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Bill Sittig:

Good morning, everyone. Thank you very much for coming on this cool day.
Welcome to today's program featuring economist Tim Harford. I am Bill
Sittig, chief of the Library's \[Library of Congress's\] Science,
Technology, and Business Division, and this event is one in our series
in which we learn from important writers, thinkers, and practitioners in
the various fields of science, technology, business and economics.

Before I introduce today's speaker I would like to mention a few of our
upcoming programs. On February 14, St. Valentine's Day, our own Abbie
Grotke from the Office of Strategic Initiatives will give us advice from
her book, "Miss Abigail's Guide to Dating, Mating, and Marriage." You're
not going to want to miss this event, which will feature an exhibit of
19^th^ century books on manners from the Library's \[Library of
Congress's\] collections as well as snacks from recipes from these
books. On more serious subjects, on February 26, Paul Orfalea, founder
of Kinko's, will speak on the book he co-authored with Ann Marsh
entitled "Copy This! Lessons from a Hyperactive Dyslexic Who Turned a
Bright Idea Into One of America's Best Companies." And on March 21, we
will feature a presentation by Mark Nash, realtor, television
commentator, and author of four books on real estate, including his
recent book, "1,001 Tips for Buying and Selling a Home." I hope you will
be able to join us for all of these presentations.

I'd also like to take this opportunity to thank Carolyn Larson, sitting
in the front row here, of our Business Reference \[Section\] staff, for
all her good work in preparing for today's program. Carolyn has prepared
a bibliography of books mentioned in Tim's book and has assembled a
display of some of these books from the Library's \[Library of
Congress's\] collections. Please help yourself to copies of the reading
list, which is on the side table there. And please spend some time
looking through the books.

It is now my great pleasure to introduce Tim Harford, an economic
columnist for the "Financial Times." Tim writes the "Dear Economist"
column, in which he analyzes readers' questions using the tools of
modern economics and the wit of Miss Manners. Last year he began writing
a second column, "The Undercover Economist," which like his book by the
same title explains the economics behind our day-to-day experiences.
This latter column is syndicated in the U.S. magazine "Slate" and in
Canada's "Commerce."

Tim was born and educated in Britain, receiving his degree in economics
from Oxford. He has been a tutor at Oxford, a speechwriter for Stanley
Fischer, now the governor of the Bank of Israel, a scenario expert at
Shell, and he worked as an economist at the International Finance
Corporation, which is part of the World Bank. He lived here in
Washington for a couple of years when he worked there. I think I read
somewhere that he started the first blog at the World Bank.

Tim is a prolific writer. In addition to his regular columns, he has
published in numerous international newspapers, including ""Washington
Post, "Forbes," and "New York Times." Last year he was awarded the
Bastiat Prize by the International Policy Network for his writings
promoting economic understanding. He is the presenter on a new BBC
series entitled "Trust Me, I'm an Economist". And he is the author of
two books, "The Market for Aid," which he co-authored in 2005 for the
International Finance Corporation, and "The Undercover Economist," first
published by Oxford University Press in 2006, and published in paperback
this year by Random House. Tim has signed copies of this book, which are
for sale right in the corner of this room here. He would be very pleased
if you would use your market power as a good consumer by purchasing
copies of this book following today's program.

I must say that Tim is going to have to leave immediately following this
program. He is going to be interviewed on WAMU at 1:00 by Kojo Nnamdi.
So please, if you have questions, you will have to ask them during the
program, which will have to end sharply at 12:30.

I enjoyed flipping through this book. On my quick perusal of the book I
discovered why there's a Starbucks on every corner, and why the prices
at Whole Foods, where my wife and I usually shop, are not really much
higher than at the neighboring Safeway. Perhaps Tim will fill you in on
some of these secrets. It is now my honor to welcome Tim Harford to the
Library of Congress.

\[applause\]

Tim Harford:

Thank you so much, Bill. It's a very generous introduction. It's
wonderful to see so many of you here. I'm very honored to be speaking at
the Library of Congress. It's wonderful to be back in D.C., which is a
city that I'm very fond of and lived here for a couple of years. My
daughter was born here. This all by way of explaining to you that, you
know, economists are people, too. Economists are human, too. But, that
said, you know, hopefully by the end of the time we have together \--
I'll talk a half an hour or so and we'll have some questions. I hope you
have questions. I hope you'll understand that economists are people,
too, and that economics is nothing if it can't help people with their
personal problems.

It won't have escaped your notice that in a week's time it's Valentine's
Day. There is, of course, an event here at the Library \[of Congress\].
I won't be here, so I'm going to try and tell you about Valentine's Day
now. Nobody here will need dating advice, but you all have a lot of
friends, I'm sure, and some of your friends may be lonely on Valentine's
Day and they may need some assistance finding that special person. And
I'm sure you'll agree with me that there's nobody better to give dating
advice than an economist.

\[laughter\]

I want to tell you first about my experience helping a lovelorn playboy
called Andy \-- we filmed this for the show, "Trust Me, I'm an
Economist." Andy's problem \-- I think a lot of men have this problem
\-- he's a good-looking guy. He's charming. But women just didn't
entirely trust him. There was something about him. I think it was the
fact that he, you know, wore his shirt to the navel and had a medallion.

\[laughter\]

But he needed a little bit of help, a little bit of extra help from
economics. And so he responded to our invitation to come on the TV show,
and I'm sure you'll understand the basic problem Andy had, and the
solution. He really needed to think of himself as a dodgy-looking DVD
player languishing on the shelves at Wal-Mart. That's what I explained
to him anyway. He didn't thank me for the comparison. But think about
the problem that the manufacturer has selling a DVD player. Maybe you
don't know the manufacturer too well. This was a problem that really
affected Japanese electronics manufacturers in the '70s initially. It's
hard to imagine that Japanese products were regarded as being shoddy and
unreliable, but they were.

