Tim Harford's Blog, page 125

Pound for pound 99p is worth every penny

‘Supermarkets, and also chemist chains, have started to rely on distinctive red stickers and very clear £1 or £2 prices in a bid to attract shoppers on a budget, as well as those consumers fed up trying to work out complex deals. One-in-four of all products sold by Asda is now either £1 or £2.’

The Daily Telegraph, June 5

What’s their game, eh?

Always the right question when dealing with supermarkets. They know what they’re doing when it comes to slapping a distinctive red sticker on a pack of chicken wings.

I thought prices always ended in 99p. Is this just an excuse to fatten their margins?

I think it’s a safe bet that most self-respecting retailers will charge as much as they can get away with, but that with every price increase they will expect to lose some customers. A key skill for those who set prices is to pick the perfect compromise between losing margins and losing customers.



And yet the perfect point often seems to end in 99p.

Indeed it does. There are three main theories as to why it makes sense to end prices with a “9”. The first is an explanation favoured by economists because it works even in a perfectly rational universe. Product prices with 99p endings are difficult to pay for with exact money; the shop assistant will almost always have to make change.

Why is that a good thing?

Because it means the sale must be recorded to open the register. The shop assistant can’t just hand over the product and trouser the cash.



Cunning. That’s not really why product prices end in 99p, though, is it?

Probably not – perhaps it once was, but in a world of credit cards, e-commerce and self-checkout, the story does not really fit. We need to look for a psychological explanation.

Not very true to the spirit of economics.

On the contrary, behavioural economics is très chic these days. And there are two theories at play here. The first, called the “left digit effect”, suggests that consumers can’t be bothered to read all the way to the end of a price. “£79.99” reads as “70-something pounds”. The alternative theory is that a price ending in 99p is simply a shorthand for good value.



Which explanation is correct?

The Telegraph’s story makes sense if the “shorthand” theory is correct. It’s easy to imagine that the shorthand for a bargain was once a 99p price, but now it’s a nice round number thanks to the pound shops.

It may be easy to imagine, but is it true?

Two business school professors, Eric T. Anderson and Duncan Simester, published the results of some field experiments in 2003 in which they had teamed up with a mail order company and manipulated the advertised prices. A $59 dress, for instance, would sometimes be priced at $54 or $64 instead. Mr Anderson and Mr Simester found that prices ending in “9” were more likely to find buyers, relative to the prices ending in “4”. This was always true but particularly if the product in question was something new. That last fact does suggest that the “9” was conveying overtones about an unfamiliar product. It’s some support for the “shorthand” theory. But there’s a catch.

Which is?

Several studies support the more intuitive idea that consumers simply ignore the pennies and round down. Whatever the reason, the fact is that 99p endings are extraordinarily common and they appear to attract consumers.



But The Telegraph says that many products are now rounded to the nearest pound.

Not quite. The Telegraph says that 16 per cent of items sold by Tesco, Sainsbury’s or Asda are priced at £1 or £2. It doesn’t reveal the pricing of the other 84 per cent. There’s no contradiction between that statistic and the typical finding in the marketing literature, which is that prices ending in a “9” make up between one-third and two-thirds of all products on sale and most of the other products have prices ending in “0” or “5”.

So has The Telegraph spotted a non-existent trend?

That’s harsh. There might be a trend, but this fundamental rule of marketing hasn’t changed. I spotted a similar story in a couple of other newspapers. The Daily Mail headline was “Asda axes the 99p price ploy”, while the Sunday Times went for “Stores abandon 99p sales ploy”. They were published in May 2000 and October 1995. We’ve been here before.

Also published at ft.com.

“Buy British” drive takes a dead-end turn

‘The Foreign and Commonwealth Office has been criticised for failing to buy British-made cars for its major embassies … Only three of 17 cars in the Washington and Brussels embassies were made in Britain’ Financial Times, May 29

Gosh. So David Cameron should always travel in the back seat of a Land Rover on overseas visits?

