Monthly Archives: December 2008

The John Templeton Foundation recently sent me a collection of essays addressing the question: “Does the free market corrode moral character?” Lacking an agreed definition of the free market, a conception of good moral character, and above all a sense of how character is shaped, it is not surprising that the answers tended to wander off topic. The writer Kay Hymowitz fears that internet chatrooms facilitate paedophilia. The economist Jagdish Bhagwati argues that globalisation makes the world a better place. However right he may be, that was not the question.

It is easy to point to systems that are far more injurious to moral character – not to mention prosperity, peace, the environment and human life itself – than the free market: German fascism, Stalinist communism. It is harder to reverse the exercise, although free markets do look corrosive when compared to some childlike state of grace.

I am not sure if it is the same question or not, but one might also ask: “Does the free market punish moral character?” On balance, the answer is no. Markets tend (but do not guarantee) to reward hard work, calculated risk-taking, applied creativity, amiability and honesty. Competition is the key here: it allows us to find alternatives to doing business with lazy, timorous, unimaginative, rude or dishonest people.

There remainder of the article can be read here. Please post comments below.

When you think about it, Christmas is a strange ritual. Is there any economic logic to it?
FR, London

Dear FR,

The late Cambridge economist, Nicholas Kaldor, is said to have observed that the money supply surges in December and then falls back in January, before dryly remarking, “At last I have discovered the cause of Christmas!”

Professor Kaldor – a staunch critic of monetarism – asked whether central banks might be able to halt the Christmas spending spree by keeping a tight rein on the money supply in December. No, he concluded: people would turn to credit cards. How ironic that this year, the central banks desperately pumped money into the economy in an attempt to ensure that Christmas wasn’t cancelled.

But you are right: the spend-and-give, spend-and-eat side of Christmas makes little economic sense. Mainstream theories suggest that consumers should prefer to smooth their consumption rather than binge at Christmas and then, broke and fat, cut back in the new year. So economists are turning to psychological research to understand what is going on. Demarcation seems to be an important part of the story: we look forward to Christmas, enjoy it while it is happening (if done right), and recall past Christmasses fondly. All of which only happens if the day itself stands out.

Gift-giving works best when co-ordinated – on birthdays, anniversaries and at Christmas. A.A. Milne, in Winnie the Pooh, wished people “happy Thursday” instead of happy birthday; Lewis Carroll’s Humpty Dumpty received unbirthday presents. Alas, neither concept has caught on. Perhaps that is no bad thing. I am always forgetting my wife’s unbirthdays, and live in fear of forgetting our anniversary. But even I remembered Christmas.

Questions to

More or Less airs on Boxing Day: Radio 4 at 1.30pm GMT (and on Sunday at 8.30pm GMT, slightly later than usual). You can also listen online, subscribe to a podcast, and read more at the More or Less website here.

This program, we have a festive celebrity edition with Dave Gorman and Konnie Huq. Fun guaranteed – and Merry Christmas, everyone.

The BBC Magazine says not, with examples:

In a collection published by the Guardian’s Simon Hoggart, one mother wrote:

“Harry was Jesus in the school Jesus Christ, Superstar. This was the best production I have ever seen, youth or adult. Both boys, especially Harry, were physically and emotionally drained at the end. I was drained too… seeing your son crucified nightly is not an experience I would recommend.”

Very funny. But I am not sure the round-robin letter deserves the bad press it gets. A Dear Economist letter from two years ago:

Dear Economist,

Christmas cards are starting to drop through the letterbox and many contain infuriating round-robin newsletters from people I barely know. This is no substitute for real friendship. Why do people send junk mail instead of a proper letter?

Tom, Lancaster

Dear Tom,

You say that people send newsletters “instead of” a proper letter, but I wonder if this is true. Newsletters are subject to extreme economies of scale: the first copy is time-consuming to produce but the rest take just seconds. The likely result is that many people receive newsletters who might otherwise get nothing at all, or only a card reading “best wishes, Brian”, leaving you to wonder who on earth Brian might be.

