Commoditize Your Complements

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.

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.

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.

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


  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.

The Budget At A Glance Document

Regardless of whether you are a formal student of economics or otherwise, here’s how I would recommend you start today.

  1. Visit this website.
  2. Go to the Budget at a Glance section. Search for it on Google, if you like, but make sure you open the 2023-24 document!
  3. Open up either the MS-Excel file or the PDF of the document titled Budget at a Glance. If you don’t plan on copying any data, I would recommend the PDF. It is marginally easier to read.
  4. Scroll down to the table, which is usually on page 3
  5. Remember that this is the government’s budget. Don’t confuse this with India’s GDP! But more about India’s GDP and how it relates to this document below
  6. Understand the structure of the document:
    • Note that the numbers are in Rs. crores
    • Understand the layout of the four columns:
      • The first will be the ‘actuals’ for the year 2021-22.
      • The second will be the ‘budget estimates’ for the year 2022-23 (note that this was the fourth column exactly one year ago)
      • The third will be the ‘revised estimates’ for the year 2022-23
      • And the fourth column will be the budget estimates for the year 2023-24
    • Understand the layout of the rows:
      • Line item no.8 and line item no. 9 will be exactly equal. This is not a coincidence. Our government’s ‘income’ (no. 8) must match it’s ‘expenditure’ (no. 9).
      • Both line item no. 8 and line item no.9 further decompose into revenue and capital ‘streams’. What are revenue and capital ‘streams’?
        • A one time income (or expenditure) can be thought of as a capital stream. You enrolling in a college degree is a one time expenditure, for example. But you paying your hostel mess bill is a recurring expenditure. Which do you think ought to come under the capital ‘stream’? Which do you think ought to come under the revenue ‘stream’? Why? Use your answers here to understand the structures of the rows numbered 1,4 and therefore 8. Also 10,13 and therefore 9.
      • Now let’s take a look at just line item no. 1 and its constituents:
        • How much growth has the government pencilled in for tax revenue (line item no. 2) between the third and the fourth column? Between the second and the fourth column? Scroll down to the bottom of this page and take a look at note (i). How much is nominal GDP – in one sense the income of the country as a whole – going to grow by? How much is the growth rate of tax collections? Why do you think this difference exists?
        • What are non-tax revenue receipts? They usually comprise of interest receipts, dividends and profits (whose?), external grants, other non-tax revenue and receipts of Union Territories. You can find more information about this in the Receipt Statement document on the Budget at a Glance web-page (bag5, usually).
      • Under Capital Receipts (4 and its constituents), pay close and loving attention to line item no. 6. This will disappoint all of us this year, which unfortunately has been a trend for a very, very long time. This is proceeds from disinvestment (3.A.(ii) in bag5), and now ask yourself why the second column is so very different from the third. Ask yourself how you should therefore interpret the value in the fourth column. Go back and take a look at the corresponding entry in previous Budget at a Glance documents. Ponder this issue, and read more about it. To me, it is the most crucial part of the income part of this document.
      • Line item no. 7 is the outcome of the following equation. Pay attention now! 9-1-5-6=7.
        In English: the government first figures out how much it needs to spend (9). It then subtracts from it all possible sources of income: all of revenue receipts (1), then recovery of loans (5) and then disinvestment proceeds (6). What remains needs must be borrowed. We call this the fiscal deficit. Line item no. 7 will be exactly equal to line item no. 17, and that’s not a coincidence.
      • Under line item no. 9 and its constituents, first check how large 10 is as a percentage of 9. Then check how small 13 is as a percentage of 10.
        • How much of 10 can the government afford to change? (More details in bag6)
        • How much of 13 does the government need to change? (ditto)
        • With regard to both of these points, go through the ‘expenditure of major items’ and ‘composition of expenditure’ sections of bag 6 (usually pages 10 and 11).
        • How large is line item 11? How to interpret 11? Is the government borrowing (7) to repay the interest on old loans (11)? What is the meaning of line item 18?
  7. Go over the rest of the document as well, but this will now fill in the details. Note that some of what I have mentioned is in bag5 and bag 6 can also be found over here, but it is worth your while to be aware of those documents as well.

Please, spend an hour going over this blogpost and the budget at a glance documents.

Then, if you so desire, start listening to the talking heads on your channel of choice. Then read what everybody has to say about the budget.

The first year you do this, it will seem like a lot of work. But as the structure of the document becomes clearer and more familiar, you will find it relatively easier to begin making sense of the budget on your own – at least a respectable top-level analysis. Then, depending on your political views, sectoral exposure and appetite to learn, you can choose to consume any amount of analysis on the budget. But bring to that experience your own independent analysis, and see how what you’re consuming resonates with what you think you know.

And if you ask me, everybody who has gone through a class on economics (and correct me if I’m wrong, but that ought to be everybody who has gone through school) should have undergone a session like this.

It does not necessarily happen, more’s the pity.

And of course, don’t stop here! As a serious student of economics, there is much more to do. But this? Difficult, tedious and time-consuming though it may seem, these ought to be table stakes to formulate (let alone give) an opinion about the budget.

Say It Ain’t So, Please?

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

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

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

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

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

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

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

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

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

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

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

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

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

I’m currently agnostic about its length!

The Times, They’re A-Changing Part II

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

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

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

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

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

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

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

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

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

Culture, Technology, Economics and Subtitles

Sharmaji ka beta, the global edition

Syllabus Bleg

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Merci d’avance!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Have you heard of the European Super League?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Please, do read Skin in the Game.

ChatGPT on Why It Is Bad to be Rich

What if we asked Navin’s question to ChatGPT?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Is it bad to be rich?