It seems so. Support the British car industry and all that.

We haven’t had a British car industry since the Austin Allegro.

Not true, the industry is doing rather well at the moment.

If it’s all going so well, who cares what the prime minister drives?

Lord Jones, former trade minister, does. He says the whole business is an outrage. Still, it’s odd. I cannot imagine the Germans worry too much about Angela Merkel’s choice of official car; the Germans have a bit more confidence in their car industry than we do.

There’s a reason for that.

Maybe so. I think Lord Jones would like us to avoid self-inflicted wounds. If Mr Cameron rides in a foreign marque, perhaps it suggests that no matter how hard we try, the British are unable to make a car worthy of a prime minister.

It’s not just about avoiding embarrassment – there’s free advertising, too.

Give me a break. People care what Lewis Hamilton drives but no one ever bought a car because they saw William Hague being driven around in one.

Then there is the direct support of the car industry. Douglas Alexander, the shadow foreign secretary, says we should be doing everything we can to support great British companies. Perhaps we should get serious here; I’ve heard it said that the Italians spend absolutely colossal sums on chauffeur-driven cars.

I’ve heard that said, too, including by Italian officials, but such tales turn out to be wildly exaggerated, partly because “official government cars” is a category that turns out to include the local council minibus.

Are you saying that government purchases can’t stimulate British industries?

In aggregate they can deliver a classic Keynesian stimulus, but that is not what we’re talking about, is it? What Mr Alexander seems to want, if he wants anything more than a sound bite, are government purchases as a form of industrial policy. The idea is that the right purchases can help to support fledgling innovative industries. It is not impossible to get this right – the US military effectively created the internet and one would need an awful lot of failures to outweigh that one achievement. But it is tricky. After all, if we’re talking about products that the government will purchase but the private sector won’t touch, I’d want a pretty good explanation of why that was supposed to be a good idea.

The government could at least encourage everyone else to “buy British”.

An intriguing concept. But I don’t understand how this would support the British economy at all. Imagine the whole country collectively agreed not to buy fancy foreign muck unless it was at least 20 per cent cheaper than a comparable British product. Imports would surely take a beating. Assuming the rest of the world simply ignored our silly British ways and did not retaliate, exports would – at first – be unaffected.

Isn’t reducing imports exactly the desired effect?

But such an imbalance of exports and imports would not last. British exporters, flush with the foreign currency they had earned, would seek to spend it, or to find somebody else who wanted it. No one holding pounds would be terribly interested – everyone has, after all, agreed not to buy foreign products unless they are particularly cheap. The only way to get pounds in exchange for dollars, euros and yen would be to offer a premium.

In other words the value of the pound would have to rise.

Of course. And after it had risen a respectable amount, those foreign products would be cheap enough to buy again. Imports would recover.And exports would suffer from the stronger pound.They would and the eventual result would be that we would still buy some foreign products. To the extent that British domestic substitutes flourished, there would be an equal and opposite effect on British export industries.

So there’s no point in a “Buy British” campaign?

You might just as well run a “screw British exporters” campaign.

Beware email’s cunning little ways

It has many key attributes but email is still inferior to pen and paper

I recently heard a question that brought me up short: what does email want? The questioner was Tom Chatfield, author of How to Thrive in the Digital Age, although the question itself draws some inspiration from an older philosopher of technology, Kevin Kelly. Of course, email does not literally want anything at all, but Chatfield’s question was designed to provoke some reflection about the logic of email – a logic that we have come to take for granted.

So let’s list some key attributes of email. First, email, like the old-fashioned stuff that comes through the letter-box, is an equal-opportunity system. Anyone with your address can reach you from anywhere in the world. Most email programs will try to catch outright junk but otherwise treat all incoming mail in the same way. Facebook, for example, behaves very differently.

Second, email programs do, however, have their own priorities: they venerate whatever is new, placing it at the top of your inbox, highlighting it, and if you are not careful, interrupting you to announce its arrival.

