Understanding Horizons, Understanding Time

The more I think about time, the more confused I get. The more I read about time, the more I cannot help but think about time.

In today’s post, I hope to be able to inspire you to get as confused about time as I am.

Before we get to the five links, here are some questions for you.

Should I have a gulab jamun after lunch today? If you are anything at all like me, your answer is likely to be a resounding “aye!”

Do you know who might want to say no? 70 year old Ashish (assuming I live to be that age) might not be such a big fan of I having that gulab jamun today.

Should 38 year old Ashish (for that is how old I am right now) listen to the entreaties of a 70 year old Ashish who doesn’t exist?

Well, if 38 year old Ashish wants 70 year old Ashish to have a chance of existing, I think it makes sense to ditch that damn dessert.

But, uh, good luck trying to convince 38 year old Ashish at 1.45 pm of the importance of thinking about the hypothetical existence of 70 year old Ashish.

That’s the problem of time discounting.

How important is the future, compared to the present?

Think of it in terms of gulab jamuns or interest rates offered to you by the bank, it’s the same thing. A weeekend trip to Goa (38 year old Ashish says yes!), or a fixed deposit in the bank (70 year old Ashish says yes!)?

Now: that was the easy bit. Let’s amp things up a little.

Do you wish your parents had saved a little bit more when they were younger? Hell, imagine if your grandparents hadn’t had that gulab jamun when they were young, and put the money in a fixed deposit instead. Go as far back in time as you wish, and imagine how important a rupee saved a couple of centuries ago would have been today – for you.

But, um, by that measure, shouldn’t you be saving every single rupee you can today for your child’s tomorrow? The argument holds whether you have children or not, by the way. If you wish your great-great-great-grandfather had been more financially responsible at age 27, when he was unmarried and without kids, then that goes for you today as well!

And all that being said, let’s get cracking with today’s set of links!

  1. “Time discounting research investigates differences in the relative valuation placed on rewards (usually money or goods) at different points in time by comparing its valuation at an earlier date with one for a later date”…
    says the very simple introduction to time (temporal) discounting on behavioraleconomics.com. While you’re on that page, also look up hyperbolic discounting.
  2. “Someone with a high time preference is focused substantially on their well-being in the present and the immediate future relative to the average person, while someone with low time preference places more emphasis than average on their well-being in the further future.Time preferences are captured mathematically in the discount function. The higher the time preference, the higher the discount placed on returns receivable or costs payable in the future.”
    That is from Wikipedia, and as homework, ask yourself if you should live life with a zero discount rate attached to most things.*
  3. “What has become known as the “Ramsey formula” says that the rate at which one should discount an increase in consumption that occurs in the future depends on three key factors, elaborated upon below: our pure rate of time preference, our expectations about future growth rates, and our judgment about whether and how fast the marginal utility of consumption declines as we grow wealthier”
    So here’s a way to understand the point above: I was in Europe on work recently. Should I have splurged on a three star Michelin meal in Paris? Or banked the money I might have spent over there and gone for three such meals when I was 70 instead? Will such a meal at age 70 hold the same importance for me as it does now?**
  4. “When brain science was young, it was thought that the frontal lobe had no particular function. There were famous cases such as that of Phineas Gage, a railway worker who, in an explosion, had a long iron rod driven through the front of his brain. The rod was removed and Gage, miraculously, survived, seemingly with his intelligence, language and memory intact. Before long he was back at work.However, observation of others with frontal lobe damage soon revealed the cost – problems with planning, and also, strangely, a reduction in feelings of anxiety. What was the link between the two? Both planning and anxiety are related to thinking about the future. Frontal lobe damage leaves people living in a permanent present, and as a result they will not be bothering to make plans, so can’t be anxious about them.”
    That is from a review of one of the finest books I have read, Stumbling on Happiness, by Daniel Gilbert. Read the book, please. I promise you that it is worth your (excuse the pun) time.
  5. “But there’s an alternative path. Generations overlap, and so by doing more to empower younger people today, we give somewhat more weight to the interests of future people compared to the interests of present people. This could be significant. Currently, the median voter is 47.5 years old in the USA; the average age of senators in the USA is 61.8 years. With an aging population, these numbers are very likely to get higher over time: in developed countries, the median age is project to increase by 3 to 7 years by 2050 (and by as much as 15 years in South Korea). We live in something close to a gerontocracy, and if voters and politicians are acting in their self-interest, we should expect that politics as a whole has a shorter time horizon than if younger people were more empowered.”
    Via Marginal Revolution, this lovely, thought-provoking essay by William Macaskill. As both the MR blog post and Macaskill are careful to point out, this necessarily implies that younger people should be more informed, for such a system to have even a shot at succeeding.