And how the, how the Japanese got around this was \-- well, put
yourselves in their shoes. You can offer a discount to the customer. But
if the basic problem is the customer doesn't really know if the product
is going to perform when you get it home \-- which I think was also
Andy's problem \-- if the customer doesn't know that the product is
going to perform, then offering a discount doesn't \-- well, there are
two problems. First, it doesn't solve your essential problem, which is
that the customer doesn't know if you're offering a quality product. And
the second problem is that even if you do make the sale with a discount,
you've obviously lost money because you had to offer a discount to make
the sale. So there's two reasons you don't want to offer a discount in
order to get over this quality hurdle.

What would you do instead? You offer a money-back guarantee, a free
money-back guarantee, and this has two positive effects. The first is
that it reassures the customer that if there's a problem they get their
money back. But that's not really what a money-back guarantee is about.
A money-back guarantee is a cast-iron signal of quality. Any
manufacturer can say, "This is a great DVD player; this is a great CD
player." Anybody can say it. That's just advertising. We ignore that.
But the money-back guarantee says, "This is a, this really is a great
product, because if it's not great, you're going to bring it back and if
you bring it back it's going to cost us a ton of money. So we know that
it's a good product. We know you won't bring it back." That's the
signal. To an economist, talk is cheap, but that sort of action really
proves that you've got a quality product.

Now I'm sure you're way ahead of me here, and you can see how Andy would
be able to offer a money-back guarantee on a date. But just in case you
don't quite see where this is going, we took Andy to a speed-dating
evening. You may, you may know about speed dating. You know, you have 20
guys and 20 girls, and they all pair up and sit down at a little table,
and the host who's organizing the speed dating event rings a little bell
and they talk to each other for three chardonnay-fueled minutes.

\[laughter\]

And then the host rings a bell. All the guys get up, move to the next
table, sit down. And so you meet 20 people over the course of just over
an hour.

You have a little card, a little box, yes or no. And if you tick the
yeses and if the person who you were meeting also ticks a yes, at that
point the speed-dating company will give contact details. So, it's a
real, you know, it's serious. You know, if you tick yes and you never
want to see this guy again, you know, he's going to get your phone
number. You don't want that. So you tick yes if you mean yes. You tick
no if you mean no. Economists love this. It's a great way of generating
information, by the way. They find out all kinds of exciting things.

But on this particular occasion we weren't interesting in finding out
about speed dating. We were interested in playing this game to win. We
put the TV camera down in front of the speed dating table. We sit Andy
down and we say, "Okay, Andy. Here's your money-back guarantee. You pick
the girl you most like. You offer her two tickets to see the best show
at the West End." This is London, right? It's like Broadway, only it's
in London. "We offer you two tickets to see the best show---you offer
her two tickets to see the best show at the West End. Don't offer it as
a bribe. Don't offer it with any conditions. Just give her the tickets
for a show in a month's time. And now we forget about the tickets, and
you say to her, 'We've only got 90 seconds here just talking. I know
that if you got to know me, if we went on a date, we could have a picnic
in Hyde Park, we could go out for dinner, you'd really like me, if you
got to know me. So, let's have a date. Let's give it a try, and then
after a couple of dates you're going to open your desk drawer. You're
going to get out the tickets in a month's time and you're going to look
at the tickets and say, 'Two tickets to see a show. Who could I possibly
bring with me? Andy. Andy's a great guy. I'll bring Andy with me.''"

So that's why it's a money-back guarantee, because if Andy performs as
expected on the date, if he is in fact an engaging and likeable young
man, then he gets to see the show after all. And if, in fact, he doesn't
deliver and is, in fact, an offensive medallion-wearing bore, then at
least the girl gets two free tickets to go to the show with some other
guy to compensate her for the evening she wasted with Andy. So really,
satisfaction is guaranteed.

So, we put the TV cameras on him. We sat him down. Beautiful girl. Gave
her the tickets. It was total disaster.

\[laughter\]

It was a complete catastrophe, and that's why for all the title of the
show, "Trust Me, I'm an Economist," trusting an economist is something
you should never do.

\[laughter\]

And by the time I'm finished with you, you will understand why you
should never trust an economist. I hope that you'll also understand a
little bit about why we have an excuse for our disreputable reputation,
why there's actually a reason why you shouldn't trust economists. And
knowing that reason helps you understand the way the economy works a
little bit more. That's what I'd like to do.

One of the reasons why you shouldn't trust an economist is because \--
well, there's no nice way to put this. Economists don't understand the
economy, which is a shame, I know. But the reason they don't understand
the economy \-- they don't understand the economy because the economy is
a very complicated thing. Think about, for example, cappuccino from
Starbucks, which is something I write about incessantly in my book, sort
of cappuccino on the brain. And think about a cappuccino. Does anybody
here know how to make a cappuccino, by any chance? So we go to the lady
here. So how are you with milking cows?

\[laughter\]

Not so good, yeah, I know; I get confused and everything, which bit goes
where.

