

17th of January, 2014MarginaliaComments off

What price supply and demand?

‘Recessions might be shaped by our desire for prices that move in line with ethical norms’

I recently had cause to visit Ambleside – a pleasant tourist-trap at the head of England’s largest lake and a perennial parking nightmare. I drove at a crawl once around the town and twice around the town’s largest car park without success. Finally I found a spot in a privately owned parking lot. I trudged to the ticket machine through the rain and on seeing the price, my first thought was not economically rational. It was, “That’s a rip-off.”

We have a complicated emotional relationship with prices. To the rational utility-maximiser of the economics textbook, a price is an exchange rate between different possible products. Outside the textbook a price can be a signal of quality (“reassuringly expensive”) or a desperate bid for attention (“FREE shipping”).

A price can also feel like a slap in the face. The simple logic of supply and demand suggests that front-row seats for the Wimbledon final should be expensive. So should bottled water after a hurricane, snow shovels after a blizzard and Ambleside parking spaces over the Christmas holiday. And yet a vendor who tries charging a price high enough to eliminate the shortages will be accused of despicable greed.

That is why the latest electronic gizmos tend to sell out when first launched. Demand is high, supply isn’t infinitely flexible and the logical solution – sell at a high price, then discount once the rush is over – causes outrage. Technology companies conclude they would rather ask their customers to queue or wait than ask them to pay the market-clearing price. Evidently most parking providers in Ambleside have adopted the same policy. The one that did not received my ingratitude.

The psychological wing of the economics profession has known this for a while – Jack Knetsch, Richard Thaler of Nudge fame and Nobel laureate Daniel Kahneman researched the issue in 1986. They found people strongly objected when wages or prices shifted sharply, even if the market logic behind the shift was clear to see.

There are obvious microeconomic consequences of this pigheaded insistence on the appearance of fairness: ticket touts, empty supermarket shelves in unseasonal weather and restaurants at which one cannot get a seat.

But what is less obvious is that the course of recessions and booms might also be shaped by our desire for prices that move in line with accepted ethical norms rather than the laws of supply and demand.

If prices adjusted swiftly and smoothly, “Say’s Law” would always hold true. The gnomic law, named after a Napoleonic-era French economist, is that “supply creates its own demand”. The implication is that recessions can only be due to supply shocks, not simple lack of demand, as Keynesians claim. Prices and wages should adjust to ensure that supply and demand are always equal. In the world of Say’s Law, monetary policy should have little or no effect. Quantitative easing would be of scarcely more significance than a new set of commemorative postage stamps.

Yet prices and wages sometimes fail to adjust. Occasionally this is for psychological reasons; at other times the hassle of changing the price tags, reprinting the menus and so on can delay price adjustments. The price of parking in Ambleside was painted on to a metal sign, after all, and it did not vary by season or (much) by the time of day. Of such inflexibilities are born substantial economic fluctuations – the intellectual descendants of John Maynard Keynes often look to price rigidities to explain why recessions happen at all.

It might seem absurd that consumer irritation at a price hike, or the cost of repainting a sign, could add up to enough price rigidity to cause a recession – and not every economist buys the idea – but it is possible, and an influential school of thought. Economic frictions, just like real friction, may seem trivial. They are not.

Also published at ft.com.

Life on a flood plain – home and dry

The state has been interfering in protection against floods since 1531

“The Environment Agency, the quango responsible for Britain’s flood defences, is set for 1,700 job losses in the next 12 months even as swaths of the country struggle to recover from the new year deluge.”, Financial Times, January 7

Awkward timing.

Yes. Although Owen Paterson, the environment secretary, insists that spending on flood defences is higher than it used to be.

Is it?

Doubtless there is some way to chop the numbers that makes Mr Paterson’s statement correct. But there’s a trap in this argument that we should avoid. Governments like to cut vague things: “finding efficiencies”, “making tough choices”. Oppositions like to point to specific things that have been cut. This week, that means flood defences. During the 2011 riots, the complaint was that the government had cut funding for youth centres. When a West End theatre roof collapsed, the story was about London fire stations being closed. And the government will always try to scrape together some story saying that, no, this particular thing was not cut, the cuts were instead something rather less tangible. It is not an illuminating discourse.

But there is a specific problem about flooding. Isn’t there?

Experts expect more of it – blame climate change. But let’s back up a bit. What causes flood damage?

Water, silly.

Not just water. Nobody complains about flood damage in the middle of Loch Ness, and there’s plenty of water there. Flood damage is caused when water meets valuable property. This isn’t just splitting hairs: one of the reasons that more flood damage is expected in future isn’t just that more downpours are expected, but that we’re building homes in vulnerable places. It’s nice to be near water, after all – as long as the water doesn’t come too near you.

