Category Archives: Economics

The Art of the Long View – Peter Schwartz

“The point of scenario-planning is to help us suspend our disbelief in all the futures: to allow us to think that any one of them might take place. Then we can prepare for what we don’t think is going to happen.”

How do you take the long view to prepare for the future? Do you try to predict what’s most likely, then prepare for it? If so, you’re doing it wrong.

Schwartz instead argues for scenario-based reasoning. The core of the idea is that the world is unpredictable: since we cannot know for sure what will happen, it is foolish to prepare for only one future. Instead, you come up with several plausible scenarios of how the future might turn out, and then look for solutions and plans that allow us to prepare for all of them. I would call this prediction using confidence intervals, not point estimates, but the point is the same. By using a point estimate (or single scenario), we blind ourselves to other possible outcomes, and neglect ideas that might have served us well in an uncertain and unpredictable world.

By using stories, we can make these futures seem real, helping us truly change and deepen our mental models of the world and take a long view. Typically, three scenarios are enough to capture three possible types of future: more of the same, but better; worse; and different but better. Of course, there are infinite possible futures, but these three classes generally help us prepare for them.

Though pretty simple, I actually think the method is pretty compelling, and the book is a well-written introduction to it. Among other things, I think Schwartz’s method helps provide a common language for discussing the future, something often not accounted for. As Greece negotiates with the euro, for example, I think both could benefit by having some scenarios of what the future could look like.

It isn’t a perfect method: there were a few points I found unconvincing, particularly that you should never probability-weight scenarios. If you come up with three, one of which has a 90% likelihood of happening, should you really prefer a solution that works better in the other two? I’m happy to agree you should consider all three, and if a solution works for all then great, but the hard decisions are when solutions are good in some scenarios, and bad in others. Still, a powerful method that deserves broader application.

Speaking of the future, having had my PhD viva last week, I am finally left with a bit more free time, and so hopefully can start posting reviews more regularly again. Look forward to it!

Shadow Work – Craig Lambert

“The innocence of leisure makes it vulnerable to the predations of organized bodies — and there are many — that have designs on our free time, something they view as a natural resource awaiting their schemes.”

The average American commute is 16 miles each way. At the 2015 federal auto mileage reimbursement of 55 cents per mile, that’s almost $20 a day, or $4,400 a year. Over the year, commuters each spend – on average – five forty-hour weeks of unpaid time commuting. That’s shadow work: work for which we are neither thanked nor remunerated, but which is increasingly pushed onto us by firms trying to reduce their costs. Whether we’re pumping our own gas, going to online forums for tech support, or self-diagnosing with WebMD, we’re doing shadow work, and it is eating into our leisure time at a ferocious rate.

At the end of the first chapter of Shadow Work, I was a little worried. Shadow work is an interesting trend, one that we are often surprisingly unconscious of. I just wasn’t sure what Lambert planned to add in the rest of the book. Fortunately, Shadow Work more than finds its feet in the second chapter. The rest of the book serves as a thoughtful and insightful reflection on the nature of work and the nature of leisure in the modern world, from increased complexity to reduced social contact.

Whether shadow work is good or bad depends on circumstance: I like going to automatic check-out machines in the supermarket, but find it annoying to wade through phone menus rather than just talking to someone for tech support. Overall though, as Lambert points out, shadow work gives us autonomy and self-sufficiency, but at a price: isolation. Shadow work creates the opportunity for a self-imposed bubble in which we interact with ATMs, automatic cashiers, and websites, but not our fellow humanity. It also gorges on our free time in what is already a rushed and harried world. I don’t mind giving up some leisure time for choice, but given how much I’ve already lost, I’m finding it harder and harder to think I should give up any more.

Overall, thoughtful and insightful, and analyzes a trend with implications for all of us. It’s easy to slip into shadow work without noticing, bit by bit, and Lambert is right to highlight the costs. Definitely recommended. You can read more reviews on amazon, here: Shadow Work.

