Overshooting, Tipping Points, and ABBA : The Indicator from Planet Money How a classic econ book explains ABBA's costumes (among other things).

Overshooting, Tipping Points, and ABBA

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CARDIFF GARCIA, HOST:

Hey, everyone, it's Cardiff. We're trying something new for this episode of THE INDICATOR. And if it works, we'll keep doing it. We ask a guest to share with us a book or a research paper or really anything that changed how she sees the world and then to try to convince us that we should read that book and that we should see the world in this new way. And for this, our inaugural episode in this experiment - and hopefully not the last episode in this experiment - we chose the perfect guest.

DIANE COYLE: My name's Diane Coyle, and I'm a professor of economics at the University of Manchester.

GARCIA: Diane is an intensely voracious, nobody-can-possibly-keep-up reader who actually runs a blog called The Enlightened Economist where the whole point is to read and review economics books, sometimes more than one a day.

COYLE: I'm looking around the - oh, I don't know - 700 books or so in my room and...

GARCIA: What?

(LAUGHTER)

COYLE: It was an amazing achievement to pick one of them.

GARCIA: How do you fit 700 books in your room? Is there space for anything else there?

COYLE: A desk and an armchair.

GARCIA: (Laughter).

(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")

GARCIA: So let's talk about the book that you want to convince our listeners to read. And we'll talk about how it affected you. First, why don't you tell us what the title of the book is and who wrote it?

COYLE: The book is called "Micromotives And Macrobehavior."

GARCIA: "Micromotives And Macrobehavior," published in 1978.

COYLE: It's by Thomas Schelling, who won the Nobel Prize in economics in 2005 for his work on game theory.

GARCIA: What's a good definition of game theory for our listeners?

COYLE: Game theory is thinking about the way that one person - one person's decisions or one group's decisions affect those of other people and how that will feed back until you get some kind of stable outcome.

GARCIA: Diane says that in this book she recommends the author, Thomas Schelling, applies game theory to everyday economic life.

COYLE: The feedback mechanism is my choice affects your choice. And we all respond to what happens as a result of those choices over time.

GARCIA: Do you remember if you had a very strong kind of reaction to it?

COYLE: Well, it was a revelation because when you're doing, you know, the introductory econ courses, you're taught about pretty simple models. You're assuming people are identical, they're all making rational choices, they all know what they're doing. And these social influences don't present themselves at all. So although you kind of quickly get used to that as an economics student, it's nothing like the real world. So it was revelatory to see this book talking about things that I knew must be true, that the social effects we have on each other must exist in the actual economy because I could see it happening. And to know that that actually counted as economics helped keep me really interested in the subject.

GARCIA: I take it you've got a few favorite examples in the book. Can you give us a few of them?

COYLE: Yes. So take the famous phenomenon of the tipping point or the critical mass.

GARCIA: The tipping point.

COYLE: The tipping point. This is something that comes from Schelling.

GARCIA: Yes, Malcolm Gladwell popularized the concept of the tipping point. That's when a critical mass of people is needed for something new to start. But Thomas Schelling got there decades earlier. Another idea in Schelling's book - overshooting, how it happens.

COYLE: There's a very homely example of being impatient when you're in the shower and adjusting the temperature, and then when it doesn't get warmer or colder fast enough for you, you turn the thermostat even further round. And then all of a sudden, it gets much too hot or much too cold - this overshooting phenomenon.

GARCIA: Yeah.

COYLE: And he said this kind of a delay in feedback is very common in economic contexts as well. So you go from a situation of undersupply to a situation of oversupply in the market. And these overshooting phenomena, they happen in all kinds of markets. They happen in exchange rates. They happen in commodities markets. A farmer, for example, might notice that the price of a crop is going up because of a shortage, but then all the farmers do the same thing and they all plant too much, and there's oversupply next year or the year after.

GARCIA: What I love about this recommendation is that this book is now 40 years old, and yet you're making a case that people either coming new to economics or maybe people who've been studying economics for a while can still get something out of it.

COYLE: I think so. And I've seen so many instances in my experience of people who don't actually think about other people's responses to them at all. All kinds of policy mistakes come about because the analysts who are drawing up the policy haven't thought about how people might respond to the policy - which seems kind of simple, you'd think, but it doesn't get done.

One example I use in my lectures is the pop group ABBA - Swedish pop group, 1980s. I don't know if you remember the costumes they wore onstage, which were extraordinarily elaborate. And it turns out the reason that they wore those kinds of clothes was because in Swedish tax law you could write off the cost of your work clothing against tax, but not clothing that you could wear in the street. So they made sure that what they wore onstage was something they wouldn't dream of wearing in the street so they could use it to reduce their tax bills.

GARCIA: It sounds like one of the unintended consequences of the change in the tax law might have been to make the world a weirder and potentially more interesting place (laughter).

COYLE: Well, it certainly gave us some classic songs.

(SOUNDBITE OF SONG, "MONEY, MONEY, MONEY")

ABBA: (Singing) Money, money, money, must be funny in the rich man's world. Money, money, money, always sunny in the rich man's world.

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