Month: December 2023

On Grand Strategy, by John Lewis Gaddis

History, John Lewis Gaddis says in the book On Grand Strategy, is learning to live within the condition that not all praiseworthy things are simultaneously possible. This necessitates adapting to incompatibles. Understanding these ‘incompatibles’, reconciling them (and more importantly, getting everybody else to reconcile to them), using them to your advantage, and adapting to them when one can’t, and doing all of this while never losing sight of the ultimate goal – that is one way of understanding “grand strategy”.

There is a more succinct definition made available in the book, which is that “grand strategy is the alignment of potentially unlimited aspirations with necessarily limited capabilities”. But that sounds uncomfortably close to Lionel Robbins’ definition of economics, and surely there is more to strategy than just plain ol’ textbook economics?

I’m joking, of course. There is more to both strategy and to economics than the reconciliation of wants and means. But I’m also not joking, because even if you know next to nothing about strategy, this simple definition is a useful hook on which to hang our attempt to understand it.

If you keep that simple definition in mind and read the book, you will come across a long list of splendid characters in history who focused more on the highest of indifference curves, and ignored the existence of budget lines… and suffered for it. This list includes Xerxes, whose indifference curves could well have included “a throne on the moon, perhaps, with a great view”. But because he chose to disregard those “stubbornly finite means”, he ultimately came a cropper.

And such, John Lewis Gaddis says, is the fate of all those before and since Xerxes, if they fail to understand that simplest of all lessons: ends and means have to connect if anything is to happen. Utni hi chadar, goes the saying in Hindi, with readily available equivalents in many languages, cultures and civilizations, and yet it is a lesson that Great Men fail to learn, over and over again.

Not all Great Men, and not Always, though. There are those who keep this simple lesson in mind, and they align those incompatibles we spoke of. More, they are Great Men not just because they keep this simple lesson in mind, but because they do so across dimensions of time, space and scale. That, perhaps, is the true definition of greatness when it comes to strategy.

And not just Great Men, of course. In Chapter 5, we learn how Queen Elizabeth managed a thousand different challenges and came out of it even stronger, by responding with quickness of thought to everything ranging from an attack upon England by the Spanish Armada to an Earl who farted while bowing respectfully in court (true story).

Queen Elizabeth is joined on the victorious side of these ten entertaining essays by the younger Pericles, Octavian Caesar, Machiavelli, Elizabeth I, the American founders, Abe Lincoln, Lord Salisbury and Roosevelt.

What is common to them, you ask? All of them had, Gaddis says, “the humility to be unsure of what lay ahead, the flexibility to adjust to it, and the ingenuity to accept, perhaps even to leverage, inconsistencies.”

And on the other side of this book are the older Pericles, Julius Caesar, Augustine, Philip II, George III, Napoleon, Wilson and the twentieth century totalitarians, “all of whom knew with such certainty how the word worked that they preferred flattening topographies to functioning within them”.

What factor, or factors, separates the winners from the losers in Gaddis’ list? F. Scott Fitzgerald’s definition of a first rate intelligence, defined as “the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function”.

What this means in practice, how this relates to Isaiah Berlin’s metaphor of the fox and the hedgehog, and how this has played out on the world stage over thousands of years, over and over again, is what the book “On Grand Strategy” is all about. And for that reason alone, it is a book worth your time.

But there are other reasons to read it too, including Gaddis’ obvious and easy familiarity with a ridiculous range of subjects. The book manages to be broad, breezy and brainy at the same time, which is no mean feat. It is peppered with vignettes from history, and with memorable quips from Gaddis’ many years of teaching an eponymous course, which help in keeping it a light read.

All in all, a most enjoyable read, especially if you know as little about strategy as I do. I still know very little, but considerably more than I did before I read the book, and for that reason, will happily recommend it to you.

The Internet Is Worse Than Ever, Per Kurzgesagt

Breakthroughs of 2023

Via MR.

I’m amazed and delighted by how little I know about almost all of them, and how helpful ChatGPT is with each tweet. And “new ancient language” is my favorite phrase of the lot!

