Uncovering the Undercover Economist
With the long weekend of gluttony and shopping behind us, we've got a little special something to wake up your sluggish brains and perhaps even lighten the load on your burdened wallets. Earlier this year Tim Harford interviewed me about high-stakes poker, and now that his new book The Undercover Economist: Exposing Why the Rich Are Rich, the Poor Are Poor--and Why You Can Never Buy a Decent Used Car! is out, he's graciously consented to let me turn the tables.
I first encountered Tim's writing through his fabulous Dear Economist column, in which he somehow manages to analyze reader's questions with the tools of modern economics and the acerbic wit of Miss Manners - two things I greatly enjoy. His new book is a fun romp through various sections of mainstream economics, some of which I found familiar, others of which were new, and all of which were entertaining. For other takes, see The Economist, In The Agora, EconLog, Marginal Revolution and Steve Landsburg.
Without further ado:
Where does your interest in economics come from? Were you always interested in economics growing up?
It was pure, unromantic accident. Oxford offers a famous course in philosophy, politics and economics that caters to the indecisive; I took it, assuming that I would drop economics. I was wrong.
Sounds like a good choice, the "Undercover Philosopher" could be a good book, but "The Undercover Politician" - not a chance.
Other than Ricardo, mentioned in the book, what economists have most influenced you?
I’m a game theorist at heart, so it would have to be Thomas Schelling. When I first read ‘The Strategy of Conflict’ I couldn’t believe it was written in 1960. It seemed decades ahead of its time and the writing was so fresh. His later books are even better. I was so excited when he shared the Nobel prize, I called the Financial Times and told them I wanted to write an op-ed about why he was brilliant. It never occurred to me that they would say yes. In retrospect I can see that his style of picking everyday examples to explain his ideas made a big impression on me.
Another big influence was Steven Landsburg. He was the first popular economics writer I discovered, and his relentless combination of mischief and logic opened my eyes to what could be done with economics as entertainment.
Who is doing the most interesting work today?
I like Steve Levitt’s work a lot – behind the ‘Freakonomics’ publicity machine is a very, very smart economist. I am also impressed with Michael Kremer. He has produced two or three big, practical ideas in the field of development economics: a self-enforcing system for cutting off public and private loans to odious regimes, the use of randomized controlled trials to evaluate aid projects (some of them work – it would be nice to know which ones), and the use of an advanced market commitment to buy vaccines or other drugs that haven’t been developed yet.
I am increasingly convinced that last idea should be used as a part-substitute for patents. Look at the current mess over Tamiflu: Roche is being bullied into selling the drug cheaply just when it looks most useful. The same thing has happened with AIDS treatments and with Cipro during the Anthrax scare. Drug companies expect this, which is why we don’t have many treatments for low-probability, high-impact diseases. A government promise to pay a certain price for a certain quantity in advance is much more attractive to the companies and more likely to be respected by the government.
What do you like to do in your free time when you're not being an economist/writer?
I’m currently moving between jobs the hard way, by doing both at the same time. Couple that with publicity efforts for the book and I’ve almost forgotten what free time is! At the moment I spend it with my wife and baby daughter, and we persuade friends to come over. We both like to cook for guests – the dining table is in the kitchen and it creates a nice feeling.
When things settle down a little I would like to spend a little more time with my board games. Computer games would be nice too, but I reckon both my career and my marriage would be on the line if I allowed myself to be sucked in.
Why is it important to educate people about economics?
We can all think of ways in which the world would be a better place if people knew a little bit more about the basics, but that’s not why I write. I write about economics because I love it and I want other people to love it too. I’m just having fun.
You blog at timharford.com, including posts of your FT "Dear Economist" column. How has blogging affected your career? What role do you see blogs having in economics?
I was a little slow to understand blogs. I used the blogging software as a simple way of putting my writing on the web. Now I follow the economics blogs, especially Marginal Revolution – it offers lateral thinking and a catholic range of subjects. What more do you want? [ed: More linking to us, of course, but perhaps this interview will help?]
I also started the World Bank’s first blog, with a colleague, Pablo Halkyard. It’s been going very well and causing some excitement inside the Bank, so far in a good way. I just think the whole blogging thing is too new to make a sensible judgment, though. I’m going to watch and learn.
What are the exciting new frontiers in economics - areas that it had been missing?
I get the sense that development economics is finally making some progress. Daron Acemoglu won the Bates Clark medal for his study of institutions and their impact on development. Kremer is charging around with these inventive policy proposals. Avinash Dixit, a brilliant game theorist, has just published a book on alternative forms of governance which I’m dying to read. So there are lots of different approaches, and you never know, one of them might pay off.
In a cage match against Steve Levitt, would your undercover spy talents or his sumo-wrestling win the day? Bonus: would adding mud or oil change the result?
Steve Levitt will tell you if sumo-wrestlers are cheating. My ‘Dear Economist’ advice can tell you if your partner is cheating. Place your bets.
In the first chapter, you talk about how to tell if a company is ripping you off, based on the barriers to entry in the industry. Throughout the book, you talk about scarcity power being crucial for business profit. At Catallarchy we're interested in applying that sort of thinking to governments. Do you have any ideas along those lines?
I think that competition between governments is very productive. That competition can take different forms. Part of it is simple bragging rights: my experience at the World Bank was that a simple project to measure the wasteful red tape all over the world very quickly sparked a race to cut that red tape. When investors have a choice of where to put their money, competition intensifies. If people can move from one jurisdiction to another, competition works even better.
