A Review of Macroeconomics: An Introduction, by Alex M Thomas

I’m not a fan of recommending a particular textbook to my students in any course that I teach. I’m not a fan of textbooks in general, but that’s a story for another day.

The reason I am against the idea that you should read “a” textbook for a course is because I find the idea that you can learn a subject by reading just one book to be a deeply repugnant one. I’m happy to recommend ten, or more. And students should learn by dipping into all of them!


But if you were to put a gun to my head and tell me that I must absolutely recommend just one macro text for Indian students who are learning macro for the first time, A Review of Macroeconomics: An Introduction, by Alex M Thomas would be it.

Why? For the following reasons:

Rare is the textbook that begins with a disclaimer to the effect that the author did not want to write a textbook. Rarer still is the preface that goes on to say that other textbooks (and more besides!) should also be read. If you are an econ prof, you must have read multiple prefaces by now that dispense advice about how chapters such-to-such, followed by chapters these-to-those ought to be included in an introductory course, but on the other hand chapters extra-but-still-necessary only need be included in an intermediate course.

The preface to this book does no such thing. Read the whole book, it says, and read more besides.

But the second most important part of the preface, and the part that got me hooked to the whole book is that includes a reference to a novel. That in itself is, well, novel. Second, it is an Indian novel. Third, it is a novel that has nothing to do with macroeconomic theory. This is a book that teaches you that macroeconomic theory – that after all, is the job of a textbook – but it is also a book that teaches you what to do with that theory. It teaches you to apply that theory to get a handle on the society that you need to study, and it helps you understand that this society is so much more than the abstractions of economic theory. Use this book to appreciate life better, it seems to say. Or, in the language of us economists, Alex Thomas has written the book as a complement to everything else that you will read and learn about Indian society. Not as a substitute. That is a rare old achievement, and one well worth celebrating.

The most important part?

Finally, this book adopts a problem-setting approach rather than a problem-solving one, as is the case with most economics textbooks. To put it more clearly, this text helps you to identify, conceptualize and discipline a macroeconomic problem. Therefore, this book does not contain exercises in problem solving, but it contains discussions and questions that make you think about the nature of assumptions, the logic of the theory, the limits of the theory, the interface between theory and policy, a little about the gaps between theory and data, and occasionally, the nature of past and present economic thought.

Preface, pp xvi, Macroeconomics An Introduction

There are nine chapters in the book, and I hope Alex Thomas won’t mind me listing them out over here:

  1. What is economics?
  2. Conceptualising the macroeconomy
  3. Money and interest rates
  4. Output and employment levels
  5. Economic growth
  6. Why economic theory matters
  7. The policy objectives of full employment
  8. The policy objective of low inflation
  9. Towards good economics

Say you want to teach a course in macroeconomics to students who have not studied the subject before. Conceptually speaking, here are the questions I would want to answer as an instructor:

What are we studying here, exactly? What are we abstracting from all of reality and of those abstractions, which features matter more than the others? Why are we studying whatever it is that we’re studying? If we (students and the prof) agree on the answers to the first few questions, how do we go about defining and measuring “success”? Why put the word success in inverted quotes?

Chapter 1 | Chapters 2,3,4 | Chapters 5 and 6 | Chapters 7 and 8 | Chapter 9 is how I interpret the layout of the book, in line with the questions above. Personally, I would have wanted to put chapters 5 and 6 right after chapter 1, but after having read the book, I can understand why the book was structured the way it has been. In particular, the four sections of the sixth chapter can only become truly comprehensible after you’ve gone through chapters 2,3,4. If I were to be teaching a course on macro, I would still be tempted to jump from 1 to at least the spirit of chapters 5 and 6, but that’s just my personal preference at play. Growth matters, and helping students appreciate why growth matters can be hugely motivating.


This book deserves a separate section of the review dedicated exclusively to the richness of the text. I challenge you to find me another textbook, from anywhere in the world that can go from talking about Tony Aspromourgo’s chapter on Piero Sraffa on pp 100, to talking about a Telugu novella on pp 102 (Kesava Reddy’s Moogavani Pillanagrovi: Ballad of Ontillu, 2013) to talking about Shrilal Shukla’s Raag Darbari on pp 103! To be clear, the challenge isn’t finding another textbook that talks of these three sources specifically (I can guarantee you that there isn’t another one!), but one that manages to traverse such breadth. Breathtaking stuff, and I never imagined I would use that phrase while reviewing a macro text.

But it’s not just that one series of excerpts. Every chapter is liberally sprinkled with a list of reading recommendations that stand out for their sheer breadth. All of them have been listed out between pages 200-208 in the text, and just these eight pages alone are worth the price of admission. Well, these eight pages and the two that precede it. In those two pages, Alex Thomas lists out all the data sources that have been used in the case of each table from each chapter.