How to Run a Government so that Citizens Benefit and Taxpayers don’t go Crazy – Michael Barber

“Increasingly, prime ministers are like CEOs or chairmen of major companies. They have to set a policy direction; they have to see it is followed; they have to get data on whether it is; they have to measure outcomes.” – Tony Blair

Laws and sausages are two things one should never watch getting made. Politics is trendy – see House of Cards, Borgen, Homeland, or any of the other political thrillers out there at the moment. What isn’t trendy is delivery, the part where the meat actually gets processed and squeezed into animal intestine. Of course, without delivery, you don’t get any sausages.

Barber presents his 57 rules for effective government programs – not advice in policy, or what you should be doing, but conditional on you knowing what you want to do, how to make sure it happens. Ironically for a man with 57 rules, prioritization is rule 1. Most of it isn’t revolutionary, but it requires a methodical and careful approach, something that is sometimes lost with all the excitement around strategy and blue-sky thinking.

Barber led Tony Blair’s delivery unit, and it’s no surprise he advocates for one in general. Basically, it’s a small team with direct access to the PM (or whoever), which is entirely focused on delivery of programs. They don’t pick what to deliver, but when it is picked, they design metrics, track data, and make sure everything is going to plan. Having a group focused on this means that data can’t just slip through the cracks, or never be tracked at all, and it’s a model that has been adopted in several places, from Malaysia to several U.S. states.

Delivery isn’t flashy, and though Barber does his best, it’s hard to keep the book interesting. It is chock-full of fun ideas, though: he hates 3 point scales, for example, because far too many people just stick in the middle. He always uses 4 point ones. Apparently, he also went through and rated every project done by the UK government by their probability of succeeding at their goals, an exercise I imagine irritated almost everyone. For someone interested in service delivery and how sausages are made, well worth a read.

Exodus – Paul Collier

“Individual migrants succeed in capturing the huge productivity gains from migration. But migrants collectively have an interest in precisely what individually is most detrimental: entry barriers.”

Some countries ban immigration entirely; some encourage it; some allow people to settle, but forbid them citizenship. The range in immigration policies spans almost the entire spectrum of possible options, and it seems unlikely all of them are optimal.

Immigration is a controversial topic, in the UK more than most. It’s also one where arguments are generally made with very little evidence on either side: it’s not impossible immigrants are good or bad for the economy/social welfare/tolerance/the social fabric, but it’s hard to know either way. With that in mind, an evidence-based look at immigration is welcome. There are a lot of good sections in Exodus, but unfortunately as whole it also has some weaknesses.

The book basically goes through the costs and benefits to the three groups affected by immigration in turn – migrants, recipient countries, and sender countries. That’s helpful, and Collier makes some insightful points on each. Overall, though, his argument is that the costs and benefits to societies from sending or receiving immigrants are probably small, and the benefits to individual migrants are huge, making at least some migration attractive. At some point, however, there might be too much immigration, given the effect on social fabric and public services.

At the extreme, the possibility of too much immigration seems plausible – purely from a population density perspective, that almost has to be true. The extremely salient question of how much is too much, however, goes entirely unaddressed. Exodus also relies on abstract models to make its points, the stock and trade of economists but something I suspect most other readers will not find convincing. Data is a better approach for this sort of controversial issue, and there the book has much less.

Overall, I think immigration is aching to be addressed in as rigorous, empirically- and evidence-driven a manner as possible, but I’m not sure Exodus is quite there. Presents a useful difference in perspective from usual accounts, but certainly not decisive.

The Undercover Economist Strikes Back – Tim Harford

“Microeconomics concerns things that economists are specifically wrong about, while macroeconomics concerns things economists are wrong about generally. Or to be more technical, microeconomics is about money you don’t have, and macroeconomics is about money the government is out of.” – P.J. O’Rourke

How, you might wonder, should governments fight recessions? Keynesians suggest that recessions happen because there is too little demand: the answer is to stimulate demand, using government spending and monetary policy. More classical economists suggest it may be because there is insufficient supply: the economy just isn’t producing enough stuff, or has endured a serious shock like a spike in oil prices. To that line, we should stimulate production: reform the economy, increase efficiency.

