Month: September 2022

Risks, Investment and the Government

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I linked to a Scott Galloway post about this topic recently, and have other posts about this topic (see this review of The Entrepreneurial State, and a post on R&D spends in an Indian context).

And the reason for another post about this topic is a recent Ezra Klein column about a new initiative out of the United States called ARPA-H:

Shortly after winning the presidency, Biden persuaded Congress to fund an analogue focused on medical technology: ARPA-H. Why do we need an ARPA-H when the National Institutes of Health already exists? Because the N.I.H., for all its rigor and marvels, is widely considered too cautious. ARPA-H will — in a move some lament — be housed at the Institutes, but its explicit mandate is to take the kind of gambles that Darpa takes, and the N.I.H. sometimes lets go. Wegrzyn, Biden promised, is “going to bring the legendary Darpa attitude and culture and boldness and risk-taking to ARPA-H to fill a critical need.”

https://www.nytimes.com/2022/09/18/opinion/biden-invention-arpa-h.html

Please read the whole article, as always, but I wanted to use this post to talk about the three things that make up the title of today’s post: risks, investments and the government.

If you are a student of economics, how should you think about these three things, and why do they matter?

  1. Investment is necessary for an economy to grow. And investment depends on a whole host of factors, and for a variety of reasons, this investment isn’t always forthcoming at speeds which one would like. This is one way to think about macroeconomics as a field of study.
  2. Part of the reason the requisite level of investment isn’t forthcoming is because of risks. Not all investments bear fruit, and it is quite likely that some investments will fall by the wayside. If firms are risk-averse, they may choose to not invest.
  3. Risk aversion (whether on parts of firms or individuals) isn’t a constant. It keeps on changing, once again for a variety of reasons, and what makes this even more difficult is that the assessment of risk is a very subjective phenomenon. You can dress it up in the garb of statistics and models as much as you like, but you’d be wrong to assume that subjectivity can be eliminated entirely. Leave alone the difference between risk and uncertainty, and the discussions that follow from here on in. That’s a whole other topic!
  4. If private firms aren’t willing to make investments, or take risks, especially in the case of moonshot investments that other nations are making, governments might decide to step in and invest instead. Remember that there is no reason to assume that governments will get the judgment call of when to do so right. They are as prone to mistakes as they rest of us, and if you take into account incentive alignment, you might well be right in assuming that they are likely to do marginally worse.
  5. But remember always that all-important question: relative to what? That is, if the need to invest is pressing and urgent (strategic considerations, geopolitical considerations, the need to develop more rapidly than we are thus far), and if investment is not forthcoming from the private sector, it makes sense for government to step in and get things moving.
  6. When should government step in? How much should it fund? How should it recoup its investments, if at all? How long should it stick around? What are the metrics of success? What are the opportunity costs? How is continuity of such programs guaranteed across different political administrations?
    There are no easy answers to these questions, and controversies galore are guaranteed.
  7. But the bottomline (to me) is that investments are necessary, they are risky, and they aren’t always forthcoming from the private sector. And there is therefore a role for government.
  8. But an economist should also worry about whether government will get it right or not, and if not, for what reasons. And to focus on making suggestions to make the processes associated with this better. This is hard, it is politically fraught, and it will go wrong more often than not.
  9. But it is necessary, and often unavoidable.
  10. If you are new to economics, and are wondering how principles of economics are applicable in “real-life” problems, I guarantee you this – you can spend entire careers thinking about these issues. And no matter when you start, your timing couldn’t be better.

A Column, A Tweet and a Substack

Ashish3 Comments

There’s been a fair bit of controversy recently in my corner of the internet. What does my corner mean, you ask? Well, my corner of the internet is where I focus on figuring out how to help people (young folks in particular) learn better. Anything related to this topic is my specific area of interest, and anybody who writes on this topic is my tribe.

And as it so happened, a recent column, a recently deleted tweet and an old Substack coalesced in my mind recently.

The recent column was written by Nitin Pai. The title of the column is “The Misleading Outrage over 18-Hour Work Days“. As always, it is an interesting, thought-provoking read. If the Livemint article is behind a paywall, Nitin has a version up on his own website, available here.

