Category: Development Economics

The Conversation About Inheritance Taxes that I Would Like to Have

Are machines dystopian, or are humans dystopian? Asking for a blog post.

I am going to give this prompt to a very capable LLM. I would like you to critique this prompt, and let me know how it can be made better. Point out what is missing in terms of the comprehensiveness of my framework, as well as any details I may have missed out on. Optimize for the LLM giving an answer that holistically addresses the problem I am thinking about. We are not as interested in generating an answer to the problem as we are in generating a way to think about the problem. What the problem is will become clear upon reading my prompt. Also rate my prompt (for the parameters we’ve spoken about) on a scale of 1 to 10, where 1 is a poor prompt, and 10 is an excellent prompt. Please give me your reasons for the points I score, and reasons for points you have deducted.

“There has been a lot of controversy recently about whether India should, or should not have, an inheritance tax. I would like you to build out for me a framework to think through the issue. While doing so, I would like you to have a persona that has deep expertise in the global history of public finance, taxation laws, development economics, political economy and welfare economics. I would also like you to be well versed in the history of India’s taxation laws, and in India’s political economy. I would like you to assume that I am a very curious person, but with very little knowledge of economics, theoretical or applied. I like detailed explanations, but in simple English. I would like the framework to contain the following aspects, and please note that I plan to ask the LLM these questions sequentially, with plenty of scope for discussion, pushback and clarification after each question has been answered:

  1. Are there principles that underlie taxation for any economy? If yes, what are they? If not, what should a list of such principles look like?
  2. Within these principles, which will presumably be generic and applicable to all kinds of taxes, what principles might apply to inheritance taxes specifically?
  3. Should an inheritance tax be taxed while the money is still in the account(s) of the deceased individual, or the inheritor’s account? What would be better? For whom would it be better? The person being taxed or the entity doing the taxing?
  4. How should one think about the desirability of having an inheritance tax for an economy? Should it be a function of the number of people in an economy? Or their age? Or their inheritance laws?
  5. Should the state capacity of that economy have a bearing on the issue? That is, it might be all well and good to take from the rich, but does the state have the ability to spend that money effectively?
  6. Should inheritance taxes be a function of how thorough income tax laws are? For example, the higher the number of loopholes in the income tax act, the better the case for an inheritance tax is my line of thinking – is this justified?
  7. What is the history of the development of the theory surrounding inheritance taxes? What about the theory as applied to different geographies, different time periods, and countries with differing stages of development?
  8. Have countries enacted laws with sunset clauses? Why or why not?
  9. Have countries experienced Laffer Curve type problems upon implementation of inheritance taxes? How have these problems been detected, and how have they been dealt with?
  10. Based on our conversations so far, give me your top five “for” and top five “against” arguments for an inheritance tax in India today.”

Here’s Claude’s answer:

“Here’s my critique of your prompt:

Strengths:

  1. Comprehensive coverage: Your prompt covers a wide range of aspects related to inheritance taxes, including principles, implementation, history, and country-specific considerations.
  2. Persona specification: You provide clear guidelines for the LLM’s persona, which should help generate responses tailored to your needs.
  3. Sequential questioning: Breaking down the prompt into sequential questions allows for a structured and focused discussion.
  4. Encouraging discussion: You leave room for discussion, pushback, and clarification, which can lead to a more engaging and informative conversation.
  5. Specific to India: Focusing on India’s context helps narrow down the scope and generates more relevant insights.

Areas for improvement:

  1. Clarity on the target audience: While you mention that you have little knowledge of economics, it would be helpful to specify your background and the purpose of this framework (e.g., personal curiosity, policy-making, academic research).
  2. Prioritization of questions: Consider ranking the questions based on their importance or relevance to your understanding of the issue.
  3. Comparative analysis: You could include a question about comparing inheritance tax policies and their outcomes across different countries, especially those with similar characteristics to India.
  4. Societal impact: Consider adding a question about the potential social and distributional effects of inheritance taxes, such as wealth inequality and social mobility.
  5. Feasibility and alternatives: You could ask about the feasibility of implementing an inheritance tax in India given its current economic, political, and administrative context, and explore potential alternatives or complementary measures.

Missing aspects:

  1. Economic impact: Include a question about the potential economic consequences of an inheritance tax, such as its effects on savings, investment, and capital formation.
  2. Tax evasion and avoidance: Address the issue of tax evasion and avoidance strategies that may arise with inheritance taxes and how to mitigate them.
  3. Interaction with other taxes: Explore how inheritance taxes might interact with other forms of taxation, such as income, property, or gift taxes.
  4. Public opinion and political feasibility: Consider asking about public sentiment towards inheritance taxes and the political challenges in implementing such a policy.

Rating: 8/10

Reasons for the score:

  • Comprehensive coverage of key aspects
  • Clear persona specification and sequential questioning
  • Encourages discussion and focuses on India’s context

Points deducted:

  • Lack of clarity on target audience and purpose
  • Missing aspects related to economic impact, tax evasion, interaction with other taxes, and public opinion

By addressing these areas and incorporating the missing aspects, your prompt could be further strengthened to generate a more holistic and nuanced framework for thinking about inheritance taxes in India.”