I think we can usefully carry over those ideas to competition between other bureaucracies. For example, the aid industry consists of a lot of public agencies and non-profit competitors, but nobody has good information about which ones are doing the best job. Better information might strangle the flow of funds to the bad and reward the competent agencies. That’s not perfect competition but it would really help.
Now wait a sec, don't forget that I'm armed with the tools of the Undercover Economist, and can use your theory find out whether I'm being ripped off. You talk about scarcity power being important for profit, and since a government has a monopoly over providing services to its citizens, doesn't that give it maximum scarcity power? Furthermore, we can look at why there is scarcity, and see that most governments don't allow competition in their monopoly areas. Isn't that a classic ripoff situation?
As for competition between governments, aren't governments historically very resistant to new competitors? When some geographic region wants to break off and compete, usually violence is used to stop them - another sign of an industry trying to limit competition.
OK, OK. You're right, of course. Governments do try to limit competition between themselves, and secession is rarely a peaceful process. Still, competition sometimes emerges when governments don't notice. The most famous example is competition between the warring states of Europe, which spurred investments in military technology and exploration, while the Chinese monopoly state turned in on itself and fell behind. Columbus pitched his idea to several European powers before getting backing from Spain - in China his peers were simply shut down without the right of appeal.
More recently, European integration seems to have spurred lots of competition to improve regulations: both the new EU states such as Poland and the old ones like Germany have been cutting red tape for fear of losing business to each other.
Then there are the really quirky cases. In most states, for instance, judges have opened themselves up to competition from bail bondsmen. They make the same decisions as judges do before a trial: should the suspect go free until the trial or not? The difference is that the bondsman is on performance pay: he gets paid for letting people out who subsequently do show up at the trial. Not surprisingly (and despite some inbuilt advantages for the judge) the bondsmen do much better. (For more information see the paper by Eric Helland and Alex Tabarrok here). I'm not sure anyone saw the bondsman system as opening the judicial system to competition, but that's what's happened.
In the book you explicitly express willingness to make normative judgements: "Billions of people could benefit from better economic policies. Millions are dying because of bad ones. Sometimes the logic of economics is so compelling that it's impossible for economists not to take a stand." I've noticed that the groups of people who care about fixing problems and people who understand and know how to fix them are often very separate. Economists, for example, are much better at the latter, while protestors are probably better at the former. How can we fix this? (Besides giving protestors your book). Is it important for economists to make some normative judgements?
It is great to see brilliant economists participating in public debate – from Keynes to Friedman and now Stiglitz, Krugman, Becker, Bhagwati and others. But someone who works away without ever having a discernable opinion on anything can be just as influential in the end. In the end I imagine we could cope with the kind of economists imagined by Keynes, who would be unremarkable but useful, ‘rather like dentists’.
In health care you talk about Singapore's efficient system, and the US/Canada/UK inefficient ones. This conflicts with the idea of democracies as being conducive to freedom and good policies. What are your thoughts on the connection between democracy and economically efficient policies?
Obviously, almost all the rich countries are democratic, which is encouraging, even if there are exceptions to the rule and all kinds of arguments about the direction of causation.
Democracies are capable of voting in clueless governments, but I think that overall they are more likely to support the basics, such as property rights and working courts, and less likely to carry out extreme expropriation.
Sometimes the discussion in rich countries gets too obsessed with what are details: Japan, the United States, Sweden, France and Britain are all hugely successful economies and they all have the same basic formula, which is to allow private enterprise to experiment with new ideas in a business environment that rewards success and punishes failure. All of them could do better, but we shouldn’t forget that they are all doing tremendously well.
Again from the book: "We think that the value we get from schools and police are more than what they cost us in taxes, but we don't know for sure." If you could have a refund of the taxes you paid towards your child's education, and send them to a private school, would you? You discussed reform in health care and pollution - how would you reform schools?
I would, and I wish everyone had that option. I actually think reforming schools is much easier than reforming healthcare – the market failures are just not as serious so you can let the market system operate with far fewer qualms.
People who oppose the use of markets in healthcare can point to two genuine problems: illness is extremely unpredictable, and it’s hard for a layman to tell the difference between good and bad treatment. I don’t think those problems are insuperable, but they’re certainly real. With schools those problems are not nearly as serious: parents know a good school from a bad one and most children have broadly similar costs of education. I would let the market provide schools, although I’m in favor of a voucher system so that every child has a minimum fund to spend on education. I’m pretty sure that many people would want the government to certify good schools and I have no problem with that, as long as it’s not compulsory to go to a certified school.
One thing I noticed in reading your solutions is that they are both economically efficient (unlike current systems) and socially redistributive (unlike hard-core free market economics). It seems like most welfare state policies are not economically efficient. Why? Is this changing? How can we change it?
In Britain, I think the left has got smarter and we are seeing less wasteful policies. The current labor government has dramatically expanded the size of government relative to the economy, but we’ve also seen the use of auctions to assign hugely valuable government assets, central bank independence and modest lump-sum transfers to all new-born children, which could become the beginning of a more efficient negative income-tax system.
I hope I didn’t oversell the efficiency of my taxes and subsidies, though. In the end, we will want to help people who are in difficulty, and we will also want to discourage people from getting into difficulty. Those two aims conflict, and clever welfare policies may help but will never change that.
Thanks, Tim! Again, the book can be found here.