Undercover Economist Strikes Back is Harford’s attempt to explain macroeconomics, in contrast to his other, microeconomics-focused, books. There’s a lot of solid common sense in it, such as the point that despite Krugman’s bombast, Keynesianism vs classical is almost certainly a false dilemma: in the short run, you should do one, and in the long run, the other.

He also responds well to the concern (often raised by physicists) that the economy simply can’t keep growing because there are finite limits to energy we can use. The second half of that is true, of course, but as Harford rightly points out the first half doesn’t follow. Physicists think about physical processes, and those do require increasing amounts of energy. Economic growth though doesn’t equal energy growth: in the last 30 years in the US, for example, the economy has grown by 2.5% a year, and energy use has actually fallen.

For more wonkish readers, I also learned something amusing: the oft-quoted story about the babysitter group in D.C. usually doesn’t include the ending. They did indeed double the number of scrips as a Keynesian policy, but they then ended up with too many scrips, and the market collapsed again. Not something the proponents of such policies seem to remember when they tell the story.

The book struggles a bit at some points: Harford isn’t a macroeconomist, and it shows. I’m also not sure whether a macroeconomist would be particularly pleased with some of his analysis. Still, if you’re looking for a jovial tour through macroeconomics, Harford is, as always, entertaining, amusing, and enlightening.

Climate Shock – Gernot Wagner and Martin L. Weitzman

“We, together with most economists, would be fine with either carbon taxes or caps, done correctly.”

What, you might frequently wonder, is geoengineering? If you’re a scifi fan, you’ll know terraforming is shaping the earth’s surface. Geoengineering refers to using similar techniques on Earth, usually particularly in reference to controlling the temperature. The release of particle such as sulfate aerosols help block sunlight from reaching the earth, similar to the effect of the eruption of volcanoes: in 1815, the eruption of Tambora encouraged Mary Shelly to spend her summer holiday indoors, writing Frankenstein. You may think this is better than sliced bread, or absolutely crazy, solving a symptom rather than the disease. Economics, though, says that what you think doesn’t really matter: since geoengineering is relatively easy, so much so it could be done by a single country, it will be hard to stop someone from doing it, whether a rogue climate engineer or Vanuatu as it gradually submerges beneath the waves.

Climate Shock looks at the insights economics can provide as we try to understand and prevent climate change. In particular, it focuses on the economics of uncertainty – how we deal with things when we are unsure of them – and externalities – how people decide to do things when the decision will affect others. Geoengineering is a classic externality (as are carbon emissions): if someone decides to release chemicals into the air because they’re too hot, everyone is affected.

The uncertainty relates to the fact that we really don’t know the potential outcomes of warming. In the Pliocene era, carbon dioxide levels were similar to today, but the seas were 20 meters higher, and Canada had camels. We don’t know how likely that is to happen again, but we probably want to avoid it (unless you’re a camel).

The book is a great survey of some economic insights for global warming, and Martin Weitzman in particular is a titan in the field. My only comment is I suspect it would struggle to convince anyone who isn’t already a believer. If you’re looking to arm yourself with facts about warming to argue with your friends, it’s a great resource: if you’re not sure what to think, less so. Some of their arguments also feel a little hasty, not really engaging with other perspectives. David Friedman, for example, argues that uncertainty cuts two ways: global warming could also end up being good for the world, as well as bad. I’m not sure I find that convincing, but I would have liked to see Climateshock rebut or acknowledge it.  Their final point, however, is a good one: even if everyone agrees that carbon emissions are immoral, and that in itself is unlikely, the immediacy of the problem means taking the economics of it seriously.

