Tim Harford's Blog, page 26

Talks about the Truth Detective

I’m giving some talks about my imminent book, The Truth Detective. Come along!

Sheldonian Theatre, Oxford – 2pm on 1st April at the Oxford Literary Festival

Oxford Maths Festival – 14th May. Details to come

Hay Festival – 26th May. Details to come.

How to fix the British economy

I recently argued that the UK’s economic performance has been disastrous for 15 years. The consequences are plain to see: people are struggling to make ends meet; taxes are high, yet public services are overloaded; fights over a shrinking economic pie are leading to widespread strikes. All this is taking place at a time of low unemployment, so we cannot simply wait for the business cycle to rescue us.

If we could somehow improve the UK’s productivity growth rate, all of these problems would become easier to solve, and we could return to the business-as-usual of each generation being able to earn more than their parents, while working less and enjoying better conditions. But how?

Start with a diagnosis of what ails the UK economy. The view from the right is that the UK is suffering from excessive taxes and red tape. This seems implausible. Taxes are certainly high by historical standards, but they have only recently spiked, yet productivity and growth have been disappointing since 2007. And there are plenty of richer economies with higher taxes.

Nor is red tape to blame. According to the OECD, UK product market regulations are among the most competitive.

The critique from the left focuses on inequality, but this is an old and mostly separate problem. Like any mixed-market economy, the UK is an unequal society, but income inequality in the UK is slightly lower now than at the time of the financial crisis and has barely changed over the past 20 years. A more relevant manifestation of inequality is the one between global titan London and regional capitals such as Manchester, which remain far behind in terms of value added per worker.

Then there’s the centrist critique: blame Brexit. Now I am as prone to highlight the idiocies of Brexit as anyone, but unless Nigel Farage has discovered a time machine, a referendum decision in 2016 cannot be blamed for poor productivity performance starting around 2007. Brexit has solved nothing, and by creating barriers to trade with our most important trading partners, along with endless uncertainty, it is demonstrably making the situation worse. But the UK’s economic problems became apparent long before the referendum.

The slightly tedious truth is that taxes, regulation, inequality and Brexit can all take a little bit of blame, alongside a gaggle of other culprits. (Professor Diane Coyle of Cambridge university has memorably likened the case to an Agatha Christie mystery: everybody did it.)

To pick a few of these culprits at random, the quality of management in British companies is the worst in the G7, according to research by economists Nick Bloom, Raffaella Sadun and John Van Reenen.

The country skimps on investment; total investment was the lowest in the G7 over the four decades preceding the pandemic. As a result, energy and transport infrastructure is run down. The Transpennine railway project is a case in point: a decade of dithering, nearly £200mn wasted and a project which was supposed to have opened in 2019 still exists largely in the imagination. Why? Politicians were more interested in announcing plans than in planning.

Low investment from the private sector is now a more acute problem than in the public sector. Is this managerial incompetence? A lack of business finance from a too-concentrated retail banking sector? A logical response to the chronic political uncertainties of the past 15 years?

Then there is the education system. It works well at the top, where British universities are still magnets for talent, but schooling is patchy and many young people, especially from deprived backgrounds, are poorly served.

Kate Bingham, who chaired the UK’s Covid vaccine development programme, recently wrote in the FT that “short-term pressures are crowding out long-term solutions”. She was pleading the case for the UK’s life-science industry, but she could easily have been describing the British condition. Short-termism is now ubiquitous. For such a venerable polity, we have developed a shocking inability to think beyond the next few weeks.

The few examples of policy excellence in the past 15 years have been times where our politicians or civil servants have risen to the challenge in a moment of crisis: I would suggest the Brown-Darling plan to prevent the banking system collapsing in 2008, the Johnson administration’s vaccine task force in 2020 and Johnson’s full-throated early support for Ukraine in 2022. Even when the UK government excels, it is not thanks to patient long-term reform and investment.

It is easy to produce a list of sensible ways forward: modernise taxes to raise more revenue with fewer distortions; improve relations with the EU and streamline UK-EU trade, especially in services; liberalise planning rules to create jobs and cheaper, better homes. But all policy wonks and most politicians know this; nothing ever happens.

It is sobering to re-read the LSE’s Growth Commission report of 2017. Many of its proposals were not policy proposals, but institutional reforms to keep the politicians away from policy proposals: Bank of England independence, but for everything. Contemplate the recent accomplishments of Whitehall and Westminster, and you see where the Growth Commission was coming from.

While researching this column, I found a video of the commission’s co-chair, John Van Reenen, in which he described “what we need to do over the next 50 years”. It seemed an impossibly daunting timescale. Then I realised the video had been posted almost exactly 10 years ago. We could have started then. We didn’t; we’ve gone backwards. We could at least start now.

Written for and first published in the Financial Times on 3 February 2023.

My first children’s book, The Truth Detective is out on 15 March (not US or Canada yet – sorry).

I’ve set up a storefront on Bookshop in the United States and the United Kingdom. Links to Bookshop and Amazon may generate referral fees.

What Lego can teach us about saving the planet

Can Lego save the world? That’s one idea that stuck with me reading How Big Things Get Done, a new book by Bent Flyvbjerg and Dan Gardner. Flyvbjerg is perhaps the world’s leading authority on the failure of megaprojects — or how big things get done, but woefully late and at woeful cost — and so he makes an unlikely optimist.

Over the decades, Flyvbjerg, a management professor at Oxford university, has assembled a database of large projects from high-speed rail lines to hosting the Olympics. His findings are so dismal that he has proposed the “Iron Law of Megaprojects”: they are over time and over budget, over and over again. Even worse, there is a long tail to these disappointments. A significant minority of megaprojects are not just late and expensive, but catastrophically so.