In particular, this book deserves to be praised for raising repeatedly issues of caste, gender and ecology at various points through the text. Growth, but at what cost? Land as a factor of production, sure, but rooted in which society, and with therefore what consequences?

Consider this excerpt from pp 128, for example:

A village economy cannot be understood as a simple departure from the competitive macroeconomy we have discussed thus far. It requires us to understand how village space is divided and demarcated (typically on the basis of caste). The spatial inequality present in a village economy is captured very well by Kota Neelima in her depiction of a poor and indebted farmer’s house in Death of a Moneylender (2016).

The very next paragraph touches upon aspects of religion and its linkages to labor mobility. As always reasonable people can and should argue about how much of an impact these aspects (and other aspects of Indian society) have on the cold austere ivory tower approach that most macroeconomic textbooks adopt. I think it is a very significant impact, and you may not – and that is, of course, absolutely fine. But we are debating the quantum of significance and relevance, not questioning its very existence – and that is very, very welcome indeed.

Indeed, this is a book that ends with an exhortation: if you take one thing away from this book, Alex Thomas seems to be saying, take away an appreciation for the pluralistic approach (pp 196):

If you are a student of economics, you will soon study “statistics for economists’ and ‘mathematics for economists’. In both these methods of economics, there exist multiple concepts, theories and approaches, just like in macroeconomics and microeconomics; pay attention to the fact that these ‘methods of economics themselves both originated and are used within a social context. Moreover, a pluralistic approach to economics by itself is not sufficient when employing economics in the service of public policy; it is important to keep in mind the collective wishes of people as Xaxa’s poem in Section 1.4 pointed out.
I end this book with the hope that you take pluralism as a friend, sometimes a difficult one, in your journey of learning.


The pluralistic approach isn’t just restricted to moving across (and beyond) the social sciences. Even within the domain of macroeconomic theory, Alex Thomas takes the time and trouble to make sure that all views about the macroeconomy are fairly represented. The fifth chapter in particular is notable for this, but that should be taken to be especial praise for that chapter, not a faint damning of the others!

What could have been done better? If this book is intended for people learning about macroeconomics for the first time, I think this books errs on the side of doing a little bit too much. Some sections might be a little bit too involved for a reader who still has to cultivate a taste for macroeconomic theory (and god knows it is very much an acquired taste). And some first time readers might also not appreciate some of the macroeconomic controversies and the role they have played in pushing the field further.

This should beg the obvious question: well, what, exactly, should be cut? Well, not cut exactly, but some of the more involved explanations can be turned into, say, accompanying YouTube explainers (about which more below).

There are also some notable names missing from an introductory text of macroeconomics, but I’m all but certain that this is a case of conscious choice rather than inadvertent omission.

A tip to the students reading this review: help Alex out by coming up with videos that will act as accompaniments to the text. That is, if you are doing the hard work of reading through the text and understanding it, help others by creating content that will act as a complement to the reading of the text. Many students should do this, and in many languages! As Alex says, embrace plurality, both in terms of approach and understanding, but also linguistically speaking.


My biggest problem with the book is a bit of a meta-problem, and I hope I turn out to be wrong in what I am about to say. The biggest requirement, I think, of this book is a teacher who will do it justice. I honestly do not think that this book can be read by a first-time student of macroeconomics without some sort of mentoring and guidance. To be clear, this is not about the book being difficult or inaccessible – I am of the opinion that macroeconomics just is that hard.

But if what I’m saying is correct, then the success of the book is as dependent on the guide/mentor/professor as it is upon both the book and the reader. And that brings me to my answer to whether or not I would recommend that you read this book. It is not, I think, for everybody. But that’s not a criticism of the book, or its contents or the author. It is an acknowledgment of just how hard macroeconomics really is. In fact, Alex Thomas himself says that a year of undergrad studies in economics is recommended before you tackle this book.

But hey, hopefully I turn out to be wrong! Hopefully you can and will read this book and understand it.

And if you are already a serious student of economics (whether formally enrolled in a university or otherwise), then I absolutely and unreservedly recommend this book to you. As a student of Indian macroeconomics, you simply couldn’t do better. Period.


P.S. Alex Thomas will be speaking about his book to the students from the Gokhale Institute on the 17th of September. I don’t think livestreaming is possible, alas, but we will be putting up the recording on our YouTube channel for sure. If you have questions you’d like to ask Alex Thomas, pass them along here in the comments. We’ll try to work them in!

What Year in History? A Fun Way to Understand Development in India

Ajay Shah, Renuka Sane and Ananya Goyal have a very interesting blogpost out, the title of which is “What year in the history of an advanced economy is like India today?”