But hey, that’s as good an argument as any for the existence of this blog!


*Yes, you should, far as I can tell. But god, it’s hard!

**If you were wondering, the answer is no. I didn’t go for that meal. I wish I had though!



Airbnb and the Asymmetry of Information

Devon Zuegel (@devonzuegel on Twitter, and definitely worth following) was less than happy with Airbnb recently:

And so of course I thought about Akerlof (1970)

This paper relates quality and uncertainty. The existence of goods of many grades poses interesting and important problems for
the theory of markets.

Akerlof, G. (1970). The Market for “Lemons”: Quality Uncertainty and the Market Mechanism. The Quarterly Journal of Economics, 84(3), 488-500

It’s a paper that every undergraduate student ought to read. Not just economics undergraduate student, mind you, but every undergraduate student. Because it helps you get an understanding of many modern businesses today.

But first, a relatively simple explanation of the core idea of the paper:

Suppose buyers cannot distinguish between a high-quality car (a “peach”) and a “lemon”. Then they are only willing to pay a fixed price for a car that averages the value of a “peach” and “lemon” together (pavg). But sellers know whether they hold a peach or a lemon. Given the fixed price at which buyers will buy, sellers will sell only when they hold “lemons” (since plemon < pavg) and they will leave the market when they hold “peaches” (since ppeach > pavg). Eventually, as enough sellers of “peaches” leave the market, the average willingness-to-pay of buyers will decrease (since the average quality of cars on the market decreased), leading to even more sellers of high-quality cars to leave the market through a positive feedback loop.

Thus the uninformed buyer’s price creates an adverse selection problem that drives the high-quality cars from the market. Adverse selection is a market mechanism that can lead to a market collapse.

Akerlof’s paper shows how prices can determine the quality of goods traded on the market. Low prices drive away sellers of high-quality goods, leaving only lemons behind. In 2001, Akerlof, along with Michael Spence, and Joseph Stiglitz, jointly received the Nobel Memorial Prize in Economic Sciences, for their research on issues related to asymmetric information.


Now, one way to understand the value of many businesses today is to realize that they’re solving asymmetry of information problems. Or at least, that’s how I think of it when I end up looking up the rating for a restaurant on Zomato in a unfamiliar part of town. I don’t know enough about this part of town, and I certainly don’t know this restaurant. Should I walk in for a meal or not?

I could always check if the people already inside are smiling or not, of course, but let’s face it, most of us will simply Zomato our way through this problem. Zomato is reducing the asymmetry of information problem. Successfully or not is a matter of opinion and perhaps controversy. But my argument here is that this is a potentially useful way of thinking about the problem: how to decide where to eat?

How to decide whom to recruit? Linkedin.

How to decide whom to trust? Look ’em up on Facebook, or Twitter, or Instagram, or wherever it is that people look up people these days.

How to decide which product to buy on Amazon? Check out the user ratings. In fact, sort by average user ratings! Yes, Amazon does provide this option.

How to decide which book to read? Goodreads.

How to… you get the drift, right. Part of the reason these firms are so highly valued by the public is because they solve the asymmetry of information problem.

And so does Airbnb. Or does it?

And that brings us back to Devon Zuegel’s tweet.

Every review left on Airbnb informs potential users about the quality of a stay at a particular host’s place. The more information they are able to glean from reviews left by previous users, the more they are likely to definitively transact…or not. That is, potential users will either stay at a particular place, or will definitely not.

Since Airbnb gets a cut from each transaction, but not from each no-stay, they have an incentive to put up only positive reviews. And that is the problem that we have to think about when we read Devon Zuegel’s tweets. Is Airbnb incentivized to leave only positive reviews up? Short answer: yes. Therefore, will they leave only positive reviews up? I’d say it’s a question of horizons, but it is also a question of the calculus.

Airbnb will not last for very long if they pull down every single negative review, because that will destroy trust.


  • every now and then…
  • particularly for really highly rated hosts…
  • especially during a pandemic…
  • will the odd negative review…
  • have a higher chance of being pulled down?

Nothing in life is ever black and white, and the truth lies somewhere in the middle. So no, Airbnb will not pull down every single negative review, but we also shouldn’t assume that it will leave every single negative review up.

More information in the hands of the consumer is a wonderful thing, and it does reduce the asymmetry of information. But who is providing the information to the consumers, and what are their incentives? What if the providers of the good/service are the ones that are making information available to the eventual consumers? Will that need to be regulated, and if so, how?