Opportunity Costs and South Korea’s Nuclearization

South Korea’s launch of its Indo-Pacific strategy in December 2022 started the country’s ascent into “strategic clarity” for the US-led Indo-Pacific construct, winning favor with Washington for this policy shift. However, in January 2023, President Yoon Suk-yeol voiced the possibility of either building nuclear weapons indigenously or redeploying US tactical nuclear weapons in the face of an ever-growing nuclear threat from the Democratic People’s Republic of Korea (DPRK or North Korea). This reoriented the debate on South Korea’s own nuclear ambitions

https://www.38north.org/2023/10/south-korea-as-a-nuclear-state-trade-offs-and-choices/

Thus begins a piece authored by Jagannath Panda over at 38North. If you’re wondering about the name of the blog, click here.

So, should South Korea nuclearize or not?

Opportunity costs are everywhere, and this question is a way for us to understand how to apply principles of economics to a tragically important question:

  1. South Koreans are increasingly distrustful of the US commitment to South Korea’s security. The government in South Korea has reaffirmed Seoul’s commitment to the NPT, but about seventy percent of South Koreans approve of the country going nuclear. There is certainly a political incentive to keep the issue alive.
  2. Having North Korea (and then China) as neighbors is an excellent argument for going nuclear is what many South Koreans will tell you. You may or may not agree with them, but you do see where they’re coming from.
  3. It could make, proponents argue, North Koreans less militarily adventurous.
  4. Look at India, they might say. They have Pakistan and China as neighbors, and they went nuclear. Didn’t hurt them too much, now did it?
    • I mean sure, the US imposed sanctions, and cut off all assistance except humanitarian aid.
    • But especially after 9/11, they had no choice but to walk those back, right?
    • Russia and France didn’t say much back then, and got back to BFF status pretty quickly
  5. Well, maybe so. But I wouldn’t be so sure about the “didn’t hurt them too much” bit!
    • Some would say geopolitical uncertainty in the region went up, not down, after the nuclear tests
    • Pakistan went nuclear too – and they almost had to, in a way. Did that make things better, or worse?
    • The Kashmir issue gained prominence on the international stage, and India didn’t exactly want that, now did it?
  6. South Korea can launch a charm offensive in case they do go nuclear, and apart from its overt dependence on China when it comes to trade, things should be ok.
  7. Plus, of course South Korea will adopt a no-first-use doctrine.
  8. But think about this:
    • Is South Korea better off with the threat to go nuclear, or with actually going nuclear?
      • Will the USA be more or less incentivized to provide security to South Korea?
      • Will going nuclear stop or accelerate North Korea’s nuclear program?
      • Will going nuclear increase or decrease military activity at the border?
      • Will this increase or reduce the chances of an arms race in the region (and not just North or South Korea, but all countries in that region)?

The answer to the question, it turns out, is not a simple one. Your ability to answer this question depends on how you frame your analysis:

  1. Who are the impacted parties (directly and indirectly)?
  2. Who are the impacted parties (immediately and eventually)?
  3. What are the first order impacts on all of these parties?
  4. What are the second order impacts on all of these parties?
  5. Are you analyzing the short term, medium term or long term impacts?
  6. Which of these impacts are you giving greater weightage to? Why?

And bear in mind, of course, that this is a good list to keep in mind when you’re analyzing opportunity costs in general, not just in the case of opining about whether South Korea should go nuclear!

South Korea’s Demographics

The “picture” you see here is based off the picture in Ross Douthat’s column. I asked Dall-E to create this one, of course.

Without clicking on the link, can you guess what his column is about?

For some time now, South Korea has been a striking case study in the depopulation problem that hangs over the developed world. Almost all rich countries have seen their birthrates settle below replacement level, but usually that means somewhere in the neighborhood of 1.5 children per woman. For instance, in 2021 the United States stood at 1.7, France at 1.8, Italy at 1.3 and Canada at 1.4.

But South Korea is distinctive in that it slipped into below-replacement territory in the 1980s but lately has been falling even more — dropping below one child per woman in 2018 to 0.8 after the pandemic and now, in provisional data for the second and third quarters of 2023, to just 0.7 births per woman.