India has been stepping out from poverty into middle income. It is estimated that the proportion of persons below the PPP$1.90 poverty line has dropped to an estimated 87 million in 2020. In thinking about India’s journey, it is interesting to ask: In the historical journey of advanced economies, What year in the history of the US or UK roughly corresponds to India of 2021? This is a good way to obtain intuition on where India is, in the development journey.

https://blog.theleapjournal.org/2021/08/what-year-in-history-of-advanced.html

It’s a good blogpost, and the section before they get to comparisons about GDP is worth reading in full, because they come up with a good set of warnings about overdoing analysis like this. Read it, but we’ll get down to the fun part right away. As they mention in the blogpost, India today is at about 6800 dollars per person in terms of GDP, adjusted for PPP and inflation. When in its history was the UK at this point? What about the US? Well, the blogpost gives the answers, but I prefer to show you screenshots of my favorite software, Gapminder:

And I won’t show you the United States here, but it’s around the same point – the late 1800’s, in effect. Or put another way, if you want to use a this very simple way of asking how long to go before we reach the same level of per capita GDP as the United States, we have about 140 years to go.


And Gapminder, of course, has the ability to allow you to do this for every single metric that is available on the software. The blogpost written by Ajay Shah, Renuka Sane and Ananya Goyal speaks about asset ownership and women’s labor participation as other things to compare India’s current level of development with America’s past – but you can, of course, take a look at whichever metric you want.

This blogpost reminded me of a chart that The Economist had come up with earlier:

https://www.economist.com/graphic-detail/2011/10/03/chasing-the-dragon

As with many charts from The Economist, it takes a while to get what is going on, but the chart is worth that effort. Here’s a quick explanation to get you started: life expectancy at birth for China is 73. India is at 65. And China was at 65 36 years ago. Once you get this, the other rows in the chart become easy to interpret. Note that this chart was published by The Economist a decade ago.


These sort of analyses are fun, but of course one shouldn’t take them too seriously. There are other things that are at play beyond the data points that are worth taking into account, but are difficult to quantify. And most notable among these is culture.

That is, sure, China was at 65 in terms of life expectancy 36 years ago, but that doesn’t necessarily mean that we will take even approximately the same amount of time to reach 73. Could be lesser, could be more – and that because of changing technology, different culture, different political structures, different – well, a whole host of things.

But this much is true: both the blogpost that I cited and the chart above shows that we have, as the poet put it, miles to go before we sleep.


By the way, a fun exercise if you are a student today is to see if you can recreate The Economist’s chart updated with today’s numbers. Give it a shot, why don’t you?

The Difference Between a Sociological and Psychological Story

I grew up in an age where the television series “Friends” was revered.

People considerably younger than me tell me that Friends is still revered, and there is probably some truth to that hypothesis. Every time I open up Netflix on my TV, Friends is regularly in the Top 10 shows in India.

Don’t worry, this is not about to turn into a snooty ol’ discussion about how Friends could be different/better. But I will say this much: I much preferred the first two to three seasons to the rest of the show. And the reason I preferred the first two or three seasons is because in my opinion, the first two or three seasons were about life happening to those six people in New York. It was observing New York through the eyes of these six people.

It helped that these six people were attractive and young. That helped in generating the kind of appeal that Friends has had for years now. But the reason why the first two or three seasons were, in my opinion, better than the latter ones is because they were sociological observations, using these lives of these six characters as a canvas. The latter seasons? Oftentimes, it seemed as if they were an extended riff on the “We were on a break” theme. In other words, it became a psychological story about what happened to these six people, and what about their psychological make-up made them take the decisions they do.

Not my phrasing (I wish it was). It simply is me applying Zeynep Tufekci’s model to the television series Friends. Here is Zeynep talking about Game of Thrones:

COWEN: TV show Game of Thrones — why does it interest you as a sociologist?

TUFEKCI: It interested me until the last season and a half —

TUFEKCI: — because before that, it was a very, very sociological thing. Here’s the thing. Here’s the difference between a sociological story and a psychological story.

In a sociological story, you can imagine yourself being almost anyone. Instead of terrible, evil characters and good people, where you just identify with the good ones — which is the classic Hollywood narrative, which is also most of human narrative, you have the good one, the bad one — it’s more like a complicated mythology where you can imagine yourself being any one of those characters, even the ones that do the terrible things, you can see yourself doing it.

The second sign of a sociological story, for me, is when nobody has plot armor because it’s the setting that’s carrying the story, with lots of people, but it doesn’t rely on one person dying or not dying. For six seasons, you have a very institutional sociology, very interesting. It’s like The Wire. People can die, but the story is still gripping because it’s sociological.

Here comes season — whichever the last season is — and all of a sudden, Arya can walk through fiery dragons and nothing happens. It just misses her by an inch. I’m like, “All right, you lost the plot here.” Plot armor essentially means you no longer have a solid sociological story.

I watched it with great interest until the end, and in the end, I’m like, “What just happened?” I wasn’t really very clear with the novel world. I learned that the novelist had run out of material, and the Hollywood showrunners were now writing the script. I’m like, “Ah, that’s what happened. They switched to the good-versus-evil story.”