Yeah, if you're given milk and coffee, maybe pre-ground coffee or a
coffee grinder, which was designed by some long forgotten engineer, if
you're given electricity generated in some far off place by people you
don't know with processes you don't understand very well, coffee that
was grown in Guatemala and flown to you and roasted and you're not sure
exactly how that process works \-- if you're given all those raw
ingredients then I'm convinced that you make a beautiful cappuccino.
However, you're just the last \-- this is the final yard of a long, long
process. And that's true for most products in the modern economy.

I think I'm safe in saying there is actually nobody in the world who can
make a cappuccino from scratch. If you just say \-- okay, the world is
your oyster, now you have to go and grow coffee. You have to dig clay
out of the ground. You have to shape it into a ceramic mug, fire it,
glaze it, fire it again. You need to generate electricity, maybe a water
wheel would work. I don't know. You need to process steel and roll it
into an espresso machine. You need to milk the cows. You \-- actually,
no, let's go back. You need to breed the cows that produce the right
kind of milk. It's fantastically complicated and that's true of any
product, almost any product in today's economy.

It is a team effort. It's the product of an amazing team effort. And
there's actually nobody in charge of the team, no one in charge of the
team, which is even more remarkable. In fact, I'm going to walk this way
for a second. I'm going to steal a copy of my book from the bookstore.
I'm not even gong to pay for it, look at that, just got it. Yeah, yeah
she's got me. She's got my number. Watch this. Watch this. Don't trust
an economist. Watch this book disappear over the course of the speech. I
just wanted to read briefly, because who wants to listen to an author
reading his own book for very long? Just wanted to read \-- I've said
most of this. I'm just going to read one paragraph.

"The economist knows that the cappuccino is the product of an incredible
team effort. Not only that, there's nobody in charge of the team. The
economist Paul Seabright reminds us of the pleas of the Soviet official
trying to comprehend the Western system. 'Tell me,' he said, 'who's in
charge of the supply of bread to London?' The question is comical, but
the answer, 'Nobody,' is dizzying."

And that's one reason why economists don't understand the economy. It is
a de-centralized process of fantastic complexity, and nobody understands
it. And, you know, that's okay, because I think, and I hope I'll
convince you, that there are still things that we can do, ways that we
can respond to the economy, ways we can try to shape the economy, with
the right degree of humility, that make some sense. But first of all I
want to explain why you should never trust an economist to tell you
which stock to buy or where a house is in an up-and-coming area, whether
the property market's going to catch fire again or whether it's going to
continue to sink.

Never trust an economist to tell you this. And the reason, I think, is
\-- well, think about picking the shortest line in the supermarket. This
is a simple problem, okay? You look at the line at the supermarket. You
look at the queue. You think to yourself, "That line looks pretty short.
I think \-- no \-- maybe it's a bit \-- oh, no. They've all got baskets.
That's quick. And I see they've got cash. They're not going to pay with
a card. That should be quick. Oh, someone like a grandmother with
vouchers just took to the line. Okay, that's no good. Or maybe there's a
short line over there. That looks pretty short. Yeah, the cashier there,
she's scanning fast. Oh, someone's in that line as well." Every time you
stand there you're trying to pick a short line. Every time you think
you've seen a short line, someone else gets in it.

That's just fundamental about the way the system works. If it was
obvious which was the shortest line, someone's standing in it, and it's
not the shortest line anymore. And the same is true \-- in fact, it's
more true \-- of, say, company stock. If it's obvious that a company
stock was cheap, well, there are an awful lot of people on Wall Street
paid a lot of money to work that out and buy it. They are being paid
millions of dollars to stand in the queue before you get there. And the
same is true, to some extent, of property. If it's\--If it's so obvious
that this neighborhood is up-and-coming, why are they selling you that
house? Yeah? Why are they selling you that house? It's not easy. You can
get in the shortest line, but it's never going to be easy, it's never
going to be obvious.

So is this a counsel of despair? I'm only telling you that economists
can't forecast. They can't make you money, can't tell you what the stock
market is going to do. They don't understand the economy. It's too
complicated. They can't even get you a date. What are they good for? But
I think there are actually some valuable lessons from this way of
understanding the economy.

The first is that our natural tendency, which is, if we see a problem
with the economy, let's just put some guy in charge of it, and he'll fix
it \-- this is not a very wise way of approaching things. For a start
he'll probably ask economists to advise him, and then you know they
don't understand, so things will go wrong. I'm not, I'm not one of those
economists \-- and you will meet some of them \-- I'm not one of those
economists who says, "Markets are perfect. Markets do everything. There
is never any point in interfering with markets. They're just wonderful."
And, you know, I don't believe that. It's not true.

There several books in my \-- several chapters in the book where I
explain first what you would have to do to actually see a perfect
market, and just to understand what a perfect market would look like,
you realize, "Oh yeah, so that would be never then; we'd never have a
perfect market."

\[laughter\]

And then I explain why \-- what the problems are, why markets go wrong,
and then what we might be able to do about them, rather than just
sweeping them away and replacing them with some guy who will get it
wrong, possibly even worse than the market does.

