Monthly Archives: December 2009

Alfred Marshall didn’t have to wait for Silicon Valley to evolve before concluding that some places are hubs of intangible knowledge. In 1890, the renowned Cambridge economist opined that “great are the advantages which people following the same skilled trade get from near neighbourhood to one another. The mysteries of the trade become no mysteries; but are as it were in the air … if one man starts a new idea, it is taken up by others and combined with suggestions of their own; and thus it becomes the source of further new ideas.” Marshall knew that where you live and work affects what you learn and what you earn. One question that economists have struggled to answer, though, is exactly how and between whom knowledge spreads.

Marshall emphasised the spread of ideas between similar companies, but there are other plausible possibilities. Jane Jacobs, author of The Death and Life of Great American Cities, was more excited by the spread of ideas across industries, citing examples from the invention of the bra by Ida Rosenthal to the development of Scotch tape by 3M, originally a mining company.

More mundane forces could also be at work: maybe innovative cities are innovative because, with so many jobs and so many workers, it is easier for each worker to find the perfect job. City-dwellers may become smarter just because they are surrounded by some well-educated people.

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There seem to be economic benefits for a society where people are law-abiding, trustworthy, caring and generally nice. You get less cheating, and where you feel you can trust people, you can enter into business dealings with more confidence. Has anyone calculated the economic value of people being nice? And could a government invest in people being nice? If so, what would be the return on that investment?
James Atkins

Dear James,

Even economists would recognise that niceness is valuable for its own sake. But you are right, it is also good for the economy. Steve Knack, an economist who specialises in governance, trust and social capital (translation: niceness) once told me that, taking a broad definition of trust, it would explain the difference between the per capita income of the US and Somalia. That is, niceness and its cousins are worth about 99.5 per cent of US national income.

There are limits, though. When people trust each other, they become vulnerable to cheats. A recent paper by economists Jeff Butler, Paola Giuliano and Luigi Guiso finds that for an individual, there’s an optimal level of trust in others. Too little and you’re over-conservative, missing opportunities; too much and you get screwed. The effects are large, similar to the difference between going to college or not.

It is not clear how a government might encourage people to be nicer, but one famous economic study does suggest a way: Ray Fisman and Ted Miguel looked at the behaviour of diplomats in New York. The Scandinavians committed 12 unpaid parking violations between them; diplomats from Chad and Bangladesh notched up over 2,500. But when the city was given more power to punish offenders, all the diplomats cleaned up their act – niceness is best supported by legal incentives.

Questions to economist@ft.com

Haven’t yet managed to persuade the powers that be at the FT to put my twitter feed up on the sidebar, but all you tweeters out there, feel free to take a peek: http://twitter.com/TimHarford. In book-writing mode, I am finding Twitter more commodious than blogging.

Episde two of More or Less airs on Radio 4 at 1.30 GMT today. This week: was the Chief Medical Officer right to attack the “middle class obsession” of giving children watered-down wine? Why are 12,000 innocent people imprisoned each year in the UK? Michael Blastland returns to ask whether rich are paying their fair share of tax. Stephanie Flanders, BBC economics editor, helps us analyse the most important inflation figures of the year – the Christmas Price Index. As an additional Christmas Treat, we’ll speak to Joel “Scroogenomics” Waldfogel.

The program website is here, or you can subscribe to the podcast, or send us your ideas for investigations: moreorless@bbc.co.uk.

The New York Times reports that Paul Samuelson has passed away at the age of 94. Here is Paul Krugman. The Nobel website (Samuelson won the second year the Nobel memorial prize in economics was awarded) has a biography.

A last chance to grab a ticket for my sermon tomorrow on Frugality:

As Christmas approaches, who better than an economist to advise us on the virtues of frugality?  “Undercover Economist” Tim Harford takes us to task on the gluttony, materialism and wasteful rituals of gift exchange that have come to characterise the most popular religious festival in the world.
Tim will preach a timely message about reducing waste, curbing indulgence and suppressing the need for instant fiscal gratification in favour of simpler and more lasting sources of pleasure.  He’ll argue for the rehabilitation of Ebenezer Scrooge, a self-denying hero unfairly maligned by the slanderous ghosts of Christmas. And he’ll urge us to reform our Christmas rituals to make them more efficient and joyful.

By the end of Tim’s sermon, you will have learned what to send instead of Christmas cards, how to choose a present so as to maximise the sum of human happiness, and why frugality is not a miserly vice but the most noble of virtues.

I was recently given notice that my position will be eliminated at the end of the month. My employer is offering two months’ severance.
I’m thinking about changing industries, from finance to clean tech, and moving from the US to Europe. I’m in my late twenties, single, and able to relocate – something less likely to be the case after my next position.
Making such a drastic change may prove difficult and take longer than two months. On the other hand, I can stay here and take a job in the same industry relatively quickly. Should I go big and risk a long unemployment or play it safe and take a job now?
Jeremy

Dear Jeremy,

“Behavioural economics” work on the boundary between psychology and economics offers relevant insights here. Unfortunately, it provides two entirely contradictory messages.

On one hand, you may be suffering from “hyperbolic discounting” – a tendency to weigh immediate costs too heavily and ignore longer-term benefits. You have three or four decades ahead of you, and yet you are focusing on a few weeks’ unemployment.

On the other hand, economist Johannes Spinnewijn has discovered that job-searchers tend to be far too optimistic about their chances of finding a new job quickly. So you are probably underestimating the risks at the same time as you focus too much upon them.

So let me put aside the contradictions of behavioural economics and rely instead on economic history. Experience suggests that grand transformative projects – Mao’s Great Leap Forward, the UK’s nuclear power “jackpot” – end in disaster. A gradual approach is better. Your own plan is to switch industries and continents from a precarious position on the dole. Would it really be impossible to reach your dream career step by step instead?

Questions to economist@ft.com

It is an old question: why are some countries rich and others poor? Sir Partha Dasgupta, a hugely accomplished economist, born in Dhaka and educated in Delhi and Cambridge, is as well qualified as anyone to come up with an answer – which he did, delivering this year’s Royal Economic Society public lecture.

Dasgupta began by inviting his audience, many of whom were A-level students, to consider the lives of two girls – Becky, an American, and Desta, an Ethiopian.

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

More or Less is back for our winter series. This week we’re asking if Rod Liddle got his numbers right on race and crime, if the numbers on your energy-efficient lightbulb are tellling you the whole story, and whether, statistically speaking, winning a medal is a sign of a decent wine. And I’ll be interviewing Sesame Street’s leading mathematician…

The program website is here, or you can subscribe to the podcast, or send us your ideas for investigations: moreorless@bbc.co.uk. Or just whet your appetite by listening to a very silly program trail.

Last December, I showed some unwitting prescience by worrying about a backlash against microfinance, the practice of providing small loans – or perhaps savings products or insurance – to poor people. I fretted that there was little compelling evidence that it worked.

A year later, the evidence is arriving and the backlash has begun. The Boston Globe published an article in September, subtitled, “Billions of dollars and a Nobel Prize later, it looks like ‘microlending’ doesn’t actually do much to fight poverty.” Other media have weighed in on all sides, with The Wall Street Journal concerned about a microcredit bubble. What is going on?

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

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.
More about Tim: Tim also writes editorials for the FT, presents Radio 4's More or Less and is the author of "The Undercover Economist" and "The Logic of Life".
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