Earlier this month, the chief executive officer (CEO) of Bombay Shaving Company was forced to apologize for advising people in their early twenties to put in 18-hour work days for 4-5 years, and work hard. The social media backlash accusing him of promoting a toxic work culture was so strong that he quit that platform entirely.

https://www.nitinpai.in/2022/09/12/letter-to-a-fresh-graduate

I have not read the original post, and if the person who came up with the post has now deleted his entire profile, let alone the specific post, I suppose digging it up will be quite difficult. If you’ll permit me the indulgence, I won’t go around looking for archives of the post.

Nitin’s next paragraph is where things get truly interesting:

The man would be wrong if he had demanded that his company’s employees work such long hours and judged them solely on that basis. But to the extent that he was counselling young people on the attitude you need to adopt early in your career, he was speaking in your interest.
Remember, all those people on social media stoning the folk devil of the day don’t care about your interests. I think you have a better chance of success heeding his advice than of those who criticized him for what he said. For those of us who started from humble beginnings, hard work is the surest ticket to upward mobility.

https://www.nitinpai.in/2022/09/12/letter-to-a-fresh-graduate

And I’m sure somebody on Twitter will tell me why I’m wrong to agree with these two paragraphs, but… I honestly do not see why what Nitin has said here is even remotely controversial. The attitude that Nitin is speaking about is, in my opinion, indispensable. There’s no alternative to hard work, and you can pick any number you like – 18 a day or 10,000 in total, or any other. But it’s not so much about the number as it is about the attitude – and the attitude is about being willing to put in the work.

And because there is no such thing as a free lunch, putting in the work might mean having to cut some things out of your life.

Now, you might well decide that 18 hours of working is far too much. Or you might decide that you might want to put in 18 hours five days a week. But don’t get hung up on the specific number – put in the hours that you need to put in, and you need to figure out what those hours look like given what you know about yourself and your own life.

That’s it.

And if this is deemed controversial, so be it. This was good advice to me when I started on my career, and this is advice that I give to young folks today.

But there was another line in Nitin’s column that caught my eye.

“Your family and well- wishers would have advised you to sacrifice some of your leisure so that you can improve your life prospects.”

A person I follow on Twitter recently came up with a somewhat similar tweet. He’s since deleted it, and I’m afraid I cannot quote it in its entirety from memory, but here’s what I remember of it:

The tweet advised one to have more serious pursuits/hobbies at a young age. Sports might come later, as might dance, for example. If you’re seeking out leisure, try and develop hobbies of a more serious nature.

Again, let me be very clear. I’m telling you what I remember of the tweet, and I may well be not remembering it entirely accurately. But while in Nitin’s case I found myself in complete agreement with his column, I find myself in slight disagreement with this tweet.

Disagreements are fine! Please feel free to disagree with my post, and please feel free to tell me, whether on social media or by way of commenting on this post, or by email. I hope we can get into a lovely little argument about why we disagree, and figure out for both our selves about what is the correct way to think about this issue. Not, note, who is right and who is wrong between the two of us. But rather, what is the right way to think about it. That is the point of an argument – figuring out what is the correct answer. Not winning it.

I should note over here that this is easy for me to write, but difficult for me to practice. I struggle with it every time I get into an argument, but this is one of those things that is worth the struggle.

But let me now tell you why I disagree with the spirit of the tweet. Because the tweet was telling me what to do to get the best out of life, not how to go about it.

The YouTube channel MKBHD produces some really good videos, as does 3Blue1Brown, and they both work extremely hard at both creating fantastic videos, and also at doing so regularly. You might say that one is frivolous and the other is not, but trust me, both require a lot of extremely hard work.

In my opinion, it is not for me to tell you what you should be doing at any age. That answer can only come from within. The answer (for you) may well be making Instagram reels, or TikTok videos. Or it could be composing a saga in Sanksrit. Or it could be becoming the next best thing in Indian cricket. Or something else altogether.

But once you’ve decided what that something is, Nitin’s point becomes applicable. Boss, you want to be the best at this thing you’ve chosen to do? Start working!