So here's an example. If you try and drive your car through \-- if you
tried in 2003 to drive your car through Central London, you would've
noticed that the speed of traffic in Central London is not very good. In
fact, the speed of traffic in Central London in 2003 was slower than the
speed of traffic in Central London in 1903. It was quite impressive. In
2003 the average speed was 11 miles an hour and in 1903 when the roads
were uncongested but populated by horses the average speed was 12 miles
an hour. So this is not good.

And this is what an economist would call \-- what most of us would call
a traffic jam or congestion an economist calls an externality. He calls
it an externality, and it's a market failure. And the externality is,
when I get in my car and drive, I am getting in your way. I am blocking
the box for you. I am ahead of you in the queue for the traffic lights.
I'm taking up space on the road. I am switching lanes. I am causing
trouble. I'm emitting pollution, I'm emitting carbon dioxide, lead,
carbon monoxide, noise. You know, I occasionally run over toddlers, that
kind of thing. I'm causing trouble for everybody else. Now maybe not a
lot of trouble, but some trouble. Okay, in fact, actually not a lot of
trouble. It's important to bear this in mind. I'm just causing a little
bit of trouble. However, with another 500,000, million drivers on the
roads of London, all causing a little bit of trouble, that all adds up
to a big amount of trouble. It's a problem. It's a market failure.

Now, ordinarily, most of what we do actually causes other people
trouble. If I buy a cappuccino, I'm causing trouble. There's some person
who would be quite happy to be watching a movie, hanging around at home,
who's had to put on a stupid uniform, get up early in the morning, come
to the Starbucks, and make me a cup of coffee. I walk in and I say, "Cup
of coffee, please," and they just have to make it. They don't know me.
They just have to make me a cup of coffee. People work very very hard
growing the coffee beans. People work very, very hard at raising the
cows, milking the cows. For this cappuccino, people are going to a lot
of trouble. I'm causing people a problem.

But that's not a market failure. It's not the same kind of problem as
with the traffic jam, and the reason is, I pay. I pay Starbucks.
Starbucks pays the barista. They pay the coffee manufacturers. They pay
the diary farmer. They pay. Everybody along the line gets paid for their
trouble. If I block the box and you're five minutes late for work
because I was on the roads, I don't pay you five minutes. I don't pay
you at all. You don't get anything from me.

But there is a way of giving the markets a little bit of a hand. You can
implement some kind of tax or charge on using the roads. And this is
something that they did in London. I want to emphasize it's not going to
work everywhere, but it works in London. They put a perimeter around
Central London, said, "If you want to drive in on a weekday, it's going
to cost you £5, which is \$10," and they put it up, \$12. Now they're
going to put it up again. It's going to be \$18. Yeah? It's going to
cost you. And, you know what, 90 percent of the drivers paid. And they
got something for their money. They got to work in 20 minutes instead of
an hour. So you paid \$12 and you saved 40 minutes of time.

Alright, and you can understand, for a long \-- actually you saved 40
minutes each way. You say drove an hour of time. So if you're paid more
than \$10 an hour it's actually not a bad deal. Yeah, and you can see, a
lot of people paid, maybe didn't pay happily, but they got something for
their money. And then a few people stopped. And the funny thing was it
only took 10 percent of the drivers to stop for the speed of the traffic
to move up dramatically. Suddenly you found the congestion had fallen
very sharply, average traffic times had risen\--average speeds had
risen, travel times had fallen, the predictability of how long it was
going to take you to get there had also improved, so instead of being
well, maybe an hour, maybe two, it was well, half an hour and definitely
not more than 40 minutes. You know, you would have \-- and that really
helps.

So this was\-- this was of tremendous value to, to the citizens of
London. The interesting thing for me is you could get that effect in
another way. You could, for instance say, "If your car registration
number begins with A, B, C, D, or E, you can't drive on Mondays. If it's
F, G, H, I, J, you can't drive on Tuesdays." You can try and legislate
some other way. Or you can try and make parking expensive. Or you can
try and gum up the roads. But none of these systems work nearly as well
because for a start we don't know which of those journeys are important.
I mean, that person whose car registration begins with B might have a
very very important meeting to get to. Or maybe they're in labor. We
don't know how valuable that journey is to them. We've just said, "You
can't travel on a Monday." But with a congestion charge, you know. If
it's more than \$12 of value to you, you do it; if it's not, you don't.

We also don't know the best way for people to get around the congestion
charge. So there are different possibilities. You could drive around
Central London. You could carpool. It doesn't save you the congestion
charge, but you split it, obviously. You could cycle. You get a moped.
You could buy a Prius. You could catch the bus, which of course is now
flowing a lot more freely because there are fewer cars. You could get on
the London underground. You could get a train. You could change your
job. That sounds ridiculous right? But we change our jobs on average
once every three years. So maybe you don't change your job immediately,
but when an opportunity for a new job comes up, and you think, "Hey,
that job, I wouldn't have to pay the congestion charge. That's worth
something." You could telecommute. You could go to your boss. You could
say, "You know, this is costing me \$12 every day. If I could work from
home on Fridays that would help." And the boss might go, "Actually
there's no reason why not." Of course, if you work in Starbucks, the
boss isn't going to go, "Sure you can work at home on Fridays."

\[laughter\]

But that's the point.

