‘Wonga, the online lender that charges annual interest rates of 4,000 per cent on short-term loans, has launched a service for cash-strapped small businesses that offers to make credit available in as little as 15 minutes.’

Financial Times, May 7

Wow.

The chief executive of Wonga describes it as a “premium service”.

I’ll say. Are they planning to charge 4,000 per cent to small businesses, too?

Apparently not. Their maximum rate is 2 per cent a week, which sounds modest but compounds to about 280 per cent a year. Sharlene Goff, the FT’s retail banking correspondent, reckoned that the largest loan (£10,000) for the longest term (a year) would rack up almost £11,000 in charges. All of this is some way short of 4,000 per cent but it’s not cheap.

How can they possibly get away with that?

You mean, why doesn’t someone put them in prison?

Well – yes, why not?

Because there are no caps on lending rates in the UK. If you treat people fairly and are transparent about your rates, you can charge whatever you like.

That raises another question: how can they possibly find anybody willing to pay that kind of money?

Assuming they do – which remains to be seen – I think there are two possible explanations. The first is that customers are idiots. The second is that some customers badly need the money and have no alternative funders.

Start with hypothesis one.

The thing that makes me nervous here is the fact that the newspaper stories all report that Wonga will release funds in as little as 15 minutes. Surely this is only a selling point for the extremely impulsive or the extremely shortsighted. Most small businesses would be just fine with a lender who took a few days to release funds. We also know, thanks to research from economists such as Annamaria Lusardi and Jonathan Zinman, that a lot of people are financially illiterate and have poor intuitions about the costs of compound interest. You might hope that most company directors would know better, but presumably there will be some exceptions to that rule.

And what about the alternative view: that a loan at an annual interest rate of several hundred per cent or more might be a good business proposition for the borrower?

First, remember that an annual percentage rate might not be the best way to evaluate the cost of a small, short-term loan. If I need to borrow money for a few weeks as a bridging loan, the lender has to bear certain costs and risks – but even a small charge would balloon into a huge annual interest rate because the loan was so brief.

In other words, charges of a few quid might look huge expressed as an APR.

In some circumstances, yes. Remember, if you stumble into an unauthorised overdraft from a high street bank you may end up paying charges of which a payday lender can only dream. I’ve written before about a randomised trial conducted by Dean Karlan, economist, and Mr Zinman on the impacts of loans at 200 per cent APR in South Africa; surprisingly, such loans seem to help borrowers because they allow them to buy work clothes or transport and so actually get or keep a job. It’s not hard to imagine situations where a few grand for a couple of months could keep afloat a fundamentally sound business with cash-flow problems.

Fair enough, but if there are so many fundamentally sound businesses with cash-flow problems, why aren’t banks lending to them?

You’re assuming that they aren’t and I have to say you may be right. The Bank of England’s latest “Trends in Lending” report finds that the stock of lending to small businesses is shrinking fast.

Perhaps because small businesses are paying off their debts and don’t want to borrow?

That’s logically possible, but the cost of borrowing is also rising. I think it’s safe to say that the banks aren’t keen to lend, either because of their own funding costs or because they are nervous about getting paid back.

So Wonga is filling a market niche?

I think Wonga’s main niche is likely to remain cash-strapped, naive consumers, but the publicity this business-lending launch has earned them will do no harm. I can’t get too excited about payday loans for businesses: I am more worried about the fact that they are a symptom of very tough times.

Also published at ft.com.

A few years ago, José Zapatero, then prime minister of Spain, was asked the price of a cup of coffee in a television interview. His answer, a woeful underestimate, became a minor embarrassment. I know all this because shortly afterwards, he appeared at a session of Congress with my book El Economista Camuflado [The Undercover Economist] under his arm – a book that discusses extensively (some say ad nauseam) the price of a cup of coffee. I was suddenly a prop in a surreal political debate.

