Month: January 2023

Say It Ain’t So, Please?

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Or is that just nostalgia talking? Here is how Arnold Kling ends a recent blog post:

I speculate that nonfiction books are headed down the path of academic journals. They will be useful for academics positioning themselves for tenure, but they will be too slow and ponderous for communicating ideas. People who really care about ideas will turn to reading and writing substacks instead of books and journals.

https://arnoldkling.substack.com/p/books-are-not-information-dense

I don’t attempt to quantify it, but I’m fairly sure that the time I spend reading has not gone down over time. If anything, in fact, I think it may have gone up slightly. But what I read has certainly changed over time. Tweets, blogs, columns and articles make up the lion’s share of the time that I spend reading, and time spent on books is on a steady decline. Again, this has not been formally quantified, but given that it’s me I’m talking about, I am fairly sure that this is the case.

One of my resolutions this year was to read more long-form content, and I’ve done ok on this goal in the month of January. Not just books, but also longer articles and columns. But I’ve had to consciously set aside time for it, and have had to make an effort to continue reading beyond the point where I’m tempted to reach out for my phone and check ‘what is happening’.

On a related note, I’ve switched off all notifications on my phone, and I can tell you that it has worked wonders for me. Your mileage may vary, of course, so this is not me recommending that you do the same – but in my case, it’s been A Very Big Help.

But the ‘what is happening’ disease is real – I’ve lost the ability to go for hours without checking my phone.

All of which is to say that while I am very tempted to agree with the entirety of Arnold’s post – and please do read the whole thing, of course – I do worry about the opportunity costs of preferring tweets or substacks to books. It’s been something I’ve written about in the past, and god knows I’m not the only one worry about this:

The emergence of shorter reading formats: tweets, book summaries, blogposts (ahem) are easier to read, quicker to digest and most importantly for the era we live in, save us a lot of time.
And that, unfortunately, means that most readers today (myself included) are akin to T20 batsmen. It turns out that we are very, very good at consuming very large amounts of snippets of information – in fact, we positively excel at it.
But the opportunity cost (and it is always there, isn’t it?) is that we struggle to sit and consume a full length book. I can’t remember the last time I sat down and read a classic, for example, and struggle to read in one sitting an entire book. We’re today a generation of T20 readers, as it were. To borrow from another Aakash Chopra column from way back in the day, we’re all Murali Vijay now.

https://econforeverybody.com/2021/01/18/on-t20-and-reading/

Most books, it is unfortunately true, ought to have been a blogpost instead. And very few blogposts, whether in isolation or as a collection, merit the promotion to a full-length book. So more often than not, you’re actually better off consuming information-dense’ content. Or as Arnold puts it, blogposts and tweets get to the point much more quickly:

Actually, showing off erudition is more of a bug than a feature. Professors who enjoy citing a wide range of references in their lectures and writing are kidding themselves if they think the rest of us have the patience for it. Niall Ferguson’s The Cash Nexus had a major, lasting influence on my view of banking and finance. But re-reading it now, it’s really painful. I want to say, “Stop showing off and get to the point.”

https://arnoldkling.substack.com/p/books-are-not-information-dense

The problem with short-form content (remember, TINSTAAFL!) is that every now and then, one is tempted as a reader to say “Stop being so concise and think about the nuance”. And I don’t know about you, but one is almost always tempted to say this while composing a tweet. Sure Twitter threads get around this problem somewhat, but there are cases where a book is better than a Twitter thread.

The truth lies somewhere in the middle, and this is something that goes for all of us. So each one of us needs to figure out the right mix of very long, long, medium, short and very short content. But just as a healthy diet for the body needs the right mix of all micro- and macro-nutrients, with the occasional fast thrown in for good measure, so also a healthy diet for the mind!

I’m still trying to figure out both the correct way to think about this, and fashion this lesson for my own personal ends, so if you have any content to share regarding this, it will be most welcome.

I’m currently agnostic about its length!

The Times, They’re A-Changing Part II

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“The putting-out system is a means of subcontracting work. Historically, it was also known as the workshop system and the domestic system. In putting-out, work is contracted by a central agent to subcontractors who complete the project via remote work. It was used in the English and American textile industries, in shoemaking, lock-making trades, and making parts for small firearms from the Industrial Revolution until the mid-19th century. After the invention of the sewing machine in 1846, the system lingered on for the making of ready-made men’s clothing.
The domestic system was suited to pre-urban times because workers did not have to travel from home to work, which was quite infeasible due to the state of roads and footpaths, and members of the household spent many hours in farm or household tasks.”

So begins the Wikipedia article on the putting-out system, a system that is about sub-contracting work.

