Tim Harford
How the Modern Economy Was Built

It is easy to take for granted the incredible amount of innovation that has contributed to life as we know it in 2017. Where would we be without electricity, railroads and even the iPhone?

But award-winning economist and journalist Tim Harford set out to highlight those inventions that are often overlooked but at that same time changed the world. From baby formula to barbed wire, cryptography to the pill, in his book The 50 Things That Made The Modern Economy, Tim shows us a world that often sits on the sidelines of being celebrated.
While the history of innovation may seem to have been reserved for ‘white English and German men in the late 19th Century’, as Tim puts it, we learn that there is a much richer picture of how the world was built. As we look at how we got to this point, it seems only right to think about where we go from here. Our society has progressed to the point where talk of robots and automation have filled the airwaves with panic. Have we reached the end point of innovation? Tim doesn’t think so, but then economists don’t always have the answers.

Firstly, how did you decide on the 50 things that changed the modern economy?

My main criteria was if there was an interesting story there. Asking questions such as does it have a lesson? Is it an untold? There’s a human element to a lot of these innovations and some of them are really tragic stories about the inventors but then some aren’t – we don’t know who invented concrete for example but it doesn’t matter that much, what matters is what concrete does. I also had other things to think about such as the geographical spread, you don’t want to be too mired down in the history of English men and Germans, all men, all white, in the late 19th century. It’s very easy to get stuck there.

How much does pure intuition and chance contribute to the efficiency of the economy? Sometimes just from having the title of ‘economist’, people assume that you have the answers and can predict trends, but in the last 10 years, it would seem that no one has the answers.

Economists don’t. I often give talks about what we know about forecasting, and as with a lot of what I do, I look back through history and some of the key actors and what happened to them. I talk about Irving Fisher and John Maynard Keynes, the two greatest economists of the age, who both failed to predict the financial crisis of 1929 and then also failed to predict the Great Depression.

 An economist that no one paid any attention to until about 10 years ago. Hyman Minsky said that the more stable everything gets, the more risks everyone takes. 

 

Which is astonishing.

Well, maybe it is but I don’t think it astonishes us anymore. Both of them made the same forecasting error but Keynes moved on to change his mind, adapted and went on to have great success, and Fisher ended up becoming one of the most successful investors and economists in history. But how? It turns out that it wasn’t about the forecasting but more about how flexible their thinking was and how quickly they were able to change their minds.

I also talk about the modern work on forecasting, and the leading guy here is a social scientist called Phil Tetlock. He runs these amazing forecasting competitions and he has found out that you can’t really do it. The people who are better at forecasting, their edge comes mostly through their humility and ability to say that they don’t know, very carefully calibrating what they can comment on and what they have no clue about.

One of the things that I have come to think about more and more from doing the book is the fact that we tend to focus on the ‘wow’ inventions, so at the moment we are talking about artificial intelligence, CRISPR-Cas9, and gene editing, but we don’t talk a lot about the really simple stuff. When you look back in the past, what are the really huge breakthroughs? Electrification, the Gutenberg printing press, very often when you look closer, the big breakthrough invention was vital but it was actually all the other stuff that was going on that made it possible.

Is the modern economy something we should celebrate?
Considering the miracle of globalisation and the interconnected economy we have built.

I think we should celebrate it. Maybe we should just quietly celebrate it ourselves every day rather than some big formal party, I’m not sure who would turn up to that. There are big problems with the way the economy works and we will come to that, but when you look at the system, first of all, it’s completely miraculous. How did this coffee get to our table? Somebody somewhere, maybe in Guatemala or Ethiopia, grew the beans and then it was shipped, processed, somebody made a coffee machine and then it was served to us… and it wasn’t like we told anyone that we were coming in and needed coffee, the system just works. Not perfectly, but given how complex the system is, it is quite remarkable.

There’s this famous question allegedly said by a Soviet planner as the Soviet Union was collapsing and they were trying to introduce market systems. He visited London and was interviewing an economist, and he says, ‘I’m just trying to understand who is in charge of the supply of bread to London?’ and it’s bewildering because we don’t know. The answer is that nobody is in charge of the bread but we still get it.

So that’s amazing, and then there is the fact that poverty is at record lows. If you look at the data on this, and it’s not that easy to interpret, but basically 200 years ago 90% of the world was below the extreme poverty line, which is a dollar a day in today’s currency. It’s an incredibly low standard of living and nearly everybody in the world was living like that. Now the World Bank is starting to think about maybe redefining the poverty standard because they are running out of poor people under the old definition. And of course, if you are on $5 a day you are still poor but there is a tremendous amount of progress that has got to be celebrated, and the freedom that gives people.