If some bureaucrat says everyone can work from home on Fridays, that
doesn't work. But each individual business, each individual is getting
the signal from the price, and they can respond to that signal however
they want. So you're keeping that the centralized nature of the economy.
And I think it's worked very well. It's not just congestion that you
could deal with in this way.

I think the general approach of trying to use markets as much as
possible and trying to behave with humility towards the economy, because
it's a complicated thing, has paid dividends, not just in the U.K., not
just in the U.S., but in places like China as well. In the last chapter
of my book \-- the whole book I just, you know, mooched around, going
into Starbucks, going into Whole Foods, getting stuck in traffic jams,
doing everyday things. That's why it's the undercover economist, just
me, just an ordinary guy wandering around, but looking at things using
economics.

In the last chapter of the book I'm doing exactly that, but I'm mooching
around Shanghai and Beijing, and trying to work out how I interpret what
I see there, and the story is very interesting. You had a country where
at the end of the 1970s they were producing less grain than they had
produced at the end of the 1940s. You had 30 million people die in a
famine in the 50s. If you see the world population graph you can look
this sort of thing up. Just look, you can see the drop in the population
of the world because of the famine that hit China. The famine that hit
China was caused by one guy saying, "You know what, I think we should
grow our crops in a different way. It would be better to plant them more
closely, and do it like this, and blah blah blah."

And so he's Mao and no one wants to tell him it doesn't work and when it
starts to fail, the crops start to rot, no one tells him. When he goes
on a tour to look at the crops, they stack them all up, they have fans
installed in the fields to keep the air flowing so the crops aren't
rotting. Everything looks great to him. He's getting no feedback from
the economy. When people start starving, the government is increasing
its exports of grain to other countries because there's no famine.
Right? There's no feedback in that system whatsoever.

Contrast that to what happened at the end of the 1970s where Deng
Xiaoping came to power and he just said, "You know what, you guys might
want to try something different, and we won't stop you." That was all he
said, "We're just not going to stop you." And a few local areas
experimented with the radical idea that if some farmer grew extra rice,
he could keep it. He could sell it to somebody else. He could do what he
wanted. So suddenly there's an incentive to work harder or to innovate,
come up with new ideas. And you know what, a lot of people didn't
respond to that incentive. It was just some people who did. That was
enough.

And in 1979 two percent of Chinese farmers were under that system, and
by 1983, 98 percent of Chinese farmers were under that system. They
tried it out. It worked. Suddenly, "Okay fine, let's go, let's not wait
around, it worked." And China has been, I think the right word \--
people describe Chinese reforms as gradual. I think maybe that's the
wrong word. Empirical maybe? Experimental? They keep trying things. If
it works, they do it.

So the same thing with a manufacturing base. You've got a coal mine
producing ten tons of coal, ordered by the government plan to ship the
coal to the steel mill, which will use the coal to make ten tons of
steel, and then the steel will be shipped to a construction site, all
written down in the plan. Then about 1984 they said, "You know what, if
the plan says ten tons of coal and you can make 11, and you can find
someone to take the last ton of coal, that's okay. But first you deliver
according to the plan." The same with the steel mill. "If you can
produce an extra ton of steel, you can find someone to take that extra
ton of steel, you do it, but first you do what is specified in the
plan." And that means that everybody kept their jobs. There was complete
security. Everybody knew what was going on.

They had the plan. A coal mine that was inefficient, was badly run,
wouldn't be able to expand, wouldn't be able to deliver more coal. A
steel mill didn't work very well wouldn't deliver more steel. But some
of these places were just sitting around going, "Well, we could produce
50 tons but the plan says ten. So we just produce ten." And suddenly
they produced 50. All the efficient factories are starting to expand.
And yeah, there were places operating that by the strict logic of the
market should be closed down. But they kept open, but the cost of that
is tolerable. And you had this experimental process and after 15 years
of this, the plan, which has not changed for 15 years, is so tiny, they
just rip it up and throw it away and no one even notices. It's an
experimental strategy. And it's a strategy that has had a big effect on
the lives of a lot of people. And economists like to talk about economic
growth a lot.

I think there's something more important than that going on. I recognize
that what's happened in China has caused a lot of pain to a lot of
people, including in China. What I argue in the book is that \-- not
that this is a good thing, not that this is not something we should
worry about, but I just list the alternatives, none of which I can see
are any better. And the progress, the fact that this is a temporary
situation, that we are moving in the right direction, that's something I
argue.

But, you know, I can quote all the statistics, but I'm more interested
in the people. So let me just read you the last page of the book and
then \-- I read you the first page. I'll read you the last page. And
then I'm very very happy to take questions.

"In the end, economics is about people, something that economists have
done a very bad job at explaining. An economic growth is about a better
life for individuals, more choice, less fear, less toil and hardship.
Like other economists, I believe that sweatshops are better than the
alternatives, without a doubt better than starvation under the Great
Leap Forward or life in modern North Korea. But if I did not also
believe they were a step to something better I would not be such an
enthusiastic supporter of China's reforms.