Thanks to Nadine Dorries the same argument has popped up closer to home: George Osborne and David Cameron are posh boys, she says, who do not know the price of a pint of milk. To accuse them of knowing nothing of lacto-economics seems odd to me. I do not know whether Mr Cameron knows the price of a pint of milk. I do know that he is posh.

I am doubtful about the idea that there is, somewhere, the Platonic ideal of a pint of milk, whose just price is known by all virtuous people but an eternal mystery to the out-of-touch. The reality, of course, is that a pint of organic Jersey milk from a Hampstead deli is likely to cost more than a quarter of a two-quart bottle from Aldi. You will pay more for a pint delivered to your doorstep than if you take the trouble to drive to the supermarket.

Beyond that, you do not need to be a Tory millionaire not to care about the price of milk. I conducted a little survey. Steering clear of soya, rice and goat’s milk, I checked the price of a single pint of ordinary semi-skimmed. It’s 49p a pint in the Marks and Spencer at the local railway station. It is also 49p a pint at the downtown Sainsbury’s. It is 49p a pint in the Tesco next door.

The financial returns to learning about milk prices seem to be limited. There are people who are so strapped for cash – or perhaps, simply curious – that they will keep track. Many others will not, but that should not disqualify them for high office.

The converse also fails to hold: knowing the price of a pint of milk is no mark of a great leader. Before carrying out my survey, I guessed that the price of a pint of milk was 50p. Perhaps Nadine Dorries thinks that I would make a cracking prime minister. I can assure her I would be a profound disappointment.

Also published at ft.com.

An economist who was taken prisoner during the second world war observed that market institutions were universal and spontaneous

Robert A. Radford had, in some ways, a perfectly conventional career as an economist. He studied the subject at Cambridge in the late 1930s, before war interrupted, and his civilian working life was spent at the International Monetary Fund. But he also spent half the war in a German prison camp, and on his release wrote an article in the LSE journal Economica.

The “Economic Organisation of a P.O.W. Camp” is a remarkable piece of writing, in which Radford analyses the economic institutions that arose in tough circumstances. Students should read it to learn about monetary economics, and their professors should read it to learn how to write. But Radford himself thought his experiences constituted more than a teachable moment: “the principal significance is sociological.”

First, a word about the basic economic building blocks. Prisoners received some rations from the Germans, but were mostly sustained by parcels of food and cigarettes from the Red Cross. The parcels were standardised – everyone got the same. Occasionally the Red Cross received bumper supplies, or ran short; in those instances everybody enjoyed a surplus or a shortage.

Radford’s first sociological observation was that there was no gift economy in the camp. Everybody started with the same, so what was the point? But trading quickly developed, because while prisoners had equal means they did not have identical preferences – the Sikhs sold their beef rations, the French were desperate for coffee. So middlemen who could speak Urdu or bribe a guard to let them visit the French quarters had the chance to make “small fortunes” in biscuits or cigarettes. In rare circumstances, the camp’s economy interacted with the outside world: coffee rations apparently went “over the wire” and traded at high prices in black market cafés in Munich.

Market institutions, Radford concluded, were universal and spontaneous, “a response to immediate needs” rather than an attempt to imitate civilian life. One of the spontaneous developments was the emergence of a currency: the cigarette, which was portable and reasonably homogenous. Not entirely so, though: cigarettes could be “sweated” by rolling them back and forth between the fingers to shake a little tobacco out. Gresham’s Law – “bad money drives out good” – asserted itself, as the plumper cigarettes were reserved for smoking, while those that circulated as money grew thinner. When Red Cross supplies were interrupted, deflation set in, as a cigarette bought ever more goods.

The law of one price also tended to hold: arbitrage meant prices rarely varied much within a permanent camp. The chaos of transit camps, however, created profit opportunities. “Stories circulated of a padre who started off round the camp with a tin of cheese and five cigarettes and returned to his bed with a complete parcel in addition to his original cheese and cigarettes; the market was not yet perfect.”

Relative prices moved in response to broader developments – such as an influx of new, hungry POWs – and from day to day. With bread rations handed out on Monday, on Sunday evening “bread now” traded at a premium to “bread Monday”. And yes, there was a futures market.

