Cabbies, Cyclists and the Cost of Living        


Why is it so hard to get a cab in the rain?  Increasing demand surely – despite there being no recorded example of any human less than 100% waterproof, most of us prefer not to get wet. But if you are a classical economist, supply should increase to match demand. The more people want a cab, the more of them should appear on the streets to satisfy that desire until equilibrium is reached.

But that doesn’t happen. The supply of taxis is limited by regulation – those who have passed “the Knowledge” in London, or those in possession of a medallion in New York. If you get wet, the theory goes, you should blame the government.

Except you can’t. For when two Israeli psychologists decided to investigate the problem in the seventies, they found something unexpected. The number of cabs available in New York on a rainy day was actually lower than on dry days. Such an unexpected result demands an explanation and what the researchers, Amos Tversky and Daniel Kahneman, discovered was that at the start of each day, the taxi drivers set a target income and worked until they achieved it. And once they had, they went home.

The upshot of this was that on pleasant days, when potential fares preferred to walk, the drivers worked very long hours to meet their target, and on wet days, when customers were easy to find, they did very short shifts. As a result, supply did the opposite of the predictions of theory, expanding when there was little demand, and shrinking when it was high. The problem was that economics assumed that people were rational, and it turned out they were not. If they were seeking to maximise their economic outcomes, they should have lengthened their shifts on rainy days when there were many potential fares, or, if they had already finished, gone back out. Instead, reaching their target early, they called it a day, leaving easy money on the table.

Over the subsequent decades in numerous papers, the pair found countless similar examples of people acting in ways which were not in their best interests, attacking the core assumption of the subject that individuals were rational seekers after their own economic utility. Rather, they argued, people were subject to biases (over 180 at the latest count) which prevented them from doing so, explaining countless examples of missed opportunities or market failure. After Tversky’s untimely death in 1996, Kahneman was awarded the Nobel Prize in Economics for their joint work and wrote Thinking, Fast and Slow, one of those break-through academic crossover books bought by many and read by few.

This brief spin through intellectual history gives context to the outrage in recent days over comments by the Tory MP Lee Anderson and the Minister, Rachel Maclean. The former, in a manner redolent to his opponents of Marie Antionette at her most haughty, suggested that “generation after generation” “cannot budget properly” or make meals from scratch, comments which were “beyond belief” or “disgraceful” depending on whether you were Labour or the Lib Dems. Ms Maclean, perhaps believing that once you’ve put your foot in it, you may as well keep walking, suggested that those suffering from the rising cost of living could work longer hours or seek a better job. Her comments were either “out of touch” or “disgusting”, depending on whether you wanted to attack her understanding or her morals.

The assumption underlying these responses is that people are already doing everything they can in the face of rising prices. They have analysed the situation, worked out all of the possible solutions and are applying the best one. Tulip Siddiq said that her constituents were “working every hour possible” and still struggling. In some individual cases, this might be true, but at the macro level, behavioural economics should make us sceptical. People do not generally behave like that. They do not do all they can to maximise their economic self-interest, they make trade-offs. We do not apply pure, disinterested reason to our circumstances, we follow well-worn paths of thought. We have blind spots. Our biases lead us to miss opportunities. We are not desiccated calculating machines, devoid of emotion. If we were, the government would probably not have paid £400mn to Iran for the return of Ms Siddiq’s constituent, Nazanin Zaghari-Ratcliffe. Having good evidence that people are irrational, we should be wary of a politically convenient argument which relies on them having undergone a miraculous conversion to rationality.

But if the behaviour of cabbies should make us sceptical of the opposition’s claims, their natural enemies, the cyclists, can lend some support to Anderson and Maclean. For while their ideas will not solve the crisis, they might ameliorate it. If more people knew how to cook cheap meals, their outgoings on food would probably decline. If people worked longer hours, assuming they could, their incomes would rise. Neither of these approaches, on their own, might resolve the problem, but, like the “marginal gains” philosophy applied so successfully by British Cycling and Team Sky, they would add up to an improvement in the situation.

By contrast, the solution favoured by the Opposition – broadly handouts funded by windfall taxes – is a big-bang solution, aimed at solving the problem in one go. As many, including your correspondent and, perhaps slightly more famously, Jeff Bezos, have pointed out, stimulating an overheating economy merely tends to increase inflation. If your problem is too much money chasing too few goods, adding more money to the system is an interesting way to solve it. While it has the undoubted advantage, for a politician, that it involves politicians doing things, in reality it will do little to resolve the underlying drivers of the current problem such as war-influenced commodity prices and global shipping backlogs and by increasing current demand, it risks entrenching the problem rather than solving it.

Instead of arrogance, the current situation demands humility, both from politicians in realising that they cannot solve every problem, and from ourselves in understanding that we are probably not doing absolutely everything possible to improve our situation.  The Tories may be the “Stupid Party”, but they may, in this case, have the wiser approach.

Stewart Slater works in Finance. He invites you to join him at his website.