"And that's why I was cheered by the latest news from China. The wealth
hasn't been evenly spread. But it is slowly seeping inland from the Gold
Coast of Shanghai and Shenzhen. Between 1978 and 1995, two thirds of
China's provinces grew faster than any country anywhere in the world.
Most importantly, the people of China are feeling the difference. After
years of paying low wages because the supply of migrant labor from China
seemed unlimited, factories on the Gold Coast are starting to run out of
willing workers. Foreign-owned factories pay a bit more. They enjoy
easier recruitment, lower turnover. But wages will have to rise,
conditions will have to improve, because inland China is catching up.

"In 2003, Yang Li did what many Chinese workers have done. She left home
to work in a sweatshop in the Pearl River Delta. A month later, after
working 13-hour shifts, she decided to go home and start her own
business, a hair salon. 'Every day at the factory was just work, work,'
she says. 'My life here is comfortable.' Yang Li's parents had to
survive the Cultural Revolution. Her grandparents had to survive the
Great Leap Forward. But Yang Li has real choices. And she lives in a
country where those choices mean something for her quality of life. She
tried factory work. She realized it wasn't for her. Now she says, 'I can
close the salon whenever I want.' Economics is about Yang Li's choice."

Thank you very much.

\[applause\]

Now, we have time for questions. I'd be very delighted to take some.

Male Speaker:

Thank you Tim. First of all, you realize you're confounding the issue
with your facts and logic.

\[laughter\]

Were you aware of Michael Pollan's book, "The Omnivore's Dilemma?"

Tim Harford:

I've heard it; I haven't read it, yeah.

Male Speaker:

He actually brings up a classic bait and switch, where ethanol and corn
\-- there are hidden costs in growing corn. It takes barrels and barrels
of oil to produce corn, and that's a classic bait and switch, and if you
could speak about that...

Tim Harford:

Yeah, I think this is important. It's very easy for us, when we're
facing, say, environmental problem, to try and legislate a solution. So
we say, "Okay we'd like some subsidies for corn farmers and then, well,
hang on, you can subsidize corn farmers so you can grown biofuels, but
how much energy does it take to grow the corn? Well, hang on, why don't
we just import the sugar from Brazil? That's a much much cheaper, much
more effective way of producing ethanol, rather than producing it from
corn. Well, no, we can't do that because we'd have tariffs. We don't
want Brazilian sugar because \-- well, I don't know why we \-- we don't
want Brazilian sugar because we want to favor a small number of very
rich men in Florida, and the rest of us want to pay a lot of money for
our candy."

Now, you know, I don't know why that works but \-- actually I do, but
that's another subject. And we push and pull, and tax breaks for these
guys, and some of it may work and some of it may not. But I know what
will work, which is a tax on gasoline, a tax on crude oil. And best of
all, if you're worried about climate change, which is I think what's
behind a lot of this, a tax on emitting carbon. You have a tax on
emitting carbon, okay? Now, all of us, at that point \-- I suspect this
is not exactly how the tax would work, but if we had a tax on emitting
carbon, all of us would be paying for breathing. You know, we're
emitting carbon dioxide, we're contributing to climate change, we should
pay the tax, okay? But I can guarantee that every single one of us would
say, "Okay, I'll pay," because that's a very high-value use of carbon
dioxide.

\[laughter\]

And you know, a lot of what we use carbon dioxide for, a lot of the
by-products of carbon dioxide are very very valuable, and we would pay
the tax. And by the way, when we pay the tax the money isn't wasted.
This is money we could use to pay off the debt or it could be used to
reduce income tax. I never really understood why we're so keen to tax
people for doing good things like making money, and we don't want to tax
people for bad things like clogging up the roads and burning energy. I
don't know why that \-- but that's the way it works, too. At least
that's the way it works in the States.

If you give people that signal, then to use a terrible bit of jargon,
the low-hanging fruit gets picked, that we could make the cars more
efficient. That's easy. We could make one trip instead of two trips.
Easy. We could insulate our houses. Easy. Maybe what happens is we see
some new sources of fuel. I suspect a lot of it would just be plain
simple energy conservation, but we keep the choices with individuals. Is
it important for me, is this important for my lifestyle, do I value
this, is this important for my business or for the pleasure I take in
just being alive, to pay this tax? If so, I pay it. But if not, I don't
pay it. And that is going to work a lot better than regulatory measures
to push and pull certain special interests. Thanks for the question.
There was a question right over here.

Female Speaker:

I have two.

Tim Harford:

Could we have one and then we'll come back for the second one if there's
time?

Female Speaker:

In reality, what percentage of factory workers can actually accumulate
capital \[inaudible\] small business owners, and how many small business
owners can the economy actually support? And the second question is, the
ecological impact of the region \-- you know, the inland growth of
factories, and how that affects anything?

Tim Harford:

Okay so, you've cheated and asked two questions, but they're good
questions. That's fine. Okay. On the ecological impact, the ecological
impact of China's growth so far has been dramatically positive. It won't
be forever. The reason it's been positive is because under Mao you had
unbelievably wasteful uses of energy. So you know your industrial
program is, take good steel, melt it down in your back garden using a
coal-fired furnace with no filters to make bad steel, which is then
useless. Repeat until necessary, because that's what Mao tells you to
do. Now, you can get rid of that and grow your economy and emit less
pollution. That's easy, so we've had this one off \-- in the 1990s, big
fall in the emission of carbon dioxide from China, big fall in urban air
pollution, which I document in the book. We're not going to have that
again. For the next 15, 20 years, China's rise is going to have an
environmental impact for sure.