They took a great story that was going to be how power corrupts, which clearly was the story, and in the end, they made the dragon lady snap just because she heard the church bells or something. [laughs] That’s not a good sociological story.

https://conversationswithtyler.com/episodes/zeynep-tufekci/

It’s a really good way (to me, at any rate) to think about why people say Seinfeld is better than Friends. Of course, you may not agree, and that’s obviously fine. But one reason why people say this might be is because Seinfeld is, to go back to my first example, about life happening to these people.

Roger Ebert, my favorite movie critic, often used to say that one shouldn’t ask what a movie is about. One should, instead ask how a movie is about whatever it is about. I can’t find the exact quote right now, but I think he was getting at the same point.


So ok, if you’re a student reading this, you’ve got one way to frame what everybody has felt about Game of Thrones. And you’ve got a way to think differently about Friends. But the large point is this: when you watch a movie, get lost in the plot and its intricacies, sure. But please, also ask yourself what you are learning about the society in which the plot, and the characters are based.

And here’s homework, if you are so inclined. How much of Michael Corleone’s decision making is a function of he being Michael Corleone, and how much of it is a function of he being who he is, in the family that he is from, the society in which he grew up, and his army background?

Or put another way: the really interesting question isn’t whether Michael and Sonny were different. In what ways were they similar, and why?

A fun thing to think about, if you ask me.


Final point: are you, like me, reminded of the Mahabharat when you read this paragraph?

In a sociological story, you can imagine yourself being almost anyone. Instead of terrible, evil characters and good people, where you just identify with the good ones — which is the classic Hollywood narrative, which is also most of human narrative, you have the good one, the bad one — it’s more like a complicated mythology where you can imagine yourself being any one of those characters, even the ones that do the terrible things, you can see yourself doing it.

https://conversationswithtyler.com/episodes/zeynep-tufekci/

Past EFE posts on Zeynep Tufekci here. Past EFE posts on sociology here.

What is a market?

Oddly enough, this is a question that most (not all, but most) economic textbooks don’t answer. Even more oddly, neither do most (again, some, not all) online dictionaries of economics.

I’ll restrict myself to just a couple of sources here, but if you are an economics student, have fun looking up your favorite textbook and let me know if it contains a definition of a market.

The Economist has a website called “Economics A-Z terms”, and the page for all things economics beginning with the letter M doesn’t have a definition of the market. A search on springer.com for “market” yields a lot of results about features and aspects of markets, it doesn’t actually define the term itself. I know Pindyck and Rubinfield have a definition, on the other hand – and this is an excellent textbook, by the way, and there are some others besides. But long story short, it is a topic that seems to have remained curiously undefined. Especially curious considering the fact that we spend such a long time talking about aspects of markets!

The field of law, on the other hand, does define markets, and does so very thoroughly indeed.


But the reason I bring this up today is because of an excellent post by Tim Taylor over on his blog recently, the title of which is “Thomas Sowell: Why “The Market” is a “Misleading Figure of Speech”. The post is a rumination on Thomas Sowell’s take on, well, the market.

“The market” is another such misleading figure of speech. Both the friends and foes of economic decision-making processes refer to “the market” as if it were an institution parallel with, and alternative to, the government as an institution. The government is indeed an institution, but “the market” is nothing more than an option for each individual to choose among numerous existing institutions, or to fashion new arrangements suited to his own situation and tastes.

https://conversableeconomist.wpcomstaging.com/2021/09/03/thomas-sowell-why-the-market-is-a-misleading-figure-of-speech/

So as per Sowell’s take here, the market is what each individual fashions to suit her own needs at a particular point of time. If I’m hungry, for example, I’m in the market for a meal. Now, that could mean that I choose to use Zomato or Swiggy to order food online and have it delivered home. It could also mean I spending some time in my kitchen rustling up a meal for myself. Or it could be I going to a restaurant and having a meal. Or something else altogether, including something that literally doesn’t exist until I invent it!

The market is simply the freedom to choose among many existing or still-to-be-created possibilities. The need for housing can be met through “the market” in a thousand different ways chosen by each person–anything from living in a commune to buying a house, renting rooms, moving in with relatives, living in quarters provided by an employers, etc., etc. The need for food can be met by buying groceries, eating at a restaurant, growing a garden, or letting someone else provide meals in exchange for work, property, or sex. “The market” is no particular set of institutions.

https://conversableeconomist.wpcomstaging.com/2021/09/03/thomas-sowell-why-the-market-is-a-misleading-figure-of-speech/

It’s an interesting take, and as Tim Taylor himself says later on in the post, if the definition of a market is “nothing more than an option for each individual to choose among numerous existing institutions, or to fashion new arrangements suited to his own situation and tastes”, that applies equally to government institutions too.