All this mattered greatly. “The small scale of the transactions and the simple expression of comfort and wants in terms of cigarettes and jam, razor blades and writing paper, make the urgency of those needs difficult to appreciate, even by an ex-prisoner of some three months’ standing,” wrote Radford. His article was written in summer 1945, looking back at March and April, where market prices twitched wildly amid rumour and scarcity. On April 12, the camp was liberated, and, says Radford, “every want could be satisfied without effort.” It is quite a parting thought.

Also published at ft.com.

The NTSB is capable of providing a clear and authoritative narrative, explanations and conclusions about the crisis

After a financial train wreck, it’s time to begin to learn lessons from the disaster and prevent its recurrence.

This is not an easy problem: Andrew Lo, a professor of finance at MIT, recently compared the financial crisis to Kurosawa’s Rashomon, a film in which each character has a different story about an alleged rape and murder. We have no agreed narrative about what has happened in the crisis, which makes it hard to figure out how to prevent it happening next time. The details are picked over in the press, by think-tanks, by commissions and, of course, by ideologues of all stripes.

Professor Lo, along with Jian Helen Yang and Eric Fielding, has proposed an alternative approach to the whole affair in the Journal of Investment Management. Lo, Yang and Fielding argue that there is an organisation that specialises in establishing a clear narrative, ruling out alternative explanations, and drawing conclusions which have real authority and influence. It’s not the Securities and Exchange Commission, the Financial Services Authority, or the G20’s Financial Stability Board. It’s the National Transportation Safety Board, the NTSB.

For more than 70 years, the NTSB – or its predecessor, the Civil Aeronautics Board – has investigated plane crashes, bridge collapses and other transport-related accidents in the US. Why do Lo, Yang and Fielding (who is an NTSB official) believe it is worth emulating?

Two attractive attributes stand out. The first seems paradoxical: the NTSB is not a regulator and has no regulatory authority. “At first I thought this undermined its effectiveness,” Lo told me. “But now I see it makes it more effective. If you are a regulator, how can you criticise your own regulations, for instance?” Quite so: in a crisis where much of the debate centres on whether regulations were too lax or perverse, and whether regulatory authorities such as the Federal Reserve and the Bank of England were asleep at the wheel, a non-regulatory investigator has something going for it.

The second admirable feature of the NTSB is its approach to investigations. First, it holds open hearings to establish a set of objective facts. As each party tries to exonerate itself with evidence about what happened, the facts tend to mount up. This initial focus on facts, says Lo, is an important discipline. Then the NTSB goes into a huddle and tries to settle on a consistent, fact-based narrative; its accounts are rarely challenged.

This all sounds very impressive. Will we get a Capital Markets Safety Board? In the US, perhaps we will: the Dodd-Frank Act established an Office of Financial Research, which has a mandate to gather data and produce or enable better analysis of the financial system. It may develop into something like the NTSB.

The other question, of course, is would an NTSB for finance actually help? There are three obvious differences between transport accidents and financial ones. The first is that what constitutes a financial accident is vague: would an NTSB for finance have studied the collapse of Lehman Brothers? The fraud at Enron? Or vaguer topics such as the dotcom bubble or the sub-prime mortgage industry? (For Lo, the answer is clear: it would study collapses of major financial firms.)

The second difference is that a financial accident is more complex than a physical one: there are more actors involved and far more variables. “It would be way too complicated to reconstruct the cockpit Dick Fuld was in,” says Lo, referring to the last boss of Lehman Brothers. True – but still worth a try.

The final difference might cause the biggest headache. Nobody actually wants to cause a plane to crash or a bridge to collapse; different people have different priorities, but nobody profits from a transport accident. When it comes to finance, that simply isn’t true.

Also published at ft.com.

‘Heathrow passport control misses target’

Financial Times, May 3

How bad are the queues, actually?

Damian Green, the immigration minister, has told parliament that the worst queueing experience was an hour and a half, at Heathrow last week.