Now I said that there are problems, and the number one problem is the environmental impact of all of this. I’m quite hopeful that we can fix this but it’s not going to fix itself so you need some kind of regulatory system, and Donald Trump is obviously trying to pull the plug on that in terms of climate change – it wasn’t that great before Trump came along but it’s even worse now. There’s a problem of fragility and this idea really goes back to Hyman Minsky, who was an economist that no one paid any attention to until about 10 years ago. Minsky said that the more stable everything gets, the more risks everyone takes. So if you look at the world economy from the point of view of 2006, you would have said that it had never been this stable, with super low inflation, strong growth, and no serious recessions. We had the dot-com bust of 2001 and nothing happened, then 9/11 and a war and still the economy was great. Then we obviously get this big crisis in 2008 because it’s a self-negating prophecy.

"What are the really huge breakthroughs? Electrification, the Gutenberg printing press, very often when you look closer, the big breakthrough inventions were vital but it was actually all the other stuff that was going on that made it possible."

Tim Harford on the modern economy

Do you ever struggle with the sheer scope and complexity of our modern economy?

Yeah, there’s a lot going on in any economic system. There are 10 billion products and services, 7 billion people; we don’t have good data on any of it or good theories. Economists are trying but it’s not like we haven’t noticed that it’s a hard problem – you have to look at psychology, sociology, and history. So if you ask a serious question about the economy, you are likely to get a rambling or equivocating answer. The questions I’m finding difficult to answer are specifically relating to automation. There are two views out there that are highly relevant to what is going on in the book: one view says that productivity is slowing down, and there is very good data on this, so maybe this is it and the computer revolution isn’t as amazing as the car, electricity or indoor plumbing. But then there is this alternative view that then you don’t know what exponential progress looks like because in computing every year something happens that dwarfs what happened the previous year.

This is the question that I really struggle answering; whether technological progress is actually incredibly disappointing or almost dangerously, threateningly brilliant.

I found the section on cryptography in the book fascinating. I liked the way you phrased it, that as technology becomes more and more advanced it will change our economies and perhaps the way we dance. 

I think that’s a good view of the way our economies work and human society in general.

I’m not a computer scientist, but there is this idea that if we get quantum computing up and running properly then it renders prime factorization easy, which is the basis of public key cryptography. If that happens, it essentially renders a lot of the Internet as we know it today unsafe and breakable. We have to find a different way of doing it. I don’t know what that other way would look like and I haven’t thought about it very seriously but maybe we never come across it.

"The contraceptive pill [...] made a huge difference to what women were then able to do and were a major source in their sudden embrace of becoming dentists, doctors, and lawyers."

Tim Harford on the empowerment of the contraceptive pill

But we are so adaptive and innovative, so does that have something to say about how we solve problems?

I hope so. The threat is, and Martin Rees the astronomer is very interested in this subject, that because our societies are becoming so complex and interdependent and we have become so good at everything, it does mean that if something somewhere breaks that is so fundamental to the system and we can’t fix it, then this amazing edifice that we have built becomes unsustainable.

It’s like if the foundation fails on a skyscraper, that is a different problem to a foundation failing on a mud hut.

Let’s discuss the contribution women have made to the economy which you talk about in your book – some of the things that you say empowered women were the contraceptive pill, infant formula, and TV dinners. On the face of it, it almost seems demeaning but was this just a symptom of the times?

Well, it certainly wasn’t my intention to be demeaning.

The idea of talking about the TV dinners came from Baroness Alison Wolf, who is a scholar at King’s College London. She has written a very interesting book about the process by which women have entered the workforce to become the equals of men, having previously been suppressed. It was Alison who said to me that we shouldn’t underestimate the power of the takeaway pizza and TV dinner. The concept of the pill as an important technology for the empowerment of women is based on a very important study carried out by Claudia Goldin, the former president of the American Economics Association. So these are two of the leading economists in the world, who are also women, and that’s where these ideas came from as opposed to coming from me as a white guy looking at it and saying that the pill is important because that’s how I think about women.