Zomato, LinkedIn, Uber, Airbnb – it’s a great time to be alive, because these firms, and many others like them, have provided for many services that would simply have not been possible otherwise. They have successfully reduced the asymmetry of information problem. But it’s not the end of the asymmetry of information problem, not just yet.

If anything, it just got more interesting.

Three Charts Related to China

Read this post, and spend a good amount of time asking yourself some questions about the three charts. Here are my questions (note that I don’t have the answers):

  • Is China’s decoupling a good thing or a bad thing? For whom?
  • What time horizon should we use to think about the answer to the first question? Why?
  • To what extent is China’s reduction in exports as a percentage of GDP deliberate? Was it deliberate all along, or did they observe a trend, think through the consequences, and then make it a deliberate policy?
  • Is China’s decline the share of global GDP growth a good thing for the world? Why?
  • What about India, is it a good thing for India? If yes, along which dimensions? If no, along which dimensions?
  • Does China count the last chart in this blog post as a victory or a defeat, or is it “too soon to tell”? Whatever the answer, why so?
  • What are other data related stories from China that we have not been paying attention to?

I don’t have, as I said, the answers. And maybe I have missed asking some obvious questions. If you have material that will help me think through these issues, please do share.

Choices, Costs, Horizons and Incentives

Economics, many people think, is about money and finance. Nothing could be farther from the truth.

Which is not to say that economics is not about money and finance – it is about that as well, but you’d be doing economics (and yourself) a disservice if you thought that economics was only about money (and finance).

A larger, more general framework for thinking about economics is to realize that it is about four things that I mentioned in yesterday’s post: choices, incentives, costs and horizons. Of the four, perhaps the one that is most misunderstood is incentives. Yes, incentives can be, and very often are, monetary in nature – but very often is not always.

Tyler Cowen puts it well in his book “Discover Your Inner Economist”:

The central concept of economics is not money but rather incentives. Quite simply, an incentive is anything that motivates human behaviour, or encourages an individual to make one decision rather than another. An incentive can be money, but it can also be a tip, a smile, or an act of praise.

Something that acts as a push for us to do (or not do!) something is all an incentive is – and if you get incentives right, you can get people (including yourself) to do what you want them to.

Not all incentives need be monetary

Incentives, and the way we interpret them, are what help us choose, and that’s the second key concept in economics: it’s a matter of being incentivized to make a particular choice, out of all the alternatives available. Quite often, though, understanding the set of choices itself can become tricky.

Think about this little puzzle (adapted from a truly wonderful book called “Thinking Strategically: The Competitive Edge in Business”, by Avinash Dixit and Barry Nalebuff):

Amar, Akbar and Anthony are three friends who, having quarreled, have decided to settle that quarrel with a shootout. They stand at the three vertices of a triangle, and decide to take turns shooting at each other, one bullet per attempt, until only one person is left standing. Amar will go first, he can shoot at either Akbar or Anthony. Assuming Akbar survives, he’ll go second, and he can shoot at either Amar or Anthony, assuming Anthony is alive, and Anthony will go third. And on and on it will go, in this order, until only one person is alive. Amar is a lousy shot – he shoots with only 10% accuracy. Akbar is pretty good, he’s working with 80% accuracy, while Anthony is just plain lethal – fully 100% accurate.

Now, Amar hires you as a consultant and asks, whom should I shoot?

What would your answer be?

It turns out that Amar’s best option is to shoot in the air (because even if you succeed in killing whoever you aim at, the survivor is left with only Amar to aim at).

The point is: any well informed decision needs two things to begin with: a clear idea of all the choices available, and a clear idea of the incentives involved (“I hate Akbar! I want to kill him!” may be a great incentive, but a higher probability of staying alive is surely the better incentive).

And this applies to everything in life: one helping of desserts or two? (Hint: how about none?). Only one more YouTube video before I get back to completing this blog post, or ten? (How about re-reading “Thinking Strategically” instead?)

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.

And in retrospect, that pounding headache the next morning is really not worth it, or to put it another way, the cost is too high.

Costs are not just monetary in nature, of course, and hangovers are a great way to explain this. You don’t pay any money the next day, but nobody who has experienced one would argue that hangovers are in any way cheap. Worse, costs are almost always a little higher than you think.

The price of the party the night before isn’t just the morning after, but it is also the fact that you could have spent the last evening reading a book, watching a movie, going out for a drive – anything but the party. Not only do you not get to watch that movie (the opportunity cost, as we economists call it), but you also have the goblins drumming away inside your head.

Choices, incentives, horizons and costs.