This system isn’t just suited to pre-urban times, of course, it is also especially suited to pandemic times. The question to ask, of course, is whether it is also suited to post-pandemic times. And an article in the Economist seems to suggest that this may well be the case:


The Industrial Revolution ended the “putting-out system”, in which companies obtained raw materials but outsourced manufacturing to self-employed craftsmen who worked at home and were paid by output. Factories strengthened the tie between workers, now employed directly and paid by the hour, and workplace. The telegraph, telephone and, in the last century, containerised shipping and better information technology (IT), have allowed multinational companies to subcontract ever more tasks to ever more places. China became the world’s factory; India became its back office. Nearly three years after the pandemic began, it is clear that technology is once again profoundly redrawing the boundaries of the firm.

https://www.economist.com/business/2023/01/08/how-technology-is-redrawing-the-boundaries-of-the-firm

If you are a person embarking upon a new career today, not only is it possible for you to earn a fairly comfortable living working out of your home, wherever it may be located in the world, it is actually desirable to do so. Not for all people of course, but the pandemic, and the acceleration of technologies associated with the consequences of the pandemic, has made it possible for you to easily do so.

Part of the reason is, as the Economist article puts it, because of the fact that ‘measuring workers’ performance based on their actual output rather than time spent producing it’ has become progressively easier. That’s not a light sentence to write, by the way, because it hides at least two Nobel Prizes’ worth of work, if not more. And because it has become easier to specify what you want, and how to measure whether it is being done or not, the ‘putting-out’ system seems to be making a comeback of sorts.

A survey of nearly 500 American firms by the Federal Reserve Bank of Atlanta last year found that 18% were using more independent contractors than in previous years; 2% said they used fewer. On top of that, 13% relied more on leased workers, compared with 1% who reduced this reliance.

https://www.economist.com/business/2023/01/08/how-technology-is-redrawing-the-boundaries-of-the-firm

Which, to my mind, means that we need to think about five big-picture questions as a consequence of this trend:

  1. How will this impact patterns of urbanization? This is not an easy question to think about!
  2. How will this impact education? Will there be the evolution of the putting out model in academia also? Why or why not, and what will the equilibrium look like? Also not an easy question to think about, and I now have a better appreciation for inertia.
  3. How will the certification of both learning and working evolve? Will freelancing now carry more weightage on a CV? Or less, as before? How should we think about what to look for on a fresher’s CV?
  4. How far away is ubiquitous VR? How will that impact the dynamics of working/learning from home?
  5. How will this impact work culture and college culture in the years to come, and how should we think about this from a normative perspective?

Culture, Technology, Economics and Subtitles

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Sharmaji ka beta, the global edition

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Syllabus Bleg

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I’m teaching a course on behavioral economics at the Gokhale Institute this semester, and as you might imagine, it is a whole lot of fun. For a whole variety of reasons, and that’s a separate post in and of itself. But for now, I’ll tell you this much – the reason I have such a lot of fun is because teaching behavioral economics forces you to take stock of what you know to be true – before, during and after this semester is over.

And part of the reason teaching this course is so much fun is because you might think that when I speak about “know to be true”, I’m talking about ‘attacking’ the fundamental axioms of economic theory. Well, yes, but that would be a very one-sided class. What are the strongest arguments of the other side is a question that seems to have fallen out of favor in the world today – but one of the meta-lessons I hope to impart is just this one. That thinking along these lines is an important, and nowadays-forgotten skill.

Learn to ask how you might be wrong about whatever it is you think you know oh-so-well.

And so one required reading, which we’re positively dawdling over in class, is a blogpost which I’ve excerpted from below:

One could just as easily make fun of psychologists and sociologists for ignoring the rationality of much human decision-making, and price incentives in particular. Gary Becker made a splendid career out of that fact.  We could easily write parallel op-eds saying all of psychology is wrong because they omit the fact that sometimes people do in fact add two and two to get four. But “rationalists” respect logic and their reader’s intelligence too much to do that: Psychologists’ omissions and simplifications likewise do not invalidate their observations about other aspects of behavior.

https://johnhcochrane.blogspot.com/2015/05/homo-economicus-or-homo-paleas.html

Or as I tell my students, ask yourself why a field of study called “Rational Psychology” should not exist, now that you’re a student of “Behavioral Economics”. You see what I mean when I say it is a whole lot of fun!

But within this blogpost, there is one paragraph that I need your help with.