Despite this gloomy evidence, he and Gardner make the case that we could work wonders if instead we used a principle most familiar from Lego sets. That principle is modularity: a complex Lego model is assembled from a limited range of bricks, each of which is precision-manufactured and interchangeable with other bricks.

Modularity has a number of advantages. The first is that the individual components can be manufactured at scale, which rapidly reduces costs. In the 1930s, an American aeronautical engineer named TP Wright made a careful study of aeroplane factories. He concluded that the more often a particular model of aeroplane was assembled, the quicker and cheaper the next plane became. The workers learnt the best ways of working, and special tools would be developed to assist with particular tasks. Wright found that the second plane would typically be 15 per cent cheaper than the first. The fourth would be 15 per cent cheaper than the second, and the eighth plane 15 per cent cheaper again. Every time accumulated production doubled, unit costs would fall by 15 per cent. Wright called this phenomenon “the learning curve”.

Later researchers have found learning curves in more than 50 products from transistors to beer. Sometimes the learning curve is shallow and sometimes it is steep, but it always seems to be there. And because modular projects repeatedly use the same plans and structures, they harness the efficiency of the learning curve.

There are other advantages to modular projects. They are more likely to be able to use factory-made components, and when you make complex things in factories, you are less at the whim of the unexpected than when you make them on a building site — especially if that building site is deep underground or offshore.

By their nature, modular construction projects are more likely to be able to keep going even when there is a problem with one element of the structure. This helps explain why, in Flyvbjerg’s database, modular projects are all but immune to the most dramatic “black swan” cost overruns, which are always a risk for other large projects.

Such are the joys of modularity. Now turn to the problem of climate change, and an intriguing pattern emerges. Low-carbon energy projects include some of the most modular and the least modular designs in Flyvbjerg’s database. Solar and wind are at the modular end, while nuclear and hydroelectric projects are at the opposite pole. Perhaps no surprise, then, that solar and wind projects are rapidly falling in price.

I have no objection in principle to nuclear power, but I wonder whether it will ever be possible to make clean, safe nuclear power at a reasonable cost, unless nuclear plants are able to switch to a much smaller, more modular design. Nuclear power stations have been supplying power to the grid since the mid-1950s, but they never seem to get much cheaper, perhaps because we have been unable to repeat the same designs often enough to climb the learning curve. I keep reading news stories about companies with big plans for small reactors, so perhaps it is not impossible.

Still, the contrast with solar energy is striking. Silicon photovoltaic cells started supplying practical power around the same time: the American satellite Vanguard 1 was the first to use them, carrying six solar panels into orbit in 1958. (The sun always shines in space, and what else are you going to use to power a multimillion-dollar satellite?) At the time, those solar panels produced half a watt at what was no doubt a painfully high cost.

By the mid-1970s, solar panels were down to $100 a watt, or $10,000 for enough panels to power a lightbulb. By 2021, the cost was less than 27 cents a watt. Why? This is the learning curve in action. The learning curve for photovoltaic cells has been estimated to be 20 per cent per doubling — steeper than for aeroplanes.

Chris Goodall, author of The Switch, notes that the world produced 100 times more solar cells between 2010 and 2016 than it had in all the decades before 2010. Batteries — an important modular complement to solar PV cells — are also racing down a steep learning curve. There is a similar story to be told about wind power. Wind turbines are made of standardised components, and a wind farm is made of standardised turbines. The price of wind power, too, has fallen faster than most proponents could have dreamt two or three decades ago.

I am no expert on nuclear energy, but I am assured that modular reactors should be possible. I hope so. We need big things to happen in our ability to generate clean energy. And the best way to go big is to start with small, repeatable blocks.

Written for and first published in the Financial Times on 27 January 2023.

My first children’s book, The Truth Detective is out on 15 March (not US or Canada yet – sorry).

I’ve set up a storefront on Bookshop in the United States and the United Kingdom. Links to Bookshop and Amazon may generate referral fees.

What the poet, playboy and prophet of bubbles can still teach us

One winter morning in early 1637, a sailor presented himself at the counting-house of a wealthy Dutch merchant and was offered a hearty breakfast of fine red herring. The sailor noticed an onion lying on the counter.

“Thinking it, no doubt, very much out of its place among silks and velvets, he slily seized an opportunity and slipped it into his pocket, as a relish for his herring,” according to a Scottish writer telling the tale two centuries later. “He got clear off with his prize and proceeded to the quay to eat his breakfast.”

The Scottish writer was Charles Mackay and the story is recounted in his book, Extraordinary ­Popular Delusions and the Madness of Crowds. It’s one of very few works of economic history to have been an enduring bestseller, from its first publication in 1841 through to the 21st century, thanks, largely, to its vivid storytelling. Mackay debunked everything from alchemy and crusades to haunted houses and religious cults. But it was the three chapters on economic bubbles that made him the enduring guru of the phenomenon, cited to this day. In the book, Mackay went on to explain that the sailor, seeking zest for his fish, unwittingly pilfered not an onion, but a rare tulip bulb. Which was a problem because, in 1637, one of the strangest of all financial booms was taking place: the tulip mania, during which the choicest bulbs went for astonishing sums.

“Hardly was his back turned when the merchant missed his valuable Semper Augustus, worth three thousand florins, or about 280 pounds sterling,” wrote Mackay. Relative to the wages of the time, that is well over a million dollars today. For a brief moment of tulip mania, a Semper Augustus tulip bulb was worth far more than its weight in gold.

And it is thanks to Mackay that tulip mania is so famous. I’ve long been fascinated by Mackay’s stories, especially today, as we seem surrounded by things which might or might not be bubbles — NFTs, meme stocks, a precarious stock market — and full-blown financial face plants such as the collapse of the FTX cryptocurrency exchange. A lot of it seems to make no sense, just as the world Mackay described, in which you might accidentally eat a million dollars as garnish, made no sense. And I wondered: could I understand the crazy financial markets of today, by following Charles Mackay as a guide into the past? I learnt much more than I could have hoped, but not the lessons that Mackay had intended to teach me.

