Search Results for: tmkk

How Might You Use Incentives in Your Own Life?

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It’s all very well to dispense gyaan about incentives, but what is the TMKK?

For those of you new in these parts, TMKK stands for To Main Kya Karoon? Learning about economics for its own sake only make sense in terms of scoring marks in an examination. But a subject truly comes alive when you are able to understand its relevance and importance to your own life – preferably directly, but at the very least tangentially. Don’t get me wrong, I am not at all suggesting that intellectual pursuits for their own sake are not worth it. But I am very much suggesting that the ability to answer a TMKK for oneself makes it much more interesting.

So how should once use incentives in one’s own life?

  1. You can make museum visits less boring.
  2. You can lose weight. I cannot find the reference I’m looking for right now, but Tim Ferriss once spoke about how you can send a truly embarassing pic of yourself to a friend, with instructions to post it on social media by the end of the month – unless a certain amount of weight loss has been achieved. If pics on social media is not your thing, give an amount of money that will truly pinch you to your friend, with instructions to donate it to a cause/political outfit that you truly loathe – again, unless a certain amount of weight loss has been achieved.
  3. What is the Pomodoro technique if not an incentive mechanism? There is more to it, sure, but incentives are certainly involved, no?
  4. If you have a gym buddy, yes, that too is an incentive mechanism. There is another phrase for it – peer pressure. That simply means that it’s not so much about you missing gym, but about the pressure you feel for letting your friend down. But the underlying mechanism? Incentives! In this case, it is a non-monetary, negative incentive.
  5. In my opinion, nobody does gamification using non-monetary incentives better than Duolingo.
  6. Ask ChatGPT3 for more examples! I could have done this myself, of course, but you really should get in the habit of using ChatGPT3 as a tool to do all kinds of research – it’s what you’re going to be doing in your careers in many different ways, so the correct time to get started is yesterday.
  7. Think about examples from your own life where you’ve tried to design incentives for yourself. Ask yourself which ones worked and which ones didn’t, and then ask yourself if we humans treat positive and negative incentives the same way.
  8. Best of all, try designing incentives for somebody in your family. See how they respond to your incentive mechanism, and see if you can iterate it (the mechanism) for the better. If you’re looking for an example – what if you promise to make breakfast in bed for a family member who promises not to look at their phone after dinner throughout the week. Will this work? Try it out! (Note: not a single “I just need to do this one little thing” allowed!). Try the same experiment the next week, but this time, use a “punishment” instead. Say, a fine of a thousand rupees, payable to you, if they break the rule.
  9. If you do “run” the experiment in pt. 8 above, ask yourself if Goodhart’s Law applied.
  10. Get better with every passing week at designing incentives, refining them and implementing them, both for yourself and for others. You’ll be surprised in two regards. First, you’ll be surprised at how easy it is to design better and better incentives. And second, you’ll be surprised to learn that GoodHart’s Law is always applicable. Tricky little beasts, incentives.

Commoditize Your Complements

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I wrote about a post written by Joel Spolsky last year, and one of the many positive externalities positive spillovers of writing on this blog has been the fact that I’ve gotten to know about Joel and his writing. It is a positive treasure trove, and well worth dipping into.

But the reason I’m writing about him today is because I originally meant to write a post on a recent Ben Thompson post (AI and the Big Five). While going over that article and taking notes, I came across a reference to an old article written by Joel:

Once again: demand for a product increases when the price of its complements decreases. In general, a company’s strategic interest is going to be to get the price of their complements as low as possible. The lowest theoretically sustainable price would be the “commodity price” — the price that arises when you have a bunch of competitors offering indistinguishable goods. So, smart companies try to commoditize their products’ complements. If you can do this, demand for your product will increase and you will be able to charge more and make more.

https://www.joelonsoftware.com/2002/06/12/strategy-letter-v/

I found parts of the write-up mysterious, because I’m not familiar with both the firms and the products that have been spoken about in it. Partly a function of I not knowing enough about the tech world, and partly a function of the article itself being quite old (Transmeta, Ximian, Gnome are examples, of you are wondering).