Behavioral marketing, for example, is a cornerstone of the business school curriculum. I presume Dick’s class “Managerial decision making” (syllabus sadly not available) covers a lot of how to use psychology to become more rational. Behavioral finance is excellent marketing for active investment strategies, that’s for sure.

https://johnhcochrane.blogspot.com/2015/05/homo-economicus-or-homo-paleas.html

I asked my students to check if they can find the syllabus John Cochrane is talking about in his blogpost. And on a whim, I decided to try and hunt it down myself. The blogpost was written in 2015, but it would seem that even now, the syllabus is not available online. Richard Thaler’s faculty page, linked to in the excerpt above, does contain the link to the course, but that page itself is just blank.

I dug around a little bit, but was only able to find a write-up about the course (but do read it, it is very, very interesting):

Memories of Thaler’s teaching style have one common thread for all of his former students: laughter. They can’t describe a Thaler class without a smile. “He meanders up to the podium,” said Linnea Gandhi, MBA ’14, who has known Thaler as a student, a teaching assistant, and now co-professor as adjunct assistant professor of behavioral science at Booth. “Then he tells stories about foibles and fumbles, not just in companies but in his own life.” In most students’ recollections, this is done at a slight lean, against the podium, against the transparency machine in the old days, against whatever’s handy.

https://www.chicagobooth.edu/magazine/class-behave-richard-thaler

And I cannot tell you how much I enjoyed reading about this, since I tried a variant of this method in my own class earlier this academic year (plus, he’s talking about ‘what are you optimizing for?’, a question I have fallen in love with):

He once ran into a student who was studying for the final exam in his class and said he was busy outlining the articles they had read, a thought that appalled Thaler. “I want them to have to think about it,” he said, “not just memorize what was said.” So he started using a new type of exam. He would ask students to submit potential exam questions and then would circulate about 75 of those questions, saying the exam would be composed of (slightly edited) versions of these. The rule in generating questions was that they could not have a simple “correct answer” but rather force the students to ponder the material they had learned and then apply it to some novel situation.
“It’s not the most precise way of measuring how much they’ve learned,” he said. “But it’s the best way I have found to maximize what they learn when studying for the exam.”

https://www.chicagobooth.edu/magazine/class-behave-richard-thaler

But anyways, here’s what I would appreciate help with, if possible. Do any of you have a copy of the syllabus in question? This search brings up quite a few syllabi, but not the specific one I’m looking for. Of course, to be clear, it may not be available online at all, and it certainly isn’t necessary that syllabi are always made available. In fact, if you ask me, a syllabus is a bit like a straitjacket – there is an argument to be made for not having one, and winging it in a semester. A blogpost for another day, this thought.

But for now, this bleg: a copy of the syllabus for Richard Thaler’s class on Managerial Decision Making, s’il vous plait.

Merci d’avance!

The Times, They’re A-Changing: The Firm Edition

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People ‘job-hop’ much more these days. Where it was very unusual for people to change jobs at one point of time, this slowly but surely changed over time. And today, we live in a world where not only is job hopping common, an increasingly large number of people are choosing to not work formally with a firm at all, but rather as free-lancers instead. Including yours truly!

What is the economic explanation for this? That is, if you look around and see that attrition is rampant, and that people up and quit their jobs, you might want to ask yourself this: what are the economic factors that explain this phenomena?

A first-pass answer is, of course, the pandemic. But the pandemic is the proximate cause, or in the language of the economist, an exogenous shock. The question that we need to ask is a narrower one: what changed in the economy that allowed people to respond to this exogenous shock by walking away from their jobs? Think of it this way – did the pandemic a century ago also result in increased attrition and folks deciding to be freelancers? While I’m not familiar with labor markets of a century ago, I feel reasonably safe in saying that the answer is almost definitely no.

So while the desire to quit (or freelance) may be because of the pandemic, the ability to do so must be because of other factors. What might these factors be?

To answer this question, we first need to understand what caused firms to exist in the first place.

One morning, an economist went to buy a shirt. The one he chose was a marvel of global production. It was made in Malaysia using German machines. The cloth was woven from Indian cotton grown from seeds developed in America. The collar lining came from Brazil; the artificial fibre from Portugal. Millions of shirts of every size and colour are sold every day, writes Paul Seabright, the shirt-buying economist, in his 2004 book, “The Company of Strangers”. No authority is in charge. The firms that make up the many links in the chain that supplied his shirt had merely obeyed market prices.
Throwing light on the magic of market co-ordination was a mainstay of the “classical” economics of the late-18th and 19th centuries. Then, in 1937, a paper published by Ronald Coase, a British economist, pointed out a glaring omission. The standard model of economics did not fit with what goes on within companies. When an employee switches from one division to another, for instance, he does not do so in response to higher wages, but because he is ordered to. The question posed by Coase was profound, if awkward for economics: why are some activities directed by market forces and others by firms?

https://www.economist.com/schools-brief/2017/07/29/coases-theory-of-the-firm

So: why are some activities directed by market forces, and others by firms? Because being able to participate in market based activities is an expensive process in terms of money and time without having access to a firm. Consider my own example: I earn a living these days by teaching courses in economics and statistics, and do some consulting work on the side. But teaching courses in economics and statistics is something I do for the customers of firms called colleges.