Let’s start with the obvious. That delightful story about the hungry sailor? It’s not true. It can’t be true. Who leaves a treasure casually lying around on a shop counter, or anywhere else? Indeed, the first thing I learnt as I explored the tulip bubble is that Mackay was wrong about most of it. Anne Goldgar, a historian, explains that Mackay’s account is plagiarised from an earlier source, which, in turn, relied on moralising pamphlets, written to discredit financial speculators. The picture Mackay paints, writes Goldgar, is “based almost solely on propaganda, cited as if it were fact”.

Nobody is denying that the Dutch became very excited about tulips in the 1630s. Over the preceding decades, a thrilling range of new plants arrived in Europe, such as potatoes, peppers, tomatoes, Jerusalem artichokes, French beans, runner beans and, of course, tulips. Tulip bulbs were sufficiently unfamiliar to be mistaken for vegetables. On at least one occasion, someone roasted some bulbs with oil and vinegar, which is the germ of truth in Mackay’s preposterous tale.

But tulips, of course, are much nicer to look at than to eat. And some, infected by a virus, changed from simple bold-coloured petals to exquisitely varied patterns. Newly wealthy Dutch merchants began to do what wealthy classes of people often do: they paid a lot of money for rare and beautiful things they could show off to their friends. They were no different from today’s influencers brandishing Birkin handbags or Bored Ape NFT digital artwork, except they splashed the cash on rare tulips. And the more that rich Dutch merchants tried to get the rarest blooms, the more expensive they became.

One fabulously wealthy Dutch politician built a garden filled with artfully positioned mirrors so that a few rare tulips were mirror-multiplied into a multitude. The choicest blooms were so costly, even he couldn’t afford to fill his garden. It didn’t last. Of course it didn’t. In February 1637, bulb wholesalers gathered in Haarlem, a day’s walk west of Amsterdam, to find that nobody wished to buy. Within a few days, Dutch tulip prices had fallen tenfold.

For Mackay, the moral of the tulip mania and his other tales is that, whether we’re talking about a financial bubble or a cult, people go mad in crowds. One doesn’t need hindsight to see it: if you can think calmly and independently, it’s obvious. But Mackay was writing with hindsight, some 200 years after the fact. And he seemed much more interested in cartoonish exaggeration than in accurate history.

It’s not just the fake story about the sailor and his expensive breakfast; it’s the idea that the mania was all-consuming, the Dutch economy destroyed in the flames of the burning desire for tulips. “The rage among the Dutch to possess them was so great,” sniffed Mackay, “that the ordinary industry of the country was neglected, and the population, even to its lowest dregs, embarked in the tulip trade.” But, for her 2007 book Tulipmania, Goldgar couldn’t find a single bankruptcy attributable to the tulip episode.

Two economic historians, William Quinn and John Turner, agree. The tulip mania isn’t even in Boom and Bust, their global history of financial bubbles, published in 2020. It had “negligible economic impact”, they explain. It “was too unremarkable to merit inclusion”. Which raises a question: if Mackay was wrong about the tulip mania, what else was he wrong about?

Charles Mackay was born in 1814, in Perth, Scotland, and he lived a remarkable life. In his time, he was best known as a poet and a hugely popular lyricist — imagine a cross between Robert Frost and Paul McCartney. He wrote a rousing celebration of colonial pioneers, “Cheer Boys Cheer”, which, counterintuitively from a Scotsman, cheers for “Mother England”. His firebrand poem, No Enemies, concludes that if you have no enemies, “You’ve never turned the wrong to right / You’ve been a coward in the fight.”

His admirers included Upton Sinclair, who appreciated Mackay’s demand for revolutionary zeal over diplomatic centrism, and his enemies included poet laureate William Wordsworth, with whom he publicly beefed. To this day, it is unclear whether the popular novelist Marie Corelli was Mackay’s adopted daughter or his illegitimate child. Mackay’s string of prominent jobs in journalism included a stint as a correspondent covering the American civil war for The Times of London.

But Mackay isn’t famous for any of that. Today, his fame rests entirely on his writing about historical manias such as the tulip bubble and the South Sea Bubble, a disastrous early example of financial engineering alongside the Atlantic slave trade. He was just 27 when the first edition of Extraordinary Popular Delusions emerged and promptly became a bestseller.

In the mid-1840s, Mackay was the editor of a small but influential newspaper, the Glasgow Argus. The British investment scene of his time was dominated by a fast-emerging technology: the railway. The first inter-city railway was the Liverpool and Manchester line, opened in 1830, and, for more than a decade after, private companies had been raising money and laying track.

By the mid-1840s a dramatic expansion seemed inevitable. The bullish consensus was that Great Britain would go from 2,000 miles of track to 20,000 by decade’s end. Promoters scrambled to register their schemes with authorities, while would-be investors, some prosperous, others not, scrambled to hand over their money to those promoters.

The boom in railway stocks was beaten only by the boom in advertising for new railway schemes. Over the past few years, it’s seemed impossible to read anything without bumping into someone selling crypto-something. In 1845, it was impossible to pick up a newspaper without seeing a solicitation for investors in a brand new railway. The Railway Times had a huge circulation. It printed three supplements a week to carry all those advertisements. There were more than a dozen weekly journals specialising in railways, most less than a year old. There was a daily railway paper, the Iron Times. Even The Economist introduced a special section covering railways. The draw of ad money from railway promoters was simply irresistible.