This is a bit of a nuanced take, but I’d actually go a bit beyond and ask if Sowell’s definition can be taken to mean that government itself is nothing but one of those numerous existing institutions. And whichever society in a particular place came up with some form of government first – well, that society was simply fashioning a new arrangement suited to that society’s own situation and tastes. This gives me the mischievous ability to drive both capitalists and socialists up the wall, for can I not then say that the government is nothing but another form of a market?


But that gentle leg-pulling aside, there is an important distinction between government and markets, as Tim himself points out:

Perhaps instead of thinking about government vs. the market, it’s more useful to think about government as embodying the set of ground-rules under which markets then operate.

https://conversableeconomist.wpcomstaging.com/2021/09/03/thomas-sowell-why-the-market-is-a-misleading-figure-of-speech/

So even if both were to be institutions that serve our needs (and can indeed therefore be thought of as “markets”), some markets are more equal than others. Governments get to embody (and indeed enforce) the set of ground rules under which markets operate.


And not to get all meta on you, but as public choice economists would rush to tell you, there also happens to be a very real market whose sole reason for existence is to influence the market we call government into making rules that suit, well, some forms of markets more than the others.

Yes, that is a long sentence, but an important one!

Lant Pritchett on Afghanistan

As we will learn in today’s post, the principles that we will learn from this marvelous essay are applicable in so many other contexts.


First, the title of his essay:

A Quickly Made Long Tragedy

Here’s one way to understand what this means in practice: the advantage of a top-down decision making system is that decisions can be made quickly. The opportunity cost of such a system is that buy-in from every person involved with the system is not only difficult to get – it is difficult to ascertain in the first place. As Akshay Alladi puts it over here:

What does Lant Pritchett mean when he says a “quickly” made “long” tragedy? The decision making was quick, sure – implementing said decisions on the ground proved to be rather more tricky. And it took twenty years to understand that in this case, more tricky was, in fact, a euphemism for “was never gonna happen”.


Second, talk about connecting the dots as a writer!

How can one not fall in love with an essay that:

  1. is written by an economist
  2. uses basic physics
  3. uses Shakespeare (!)…
  4. uses medicine
  5. … to explain how sociological concepts
  6. … can be used to understand how political goals
  7. were never going to be achieved
  8. … and all this using a diagram that absolutely anybody could understand?
https://lantpritchett.org/afghanistan-2021-a-quickly-made-long-tragedy/

Third, this excerpt:

I am a very visual person so I propose this diagram as an aid to understanding the tragedy, for both the USA but much more so the people of Afghanistan, of the US engagement

https://lantpritchett.org/afghanistan-2021-a-quickly-made-long-tragedy/

If you’re a student, this is an important lesson. Figure out what type of learner you are, and that as quickly as possible. Do you prefer to understand a concept by drawing a diagram? Or by writing down an equation? Or by writing down your understanding in words? You’d be doing yourself a favor by trying to get better at all three, but any subject becomes easier when you try to figure out how you learn best. Double down on that method and get excellent at it. Try to get better at the other methods sure, but be unapologetic about the method that works best for you.


The entire essay is worth reading, and multiple times. But when you consume anything (a video, a movie, a podcast, a textbook – anything) always ask what else you can learn from it, apart from the intended lesson itself.

It is A Very Underrated Skill indeed!

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.”

https://www.nytimes.com/2005/09/01/business/the-opportunity-cost-of-economics-education.html

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)

https://www.nytimes.com/2005/09/01/business/the-opportunity-cost-of-economics-education.html

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”.

The Data and The Narrative

This week is Back to College at the Gokhale Institute. A podcast that I started a couple of years ago has become a tradition of sorts at the start of each semester at the BSc programme.

For about a week, we have people come and speak to us. All of them answer a simple question in a variety of ways. And that question is this: what would you do differently if you got the chance to go back to college? It’s a simple question, and can be answered in myriad ways. Here are some of the past talks, if you’re interested.

There’s one theme that has come up in all of the talks so far, and often enough for me to want to emphasize on it further. All of the speakers have spoken about the importance of doing the analysis, but also having the ability to build a story around it. Most folks are perhaps good at one, but not the other, and rarely both.

As an economist, almost all of the speakers have said, we have nowadays the ability to build models and run regressions. Building out a more sophisticated model, tweaking it, refining it, is either already possible, or can be learnt relatively easily. But where we lose out on, as young economists entering the workforce, is in our ability to explain what we’ve done.

I often say in my classes on statistics that the most underrated skill that a statistician possesses is the English language. I usually get confused laughter by way of response, but I am, of course, getting at much the same point. Unless you have the ability to explain what your model implies for the business problem at hand, you haven’t really done your work. And when I say explain, I mean using the English language.

Each of our speakers for the week so far have made the same point in their own way. Technical ability is table stakes. The differentiator is the ability to expand on what you’ve done, in a way that resonates with the listener. And resonance means the ability to tell a story about how what you’ve done is A Good Thing For The Business.