The truly tricky thing, and this is what makes economics such a worthy endeavour, is that each of these four aren’t understood by all of us in a rational, objective manner. Our brain processes each of these for us in ways that are subject to the way we are raised, the environment in which we are raised, our emotional state at the time of making decisions, and much else besides. Our decision making, predicated on these four concepts, is gloriously uncertain, fickle and inconsistent.

But it is exactly this that makes studying economics such a lot of fun.

Reflections on The Entrepreneurial State, by Mariana Mazzucato

The full title of the book is “The Entrepreneurial State: Debunking Public vs. Private Sector Myths“, and the author is Mariana Mazzucato, Professor in the Economics of Innovation and Public Value at University College London (UCL), and Founder/Director of UCL’s Institute for Innovation and Public Purpose.

The key point made in the book is that entrepreneurship is not – and should not – the responsibility of the private sector. Indeed, it cannot be the responsibility of the private sector.

Early on in the book, she makes the strongest case there is to be made for her thesis, by arguing that the United States of America has known this, and practiced this, for years on end. The rest of the world, she says, would do well to emulate the USA:

If the rest of the world wants to emulate the US model they should do as the United States actually did, not as it says it did: more State not less.

LOCATION: 372 (Note that the location refers throughout to the Kindle version)

There are a lot of excellent reviews out there already. See this one in the New York Times, for example. It is a mostly favorable review. Or, if you want a slightly more critical one, see this one in The Guardian. Indeed, there are many others out there.

I want to focus on three key points in this essay: horizons, incentives and spillovers. Let’s tackle each in turn.


Moonshots is a word that has become increasingly popular over the last two decades, and it refers to projects or even ideas that have a relatively low chance of succeeding. The payoff, if these ideas succeed, is so large that that it may compensate for the relatively low probability of this actually happening. That, of course, is exactly what expectations are all about.

But for a firm, particularly one that may not have the luxury of time and money on its side, placing bets on projects that may not work out – and indeed most of them will not – is a rather risky thing to do. Money is an obvious constraint, but a less obvious one is time.

Firms just do not have the luxury of waiting while a project turns out to be successful… eventually. These kind of moonshots, then, are perhaps best handled, for this specific reason, by the state.

In fact, the point is even more nuanced, because a firm is much more likely to (if at all) invest in a moonshot project based on a specifically desired outcome. The word project itself is an indication of this fact – this is not “blue sky research” that we are talking about.

But blue sky research is important!

A core difference between the US and Europe is the degree to which public R&D spending is for ‘general advancement’ rather than mission-oriented. Market failure theories of R&D are more useful to understand general ‘advancement of knowledge’–type R&D than that which is ‘mission oriented’ (Mazzucato 2015). Mission-oriented R&D investment targets a government agency programme or goal that may be found, for example, in defence, space, agriculture, health, energy or industrial-technology programmes (Mazzucato and Penna 2015).


Governments need to focus, for the sake of their own economies, their domestic firms and their long term growth, on focusing on moonshot projects, precisely because firms are reluctant to do so. The state needs, in other words, to take risks that private firms will not.

Saying this is easy, but how to go about doing this?

That is, if governments need to tackle long-term low-probability-of-success and uncertain-outcome initiatives that are important, but unlikely to be taken up by the private sector, the question that then arises is: how?

Mazzucato offers two points in this regard that I found interesting:

Block (2008, 188) identifies the four key characteristics of the DARPA model:

1. A series of relatively small offices, often staffed with leading scientists and engineers, are given considerable budget autonomy to support promising ideas. These offices are proactive rather than reactive and work to set an agenda for researchers in the field. The goal is to create a scientific community with a presence in universities, the public sector and corporations that focuses on specific technological challenges that have to be overcome.

2. Funding is provided to a mix of university-based researchers, start-up firms, established firms and industry consortia.

3. There is no dividing line between ‘basic research’ and ‘applied research’, since the two are deeply intertwined. Moreover, the DARPA personnel are encouraged to cut off funding to groups that are not making progress and reallocate resources to other groups that have more promise.

4. Since the goal is to produce usable technological advances, the agency’s mandate extends to helping firms get products to the stage of commercial viability. The agency can provide firms with assistance that goes well beyond research funding. Part of the agency’s task is to use its oversight role to link ideas, resources and people in constructive ways across the different research and development sites.


In effect, she is suggesting that government alone cannot do this, it needs to be a “scientific community” that is decentralized, has autonomy, sets the agenda, and applies Darwinian principles (see point 3). Hmm, sounds familiar. Different context, but a similar lesson!