But the core insight from the article? Both spot on, and an excellent example of a TMKK in a into class about micro.

What is the core insight? A simple, almost throwaway line in micro classes:

All other things constant, the demand for a product will go up when the price of the complement goes down

And we’ve all gone through examples of how “the demand for tea will go up when the price of sugar comes down”. But consider this instead:

When IBM designed the PC architecture, they used off-the-shelf parts instead of custom parts, and they carefully documented the interfaces between the parts in the (revolutionary) IBM-PC Technical Reference Manual. Why? So that other manufacturers could join the party. As long as you match the interface, you can be used in PCs. IBM’s goal was to commoditize the add-in market, which is a complement of the PC market, and they did this quite successfully. Within a short time scrillions of companies sprung up offering memory cards, hard drives, graphics cards, printers, etc. Cheap add-ins meant more demand for PCs.

https://www.joelonsoftware.com/2002/06/12/strategy-letter-v/

Why did this matter to Microsoft? That is, why would they want to ensure cheap add-ins (complements) for PC’s, so that the demand for PC’s (the product) go up? They didn’t actually manufacture the PC’s back then, so how were they profiting?

Microsoft’s goal was to commoditize the PC market. Very soon the PC itself was basically a commodity, with ever decreasing prices, consistently increasing power, and fierce margins that make it extremely hard to make a profit. The low prices, of course, increase demand. Increased demand for PCs meant increased demand for their complement, MS-DOS. All else being equal, the greater the demand for a product, the more money it makes for you. And that’s why Bill Gates can buy Sweden and you can’t.

https://www.joelonsoftware.com/2002/06/12/strategy-letter-v/

As always, do read the rest of Joel’s write-up, please.

Homework:

  1. What examples can you think of where this lesson has been applied in a modern context? Software or otherwise.
  2. How can those of us in the education sector think about the applicability of this lesson?
  3. Industrial organization remains an underrated subject. Discuss.

Land, Labor and Capital

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A very long extract to begin with today, because it just is that important:

The first tentative economic reforms began after Indira Gandhi came back to power in 1980. Political scientist Atul Kohli has written of how she made her peace with Indian business houses. The licence raj was eased. Taxes were reduced. VP Singh presented a reformist budget in 1985, when Rajiv Gandhi was prime minister. Manmohan Singh helmed the seventh five-year plan. It focussed on technology, productivity and efficiency. The Reserve Bank of India allowed the rupee to gradually depreciate in a bid to promote exports.
The growth spurt in the 1980s was supported by a large increase in fiscal deficits as well as international borrowing. It was unsustainable. The road to the 1991 crisis lay ahead. The macroeconomic crisis—in the midst of political and social instability —was a turning point. The duo of PV Narasimha Rao and Manmohan Singh abolished industrial licensing, slashed import tariffs, opened up the financial sector, attracted foreign capital, fixed public finances and made the rupee convertible on the current account. In his landmark budget speech in July 1991, Manmohan Singh cogently argued that the balance of payments crisis was a symptom of a deeper malaise: macroeconomic imbalances, low productivity of public sector investments, loopholes in the tax system, indiscriminate protection that had weakened the incentive to export, lack of domestic competition, a weak financial system that was not allocating capital efficiently, lack of access to the latest technology, and much more. The great achievement of 1991 was not each reform in isolation, but the rollout of a comprehensive reform programme where different parts complemented each other.
The development state was replaced by the regulatory state. The government was no longer the main vehicle of investments. That job was handed over to the private sector, while new regulators were set up or empowered to ensure markets functioned well in a wide range of areas.

https://www.livemint.com/politics/news/the-long-road-to-breaking-free-11660502122505.html

The entire column is excellent – that’s why we’ve spent four days (and counting) on it. But it is awe-inspiring to see how concisely and yet how thoroughly Niranjan has spoken about the 1991 reforms in three short paragraphs. Shruti Rajagopalan and her excellent colleagues at the Mercatus Center have an entire website dedicated to the events of 1991 and what came after, and I would strongly encourage you to spend a lot of time on it.