I get all that – but why are we building homes where they’ll be flooded?

Part of the problem is the way we think about important but unlikely risks. Consider a flood that is expected to occur roughly every 30 years, and to cost £30,000 pounds if it does occur. The expected cost of that is £1,000 a year, or £3 a day. But to a homeowner, or a local council granting planning permission, the subjective perception of the risk is likely to fluctuate between the odd sleepless night and utter unconcern.

That’s a rather psychological take from an economist.

There’s a straightforward economic explanation, too. The government has been interfering in flood protection since Henry VIII’s Statute of Sewers in 1531, and that interference has had malign effects. Until recently, the arrangement has been that homeowners in high-risk areas have received subsidised flood insurance, which naturally makes people more willing to buy houses in such areas, and to build houses in such areas. The quid pro quo for the insurers was that, if they agreed to provide this cross-subsidy, the government would spend money on flood defences to enable people to continue to live near the beach, or with gardens backing on to the Thames. These are people of quality, after all – people whose opinions should be respected. People are quite good at making sure their choices are subsidised by others.

I get the picture. But you’re speaking in the past tense.

Things have changed. There’s a new accord between the insurance industry and the government. The cross-subsidy is going to be made more transparent, with a levy on all home insurance policies going into a non-profit fund called Flood Re.

If everyone is going to pay into Flood Re, why not just fund it from general taxation?

Because politically speaking it is convenient to be able to outsource some tax collection to insurance companies, and pretend it isn’t a tax, even if it amounts to the same thing. But that’s not the only change. Many houses – including the priciest ones, and those built in the past five years – are excluded. Others that end up flooding too often will also be thrown out of the scheme.

Is that an improvement?

Possibly, if the scheme is solvent; that remains to be seen. There is something to be said for withdrawing the insurance subsidy for new-build homes, although it hardly seems fair to make it retroactive to 2009. But we need to hope that the government makes wise choices about flood defences – and our planning system needs to allow homes to be built on dry land.

Also published at ft.com.

How can we outwit our lazier selves?

‘Be careful what you resolve to do in 2014 – and how irrevocably you resolve it with commitment strategies’

What do the cold war, expiring gift vouchers, the euro and New Year’s resolutions have in common?

A hunt for the link begins with Thomas Schelling, the only person in history to have run war games for Henry Kissinger, won a Nobel memorial prize in economics and served as a script consultant for Stanley Kubrick’s Dr Strangelove.

The film featured the Soviet doomsday device: “When it is detonated, it will produce enough lethal radioactive fallout so that within 10 months, the surface of the earth will be as dead as the moon!” The point about the doomsday machine is that no sane person would ever trigger it, so it is set up to explode automatically in the event of the war. It is thus the perfect deterrent.

Strategic commitments need not be so cartoonish: a public declaration can serve as well, by making it awkward to retreat. Consider John F. Kennedy’s televised address from the Oval Office in which he declared that West Berlin would be defended, and “an attack upon that city will be regarded as an attack upon us all”. Schelling, whose ideas also informed Kennedy, was widely regarded as the authority in the use of such commitments.

In the 1970s, Schelling turned his attention to what we would now call behavioural economics. He was fascinated by what he described as “the intimate contest for self-command” – our efforts to quit smoking or learn Mandarin in the face of stubborn inertia. And Schelling felt that commitment strategies could help us outwit our lazier selves.

The New Year’s resolution can be supplemented with a commitment strategy: paying in advance for a year’s gym membership or betting with friends that we’ll stop smoking. Announcing on Facebook that we’ll be running a marathon in April isn’t quite JFK, but the declaration serves the same purpose.

Commitment devices can work but Schelling raised two awkward questions. The first is, whose side should we take in the intimate contest for self-command? If part of me wants to quit smoking and part of me doesn’t, most of us hope the quitter will win. People tend to eat too much, exercise too little and not save for retirement. But some people eat too little, exercise too much and hoard when they should be spending. It is possible to worry too much about the future.

A second challenge from Schelling: what if the commitment backfires? Many people pre-pay their gym membership as an attempt at strategic commitment, and then don’t go to the gym. This is the worst of both worlds: we fail to keep our resolutions and, in addition, pay the costs of the failed commitment. Spoiler alert: the doomsday machine in Dr Strangelove does not deliver the hoped-for permanent peace.

Some research by Suzanne Shu and Ayelet Gneezy, professors of marketing, suggests that commitment strategies may work with Christmas gift vouchers: a voucher with an imminent expiry date induces urgency and is more likely to be spent than one that expires later. (Similarly: tourists see sights that the locals never get round to visiting.) And yet in Shu and Gneezy’s study, the majority of vouchers expire unused. This is hardly an unmitigated success.