You can see more reviews and buy it on amazon here: Climate Shock.

The ABCs of Real Estate Investing (Rich Dad Advisors) – Ken McElroy

How, you might be wondering, would I go about buying an apartment building (or multiplex, or whatever) with the intention of renting it out? First, check out cities: what are supply and demand like? Is there something limiting supply, like an urban boundary? Is population growing, increasing demand? Is a new business moving in, boosting employment? Second, focus on a submarket: if the city is in a downturn, which region or neighbourhood is likely to turn around first? Third, get down to the nitty gritty: focus on gathering as much information as possibly to really get a feel for the area: meet with officials, local real estate agents, etc. At every stage, focus on the big forces of supply and demand, and also on location: is it near services, close to employment, in a good area? Then, buy the property, become wealthy, and wash, rinse, and repeat.

Real estate is an investment niche that frequently appeals to people: unlike the stock market, it provides something concrete that people can admire, and is often easier to understand because everyone owns or rents a house of their own. On the downside, however, it can often require a fair amount of capital to get started, in order to make the down payment, and though house prices generally (though not always) increase, covering the mortgage payments and taxes may mean you’re making less of a return than you would have if you’d just put it in the stock market and forgotten about it.

Rich Dad Poor Dad is a tremendously popular series, and has sparked a number of spinoffs, including this one, focused on real estate investing. It is intended for a novice in the field, and focuses on apartment buildings, though many of the lessons are also relevant to single-family homes. McElroy’s approach is also quite mathematical: he focuses on calculating your return on investment, and then using that number to calculate what the building is worth. Buy it only if you can get it for less. Words that could have done a lot for people who suffered in the sub-prime crisis, I suspect.

The book is not as strong as some of Rich Dad Poor Dad’s other works, but if you have a particular interest in real estate, it’s not a bad introduction. I think for most people, though, the sums he talks about in buying and selling apartment buildings make it seem a bit far away: many families have experience buying single family homes, but most haven’t considered buying multi-million dollar apartments. The principles are the same, but it makes it feel less relevant. Still, if you can get past that (or are considering buying apartments yourself!), then a solid introduction to a very popular field.

Dear Undercover Economist – Tim Harford

“When a dinner party guest wonders how much to spend on a bottle of good wine, Dear Economist ignores the Good Wine Guide and reaches for the Journal of Wine Economics.”

What, you might wonder, is the secret to happiness? Harford, citing Kahneman, says that sex is best, but that exercise, food, and prayer are also good. In fact, all human contact is good, except for that with your boss, which is quite bad. The secret to happiness? Don’t have sex with your boss.

Tim Harford is a frequent writer for the Financial Times, and has also published several excellent pop economics books, including The Undercover Economist. Dear Undercover Economist, however, is a collection of advice columns he published in the FT. Written in the classic style of Dear Abby columns, they use economics to answer questions about love, family, careers, and other domains. He gives advice to a man who gives bad first impressions (give a signal of quality, like giving the girl theatre tickets for a third date with him when they first meet); a student who is too busy with his karate club activities to study (gains from trade: find a weakling to do his homework and beat up the weakling’s enemies); someone looking for missing socks (give up on them: instead, focus on interchangeable parts, and just buy all identical socks); and, in response to someone concerned about inflation and the shrinking size of Mars Bars, points out they are actually a very stable unit of account, with about 20,000 bars buying you a small car for the last 70 years.

This is classic pop economics, freakonomics-style. It takes the insights of economics, particularly signalling, screening, and trade, and applies them to problems outside economics’ traditional gaze. I’m not sure I’d take the advice myself, but the columns are entertaining and well written: you could do worse if you’re trying to learn some microeconomics for yourself, or if you’re a student taking microeconomics. After all, how many other opportunities will you have to make economics fun? Overall, a great romp through the insights of economics, applied to everyday problems.