Which brings me to the Substack post. So you should work hard, no matter what you chose to do. But what should you choose to do?

Well, as I said, not my place to tell you – that choice must come from you, and you alone. Not me, not Nitin, not the person who wrote the deleted tweet, not your best friend, not your parents, not your significant other. You, and you alone.

But I’m happy to tell you that I think I can give you advice in this regard. If you’ve chosen to do something, do you enjoy the process of working at it? Do you enjoy the hours you’re going to have to spend on working at it, day in and day out? Do you, in fact, enjoy this so much that this – the journey – ends up becoming its own reward? So much so, in fact, that the outcome doesn’t matter that much in comparison?

If yes, then congratulations, for now you’re not working 18 hours a day. For it’s no longer work, is it? It is something that you truly enjoy doing for its own sake. And a positive outcome, however defined (a prize, first place in class, a great career, awesome pay packages) is a bonus, but not the point. The point is the process.

So, your motivation should not be primarily based on the goal/outcome/results. Success is best achieved by those who find motivation in the process, rather than the outcome.

https://futureiq.substack.com/p/karmanyevaadhikaraste-in-modern-life

So what should you do in life? You know best! But don’t choose to do something for the sake of the expected outcome, choose to do something in which you enjoy the process.

“For example”, I hear you ask? Well, I enjoy the process of trying to write (and then post) everyday. Do I manage to do so every single day? Alas, no. Life sometimes gets in the way. But do I enjoy the process of reading stuff, and asking myself if what I’ve read will help me help young folks learn better, and then writing about it?

I love it. I adore it, I am besotted with it, and I never want to stop.

Try it. And by it, I mean optimizing for the enjoyment of the process, rather than the potential outcome.

And if it clicks, I envy you the happiness you’re about to feel. 🙂

Audiobook Bleg

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In general, I prefer reading content rather than listening to it.

I read much faster, for one. And while it is certainly true that I can listen at 2x, it still is faster in my case to read. Plus, no matter how hard I try, listening at 2x doesn’t seem like a – for lack of a better word – nice experience. I know I should be defining this better than simply saying “not nice”, but that’s the best I can do for the moment.

There are exceptions, of course. If it’s an Amit Varma podcast, 2x is an imperative (although I do know folks who listen at 1x). And given the quality of each episode, and given the fact that transcripts aren’t yet available, the opportunity costs are worth it. But in general? Reading trumps listening.

But even in the case of Amit’s podcast, my preferred location for playing it is in my car. I get far too easily distracted during walks – could be a chain of thought that develops because of something that was said on the podcast, could be a dog that walks past me, or it could be a nice little bout of daydreaming. Shouldn’t be happening, and I ought to be worried about my attention span, but now what to do?

In a car, though, it is a different story. The hassle of trying to drive a car through the dynamic jigsaw puzzle that is Pune’s traffic is the perfect semi-distracted environment in which I just have enough attention to give to the podcast and nothing else.

But audiobooks? Never been able to consume them. I’ve tried with a couple, but rarely gone past the first two chapters. I did listen, with my daughter, to a couple of Harry Potter novels during the lockdown (Stephen Fry was a major reason why), but that apart, I haven’t had much luck.

Recently though, David Perell recommended a book called “The Goal”, and specifically recommended the audiobook. I’ve been listening to it, and it has been a very enjoyable listen. I’m about halfway through, and in this case, definitely plan to finish it.

  1. It’s got a lot of dialogues, and the audiobook does a nice job of making them seem very stylistic and entertaining.
  2. The rhythm of the conversations sounds much better when you’re listening to it, and because the book doesn’t contain a lot of dry descriptive sentences, the format really works.
  3. Each chapter is fairly short – about ten minutes or so, and these bite sized chunks work for me when listening.
  4. There is also some background music that plays at the start and during the chapter, and that enriches the experience of listening, at least for me.
  5. The concepts that are being spoken about in the book are directly related to economics, and the treatment is novel enough for me to remain interested.
  6. The fact that these concepts are interwoven with at least two different stories involving the protagonist make for an interesting tale, and that acts as a lovely bonus. It’s a hook that has kept me interested so far.