Commitment strategies are now cool in macroeconomic policy. An independent central bank with an inflation-busting mandate is a commitment strategy. So is a fiscal watchdog such as the Office for Budget Responsibility. Bank of England governor Mark Carney’s “forward guidance” is too. But the most ambitious attempt at macroeconomic commitment was the euro. It was a doomsday machine in more ways than one.

So be careful what you resolve to do in 2014 – and how irrevocably you resolve it.

Also published at ft.com.

Casinos’ worrying knack for consumer manipulation

The spread of machine gambling offers a portent of other economic developments

What if the future of capitalism is not to be found in Shenzhen, Abu Dhabi or the Massachusetts Institute of Technology Media Lab – but in the Nevada desert? Natasha Dow Schüll, an anthropologist, has spent 15 years conducting field research in Las Vegas, culminating in a disturbing book, Addiction by Design. We are used to thinking of Vegas as a city of gaudy spectacle and the green baize of poker, blackjack and roulette tables. It is now a city of slot machines, which have grown like weeds because they are fantastically profitable. And the spread of machine gambling offers a worrisome portent of developments elsewhere in the economy.

Three slot-machine innovations stand out: first, confusion by design; second, addictiveness by design; third, the use of play money. All have been made possible by the digital automation of the machine itself, which in Las Vegas as elsewhere eliminates the skilled service jobs of croupiers and replaces them with highly paid jobs in interface design and low-paid work as a security guard or waitress.

Consider, first, confusion by design: Las Vegas casinos are mazes, carefully crafted to draw players to the slot machines and to keep them there. Casino designers warn against the “yellow brick road” effect of having a clear route through the casino. (One side effect: it takes paramedics a long time to find gamblers in cardiac arrest; as Ms Schüll also documents, it can be tough to get the slot-machine players to assist, or even to make room for, the medical team.)

Most mazes in our economy are metaphorical: the confusion of multi-part tariffs for mobile phones, cable television or electricity. My phone company regularly contacts me to assure me that I am on the cheapest possible plan given my patterns of usage. No doubt this claim can be justified on some narrow technicality but it seems calculated to deceive. Every time I have put it to the test it has proved false.

I recently cancelled a contract with a different provider after some gizmo broke. The company first told me the whole thing was my problem, then at the last moment offered me hundreds of pounds to stay. When your phone company starts using the playbook of an emotionally abusive spouse, this is not a market in good working order.

Another example is the way the pension providers charge for their services. Between the pensioner and the financial assets they are acquiring, it is almost impossible to figure out who is being charged for what. Even when annual charges are transparent, few people begin to grasp the vast sums such charges may cost them over the life of the product.

Now consider addiction by design. What is not understood about modern slot machines – certainly not by the UK’s Labour party, which recently tried to spark a moral panic on the subject – is that they do not try to drain your money away quickly. They do so slowly, by maximising “time on device”. The machines are cheap to run: what is the hurry? Machine gamers do not even play to win: they play to play. The aim of the machine is to deliver constant reinforcement – for instance, the “false win”, where a player is treated to fanfares and flashing lights after betting $3 and winning 60 cents.

Here, the natural analogy is with Facebook, Twitter and Google. These companies, ultimately, are selling one thing: our attention. Nothing about Facebook makes sense until you view it as a well-honed system for persuading you to check Facebook one more time.

Finally, consider the arrival of play money. A cutting-edge slot machine will not bother with a slot: the player will be attached umbilically via a casino charge-card on an elastic cord. This is partly a logistical matter: feeding machines with money, summoning a cashier to make change and cashing out jackpot wins all take time and interrupt a player’s flow.

But the substitution of cash for “credits” has a psychological effect too. Behavioural economists have shown that cash seems to have a bracing effect on our ethics and our judgment. Dan Ariely has found that we are willing to cheat for poker chips convertible into cash but less willing to be dishonest for naked cash itself. Drazen Prelec and Duncan Simester discovered a much higher willingness to pay for a good of uncertain value if the payment was made by credit card.

I would not wish to be too gloomy about all this. Most people do find a way to navigate through the maze of shopping malls and phone bills and loyalty cards and easy credit – the research of the economist Eugenio Miravete often shows people finding satisfactory deals against what look like insuperable odds. And the free market continues to deliver valuable products.

Nor is the right regulatory intervention always clear. Slot machines could be banned, I suppose – no doubt with unintended consequences – but the Vegas-isation of the everyday economy is not easily curbed with the stroke of a legislator’s pen.

Yet it is hard for a free-market enthusiast like me to look unblinkingly at Las Vegas, at row upon row of machines, designed by an elite and needing little human intervention, drawing in consumers, soothing them, entertaining them and eating their money – and not to feel that the invisible hand has slipped.

Also published at ft.com.


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