Run with this framework, and please feel free to modify it and improve upon it. Please use this framework to have a discussion with an LLM about inheritance taxes. It’s the kind of discussion our ancestors were capable of having re: public policy issues.

Also, feel free to copy and improve upon the framework itself – run your prompts through an LLM to see how you can make your thinking about an issue better.

There is a discussion to be had about how the price, income and substitution effects are at play when it comes to spending time talking with folks online, or spending it talking to LLM’s, but I’d rather not go there for now.

I’ll say this much though: I’m usually quite favorably disposed to the substitution effect.

Recursively. That’s The Only Change I’d Make.

The ability to exercise good judgment is the binding constraint in development is the title of Gulzar Natarajan’s blogpost on Oliver Kim’s essay, which we’ve covered earlier here.

Almost all of doing development is about making non-technical decisions (the technical ones are easier, have limited degrees of freedom, and mostly slot themselves into place). Such decisions are invariably an exercise of judgment by taking into consideration several factors, one of which is the technical aspect (or expert opinion). The most important requirement for the exercise of good judgment is experience or practical knowledge. In the language of quantitative science, it’s about having a rich repository of data points that one can draw on to process a decision.

Source: https://urbanomics.substack.com/p/ability-to-exercise-good-judgment

This applies, Gulzar Natarajan says later on in the essay, to “industrial policy and promotion of industrial growth, macroeconomic policy and inflation targeting, and programs to improve student learning outcomes or skills, increase nutrition levels and health care outcomes, improve agricultural productivity, and so on”.

Let’s take one of these and think about it in slightly greater detail: health care outcomes. Let’s do this in the context of India. Answer these questions, for yourself:

  1. What is the best possible health care outcome you would wish for, in India’s context? Define it however you like – everybody should have excellent healthcare so long as they can pay for it is one option. Everybody should have excellent healthcare regardless of whether or not they can pay for it is another option. Everybody should have free healthcare until we reach a per capita income of x dollars (adjusted for inflation and purchasing power parity, if you prefer) is a third option. You can whistle up a million more, and feel free to let your imagination run wild. You get to define the best possible health care outcome for India – setting the standard is up to you.
  2. Microeconomists will call this the indifference curve, and ask you about the budget line. Mathematicians will call this the objective function, and ask you about the constraints. Humans will say “Haan woh sab to theek hai, magar bhaiya, kaise?”. This is the part where we encounter the bad news – what are you willing to give up in order to achieve your best possible outcome? Best possible health care outcome subject to we spending not more than 20% of our GDP on health might be a constraint you choose to apply, for example. Other people may start to froth at the mouth at the thought we spending 20% of our GDP on health, but you do you (for now). Reduce spending on defense, and pensions, and highways, and on education, you get to say (for now). In my little ivory tower, you get to say, I want India to focus on healthcare outcomes, and healthcare outcomes alone – and I’m ok spending x rupees on it. We get to not spend those x rupees elsewhere, of course – remember, opportunity costs are everywhere, including in imaginary ivory towers.
  3. Here’s another way to think about the same problem. You could also say, I’m optimizing not for healthcare outcomes in the short run, but for free markets. I’m not doing this because of my love for free markets per se, but because of my conviction that this path, and this path alone is the only way to deliver the best possible healthcare outcomes eventually. Sure there will be mistakes along the way, and sure some healthcare services will be denied to people who need it the most for now. But eventually, the market will correct all of these errors, and that in ways we simply cannot know right now. Why can we not know them right now? Well, because we are not omniscient. We don’t know what errors will crop up, and we don’t know what solutions will work best for whatever errors will crop up. If we did know this, we could have avoided those problems in the first place, no?
  4. There are, in other words, unseen consequences to Bastiatian solutions as well. That’s just a fancy way of saying there are opportunity costs everywhere, but let me make the point more explicitly: the opportunity cost of an immediate application of a completely free market solution to healthcare is poor health outcomes for at least some folks today. I might be wrong about this, so please, don’t hesitate to tell me the how and why of it.
    For example, let’s say that government stops spending even a single rupee on healthcare (no CGHS, no PMJAY, no ESIC, no Jan Aushadhi, no government run hospitals, no PHC’s, no government run vaccination programmes, nothing) at 12 pm today. Will health markets be Utopian at 12.01 pm, or will they transition to Utopia eventually? How long is eventually? What problematic outcomes will occur along the way, and do we correct for them? How?
    For example, we may learn that poor families in rural Jharkhand now do not have access to healthcare because all government intervention has stopped. Do we do something about this? If yes, what? If not, why?
  5. This cuts both ways, of course.
    For example, let’s say that government doubles its current expenditures on healthcare, at 12 pm. Will health markets be Utopian at 12.01 pm, or will they transition to Utopia eventually? How long is eventually? What problematic outcomes will occur along the way, and do we correct for them? How?
    For example, we learn that corrupt practices when it comes to invoicing in procurement departments have gone up because government expenditure has gone up. Do we do something about this? If yes, why? If not, why?
  6. Given your ideological bent of mind (and we all have one, learn to live with it), you have an urge to say “Ah hah, exactly!” and “Oh, c’mon!” to pts 4 and 5 – in that order. Or to pts 5 and 4 – in that order – it depends on what your ideology is. But if both of those things was what you ended up saying, that’s just you being bad at elementary economics, because there is no such thing as a free lunch, regardless of what your preferred solution is. You can have inequitable outcomes today and therefore a relatively more efficient outcome tomorrow, or you can have equitable outcomes today and therefore a relatively more inefficient outcome tomorrow.
    Equity today and efficiency tomorrow is like those real estate ads offering you high returns and low risk – it doesn’t happen.
  7. Which brings us back, in a very roundabout fashion, to the point that Gulzar Natarajan was making in his post. When he says that “it is not one decision, but a series of continuing, even interminable, decisions”, I interpret it as two different but very related things.
    One, if you’ve chosen to optimize for equity today, you have to be explicit about the fact that you’ve sacrificed optimized efficiency (today and tomorrow). The worst manifestations of these sacrifices must be adjusted for at the margin. And ditto if you’ve chosen to optimize for efficiency today! You have to be explicit about the fact that you’ve sacrificed optimizing for equity (today and tomorrow). The worst manifestations of these sacrifices must be adjusted for at the margin.
    Two, no matter what your favored path is (and I envy you your conviction if you know that your path is The Best One For All, I really do), there will be errors along the way. That’s just life, there will be unexpected surprises along the way. Call it risk, or uncertainty, or whatever you like (and yes, I know, comparing the two is like comparing Knight and day) – but account for the fact that your battle plan will meet the enemy, and it will not survive.
    You must adapt, and said adaptation will involve a series of continuing, even interminable decisions.
  8. Those adaptations will land you somewhere in the middle of efficiency and equity. At which point, you can adapt your will to your circumstances and say you’ve found the truth, or you can continue with your decision-making. It is, after all, interminable.
  9. “Wait, so there’s no end to this?!”, I hear you ask in righteous indignation. “What is the eventual outcome? Or are we doomed to keep making these interminable decisions forever?”. Kids these days, I tell you. They’re just like kids in those days.