If you are younger than thirty years today and are reading this, you need to understand why you are able to read this today. You need to understand how the Indian economy changed enough for me to be able to write this blog in addition to all of what I do to earn my daily bread, and you also need to understand how your own income (or that of your family’s) went up enough to be able to afford the device that you are using right now to read this. To say nothing of the job/business that paid for this device- both the device and the job likely wouldn’t have been available prior to 1991.

I hope to write more about how the 1991 reforms changed lives on the ground for those of us who were around in the 1990’s and the early 2000’s. In all my classes, I tell my students that they have a secret superpower that they should make full use of. This secret superpower is called TMKK. It stands for Toh Main Kya Karoon? In English, that means ‘so what should I do?’, although a more accurate translation would be ‘so why should I care?’.

Consider this sentence once again: “The duo of PV Narasimha Rao and Manmohan Singh abolished industrial licensing, slashed import tariffs, opened up the financial sector, attracted foreign capital, fixed public finances and made the rupee convertible on the current account.”

Especially as a young student, you should absolutely be asking TMKK. How did the life of the average Indian change because industrial licensing was abolished? So what if import tariffs were abolished? What could I buy and consume that I could not earlier? How did opening up the financial sector help ordinary folks who were around in the 1990’s? What changes in the lives of ordinary citizens when India finds herself able to attract foreign capital?

You get the drift. I suspect most folks nod along when they hear us economists rhapsodize about 1991, without really getting what was in it for them. But they need to know. One, to better understand why exactly 1991 was so important, and second, to realize how fragile our economic freedom is, and to do our utmost to preserve it in the years/decades to come.

In their book, Tryst with Destiny, Bhagwati and Panagariya speak about how far India has come since 1991. And it really has come a long way! But they also speak about the need to have sustained and accelerated growth from here on in (the book was published about a decade ago). And they say that this needs two kinds of further reform.

Track I reforms are all about accelerating and sustaining growth, while making it even more inclusive, while Track II reforms are about making redistribution even more broad-based and effective. And they make the point that while 1991 was a great start to Track I reforms, there is a long, long way to go:

If truth be told, India is far from done on Track I reforms for two broad reasons. First, the potential for growth remains grossly underexploited. The economy remains subject to vast inefficiencies. Removing these inefficiencies not only offers the opportunity to arrest the recent decline in growth but to push the economy to a double-digit growth trajectory. Second, the poverty reduction that directly results from growth, in terms of enhanced wages and employment opportunities per percentage point of growth, can be increased: we can get a larger bang for the buck.

Panagariya, Arvind; Bhagwati, Jagdish. India’s Tryst With Destiny . HarperCollins Publishers India. Kindle Edition.

Every single economics student is taught, sooner or later, about the three factors of production: land, labor and capital. The link I have added here mentions a fourth, but let’s keep things simple for now. And I find it instructive to think about what Bhagwati and Panagariya choose to talk about in Part II of their book. This section of their book is about accelerating, widening and deepening what they refer to as Track I reforms, and the these are the first three sub-sections:

  1. Labor laws
  2. Land Acquisition
  3. Infrastructure

That is to say, even now, a full 75 years after India’s Independence, it isn’t as easy as it should be to utilize land, labor and capital to the fullest extent possible. You may agree or disagree with their solutions to these problems, but I would argue that the diagnosis is spot on.

The Indian economy is freer today than it was in 1990, and that is really and truly awesome. But it isn’t free enough, and much more work remains to be done.

Quite what this work is, and how to best go about it, is the journey that we need to undertake on the long road to breaking free.

And if this challenge excites you, well, like it or not, you are a student of the Indian economy – welcome to our tribe!