Sorry – the worst queue at Heathrow last week was an hour and a half, or Heathrow was the place with the worst queue, ever?

Good question. Meanwhile, Heathrow’s operator, BAA, released data showing the worst queue was three hours.

I’m confused.

The way in which the statistics are gathered and reported doesn’t help either. The Border Force is supposed to ensure that passengers from outside the EU get through immigration checks within 45 minutes 19 times out of 20, while EU-based passengers should get through within 25 minutes, again 19 times out of 20.

They aren’t exactly stretch targets, are they?

No. The Home Office has been proudly pointing to its latest report that shows all these targets have been hit with room to spare.

Hurrah!

Which tells us that things were going smoothly in October to December last year.

Hurroo . . . 

Quite so. And normally we’d just have to wait for the Home Office to get around to publishing data for January to March and finally, in the summer some time, we’d get to hear about what happened in April.

So how come everyone is reporting that the targets were missed in April?

This is unofficial data released by BAA.

Are we comparing apples and oranges, then?

Not really. Both BAA and the Home Office use the same basic methodology. At regular intervals they pick somebody joining the back of the queue and then time how long it takes for that person to clear immigration. There is one difference: BAA picks a person to track every 15 minutes; the Home Office only does it once an hour.

So that might explain why Mr Green and BAA were reporting different numbers.

Yes. Also, the worst cases reported by BAA actually happened shortly after Mr Green had made his statement. Mr Green, incidentally, was trying to have his cake and eat it by using unpublished data to bolster his argument in the House of Commons. His numbers are supposed to be either official statistics or he is supposed to keep them to himself. I suspect the UK’s statistics watchdog will take a dim view of that.

Can we start talking about how to fix the problem now?

Patience. There is one nerdy point about the numbers worth attention. Imagine Heathrow has 10 hours in which 1,000 passengers an hour arrive and walk right through, followed by one hellish hour in which 10,000 passengers arrive and end up camping out half the night.

It’s easy enough to imagine – go on.

Well, in that case half the passengers have had a terrible time. But the way passengers are sampled by both BAA and the Home Office, it was only in one hour out of 11 that things went badly and so only one passenger out of 11 suffered excessive queues. The sampling method they’re using systematically under-samples times when the airport is very busy, which is the very time that queues are longest – Mr Green did, after all, blame “bunching of arrivals” for recent problems.

I get the point. So things may be worse than the official numbers suggest.

Yes. And since the official numbers suggest that almost a quarter of non-EU arrivals at Terminal 5 in April had to wait more than 45 minutes, the baseline is hardly great.

How do we solve the problem?

More staff. As a rough reckoner, if a queue is an hour long and you open up a new desk, every person you pull out of that queue saves an hour of queueing time. If an immigration official can check 60 people an hour then she is saving 60 hours of passenger time for one hour of her time.

But who is going to pay them? The government? The airlines?

The point is, the benefits are greater than the costs, so if the government can’t figure out how to make the queues go away they’re not fit for office.

At least the Border Agency is recruiting, right?

No, they’re going to cut staff by 18 per cent over the next three years.

This is insane! I’m going to complain to the Home Office.

Really? Join the queue.

Also published at ft.com.

‘It’s official. The UK is in a double-dip recession.’

Financial Times, Lex, April 25

That sounds bad.
I hate to split hairs, but there is no official definition of recession in the UK. But if you’d like to tell yourself we’re in a recession, don’t let me stop you. What’s happened is that the UK economy apparently shrank in the first quarter of the year; it also shrank in the final quarter of last year, and two consecutive such quarters typically earn the tag “recession”. I note that after pronouncing an “official recession”, Lex described this customary definition as “arbitrary and unhelpful”, which sounds about right to me.

You seem to be denying the seriousness of the situation.
I am not denying the seriousness of the situation. I’m just sceptical that we learnt much about it this week. The nation’s commentariat has become fixated on this question of whether the economy shrank over the last quarter because if so, we can call it a recession, if not, we can’t.