That is no consolation if it is really preferable to receive nothing at all than to receive a newsletter. But that seems unlikely: economists talk of “free disposal”, a theoretically convenient assumption that would not apply to a half tonne of manure on the doorstep, but surely describes the marginal cost of throwing away Brian’s newsletter along with his card. If you are so certain that these newsletters contain nothing of interest, waste no time in reading them.

You have evidently not discovered the work of economists Jess Gaspar and Ed Glaeser, who show that the new communication technologies – mobile phones, e-mail, word-processors – are not substitutes for traditional human interaction but complements to it. These newsletters, like e-mails and weblogs, help keep friendships alive and actually increase the number of old-style face-to-face meetings.

If you are finding that despite all these newsletters you still have no real friends, I don’t think you should blame the newsletters.

A quick question, as the Christmas cards arrive on the doorstep. Do you prefer the ones with round-robin letters or the ones with nothing but a quick signature or “hope to see you in 2009″? Yes, a handwritten letter in every card would be best, but one must be realistic.

And no, I did not send round-robin letters this year. I probably should have.

Were an alien to pick up our news channels, it would conclude that human civilisation depended on the production and purchase of cheap plastic tat. First came the concern that we might talk ourselves into not spending enough; then the fear that the banks wouldn’t lend us the money to spend, even if we wanted to. In November, our governments borrowed money and gave it to us in the hope that we’d get the hint. Are we really so dependent on consumption?

In the short run, yes. Economists worry about a sharp fall in consumer spending because when demand for goods falls, so does demand for labour. Our desire to spend less is quickly revealed as a desire to spend less hiring each other (and our friends in China) to make things. Result: economic collapse, unemployment, misery.

In the long run, the picture is completely different. The typical British man earns roughly twice what his father earned at the same age. When today’s teenagers are in their forties, there is no reason why they shouldn’t decide to enjoy their increased prosperity by working less instead of earning more. Rather than being twice as rich as their parents, they could be no richer but start their weekends on Wednesday afternoon.

The remainder of the article can be read here. Please post comments below.

Dear Economist,
Can economics help me pick out the perfect Christmas gift for my brother?
Tim Maly, Ottawa, Ontario, Canada

Dear Tim,

Your letter obliges me to disinter the influential research of the economist Joel Waldfogel on the “deadweight loss of Christmas”. Fifteen years ago, Waldfogel published an academic article demonstrating that the recipients of gifts would not generally have been willing to pay what it cost to provide the gift. A £30 sweater was valued at £20, for example, creating a “deadweight loss” of £10. Siblings were not the most incompetent givers – that honour goes to aunts and uncles – but they were not especially competent either.

Waldfogel’s work is often misinterpreted as suggesting that gift-giving is pointless. That is not true. He explicitly excluded the sentimental value of gifts from his calculations, and, of course, the sentimental value is part of the purpose of giving presents. That may explain why the economists Sara Solnick and David Hemenway have discovered that we prefer unsolicited presents to those we have specifically requested. It may also explain why gift vouchers are a bad idea: they have no sentimental value but still create deadweight loss, since many expire without being used, or are sold at a loss on eBay – as the economist Jennifer Pate Offenberg has documented.

All this points to the optimal gift-giving strategy: you need to minimise the deadweight loss while maximising the sentimental value. This suggests buying small gifts and striving for emotional resonance. Look for something inexpensive, and consider supplementing it with a letter, a photo, or time spent together.

If you feel a financial transfer is necessary, slip a cheque into the envelope too. I wish you, your brother, and all the readers of this column an optimal Christmas.

Questions to

Strictly for Strictly Come Dancing fans…

If you want to succeed at Strictly Come Dancing, you need the full package: the clothes, the moves, the smile. The ability to add up would not go amiss, either.

Last week’s voting fiasco on Strictly saw the show’s organisers effectively giving up on the whole point of the format, cancelling the dreaded “dance-off” and declaring that all three couples would proceed to the final.

The apparent problem was that two couples tied for first place in the judges’ affections, giving them three points each and leaving Tom Chambers and Camilla Dallerup languishing in third place with a single point.

