This week I've been launching my new book 'The Economics of Just About Everything' with a series of public lectures around Australia. Here's the text from the Canberra launch, which was generously hosted by my old colleagues at the Australian National University:
WHAT DO DATING, DIETING AND SPORTS STATISTICS HAVE IN COMMON?
LAUNCH OF 'THE ECONOMICS OF JUST ABOUT EVERYTHING'
ANU, CANBERRA, 29 JULY
Can I of course acknowledge that we are meeting tonight on the land of the Ngunnawal people, and recognise their elders past and present. There are so many good friends present in the room tonight, but I wanted to particularly acknowledge Bob Gregory and Rabee Tourkey for putting this together, and Beth Lawton and her team for making tonight happen. It was an event whose boundaries continued to expand and I'm very grateful to all of them for allowing that.
This book, 'The Economics of Just About Everything' comes from being at ANU and having extraordinary colleagues. I see many of them here around me in the room today, and in some sense this is your book as much as mine because I had such interesting and productive collaborations with many of you.
As Bob said, the book is 'The Economics of Just About Everything', and when I mentioned this to my seven-year-old son, Sebastian, he said: 'Has it got dragons in it?' Sadly, I had to say: 'No, it doesn't have any economics of dragons.' And likewise, it doesn't have anything on the economics of Liberal Party leadership, or indeed on Labor Party leadership. But there are other contributions that you'll have the chance to read about.
Let me start with a story.
In 1790 the Second Fleet set sail from the United Kingdom for Australia. Unlike the First Fleet, which has been a government enterprise, the Second Fleet was a private enterprise put together by the firm of Camden, Calvert and King - a firm which had previously been involved in the trans-Atlantic slave trade. For their task of bringing convicts to Australia, they were paid six pence for every convict who was taken on board. And they used the same methods they had used for the trans-Atlantic slave trade: recruiting sailors from local taverns, shackling the convicts below deck for most of the voyage. They fed the convicts so little that by the time they arrived in Australia, they had spare rations left to sell.
The voyage was one of the most brutal in shipping history. Fully one-third of the convicts on the Second Fleet died before they reached Australia. Of the remaining two-thirds, many were covered in lice and, it's said, unable to move for months after they arrived in Sydney.
When the news reached London, there was an outcry. But Camden, Calvert and King had already been commissioned to take the Third Fleet to Australia. They couldn't take the contract away from them, but they could change the pricing mechanism. Whereas the Second Fleet had been paid six pence for every convict who boarded the ship in the UK, the Third Fleet was paid an additional 20 per cent bonus for every convict who got off the ship alive in Australia.
The death rate on the Third Fleet was not one in three, it was one in 11.
One of the most powerful notions in economics is the idea of incentives. They can literally mean the difference between life and death.
Now, for economists, the idea that people respond to incentives is an intuitive one. But not so to many others.
So when, in 2004, the government announced that it was putting in place a Baby Bonus that would pay $3000 for any baby born on or after 1 July 2004, many people thought it was inconceivable that people might respond to that incentive by moving the timing of their child's birth from June to July. The minister in charge was asked on the 7:30 program whether she thought that would happen, and after trying to obfuscate for a few questions finally admitted that it might, while saying 'but I don't think it would happen'.
So Joshua Gans and I decided simply to look at the data. It turned out to be the simplest paper I've ever written. We got daily birth counts for a 30-year period, including 1 July 2004. And you only have to graph them to see the story. Births begin to fall in late June and then spike upwards like Mount Everest on 1 July 2004.
Throughout the 30-year period we looked at, no day had more births than 1 July 2004 - the day of the introduction of the Baby Bonus. Australians had responded to the incentives on offer, and because half of all babies are born by induction or caesarean section, half of the births were amenable to being moved from June into July.
Incentives matter in other, somewhat more unexpected, ways. Imagine you're a child who is getting involved in a sport and your birthday falls just before the age cut-off for that sport, in the month just before the age cut-off. What that means is you're going to be the youngest in the sporting team. You'll always be the one who is struggling to keep up with the ball, struggling to score a goal or get a try.
Now imagine, by contrast, a child who is born just a month later. This child is in a different position. They are now the oldest in their team. They're the child who scores more runs in cricket, who scores more tries in rugby league, who gets more goals in soccer. The coach lavishes praise upon that child, and they do better. They get more attention as they go through school. By the time we come to select our national teams, we can see the effect of those youth cut-offs still in place.
Rugby league, in most states, has an age cut-off of 1 January. There are twice as many rugby league players with birthdays in January as in December. Soccer, in most places, has an age cut-off of 1 August, and there are twice as many Socceroos and Matildas born in August as there are in July. In fact, my own birthday is in August, so I clearly have no excuse for not being in the Socceroos.
Economics is also a discipline which thinks carefully about costs and benefits. Again, it might sound intuitive, but not so to people in other disciplines.
In 2012, Marius Kloppers, the CEO of BHP, sent around a memo to the staff in his Perth office. Kloppers - an engineer by training - had been frustrated by the messiness that he saw on his staff's desks. And so he sent around a memo, in which he said that henceforth, desks were to be clean. There would be no plants, no iPads, no smelly food. There could, he acknowledged, be a photograph – but just one, as long as it was below A5 size.
To Kloppers, utopia was that everyone had a clean desk.