Students – and this might come as a surprise to some people in academia – are the customers of firms called colleges. They are not aware of my existence before they enroll in these colleges (for the most part). And I am unaware of these students before I walk into my first class. It is the firm – the college – that does the job of getting ‘my’ customers to sit in class. Me? I rock up to the class and start yapping.

And while both the students and I would greatly prefer that we deal with each other directly, without the middleman’s meddling (attendance! examinations! certificates!), that realization only strikes us much later on in the semester. At the start of the college year, the costs involved in terms of the students getting together and figuring out who to hire to teach them economics are very high in terms of time, money and coordination efforts.

It is the same for the teacher too, of course. How do I know, without knowing of the student’s very existence, that this is the bunch of students I want to teach? It’s easier for both the students and the teacher in question to outsource this job to the firm – the college. An economist would say that we (the students and I) are reducing our transactions costs, or our search costs. Plus, the students might quite entirely reasonably point out that what the market values isn’t so much the fact that they’ve learnt economics, but the fact that the college has certified that the student has indeed learnt economics. And a certification to this effect from a college will always carry more weight than any certificate that an individual can issue. Colleges know this fact, by the way, and will of course do everything in their power to maintain this status quo.

So as far as I am concerned, and as far as students are concerned, it makes sense to enter into the kind of transaction we do, via the medium of a firm called the college.The college might prefer to hire me because it is much cheaper for the firm to pay me my hourly rate, and be done with me as soon as this transaction is over. There’s no need to pay me for the hours I sit in office, there is no need to make contributions into my Provident Fund, there is no need to pay out gratuity – outsourcing is cheaper. The higher the supply of people willing to work as visiting faculty, the more the temptation for the college to run a course by using visiting faculty only. It might make for a poorer on-campus experience, having more visiting faculty, but that’s a whole other story.

But are transaction costs going down over time? Did students realize that you could too learn at home during the pandemic? Did teachers realize that they could talk to their students using blogs, or YouTube videos, or podcasts or even Instagram reels? Did firms realize that the certificates issued by colleges – especially during the pandemic – are on the basis of examinations so horribly farcical that they effectively mean nothing? Might all these drive down transaction costs? If so, how? With what consequences for teachers, students and colleges?

Does all this make sense to you if you are (or recently have been) a student? And if yes, now ask yourself a broader question. How should you then think about all firms and all of their employees and all of their customers post the pandemic? Have transaction costs come down post the pandemic? If so, due to what reasons? With what consequences?

To understand this, you might wish to read this thread, which I will talk about in greater details in Monday’s blogpost:

Why is it bad to be rich? Final take (for now)

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Third blog post and counting in response to one simple question!

But as the title suggests, this will be the last one, I promise. Mostly.

But this last one, it is my favorite of the three, Here we go:

Have you heard of the European Super League?

The European Super League (ESL), officially The Super League, was a proposed seasonal club football competition that initially would have been contested by twenty European football clubs, twelve of them being the competition’s founding members. It was organised by the European Super League Company, S.L., a commercial enterprise created to rival the UEFA Champions League, Europe’s premier club football tournament organised by UEFA.
The announcement of the European Super League in April 2021 received wide opposition from fans, players, managers, politicians, and other clubs in England, which with six teams was the most represented country in the project. It also received opposition from UEFA, FIFA, and some national governments. Much of the criticism against the ESL was due to concerns about elitism and the lack of competitiveness within the competition, as it would have consisted of only high-ranking teams from a few European countries

https://en.wikipedia.org/wiki/European_Super_League

There were many reasons to oppose the ESL, and I should at the outset make my own opinion clear – I abhor the idea. But the main reason to oppose it? The structure, or the format of the competition:

Inspired by European basketball’s EuroLeague, the proposed competition was to feature twenty clubs who would take part in matches against each other; fifteen of these would be permanent members, dubbed “founding clubs”, who would govern the competition’s operation, while five places would be given to clubs through a qualifying mechanism focused on the teams who performed best in their country’s most recent domestic season. Each year, the competition would see the teams split into two groups of ten, playing home-and-away in a double round-robin format for 18 group matches per team, with fixtures set to take place midweek to avoid disrupting the clubs’ involvement in their domestic leagues. At the end of these group matches, the top three of each group would qualify for the quarter-finals, while the teams finishing fourth and fifth from each group would compete in two-legged play-offs to decide the last two quarter-finalists. The remainder of the competition would take place in a four-week span at the end of the season, with the quarter-finals and semi-finals featuring two-legged ties, while the final would be contested as a single fixture at a neutral venue.Each season of the competition would feature 197 matches (180 in the group stage and 17 in the knockout stage)

https://en.wikipedia.org/wiki/European_Super_League (emphasis added)

A while ago, Tyler Cowen spoke with Luigi Zingales for a Conversations with Tyler episode. A truly wonderful episode, full of enjoyable insight, but this in particular really stuck with me:

I don’t understand why in the United States the only thing that is really noncompetitive is sports. In Europe, the only thing that is really competitive is sports. In Italy, soccer you are the first division, second division, you are promoted or demoted, according to performance. You don’t buy your way into the NFL or the Major League, et cetera.
Here, you buy the franchise, and once you’re in, no matter how incompetent you are, you stay there, which is completely un‑American.

https://conversationswithtyler.com/episodes/luigi-zingales/

The next three words in the transcript are, and I quote “laughter and applause”, but this is no laughing matter. Luigi Zingales is completely right, and is speaking about a ridiculously powerful idea: skin in the game.

The reason every single football fan I know, without exception, was completely set against the ESL is because it took away skin in the game. The top fifteen clubs would never be demoted from the league.

There was no fear of failure, and without fear of failure – without skin in the game – you can’t make the jump.

The way to make society more equal is by forcing (through skin in the game) the rich to be subjected to the risk of exiting from the one percent

https://medium.com/incerto/inequality-and-skin-in-the-game-d8f00bc0cb46

You really should read the whole post on Medium (and then the entire book, and both at least twice, preferably once more, just to be sure), but think about what Nassim Nicholas Taleb is saying in that quote. Inequality, he says elsewhere in the post, is a zero-sum game. In countries such as the US, he says, the act of wealth creation is also an act of destruction (he means it in a Schumpeterian sense).

And that’s what Zingales is getting at when he says that sports in America is, well, un-American. The leagues there have no skin in the game, because no matter how incompetent you are, you never get demoted from the league. There is no creative destruction in American sports leagues.

And that was the problem with the ESL. There would have been no skin in the game, and that doesn’t sit well with us. The best team in the leagues as they are structured today begins with a clean slate next year, and while the probability that it will be demoted the next year is very low, it isn’t zero. Every team in, say, the English Premier League has skin in the game in this sense. And it really and truly matters.

And so my final answer to Navin’s question isn’t really my own, it is a quote from Taleb:

What people resent –or should resent –is the person at the top who has no skin in the game, that is, because he doesn’t bear his allotted risk, is immune to the possibility of falling from his pedestal, exiting the income or wealth bracket, and getting to the soup kitchen.

Inequality itself isn’t bad. Inequality in a rigged game, where there is no skin in the game? In that case, it is really and truly bad to be rich.

Please, do read Skin in the Game.

ChatGPT on Why It Is Bad to be Rich

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What if we asked Navin’s question to ChatGPT?

This post is as much an attempt to think more about Navin’s question as it is an attempt to show you, concretely, how you might want to use ChatGPT.

Complements over substitutes, always remember. By which I mean that you should use ChatGPT as a tool (complement) to make your thinking better. You should not use it as a replacement (substitute) for your own thinking.

Say you’re at a dinner party, and somebody brings up this question: why is it bad to be rich?

How should you go about thinking about this question? Me, I would want to ask two extremely basic questions first:

  1. Bad for whom?
  2. Relative to what?

The first question is about asking whose perspective one is going to try and answer the question from. Is it bad to be rich if you are the person getting rich? Or is it bad to be rich from the perspective of somebody else? That somebody else – if that’s the answer – is who, exactly? Somebody who didn’t get rich as a consequence of you getting rich? Somebody who will also get rich as a consequence of you getting rich? A bit of both, maybe (by which we mean we are analyzing the question from the point of view of society)?