But I do think it’s important to recognise that there were serious technological impediments to women playing the role that they should be able to in society and in the economy. The fact that contraception wasn’t available made a really big difference to what women were able to do, so when the contraceptive pill did become available, this made a huge difference to what women were then able to do and were a major source in their sudden embrace of becoming dentists, doctors, and lawyers. That’s Goldin’s argument and I buy it. Is it offensive? I didn’t see it as being that.

In the 1940s when Margaret Sanger was urging scientists to work on the pill, her aim was that women should be the equal of men politically, sexually and economically, so to do that they needed to have control over their fertility.

The TV dinner effectively changed the dynamic of the modern family.

 

There’s this idea from the 20th century that if you work for a company long enough the government will give you benefits like unemployment compensation, pension schemes etc. But do you think that the modern economy needs a new concept of this social contract with the individual?

I think it probably does and there are a couple of things going on. One is the potential for people’s economic value to go to zero, and I distinguish economic value from value as a human being. Historically, apart from people with severe disabilities, everyone has been able to go out and get a job to provide for themselves and their families, therefore they have always had an economic value. As a result, we have focused the welfare system on people without economic value, so those with disabilities, people with temporary distress or who have lost their jobs. Now we are looking at a possible situation where millions of able-bodied and hard-working people will be taken out of work by robots who can do the same job better and for less money. We aren’t there yet, but if we move on to that, we will have to totally rethink the way that the economy operates. These people still have every right to be respected as human beings but there is nothing they can do that employers will want to pay them for, so how are you going to keep them alive and allow them to express their autonomy and dignity? We need a different system and this is where conversations around universal basic income kick in, which is not straightforward at all but it is attractive.

You talk about these amazing miracles of the modern economy. Two of them are the shipping containers and the cold chain. I loved the cold chain because I don’t think we realise how brilliant it is, but it also has a byproduct of wastage, which we don’t realise either.

It’s very obvious to say that it must be environmentally damaging to ship these tomatoes from Spain in a shipping container to the UK and on a climate controlled truck. But the alternative is to grow them in greenhouses in the UK, which would have to be heated, and where is the heat going to come from? Another example is frozen lamb from New Zealand, which is probably more environmentally efficient than growing lamb in the UK because New Zealand is great for growing simple organic lamb and you don’t need to do a lot of messing around with it, and actually shipping enough lamb to feed the UK is quite efficient.

So you are absolutely right to focus on the byproducts, the costs and the environmental impact of that, but often the environmental impact doesn’t come where you think it comes and the reforms that you might suggest often make things worse rather than better.

Part of the idea with economics is that nations are always excited to flourish and prosper. Through your research in the book, where would you say the global economy is trying to get to? 

There is no end. It’s just a bunch of people trying to invent things that either they can sell and make money from or they can use to lower the cost of things, or it’s just people fuelled by curiosity and trying to solve problems. Very often you end up solving a different problem to the one you set out to solve, or even creating a new problem. I don’t see it as ever stopping but I think we may see two other things stopping: the growth in the use of the physical product, so moving stuff around and consuming energy, that may stop. We are already seeing that slow down so it may stop at some stage. Where we need to focus our attention is specific technologists, so it’s not do we stop innovating, it’s do we need to put the breaks on artificial intelligence or nuclear bombs? That’s the big question because we don’t need to make bigger and better nuclear bombs, we don’t really want any more technology in that and it’s the same thing with chemical weapons.

"How are you going to keep them alive and allow them to express their autonomy and dignity?

Tim Harford on an automated future

If countries were to write a mission statement about their economies and its innovation what would it look like?

We can write these grand mission statements but so much of what goes on is simply individual human action responding to quite narrow incentives, generally working out quite well but occasionally working out very badly. 

We have made a lot of progress, such as the advancement of contraception and access to it bringing down the birth rate and therefore empowering women. There are lots of different things you can track that is moving in the right direction, like the decrease in violence and violent deaths. Some of this progress is because Bill Gates thought really hard about where to put his money or the World Bank thought about this, so a lot of people thinking really hard about how to improve the human lot and going for it.

However, a lot of it is by accident. For example, the idea to make a refrigeration unit that even works in a truck didn’t come about so that they could thereby transport vaccinations and improve a lot of humanity, it was more about being able to transport food around better so it wouldn’t rot and then they could sell more. It’s not an idiotic or blind view but I would say that it is a blinkered one because the people doing that were focused on quite a narrow problem, but it ended up having very positive consequences overall. 

Fifty Things that Made the Modern Economy is out today on Little, Brown Publishing