Unfinished Work – Joseph Coleman

“Denial of employment opportunity to older persons is a personal tragedy…It is also a national extravagance, wasteful of human resources. No economy can reach its maximum productivity while failing to use the skills, talents, and experience of willing workers.” – JFK, 1963

You’ve probably heard of the demographic crisis: baby boomers are getting older, people are having fewer children, and pretty soon the pension pot will be all used up on the generation that also brought you global warming. If you’re a young person, you may find the whole thing somewhat depressing: it seems like most public policies are designed to transfer money from (low-income) young people to (high-income) old, whether it’s increasing house prices, fuel subsidies for the elderly, pensions, or healthcare. If you’re the Economist, you’ve also faced a huge flood of complaints when you suggested reducing pensions for wealthy seniors in the UK, and since seniors vote and young people don’t, no one was going to listen to the suggestion anyway.

Coleman presents an alternate, possibly more valuable, perspective. Older workers are often forced out of work before they would actually want to leave, whether because of pension plan design, insufficient training, or blatant discrimination. These older workers would often have preferred to stay, particularly part-time, deriving meaning and value from their employment as they have done for decades. Letting them stay makes them better off, and also helps reduce our demographic challenge.

Unfinished Work looks at this problem from the perspective of elderly workers around the world, from Japan to Sweden, France, and the U.S. Some countries are doing well (Sweden and Japan) and others are doing poorly (France), but all have room to improve. The book’s emphasis on stories makes it more readable, but also reduces the content: the book is better at raising issues than solving them. The book also sometimes seems to lack concrete data: Coleman criticizes discrimination on the part of employers against the elderly, particularly a reluctance to train them, but there is also evidence that elderly people make less good employees. He may well be right this isn’t a large concern, but I would have appreciated some data on how big an issue it might be. Nevertheless, the book advances an important perspective on an increasingly large challenge for many Western societies. This is a problem we don’t think about often enough, and certainly haven’t solved. Unfinished Work presents an alternate framing to the divisive, young vs. old narrative, one well worth reflecting on.

You can see other reviews of Unfinished Work here.

Zero to One – Peter Thiel

“Zero to One is about how to build companies that create new things…The single most powerful pattern I have noticed is that successful people find value in unexpected places, and that they do this by thinking about business from first principles instead of formulas.”

Thiel divides the world into four: an axis of pessimism and optimism, and an axis of future-definite and future-indefinite. Entrepreneurs, he argues, rely on future-definite thinking: they believe the future can be predicted and so work to shape it. Much of the US, however, has fallen to optimistic/future-indefinite thinking. They believe the future will be better, but have no idea how or why, and so don’t bother to prepare other than to get general skills and knowledge, a process that culminates in becoming a lawyer, consultant, or banker. Thiel recommends the opposite: pick one valuable skill or area, specialize carefully, and double down to achieve enormous success.

Zero to One is Thiel’s hymn to entrepreneurs and innovators, those individuals who don’t just achieve incremental improvements (one to two), but manage a real step change in technology, going from zero to one.

In truth, for me there are a couple of points I don’t think he’s entirely thought through. He waxes eloquent about monopolies, for example, arguing that they are the best way to run a business: “the more we compete, the less we gain.” I completely agree, I’m just a little worried his ‘we’ only includes businesses, not the consumers, who take it in the shorts. That said, monopolies may also provide more resources for innovation, so the question is not as simple as economics 101 might argue. His advice to specialize the same: he’s wholly correct that if you want to be a billionaire that’s the way to go, but he doesn’t seem to have considered that it’s a high-risk strategy. The returns are so high precisely because of the enormous number of people who will fail utterly as a result.

In some ways, the book is interesting because of these weak points: it tells us what Peter Thiel, the billionaire co-founder of Paypal, believes. Paypal’s team has also achieved great things: 7 of the early employees have founded billion dollar businesses, from Youtube to Tesla to LinkedIn. It’s a success so noted that they’re sometimes referred to as the Paypal Mafia in the tech world. The team was clearly doing something right!