Third, emails don’t expire. I never questioned this until I began to use Twitter, a service that simply assumes its users will not bother to read anything that isn’t up to date.

Fourth, emails provide a written record. This can be very useful (and occasionally dangerous) but it encourages your inbox to become your “To Do” list. If someone asks me to do something, or the idea pops into my head that something should be done, I will often write it down. But email is “performative” – it constitutes its own written reminder.

Email is also a system, and we are locked into it just as we are locked into the Qwerty keyboard, 240-volt mains electricity, or the rather unhygienic convention of shaking hands. It is possible for an individual to opt out of such systems, but usually easier to adapt yourself than to adapt the system.

Finally, because email is very cheap and easy to send, there’s a lot of it about. You may have noticed.

None of this is dramatic news, but I found thinking about it in this way profoundly helpful. Every technology has its own logic. Facebook “wants” us to log in a lot and to interact with each other – hence the ability to “like” posts, to comment, to “like” comments, and the constant stream of notifications about all of this. This is sinister, but less insidious because it is so brazen. Facebook the technology has metaphorical wants that reflect the entirely non-metaphorical strategy of Facebook the company.

Email, on the other hand, wasn’t designed with the conscious aim of transferring your “To Do” list to the inbox. That’s just the way things tend to gravitate. And whether you are using Facebook or email or any other technology, it’s a good idea to do so with eyes wide open. As Chatfield argues in his book, many people are now connected to the internet more than half of their waking hours, thanks to the spread of computers, tablets and powerful smartphones. This is not necessarily a bad thing – but it is not a good thing either.

Many of us wage a constant battle against distraction. Rather fewer of us, I suspect, make very careful, conscious choices about when to be online and when not to be. This is a shame, because it doesn’t take much introspection to realise that some things are simply much easier to do when online, while other things are much easier to do when offline. That difference calls for a deliberate exercise of choice; most of us allow circumstances to make the choice for us.

After all, we know what Facebook wants and what email wants. But what do that trusty pairing of a pen and a sheet of blank paper want? They want you to think for yourself, and to make your mark.

Also published at ft.com.

An education on social mobility by degrees

‘Social mobility is about creating a truly level playing field and a fair race. That is why, for example, the Coalition government is encouraging universities to recruit on the basis of academic potential, on the basis of an ability to excel, not purely on previous attainment.’

Nick Clegg, May 22

Why does Mr Clegg want to lean on Universities?

Because he seems to believe that armed with an expensive enough education, a mediocrity can rise to the very top of British public life.

Nick Clegg should know all about that.

Harsh. It’s not his fault that he was educated at one of the poshest schools in the country.

Fair enough. What do the punters make of the idea?

Curiously enough, the private school sector doesn’t seem to make much of it. Tim Hands, a leading headmaster in the private sector, accused Mr Clegg of using “communist tactics” in trying to rig the market for university education after the event.

Daft to use university admissions to compensate for existing failures in the school system.

I think Nick Clegg and Tim Hands both have a point. It is easy, and lazy, to blame Oxford and Cambridge for society’s ills: David Cameron has done it, Gordon Brown loved to do it, and when an MP such as David Lammy says – as he did in 2010 – that getting a place at Oxford or Cambridge “remains a matter of being white, middle class and southern”, the dons are not terribly deft at defending themselves. It is far riskier to blame schools. Attacking university admissions is just good politics, even if the problems really lie in the school system.

I can see that – but are the attacks justified?

Less than you might think. Mr Lammy’s assault on Oxford was carefully phrased and many people, including Mr Cameron, inferred from his remarks that just a single black student was admitted to Oxford in 2009, which isn’t true. What is true is that not many black students are admitted to Oxford and Cambridge; but it is also true that not many black students get the A-level results that successful applicants usually boast. As far as I have been able to work out there is no serious evidence of discrimination but neither is there any evidence that Oxford has been bending over backwards to admit black applicants.



And this is the kind of thing that Mr Clegg would like to see.