Only the leading couple could avoid the dance-off, so while the viewers were being invited to phone in and save Tom, it was ever so slowly dawning on the show’s producers that even if every single viewer voted for him, he couldn’t magically leap into first place.

The BBC’s head of entertainment, Jon Beazley, said the bungle had been “unforgivable” but blamed the “exceptional circumstances” of a tie at the top of the leader-board. But were the circumstances really so exceptional?

More or Less, BBC Radio 4′s programme about the numbers in the news, does not think so. Inspired by an email from a listener, we looked at how often we should expect a tie…

A matter of national interest, I’m sure you can agree. You can read the rest of the article on the More or Less website

Did Robert Peston cause the credit crunch? Some people seem to think so: the Daily Mail recently asked if he had too much power; Neal Gandhi, the chief executive officer of an outsourcing company, claimed that “because of his influential position, his predictions come true almost exclusively because he has predicted them”. This seems implausible, and I’m not saying that merely because Peston once worked for the Financial Times. After all, there’s a credit crunch on in New York too, where few have ever heard of the BBC’s inimitable business editor.

It is less absurd to claim that media exaggerations have deepened the recession, perhaps even caused it. Mark Fenton-O’Creevy, a professor of organisational behaviour at the Open University, argues that “media stories on the current turmoil are not just reflecting events, they are also creating them”. The journalist Michael Blastland, an evangelist for responsible use of statistics, argued in a debate at the Frontline Club in November that the media’s gloom about consumer spending had far outpaced any signs of a slump in the data and was contributing to the downturn.

The remainder of this column can be read here. Please post comments below.

Dear Economist,
My young son came home from school and asked me: “Mummy, what’s a credit crunch?” How can I explain this to a five-year-old?
Ms LG, London

Dear Ms LG,

Once upon a time, there was a blameless girl called Consumerella, who didn’t have enough money to buy all the lovely things she wanted. She went to her Fairy Godmother, who called a man called Rumpelstiltskin who lived on Wall Street and claimed to be able to spin straw into gold. Rumpelstiltskin sent the Fairy Godmother the recipe for this magic spell. It was written in tiny, tiny writing, so she did not read it but hoped the Sorcerers’ Exchange Commission had checked it.

The Fairy Godmother carried away armfuls of glistening straw-derivative at a bargain price. Emboldened by the deal, she lent Consumerella – who had a big party to go to – 125 per cent of the money she needed. Consumerella bought a bling-bedizened gown, a palace and a Mercedes – and spent the rest on champagne. The first payment was due at midnight.

At midnight, Consumerella missed the first payment on her loan. (The result of overindulgence, although some blamed the pronouncements of the Toastmaster, a man called Peston.) Consumerella’s credit rating turned into a pumpkin and Rumpelstiltskin’s spell was broken. He and the Fairy Godmother discovered that their vaults were not full of gold, but ordinary straw.

All seemed lost until Santa Claus and his helpers, men with implausible fairy-tale names such as Darling and Bernanke, began handing out presents. It was only in January that Consumerella’s credit card statement arrived and she discovered that Santa Claus had paid for the gifts by taking out a loan in her name. They all lived miserably ever after. The End.

Questions to

To most thoughtful people, unemployment benefit embodies a painful trade-off. It’s the mark of a civilised society, clubbing together to provide assistance to those in need. It is also, regrettably, an incentive to remain unemployed. At its worst, unemployment benefit pays people to watch daytime television; it is particularly pernicious if the skills of the jobless decay, and unemployment becomes unemployability. Yet, at its best, it is a life-saver.

In balancing these two effects, it’s hardly surprising that different societies have adopted very different systems. According to the Organisation for Economic Co-operation and Development, member governments spent an average of 0.75 per cent of gross domestic product on unemployment benefits in 2006. France spent nearly twice this sum, and Germany almost three times as much, while the US spent a third of the average, and the UK just over a quarter. Germany spent more than 10 times as much as the UK, relative to GDP.

The remainder of this article can be read here. Please post comments below.

Tim Harford’s blog

This blog is no longer updated but it remains open as an archive.

Tim, also known as the Undercover Economist, writes about the economics of everyday life.