So rather than ask the question directly to ChatGPT (“Why is it bad to be rich?”), it might help if you thought about the question yourself, and then asked a better question to ChatGPT (“If a person were to be rich, is that good or bad for that person?”):

You and I might have a difference of opinion about which answer is better, and that’s fine. The point is that phrasing the question differently evokes different responses, and that phrasing the question the right way matters as much when you’re chatting with AI as it does when you’re chatting with human beings. If, at the first attempt, the answer isn’t along “expected” lines, don’t fall prey to confirmation bias, but rather ask yourself if ChatGPT has understood you well enough to be able to answer. Consider this version, for example:

All right, enough gyaan, you might say. Let’s see what the econ literature has to say about this last question:

I ran the first sentence of ChatGPT’s answer through elicit.org, and this is what turned up:

Not only does phrasing matter, but don’t end up depending on just one AI assistant – that’s the lesson from this exercise. Broaden your search (and this should go without saying, but please do also check if the papers cited by ChatGPT also exist!) If you’re as lazy as I am, you might want to meta-outsource – but even if you, do still verify the whole thing independently!

And now on to the second question (relative to what?). Is it bad being rich relative to other people/regions/countries being poor? We’re talking about inequality now, and the relationship between inequality and economic growth has a long and rich history.

This rabbit-hole can keep you occupied for hours. You can dig further by asking ChatGPT what it means when it says “structure of the economy”, for example. You could ask it to elaborate on ways in which the labor market might not function to full efficiency, and how that impacts the evolution of both poverty reduction and inequality. You could ask it what it means by “full efficiency”, if you want to go hyper-meta.

Depending on your research interests, you could ask for a literature review for any one of those questions, and drill further down still.

This, so far, has been a sojourn into the world of economic literature. But we would be remiss to stop there! What does the field of philosophy have to say about this question? What about sociology? What about psychology? Here’s the first of these:

Again, note that you will have to verify that each of these exist! The more you play around with ChatGPT, the more you should try and build a model in your own head about questions for which it is likely to ‘hallucinate’. It’s a little like conducting a viva voce for a student. Play the game often enough, and you develop a sense for when a student is winging it, and when a student isn’t. It is a much more difficult game – detecting bullshit on part of ChatGPT – but you can get better at it, and it is a useful skill to possess, no matter how rudimentary.

There is now, in all probability, nobody else left at the dinner table, and you’re not about to be invited back anytime soon. But on the other hand, you’re much richer in your knowledge about how to think about this issue and about how to work better with ChatGPT. Those who left that hypothetical dinner party are, along this dimension, poorer.

Is it bad to be rich?

Why is it bad to be rich?

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Navin asked this question on Twitter recently:

(My thanks to Mihir Mahajan for pointing the tweet out to me, and for requesting for a post on this topic)

My current plan is to answer this question over three posts. In today’s post, I’ll try and answer this question using a first principles approach. That is, without using Google, or ChatGPT3, or my notes and references, I’ll answer this question using nothing more than what I think are the basic, foundational principles of economics.

In tomorrow’s post, I’ll trawl through the internet (and make use of ChatGPT3), and throw in articles/blog posts I’ve bookmarked over the years that speak to this point. And finally, in the post the day after tomorrow, I’ll speak about books you might want to read about this topic.

But even before having written down a single word re: my first principles argument, here is my answer in short: it is wonderful to be rich.

Six principles, if you ask me, that you absolutely must learn if you are a student of economics (and note that whether you like it or not, everybody is a student of economics):

  1. Incentives Matter
  2. TINSTAAFL
  3. Trade Matters
  4. Costs Matter
  5. Prices Matter
  6. Externalities Matter

As I was telling somebody the other day, most – if not all – problems in economics can be thought of using these six principles. If you truly understand these six principles and all of what they imply, you will be able to reduce every economic problem you meet down to the application of these six principles. The applications may be nuanced, there may be more than one principle applicable, and you may have to supply a lot of caveats. But you’ll go a very long way towards tackling your problem of choice by starting with these six principles.

And I’ll fire my first salvo at Navin’s question by deploying the third principle in the list: trade matters.

People get rich by trading with other people. Sure, people have gotten rich in the past (and in some cases, even today) by expropriating property, through loot and through dacoity. But I hope you don’t think I’m ducking the issue by saying that’s not the focus of today’s post. My focus in today’s post is about people who get rich through peaceful, voluntary trade. This particular process of getting rich focuses on offering you, through entirely peaceful, non-coercive means, a trade.

You are free to evaluate the terms of this trade, and if they seem agreeable to you, you enter into this trade. Note that the only reason you do is because you think that doing so is to your advantage. You are better off for having done this trade, relative to the option of not doing so. And the person who offered this trade to you is presumably better off for you taking the other end of it, for why else would she have offered you this trade instead?

That’s a non zero sum game, and the more we play such games with each other, the better off we are. That’s what the principle of “Trade Matters” means, and that is what it entails: peaceful, voluntary trade leaves both parties better off, and the world is therefore better off for this trade having gone through. If, as a consequence, both parties get richer, that’s A Very Good Thing, and it is therefore good to be rich.