There are many other lessons to have come out of this week’s talks, and more, I’m sure, to come. But this is worth internalizing and working upon for all of us (myself included): it’s about the analysis and the narrative.

The Olympics and Economics

There’s something inexplicably uplifting about sporting success. Not only does it inspire — even if fleetingly — at an individual level, it fosters national pride, a feeling rarely experienced in our networked world of partisan sniping. India’s best-ever performance at the Tokyo Olympics gave me, you, and millions of other Indians a reason to chin up in these challenging times.

https://publicpolicy.substack.com/p/139-a-question-of-sports?

So begins Pranay’s essay today from his (and RSJ’s) excellent newsletter, Anticipating the Unanticipated. The essay is a rumination on the role of government in sports, and as Pranay rightly points out, the implicit assumption that most of us make is that government should play a bigger role in fostering an environment more conducive to sporting excellence.

“Fostering an environment more conducive to sporting excellence” ought to at least get me an interview with a consulting firm, so I’ll translate that into plainspeak. The government should spend more, and work more on building out better sporting facilities, hiring better coaches, paying our sportspeople more, and more besides – all so that we win more medals.


Pranays disagrees with this view (and I agree with Pranay). This job, he says, is best left to markets and society.

Consider the role of markets first. Not too long ago, cricket would be criticised by players of other sports for hogging all the popularity, attention, and resources. And then a commercial, entertainment-focused enterprise such as the IPL turned this argument on its head. The city-based league format pioneered in India though IPL proved to be a positive-sum game for other sports. It spawned similar leagues in several sports, even managing to bring back Kabbadi to primetime TV screens. This commercial model energised many sports in ways that no government medals could have done.
At the amateur level, reforms in India’s FDI policy finally brought world-class sporting retailers such as Decathlon to India. Earlier, the sports retailing scene was stagnant, with few old-style shops only catering to demands of select, mass-market sports. By getting out of the way, the government helped change the sports equipment landscape for millions of budding sportspersons in the country. In short, markets are critical to lasting sporting success.

https://publicpolicy.substack.com/p/139-a-question-of-sports?

I agree, for the most part, but with government support, about which I’ll write more in a bit. Pranay also makes the case for the third pillar to do its bit:

Take the role that the MRF Pace Foundation has played in producing fast bowlers in India. Or the contribution of the Tata Group in improving hockey facilities in Odisha. We need many more philanthropic initiatives of this nature.
Besides the well-established corporates, there are smaller non-profit organisations such as the GoSports Foundation and Olympic Gold Quest. These organisations sponsor and support talented Indian sportspersons so that they can become world-class. Perhaps, we need hundreds of such societal initiatives outside the government to achieve sporting excellence.

https://publicpolicy.substack.com/p/139-a-question-of-sports?

By the way, here’s a good (and fairly straightforward) paper to read on this issue:

Every four years it begins anew, the hand-wringing and finger-pointing over a poor showing at the Olympics. The only real uncertainty is which countries will feel the sharpest disappointment over their poor performances. After the
Barcelona Olympics, a headline in the New York Times read “Despite its 108 medals, U.S. rates mixed success.” In 1996, headlines in London trumpeted “Olympic shame over Britain’s medal tally” and “Britain in danger of being left at the starting line,” while in Mexico, Japan, Singapore, Colombia and Egypt, medal totals below expectations led to national self-examinations. After Sydney, in Canada the Globe and Mail bemoaned “Canada’s Olympic fears come true: Despite a few bright spots, athletes not only won fewer medals, they performed below their own and nation’s expectations.” In this paper, we ask the straightforward question of how many medals countries should be expected to win by considering what factors influence national Olympic success

https://www.nber.org/system/files/working_papers/w7998/w7998.pdf

Read the whole paper, of course, but here’s a key bit:

Over time, a country’s real GDP remains the single best predictor of Olympic performance. Population and per capita GDP contribute equally at the margin implying that two countries with identical levels of GDP but different populations and per capita GDP levels will win the same number of medals. While GDP is most of the story, it is not the whole story. Host countries typically win an additional 1.8 percent of the medals beyond what would be predicted by their GDP alone. The forced mobilization of resources by governments clearly can also play a role in medal totals. On average, the
Soviet Union and Eastern Bloc countries won a share of medals higher by 3+ percentage points than predicted by their GDP

https://www.nber.org/system/files/working_papers/w7998/w7998.pdf

As Pranay mentions in his newsletter, sure you could sponsor projects of national pride, but the opportunity costs are far too high.1.

But ultimately, economic well-being is a good predictor of doing well in the Olympics. So what can (and more importantly, should) a government do about increasing the tally of medals at the Olympics?