It’s worth unpacking what that means. A country that sustained a birthrate at that level would have, for every 200 people in one generation, 70 people in the next one, a depopulation exceeding what the Black Death delivered to Europe in the 14th century. Run the experiment through a second generational turnover, and your original 200-person population falls below 25. Run it again, and you’re nearing the kind of population crash caused by the fictional superflu in Stephen King’s “The Stand.”

https://www.nytimes.com/2023/12/02/opinion/south-korea-birth-dearth.html

Get used to worrying about not enough people, because that’s what the study of demographics will (has already?) come to mean in the 21st century. It’s not just South Korea, of course – Germany, Italy and Japan are also staring at the same problem, and that list is very far from being complete.

And what problem is that?

Not Enough People.

And as an Indian, sure you can ask how this can possibly be a problem. Here’s how:

There will be a choice between accepting steep economic decline as the age pyramid rapidly inverts and trying to welcome immigrants on a scale far beyond the numbers that are already destabilizing Western Europe. There will be inevitable abandonment of the elderly, vast ghost towns and ruined high rises and emigration by young people who see no future as custodians of a retirement community. And at some point there will quite possibly be an invasion from North Korea (current fertility rate: 1.8), if its southern neighbor struggles to keep a capable army in the field.

https://www.nytimes.com/2023/12/02/opinion/south-korea-birth-dearth.html

I’m actually slightly uncomfortable with the assertions in this paragraph (note the repeated use of the phrase “there will be”). Not because I disagree with them, but because we simply do not know how this will pan out. Maybe the immigration story will play out better than expected, and maybe (as Ross Douthat himself says elsewhere in the column, the tide will turn in pleasant and unexpected ways). Maybe, if you want to be all weirdly sci-fi about it, the South Korean government will produce babies in artificial wombs.

Too weird, and can’t possibly happen, you say? I present to you the last fourteen years or so.

But what really gave me pause was thinking about how Ross Douthat ends his column. What, he asks, are the underlying sociological causes of and responses to this rapid fall in birthrates?

  1. Traditional social mores in South Korea, including very low out of wedlock births
  2. A feminist revolt against conservative social expectations
  3. A consequential male anti-feminist reaction
  4. Sharp polarization between the sexes
  5. A sharp reshaping of the country’s politics, and a sharp decline in marriage rates

If you are a student of economics, but only faintly interested in demographics and sociology, you’re doing it wrong, I promise you.

We live in interesting times!

ChatGPT and Irwin Collier’s Latest Blog Post

The post is Abba Lerner’s final examination at Johns Hopkins University in 1958. The subject is welfare economics. I hope this doesn’t create legal problems of any sorts, but I’m reproducing below the full paper:

Answer four questions, in separate blue books, in ink.

  1. Discuss the meaning, the validity and the significance of the proposition that it is impossible to derive a social welfare function from individual preference functions.
  2. How far can one carry the analogy between a political voting procedure and the economic price mechanism, and between the rationale of voting between alternative policies and that of allocating dollars between alternative purchases?
  3. Discuss the rational elements in relation to other elements in the social objectives of optimum distribution of income, optimum population, and optimum rate of saving.
  4. What is sound, what is unsound, and what is useful in the doctrine of consumers’ surplus?
  5. Why is it socially desirable to have the prices of products equal to the value of the marginal factors used in their production? How is this objective affected by equity elements such as the need for subsidies?
  6. Under what conditions would a partial freeing of trade be harmful to society in the largest sense? In your answer explain the treatment of this problem in terms of “second best” and the use of the concept of “divergence”.
  7. Compare the arguments for the imposition of trade restrictions for the sake of affecting the international terms of trade with those undertaken for the sake of affecting the domestic distribution of income. Give special attention to the interdependence of efficiency and equity considerations.
https://www.irwincollier.com/johns-hopkins-exam-for-welfare-economics-lerner-1958/

If you are a masters level student, you will enjoy answering (or having ChatGPT answer) these questions, and I hope you try either one of these options. But on the other hand, if you are an undergraduate student, or an amateur fan of economics, here are some prompts you might want to use:

  1. You are a professor of the history of economic thought, with a keen interest in how the field of economics has developed, especially in the 20th century. You are well aware of the famous economists of this era, their main contributions, and the main schools of thought that have developed in this period. Explain to me what welfare economics is, why it mattered when it was first developed, and why it matters now. In light of your answer, choose three questions from this blogpost that are worth discussing, and give me your take on them. It will help if you contextualize your answers by assuming I am an Indian with a somewhat basic understanding of economic theory.
  2. What are social welfare functions, and why do they matter in economics? What was the basic problem that was being tackled when folks came up with the idea of social welfare functions? How are social welfare functions different from individual preference functions? In your answer, explain like you would to a curious fifteen year old.
  3. What does “socially desirable” even mean in the context of economics? Whatever your answer, how does equating the price of products to the value of the marginal factors used in their production help? When you answer this question, please use a simple example that I can follow.
  4. What are efficiency and equity considerations in economics? What is the link between international trade and welfare economics? Explain with the help of an example that makes sense to me in the year 2023.
  5. My professor has given me an assignment: I have to design one more question to add to this question paper, in addition to the seven that are already there. I have to explain why I added this question, and I have to answer it. Please do all of these things for me? Note that I am an Indian student, currently studying in the sixth semester of an Indian undergraduate course.

Two Exciting Announcements in the Field of Public Policy

One, I’d written a blogpost on a World Bank report on the progress of rural sanitation in rural India. These were, according to me, the key takeaways from that report:

Four key results emerge from this report:

Enormous expansion in toilet access, with near-universal coverage of rural sanitation infrastructure

Substantial increase in regular toilet use, especially for the poor and socially disadvantaged groups

Wide variation in progress of regular toilet use across and within states

The impressive gains in regular toilet use are slowing or reversing, sustainability is a key challenge

https://econforeverybodyblog.wordpress.com/2023/10/04/a-world-bank-report-on-the-progress-on-sanitation-in-rural-india/

But that report has now been withdrawn.

Two, next year there will be a festival in Pune. A festival of public policy. The theme is trade-offs.

Details of the festival are here.

Andrej Karpathy on an Intro to LLM’s

Max Roser on Data Pages

In Praise of GLS Shackle

You must have heard of the drunk who was searching for his keys under a streetlight. When asked why he is searching here, rather than the place where he had dropped the keys, the drunk replies that he can see well over here.

Haha and all that.

Here’s Kenneth Arrow writing about a person you likely have not heard of, GLS Shackle. Arrow is writing about why people aren’t interested in reading Shackle anymore:

The reason for the current lack of interest is probably not any denial that Shackle’s position is fundamentally correct; it is the absence of the analytic tools needed to make the exceptional approach capable of generating operationally meaningful conclusions.

https://www.journals.uchicago.edu/doi/abs/10.1086/257884

What was GLS Shackle’s position, and who was GLS Shackle?

GLS Shackle was an economist. Wikipedia tells us that he started work on a PhD under the supervision of Hayek, but that he later switched to “an interpretation of Keynes’s General Theory of Employment, Interest and Money”. Because we know that the truth lies somewhere in the middle, this is a most wonderful thing, of course. Note too that there is a correct way to handle a situation such as this, and Hayek was more than up to the task:

A student of Hayek’s at the London School of Economics in the 1930s, Shackle renounced his early Hayekian views and the doctoral dissertation on capital theory that he had already started writing under Hayek’s supervision, after hearing a lecture by Joan Robinson in 1935 about the new theory of income and employment that Keynes was then in the final stages of writing up to be published the following year as The General Theory of Employment, Interest and Money. When Shackle, with considerable embarrassment, had to face Hayek to inform him that he could not finish the dissertation that he had started, no longer believing in what he had written, and having been converted to Keynes’s new theory. After hearing that Shackle was planning to find a new advisor under whom to write a new dissertation on another topic, Hayek, in a gesture of extraordinary magnanimity, responded that of course Shackle was free to write on whatever topic he desired, and that he would be happy to continue to serve as Shackle’s advisor regardless of the topic Shackle chose.

https://uneasymoney.com/2014/01/22/g-l-s-shackle-and-the-indeterminacy-of-economics/

And what was his position? This is not an easy question to answer, and I will admit that I am not entirely sure of the correct answer. But given that disclaimer, here is the best I can do:

You can either reject rationality or time

What does this mean, and why does it matter?

