I take out a £5 (Dh30) note from my pocket and ask Tim Harford, also known as the “Undercover Economist”, if I would be doing a favour to society by burning it.
Admittedly, it is a strange way to start a conversation. We are seated in a branch of Pret A Manger in central London where music was blaring out. I have just persuaded Harford to shift from another café to escape the high-pitched sound from the coffee machine. Rather than going on a hunt again for a quiet place, Harford volunteers to hold the dictaphone in his hands.
The Financial Times senior columnist, BBC Radio 4 presenter and author of a number of well-received books on economics, takes a brief pause, then replies: “Yes, you are. This is one of the most wonderful and mysterious things about money. It is like magic, and it is one of the things I wanted to write about.”
I am meeting Harford to talk about his new book, “The Undercover Economist Strikes Back: How to Run or Ruin an Economy”, which looks at different aspects of macroeconomics. My question relates to one of the incidents Harford describes in the book — of two British artists, Bill Drummond and Jimmy Cauty burning a million pounds in 1994.
At the time, there was widespread condemnation at what many saw a waste of good money. However, as an economist, Harford has a different perspective on the incident, as he elaborated in the café.
“If you take a £5 note, it actually only costs a few pence,” he says. “Bank of England, or any Central Bank, produces as many as they like. If you burn a £5 note, either it is costing the Bank of England a few pence to replace it, or you are lowering inflationary pressure in the economy. And effectively you are making a donation of £5 to everybody else who owns pounds.”
In a similar vein, Harford explains, the duo who burnt the million pounds was actually donating that money to everyone holding pounds in the form of lower prices by an amount of 5 or 6 pence.
“What was interesting to me was that the guys who burnt a million pounds were vilified,” he says. “People just thought they had done something really evil. People just thought if they had spent the money on chauffeurs or swimming pools — no problem. But to burn the money, it felt almost like an act of blasphemy somehow. But actually they were just burning paper. They had given money to everyone else effectively.”
But is he saying, in effect, that it is a better option if I burn this £5 note rather than give it to a charity, say, Save the Children?
“Not that it is a better option,” he says. “If you burn it, you are not destroying £5. You are giving £5 to everybody. They might say giving £5 to Save the Children is better than giving £5 spread out over everyone — that is fine. But what I am saying is, you are not destroying economic value at all. You are destroying your purchasing power, but you are not destroying the purchasing power of the economy.”
Bringing to life a dry subject such as economics takes some talent, and this is what that makes Harford stand out from other pundits in the field. I ask Harford how he came up with the title of his new book. “It’s because it is a sequel to that first book ‘The Undercover Economist’,” he says. “I just thought — what is the coolest sequel ever? It is ‘The Empire Strikes Back’. So really there is no more reason than that.”
The original book dealt with microeconomics, which is the economics of the things we see in front of us every day — a cup of coffee, a traffic jam. This one is about macroeconomics, which can be harder to understand.
“Macroeconomics is much more abstract, is much more systemic. It is about inflation, it is about unemployment,” he says.
Harford’s book begins and ends with a man whom he feels comes closest in economics to Indiana Jones. When he began working on the book, he planned to start with the story of the MONIAC machine, which was created by the New Zealand economist Bill Phillips.
Harford describes the MONIAC as a “beautiful visualisation” of the macroeconomic system. “As I looked more and more into Bill Phillips, I discovered this amazing life story that I never knew about — his wartime experiences, how he was this amazing engineer, how he won medals, how he was the hero in the prison camp,” he says.
He found a man who was fascinated by China and saw long before any other economist how important China was going to be. But there was also a sad personal story, about a person whose economic ideas were discredited, and who died young before he had a chance to defend himself.
“The criticism wasn’t really fair,” Harford says. “There are so many different things to talk about Phillips, most of which I didn’t know when I began to do my research. This is the wonderful thing about writing a book, you discover stories you never knew, and you get to share them with people.”
Phillips’s big break happened in 1949 with a presentation at the London School of Economics (LSE).