You are denying the seriousness of the situation.
The situation is serious, no doubt about it. The British economy hit a peak in 2008 and we’re still not close to passing that previous peak. This is unprecedented in living memory; even in the early 1930s a recovery sufficient to pass the pre-recession peak would have happened by now. By any reasonable measure, the British economy is in deep doo-doo. This makes the fixation on whether growth in the last quarter was slightly positive or slightly negative all the more baffling. What happened this week was this: the Office for National Statistics produced an early and uncertain estimate that the economy was two-thousandths smaller at the end of March than it had been at the end of December. If the ONS had instead guessed that the economy had been two-thousandths bigger at the end of March, I hardly think we’d all be dancing in the streets.

It would have been more welcome news.
Fractionally, yes. We’re treating the whole business as a black/white, pass/fail affair. In fact, it’s all shades of grey. Remember that we’ve already had negative quarters of growth in this non-recovery, in late 2010 and twice in 2011. This time, though, two of them were consecutive. To add to the murk, it’s worth bearing in mind these figures are often revised substantially.

So growth might not be negative at all?
Indeed. Or it might be even worse than we think. Although in this particular case, it’s probably worth pointing out that alternative indicators, such as surveys of business activity, are painting a rosier picture. Many City economists think that if there is a revision of these figures, it will be up rather than down.

Ah, those infallible City economists! So, is this all about austerity or is it the eurozone crisis?
What makes you think the two are mutually exclusive? Clearly neither is likely to help the situation. Although the ONS figures cast an intriguing new light on the austerity debate.

How so?
Take a look at the back page of the ONS press release and it breaks the numbers down by sector, showing how each has developed since 2008.

And what’s the story?
A couple of sectors have done very badly, for example agriculture is down more than 20 per cent and mining is down by almost a third. Others, such as construction and manufacturing, are down by 5 per cent or 6 per cent since 2008.

Has any part of the economy grown since 2008?
Well, yes. There is one sector.

Don’t keep me in suspense – what is it?
Government.

What?
Surprising, isn’t it? Well, strictly, “government and other services”, so it includes defence, the National Health Service and so on, but also private education and private healthcare. That sector of the economy has expanded by more than 5 per cent since 2008; health and social care has expanded particularly strongly.

What happened to austerity?
A couple of things. One is that the government hasn’t really cut much yet. The main austerity measures so far have been tax rises and they might have contributed to the slowdown in other sectors of the economy. So if this is what happens when government services are still expanding, you might enjoy contemplating what will happen when austerity really kicks in.

Also published at ft.com.

Be careful whose interests the expert is serving…

Don’t try this at home: seek professional advice. A sound maxim, one might think. Unless you know something about electrical wiring, get an electrician in; go to a doctor rather than diagnosing yourself. And, since you are a fallible investor, choose your financial portfolio with the help of an investment adviser.

But do typical investment advisers give good investment advice? Three economists recently published research exploring this question in an intriguing fashion – they mixed the experimental methods of a double-blind controlled trial with the latest behavioural economics, all seasoned with a dash of tabloid sting.

The researchers recruited professional mystery shoppers and asked them to seek advice from a variety of financial advisers in Massachusetts. Each mystery shopper was equipped with one of four imaginary portfolios.

The first portfolio exhibited the classic investor bias of buying whatever did well last year. This is likely to destroy value partly because it leads to excessive trading, which is expensive, and partly because, as the small print says, past performance is no guarantee of future results. Mystery shoppers with this portfolio were instructed to ask the financial adviser to recommend further hot stocks.

The second portfolio demonstrated a different bias: 30 per cent of its value was invested in the imaginary investor’s employer. This is common, but unwise: it reduces diversification for no good reason, and exposes people to the risk that they lose both job and savings if the employer seeks bankruptcy.

These portfolios were artfully designed, because if a financial adviser is paid on commission – and everyone in this experiment was – he will have an incentive to exaggerate the first bias and to discourage the second one, in both cases to create the opportunity for earning a slice of the resulting trades.