Mr Clegg talked about class, not race. But he said, correctly, that state school applicants tend to over perform once selected for university, relative to public school kids. That implies that if universities lowered the bar for state school applicants and raised it for public school kids, we would expect more first-class degrees in the end.



Communism!

Actually, there is every reason to believe that such a tweak might make the “market” for education work better. Put it this way, if you had to race against Usain Bolt in the 100 metres, neither you nor Usain Bolt are likely to regard it as a serious contest. He wins, you lose, neither of you need put any effort. But if Mr Bolt had to give you a 35 metre start, suddenly there is a real competition and we might expect both of you to run harder. Positive discrimination based on “contextual” variables – probably an applicant’s school, postcode and family circumstances – might well light a fire under everybody.

Don’t universities already do this?

Yes. Mr Clegg wants them to do more, it seems.

But isn’t this undermining the very idea of academic excellence?

It all depends on what you want from your universities. The implicit model of people who complain about Mr Clegg’s proposals seems to be that university is a kind of prize for the best performance so far – along the same theory that the Wimbledon Girls’ title is awarded to the player who beats her opponents, rather than the player regarded as most likely to win the Ladies’ title in future. But that is a little hard to justify. More reasonable alternatives are that university places should go to those most likely to excel in the future, or to those most likely to benefit from the education.

And meanwhile our political masters just need to sort out the school system?



Yes. I’ll give them six months to get that done.

Also published at ft.com.

Congestion tax is the way to go

Subjecting an undertaxed activity to duties might provide a solution to a thorny problem

Imagine yourself to be a key adviser to the chancellor, George Osborne. Clearly, keeping tax revenue buoyant is a thorny problem both in the short term – because the deficit is colossal and the tax base has shrunk – and in the long term, because there will be intense pressures to spend money both on an ageing population and as interest on a growing public debt.

How to do it? Well, here is a thought. There is an economic activity that is currently scarcely taxed. Unlike buying food or burning domestic fuel, this activity consumes proportionately more of the income of the middle class and the rich than of the poor, so taxing it would be progressive. The activity is widespread, meaning that substantial revenues could be raised. Unlike high-frequency trading, or declaring corporate profits, the activity is price inelastic – meaning that when taxed it does not evaporate.

You might think that the case for a tax on this activity is so compelling as to be self-recommending. Let me tilt the scales a little more and point out that the activity generates a vast “negative externality”, which means that it is an activity that imposes a cost on people who get no say in whether the activity happens or not (graffiti spraying is one example of this). Ever since the Cambridge professor Arthur Pigou analysed the problem in 1920, most economists have believed that taxing negative externalities is often an excellent idea.

The activity I have in mind is driving in a congested area. As a driver myself, I know that drivers are subject to hefty taxes: vehicle excise duty, fuel duty and VAT on fuel add up to £38bn, about 7 per cent of all tax revenues. Fuel taxes alone average five or six pence per kilometre driven, according to Fuel for Thought, a recent study conducted by the Institute for Fiscal Studies (IFS) and paid for by the RAC Foundation. But as the IFS goes on to point out, the actual cost imposed (as a total) on all other motorists when a driver thickens the traffic in rush hour approaches £2.50 per kilometre, almost 50 times the fuel tax.

My environmentalist friends tend to dislike cars in general, and big, bulky, dangerous cars in particular. I don’t like lorries dressed up as cars either, but I am forced to acknowledge that the costs we drivers impose on society accrue less from what we drive and far more from when and where we drive it. For example, an SUV driven in rural Wales at 10pm on a Sunday imposes far less social cost than a Prius driven into central London at eight o’clock on a Tuesday morning.

What we drive matters far less than one might think, partly because engines are much cleaner than they used to be and, therefore, emissions of important pollutants (with the key exception of carbon dioxide) have fallen precipitously over the past two decades. No, the real problem with cars is that they get in the way of each other, and a super-efficient car gets in the way of other cars just as much as the most ridiculous Chelsea tractor.