But remember that for some problems, the applications of these principles may be nuanced, and that there may be more than one principle applicable.

First, opportunity costs. TINSTAAFL stands for There Is No Such Thing As A Free Lunch, and even to a non-zero sum game, opportunity costs are very much applicable. In the context of international trade, your level of analysis matters. Trade might make sense at the level of the parties involved in the trade, but that doesn’t necessarily mean that everybody else is better off as a consequence:

Because in the case of trade between countries, as opposed to trade between individuals, there are people who will lose out. If a university in the United States of America hires me to teach online classes to the students over there, there isn’t a hypothetical amateur cook who is losing out. There is an actual person in that country who could have taught this course, but is no longer able to because of me.
The university that hired me is better off, because it is able to hire the services of a teacher for less money. To the extent that I do about as good a job as the person I replaced, the students are (at least) indifferent. And given how strong the dollar is, I am certainly better off!
But it is not enough to say that both parties in this trade are better off (I and the university). A complete economic analysis should also include the person in the USA who is out of a job, and I would argue that one should also include what I find myself unable to do here in India as a consequence of teaching that course abroad. Both of these are the opportunity costs of this trade, and a complete economic analysis should include these aspects as well

.https://econforeverybody.com/2023/01/10/so-no-one-loses-when-it-comes-to-trade-rightright-part-ii/

Trade might then, at the margin, cause an increase in inequality. You’d be surprised at how old (but still somewhat underrated) an idea this is, but the opportunity cost of more trade might well imply an increase in inequality. So you might well say that it is bad to be rich because the opportunity cost of you being rich is that somebody else is (comparatively) poor.

But be careful with how you proceed with this! It cuts both ways, this analysis. Is the opportunity cost of reducing inequality a reduction in the creation of wealth? When you attempt to reduce inequality by taxing the rich, you reduce their incentive to trade. And remember, they get rich by voluntarily trading with you, and if that trade leaves you better off, you’ve made yourself poorer in the bargain.

If you tax Amazon so much that Amazon decides it is better for them to shutter up altogether, have you made the world better off or worse off? I’d urge you to ignore your first, visceral take, and take a look at your Amazon app to find out how often you’ve ordered from Amazon in the past month before answering this question.

So I’d argue that it still is good to be rich – but it ain’t for free. But in my opinion, the price is worth it. One can, and one should, argue about what the appropriate level of taxation should be. One can, and one should, worry about tactics used by Amazon to make sure that they remain a monopoly provider of certain goods and services. One can, and one should, worry about whether Amazon pushes its employees a little bit too much. I’m not defending Amazon as a perfect company without flaws. But I very much am saying that the world is a better place because Amazon exists. There are costs that we bear for having Amazon in our midst, but those costs are worth it.

And I picked Amazon as a stereotypical example here, but the argument is about the underlying idea, not about the specific organization. Trade matters, even after acknowledging that there are opportunity costs involved with trade.

We’re trading right now, you and I. You’re paying me with that most precious of all commodities in the year 2023: attention. And I can’t begin to thank you enough for having given me your attention so far, because I know that reading this ain’t easy. Pleasurable, hopefully, and worth your while – but not easy. And you’ve chosen to continue to pay me with your attention because what you’re getting in return – the pleasure you feel in tackling my arguments – is worth your while.

But how do you know that it is worth your while? You could have been doing something else with this time. You could have been learning how to code. You could have finished at least part of some project or an assignment. You could have picked strawberries. You could have milked a cow.

The point is that you could have been doing something that actually earns you cold hard cash, instead of reading this article. And it is your assessment of your own opportunity costs that allow you to continue reading this article. You know that you can ‘afford’ to spare the time required to read this article.

But how do you know this? You know it because you are part of a national (and global) economic system that depends upon the principle that ‘prices matter’.You have at least an implicit valuation of how much a minute of your time is worth, and you have made the rational decision to ‘spend’ this time reading this blog.

What is my point? My point is that we know how much it costs to enter into a trade only if we know how much that trade is worth to us, and we only know how much a trade is worth to us by having a sense of what we’re worth to society. Trade matters is a principle that works only if we know the price of a good or a service, and we know the price of a good or a service best in a free market economy. Deciding how much to produce something, and deciding at what price to sell it is a truly difficult problem to solve in an economy that is not based on markets.

So yes, trade matters, but so do prices.

But speaking of prices, it gets trickier still.