The Victorians were spared Elon Musk boosting crypto. But the great and the good of the era enthusiastically plunged into railway stocks. Charles Babbage, Charles Darwin, John Stuart Mill and William Makepeace Thackeray all invested in railways, either directly or through their families. So did three future prime ministers. So did the actual prime minister, Robert Peel.

Emily and Anne Brontë were big fans of railway shares and hurried to invest in the York and Midland line. Their sister Charlotte wasn’t so sure. “I have been most anxious for us to sell our shares ere it will be too late,” she wrote to a friend. “I cannot, however, persuade my sisters to regard the affair precisely from my point of view.”

Indeed, Charlotte Brontë was in the minority. The country was going mad for the railways. The price of railway stocks doubled in two years, but that understates what was really going on. Many investors would pay just a 5 per cent downpayment to obtain a toehold in a share — it was called “scrip”. But if you’d paid £1 for scrip in a £20 share and then the £20 share doubled in price, well, you’d just made £20 on an initial payment of just £1. No wonder people got excited.

Speculators enthusiastically traded scrip, feeling like financial wizards as prices rose and flipping their initial investment for a profit. Not too many people seem to have thought about the fact that they had paid £1 — a week’s wages — for a £20 share, and they were still on the hook for the other £19. Even fewer thought about what would happen if share prices stopped rising or fell.

There were some sceptics. The most prominent was The Times of London newspaper, which asked sharp questions: would that dramatic growth in railway mileage really happen? If it did, could it ever be profitable? Plenty of people were willing to pay to travel between prosperous, bustling Liverpool and Manchester, but would rural lines be so lucrative? Were railways really as cheap to build and to run as promoters claimed? And when railway companies ran parallel lines in competition with each other, what would happen to fares?

The wise listened to Mackay, the nation’s foremost scholar of investment bubbles, for insight into the debate. So what did the great historian think of the railway boom? Had another mania broken out, right in front of his perceptive eyes? Absolutely not, ruled Mackay. In 1845, he penned an editorial explaining, “We think that those who sound the alarm of an approaching railway crisis have somewhat exaggerated the danger.”

Mackay explicitly referred to some of the historical manias he so famously described in Extraordinary Popular Delusions and slapped down those who drew any parallels. “It may appear wise to the careless or to the ignorant to trace resemblances,” he wrote. “Those, however, who look more deeply into the matter and think for themselves cannot discover sufficient resemblance of cause to anticipate a ­similarity of effect.”

He had a point. The tulip mania was a silly fuss about flowers. The railways were iron and flame, speed and progress. They were different. “So much difference,” opined Mackay, “as to lead to the very opposite conclusion from that reached by the alarmists.”

Mackay, to his credit, warned his readers to watch out for fraudsters and opportunists. But he insisted that the fundamentals of the railways, both as a transformative technology and as a profitable investment, were sound. It wasn’t like the tulips and other delusions of crowds at all. “With railways, the foundation is broad and secure,” he explained. “They are a necessity of the age. They are a property real and tangible in themselves, and they must of necessity increase and lead to still further and more beneficial developments.”

Mackay was aware of the sceptics and sometimes published sceptical pieces by others. But this bullish essay on railways as an investment opportunity was no outlier. Mackay wrote several times on the topic, and, according to historian Andrew Odlyzko, “he appears never to have wavered in his belief that there would be abundant profits”. Odlyzko has carried out an exhaustive study of everything Mackay wrote — and commissioned others to write — in the Argus in 1844, 1845 and 1846, the peak years of the railway boom.

“We think the alarmists are in error,” Mackay concluded, “and that there is no reason whatever to fear for any legitimate railway speculation.”

Mackay’s argument seems plausible enough at first sight. Mackay’s investment maxim was: look for a broad, secure foundation, based on a necessity of the age. Don’t be distracted by fads and fashions.

There’s only one problem: this investment advice doesn’t work. The modern equivalent of the railways was the world wide web. It was like the railways, “a necessity of the age” and would, like the railways, “of necessity increase and lead to still further and more beneficial developments”. But that doesn’t change the fact that if you’d put money into almost any dotcom company in 1999, you’d have lost most of it over the next two years.

Nor are fripperies such as tulips necessarily bubbles. Compare and contrast the difference between the rare tulip bulb and the Birkin handbag, a capacious but painfully expensive offering from Hermès, named after the actor Jane Birkin. (She bumped into the fashion house’s boss on a plane in 1984, and complained about the dearth of suitable bags.) Both rare tulips and Birkin bags are quintessential examples of conspicuous consumption by the wealthiest of “collectors”. Both the rarest tulip bulbs and the rarest Birkin bags cost as much as a house. The difference is that the bottom quite quickly fell out of the market for rare tulips, and it hasn’t for Birkins. Not yet. Perhaps it will. But as far as I can figure out, the price has been rising for long enough that it is perfectly possible to have spent most of your working life building up a pension entirely based on investing in Birkins.

Then there are the ambiguous investments. Is gold a frivolous investment or a necessity of the age? Gold produces no stream of income. It has some industrial and ornamental uses, but it is chiefly valued because people expect that they will be able to find someone to take it off their hands, quite likely at a profit. That is almost a textbook definition of a bubble, but if gold is in a bubble it has been in a bubble for several thousand years.

As for cryptocurrencies, Dogecoin is absurd by design. But the blockchain, the clever decentralised spreadsheet that underpins cryptocurrencies, may just be revolutionary. Or not. Are we looking at tulips or railways? And if we really knew, would that help? With his outrageous stories about tulip madness, Mackay made it seem easy to spot a financial bubble. But perhaps it wasn’t as easy as he thought — because shortly after Mackay published his enthusiastic editorial, the railway bubble burst.