All of which was to explain to you why I like this particular audiobook – and to explain why I’m more than willing to try some other audiobook content once this one is done.

So: here’s the bleg.

What audiobooks do you think I might like?

Please do let me know, whether in the comments or however else you like.

Relative to What?

Ashish1 Comment

“We should not measure GDP because there are so many problems/controversies surrounding it.”

“Democracy doesn’t work.”

“Three hour examinations using pen and paper, sans Internet access, don’t make any sense .”

Just three examples of assertions out of many, many possible ones – and there is just one question that is good enough by way of response:

Relative to What?

That is, if you are saying that we should not be measuring GDP, are you saying that we shouldn’t be measuring economic output at all? Or are you saying that GDP isn’t the best measure of economic output? But both can be summarized more easily by saying “relative to what”? If you’re saying that a world with no economic measurement is better relative to a world with economic measurement, why are you saying so? If you are saying that GDP isn’t the best possible measure – relative to what? Whatever this other measure – is it as objective, as easy to obtain, as easy to meaningfully compare, as GDP?

Democracy doesn’t work compared to what? Are you suggesting a political system such as anarchy? And if yes, why is it better than democracy? Along what dimensions is it better, along what dimensions is it worse? How do you know? Are you suggesting another political system, not the absence of one? If so, which – and how is this system better and worse relative to democracy? Short summary: relative to what?

Wake me up at three in the morning, and I’m happy to go on a rant about how three hour examinations with no internet access simply don’t make sense for much of higher education. There are exceptions, and I don’t mean this as a one size fits all rule, but I should still be able to defend my stand if I’m asked the question: relative to what? Take home essays? Open book examinations? Take home question papers? No examinations? Vivas? Capstone projects? In what ways are these alternatives better, and in what ways are they worse than three hour in class examinations sans internet access? Short summary: relative to what?

It is extremely easy to poke holes in any system, because no system is perfect. The reason no system is perfect, as far as an economist is concerned, is because there is no such thing as a free lunch. That is, opportunity costs are everywhere.

So this, my second question, is effectively a restatement of the fact that opportunity costs are everywhere, or that there is no such thing as a free lunch.

But however you phrase it, the point is that as a student of economics, it is not enough to criticize the status quo, or to reject an idea as being bad/problematic. Evaluate the status quo or the alternative by gauging it against its competition.

“But xyz is bad because of abc reasons” is bad economic analysis. Well, incomplete economic analysis, at any rate. “Xyz is bad because of abc reasons, but it is also good because of pqr reasons, and it is better/worse than efg. Hence we’re going with xyz/efg” is better economic analysis.

Always remember:

Relative to what?

Two Magic Questions

Ashish2 Comments

I’ve linked to this magnificent paper by Robert Frank quite a few times by now, and will begin today’s blogpost with a quote from it as well:

Again, the important point is not whether this is the best possible short list of principles but rather that instructors will teach their introductory students more effectively if they begin with a well-articulated short list of some sort and then doggedly hammer away at it, illustrating and applying each principle in context after context.

https://www.siue.edu/~wrichar/economic%20naturalist%20writing%20assignment.pdf

His list of principles is worthy of discussion, because it is different from mine. Of course, as he himself says, a different list is just fine (I would argue it’s a good thing, because there is then more to learn), and when I say worthy of discussion, I mean that as a “Yes, and” discussion rather than a “No, but” discussion. (Have I linked to this tweet before? Yes. And I will do so again, as will I link to Robert Frank’s paper again, because one should doggedly hammer away at points that need to be reiterated, giving context after context!)

But the reason I begin with this excerpt is because I want to add to my own list of principles two different questions which I believe help one become a better economist. I’ll speak about the first of these questions today, and add the second one in tomorrow.

Here’s the first question:

What are you optimizing for?

Here is a list of questions that I usually get at the start of every academic year:

  1. Which stream should I take, or if from a parent, which stream should my child take?
  2. Should I accept admission in xyz college, or should I go to abc college instead?
  3. Which universities should I apply to in which country once I graduate out of this course?
  4. Which textbook should I read to understand subject xyz?

