Undercover Economist

Would smokers prefer that cigarettes be expensive? The Office of Fair Trading seems to think so, to judge by its recent announcement alleging that some supermarkets and tobacco companies had been fixing the price of tobacco.

Certainly, higher cigarette prices would make smokers healthier. There is plenty of evidence that smoking is very bad for you, and almost as much evidence that people smoke fewer cigarettes if they are expensive. But “healthy smokers” are not the same thing as happy smokers.

So, do high cigarette prices make smokers happier? If smokers are rational, they don’t. But if smokers are wracked by temptation and are trying unsuccessfully to quit, then higher prices might make them happier by encouraging them to smoke less, or even to stop entirely.

This turns out to be a controversial point for economists, surely members of the only profession that could argue about whether smoking is rational. The “rational addiction” theory was put forward by the celebrated pair Kevin Murphy and Gary Becker, a Nobel laureate. They argue that people weigh up the health risks of smoking, the possible social and psychological benefits and the fact that it is habit-forming, before deciding whether to light up.

That is not as absurd as it sounds. Even smokers know that their habit is dangerous; in fact, the economist Kip Viscusi established that smokers overestimate the risks. And there is nothing necessarily irrational about deciding to embark on a course of action that many find enjoyable but that is painful to reverse. Otherwise marriage would be irrational, too. Addictive or not, the question is whether, for some people, the benefits might reasonably outweigh the costs.

A second possibility is that, rather than acting rationally, smokers are helpless puppets who will pay any price for a smoke. If so, expensive cigarettes are bad news for them; making them poorer without encouraging them to quit. But that possibility doesn’t fit the facts: we know that smokers respond to price signals by smoking less. They also smoke less if prices are expected to rise at some later stage. This implies that smokers both think about the future and recognise their own addiction, because a self-diagnosed addict who expects prices to rise may try to begin the difficult process of quitting before the habit becomes expensive.

A third possibility is that smokers are neither puppets nor ultra-rational robots, but simply creatures of flesh and blood. They recognise the risks and would like to quit, but keep valuing the short-term bliss of the nicotine hit over the longer-term benefits of kicking the habit. For smokers who fit this description, expensive cigarettes can indeed be a blessing by encouraging them to cut down or quit. Rational and temptation-wracked smokers behave in similar ways, smoking less if prices rise; they just feel differently about price-fixing in the cigarette market.

One way to resolve the debate is to ask smokers how they feel. Six years ago, the economists Jonathan Gruber and Sendhil Mullainathan did the next best thing, looking at two large sets of data on overall happiness, one covering Canada and one the US. By comparing what happened to happiness in US states and Canadian provinces where cigarette taxes rose, they were able to take an educated guess at whether high prices made smokers more or less cheerful. They had to make some heroic assumptions, but the results did point in the direction of the temptation model: where cigarette taxes rise, “potential smokers” – the people whose age, class, income and domestic circumstances suggest that they are likely to smoke – are happier. If the tobacco industry did collude to fix prices, at least it may have spread a little cheer while it did so.

Also published at ft.com, subscription free.

I was recently invited to appear on radio to give an economist’s perspective on the costs and benefits of local exchange trading schemes (LETS), which are alternative currencies that circulate around a small community. This made me scratch my head a bit. I could not think of any real benefits, but then I couldn’t really think of any serious costs, either.

Advocates of community currencies argue that they have social, economic and environmental advantages. BerkShares, which organises a local currency in Massachusetts, claims that the currency helps businesses to connect with their customers, and strengthens the regional economy by favouring locals. In the UK, “transition towns”, which are seeking to use less oil, are exploring the environmental benefits of local currencies.

The common-sense economic case for these currencies was summed up for me by John Walker, acting treasurer of Brixton LETS in London: “They’re more appropriate for local communities, because the money doesn’t drain out of the local community.”

That seems plausible: the money (“Brixton Bricks”) goes round and round Brixton and isn’t sucked away by the insidious multinationals of neighbouring Clapham.

But this is one of those cases where common sense lets us down. Money (whether pounds or Brixton Bricks) isn’t wealth. It’s just a way of keeping accounts, and swapping one system of accounts for another isn’t going to alter the basic productive potential of Brixton.