Charles Mackay was championing the railways at the very peak of the railway mania, late in 1845. Within a matter of weeks, shares in railways fell by one-fifth. That’s a problem if you own a full share. But it’s a catastrophe if you’ve just bought some scrip to flip for a profit. You’ve spent £1, a week’s wages, and on paper you’ve already lost four times that amount. Nobody is going to take the scrip off your hands, so you’re legally obliged to pay another £19 to complete the purchase. That’s money which you don’t have and which the share won’t be worth when you’ve paid it.

At the close of 1849, Charlotte Brontë lamented, “My shares are in the York and North Midland railway . . . The original price of shares in this railway was £50. At one time they rose to 120 . . . they are now down at 20, and it is doubtful whether any dividend will be declared.”

Ah, yes. The York and North Midland railway. It was run by George Hudson, a flamboyant politician and entrepreneur nicknamed The Railway King. Sam Bankman-Fried, currently awaiting trial for fraud and money laundering after the collapse of his FTX cryptocurrency exchange, has a similar sobriquet, The Crypto King. No doubt that is pure coincidence, but the York and North Midland turned out to be a massive accounting scandal and a disaster for investors, so the coincidence is eerie.

But even the honestly run railway companies suffered from an economic downturn, rising interest rates, too many duplicate lines and, fundamentally, impossibly optimistic expectations. Within a few years, railway shares had fallen from their peak by two-thirds. Odlyzko estimates the total railway investor losses at about £80mn across the late 1840s. Relative to the size of the British economy, that would be the equivalent of one-third of a trillion pounds in today’s terms.

It was the sheer scale of investment in the railways that made the slump in prices so catastrophic. In the peak year, the amount spent on railways by private investors nearly matched the entire budget of the British government which was, at the time, in the process of maintaining an empire and waging a series of expensive wars. The cost of building all the approved railways would have been almost twice the country’s entire annual output. Historians say there is simply no parallel. No investment scheme has ever sucked in so much of a leading economy’s output. It was as though the entire industrial and financial base of Britain had shifted to mobilise for an all-out war, except that the generals were railway engineers and the enemies were the canal boat and the horse-drawn coach.

When so much money was at stake, the slump was ruinous. Vast sums had been invested and vast sums lost. Charlotte Brontë’s Jane Eyre had become a bestseller, so she was cushioned from the disaster. But she was quite aware that others were not so lucky: “This business is certainly very bad — worse than I thought, and much worse than my father has any idea of,” she wrote. “I ought perhaps to be rather thankful than dissatisfied. When I look at my own case, and compare it with that of thousands besides — I scarcely see room for a murmur. Many — very many are — by the late strange Railway System deprived almost of their daily bread.”

That phrase — the late strange Railway System — speaks vividly of the bewilderment investors felt. They could scarcely comprehend what had happened to them and their money. Writing two years later, the contemporary chronicler John Francis vividly told the tale: “No other panic was ever so fatal to the middle class. It reached every hearth, saddened every heart in the metropolis. Entire families were ruined. There was scarcely an important town in England but what beheld some wretched suicide.”

In Boom and Bust, Quinn and Turner argue that a bubble needs three elements to inflate, just as a fire needs three elements — fuel, heat and oxygen — to keep burning. For a financial bubble, it’s marketability, speculation and cheap money. Marketability means that you can easily buy and sell assets, such as that cheap scrip. Marketability sets the stage for speculation. Speculative investors don’t buy with an eye on the fundamentals, but in the hope of quickly reselling at a profit. Speculation can create a self-fulfilling spiral. Just as a burning fire creates its own heat, hopeful speculators cause rising prices, and rising prices draw in new hopeful speculators. Finally, there’s cheap money. If people are able to borrow easily at low interest rates, they can take bets with borrowed money. When prices rise, they feel like geniuses. When prices fall, they lose it all.

The railway mania had all of those elements. But then, so have most modern financial markets for the past 30 years or more. And they’re not all bubbles. Just as, when you have fuel, heat and oxygen, you still need something else to start a fire: a spark. Why do some investments find a spark, like Bored Apes and Dogecoin and Birkin bags, while others don’t? I don’t know. How do you tell if some new investment craze will fizzle out as quickly as Dutch tulips, or keep its value for as long as Birkin bags and gold? I don’t know.

By following Mackay as a guide, I haven’t learnt to make sense of today’s financial markets. But I have learnt one thing: when Mackay said you don’t need hindsight to see a bubble — that it’s obvious, if you think calmly and independently — he was wrong.

Mackay must have been aghast at the collapse of the railway boom. Most railway bulls anticipated 20,000 miles of railway by 1850. That figure was eventually reached, but not until the 1900s. Mackay predicted that there would eventually be 100,000 miles of railway line in Britain. We never got close. Mackay wasn’t wrong to argue that people can suffer from collective delusions, but his account lacks a crucial element: humility. Mackay’s caricatures made it seem so easy to spot bubbles, but it’s not so easy to see a bubble when it’s all around you.

Bubble historian Odlyzko described the railway mania of the 1840s as “by many measures the greatest technology mania in history, and its collapse was one of the greatest financial crashes”. Mackay stood right in the middle of it, looking around at it, debating it and pondering his own work on financial manias. And he utterly misperceived what he was witnessing.

Those who forecast great things for the railways weren’t wrong. The lines built in the 1840s still form the backbone of the country’s rail system in the 21st century. Those who forecast great things for the internet in 1999 weren’t wrong, either. Perhaps the prophets of crypto will turn out to be right too. But none of this justified investment optimism. The railways were a disaster for their investors, and the railway bubble caused vastly more hardship than the tulip mania ever could.

Don’t feel too sorry for Mackay. His reputation appeared untarnished by his spectacular error. In 1850, when Wordsworth died, Mackay was said to be in the running to replace him as poet laureate. Instead, he became the editor of the most-read newspaper in the country, the Illustrated London News. Mackay even found time to revise his bestselling Extraordinary Popular Delusions. He didn’t have much to say about the railway bubble.