As with much else in life, just one thing:

  1. Grow the economy as rapidly as possible

… but that being said, help (state, markets or communities – or all three) is needed. This video, via MR (and remember, this is the USA), shows how difficult the economics of being an Olympian are:

If you can afford to help out, please do! 🙂

  1. He doesn’t put it like that, the phrasing is mine[]

Putting the Con in Convenience

Do nudges work?

Yes:

Governments are increasingly adopting behavioral science techniques for changing individual behavior in pursuit of policy objectives. The types of “nudge” interventions that governments are now adopting alter people’s decisions without coercion or significant changes to economic incentives. We calculated ratios of impact to cost for nudge interventions and for traditional policy tools, such as tax incentives and other financial inducements, and we found that nudge interventions often compare favorably with traditional interventions. We conclude that nudging is a valuable approach that should be used more often in conjunction with traditional policies, but more calculations are needed to determine the relative effectiveness of nudging.

Benartzi, S., Beshears, J., Milkman, K. L., Sunstein, C. R., Thaler, R. H., Shankar, M., Tucker-Ray, W., Congdon, W. J., & Galing, S. (2017). Should governments invest more in nudging?. Psychological Science, 28(8), 1041-1055.

Which kind of nudges work best?

Perhaps the most frequently mentioned nudge is the setting of defaults, which are pre-set courses of action that take effect if nothing is specified by the decision-maker. This type of nudge, which works with a human tendency for inaction, appears to be particularly successful, as people may stick with a choice for many years (Gill, 2018).

https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/nudge/

Is that always and everywhere a good thing? Well…

The logical extreme is the endlessly renewable subscription. Alongside the familiar bills for utilities, internet, mobile phone and mortgage, our household subscriptions include services as varied as an online yoga resource, access to all the Star Wars and Marvel movies, a Patreon campaign, wine, Amazon Prime, Microsoft Office, Adobe Photoshop, apps for mindfulness, language learning and productivity, two cloud storage services, unfettered access to BoardgameArena and a music bot on Discord.
Some of that will be incomprehensible, I’m sure; 15 years ago it would have been not just incomprehensible, but unimaginable. Yet not only are we paying for all this, we’re paying without a clear idea of when or how much the payments are, or even the method of payment we are using.
In a classic article from 2006, “Paying Not To Go To The Gym”, economists Stefano DellaVigna and Ulrike Malmendier compared consumers paying for health club membership in three different ways: with a 10-visit pass, on an annual membership and with an auto-renewing monthly subscription. The monthly consumers had more flexibility — and paid for the privilege — but they did not use it. Instead, they stayed subscribed for longer, paid nearly twice as much per gym visit and typically took more than two months to cancel after their final gym appearance. All these online subscriptions are plugging into something that health-club owners have known all along.

https://timharford.com/2021/07/why-we-lose-track-of-spending-in-a-cashless-society/

Most students I speak to are fascinated with behavioral economics, and rightly so. It’s a great way to learn at the intersection of economics and psychology, and ask how both fields of study might become better.

But it might make sense to ask if behavioral economics as a tool in less-than-perfectly-ethical hands might lead to less-than-perfect outcomes. And that is a worthy field of study too!

As an example:


Nobody is saying, least of all me, that behavioral economics is “wrong”, or “dangerous”. But I think it makes sense to realize that it is a tool, and can be misused, just like any other tool. If anything, given the very real biases and heuristics that all of us are susceptible to and use (respectively), it is perhaps more likely to be misused.

Always consider both sides of an argument, especially if you instinctively like one side more! 🙂

The Chinese Tech Crackdown, Take 2

On Tuesday, I ended my post with this:

At the moment, and that as a consequence of having written all of this out, this is where I find myself:
China is optimizing for power, and is willing to give up on innovation in the consumer internet space. America is optimizing for innovation in the consumer internet space, and is willing to cede power to big tech in terms of shaping up what society looks like in the near future.
Have I framed this correctly? If yes, what are the potential ramifications in China, the US and the rest of the world? What ought to be the follow-up questions? Why? Who else should I be following and reading to learn more about these issues?

https://econforeverybody.com/2021/07/27/the-three-article-problem/

How might I have been wrong? V Ananta Nageswaran and Nitin Pai wrote posts recently that helped me learn about some answers to at least the first of my questions above.

Let’s find out how I might have been wrong!


Noah Smith had hypothesized that the tech crackdown is because China’s goals are about asserting its power internationally. And not soft power, but the tanks and boots on the ground type power.