And elsewhere in the book, her example of how Japan did this in the 1970’s is instructive:

The general point can be illustrated by contrasting the experience of Japan in the 1970s and 1980s with that of the Soviet Union (Freeman 1995). The rise of Japan is explained as new knowledge flowing through a more horizontal economic structure consisting of the Ministry of International Trade and Industry (MITI), academia and business R&D. In the 1970s Japan was spending 2.5 percent of its GDP on R&D while the Soviet Union was spending more than 4 per cent. Yet Japan eventually grew much faster than the Soviet Union because R&D funding was spread across a wider variety of economic sectors, not just those focused on the military and space as was the case in the Soviet Union. In Japan, there was a strong integration between R&D, production and technology import activities at the enterprise level, whereas in the Soviet Union there was separation.



Equally important were the lessons learned by Japanese people that went abroad to study Western technologies for their companies, and relationships between those companies and US firms. These companies benefited from the lessons of the US (hidden) ‘Developmental State’, and then transferred that knowledge to Japanese companies which developed internal routines that could produce Western technologies and eventually surpass them.


So, bottom-line: the state has to get in this business, but it can’t “go” it alone. There needs to be a community of academicians, researchers, firms, scholars – and as the example of Japan shows, this community needs fostering, and horizontal collaboration.

Or, if you prefer to put it simply, this is going to be hard.


Academia suffers from the same problem that government bureaucracy does in India: the incentives are all wrong. Both are about risk minimization.

A professor in a college has no incentive to try and do something new, something risky, something innovative. Why, if you think about it, should she? Your best case scenario is that it works, but you get no upside for it: remember, wages aren’t a function of what you do, they are a function of how long you have been in the system. Your worst case scenario is that what you tried to do blows up in your face. So why take the risk?

And it is the same, of course, with a government bureaucrat. And that makes the conclusion of the previous section even more problematic, for where, exactly, are you going to unearth government bureaucrats willing and able to make this happen?

I’m all for the state being more entrepreneurial. I buy into the idea. But I worry, especially in a country like India, about the feasibility of it, for hey, incentives matter!

In a blogpost I had written earlier this year about the budget, I had touched upon this point:

Here is Ninan’s solution:

“Is there a solution? Yes, railway engineers of old like the metro builder E Sreedharan, builders of government companies like D V Kapur and V Krishnamurthy, and agricultural scientists like M S Swaminathan have shown how they made a difference when given a free hand. Vineet Nayyar as head of Gas Authority of India was able to build a massive gas pipeline within cost and deadline in the 1980s. The officers who are in charge of Swachh Bharat and Ayushman Bharat, and the one who has cleaned up Indore, are others who, while they may not match China’s speed, can deliver. Perhaps all we have to do is to spot more like them and give them a free hand.”

But as any experienced HR professional will tell you, spotting them is very difficult, even in the corporate world. And as any corporate CEO will tell you, giving these talented folks a free hand is even more difficult. And as any student of government bureaucracy will tell you, achieving the intersection set of these two things in a governmental setup is all but impossible.

And so what we need to study and copy from China is not so much anything else, but lessons in achieving, and sustaining, excellence in government bureaucracy. Or, if you prefer, how to improve state capacity.

In short, quality of government, not size of government, is what matters for freedom and prosperity.


That point resonates even more in this context: fostering an ecosystem led by the government is dead in the water without either the proper incentives, or at least bureaucrats who are able to work through poorly designed incentives. It is a hard problem, state led entrepreneurship, and made harder by the problem of incentives.


Or externalities, if you prefer. It doesn’t matter how hard the problem is, the payoffs are worth it!

Ruttan (2006) argues that large-scale and long-term government investment has been the engine behind almost every GPT (general purpose technology) in the last century. He analysed the development of six different technology complexes (the US ‘mass production’ system, aviation technologies, space technologies, information technology, Internet technologies and nuclear power) and concluded that government investments have been important in bringing these new technologies into being.


(Note: emphasis added)

If those GPT’s are the outcome of general, as opposed to specific, R&D, sign me up. They are magnificent positive externalities. Indeed, elsewhere in the book, Mazzucato points to how almost everything produced by Apple today simply could not have been produced without an entrepreneurial state:


The final point that I’ll make relates to how Mazzucato proposes “capturing” some of these externalities:

Where an applied technological breakthrough is directly financed by the government , the government should in return be able to extract a royalty from its application . Returns from the royalties , earned across sectors and technologies , should be paid into a national ‘ innovation fund ’ which the government can use to fund future innovations . Granting a return to the State should not prohibit the dissemination of new technology throughout the economy , or disincentivize innovators from taking on their share of the risk . Instead it makes the policy of spending taxpayers ’ money to catalyse radical innovations more sustainable , by enabling part of the financial gains from so doing to be recycled directly back into the programme over time .