In the 1852 edition there is a footnote which comes at the question sideways, by alluding to the notorious South Sea Bubble. “The South-Sea project remained until 1845 the greatest example in British history of the infatuation of the people for commercial gambling.” The railway mania was even bigger than the South Sea Bubble, and Mackay obviously knew it. But he couldn’t quite bring himself to say so directly. Instead, he added: “The first edition of these volumes was published some time before the outbreak of the Great Railway Mania of that and the following year.”

A meagre footnote is his only acknowledgment that railway mania even existed. The most famous historian of bubbles had a front-row seat for the largest speculative bubble in British history. And he had absolutely nothing to say about it.

Written for and first published in the Financial Times on 26 January 2023.

My first children’s book, The Truth Detective is out on 15 March (not US or Canada yet – sorry).

I’ve set up a storefront on Bookshop in the United States and the United Kingdom. Links to Bookshop and Amazon may generate referral fees.

Cautionary Tales – The Hero Who Rode His Segway Off A Cliff

Steve Jobs called ‘IT’ “the most amazing piece of technology since the PC”. According to Jeff Bezos ‘IT’ was not only “revolutionary”, but also infinitely commercial. IT was a fiendishly clever and massively hyped invention. But in the end ‘IT’ — also known as the Segway — crashed and burned.

What makes an invention useful and valuable? Jimi Heselden’s pragmatic brainchild the Concertainer might hold the answers. First used to shore up the collapsing walls of a canal, it ultimately solved problems that Jimi had never imagined.

Cautionary Tales is written by me, Tim Harford, with Andrew Wright. It is produced by Alice Fiennes, with support from Edith Rousselot.

The sound design and original music is the work of Pascal Wyse. Julia Barton edited the scripts.

Thanks to the team at Pushkin Industries, including Jacob Weisberg, Ryan Dilley, Heather Fain, Jon Schnaars, Carly Migliori, Eric Sandler, Emily Rostek, Royston Beserve, Nicole Morano, Daniella Lakhan and Maya Koenig.

If you have questions for our Listener Q&A episodes please send them to tales@pushkin.fm. Or, you can leave a voice note at 914- 984 – 7650 (US number, so international rates may apply). Please be aware that we may use your question on the show.

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Further Reading

Reinventing the Wheel: A Story of Genius, Innovation, and Grand Ambition, Steve Kemper, HarperCollins, 2005

This Is Going to Change the World, Dan Kois, Slate, 1 August 2021

Reinventing the Wheel, John Heilemann, Time, 2 December 2001

Obituaries for and news stories about Jimi Heselden in the Independent, the Guardian, the BBC, the Yorkshire Post, and the Yorkshire Evening Post.

Is life in the UK really as bad as the numbers suggest? Yes, it is

At a time of shortages, we are certainly not short of gloomy economic forecasts. The Resolution Foundation think-tank notes that average real earnings have fallen by 7 per cent since a year ago and predicts that earnings will take four or five years to recover to the levels of January 2022.

Yet if the forecasts are bad, it is the scene in the rear-view mirror that is truly horrifying. The British economy is in a generation-long slough of despond, a slow-burning economic catastrophe. Real household disposable income per capita has barely increased for 15 years.

This is not normal. Since 1948, this measure of spending power reliably increased in the UK, doubling every 30 years. It was about twice as high in 1978 as in 1948 and was in touching distance of doubling again by 2008, before the financial crisis intervened. Today, it’s back at those pre-crisis levels.

It’s worth lingering on this point because it is so extraordinary. Had the pre-crisis trend continued, the typical Brit would by now be 40 per cent richer. Instead, no progress has been made at all. No wonder the Institute for Fiscal Studies is now talking of a second lost decade.

Go back and look for historical precedents for this, and you will not find much. In the National Institute Economic Review, economic historians Nick Crafts and Terence Mills examined the growth in labour productivity over the very long run. (This is defined as the total output of the UK economy divided by the total number of hours worked; labour productivity is closely connected to material standards of living.)

They do find worse runs of performance — 1760 to 1800 was not much fun — but none within living memory. Nowhere in 260 years of data do they find a sharper shortfall from the previous trend. The past 15 years have been a disappointment on a scale that previous generations of British economists could hardly have imagined.

The questions of how this can have happened, and what can be done to change things, can be left for another column. (Part of the problem, in any case, may have been government by newspaper columnists.) But it is worth looking for symptoms. Is life in the UK really as bad as the apocalyptically bad economic numbers suggest?

Perhaps so. There are some obvious problems: widespread worry about the cost of living; strikes everywhere; the utter meltdown of the UK’s emergency healthcare. There are also subtler indicators of chronic economic disease. Consider the public finances. In an ideal world, governments offer their citizens low taxes, excellent public services and falling national debt. In normal circumstances, we can’t have it all. Right now, we can’t have any of it.

We have rising taxes. At more than 37 per cent of national income, they are four percentage points higher than they’ve tended to be over the past four decades. Yet those high taxes are doing nothing to shore up public services, which have been steadily squeezed for more than a decade. (The NHS, believe it or not, has been shielded from this squeeze; if it’s bad at your local A&E, don’t think too deeply about schools, courts or social services.)

Low growth puts pressure on public sector wage settlements — if the pie isn’t growing, no wonder there is such a scrap over each slice. One might at least hope that, with high taxes and spending constraints, debt would be low and falling. No. Debt is high, the deficit is a permanent fixture and interest payments on public debt have risen to levels not seen for 40 years.