China may simply see things differently. It’s possible that the Chinese government has decided that the profits of companies like Alibaba and Tencent come more from rents than from actual value added — that they’re simply squatting on unproductive digital land, by exploiting first-mover advantage to capture strong network effects, or that the IP system is biased to favor these companies, or something like that. There are certainly those in America who believe that Facebook and Google produce little of value relative to the profit they rake in; maybe China’s leaders, for reasons that will remain forever opaque to us, have simply reached the same conclusion.

https://noahpinion.substack.com/p/why-is-china-smashing-its-tech-industry

Nitin Pai disagrees:

Now, it’s unclear if the opportunity costs of talent are so stark in China that the government must crack down on consumer internet companies in order to incentivise people to get into hardware. But Smith’s explanation is consistent with the popular view that China’s leaders are astute and inscrutable strategists who think really long term.
..
..
My answer is simple: it’s about political power. In fact, if we frame the question differently, the answer becomes readily apparent: “Why is the autocratic leader of the Chinese Communist Party attacking media companies that directly reach almost everyone in the country?” Because size, reach and control of consumer data gives them narrative power comparable to what the Party has. Further, the ability to tap foreign capital gives them more freedom, albeit of the kind with Chinese characteristics. The Party doesn’t like that. And Xi likes it even less. That is why he moved aggressively to pre-empt a challenge to the Party’s narrative dominance and preserve its monopoly on power.

https://www.nitinpai.in/2021/07/27/why-china-is-attacking-its-consumer-internet-companies

Another way to think about it: it is about soft power, but the soft power that the CCP would like to project to its own people. There is only one storyteller that shapes the societal narrative in China, and anybody else who wants to play is going to be cut down to size. Ruthlessly.

(Of course, it is not just about soft power being projected to its own people. But nobody in China is crazy enough to want to play the hard power game with the CCP. That’s a well established monopoly. But Nitin is saying that the CCP wants all aspects of power to be within its complete control, soft and hard.)

As he puts it towards the end of his post:

It’s consistent with what it has been doing since Mao Zedong’s time: ruthlessly cutting down challenges to its hold on Chinese minds.
That’s it, folks. Nothing more to see here.

https://www.nitinpai.in/2021/07/27/why-china-is-attacking-its-consumer-internet-companies

Ananta Nageswaran also blogged about this yesterday:

In the meantime, a blog post by Noah Smith, an economics teacher and a (former?) columnist for Bloomberg wrote that China’s crackdown on consumer-internet companies was to ensure that China’s financial and intellectual resources were not diverted for creating low value addition. It did not strike him that such an explanation – if it were true – did not do any credit to China. It reeks of central planning and omniscience. Two, even if it were true and even if it was meant to be a benign explanation, malign explanations cannot be ruled and need not be ruled out.
Mutually exclusive explanations help keep the narrative simple and, two, it helps make the narrator appear smart because he/she has figured out the ultimate explanation. More often that not, reality is grey. Or, it has many shades.

https://thegoldstandardsite.wordpress.com/2021/07/28/fintech-edtech-and-china/

In other words, he’s saying that even if what Noah is saying makes sense, there is more to it than that. It’s not just the opportunity cost of having some of the best minds in China work on consumer tech. What else might it be? Ananta Nageswaran finds himself in agreement with Nitin Pai:

I agree. It is political power and the interpretation (of Xi and correctly so) that information (Nitin calls it mindshare) about people’s behaviour that these companies have give them the ability (and the chance) to set the narrative later, in Xi’s thinking, seizing it from the CCP.

https://thegoldstandardsite.wordpress.com/2021/07/28/fintech-edtech-and-china/

A minor point I would like to make here: I don’t think information and mindshare are the same thing, though they certainly are related. The information that tech firms have allows them to shape (sometimes in entirely unexpected ways!) the narrative, and therefore influence mindshare. Information is the tool and mindshare is the outcome – or at least, that is how I see it.

Please read Sanjay Anandram’s quotes from that blogpost too. I learnt about (and am going to shamelessly borrow) the RFRE principle.


So is it Noah’s story, or Nitin and Ananta Nageswaran’s? Regular readers know what’s coming next: the truth lies somewhere in the middle! Or at least, that’s my take, and it seems to be Ananta Nageswaran’s as well:

Of the three explanations that have been on offer, Noah Smith’s is the least persuasive. In some respects, Nitin and Sanjay are aligned and they diverge in some other aspects.
As always, the real motivation behind some of the recent decisions of the government in China will have elements of all three and more.

https://thegoldstandardsite.wordpress.com/2021/07/28/fintech-edtech-and-china/

To a student reading this: spectrum based thinking is a gift. Reasonable people can and should argue about where the truth lies, but always think intervals, never point estimates.

And having read all of the pieces that I have linked to across these two posts, I find myself in the same space on the spectrum as Ananta Nageswaran. That is, it’s not just the Noah Smith/Dan Wang argument at play (regarding which, Noah has updates. Scroll to the bottom of the post where he links to pieces that bolster his argument). But it is more about the CCP asserting its power.

Ananta Nagewaran ends with a Bruno Maçães quote: “the main players compete not under a common set of rules but in order to define what the rules are”.

It is a weird coincidence, but I just introduced some students to Frederich List yesterday. The more things change…