Monthly Archives: June 2009

I wish I frequented the same high street as the statisticians who calculate measures of inflation. Given their calculations include “Various selected popular brands of sweets, chocolates, gum”, will they take note of a Mars Bar shrinking in size from 62.5g to 58g while remaining the same price? I make this an effective price increase of 7.76%. If not, when are those lying bastards going to stop lying to me?
Ralph Corderoy

Dear Mr Corderoy,

Your arithmetic is correct but your objection is confused. The statisticians – or “lying bastards”, au choix – do indeed adjust for such changes. It is far easier for them to do that than to make the many other adjustments they attempt every year to cope with the fact that nobody knows how many gramophones there are in an iPod.

Certainly, you are right to suspect that when the bean-counters go out to calculate inflation, they are not buying exactly the same products that you buy. How could they? Some people spend a lot on petrol, heating and mortgage payments; others are more interested in clothes, fast-food and laptops. The statisticians’ best can never be quite good enough.

I will concede, though, that the Mars Bar has been worthy of scrutiny ever since the late Nico Colchester noted in the Financial Times back in 1981 that it was a very stable unit of account. It is a veritable ingot of basic commodities (sugar, milk, cocoa) that has kept its value relative to the price of other goods such as small cars, which have cost about 20,000 Mars Bars for the past 70 years.

Fortunately, there is no strong trend towards debasing the Mars Bar – its weight has always fluctuated. It weighed 57g in the late 1970s and as much as 67g in the mid-1980s: 58g is simply a return to historical norms after something of a Mars Bar bubble.

Questions to economist@ft.com

Spare a thought for the weather forecasters. Taken for granted when they get it right, they are invariably whipping boys when they get things wrong – despite a far better forecasting record than we economists have. They probably have more to contribute to the economy, too.

A recent case in point: Bournemouth’s woes during the bank holiday at the end of May. The Met Office predicted storms, but the beach resort in fact enjoyed the sunniest day of the year. Bournemouth’s tourist office reckons the town missed out on at least 25,000 visitors and more than £1m of revenue as a result. Subtler losses and gains were registered by the would-be tourists, and the lucky ones who enjoyed both a sunny day and a quieter beach.

Tourists have always been vulnerable to the weather, but they may now be more vulnerable to weather forecasters. The internet has made it easy to check the forecast and easy, too, to make late bookings for short breaks – which are self-evidently more responsive to the weather.

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

Create Your Own Economy” has arrived and I cracked it open immediately. As expected, it is engaging, creative and every page makes you think differently about the world. I have read one chapter and can’t wait to read the rest.

However, the book quickly surprised me. I read Tyler every day and didn’t anticipate the turn it took on page one. It was so surprising – and the surprise is a pleasant one – that I don’t feel I should say more. Except: Recommended.

Tyler and Alex have a set of textbooks out (or nearly so).

Tyler’s “Create Your Own Economy“:

1. The Future of Thinking Differently

2. Hidden Creativity

3. Why Modern Culture is Like Marriage, in all its Glory

4. IM, Cell Phones, and Facebook [this chapter discusses Twitter as well]

5. The Buddha as Savior and the Professor as Shaman

6. The New Economy of Stories

7. Heroes

8. Beauty isn’t What You Think

9. Autistic Politics

10. The Future of the Universe

Amit Varma’s “My Friend Sancho

James Tooley’s “The Beautiful Tree

David Kilcullen’s “The Accidental Guerilla

Various reasons why I haven’t read any of them yet, most notably Loren Graham’s “The Ghost of the Executed Engineer“.

At the time, Kaká’s transfer fee from AC Milan to Real Madrid was reported to be the largest in the world, clocking in at £57.5m (€67.2m). However, in terms of euros, Zinedine Zidane’s transfer from Juventus to Real Madrid in 2001 was the largest, at €76m (£46m). Given that both transfers happened solely in the eurozone, with no English clubs involved, how can we claim this is a world record transfer?
Ed Lewis, London

Dear Mr Lewis,

The fact that the pound was strong in 2001 and weak today does not justify the suggestion that Kaká’s transfer fee is larger than Zidane’s, so you are right to query the way this has been reported. But the problem goes deeper than you suggest. Even if both transfers had taken place in the UK, a 2001 pound is not the same as a 2009 pound.

I have before me an illustration of the so-called world transfer records, courtesy of the BBC. These start in 1905 with Common (£1,000), move through Jeppson (£52,000, 1952), Maradona (£5m, 1984) and others, to Ronaldo (£80m, 2009). But it is absurd to suggest that Ronaldo’s transfer fee was 16 times greater than Maradona’s or 80,000 times greater than Common’s.

According to www.measuringworth.com, £1,000 in 1905 is worth about £80,000 today if adjusted for retail price inflation, and about £425,000 today relative to average earnings. Maradona’s £5m transfer fee in 1984 is worth £12m or £17.5m today, by the same metrics. Cristiano Ronaldo’s transfer fee of £80m is titanic enough to need no flattering.

I am sure the press fail to make these adjustments because they want to be able to announce new records. In future, perhaps they should first convert all monetary sums into Zimbabwean dollars. Records would tumble daily.