Many people struggle to pay for the basics. A large survey conducted by the Resolution Foundation in late November found that about a quarter of people said they couldn’t afford regular savings of £10 a month, couldn’t afford to spend small sums on themselves, couldn’t afford to replace electrical goods and couldn’t afford to switch on the heating when needed. Three years ago, only an unlucky few — between 2 and 8 per cent — described themselves as having such concerns over spending. More than 10 per cent of respondents said that at times over the previous 30 days, they’d not eaten when hungry because they didn’t have money for food.

This is not supposed to happen in one of the world’s richest countries. But then, the UK is no longer in that club. As my colleague John Burn-Murdoch has recently shown, median incomes in the UK are well below those in places such as Norway, Switzerland or the US and well below the average of developed countries. Incomes of the poor, those at the 10th percentile, are lower in the UK than in Slovenia.

If all this was happening during a deep recession, we could have hope. “One day,” we’d say to ourselves, “the business cycle will turn, businesses will start hiring again, tax revenues will increase and some of our problems will disappear of their own accord.” But we are not in a deep recession. Recently unemployment has been lower than at any time since before the prime minister was born, which suggests that a dramatic cyclical uptick is unlikely. The UK economy has the accelerator to the floor yet is barely able to gain speed. That is hardly likely to improve as the Bank of England applies the brakes.

I don’t believe the situation is hopeless. The UK has many strengths and many resources and has overcome adversity before. But if we are to solve this chronic economic problem together, we first need to acknowledge just how serious — and how stubborn — the issue has become.

Written for and first published in the Financial Times on 20 January 2023.

The paperback of The Data Detective is now available in the US and Canada. Title elsewhere: How To Make The World Add Up.

I’ve set up a storefront on Bookshop in the United States and the United Kingdom. Links to Bookshop and Amazon may generate referral fees.

Cautionary Tales – The Mummy’s Curse (Classic)

One hundred years ago, on 16th February 1923, the Tomb of the Pharaoh Tutenkhamun was officially opened. Disturbing the remains of the Egyptian pharaohs is known to incur a deadly curse, so why did a team of archeologists still risk inciting the wrath of King Tutankhamun by entering his burial chamber? And how many of them met a premature end for their impudence?

Cautionary Tales is written by me, Tim Harford, with Andrew Wright. This classic episode was produced by Ryan Dilley and Marilyn Rust and was first released in November 2021.

The sound design and original music is the work of Pascal Wyse. Julia Barton edited the scripts.

Thanks to the team at Pushkin Industries, including Mia Lobel, Jacob Weisberg, Heather Fain, Alice Fiennes, Jon Schnaars, Carly Migliori, Eric Sandler, Emily Rostek, Daniella Lakhan and Maya Koenig.

If you have questions for our Listener Q&A episodes please send them to tales@pushkin.fm. Or, you can leave a voice note at 914- 984 – 7650 (US number, so international rates may apply). Please be aware that we may use your question on the show.

[Apple] [Spotify] [Stitcher]

Further reading and listening

Roger Luckhurst’s book, The Mummy’s Curse , is the perfect guide to every angle of the tale. Nigel Blundell’s The World’s Greatest Mistakes gives a vivid tabloid-style version, and Snopes described and then fact-checked the tale of the Unlucky Mummy. Skeptoid covers and debunks various explanations for the curse.

The Mesmeromania incident is covered in detail by Christopher Turner for Cabinet Magazine. Shankar Vedantam and Bill Mesler set it in wider context in their fascinating book Useful Delusions.

Charle’s Duhigg’s story about Target and the pregnant teenager is in the New York Times Magazine.

Academic studies on placebos, nocebos, and the BMJ article about the mummy’s curse:

Howick, J. Unethical informed consent caused by overlooking poorly measured nocebo effects. Journal of Medical Ethics. https://ora.ox.ac.uk/objects/uuid:07126ead-92c8-4b82-87b2-7e677aaf98b5

Colloca L, Miller FG. The nocebo effect and its relevance for clinical practice. Psychosom Med. 2011;73(7):598-603. doi:10.1097/PSY.0b013e3182294a50

Nelson MR. The mummy’s curse: historical cohort study. BMJ. 2002 Dec 21;325(7378):1482-4. doi: 10.1136/bmj.325.7378.1482. PMID: 12493675; PMCID: PMC139048.

What economists get wrong about personal finance

In my defence, I didn’t get into financial trouble immediately after finishing my master’s degree in economics. It took months. I had a decently paid graduate job and was living within my means, so how did it happen? Simple: I had “cleverly” put all my savings in a 90-day notice account to maximise the interest I earned. When I was surprised by my first tax bill, I had no way of meeting the payment deadline. Oops.

Fortunately, my father was able to bridge the gap for me. He had no economics training, but three decades of extra experience had taught him a straightforward lesson: stuff happens, so it’s best to keep some ready cash in reserve if you can. It wasn’t the first collision between formal economics and the school of life, and it won’t be the last.

My eye was caught recently by James Choi’s scholarly article “Popular Personal Financial Advice versus the Professors”. Choi is a professor of finance at Yale. It’s traditionally a formidably technical discipline, but after Choi agreed to teach an undergraduate class in personal finance, he dipped into the market of popular financial self-help books to see what gurus such as Robert Kiyosaki, Suze Orman and Tony Robbins had to say on the subject.

After surveying the 50 most popular personal finance books, Choi found that what the ivory tower advised was often very different to what tens of millions of readers were being told by the financial gurus. There were occasional outbreaks of agreement: most popular finance books favour low-cost passive index funds over actively managed funds, and most economists think the same. But Choi found more differences than similarities.

So what are those differences? And who’s right, the gurus or the professors? The answer depends on the guru, of course. Some are in the business of risky get-rich-quick schemes, or the power of positive thinking, or barely offer any coherent advice at all. But even the more practical financial advice books depart strikingly from the optimal solutions calculated by economists.