And my answer to all of these questions is the same. I respond with a question of my own: what are you optimizing for?

With regard to the first question in the list, here are questions you might want to think about. Are you optimizing for a course that maximizes the likelihood that your (or your child’s) passion will be nurtured? Or are you optimizing for future income streams, regardless of passion? Are you optimizing for the ability to graduate without breaking into a sweat? Or are you optimizing for the best possible brand of university/college to graduate from? Or something else?

With regard to the fourth, here’s another list of questions. Are you looking for a book that will help you learn the most about this subject? Or are you looking for a book that will help you score well? Or are you looking for a book that will help you score reasonably well without working too hard? The fact that there are meaningful answers to each of these questions is an indictment of the way we teach and conduct examinations. But the fact that entirely acceptable (and different) answers exist for each category is the point.

And of course, one can come up with a similarly long list for virtually every single question that you can come up with, or will encounter. The reason you can always do so is precisely because of the fact that choices matter.

As a politician in power, are you optimizing for long run growth, or are you optimizing for votes in the next election? As a politician in the opposition, are you optimizing for toppling the current government, or are you optimizing for what’s best for your constituency/country? As a judge, are you optimizing for the best application of accepted and laid-down principles of justice, or are you optimizing for currying favors? As a teacher, am I optimizing for pretending to finish a syllabus by putting in the least amount of effort, or am I optimizing for making sure that my students leave the class wanting to learn more? As students, are you studying a particular subject in order to learn as much about it as possible or are you optimizing to score the highest amount of marks for the least amount of effort? As an employee in an organization, are you looking to do the best possible job in your role, or are you looking to meet the minimum amount of effort required to keep your job?

Always remember, the question “What should I do?”, whether asked to yourself or to somebody else, always deserves to be met with a question in response. The answer to this question will go a very, very long way in terms of helping you answer the original one.

Here is the question once again:

What are you optimizing for?

A Rare Ol’ Treasure Trove

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After yesterday’s post, I asked some folks for their choice of textbooks that undergraduate students should definitely be reading before getting their BSc/BA degree in economics. And what a list we have, already!

If you are an undergraduate student, please bookmark this post, and keep coming back to it when you want book recommendations. And I would argue that even if you are not an undergrad student of economics, you might still want to keep checking on this post, because I will be updating it regularly.

In what follows, I have not mentioned who has recommended what. That’s simply because I’m writing this post out on the fly, and haven’t had time to format it, add hyperlinks or even figure out how I want to tabulate this data. More than one person has recommended some of the books on the list too, and that’s an additional complicating factor. Note that not all of them are textbooks, and some aren’t even books (they’re essays), but hey, when it comes to reading, there’s no bureaucratic stuffiness in these parts.

Folks who have read some of these books might wonder at the very broad political and economic ideology spectrum over here, but surely this is a plus and not a minus. As an undergrad student, read far and wide, and figure out over time what resonates and what does not (and why).

Finally, to everybody who took time out of their busy schedules to reply, thank you very much!

Here is this most magnificent list, in no order whatsoever:

  1. On the Wealth of Nations, by Adam Smith
  2. That Which We See and That Which We Do Not See, by Frederic Bastiat
  3. (Bonus points if you saw this coming) Economics in One Lesson, by Hazlitt
  4. Micro Motives and Macro Behavior, by Schelling
  5. Free to Choose, by Milton Friedman
  6. Both the Freakonomics books, by Levitt and Dubner
  7. Road to Serfdom, by Hayek
  8. Modern Principles of Economics, by Cowen and Tabbarok
  9. Public Finance and Public Policy, by Jonathan Gruber
  10. Economic Growth, by David Weil
  11. The Effect: An Introduction to Research Design and Causality, Nick Huntington Smith
  12. Economics Rules, by Dani Rodrik
  13. An Uncertain Glory, by Amartya Sen
  14. Everybody Loves a Good Drought, by P Sainath
  15. In The Service of the Republic, by Vijay Kelkar and Ajay Shah
  16. Of Counsel: The Challenges of the Modi-Jaitley Economy, by Arvind Subramanian
  17. In Spite of the Gods, by Edward Luce
  18. The Vision of the Anointed: Self-Congratulation as a Basis for Social Policy, by Thomas Sowell
  19. The Meaning of it All, by Richard Feynman
  20. Delhi Rape: How India’s Other Half Lives
  21. Principles of Economics, by Mankiw
  22. Intermediate Microeconomics, by Hal Varian
  23. Macroeconomics, by Dornbusch Fischer and Startz
  24. International Economics, by Dominic Salvatore
  25. Introduction to Econometrics, by Woolridge
  26. Complete Business Statistics, by Aczel and Sounderpandian
  27. Using Econometrics: A Practical Guide, by Studentmund
  28. Introduction to Economics, by Richard Leftwich
  29. Theory of Econometrics, by Koutsoyiannis
  30. Principles of Economics, by Koutsoyiannis
  31. The Worldly Philosophers, by Heilbronner
  32. Macroeconomics, by Alex Thomas
  33. Economic History of India, by Tirthankar Roy
  34. India After Gandhi, by Ramchandra Guha
  35. Macroeconomics, by Snowdon and Vane
  36. Causal Inference Mixtape, by Scott Cunningham
  37. International Economics, by Paul Krugman
  38. Capital, Vol. 1, by Karl Marx
  39. Classical Political Economy and the Rise to Dominance of Supply and Demand Theories, by Krishna Bharadwaj
  40. Three Essays on the State of Economic Science, Koopmans
  41. Universal/University Economics by Alchian and Allen
  42. Introduction to Econometrics, by Cristopher Dougherty
  43. Studies in Indian Public Finance, by M. Govinda Rao

Which Textbooks Are We Recommending Our Students Read?

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I chanced upon this excellent website via Marginal Revolution yesterday.

What is Open Syllabus?

Open Syllabus is a non-profit research organization that collects and analyzes millions of syllabi to support novel teaching and learning applications.  Open Syllabus helps instructors develop classes, libraries manage collections, and presses develop books.  It supports students and lifelong learners in their exploration of topics and fields.  It creates incentives for faculty to improve teaching materials and to use open licenses.  It supports work on aligning higher education with job market needs and on making student mobility easier.  It also challenges faculty and universities to work together to steward this important data resource.
Open Syllabus currently has a corpus of nine million English-language syllabi from 140 countries.  It uses machine learning and other techniques to extract citations, dates, fields, and other metadata from these documents.  The resulting data is made freely available via the Syllabus Explorer and for academic research. 
The project was founded at The American Assembly, a public policy institute associated with Columbia University. It has been independent since 2019.

https://blog.opensyllabus.org/about-the-open-syllabus-project/

Tyler Cowen linked to a Davis Kedrosky thread about the most cited papers, and the thread is well worth your time. Here are the top five papers assigned as readings in economics since 1990, worldwide:

https://twitter.com/dkedrosky/status/1566617470122635266

But I dug around on the website to see what textbooks have been recommended. And worldwide, this is what comes up:

https://opensyllabus.org/result/field?id=Economics

If you’re wondering, The Wealth of Nations comes in at number 13, and the General Theory comes in 22. I don’t intend this as snark or criticism, and I would in fact argue that the General Theory is not the best book to read if you’re starting on a study of macroeconomics – but that’s a topic for another blogpost. The top 5 is actually a pretty good list, although my personal preference would be to have it reversed. That is, a book on the principles of economics ought to be number one, in my opinion. Should it be N. Gregory Mankiw or some other book? Some other book(s) if you ask me, but that too will be a topic for another blogpost!

Take a look, however, at India’s most recommended textbooks (you can filter by country):

https://opensyllabus.org/result/country-field?id_country=IN&id_field=Economics

And personally, I find it worrying that a Principles text doesn’t make the top 5, and neither does an introductory text on micro or macro! Modern Microeconomics by Koutsoyiannis makes an appearance at number 7 and the first macro text is Shapiro, in at number 10.