On Enshittification

AshishLeave a comment

The writer and activist Cory Doctorow has coined a memorable term for this tendency for platforms to fall apart: enshittification. “Here is how platforms die,” he wrote in January. “First, they are good to their users; then they abuse their users to make things better for their business customers; finally, they abuse those business customers to claw back all the value for themselves.”

https://timharford.com/2023/03/the-enshittification-of-apps-is-real-but-is-it-bad/

What a lovely word, enshittification. I’m sure you’ve experienced the feeling of your own favorite app/online service going down Route Enshittification, pedal to the metal. Tim Harford refers to Facebook, Instagram, Twitter and Tiktok going down this route, with his own personal experience being a witness to the slow and – as he explains later on in the blogpost – inevitable degeneration of Amazon.

The problem, Harford says, is due to two important concepts that are (at least tangentially) from the field of microeconomics: network effects and switching costs.

What are network effects? The quote isn’t my own, and I’ve forgotten where I’ve filched it from, but here’s the easiest way to understand network effects:

“The first person to buy a fax machine was an idiot. The second was a genius.”

What this means is that just the one fax machine isn’t a useful thing, at all. You need another fax machine to send a fax to. Ditto with email addresses, if you’re looking for a more modern example (well, more modern than fax machines, at any rate!). People from the technology/marketing side of things are probably more familiar with Metcalfe’s Law:

In 1985, the economist George Gilder named the idea Metcalfe’s law. It’s probably the most celebrated equation of its kind since Gordon Moore’s observation about computer chips. Metcalfe says his motivation was not science but commerce. “It was a sales tool,” he says. “People were building small networks and not finding them useful. So I ginned up a slide on an Alto that showed that the cost of a network goes up linearly with the number of nodes, but the number of possible connections goes up as the square. Our salesforce took this 35-millimeter slide and told people the reason they weren’t useful is that they weren’t big enough. The remedy, of course, was buying more of our networks.”

https://www.wired.com/story/plaintext-the-man-who-discovered-network-effects-isnt-sorry/

And what are switching costs? As the phrase itself suggests, they’re the cost of switching from one service provider to another. I’ve had a lot of reasons to be deeply unhappy with my bank over the past year or so. I’m really tempted to switch. But the very thought of having to jump through a million hoops to do so, not to mention having to think through all of the ways my life has become immeasurably intertwined with my curren’t bank’s systems, makes me not want to go ahead with it. The only option that leaves me with regard to my current bank is to bleat at them in outraged fashion once I defeat their IVR. But anyways, that’s switching costs.

Now, combine these two things – network effects and switching costs, and the result, Tim Harford says, is enshittification:

Both switching costs and network effects tend to lead to enshittification because platform providers see early adopters as an investment in future profits. Platforms run at a loss for years, subsidising consumers — and sometimes suppliers — in an effort to grow as quickly as possible. When switching costs are at play, the logic is that companies attract customers who they can later exploit. When network effects apply, companies are trying to attract customers because they will draw in others to be exploited. Either way, exploitation is the goal, and the profit-maximising playbook will recommend bargains followed by rip-offs.

https://timharford.com/2023/03/the-enshittification-of-apps-is-real-but-is-it-bad/

Well, TMKK?

  1. As Tim writes in his post, as a smart, trained-in-microeconomics consumer, go to town on all the deals that a start-up offers you. Before the enshittification process starts, and while the app is in the “let’s get network effects to work for us” stage, make sure you double down on acquiring all the freebies on offer
  2. Don’t get attached to the awesomeness of a brand. Get attached to the early stage marketing offers of all brands. Remember, economics is “the dismal science”, and the dismal conclusion from Tim’s post is that all brands will eventually enshittify themselves.
  3. Read Tim’s post, all of it. Ask yourself if you’re in favor of eliminating switching costs. Remember that the opportunity cost of eliminating switching costs is that apps won’t bother with trying to build out network effects. That means a) no mad offers at the outset, but also, b) weaker network effects on your app. There is, unfortunately, no such thing as a free lunch!