The third portfolio was close to perfect, at least from the point of view of the economists, Sendhil Mullainathan, Markus Noeth and Antoinette Schoar. It was diversified and packed full of US bonds and low-cost index funds invested in US equities. Good investment advice would be not to touch it; at a push, a financial adviser might suggest purchasing some index funds invested outside the US.

The final portfolio was the control: a blank slate, invested entirely in cash. The mystery shoppers holding this were told simply to ask for advice, and to state they were willing to take more risks if necessary to earn a higher return.

What I love about this experiment is the way it was done. It was double-blind: not only did the financial advisers not know what was going on, but the mystery shoppers weren’t told why they had been given a particular portfolio, nor that there were three other “treatments” doing the rounds.

Nor did the researchers know which advisers had been visited by which mystery shoppers – the logistics were outsourced to an audit firm.

And the results? Advisers made flattering remarks about the clients’ portfolios and then proceeded to try to change them in exactly the way that would tend to generate commissions. The gap between flattery and action was particularly stark in the case of the diversified low-cost portfolio; advisers were more likely to praise it, but more than 85 per cent of them tried to change the strategy.

Almost a third of advisers refused to give any advice at all until the client agreed to transfer control of their portfolio to the adviser, which makes it almost impossible to rate the quality of the advice. And a curiosity: this behaviour was substantially more common when the mystery shopper was a woman.

My financial advice? If you’re looking for investment advice, be careful whose interests your adviser is serving. And if you’re a financial adviser, beware economists bearing randomised trials.

Also published at ft.com.

‘Royal Mail has increased the price of first and second-class stamps by 14p to record highs, after it was given freedom to set its own prices as it heads towards privatisation. A first-class stamp will now cost 60p, with the slower second-class service priced at 50p from April 30.’ – Financial Times

Cue panic buying of stamps
Perhaps a little. Some shops reckon they’re out of stamps. Others say they have stock, and you can always order in bulk from Royal Mail.

A risk-free investment opportunity?
Not quite. I bought almost £300-worth of stamps and am now an unsecured creditor of Royal Mail: it’s always possible that the company will simply not provide the service I thought I was paying for.

Is that likely?
Outright default is unlikely, I am sure. Chipping away at the value of what is on offer is always possible – anyone who has tried to spend air miles can testify to that.

But it didn’t discourage you from plunging in.
I think the risk is worth the reward. I suppose I could have ordered £3,000-worth of stamps, or £300,000, but I don’t really plan to become a stamp dealer. For more modest purchases the investment looks like a no-brainer. It’s very unusual to have access to an asset whose value is guaranteed to increase by 39 per cent overnight. Normally arbitrageurs would leap in to buy now and sell later so the price today would converge with the price tomorrow. But Royal Mail has the absolute right to set the price of a stamp.

Not in the secondary market.
True. We may well find that very few people buy stamps over the counter for a while, buying instead cheap stamps from the stockpilers. But it’s such a small and occasional purchase for many people that I suspect simplicity will win out and this secondary market is going to be limited.

Fattening the company up for privatisation?
Potential investors would have to be pretty thick to mistake one month’s windfall sales for a trend and the stockpiling will presumably make it hard to judge what demand really is for postage at a more expensive rate.

The new price does seem prohibitive.
Royal Mail is adamant that UK stamp prices are still among the best in Europe.

Is that true?
Well, I’ve always thought that when you think about what is involved to get a letter from one end of the country to another, stamps are a bargain. But less so at 60p a pop, I’ll admit.

And compared with other countries?
It’s not as much of a steal as Royal Mail would like you to believe. If you’re posting a heavy letter second class and make various adjustments for purchasing power parity, you can get British postage to look quite cheap. But when my colleagues on the BBC’s More or Less radio programme compared the cost of posting a couple of sheets of paper, first class, they concluded that the British postal service was about to become one of the most expensive in the world.