“Bill Phillips was this nervous, chain-smoking student,” Harford says. “He had signed up to be an engineer, he had gone away to fight in the Second World War, he had come back. He had switched to sociology because he wanted to understand how people could do these terrible things to each other. And he did a little bit of economics on the side.”
But Phillips found he didn’t like sociology, he didn’t really like economics either. He was actually in the process of failing his exams when he spoke to his tutor, the noted economist James Meade who later went on to win a Nobel Prize.
Phillips told him that he recognised in economics, the engineering equations he had learnt via a mail-order correspondence course. He used to work in a hydroelectric dam and, with his knowledge of how water flows, felt he could build a machine that would solve these equations automatically.
Meade, instead of telling him to get back to his exam revision because he was failing, encouraged him with his idea. “Bill Phillips pretty much gave up on his exams completely to build this machine,” Harford says. “And when he gave that presentation in front of these great economists at the London School of Economics, many of them were future Nobel prizewinners, everything was really on the line. If he turned out to be a failure, he was probably going to have to give up completely and go back to being an engineer, or maybe even go back to New Zealand and become a farmer again.”
But luck was on Phillips’s side. “Somehow people thought something interesting was going to happen and it did,” he says. “And 5 minutes after his presentation began with this amazing machine, they were talking about how to make him a professor.”
Harford feels Bill Phillips was ahead of his time in his interest in dynamics. “The discredited idea, his most famous idea, was something called the Phillips curve,” he says. “And Phillips curve was just a correlation between inflation and unemployment. It was taken up by many economists who thought that governments could basically choose high inflation and low unemployment, they could choose low inflation and high unemployment, and that choice is just a fallacy.
“That is based on a simple conceptual error. And it is unfortunate — the research paper drew attention to that correlation, the most famous thing Bill Phillips ever wrote, in fact it is the most cited paper in macroeconomics full stop, but Bill Phillips never really rated it thus.”
Harford says Phillips never thought it to be an important idea. “He thought it was a bit rushed, and his colleagues rushed to publish it, really without his permission, because they wanted to make him a professor and they needed a publication track record. I mean I wouldn’t say he totally disowned the idea. He just thought it wasn’t such a big deal. It was just an interesting observation.”
I tell Harford that I studied the Phillips curve when I was at university, although I couldn’t recall any mention of Indiana Jones during the lectures. “Well economists don’t tell these stories. We like our lines, we like our equations. It is just amazing that we miss out on these personal stories.”
Although technology has made them dated, there are MONIAC computers around even today. “There is a working one in Cambridge and you can see very good videos of it online,” he says. “Also there is a version in Wellington, in New Zealand, which I have seen. And there is also a version in the Science Museum in London which I have seen. I don’t know if there are any others still around, there were several made. But yeah, anyone in London can just go to the Science Museum.”
While the MONIAC has now been replaced by digital computers, back in 1949, using a hydraulic computer was more practical and made a lot of sense. Even after it became ridiculous to use to actually solve an equation, the hydraulic computer was seen as a great teaching aid.
“James Meade, Phillips’s mentor, used to take two of these machines and plug them into each other to talk about monetary policy and international trade,” Harford says. “So you would get one person pretending to be the governor of the Bank of England, and one person would be the chairman of the Federal Reserve in the United States. And he would get two students out to practise. There would be lots of water on the floor. And one of those students was a young man called Paul Walker, who later went on to be the most successful chairman in the history of the Federal Reserve.”
Harford is married and a father of three young children. I ask if he has teaches them economics. “I think they are a bit young for economics,” he says. “I try and give them a love of reading, maths and science. I think economics is a little bit too grown-up, although I do try and discuss the value of money and so on with them. But it is interesting you raised that because I would like to write a children’s book about economics at some stage.
“But I think 8 years old, maybe not. I think, for older children. These days you would call them young adults, which is fine. Someone who is 10 or 12 or 14, I think there is a gap in the market for people like that.”
How about comics? “Well comics can be for grown-ups, and books with only words can be for younger people,” he says.