I have nothing against any of the textbooks mentioned in this list, and I have (genuinely) fond memories of doing battle with all of them when I was a student, but I do ask myself if these five ought to be the most assigned texts for Indian students.

Which, of course, begs the obvious question, and that will be tomorrow’s blogpost. But for now, a request: if you are (or have been) a student of economics in an Indian university, what would your top 5 list look like? Much more importantly, if you are a professor of economics in India, what would your top 5 look like?

If you can spare the time, I would love to know!

Top Gear and The Division of Labor

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You may or may not agree, but I think Top Gear to be one of the best television shows ever produced. Yes, they were politically incorrect more often than not, yes they were occasionally outrageous and yes they courted controversy. But also, the show was of extremely high production quality and if nothing else, it made for excellent entertainment.

Phull paisa vasool, as they say.

But hey, Jeremy Clarkson, Richard Hammond and James May can also help us understand the importance of the division of labor.

What is the division of labor?

Here is the opening paragraph from an essay on the topic over on EconLib:

Division of labor combines specialization and the partition of a complex production task into several, or many, sub-tasks. Its importance in economics lies in the fact that a given number of workers can produce far more output using division of labor compared to the same number of workers each working alone. Interestingly, this is true even if those working alone are expert artisans. The production increase has several causes. According to Adam Smith, these include increased dexterity from learning, innovations in tool design and use as the steps are defined more clearly, and savings in wasted motion changing from one task to another.

https://www.econlib.org/library/Enc/DivisionofLabor.html

Two questions at play here, really. First, what is division of labor? It is “the specialization and the partition of a complex production task into several sub-tasks”. Second, what is the benefit to society of this concept? It is “the fact that a given number of workers can produce far more output using division of labor compared to the same number of workers each working alone.”

And over millennia, this division of labor has resulted in humans building ever more complex things in ever more affluent societies. This process has, of course, rapidly accelerated over the last two hundred years or so. But precisely because we have gotten so very good at division of labor, we have experienced yet another benefit of this concept:

The reason is that division of labor produces a cost advantage where none existed before—an advantage based simply on specialization. Consequently, even in a world without comparative advantage, division of labor would create incentives for specialization and exchange.

https://www.econlib.org/library/Enc/DivisionofLabor.html

This, to me, is an underrated point, and worthy of elaboration. Division of labor is (partly) specializing in a particular task, but the magical bit is that division of labor itself creates incentives for further specialization. Or, to put it another way, division of labor begets more division of labor, and more specialization.

And one indication of this, to me, is the fact that we’ve created a society in which we tell three middle-aged British gentlemen that they can spend about three decades and counting on creating ridiculous, over-the-top television shows that will entertain and enrage in equal measure. This – climbing dams in a car, dropping a car from the sky, taping a car on top of another car and playing football with cars, among other mad things – is what they should specialize in.

Not only will we lap it up, but we’ll pay for knock-offs, spin-offs and versions in different countries. This is going to sound faintly ridiculous, but imagine the three of them trying to pull this off in a hunter-gatherer society. Not a show about cars, of course, but a proposal that the rest of the tribe should get on with the business of hunting down food or foraging for it, while the three of them entertain the others with mad-cap capers. I suspect it wouldn’t have gone down well.

But today, we have enough of a surplus from other parts of society for us to be able to say that hey, a section of our 7 billion plus tribe should drop cars from the sky, and record it so that the rest of us can watch it and be entertained.

Which brings me back to another topic of discussion: perhaps you are of the opinion that surely this is not what we created our modern civilization for. All the efforts of the past thousands of year culminate in… “this?“, you might quite reasonably ask.

Well, this and the Laser Interferometer Gravitational-Wave Observatory. Specialization has resulted in us building tunnels over four kilometers in length so that we can detect gravitational waves that originated 1.3 billion light years away also.

Go back to the question embedded in the first sentence of this section: what did we create our modern civilization for? The question is “what”, not “how”. Economics doesn’t tell you what you should be optimizing for, that’s your business.