Damn lies and statistics, eh?
Well, perhaps. The truth is there are so many variables it’s hard to make reasonable comparisons. It’s very costly to post a letter in Peru, for instance, but they do have the Andes to contend with. And it’s pricey to post a letter in Jamaica, but apparently your letter can travel almost anywhere in the western hemisphere for the same price.

The comparison everyone is making is that stamps will be more expensive soon.
Quite so. No wonder so many people are stocking up. Hopefully the experience will set George Osborne thinking.

Hasn’t he done enough thinking? The pasty tax and all that.
Ah yes, the pasty tax. Imagine if pasties could be stockpiled like stamps.

Imagine? Some of them look like they could survive a nuclear winter.
By pre-announcing a tax on pasties Mr Osborne could stimulate the economy by encouraging stockpiling today. So, imagine what might happen if the chancellor announced next year he would increase VAT again. Everyone would have an incentive to buy now anything that could be stockpiled before prices increased. Macroeconomists such as Simon Wren-Lewis of Oxford university have argued that a pre-announced VAT rise is one of the least damaging ways for a government to implement an austerity programme.

Maybe somebody should tell the chancellor.
I’ll write him a letter. First class.

Also published at ft.com.

Collaborative consumption websites and microlabour services may lower transaction costs but they raise the issue of internet-based trust

Loyal readers will recall the second-hand Volvo I bought six years ago. After an unpromising start, it’s now ticking over nicely. Well, ticking over may be the wrong phrase. Mostly it just sits around. It is occasionally invaluable for our family of five. Still, it hasn’t moved today. It didn’t move yesterday. It feels like a waste of a good car, but what is the alternative?

Digital technology is providing several alternatives, making it easier and easier to unlock the hidden value in such assets. Companies such as Zipcar will rent you a car by the hour. More radical are the likes of WhipCar, which allows owners to rent out their cars when they don’t need them. The opportunities are obvious, as are the obstacles.

WhipCar is an example of what the hip kids are calling “collaborative consumption”. The term seems to cover a multitude of activities. Ebay will let you sell your old stuff to someone who wants it more than you do. It was radical when it first appeared, not because the idea of a second-hand shop was new, but because of its unparalleled ability to find buyers – and sellers – for narrow niches.

More recent sites such as Swap.com or Freecycle will let you swap with others, or simply give away unwanted kit. On Zopa, lenders find borrowers without the need for a bank. Then there’s Airbnb (WhipCar for your spare room), or Landshare (people with unruly gardens meet people who want to do gardening).

Alongside the collaborative consumption sites are microlabour services such as TaskRabbit and Amazon’s Mechanical Turk, both of which connect people with small tasks to be done and people with time to do them. The actual offerings seem very different: TaskRabbit operates in just a few markets, such as Boston, Chicago and San Francisco, and is full of cheerful-looking background-checked locals who will run errands for you or put together an Ikea desk. Mechanical Turk distributes digital tasks anywhere in the world – but it has acquired an unenviable reputation for rock-bottom pay and spam.

For all the variety on show here, collaborative consumption and microlabour share two important characteristics. The first is that digital technology is lowering transaction costs, making it easier and easier for people to sell (or swap, or share) very small offerings. The second is that because so many of these offerings are in the hands of individuals rather than branded corporations, mechanisms for maintaining trust are very important. If we are going to let strangers stay in our homes, or drive our cars, or have custody of our dogs, on a one-night-stand basis, we may need some kind of reassurance.

Internet-based trust mechanisms where website users rate each other after each transaction also seem to be working tolerably well. Online rating systems can be tricked, but have held up better than anyone might have anticipated 15 years ago. Rachel Botsman, an evangelist for collaborative consumption, argues that trust is the pivot on which many of these new possibilities turn. It is hard to disagree. Presumably the likes of Google and Facebook are licking their lips as they contemplate their role in creating digital identities where your punctuality on eBay, efficiency on TaskRabbit and cleanliness as an Airbnb guest can be stitched together in a seamless tapestry of reputational capital.