True, community currencies may very gently encourage trade with locals rather than strangers. But the gains from more trade with locals are more than offset by the losses from less trade with strangers – otherwise, economic sanctions would be a blessing. This also explains why no community currency movement tries seriously to restrict broader trade. Everyone knows that is a recipe for a return to the dark ages.

There have been times and places when national currencies have so malfunctioned that community currencies would have been preferable: Weimar Germany, modern Zimbabwe, perhaps also the Depression-era US, where community currencies briefly flourished. There is also a healthy debate in economics over the appropriate size of a currency union, but few serious economists think that the optimal currency area is the size of Brixton or the Southern Berkshires.

Nor are the environmental benefits of community currencies terribly persuasive. Local trade sounds environmentally friendly, but it is a distraction: the environmental costs of driving to the shops or growing food on inappropriate local land far exceed the costs of carbon emissions from long-range shipping.

The real benefits, if they exist, are not economic but social, and best explained not by an economist like me, but by a sociologist such as Ed Collom, a professor at the University of Southern Maine.Collom’s work looks at first glance like bad news for the community currency movement.

He has found, for example, that most currency schemes in the US last only a few years before collapsing. The ones that thrive are in places that already have strong, liberal, middle-class communities, such as Portland, Oregon, or Ithaca, New York.

In rust-belt regions that would seem to need them more, they have not taken root. Also, the schemes take a lot of effort to set up: Brixton LETS, for instance, is only in its early stages.

But despite the obstacles, Collom is convinced that local currencies can strengthen neighbourhood ties and allow people to make friends: they are a focal point for the community-minded, even when they do not last.

That is possible. I live near a determined, community-minded entrepreneur who owns the local cafe, the sort of person who helps to get community currencies started. But rather than minting a Hackney dollar, she has founded a traders’ association and is trying to set up a street market. I think she has her priorities straight.

Also published at ft.com, subscription free.

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.

This is an excellent test of the market’s response to news: the bets have a clear value at the end of the game, goals are scarce and important events – and (unless one is a referee) they are easy to spot. And the stakes are not trivial: hundreds of pounds a second are wagered during the match.

The idea of using sports betting to test market efficiency came from Steven Levitt (the co-author of Freakonomics) and Ricard Gil. Levitt and Gil had conducted an earlier study in rather thinner betting markets, and found that prices jumped immediately after a goal, but they then drifted further in the same direction. Was that because the traders were sluggishly digesting news of the goal? Or was it because the clock was ticking down, no news being good news for the team in front? Croxson and Reade offer a clever answer, by looking at those goals scored just before half time. Relevant news hardly ever emerges during half time and the pair find that, although trading is active during the break, prices barely move at all. This shows that the market traders instantly absorb the news of a goal. After the second half begins, prices start to drift again, just as Gil and Levitt found.

That suggests an efficient response both to news and to the absence of news, in sports betting markets at least.

But Peter Koudijs of Barcelona’s Universitat Pompeu Fabra has a different perspective. He looked at prices of three English stocks (the East India Company, the Bank of England and the South Sea Company) on a secondary market in Amsterdam from 1771 to 1777.

Koudijs realised, and proved, that relevant news flowed almost exclusively from London to Amsterdam – and always through the same channel, a boat sailing across the North Sea bringing market data to Amsterdam. Depending on wind speed and direction, the “packet boat” might arrive promptly or after a delay of more than a week, occasionally starving the Amsterdam market of news for days on end.

Koudijs discovered that when the wind was unfavourable and no news was available, Dutch prices for these English companies were highly volatile anyway. That is not an efficient market.

So, have we discovered something uniquely inefficient about Dutch markets, or something uniquely efficient about sports betting? I am not sure. An analysis of Dutch football games is the logical research extension.

Also published at ft.com, subscription free.

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.

For Luxembourg – or any other rich country – there is a trivial difference between income per natural and more conventional measures of national income. But for Liberia, the difference is anything but trivial: the Liberian-born make 50 per cent more than Liberian residents. Nor is Liberia unique: Clemens and Pritchett estimate that the income of the Samoan-born is nearly twice the income of the Samoan resident, and the Guyana-born are more than twice as well-off as residents of Guyana.