Location 3735

Mazzucato does present alternative schemes to the one shown above, but this is the one that strikes me as being the one with the most promise, if administered well, with appropriate risk-mitigation built in. But again, saying that is much easier than actually getting it done.

But all the being said, one simple fact is inescapable: India needs to be thinking about how to get something like this off the ground, and ASAP.

For that reason alone, more of us should be reading this book.

V Ananta Nageswaran on the IMF’s Medium-Term Forecasts for India and China

If you are an undergrad or post-grad student in India studying economics, you’ve no doubt been taught how to think about GDP (ways to measure it, ways to define it, its limitations, its advantages). But if you ask me, what we fail to do enough of is explain to students how one is supposed to use these concepts.

I often tell my students that GDP for a nation is like grades/marks obtained by a student. In much the same way that grades are not an accurate reflection of all of what a student has done in an academic year (even in purely an academic sense), GDP isn’t an accurate reflection of what a country has earned in a given time period. But also in much the same way that we have not been able to come up with a better way to assess students, we have not been able to come up with a better way to measure the economic output of a nation.

So while keeping in mind the fact that the measure isn’t perfect, but also that there isn’t a better measure in place just yet, let’s go ahead and read V Ananta Nageswaran’s excellent column in the Livemint about India and China’s medium term forecasts by the IMF.

What I am going to do below is highlight some sentences from this column and pose questions on the basis of these excerpts. Try and answer these questions, especially if you have been taught macro in your college/university. To my mind, this will go a very long way towards helping you understand if you have, well, understood key macroeconomic concepts:

  1. The International Monetary Fund (IMF) publishes its World Economic Outlook (WEO) twice a year after its Spring and Autumn meetings.

    Have you read the latest edition? If nothing else, take a look at the executive summary.
  2. “However, since then, many private-sector economists have upgraded their forecast for India’s economic growth this financial year to more than 10%, based on more recent and real-time indicators including mobility data.”

    What might a list of such indicators look like? Here’s a place to get started.
  3. “In October, India’s nominal GDP for 2026-27 was projected at ₹392.84 trillion and $4.393 trillion. In the April WEO edition, the corresponding forecasts were ₹389.01 trillion and $4.534 trillion. So, secondary-school arithmetic will tell us that the Fund has become relatively more pessimistic on the Indian rupee versus US dollar (USD) in October than in April. From 70.9 in 2020-21, the Fund sees the rupee depreciating to 89.4 against the US dollar by 2026-27. In April, the implied exchange rate forecast for 2026-27 was 85.8. So, the US dollar is stronger by 4.2% at the end of 2026-27 as per the October 2021 forecast versus April’s. The effect is that India’s nominal GDP in USD terms in 2026-27 is $140 billion lower than the April forecast.”

    Can you go back to the report and find out how the author reached these numbers? Do you agree with his calculations? Can you explain these calculations to somebody else? Do you find yourself able to write paragraphs like these? If not, what do you think you need to learn?
  4. “When it comes to forecasting exchange rates, the literature informs us that economic fundamentals do a poor job for any horizon under three years.”

    What might this mean in terms of statistical concepts? What does this tell you about how to think about long term investing (in financial assets, people and entire nations)?
  5. “Of all the economic fundamentals that influence exchange rates, the one enduring factor is the inflation differential.”

    Which are the other economic fundamentals that influence exchange rates? What is the inflation differential? Why does the author say that this particular factor is an enduring one?
  6. This is a truly remarkable graph, and worthy of thinking about deeply. Why does it look the way it does? Is this a good thing or a bad thing? For whom, exactly, and over what time horizon?
  7. “So, for any USD-INR forecast, higher inflation rates in India over the US that have been the default factor for the past few decades cannot form the basis. The Fund may have to revisit its implicit forecasts for USD-INR in April 2022.”

    Do you agree with the author’s assessment that inflation in India may not necessarily be higher than in the United States? Why or why not? With what implications beyond GDP calculations?

I’d recommend that you try and figure out the answers to these questions yourself, or even better, with a group of like-minded people. Run them past your prof(s), and see what they have to say. Wwrite up/record your answers and put ’em up for public consumption.

And best of all, try to come up with more such questions yourselves!

Less is More

We had the honor of hosting Robert Frank for a talk at the Gokhale Institute the other day.

There’s a lot to learn from that talk (duh), but there was one particular thing he mentioned in that talk that I want to focus on today:

When it comes to teaching principles of economics, less is more.