As the IFS research makes clear, the curious upshot of the way that motorists are taxed in the United Kingdom is that we probably pay too little tax in total, despite the fact that half of all miles driven are taxed too much relative to the social costs involved, and another quarter or so are taxed at about the right level. It’s the remaining quarter of miles driven – on the M6 and M25 at rush hour, around the south-east, and in city centres around the country – which are undertaxed, many by a factor of 10 or more.

Fuel duty should be cut from almost 58p a litre to about 20p a litre, and motorists should instead be taxed through a system of congestion charging based on location and time of day. The economic logic is solid; the political calculus, of course, points in another direction.

Also published at ft.com.

A questionable move by Starbucks

Big organisations should test out their new policies whenever they can

An awkward moment recently: I ordered an espresso from Starbucks and the barista, a young fellow with fashionably chaotic blond hair, asked my name. I’d heard that this is the new policy at Starbucks but, not being a regular, I’d forgotten. None of your business, I thought, and fumbling for something to say instead of my name, I said, “I suppose you’re getting annoyed having to ask people their names.”

The young man’s face darkened perceptibly. “A lot of things annoy me,” he said, “but if you don’t want to tell me your name, that’s fine.” His colleague proceeded to pull me a deeply uninspiring espresso, which I felt that I rather deserved.

I took the coffee and sat awkwardly in the corner, avoiding eye contact with the staff and vowing to steer clear of Starbucks in future. One bad espresso just isn’t worth the social discomfort.

If my Starbucks experience is typical, the policy of requesting names is going to prove very ill-judged. But perhaps my Starbucks experience isn’t typical; I’m not a regular customer, after all. Perhaps the regulars love it. Who can say? But it’s worth asking: where does this kind of idea come from in a large organisation? How is it tested? Under what circumstances might it be reversed?

The question of the U-turn is a particularly vexed one. Politicians find it especially painful, perhaps because lazy journalists find U-turns easy to criticise: either the old policy was wrong or the new one is wrong, and either way, the politician can be blamed with no need for further investigation. Just think of the plight of Theresa May, the Home Secretary: she demanded tight border controls, but lacked the personnel to carry out the new regime efficiently. She has painted herself quite methodically into a policy corner.

Any high-profile policy runs a similar risk: if it doesn’t work, it is hard to perform an elegant about-face. This is why I think Starbucks should have conducted a randomised trial to test the question: pick 100 branches, then randomly select half of them to receive instructions and training videos, and see whether there was any effect on staff morale, customer satisfaction or sales.

It wouldn’t have been a perfect double-blind trial, but it would have been revealing. I can confidently assert that if we were talking about Amazon, it would be inconceivable that the company would change how it interacted with a customer without testing the idea with such a trial.

As it happens, Starbucks wasn’t quite as clueless about this as I might have guessed. (I suppose I shouldn’t be surprised that these people know something about selling coffee.) I am told the idea emerged after listening to customers in focus groups, who pointed out that they liked the fact that in their local branch, the staff knew who they were. (I think the Starbucks press officer telling me about the focus groups was about to say that the customers didn’t mention the coffee as a reason to go to Starbucks, but thought better of it. Perhaps I imagined that.)

Next came informal testing: staff at some Starbucks branches – for instance, in Cambridge and in the new Westfield shopping centre in east London – had already been doing this for a few months. An internal “training” video shows these staff enthusing about the idea and entertains no possibility of awkwardness.

Perhaps my cynicism is misplaced. Starbucks is trying to keep regular customers happy; there is no reason to expect sceptics to like it any more than we should expect atheists to be impressed by a religious sermon. Intuition can be misleading in such matters – all the more reason why big organisations should test out their new policies whenever they can.

Also published at ft.com.

The weighty problem of road and fat taxes

‘The UK needs to impose a “fat tax” of at least 20 per cent on unhealthy foods to have any significant impact on rising levels of obesity.’

Financial Times, May 15

I thought it was supposed to  be  a  10  per  cent  fat  tax?