A rational-expectations model allows for stochastic variables (e.g., will it be rainy or sunny two weeks from tomorrow), but those variables are assumed to be drawn from distributions known by the agents, who can also correctly anticipate the future prices conditional on any realization (at a precisely known future moment in time) of a random variable. Thus, all outcomes correspond to expectations conditional on all future realizations of random variables; there are no surprises and no regrets. For a model to be correct and determinate in this sense, it must have accounted fully for all the non-random factors that could affect outcomes. If any important variable(s) were left out, the predictions of the model could not be correct. In other words, unless the model is properly specified, all causal factors having been identified and accounted for, the model will not generate correct predictions for all future states and all possible realizations of random variables. And unless the agents in the model can predict prices as accurately as the fully determined model can predict them, the model will not unfold through time on an equilibrium time path. This capability of forecasting future prices contingent on the realization of all random variables affecting the actual course of the model through time, is called rational expectations, which differs from perfect foresight only in being unable to predict in advance the realizations of the random variables. But all prices conditional on those realizations are correctly expected

https://uneasymoney.com/2014/01/22/g-l-s-shackle-and-the-indeterminacy-of-economics/

I wouldn’t blame you if your eyes glazed over while reading this. But bear with me, and let’s go over this slowly:

  1. Imagine that you are a farmer, and you are going to harvest strawberries two weeks from now.
  2. If it rains at or around the time of the harvest, your harvest is going to be destroyed. If it doesn’t rain, you will have strawberries to sell. Should you assume that you will have a harvest ready to sell, or not?
  3. Imagine that your best friend has a shop that sells smartphones, and you’ve told him that you will buy a smartphone from his shop, once you’ve sold your strawberries. Should he assume the sale of a smartphone to you, or not?
  4. The strawberries from your farm are usually purchased by a jam manufacturing company. This company has, for the first time ever, won a contract to sell its famous strawberry jam to Walmart. They got this contract because of the quality of your strawberries. No harvest on your farm, no sale of their jam to Walmart.
  5. This firm has promised temporary employment to locals to make this jam, who in turn have promised their families a trip to their hometown once the jam manufacturing company pays them.
  6. Toy manufacturers in that hometown are anticipating a rise in sales when these families come visiting.
  7. We don’t know if it will rain in two weeks or not. Nobody does. But should we assume that we can forecast rain with x% probability?
  8. And should we therefore assume that we know today the prices of smartphones, the wage-rate for hiring workers to make jam, the price of a ticket to a village nearby, and the prices of toys in that village – all of these two weeks from now?
  9. Now read the last two sentences in that excerpt above:
    “This capability of forecasting future prices contingent on the realization of all random variables affecting the actual course of the model through time, is called rational expectations, which differs from perfect foresight only in being unable to predict in advance the realizations of the random variables. But all prices conditional on those realizations are correctly expected”

GLS Shackle was saying that there is no such thing as rational expectations, because, well, time. That is, if you accept rational expectations as a feature of your model, you must reject time. And if you accept time, you must reject rational expectations.

So, dear reader, do you accept the existence of time, or not?

But what does the “existence of time” mean, in the context of economics?

Note that I am going to keep things as simple as possible, both for your sake and mine. And the simplest possible answer to this question is this:

Acknowledging the existence of time necessarily implies that the future is always, and by definition, unknowable

You have two choices: to continue reading from here on in, or to stop reading at this point. You have created your future by choosing one of these two courses of action. And until you make that choice, your future is unknown.

If, after you stopped reading, you walked into a store and purchased a jar of strawberry jam, you changed the future of the store owner, the strawberry jam manufacturer, the part time employee of the strawberry jam manufacturer, the kid of the part time employee and the toy manufacturer. If you didn’t stop reading, and therefore ran out of time to buy that jar, you changed their future too! And of course, if it rains (rained?) in the next two weeks, there might not be any strawberry jam to buy in the first place! Oh, and of course you could sprain your ankle while stepping into that store. Or <insert random event of your choice here>.

We just don’t know what our future holds, and our future is being shaped and fashioned by the choices made by million of other people – in much the same way that their futures are being shaped and fashioned by the choices made by you.

Bottomline?

Acknowledging the existence of time necessarily implies that the future is always, and by definition, unknowable

Again, GLS Shackle was saying that there is no such thing as rational expectations, because, well, time. That is, because the future is inherently and by definition unknowable – not predictable, not modelable – there can be no such thing as rational expectations.

Is there any point, then, to building a rational expectations model?

If you say no, you are a newly minted member of Team Shackle. If, on the other hand, you say yes – well, I hope you find those keys of yours under this streetlight.

Good luck!