These dramatic differences have a simple explanation: many poor people became richer by leaving their country of birth. Clemens and Pritchett estimate that “two of every five living Mexicans who have escaped poverty did so by leaving Mexico; for Haitians it is four out of five”.

There is a point to this exercise: Clemens and Pritchett want to draw attention to the fact that migration has made a lot of migrants richer. Traditional measures of income tend to mask this fact.

In rich countries, we usually ask whether migrants improve the lot of existing residents, not whether migration improves the lot of migrants. Meanwhile, the welfare of migrants rarely figures in debates in developing countries or in development institutions such as the World Bank, because the migrants have gone.

Simply because of the way the discussion is framed, the benefits to migrants tend to be ignored. Imagine a man who moves from earning €10,000 in Poland (an above-average wage) to £15,000 in the UK (a below-average wage). Simple arithmetic says that he has reduced the average income of both countries; that could be true even if he has impoverished nobody and enriched himself a great deal.

The “income per natural” statistic is the latest in a long line of alternatives to gross domestic product, the standard measure of an economy’s size. Others – variously championed by Nobel laureates such as Amartya Sen, Daniel Kahneman, Joseph Stiglitz and the late James Tobin – try to adjust GDP to account for the depletion of natural resources, or to incorporate measures of health and education, or even (in Kahneman’s case) to start from scratch with time-weighted accounts of happiness.

I sometimes wonder if these alternative measures make a difference to the way policy is conducted. After all, no government ever tried to maximise GDP anyway, so why try so hard to measure something else?

But Pritchett is convinced that the way the discussion is framed really does make a difference.

“I’m crazy,” he told me. “I’m a lunatic. But I think we have a chance of changing the way the discourse is carried out.”

Also published at ft.com, subscription free.

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.

It has always seemed obvious to economists that national pay scales are an oddity. It may appear fair to pay nurses, lecturers or teachers much the same in Chelsea as in Chesterfield. Yet since we cannot eat money, it is silly to compare a Chelsea salary with a Chesterfield one without considering what each might buy, and what alternatives might be on offer.

Still, just because a pay arrangement offends against the principles espoused in economic textbooks does not mean that it is a problem in practice. It is not easy to prove that the theoretical concern is a practical problem, but the researchers have convincingly done so using data from 1996-2001: nationally regulated pay was, at the time, killing National Health Service patients in high-wage areas.

The researchers – they are Emma Hall and Carol Propper of the University of Bristol, along with John Van Reenen of LSE’s Centre for Economic Performance – used as their benchmark the proportion of patients who dropped dead inside a month, having arrived at the hospital suffering from a heart attack. (This is a common measure of hospital performance, since neither the patient nor the hospital have much chance to be selective under the circumstances, and because unlike, say, waiting lists, this number is hard to fiddle with.)

They found that the higher the alternative wages available, the higher the death rate at a region’s hospitals, and the effect does not seem to be due to any intrinsic difference in the type of patient, the journey taken by the ambulance or any of the other likely explanations. Nor is this a trivial effect: if the alternative wage rises 10 per cent, the death rate rises by nearly 5 per cent.

Hall, Propper and Van Reenen also looked at measures of productivity in other service industries, including nursing homes, where pay is not regulated by the government. There is absolutely no sign of trouble in any of them.

The good news is that the NHS has recently moved to more flexible wage agreements, with more pay for staff in high-wage areas and the flexibility to add further inducements when staff shortages are a particular problem. This is a positive step, although just because NHS employers are now allowed to pay staff more in London and the south-east does not mean that they will find the money in their budgets to do so.

Nor is the NHS the only government organisation with nationally agreed pay standards. Readers based in London might enquire about teacher turnover at their local school – and hope the answer does not provoke a heart attack.

Also published at 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.

Even more perplexing, Microsoft seems to hold two opinions at once: doing its best to prevent piracy on the Xbox console, but (as far as this outsider can tell) accepting that piracy of its Office suite of software is a fact of life.