I’m paraphrasing here, and what you’re about to read is my interpretation of his point – but when it comes to a subject like Principles of Economics, width isn’t the point, depth is.

Unfortunately, however, most students seem to emerge from introductory economics courses without having learned even the most important basic principles. According to one recent study, their ability to answer simple economic questions several months after leaving the course is not measurably different from that of people who never took a principles course.
What explains such abysmal performance? One problem is the encyclopedic range typical of introductory courses. As the Nobel laureate George J. Stigler wrote more than 40 years ago, “The brief exposure to each of a vast array of techniques and problems leaves the student no basic economic logic with which to analyze the economic questions he will face as a citizen.”


Honestly, if you understand the principles of economics well enough, that alone suffices to get a grasp on how economists view most things about society. Each economist has his/her own list of what they might consider to be the principles of economics, but I’d argue that there are some that will certainly be on everybody’s list:

Incentives matter | Costs Matter | Trade matters | Externalities matter | Prices matter

As I said, some folks might include other principles, some folks might include a whole lot more, and some might provide our field with some much needed levity. It’s not so much about what makes each economists’ list and what doesn’t (although that is a topic that us economists can keep going for days on end) – but it is about two very different, and very important things:

  1. How well do you teach these principles?
  2. How much do you stress upon the application of these principles?

Learning about the principles doesn’t take all that much time, and neither does understanding them.

Applying them? Trust me, that takes a lifetime, and even us economists can trip up every now and then:

Virtually all economists consider opportunity cost a central concept. Yet a recent study by Paul J. Ferraro and Laura O. Taylor of Georgia State University suggests that most professional economists may not really understand it. At the 2005 annual meetings of the American Economic Association, the researchers asked almost 200 professional economists to answer this question:
“You won a free ticket to see an Eric Clapton concert (which has no resale value). Bob Dylan is performing on the same night and is your next-best alternative activity. Tickets to see Dylan cost $40. On any given day, you would be willing to pay up to $50 to see Dylan. Assume there are no other costs of seeing either performer. Based on this information, what is the opportunity cost of seeing Eric Clapton? (a) $0, (b) $10, (c) $40, or (d) $50.”
The opportunity cost of seeing Clapton is the total value of everything you must sacrifice to attend his concert — namely, the value to you of attending the Dylan concert. That value is $10 — the difference between the $50 that seeing his concert would be worth to you and the $40 you would have to pay for a ticket. So the unambiguously correct answer to the question is $10. Yet only 21.6 percent of the professional economists surveyed chose that answer, a smaller percentage than if they had chosen randomly. (Emphasis added)


It gets even worse, because as Robert Frank goes on to say in that article, students were likelier to give the correct answer if they had not taken an introductory econ course. And if that is not a damning indictment, I don’t know what is.

And so one thing that I’ve tried to change in how I teach Principles of Economics is to take things really, really slowly. Answer as many questions as possible for every nuance related to every principle, and not worry about the schedule and the teaching plan. Soak ourselves as thoroughly and as extensively as possible in each principle, ruminate about potential applications, wonder about exceptions, and then move on.

We might end up covering less, but that which we will cover, we will cover as thoroughly as possible. It is, I think, a better way to go about things. We’ll find out, at any rate 🙂

P.S.: One principle that I would want to talk about (and think about myself, to begin with!) is the principle that time matters. What is the best decision is as much a function of the choices, the trade-offs and the incentives, but each of these are subject to the time horizon that you have in mind. The decision about whether or not to have a second helping of desserts after lunch today (yumm!) is about choices, trade-offs and incentives, but it also is a function of what time horizon one has in mind:

And that principle is applicable in so many different ways! So yeah, about the list of principles of economics, my addition to the list would be “Time Matters”.

January 2020 Collated

Maybe you have noticed, and maybe you haven’t, but I’ve been trying to make my writing on EFE just that little bit more systematic.

Towards that end, this post is simply links to all of what I posted in the month of January 2020, separated out by category.


We started with a set of five articles about India in 2020, and then learnt about Makar Sankranti in the next set of weekly links about India. The next set of links is my favorite post of January 2020 – writing it helped me learn more about the Indian Constitution, and I hope this turns out to be an exercise I can come back to twelve times this year. A hat tip, once again, to Murali Neelakantan, for helping out with the links, so much so that I may well end up posting a bonus set of links! The last in the India series was about expectations from the Union Budget for 2020.


As in India’s case, we started with expectations from tech in the decade to come (although the last article in the set was quite interesting: predictions made in 2010 about the decade ahead). The next set of links, on the 14th of January, was about CES, and its evolution over time. We then took a look at the evolution of mainframes, and finished Tuesdays in January 2020 with a look at the evolution of personal computing.