But that's not how an economist would have thought about it. An economist would have thought not only about the benefits of a clean desk, but also of the costs, such as the time spent putting stuff away that you will later take out to work on. Kloppers turns out to have made a disastrous decision and his 2012 'clean desk' memo is one of the reasons he was ousted as BHP CEO a year later.
Utopia rarely lies in a corner solution.
Economists like to take our tools to a range of different problems, and when we do cost-benefit analysis we sometimes think about costs and benefits where things are uncertain. We can even take our tools to the concept of dating.
When you're thinking about dating, economists will talk about dating not as a matter of trying to find true love. The economists' mindset can perhaps better be summed up by that famous line from The Whitlams: 'she was one in a million, so there's five more just in New South Wales'.
To an economist, love isn't - as Tim Minchin put it - 'destined perfection'. It's something that grows over time.
In 1875 Arthur Cayley proposed something called an 'optimal stopping problem'. Here's how it works.
You get a flow of information coming in, and at some point you might want to make a decision. Imagine that your house is on the market and you're deciding whether or not to sell. Each week, people come in and make offers on the house. At some point, you have to decide whether you're going to accept one of those offers, and generally it is better to accept one than to leave your house on the market forever.
Or you might be looking for a job. You might spend some time trying out different jobs, moving from firm to firm. At some point, it's probably optimal to stop. To settle down and make a career in a single firm.
Which brings me to dating. When it comes to dating, economists think of it in exactly the same way. Each time you date, you get information about that other person, and perhaps a little bit more about yourself as well. But at some point it's probably optimal to settle down, maybe even to get married and lock into a contract which makes it relatively hard for the two of you to stray. Economists even think of marriage through the lens of cost-benefit analysis.
One of the other things we think about it the impact of policy changes in unexpected ways. When we put in place the gun buyback scheme in 1996, Australians did so because of the horror of mass shootings, which had been occurring, on average, about once a year. We'd had the Strathfield Massacre, the horrendous Port Arthur Massacre, and many others in between. So we introduced this policy because we wanted to stop mass shootings.
But the thing that policymakers didn't talk about at the time was how rare mass shootings are. They're horrendous, they make the news, but the person most likely to kill you with a gun is actually yourself. Suicide by gun in the highest cause of gun deaths, closely followed by somebody you know, such as your spouse.
The impact of the gun buyback was to reduce mass shootings - we haven't had one since the Port Arthur Massacre. But the 200 or so lives a year that are saved as a result of the gun buyback are mostly due to averted homicides, and even more so to averted gun suicides.
Big changes can have unexpected effects.
We see unexpected effects too in the labour market. Economists have shown that there are big benefits to gaining more education, and naturally that's one of the pitches we make when we're here at universities, to our prospective students.
But it's not just things you do that boost your earnings. The luck that comes upon you matters too. With a co-author, I looked at the impact of height on labour market earnings. Height is something that - as long as you eat a good diet - is basically determined by genetics. We found that the impact of height on earnings is large and statistically significant. An extra 10 centimetres of height buys you between $1,000 and $2,000 of additional earnings.
Curious about the effect of this, Jeff Borland and I decided to look at a different characteristic which is, to a large extent, genetically determined. We decided to look at the effect of beauty on labour market earnings.
Now, I know what you're thinking. Beauty is entirely in the eye of the beholder and everyone's notions of beauty will be different. But empirically, that turns out not to be true.
When we got a team of Roy Morgan researchers and gave them a set of pictures and asked them to rank them in terms of beauty, they came back with almost exactly the same results. So then we sent them out in the field and we got them to ask a set of questions about wages and earnings. As they left each house, we also asked them to rate the physical beauty of the people they'd been speaking to. They rated, on average, four out of ten of those householders as being 'above average', and one out of ten as being 'below average'.
When we compared the household earnings, we saw something stark and large: a $40,000 household income gap between households where the respondent had been rated as 'above average' and those where they'd been rated 'below average'.
This effect of luck - whether it comes through height, or beauty or something else - is something that I think ought to give us pause when we think about how society is organised. Sure, people who are affluent are sometimes there because they've worked hard. But sometimes they're there out of sheer luck.
I think that ought to make us a little bit more generous towards those who've had a hard time in life, and maybe a little less inclined to put the successful up on a pedestal. Understanding luck, I think, ought to lead us to being a more generous society.
I've talked tonight about some of the core principles of economics. The idea of incentives, of cost-benefit analysis, and of unexpected effects rippling through things like crime and the labour market.
But I do want to leave you with a note of caution. For those of you who think about economics, I'd like to issue a warning, particularly if you are thinking about the economics of dating. There may be 50 ways to leave your lover, but there is only one way to use the economics of dating: tactfully.
I would urge you, if you're on a first date, you may not necessarily want to introduce the notion of the optimal stopping problem right at that first date.
Economists too need to be careful about when we bring our tools to bear. Joel Waldfogel has shown quite convincingly that there is a gap between what the typical Christmas gift giver pays for a present, and what the typical gift recipient would have paid for that present. The gap is about one-sixth. So this year, when Australians spend $6 billion on Christmas presents, there will be what economists refer to as a $1 billion 'deadweight cost' of Christmas.
Academically interesting, but not necessarily the best topic of conversation at Christmas lunch.
Curiosity through economics can help us enjoy the world more, and even build a better world. Economics can help us to lose weight or find a lover. To choose the most productive AFL team, or get a better night's sleep. It's not the only way of understanding the world, but it is a set of tools that can be applied to just about anything.
*For references and source data see The Economics of Just About Everything, Allen & Unwin 2014
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