Now, historically what we have always seen is that from the pollutants
\-- whenever a country gets rich it is able to cut down on the
pollutants that really matter to our quality of life, not by magic, by
legislation, but by legislation that is demanded in a rich country. You
know how the \-- waterborne diseases, pesticides in the U.S., we had
Carson's "Silent Spring," all this stuff sort of damped down. We have
much, much cleaner air now. The same thing in the U.K., thousands of
people just dying of smog pollution in London in the 1950s, just changed
the law because we were rich, because we could afford to do it. The
Chinese when they get rich will also do the same thing.

So the other question is about, sure how many people have these choices?
Well, I don't know the answer to that; I don't know the numbers. What I
do know is where they came from, terrible poverty, terrible oppression,
and we see the sweatshops in the United Kingdom, first of all, world
leaders in sweatshops \-- we got there first \-- in the United States.
Then we see them in Japan. Then we see them in Taiwan. Then we see them
in Korea. And they all go away when the country gets rich. They will go
\-- well, we don't have people working for 50 cents a day, we don't have
people working for 50 cents a day. This is a country that is getting
richer.

So behind the question is, could you somehow legislate to make these
sweatshops go away? And I think the answer is, only to a limited extent.
I mean, we could legislate "I don't think I was paid enough money for my
book." And we could legislate that I should be paid a million dollars
for my next book. And we know what will happen. I will not get a book
deal. Yeah? Now, to a certain extent, you can legislate to improve
conditions in a very poor country like China. At a certain point, that
legislation becomes very counterproductive, because no one wants to go
to China anymore. We could say, "All Chinese workers have to be paid
\$10 an hour," and I guarantee you that all the money would leave China
and they would all be paid nothing.

So, and finally I guess I point to the poorest place in the word, which
is Africa. There are no sweatshops in Africa. I visit Africa. I talk
about the African experience in my book. There is no globalization
Africa, there are no sweatshops, no one's interested. It's just not
worth \-- even if they work for nothing, it is not worth anybody's while
to do business with Africa, which sounds incredibly harsh. That's just a
description of the reality. So I look forward to the day when African
governments are able to provide an environment where we get sweatshops
in Africa, not because I want to sweatshops, because they are the step
on the ladder. And I don't think there's ever been a country that has
become rich without going through that process first. These are serious
and good questions. Thank you. Yes.

Female Speaker:

I'd love to hear your thoughts on health insurance and health coverage
in the U.S. I know in your book you talk about the Singapore model?

Tim Harford:

Yeah.

Female Speaker:

I just wondered if you had any more recent thoughts on \[inaudible\].

Tim Harford:

Yeah, I mean, the thing that really strikes me about health insurance
here is we have too much and too little. Okay? So we have too much
because we're insured \-- if we have insurance we're insured for
everything. And this is a little bit like having insurance for \--you
know, your auto insurance, you want insurance against theft, right?
Insurance against crashing the car? Do you want insurance against having
to fill your tank up? Insurance against replacing your tires? These are
not things that we want insurance for because these are totally
predictable expenses.

And if you imagine a world where you had insurance to fill up your tank,
well then you're not paying the cost of filling up your tank, so what do
you think the experience of going to a gas station's going to be like?
You're going to drive in, the valet is going to take your keys, you're
going to sit down in a nice cushy waiting room. You'll be fed coffee.
This is going to be like going to the doctor, right? You'll get nice
free coffee and magazines to read and all this glossy stuff while they
fill your car up, and they'll charge you \$15 a gallon for the gasoline,
but you don't care because you're not paying the bill. This is not --
this is not a way to encourage price sensitivity and sensitivity to cost
effectiveness. So we don't want insurance for that. I think we should be
paying for that out of our own pocket.

And then you have this problem that you have 45 million Americans that
don't have insurance at all. And I think that those two problems are
linked. So, I think that it's a very hard problem. This is a very hard
problem, lots and lots of ways \-- reasons why the market for health
care doesn't work very well, but I think that we could make it work
better. I think it needs some government subsidy, a good chunk of
redistribution to make sure the people at the bottom have enough to pay
for basic health care costs. Everybody should have insurance for the
lung transplant, you know, the serious costs. And I don't think anybody
should have insurance for a regular check-up. People are prepared to
pay, you know? You don't need insurance to go to Whole Foods or Safeway
and buy food, you know; you just do it, don't need insurance, you do it.
I think the same should be true with these regular predictable expenses.
So, that's my suggestion. But with humility, because economists don't
understand the economy.

\[laugher\]

Question here.

Male Speaker:

In the \[inaudible\] it said why you can never get a decent used car, so
I was wondering if \[inadible\]?

Tim Harford:

Could I please explain why you can't get a decent used car? Actually,
somebody spoke to me just before the speech and she said, "Well, I don't
know what an economist thinks, but as far as I'm concerned you can't buy
a decent used car because anybody who has a decent used car won't sell
it."

\[laughter\]

And she's completely right. But actually what's behind the process is
something that an economist calls adverse selection.