Questions to economist@ft.com

“The economy, stupid.” An internal reminder for Bill Clinton’s presidential election team eventually became one of the most famous slogans in politics. The first President Bush was duly kicked out by the voters in the teeth of a recession, and Clinton became the 42nd president of the United States.

That is a common story. While there are exceptions, voters tend not to re-elect governments that have trashed the economy. Barack Obama’s electoral fortunes were clearly boosted by the collapse of the US economy – it is easy to forget that, before Lehman Brothers folded, John McCain had been ahead in the polls. After Northern Rock failed, Gordon Brown hesitated and then decided against calling an early election with the economy looking ropey. Unfortunately for him, it has been looking ropier ever since, along with his approval ratings.

But is this really fair? Gordon Brown’s first line of defence is that we are facing a world economic recession, so it’s not his fault. The opposition likes to point out the corollary: in that case, the good times weren’t his doing either.

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

Turn up the lights, and the workers work harder. Turn them down again, and they work harder still. The “Hawthorne Effect” is named after Western Electric’s titanic Hawthorne Works in Cicero near Chicago, where a series of productivity trials was carried out between 1924 and 1932. Led by Elton Mayo, a professor at Harvard Business School, they are among the most famous experiments in social science. Not every social scientist is impressed.

Richard Nisbett, a social psychologist at the University of Michigan, complained to The New York Times a decade ago about the study’s fame, calling it a “glorified anecdote”. He had a point. Among managers, the study is generally held to demonstrate that people respond to change: whatever you do, output rises for a while, as long as you do something. Inside academia, “the Hawthorne Effect” refers to the idea that people work hard once you start experimenting on them. Both beliefs are surprising enough to be interesting, while nicely confirming the prejudices of those who hold them.

Interested psychologists have known for a while that all was not well with the study. The experimental room was smaller and quieter than the factory floor. Two workers were sacked and replaced during the study for talking and idling. Experimental conditions were changed on Sundays, so each surge in productivity coincided with a Monday. These were not controlled conditions in the modern sense.

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

One of the first lessons I learnt in Econ101 was that barter trade is inefficient compared with a money economy. Yet, in an interesting article in the FT’s House & Home section (“Fair Trade”, May 16 2009) I read about the rising popularity of websites through which people can swap houses, instead of buying and selling them. Is this another example of how useful my economics degree is?
Confused Economist

Dear Confused,

Up to a point. Your degree probably did not contain much behavioural economics, and that would have been helpful to understand half of the story. People tend to form strong views about what a fair price is for a house, and behavioural economists call this “anchoring”.

Anchoring can take extreme forms. Experimental subjects have been known to be influenced by contemplating the last two digits of their national insurance number or other obviously random numbers. More commonly, people fixate on what some estate agent told them was their home’s value at the peak of the market. When the market weakens, prices do not so much fall as evaporate, as sellers cling on to the hope of a price that buyers are not willing to pay.

Under the circumstances it should not be surprising that barter has become more common. Neither seller needs to acknowledge that his precious house has become less valuable; they simply recognise the fact that their homes are of similar value and get on with the trade.

Still, the practice is not entirely the product of a psychological quirk. In a market as thin as this one, selling a house and buying another one is a big financial risk. Prices can move a long way before the two trades are finalised, and so swapping hedges both parties against that risk. Your degree has a little life left in it yet.

Questions to economist@ft.com

I’ve had my head down, working on a new book – sorry for the low traffic. Meanwhile:

The Economic Naturalist returns

Against intellectual monopoly reviewed

Make way for ducklings (Hackney edition)

You have advised readers that, in blind tests, most people like the taste of inexpensive wine, and that their impressions of wine are more closely correlated with the price tag than with expert opinion. In other words, it is possible to save money by drinking plonk. In these straitened times, can we draw similar conclusions about food?
Harry Nicholas, Los Angeles

Dear Harry,

My gurus in these matters are the members of the American Association of Wine Economists, and a new AAWE working paper, “Can people distinguish pâté from dog food?”, suggests an answer to your question. The authors were the “Gonzo Scientist” John Bohannon and two food critics who had worked on the earlier findings on cheap wine.

The appearance of food is key, so it was an important breakthrough to realise that dog food and pâté look much the same – once the former has been blended to a mousse-like consistency and garnished with parsley. In order to win over some subjects without deceit, the experimenters began with a wine-tasting session. Subjects were then offered two quality pâtés, two cheap imitations (puréed liverwurst and puréed spam) and the dog food – all accompanied by Carr’s water biscuits.

The results were surprising. Subjects overwhelmingly rated Dish C (the dog food) as the least tasty. However, few actually thought Dish C contained dog food. Broadly, people thought that Dish E (the liverwurst) was the dog food; they also thought it tasted good. Disappointingly, most people correctly identified the expensive pâtés, and the blind-taste rankings correlated exactly with the (unseen) price tags. In other words, there are no bargains to be had by serving dog food to dinner party guests. No wonder economics is known as the dismal science.

Questions to economist@ft.com

The Undercover Economist: a guide

Publishing schedule: Excerpts from "The Undercover Economist" and "Dear Economist", Tim's weekly columns for the FT Magazine, are published on this blog on Saturday mornings.
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