Sometimes the popular books are simply wrong. For example, a common claim is that the longer you hold equities, the safer they become. Not true. Equities offer both more risk and more reward, whether you hold them for weeks or for decades. (Over a long time horizon, they are more likely to outperform bonds, but they are also more likely to hit some catastrophe.) Yet Choi reckons that there is little harm done by this error, because it produces reasonable investment strategies even if the logic is muddled.

But there are other differences that should give the economists some pause. For example, the standard economic advice is that one should repay high-interest debts before cheaper debts, of course. But many personal finance books advise prioritising the smallest debts first as a self-help life hack: grab those small wins, say the gurus, and you’ll start to realise that a path out of debt is possible.

If you think that this makes any sense, it suggests a blind spot in the standard economic advice. People make mistakes: they are subject to temptation, misunderstand risks and costs, and cannot compute complex investment rules. Good financial advice will take this into account, and ideally defend against the worst errors. (Behavioural economics has plenty to say about such errors, but has tended to focus on policy rather than self-help.)

There’s another thing that the standard economic advice tends to get wrong: it copes poorly with what the veteran economists John Kay and Mervyn King term “radical uncertainty” — uncertainty not just about what might happen, but the kinds of things that might happen. For example, the standard economic advice is that we should smooth consumption over our life cycle, accumulating debt while young, piling up savings in prosperous middle age, then spending that wealth in retirement. Fine, but the idea of a “life cycle” lacks imagination about all the things that might happen in a lifetime. People die young, go through expensive divorces, quit well-paid jobs to follow their passions, inherit tidy sums from rich aunts, win unexpected promotions or suffer from chronic ill health.

It’s not that these are unimaginable outcomes — I just imagined them — but that life is so uncertain that the idea of optimally allocating consumption over several decades starts to seem very strange. The well-worn financial advice of saving 15 per cent of your income, no matter what, may be inefficient but has a certain robustness to it.

And there is a final omission from the standard economic view of the world: we may simply squander money on things that do not matter. Many financial sages, from the ultra-frugal Financial Independence, Retire Early (FIRE) movement to my own colleague at the Financial Times, Claer Barrett (her book What They Don’t Teach You About Money will hopefully soon be outselling Kiyosaki), emphasise this very basic idea: we spend mindlessly when we should spend mindfully. But while the idea is important, there is no way even to express it in the language of economics.

My training as an economist taught me plenty of value about money, giving me justified confidence in some areas and justified humility in others: I am less likely to fall for get-rich-quick schemes, and less likely to believe I can outguess the stock market. Yet my training missed a lot too. James Choi deserves credit for realising that we economists have no monopoly on financial wisdom.

Written for and first published in the Financial Times on 13 January 2023.

For the next few days UK readers can get my most recent two books – The Next Fifty Things That Made The Modern Economy, and How To Make The World Add Up – for just 99p each on Kindle. Consumer surplus gone mad! Enjoy.

I’ve set up a storefront on Bookshop in the United States and the United Kingdom. Links to Bookshop and Amazon may generate referral fees.

We are taking your questions for Cautionary Tales

I’m taking your questions! Do you have any queries about one of the stories we’ve covered? Are you curious about how we make the show? Or is there anything else you think I might be able to help with? I want to hear from you, so send any questions you might have – however big or small – and I’ll do my best to answer them in a special Q&A episode of Cautionary Tales.

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If you have questions for our Listener Q&A episode please send them to tales@pushkin.fm. Or, you can leave a voice note at 914- 984 – 7650 (US number, so international rates may apply).

Cautionary Tales – The Final Illusion of The Great Lafayette

Golden sparks rained down on The Great Lafayette’s famous show, “The Lion’s Bride”. They looked like they were part of the performance. They weren’t — and soon the theatre was ablaze. How to save the three thousand audience members now trapped in a burning building?27 years previously the Brooklyn Theatre had gone up in flames too. The terrified spectators became a frantic, trampling mass, and nearly three hundred people perished in the flames and smoke. Panic in an emergency can kill. But keeping calm can also be lethal…

Cautionary Tales is written by me, Tim Harford, with Andrew Wright. It is produced by Alice Fiennes, with support from Edith Rousselot.

The sound design and original music is the work of Pascal Wyse. Julia Barton edited the scripts.

Thanks to the team at Pushkin Industries, including Jacob Weisberg, Heather Fain, Jon Schnaars, Carly Migliori, Eric Sandler, Emily Rostek, Royston Beserve, Nicole Morano, Daniella Lakhan and Maya Koenig.

If you have questions for our Listener Q&A episodes please send them to tales@pushkin.fm. Or, you can leave a voice note at 914- 984 – 7650 (US number, so international rates may apply). Please be aware that we may use your question on the show.

Shownotes

The Death and Life of the Great Lafayette, Gordon Rutter and Ian Robertson, New Lands Press, 2011

Investigation into the Kings Cross Underground Fire, Desmond Fennell, Her Majesty’s Stationery Office, 1988

Body 115: The mystery of the last Victim of the King’s Cross Fire, Paul Chambers, Wiley, 2007

The Mass Psychology of Disasters and Emergency Evacuations: A Research Report and Implications for Practice, John Drury and Christopher Cocking, University of Sussex, 2007

To Prevent ‘Panic’ in an Underground Emergency: Why Not Tell People the Truth? Guylene Proulx and Jonathan D Sime, Fire Safety Science – Proceedings of the Third International Symposium, pp. 843-852

Evacuation behaviors and emergency communications: An analysis of real-world incident videos, C. Natalie van der Wal, Mark A. Robinson, Wändi Bruine de Bruin, Steven Gwynne, Safety Science Volume 136, 2021