Karen Croxson is a young economist at Oxford University who claims that there is method in the madness. She argues that there will never be a single correct trade-off between sales lost to piracy and sales generated by the buzz from pirated copies in circulation. That is because there are different kinds of potential consumer in different markets, or even in the same market at different times. A company’s most profitable response to piracy depends on what sort of consumers it is facing.

For example, the consumers who would pay for console games if given no alternative are probably the type of consumers who are happy to use pirated copies: tech-savvy youngsters. That means that an extra pirated copy in the console market is quite likely to mean a lost sale.

But the customers who will pay most for corporate software are, well, corporations. They won’t want to risk being caught and sued for piracy, so an extra pirated copy in the corporate software market probably isn’t a lost sale at all. The guilty party isn’t a customer, but a home-user or a student who would never have stumped up full price. Thanks to piracy, though, that home user is now learning how to use Word and PowerPoint and making the legal copies of Microsoft Office more valuable.

Croxson can even make sense of the record industry’s apparent volte-face with the pricing of CDs. When Napster was starting up and piracy was still a marginal activity, it made sense for record labels to write off a few cheapskate customers as a marketing expense and raise average prices to everyone else – presumably the older, more prosperous customers who were willing to pay for legal music. But as the pirated sector embraced even those customers, the best strategy was to fight back by slashing prices.

In Croxson’s world, then, “promotional piracy” is an alternative to discounted pricing. Both approaches are a way for companies to advertise their products or expand their user base. And as with discounted pricing, promotional piracy only makes sense if there is a decent supply of customers who will eventually pay full price, which is not always true.

Corporations may be able to do more to maximise the gains or minimise the losses from piracy. Why not offer two versions of the product: a cheap-to-pirate, lower-quality product, and a high-end offering incorporating tight security? If Croxson is right, for some industries, piracy is a wonderful distribution channel.

Also published at ft.com.

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.

All very well in theory, but the practice has been shameful. Green taxes have been fussy and poorly-targeted, by turns too stringent and too lax. For fussiness, one need only point to the tax break on occasional breakfasts for bicycling commuters. It is hard to imagine that the environmental benefits outweigh the red tape, but no doubt some minister was able to burnish his or her green credentials with the hare-brained scheme.

As for the evidence of inept targeting, simply contrast the two most significant features of the UK’s green tax “system’’. On the one hand, fuel for domestic heating is effectively subsidised, attracting VAT of 5 per cent instead of the usual 17.5 per cent. On the other, the tax on petrol, which raises far more money than any other green tax in the UK, is a lot higher than can reasonably be justified on environmental grounds and was raised still further in the recent budget.

That conclusion comes from the environmental economists Ian Parry and Kenneth Small, who tried to estimate the appropriate gasoline tax in the US and the UK, taking into account congestion, pollution, and the fact that gasoline tax revenue would allow other taxes to be cut. They concluded that US gasoline tax should be more than doubled, while UK gasoline tax should be roughly halved. Green taxes are a good thing – but we all know that you can have too much of a good thing.

What are we to make of a government that is so confident of its omniscience that it will subsidise my breakfast on environmental grounds, yet at the same time cannot get the most basic decisions right, setting petrol tax far too high and tax on domestic fuel far too low?

I realise that I am complaining that gas-guzzlers are taxed too much and pensioners in fuel poverty are taxed too little. Fine. I’ll contribute my tax-free breakfasts to the pensioners and recommend that the government use its much-vaunted winter fuel payments to deal with the problem. But holding domestic fuel taxes low, thus encouraging the entire nation not to bother with double glazing, is a clumsy way to help the vulnerable.

But I am not holding my breath waiting for sensible green taxes.

This government – like most governments – likes to use the tax system as a way of expressing its moral views: hooray for pensioners, down with Jeremy Clarkson. Cheap politics for them, less so for the taxpayer.

Also published at ft.com.

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.

