From 2nd June, 2006:

Every now and then, the markets are gripped by a strange madness. The recent sudden sharp slump in share prices has many commentators recalling October 1987, when the Dow fell by more than a fifth in a day. What is odd about that “Black Monday” is that the collapse was so swift and yet so brief – in retrospect, just a blip in a 20-year bull market.

Small wonder that at such times we can only conclude that animal spirits are at play. What else could explain buying frenzies and desperate crashes? The FT’s own Tony Jackson recently put this received wisdom very clearly: “What we have here is the Greater Fool Theory. This says that even though you are perfectly aware a thing is overvalued… you keep buying it anyway. Why? Because the thing is still going up. When the time comes, you will find a Greater Fool to take it off your hands. Until, of course, the music stops, and the Greater Fool turns out to be you.”

Continued at timharford.com.

Sir Alec Issigonis, the designer of the Mini and the Morris Minor, once declared the camel to resemble “a horse that was planned by a committee”. He has a point: this column wasn’t written by a committee either.

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

From 26th May, 2006:

If you’re lucky enough to visit the spectacular Kunsthistorisches Museum in Vienna, your eye may be caught by one of Pieter Bruegel’s best known works, the “Peasant Wedding”, which depicts a feast table of peasants absorbed in eating and drinking while a vast stretcher of pies is carried past.

It seems that the lives of our 16th-century forebears were not always cripplingly harsh. Economists, being economists, wish to know just how poor or prosperous life used to be. We have historical information about how much money people earned, but that is no use unless we know how much things used to cost. So economists calculate the inflation rate, which is an attempt to adjust for the effect of increasing prices.

But which increasing prices? Flipping through the Montgomery Ward & Co mail-order catalogue, which began publication in 1893, the economic historian Bradford DeLong calculates that a simple bicycle cost 260 hours’ wages for the typical worker in 1895, and just 7.2 hours’ wages in 2000. But silver spoons cost more hours of labour today than in 1895. Your personal inflation rate depends on whether you are spending your money on bicycles or spoons.

Continued at timharford.com.

Is the world like Play-Doh or like Lego? That might seem like an odd question for an economist, but there were some provocative characters present at a recent “Growth Week” at the London School of Economics, organised by a new joint venture between Oxford, LSE and the Department for International Development.

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

From 19th May, 2006:

“There are simply too many notes, that’s all. Just cut a few and it will be perfect.” Joseph II’s friendly advice to Mozart – as presented in Peter Shaffer’s screenplay for the film Amadeus – provokes harsh laughter from any writer who has dealt with the editor’s pen. Mozart is said to have replied, “Which few did you have in mind, Majesty?”

Mozart’s urbane response made the emperor look absurd. But Tyler Cowen, an economics professor at George Mason University, seems to have a similar perspective in his new book about arts funding, Good and Plenty: “Mozart’s Don Giovanni has musical beauty, terror, comedy and a sense of the sublime, making it a favourite of opera connoisseurs. But what if consumers draw their comedy from one work, their terror from another, their beautiful music from yet another, and so on?” Cowen knows that the idea is outrageous for Don Giovanni, but not so for lesser works.

Continued at timharford.com.

When Venetia first tried to set up a café on Chatsworth Road in Hackney, east London, she encountered an unexpected obstacle: she couldn’t find a landlord who believed that she’d be good for her rent. The problem was that the kind of café Venetia imagined – one that served good pastries and excellent cappuccino – wasn’t the kind of café anyone had ever tried before on Chatsworth Road. The local property owners figured that if nobody had ever tried it, it probably wouldn’t work.

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

My old university tutor often complains when he has to write references – they take up a lot of his time, and he doesn’t get paid for them. Since he’s doing my prospective employer a service, he thinks they should pay him. However, that means he’s motivated to write me a bad reference, because then I won’t get the job, and I’ll ask him to write me another one – so he gets paid again. Of course, we could say that he only gets paid if I get the job – so he writes me an overly gushing reference. How can we motivate my tutor to write a fair and accurate reference, and compensate him for his time?

Phil C, Aylesbury

The answer to this question can be read here. Please post comment below.

From 13th May, 2006:

My wife and I have become hooked on the national addiction: pressing our noses against the windows of estate agents, visiting unaffordably nice parts of London and flicking through real-estate porn.

Sadly, my experience as an undercover economist offers few tips on judging what the housing market will do. I would guess that it will fall over the next few years, but you should pay no more attention to that claim than if it was made by a taxi driver or a waitress.

I don’t have enough confidence in my forecast to sell my house, rent while prices collapse, and then buy somewhere bigger for bargain prices. Nor should I. If house prices were obviously due for a fall next year we would all sell immediately and the fall would happen now instead. That is why the future of house prices will never be obvious.

Continued at timharford.com.

A “Dear Economist” correspondent once asked me why people post clips of classic comedies on YouTube, or go to the trouble of writing online reviews, given that there seems to be nothing in it for them. A textbook economics model would say that people would not, in fact, post online reviews or contribute to YouTube. And my answer, in brief, was that they don’t. Far more people read books than write reviews of them, and far more watch YouTube videos than post them. As a broad defence of rational economic man, my answer wasn’t too bad; but as a way of understanding online volunteering, it was useless.

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

Frequent-flyer programmes are very popular here in Australia, where people often travel long distances for work and can subsequently be rewarded with large perks by selecting their preferred airline ahead of cheaper offers from other carriers – and to the detriment of their employers.

I am sure the airlines must benefit from all of this, but what about the rest of the economy? Are we encouraging an inefficient market by signing up to loyalty programmes?

Oliver Jones, Perth, Western Australia

The answer to this question can be read here. Please post comment 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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