That was the British Journal of Nutrition in December. This is the British Medical Journal, this week. Do try to keep up.

Either way, would it work?

It all depends on what you mean by “work”. Inasmuch as anything can be said to be certain in social science, a tax on some foods would certainly reduce the consumption of those foods, just as surely as cigarette taxes have reduced the consumption of cigarettes. Whether that reduction is desirable is another question.

You’re saying obesity is a good thing?

No, but ice cream is a good thing and obesity is a potential unwanted side-effect of ice cream. If you tax ice cream, people will be less obese, which is good, but they will also be enjoying less ice cream, which is bad.

Which is sophistry.

Not at all. Ice cream versus obesity is the key imponderable about the whole policy. I find there’s a striking contrast with the idea of a congestion-based road tax, as advanced by the Institute for Fiscal Studies this week. The case for the congestion tax is pretty unanswerable: every driver who joins rush-hour traffic is making it worse for every other driver. If we could all get together and agree to drive a bit less, we’d all be better off because when we did drive, our journeys would be quicker and less uncertain. But we can’t enforce that kind of agreement, hence the need for the tax.

It’s all the same: obesity is bad and traffic is bad. I’m not sure why you’re trying to make a distinction.

It’s not the same at all. Each driver causes a problem for others and she can’t be expected to take that into account. But an ice cream lover is causing a problem only for himself. It remains to be demonstrated that he would find an ice cream tax helpful.

What about the cost to the National Health Service?

That is certainly a consideration, although don’t be too quick to assume there is a net cost. It’s fairly clear that smoking should, on this logic, be subsidised because it tends to kill people, often quite quickly, just as they have finished paying their taxes but before they start to draw their pensions. Perhaps obese people are more costly, but this is a double-edged argument. The Department of Health has published estimates suggesting that obesity and related conditions cost the NHS an extra £2.2bn, a figure that is rising rapidly. What the impact on pension costs might be is not clear.

Why do we tax cigarettes, then?

Partly because they’re a good revenue source, partly because of passive smoking. But I think a key reason is that because nicotine is so addictive, many smokers ardently want to be non-smokers but find it hard to quit. And surely this is the basic idea behind a “fat tax” as well: it is to help weak-willed people do the right thing. The economists Sendhil Mullainathan and Jonathan Gruber put their finger on the key issue about 10 years ago with a clever research paper titled: “Do cigarette taxes make smokers happier?” Which seems to be an important question.

And the answer?

It seems that cigarette taxes do indeed make smokers happier. More specifically, it seems that the reported happiness of people with a propensity to smoke rises in parallel with increasing state cigarette taxes in the US, but not with increases in other taxes. You need to jump through a lot of statistical hoops to reach this conclusion but the research makes a pretty good case. Presumably this is because smokers often do have self-control problems and the fact that the tax helps some of them to quit outweighs the fact that the tax also makes the non-quitters poorer.

And that’s the case for the fat tax in a nutshell, isn’t it?

It might be, if the research paper had instead been called: “Do fat taxes make fat people happier?” I hope and trust that someone has examined that question but I am not aware of any attempts to do so.

George Osborne is taxing pasties – perhaps he’s ahead of the curve.

I am sure he eagerly awaits his plaudits from the BMJ.

Also published at ft.com.

That’s a lot of Wonga for a business loan!

‘Wonga, the online lender that charges annual interest rates of 4,000 per cent on short-term loans, has launched a service for cash-strapped small businesses that offers to make credit available in as little as 15 minutes.’

Financial Times, May 7

Wow.

The chief executive of Wonga describes it as a “premium service”.



I’ll say. Are they planning to charge 4,000 per cent to small businesses, too?

Apparently not. Their maximum rate is 2 per cent a week, which sounds modest but compounds to about 280 per cent a year. Sharlene Goff, the FT’s retail banking correspondent, reckoned that the largest loan (£10,000) for the longest term (a year) would rack up almost £11,000 in charges. All of this is some way short of 4,000 per cent but it’s not cheap.