So the idea is it would be fine, if like Andy, our hapless playboy with
the medallion \-- if you could prove your quality to the world then
you'd sell a good used car, sure you would, because you'd get a good
price. And you'd sell a bad used car as well and you'd get a bad price.
And they would both be a fair price. The problem that we have \-- I
mean, can you imagine \-- restaurants as an analogy: you know, you can
go and eat at a really fancy restaurant or you can go and eat at
McDonald's. You've got the choice because you can see the quality. You
know what you're paying for.

But with used cars, the buyer is not sure of the quality. The seller
does know the quality. The seller would love to convince the buyer that
it's a great car. But the seller is not able to prove it. And if the
seller's not able to prove it, the seller won't get a good price. And if
the seller doesn't get a good price, the seller will hold onto the car.
So if you want to buy a good used car, you find somebody who you trust a
lot, or you find someone who is moving to a different country or
something or for some reason actually has some, has a real reason to
sell the car, other than just it's a terrible car. That's how you buy a
good used car.

The interesting thing for me is that \-- actually this applies not just
to used cars, but it applies to all kinds of \-- parts of the economy.
So it applies to health care insurance; I write about in the book. It
also applies to getting a job. Let's say you're smart, hardworking,
honest, and you have no way of demonstrating these qualities to an
employer. Well, in that case, maybe you set up your own business. Let's
say on the other hand you're stupid, lazy, dumb. Not you, sir, but you
know, people you may know. Well, they have no way \-- the employer has
no way of determining, you know, whether you're good or not. So the good
people go off and be entrepreneurs, and the idiots get hired by
bureaucracies, which I think explains a great deal of our daily
experience.

\[laughter\]

So, yeah, yeah, I'm exaggerating, but there is something of this in the
used car market, something of this in personnel economics, and something
of this in health insurance as well. Thank you.

I think we have time for one more, maybe two more questions, quick ones.
So, sir, and then \-- yeah.

Male Speaker:

What about behavioral economics? For example, the efficient market
theory \-- Warren Buffett, when he was asked, "Is the market efficient?"
he said, "Some of the time it is," and we have like stock market
bubbles, for example, \[inaudible\].

Tim Harford:

Yeah, I mean, the market's pretty efficient. I mean, it's not efficient,
but good luck beating it. Buffett does it, but others don't. But yeah,
you're right, there's a big literature now, which getting a lot of
press, on behavior economics, that comes up with all kinds of examples
as to when people do not behave the way that economists predict they
should behave. I think this is very interesting literature. It gets a
lot of coverage, because people like economists to be wrong about stuff.

I question some of it, though. You have to get the next book for my take
on some of this, but here's an example. The behavioral economics
literature says if you're hiring somebody, there's no way that you would
pay them more than the going rate. You'd pay them the market rate. Why
would you pay them extra? And if you do happen to get a job, paid, you
know, with a really generous salary, much more than you really need to
do the job, then, you know, you would just goof off the same as anyone
else and, you know, you'd just take the money, and what suckers they
were for paying you. That's the standard economic view.

Now the more common sense, intuitive, behavioral economic, psychological
view is, "No. If someone is paid more than they need to be paid, they
will be grateful and they will work harder." This is called the gift
exchange theory. And there's some great lab work that shows that this is
how people behave. Employers often offer higher wages than they need to,
and workers in gratitude work harder than they need to, and so actually
it turns out in retrospect to be profit maximizing for the employers,
and it all makes sense.

The trouble is these lab experiments \-- they don't actually involve
anybody doing any work. I mean when I say "employer" I mean "employer."
When I say "employee" I mean "employee." And these are people just
ticking boxes and saying, "Yeah, I'll pay the employee \$15 an hour."
And that costs them some money, though in the experiment there are some
financial incentives. And then the employee gets a thing and it says,
"Well, the market-clearing wage is \$10 an hour, but you are going to be
paid \$15 an hour, and what did you want to do?" And you go, "Oh, that's
generous. I will work hard." And they tick a box.

\[laughter\]

They don't work; just take a box. It costs them some money. They have to
pay money, but that's what they do.

So an economist at Chicago called John List \-- I'm a big fan of his \--
said, "Okay, fine, that's very interesting. I wonder what happens
really." And what he did was he piggybacked on a temping agency, and
they were hiring people to go door-stepping for charity and door-to-door
trying to solicit donations, and also another group of people who were
doing data entry in the library. And so for each of these groups they
were offered \$8 an hour, \$12 an hour, whatever, and they agreed. And
then for half of them, chosen at random, he would go in and say, "Great
news, you agreed to do this for \$10 an hour but actually I'm going to
pay you \$15 an hour. Now off you go and good luck."

And what he found was people do, in gratitude presumably, work harder
when they received the \$15 an hour. Until lunch.

\[laughter\]

The effect lasts 90 minutes for data entry clerks, and it lasts until
lunch on day one for charity door-steppers. And then they go back to
being the stupid, work-shy, goofing off employees that, you know, you
would have expected. And the effect just evaporates.

So behavior in economics is interesting. I'm sure that some of the
results that they find are real. I'm also sure that some of the results
they find are not real. And there is quite an interesting
counter-literature of things that you see in the laboratory where when
you actually go into the real world and try and replicate it, it turns
out that people are a little bit closer to the rational economic man
than we really like to think.

I'm afraid I talked too long, and I don't have time for the last
question. So, thank you very much. You've been a great audience. I
appreciate it.

\[applause\]