For at least the first half of the year in 2020, we’ll be taking a look at countries in Europe, and trying to learn more about them. That, fingers crossed, will result in series of 20 free-to-read articles about each country by the end of June 2020.

But to begin with, keeping with the themes for India and Technology, we learnt about where the global economy might be headed this year.

We began the country series with Poland. We learnt about Poland’s modern historyimmigration and emigration in Poland in recent times, and her geopolitics in modern times. What next for Poland rounded off our set of articles about Poland in January 2020.


Incentives, sunk costs, opportunity costs, choices and horizons. To me, these four things taken together are the very foundations of economics. Everything else comes after. There is in fact an earlier post about Choices, Horizons, Incentives and Costs as well on the blog – which only serves to reiterate how important I hold these four concepts to be.

The Rest

Click on the relevant links in the right sidebar to take a look at the Etc series, which comes out every Friday, as well as the selection of tweets on Saturday and the videos on Sunday for the month of January, 2020.


Thanks for reading!

Agriculture in England and India, Immigration, Water and Healthcare

Five articles I enjoyed reading this week – and hopefully you will as well

The change that is coming over farming can be summarised in simple economic terms. Intensive agriculture prioritises a bumper harvest – the annual dividend – while the new approach emphasises the preservation of the initial capital – the land itself. For a glimpse of how this new investment priority will affect British farming, it suffices to visit those progressives who have already, to varying degrees, made it their own.

The Guardian Long Read on agriculture (in England). Horizons (one out of choices, horizons, incentives and costs) remain underrated in economics classes, as this article points out. But there is much more to read here: recommended!

It developed an app-based platform that registers orders directly from buyers, analyses category-wise demand, fixes dynamic prices depending on daily demand, and transfers the orders to its network of 1,000+ farmers. Farmpal’s price comparison feature ensures that farmers can sell their produce at rates higher by 20 to 30 percent than what they would normally get in the mandis.
“This is one of our main promises to the farming community. We are able to offer them premium prices because technology eliminates at least four to seven middlemen from farm to fork,” the founder explains.

While on the topic of agriculture, this from Maharashtra, India: Farmpal.

Caplan’s case isn’t entirely about economics: he also makes a moral appeal. Consider the case of “Starving Marvin,” who needs food and is prepared to purchase it legally. On his way to the market, he is turned away by an armed guard. If Marvin subsequently dies of starvation, Caplan asks, is the guard guilty of murder? The philosopher Michael Huemer, who first introduced this hypothetical, in 2012, concluded that the answer was yes. He writes, “If a person is starving, and you refuse to give him food, then you allow him to starve, but if you take the extra step of coercively interfering with his obtaining food from someone else, then you do not merely allow him to starve; you starve him.” Caplan doesn’t go that far, but he does argue that the guard is wrong to prevent Marvin from feeding himself.

Read the paper, read the book, read this profile of Bryan Caplan, and his quixotic quest to get all of us to accept a world without borders.

Geologists and hydrologists, who worked on implementing the project, shared similar views and hailed Jalyukta Shivar. This was mainly due to the interventions undertaken in the existing water reserves, planned de-silting activities, among many others. However, experts agreed that the scheme was not appropriately implemented. Now with Jalyukta Shivar no longer in existence, focused efforts of the past five years, in most likelihood, will go down the drain unless a similar scheme is introduced. With rainfall variations getting more pronounced, in addition to depleting groundwater reserves, the state will need concrete interventions to tackle future water requirements, experts recommended.

As Tyler Cowen is fond of saying, solve for the equilibrium. On the politics of water conservation in Maharashtra.

America’s mediocre health outcomes can be explained by rapidly diminishing returns to spending and behavioral (lifestyle) risk factors, especially obesity, car accidents, homicide, and (most recently) drug overdose deaths. [Please read this post for the full explanation]

The diminishing returns are evident in cross-sectional analysis. Higher-income countries like Norway and Luxembourg spend twice as much as the likes of Spain and Italy and probably experience worse average outcomes.

Via the excellent Navin Kabra, a very, very long article on healthcare in America. Excellent if you are a student of America, healthcare or microeconomics. At the intersection of the three, it becomes mandatory reading. Pair up with Baumol’s Cost Disease (although the name is misleading, it is the most popular way to this phenomenon is referenced)


Links for 12th Jan, 2019

  1. Charles Dickens on poverty.
  2. In line with the Macaulay piece a couple of days ago.
  3. Analyzing the China slowdown.
  4. Longer horizons make more sense.
  5. The fight against malaria is not going well.