But if you have decided that what you should be optimizing for is having cars fall out of the sky, then economics can tell you how to go about getting this to happen. Economics will help you align the incentives, set the prices, deal with the unintended (is that the word I’m looking for?) consequences, and execute the trades necessary for the show (or the laboratory) to come to fruition, and stay popular.

But every time I watch an episode from Top Gear, I can’t help but wonder at how far we’ve come. You might wonder if the direction in which we’ve come is the right one, but you can’t help but marvel at the distance civilization has traveled.

What a time to be alive.

Scott Galloway on Government Spends on R&D

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Srinjoy Bhattacharya, a regular reader of EFE, sent along a recent post by Scott Galloway:

What’s the most successful venture capital firm in history? Kleiner Perkins and Sequoia Capital backed many Internet-era success stories. Andreessen Horowitz? No, one organization towers above. This firm was there before the first transistor was printed, and it will be there after we receive brain implants. One investor funded the computer, the internet, speech recognition, last-mile distribution, mapping the human genome, the core technologies of fracking, and the first horizontal shale drill, and today it’s driving down the cost of solar and wind power below that of coal. Even better news: If you’re a U.S. taxpayer, you’re a limited partner.

https://www.profgalloway.com/welfare-queens/

I have covered this topic before, about government spending on R&D, here and here. If you are curious about how countries can go about fostering an ecosystem geared towards better outcomes in terms of research and development, please do read these posts, and much, much more. More importantly, please click on the links in those posts, and read more!

Scott’s article is written in defense of the idea that government spending matters for development of the R&D ecosystem, and I have more than some sympathy for that view, especially in the Indian context. But I’m going to take a contrarian stance in today’s blogpost and ask how Scott (and I!) might be wrong about there needing to be a bigger role for government in this area.

This blogpost isn’t a “gotcha” post about trying to prove specific points in his post or mine as being wrong. It is, instead, a way to try and understand for myself how arguments I am sympathetic towards might be wrong. And that is the meta lesson in today’s post: if you find yourself in strong agreement with something while you’re reading/listening to it, force yourself to disagree. Ask how you might be wrong. Remember, certitude is the enemy, and doubt is your friend!

  1. Be cognizant, always, of opportunity costs. What is the opportunity cost of having government spend on R&D?
    1. Will the government spend the money as efficiently as possible? How will the government define efficiency differently from the private sector?
    2. What are the incentives of the private sector in this regard, and what are the incentives of the public sector? Which incentives, in both cases, might exist but are not publicly acknowledged?
    3. Will bureaucratization be a problem when it comes to government spending? Will this problem be more in government relative to the private sector? Will the answer remain true throughout, or will the relationship change over time? If it will change, according to you, on what grounds?
  2. Is investing in public universities the best way to generate higher long-run returns? Note that the answer may well be yes, especially in the case of the USA, but I would argue that the question should be asked, and on an ongoing basis. If not in public universities, where else? Should government be spending money on rethinking what universities do and how?
  3. An additional point on bureaucratization: might some entrepreneurs be turned off by the pace of bureaucracy and the extent of paperwork? Might government agencies end up playing it too safe relative to the private sector? If yes, how might this problem be solved?
  4. Might the fear of a public backlash in the case of a failure prevent more investments being made in that area again (Solyndra is a classic example, but there are others too)? If so, how do we solve this problem?
  5. At what stage should governments think of getting out of investments in R&D? The answer may well be never, and that’s fine, but the question should be asked. If the answer is not never, how does government exit? How should government exit?

Again, I believe there is absolutely a role to play for governments when it comes to R&D expenditure, and at least in India’s case, I think it to be urgently required. I therefore agree with much of Scott’s post. But precisely because I find myself in agreement, I tried to take the other side of the debate.

But that contrarian stance aside, let me once again reiterate the urgency for more R&D expenditure on India’s part, with a large role for government for the foreseeable future. We have a neighbor that necessitates this, and said neighbor has been a little too good at government expenditures in R&D. We need to catch up – but we also need to (always) question our premises.

Why 7 is Weird

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Divisibility tests are a lot of fun, and they kept me awake through boring lectures in school. My most fun “discovery” was regarding the number 27, and remind me to tell you about it whenever we meet.