And there is a curiosity here. Enthusiasts such as Botsman celebrate the way in which the internet enables human connection, where you can transact with real people rather than faceless corporations. But the other thing that is emerging is an ever-more-perfect market, with high price transparency, low transaction costs, and few interactions that cannot be priced and paid for.

The promise is either of creating value with a far more human touch, or of a hyper-competitive global marketplace. It would be fascinating if these things amounted to much the same.

Also published at ft.com.

‘The latest advice is that there is no need to queue at forecourts or “top up your tank” as there will not be a strike over Easter. The [energy] department is also urging motorists to stick to speed limits to conserve fuel. ’
Financial Times, April 2

Good morning. How are you?

I’m distraught. No Easter egg for me last Sunday.

You’re joking.

It’s true. My wife went to a fancy patisserie to buy one, only to discover that they’d sold out. A cheap one would have done, to be honest.

They’re all cheap now.

They are. It’s puzzling, though. If it’s fine to cut the price of eggs when demand falls, why not raise the price when demand is high? Why didn’t the patisserie put up the price of their last few eggs, rather than sell out on Maundy Thursday?

I don’t think that would have gone down well. Price gouging, don’t you know.

I’d rather think of it as dynamic pricing. I realise people use pejorative terms to describe it, but we’d all be better off if certain products varied in price a bit more.

Example?

Well, last week we discussed water and proper metering and seasonal pricing as a rational alternative to hosepipe bans. Or petrol. Remember the petrol panic a couple of weeks back, when everybody rushed out to fill up their tanks, causing queues and shortages?

You think petrol stations should have whacked an extra 20p on the price?

Of course. Think about it. There was a sudden demand for petrol because of the fear of a strike and shortages.

It was a government-engineered panic.

It was, although the point is, the demand was purely precautionary. The actual need to drive around didn’t change. Some people whose cars were empty had to queue for hours, or even go without. Those who needed petrol would have been able to get 10 litres quickly and easily at the cost of an extra couple of pounds. Meanwhile, the people who late last month were topping up their tanks because – well, why not? – would have waited for prices to fall again. The petrol stations would have provided a valuable social service by charging more, as well as making money into the bargain.

The petrol stations that did raise prices were vilified.

They were, which shows that some people don’t know what’s good for them. The idea of the “just price” has a long history but very little economic basis. There are some theoretically sophisticated stories one can tell explaining why prices tend to stick, but the truth is that in most cases we’d be better off if they moved more. The latest toys wouldn’t all sell out at Christmas, there’d be fewer hosepipe bans, you wouldn’t need a lottery to allocate Olympic event tickets and I’d have been chowing down on an Easter egg last weekend.

Life doesn’t always respect your fancy economic models.

Indeed not, and thank goodness – although the laws of supply and demand are hardly fancy. But the fuss about price gouging really does make us worse off. There are two problems with prices that don’t rise quickly enough in the face of fixed supply and high demand. First, the goods may not reach the people who want them most. Second, even the lucky customers who get the cheap product may lose out because of the non-monetary costs of getting it.

Such as?

Such as queueing for hours to get the latest iPhone or a day pass to Wimbledon, for example. Many, surely, would happily pay a little extra to sidestep these wholly avoidable costs.

If this is such a brilliant idea, why don’t we see more of it?

The simple answer is because people hate it and call it price gouging. Why people hate it is another question and one to which there is no straightforward answer. The riddle deepens because some products are routinely sold using dynamic pricing and nobody complains – for example, seats on an aircraft.

It’s not true that nobody complains. You complain about Ryanair all the time.

Yes, but that’s because of the opaque drip-pricing, the unassigned seating and the lack of customer service. It’s not about the same type of seats at different prices. I have no problem with that idea and, curiously, I’ve never heard anyone else complain about it either. But if you tried to price Wimbledon tickets like that, there would be a riot in SW19.

Why, what’s the difference?

I have no idea. But at least I was able to feast on cut-price chocolate eggs all week.

Also published at ft.com.