How can they possibly get away with that?

You mean, why doesn’t someone put them in prison?



Well – yes, why not?

Because there are no caps on lending rates in the UK. If you treat people fairly and are transparent about your rates, you can charge whatever you like.



That raises another question: how can they possibly find anybody willing to pay that kind of money?

Assuming they do – which remains to be seen – I think there are two possible explanations. The first is that customers are idiots. The second is that some customers badly need the money and have no alternative funders.

Start with hypothesis one.

The thing that makes me nervous here is the fact that the newspaper stories all report that Wonga will release funds in as little as 15 minutes. Surely this is only a selling point for the extremely impulsive or the extremely shortsighted. Most small businesses would be just fine with a lender who took a few days to release funds. We also know, thanks to research from economists such as Annamaria Lusardi and Jonathan Zinman, that a lot of people are financially illiterate and have poor intuitions about the costs of compound interest. You might hope that most company directors would know better, but presumably there will be some exceptions to that rule.

And what about the alternative view: that a loan at an annual interest rate of several hundred per cent or more might be a good business proposition for the borrower?

First, remember that an annual percentage rate might not be the best way to evaluate the cost of a small, short-term loan. If I need to borrow money for a few weeks as a bridging loan, the lender has to bear certain costs and risks – but even a small charge would balloon into a huge annual interest rate because the loan was so brief.

In other words, charges of a few quid might look huge expressed as an APR.

In some circumstances, yes. Remember, if you stumble into an unauthorised overdraft from a high street bank you may end up paying charges of which a payday lender can only dream. I’ve written before about a randomised trial conducted by Dean Karlan, economist, and Mr Zinman on the impacts of loans at 200 per cent APR in South Africa; surprisingly, such loans seem to help borrowers because they allow them to buy work clothes or transport and so actually get or keep a job. It’s not hard to imagine situations where a few grand for a couple of months could keep afloat a fundamentally sound business with cash-flow problems.

Fair enough, but if there are so many fundamentally sound businesses with cash-flow problems, why aren’t banks lending to them?

You’re assuming that they aren’t and I have to say you may be right. The Bank of England’s latest “Trends in Lending” report finds that the stock of lending to small businesses is shrinking fast.



Perhaps because small businesses are paying off their debts and don’t want to borrow?

That’s logically possible, but the cost of borrowing is also rising. I think it’s safe to say that the banks aren’t keen to lend, either because of their own funding costs or because they are nervous about getting paid back.

So Wonga is filling a market niche?

I think Wonga’s main niche is likely to remain cash-strapped, naive consumers, but the publicity this business-lending launch has earned them will do no harm. I can’t get too excited about payday loans for businesses: I am more worried about the fact that they are a symptom of very tough times.

Also published at ft.com.

Leaders do not need to milk price of pint

A few years ago, José Zapatero, then prime minister of Spain, was asked the price of a cup of coffee in a television interview. His answer, a woeful underestimate, became a minor embarrassment. I know all this because shortly afterwards, he appeared at a session of Congress with my book El Economista Camuflado [The Undercover Economist] under his arm – a book that discusses extensively (some say ad nauseam) the price of a cup of coffee. I was suddenly a prop in a surreal political debate.

Thanks to Nadine Dorries the same argument has popped up closer to home: George Osborne and David Cameron are posh boys, she says, who do not know the price of a pint of milk. To accuse them of knowing nothing of lacto-economics seems odd to me. I do not know whether Mr Cameron knows the price of a pint of milk. I do know that he is posh.

I am doubtful about the idea that there is, somewhere, the Platonic ideal of a pint of milk, whose just price is known by all virtuous people but an eternal mystery to the out-of-touch. The reality, of course, is that a pint of organic Jersey milk from a Hampstead deli is likely to cost more than a quarter of a two-quart bottle from Aldi. You will pay more for a pint delivered to your doorstep than if you take the trouble to drive to the supermarket.