“Funnily enough, the Federal Reserve produced comics about monetary policy and there is a good comic book guide to microeconomics and macroeconomics out there. But it is not really appropriate for younger readers, it is really aimed at economics students.
“It is called ‘The Cartoon Guide to Economics’. There are two volumes. It is good, but it is very much like a beginners’ microeconomics or macroeconomics textbook with cartoon illustrations.
“I’d like to do something a bit different. I’d like to go back and say to somebody who is looking at the world like a 10-year-old or a 12-year-old, right, given their experiences, what is the right way to talk about economics and why it matters to them. And just to say, oh a comic book, well maybe, but that is not necessarily the way.”
Why doesn’t he himself do something along the lines of “Indiana Jones”, perhaps for the BBC? “I do talk to the BBC about doing this kind of thing,” he says. “There is an issue — I have three children. I love my kids and travel and standing on top of mountains. And talking about gold mines or something on television sounds great, but you don’t see your family for a long time. That is the problem.”
One especially inspiring tale for budding economists mentioned in Harford’s book is of a student called Thomas Herndon. He discovered glaring errors in a famous paper by two eminent Harvard University economists, Professor Carmen Reinhart and Ken Rogoff. The paper had been used to argue the case for austerity cuts by some senior American politicians.
“One day Thomas Herndon, who is a student at the University of Massachusetts Amherst, was set an assignment to take an academic paper and just replicate the results and show that you can know how to do it,” Harford says.
“And he took this particular short paper, ‘Growth in a Time of Debt’, and he just couldn’t do it. And he kept doing it, and he just couldn’t make the results come out. And in the end he approached Reinhart and Rogoff. All their data was on the website, but they gave him the original spreadsheets they had used to calculate this result. And he just found that they had made an error in the spreadsheets, which of course is the most famous mistake.”
Because of the references to “Star Wars”, “Indiana Jones” and “Hitch Hikers Guide to the Galaxy”, I wonder if there is a 1970s or 1980s theme in Harford’s book. “I am 40, I am just revealing my own childhood I think.”
While, with his lively talk, Harford makes economics sound exciting, even thrilling, I pluck up the courage to remark that it is still a dry subject — despite “Star Wars” and all that. Has he ever had someone fall asleep in a lecture?
“Not that I have noticed,” says Harford, who has a lot of experience of public speaking. After my interview Harford is off to a nearby place to give his sixth talk in just a week.
“I would disagree, though, that economics is a dry subject,” he says. “At university level it’s a technical subject, and technical subjects can be hard work. But at the level I am discussing, it is not university level. I am aiming my books at anybody with no economics background.
“It is not dry at all. It is absolutely about everybody’s everyday life. We are economic beings. We are surrounded on all sides by the economy. Our political system, our social system. Everything is economic. To write about economics is to write about what it means to be human in the 21st century and I can’t possibly accept that is a dry subject. There couldn’t be a more relevant subject.”
The way Harford talks about economics, he makes it sound almost like a religion. I challenge him to write about econometrics, a particularly difficult branch of economics involving statistics, in a way that would be appealing. “You are absolutely right,” he admits. “There are technical aspects of economics, but I don’t write about the technical aspects. I write about the big picture. The big picture is totally relevant.”
There is still the question of the £5 note which is lying on the table.
Regrettably, I don’t have a lighter to do a little experiment inside the café. I ask Harford if he would advise our readers to burn their money. “It is not something I recommend as a charitable act,” he says. “But actually the microeconomics of giving to charity is itself a fascinating subject which I have written about. No, keep your money. If you are feeling generous, I think you will probably find a better use for it than a generalised donation to the rest of society. But, if you fancy creating a bit of art, then there is no harm in it.
Has he ever burnt money himself? “I never have,” he confesses.
“And soon we are going to get these polymer notes — plastic notes — in England. And I don’t know how well they will burn. I think they may just shrivel up like sweet wrappers.”
Syed Hamad Ali is a writer based in London.
