If markets are efficient, you will never make profitable trades as a result of reading the Financial Times. Efficient markets move quickly and respond to any new headlines – disappointing earnings, a cut in interest rates, a fraud or a safety incident. Markets will sometimes overreact, drifting backwards after a lurch, or underreact, taking time to digest the true impact of the new information – but overreactions and underreactions should balance out. And when no news is available, the prices of an efficient market won’t change much.

But do markets really react efficiently to news? It would be easy to tell if it were easy to identify all genuine news. Sadly, it is not. Yet two inventive new academic papers claim to have solved the problem of identifying news, in two very different contexts. The studies could not be more unalike. One looks second-by-second at trading data from one of the world’s most active financial exchanges. The other analyses market information that is more than two centuries old.

Karen Croxson and J. James Reade of Oxford University studied the Betfair exchange, a sports betting site that supports many more trades than the London Stock Exchange. Betfair allows punters to bet on football games, and the market stays open throughout the match. Croxson and Reade studied how the price of different bets varied as goals were scored during English league games.

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

The FT has a report on Global Brands today; meanwhile, the NBER tells me about this research from economist Gary Richardson:

In medieval Europe, manufacturers sold durable goods to anonymous consumers in distant markets, this essay argues, by making products with conspicuous characteristics.  Examples of these unique, observable traits included cloth of distinctive colors, fabric with
unmistakable weaves, and pewter that resonated at a particular pitch.
 These attributes identified merchandise because consumers could observe them readily, but counterfeiters could copy them only at great cost, if at all.  Conspicuous characteristics fulfilled many of the functions that patents, trademarks, and brand names do today.
The words that referred to products with conspicuous characteristics served as brand names in the Middle Ages.  Data drawn from an array of industries corroborates this conjecture.  The abundance of evidence suggests that conspicuous characteristics played a key role in the expansion of manufacturing before the Industrial Revolution.

Which nation produces the richest people in the world? You might think that an easy question to answer: just grab the latest figures from the International Monetary Fund, and you’ll see that the answer is Luxembourg ($102,000 gross domestic product per head in 2007). The US is in ninth place ($46,000) and the UK in 11th ($45,000).

There are some methodological wrinkles to iron out: what exchange rate to use, for instance. And for the poorest countries such as Liberia ($200 per person in 2007) or Burundi ($130), the numbers involve some guesswork. But overall, these are not controversial statistics – unless you are Lant Pritchett or Michael Clemens.

Pritchett, of Harvard’s Kennedy School, and Clemens, of the Washington, DC, think-tank the Center for Global Development, argue that my opening question should be answered in a radically different way. Rather than measuring the income of people who are now residents of Liberia, Clemens and Pritchett have produced a research paper estimating the income earned by people who were born in, say, Liberia, regardless of where they now live – what Clemens and Pritchett call “income per natural” of Liberians.

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My family’s experience of the local hospital has been mixed. Sometimes it is impressive; at others it falls below the standard one would expect in the capital of a developed country. Our rule of thumb is that it’s much safer to get sick in Cumbria, where my wife’s parents live.

Although we have had our fair share of dashes to Accident and Emergency, they have been not been so frequent as to constitute a statistically rigorous study of the local facilities. Still, such studies do exist, and one recently published investigation suggests that patients in London have indeed been suffering unduly.

The reason is that many skilled workers in London have decided they have better things to do than work for the National Health Service: in the private sector they can expect to earn 50 or 60 per cent more in London than further north; in the NHS, wages for London staff are relatively meagre. As a result, hospitals in booming areas such as London have more staff vacancies, seem to over-promote staff as a way of giving them more competitive pay, and use more temporary staff hired through private agencies.

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Dear Economist,
I subscribe to the FT and enjoy it with my morning coffee. Yet whenever there are school holidays, the paper is delivered late in the day, sometimes the next day or not at all. I expend valuable time calling FT circulation, which always promises this will never happen again. This has been going on for years. Should I be pragmatic and do nothing, saving my valuable time, or should I be quixotic, persisting in an effort to force the FT to live up to its timely delivery obligation in the hope that others may also benefit?
Conflicted Subscriber
Paris, France

Dear Conflicted Subscriber,

I am delighted to hear you love the FT and can vouch for the fact that, from newsroom to delivery team, its managers hand-pick elite workers. How, then, are we to explain this manifest underperformance of the organisation as a whole?