Beyond that, you do not need to be a Tory millionaire not to care about the price of milk. I conducted a little survey. Steering clear of soya, rice and goat’s milk, I checked the price of a single pint of ordinary semi-skimmed. It’s 49p a pint in the Marks and Spencer at the local railway station. It is also 49p a pint at the downtown Sainsbury’s. It is 49p a pint in the Tesco next door.

The financial returns to learning about milk prices seem to be limited. There are people who are so strapped for cash – or perhaps, simply curious – that they will keep track. Many others will not, but that should not disqualify them for high office.

The converse also fails to hold: knowing the price of a pint of milk is no mark of a great leader. Before carrying out my survey, I guessed that the price of a pint of milk was 50p. Perhaps Nadine Dorries thinks that I would make a cracking prime minister. I can assure her I would be a profound disappointment.

Also published at ft.com.

Rules of trading in a POW camp

An economist who was taken prisoner during the second world war observed that market institutions were universal and spontaneous

Robert A. Radford had, in some ways, a perfectly conventional career as an economist. He studied the subject at Cambridge in the late 1930s, before war interrupted, and his civilian working life was spent at the International Monetary Fund. But he also spent half the war in a German prison camp, and on his release wrote an article in the LSE journal Economica.

The “Economic Organisation of a P.O.W. Camp” is a remarkable piece of writing, in which Radford analyses the economic institutions that arose in tough circumstances. Students should read it to learn about monetary economics, and their professors should read it to learn how to write. But Radford himself thought his experiences constituted more than a teachable moment: “the principal significance is sociological.”

First, a word about the basic economic building blocks. Prisoners received some rations from the Germans, but were mostly sustained by parcels of food and cigarettes from the Red Cross. The parcels were standardised – everyone got the same. Occasionally the Red Cross received bumper supplies, or ran short; in those instances everybody enjoyed a surplus or a shortage.

Radford’s first sociological observation was that there was no gift economy in the camp. Everybody started with the same, so what was the point? But trading quickly developed, because while prisoners had equal means they did not have identical preferences – the Sikhs sold their beef rations, the French were desperate for coffee. So middlemen who could speak Urdu or bribe a guard to let them visit the French quarters had the chance to make “small fortunes” in biscuits or cigarettes. In rare circumstances, the camp’s economy interacted with the outside world: coffee rations apparently went “over the wire” and traded at high prices in black market cafés in Munich.

Market institutions, Radford concluded, were universal and spontaneous, “a response to immediate needs” rather than an attempt to imitate civilian life. One of the spontaneous developments was the emergence of a currency: the cigarette, which was portable and reasonably homogenous. Not entirely so, though: cigarettes could be “sweated” by rolling them back and forth between the fingers to shake a little tobacco out. Gresham’s Law – “bad money drives out good” – asserted itself, as the plumper cigarettes were reserved for smoking, while those that circulated as money grew thinner. When Red Cross supplies were interrupted, deflation set in, as a cigarette bought ever more goods.

The law of one price also tended to hold: arbitrage meant prices rarely varied much within a permanent camp. The chaos of transit camps, however, created profit opportunities. “Stories circulated of a padre who started off round the camp with a tin of cheese and five cigarettes and returned to his bed with a complete parcel in addition to his original cheese and cigarettes; the market was not yet perfect.”

Relative prices moved in response to broader developments – such as an influx of new, hungry POWs – and from day to day. With bread rations handed out on Monday, on Sunday evening “bread now” traded at a premium to “bread Monday”. And yes, there was a futures market.

All this mattered greatly. “The small scale of the transactions and the simple expression of comfort and wants in terms of cigarettes and jam, razor blades and writing paper, make the urgency of those needs difficult to appreciate, even by an ex-prisoner of some three months’ standing,” wrote Radford. His article was written in summer 1945, looking back at March and April, where market prices twitched wildly amid rumour and scarcity. On April 12, the camp was liberated, and, says Radford, “every want could be satisfied without effort.” It is quite a parting thought.

Also published at ft.com.