How a pricing policy is presented clearly matters – which is disconcerting to economists, who can translate all the pricing into mathematical equations and make the presentation irrelevant. It seems to be acceptable to charge a higher mark-up for fair trade coffee, organic bread or lower-emission petrol. It is not acceptable for businesses to say, “we are such fans of exploitative coffee, pesticide-laced loaves and dirtier petrol that we’re willing to discount them and accept a lower profit margin.” Underneath the gloss, the pricing policies are, nevertheless, identical.

The most common puzzle of all, to an economist, is why prices so rarely rise in the face of a shortage. There was a shortage of Wii games consoles last Christmas, Xbox 360s in 2005, PlayStation 2 consoles before that, and so on, yet the retail price remained the same. To secure tickets for a hot concert, you will usually need to go to a ticket tout, because the regular concert promoters wouldn’t dare charge a price that might bring demand down to the level of supply. And when US oil companies raised gasoline prices after Hurricane Katrina, there were howls of outrage – despite the fact that the refining infrastructure was badly damaged and it was self-evidently impossible to supply everyone at the customary lower price.

I have pondered before the very clever explanations economists produce to explain why prices do not rise to equalise supply and demand. Perhaps ticket prices are kept low to encourage a memorabilia-buying younger crowd. Perhaps popular restaurants like to have a waiting list for reservations because it adds to the cachet. Even I am starting to feel that these explanations sound strained: are these side-benefits really enough to outweigh the lost revenue from higher prices?

The intuitive explanation, of course, is that we irrationally object to high prices even when the alternative is rationing, long queues, and uncertainty over whether we can buy what we really want.

That is discomfiting for economists, but we might at least take solace in the idea that even though there is no immediate logic to a belief in the right price, there is at least an evolutionary logic. David Friedman – son of the late Milton Friedman, and a superb communicator of economics – has argued that our ancestors evolved in an environment where most transactions were one-on-one bargains. A hard-wired refusal to accept something other than the customary price would, in such a setting, be an advantage. Anyone who reacts to a price rise with irrational rage turns out to be a strong negotiator.

Our stubborn preference for a just price evolved in a setting that is no longer common; but evolution does not respond quickly, which may be why we still shriek with outrage at price hikes. It would also explain why ticket touts still make a living.

Also published at ft.com.

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.

That is worrying. Perhaps it does not even make sense to compare two static “before” and “after” states; perhaps “during” is everything. In fairness, economists are not blind to this problem. Back in 1923 John Maynard Keynes warned that “Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.” He was not the only one with reservations. Yet identifying the problem is easier than solving it, at least using the mathematical tools with which economists are familiar.

Several popular books have argued that economists could learn about dynamics from approaches developed in the sciences. Malcolm Gladwell, a journalist, wrote an entire book – The Tipping Point – devoted to the idea that innovations, fashions and other ideas spread through society in much the same way as a disease does. Philip Ball, a science writer, attacked economics more directly in his book, Critical Mass, arguing that economists should learn from physicists’ understanding of dynamic processes, such as phase transitions. (An example of a phase transition is when cold water suddenly turns to ice. It turns out that, for example, traffic flows can exhibit phase transitions.) Still others advise economists to look to models of evolutionary dynamics.

This is all sage advice, but the details matter. Duncan Watts, who studies dynamic processes on networks, has discovered that neither Ball nor Gladwell has the whole story. Ideas can spread through an economy like a disease or like a phase transition – it all depends on how the social networks along which the ideas flow are connected.

In The Tipping Point, Gladwell focused attention on highly connected individuals – the “connectors” or the “influencers” – who were able to spread anything from a fashion trend to a new software release. He was influenced by epidemiologists who already knew that diseases often spread through such “connectors”. But Watts points out that ideas can flow along many more connections than diseases do. That implies that the epidemiological model does not apply, and a new trend will either ripple through the economy like a near-instantaneous phase transition, or it will ripple nowhere at all because it never gets started. And in either case, the “connectors” will be irrelevant, because we’re all so interconnected anyway.

My guess is that it is just a matter of time before economists embrace methods from other disciplines in an effort to understand dynamic processes better than we do.

But it would be a shame if we looked only to physicists, chemists and biologists for advice; something would be missing if we did. Duncan Watts, after all, is a sociologist.

Also published at ft.com.

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. Read the rest of this entry »