  1. What if you set prices to not just lure the buyer into buying your product, but at a price which is so attractive to buyers that your competitors cannot afford to match it? What if they go out of business as a consequence, leaving you as the only game in town? What if you then raise prices?
  2. What if you use patents to make sure that others cannot sell the same goods that you are selling? What if you abuse the patenting process to stymie the competition? What if you then become the only game in town, and raise prices to eye-watering levels?
  3. What if the price at which you sell the product you are selling does not take into account the damage done to the environment?
  4. What if the buyer isn’t aware of further purchases she might need to make for having bought your goods? What if she realizes later that the true price of the good in question is much higher?
  5. What if the buyer is tempted into buying the product because of shady marketing techniques?
  6. What if you lobby with the government to make sure that nobody else but you can sell the product that you’re selling? Will you then be able to charge a higher price?

Each of these questions merits a much deeper exploration than is possible in this blogpost (for those who are interested, or wondering, here are the topics you want to think about in the case of those six questions: monopoly | propoerty rights and patents | externalities | asymmetry of information | microeconomics/ behavioral economics | public economics). These topics would just be the start, there are many nuances to consider in each of the six questions. But for having raised these six questions, and the two separate arguments I’ve made in the last two sections above, here is my answer to Navin’s question about why it is bad to be rich:

It is bad to be rich if you live in a world without a fully operative price system, and/or a world in which non-voluntary trades can take place.

Interpret that sentence however you like, but begin to worry if you are convinced that there is only one interpretation, or if you are convinced that your interpretation is the only correct one!

I write on this blog for many reasons, but chief among them is a very personal reason. I would like my thinking, and my writing, to be become clearer and better over time. I’ll be the first to put my hand up and say that there are days on which I think I succeed in this endeavor, and there are days on which I don’t. But taken as a whole, I am convinced that I am a better thinker and writer than I was in 2016, which is when I started this blog.

Far from perfect, in case it needs to be said, but the benchmark isn’t perfection, the benchmark is Ashish of 2016. And on any given day, it is the Ashish of the previous day. One day at a time, as it were.

And one thing that has happened over these past six years is that I have become better at distilling in my own head what economics ultimately comes down to. Six microeconomic principles, and three big picture questions. I have outlined the six principles above, and I have written about the three big picture questions before, but here they are once again:

  1. What does the world look like?
  2. Why does it look the way it does?
  3. What can we do to make the world a better place?

Students who have learnt from me these past six years will be familiar with this list. But there is a crucial component that is missing in this list of six principles and three big picture questions: time. On my blog, I have attempted to get around this problem by speaking of an alternative framework, which I have shortened in my head to the CHIC acronym: Choices, Horizons, Incentives and Costs:

The trouble is, our brain isn’t always the best at interpreting incentives correctly, which brings us to the third key concept in economics: horizons. Or, if you have had enough nerd talk for one day, we could also call it the instant gratification monkey problem. Call it what you will, the problem is that we tend to prioritize choices that payoff in the short run, but create problems in the long run. If you’ve ever had that last “one for the road” drink, or ended up actually eating that second dessert (and who hasn’t?), you don’t really need an explanation for this. We tend to choose those options that payoff over the short horizon, and ignore the long term consequences.

https://econforeverybody.com/2018/05/03/choices-costs-horizons-and-incentives/

I have also written about time, and how it is ever-so-confusing to think about it in the context of economics. In my classes, I show students the circular flow of income diagram, and once they’ve understood it, I ask them to think of it as a video, rather than a still picture. That is to say, time matters.

Time matters.

Go and read the responses that Navin got on his original question on Twitter. I sent this essay that you are reading right not to some people, and they highlighted this same problem – they thought of intergenerational problems about being rich. Inheritance and the perpetuation of inequality across time, for example. Almost the entirety of my blogpost tomorrow, where I will share many articles that answer Navin’s question, focusses on this issue.

So here’s a question I have been grappling with for a while: should I update my list of six principles (Incentives matter | TINSTAAFL | Trade Matters | Costs Matter | Prices Matter | Externalities Matter) to also include Time Matters? And if yes, how do I expound upon this principle?

Here’s another way of thinking about this issue – one of my objectives on this blog is to teach economics to anybody and everybody. So ask yourself this question – what do we need to do to simplify economics down to its absolute bare minimum? Will somebody who has learnt about economics by attending my classes, or reading my blog, be able to answer Navin’s question? And the short answer to this question is yes, they will. But in an incomplete fashion, because in the context of this question (and many others besides), time matters.

Time, as it turns out, really and truly matters. And for me to teach this principles, I need to try and understand it better myself.

Onwards!

Signal, Noise and Glenn McGrath

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Don’t miss Tony Greig’s explanation at the end.

Accuracy is awesome – accuracy with minor variations is terrifying!