Economic investigation of sport offers a clue. Economists such as Mark Walker, John Wooders and Ignacio Palacios-Huerta, have studied professional tennis and football players. When deciding where to serve or place a penalty kick, they behave in rough accordance with economic theory. David Beckham, it seems, is an intuitive economist.

Yet in a team, the story gets worse. Economist V. Bhaskar studied the declarations of cricket teams, David Romer the fourth-down decisions of American football teams. Neither matched optimal strategy, perhaps because of internal team tensions.

This helps to explain your troubles but offers no solution. All I can suggest is that you make a fuss and write indiscriminately to complain. Evidently, you did not need me to tell you that.

Questions to economist@ft.com

What should top record labels, software giants and other media companies do about digital piracy? There are two obvious options: get tough and defend intellectual property rights with every legal and technological trick in the book, or tolerate some illegal copying in the hope of generating buzz and making money in some other way.

This is a debate that generates strong opinions, and where you stand seems to depend on whether you’re an industry accountant or a new economy guru. (Chris Anderson, editor-in-chief, Wired magazine, coined the phrase “Freeconomics” to describe giving cheap things away for free in order to create buzz.)

But look closer and you realise that the corporate suits aren’t all adopting the same strategy. The music industry doesn’t seem able to make up its mind: first it turned a blind eye to traditional mix-tape piracy, then it cracked down on illegal file-sharing while raising the price of CDs, and finally it slashed the price of CDs in an attempt to compete head-on with downloads, legal and illegal.

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I recently discovered that I am entitled to an occasional tax-free breakfast, because I cycle to work. (The UK government advises that “Under general principles such meals are a taxable benefit in kind but regulations exempt them from tax, as long as they are provided on designated ‘cycle to work’ days.’’) Good to know – and a reminder that the idea of using the tax system to promote environmental goals has taken a wrong turn somewhere.

The basic idea behind green taxes is sound. Since people usually respond to financial incentives, whenever something is taxed they tend to do less of it. Usually, that is a problem. When the government taxes income, we slack off. When the government taxes moving house, we may stay in the wrong size house on the opposite side of town from our new job. What’s more, whenever the tax dissuades someone from earning income or moving house, the tax office loses out as well.

But when the government levies a “green tax’’ – that is, a tax on some polluting activity – these vices become virtues. If the tax does not dissuade the polluters, they pay through the nose, funding public spending or tax cuts on the rest of us. And if the tax does dissuade the polluters, all the better, because pollution will fall.

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Friends of mine, husband and wife, once argued over the price of a branded packet of lemon slices bought at some convenient corner shop or petrol station. She complained that the slices weren’t worth the price she had paid. He pointed out that she had bought them – albeit grudgingly – knowing exactly how they tasted, and that therefore they had to be worth what she had paid. No prizes for guessing which of them is an economist.

We economists know a lot about pricing, but we tend to be baffled by the way the rest of humanity thinks about it. The package holiday offer, “Kids go free to Disneyland”, is, to an economist, a profitable attempt to charge more to couples with two incomes and no children, who are likely to have more cash to burn. To everyone else, it is an idea waved through unquestioningly.

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The three most familiar economic statistics are all measures of change: inflation, the growth of gross domestic product, and the daily rise or fall in the price of shares. Even so, they do not begin to capture the mad churn of the economy: the growth and bankruptcy of companies; the millions of sackings and hirings, which unemployment statistics barely summarise; the movement of goods and services around the world and the ebb and flow of consumer fads. Under the circumstances, it is strange that economists do not have a satisfactory way of talking about change; yet we do not.

As any undergraduate student of economics knows, both microeconomists and macroeconomists tend to describe change in the same way that an advertisement for washing powder does: “before” and “after”. When oil cost $20 a barrel the economy looked like this; now oil costs $100 a barrel, the economy looks like that. Quite how the process of change occurred – or how quickly – is a problem glossed over in the textbooks and most journals.

Continue reading Tim Harford’s column here. Please post comments below.

So much hot air has been spouted over climate change it is a wonder the ice caps haven’t melted already. At first the debate was whether climate change was happening, and if so whether it was humanity’s fault. Far too late for the tastes of most economists, the debate then started to encompass other important questions, such as whether the costs of responding to the threat outweighed the benefits.

Perhaps I should withdraw my jibe about hot air. This is such an uncertain business, and the stakes are so high, it is no surprise that the debate on both questions continues. Still, that should not distract us from asking a different kind of question: given that climate change is going to need a policy response, what kind of institutions are best suited to implement it?

Continue reading Tim Harford’s column here. Please post comments below.