And that’s why I say what I did at the start of today’s post. The only change I’d make is the addition of one word:

The ability to exercise good judgment recursively is the binding constraint in development.

A Fine Unbalance

“The person we are talking about was born in Germany, in 1915. He took part in anti-Hitler protests in the early 1930’s, and had to flee to Paris as a seventeen year old to escape persecution back home. He later attended lectures by Lionel Robbins and Hayek while in London, and also participated in the Spanish Civil war. In the interim, he also helped thousands of Jewish refugees escape Nazi persecution in France – among them, Hannah Arendt, Marc Chagall and Marcel Duchamp. He managed to do all this at or before the age of twenty-five. He would go on to become one of the most famous development economists of the 20th century.
Who are we talking about?”

You might know the answer to this question if you are a very good quizzer, but you may not know the answer even if you are a very good economist. And that’s because of two reasons.

One, Albert O. Hirschman isn’t as celebrated as he should be. Consistently underrated, you might say.

And second, we in the economics teaching profession don’t like to tell stories about economists. We like to bore people to death with equations and models, but making the economist behind the theories come alive? Doesn’t happen nearly as often as it should, if you ask me.

Watch about a minute or so of this excellent interview from around the 30 minute mark. As always, please watch the whole thing, it’s a great interview – but for the purposes of today’s post, just for about a minute or so from the 30 minute mark.

And Alex is bang on when he says that knowing that the person is French will often tell you more than the fact that the person is an economist. I’d go a step beyond and say that it is not just the location, but also the time that matters. A French person born around 1930 will be a very different person from a French person born in 1980, for example. This isn’t about who is better or worse compared to the other, this is about understanding why those people created the things that they did. And part of this understanding comes from understanding the time and place of their birth. Not just knowing the time and place, mind you, but understanding it.

And to understand why Hirschman was the kind of economist he was, you need to understand where he came from, all of what he experienced in his formative years – and the cultural milieu that surrounded him when we was an economist.

And it is for this reason that reading this blogpost about Hirschman’s work, but also his biography is ever so illuminating. You don’t just get a sense of Hirschman’s central ideas, but you also get a sense of how events in his life formed his worldview, and possibly influenced some of his decisions later on.

He encourages us to see the inevitable pitfalls and stumbles of the growth process not as disappointments, but as opportunities, and gives us a conceptual language to identify them. For randomistas-in-training, steeped in the world of deworming and bed-nets and pre-analysis plans, Hirschman also reminds us that we need to step back from individual interventions more often and think more about development strategies–not just how different projects can complement each other, but also how each project might organically summon market and non-market forces to help growth along.
The Credibility Revolution has yielded, perhaps for the first time, robust evidence for individual program effects. The time is ripe, not to copy Hirschman’s ideas wholesale, but to borrow his clear-eyed approach and think carefully about how projects can be brought together, pressure point by pressure point, into programs for sustained development.

https://www.global-developments.org/p/the-real-development-was-the-friends

This is worth doing for everybody of note, of course, not just Albert O. Hirschman – but if you are a fan of studying the development of the field of development economics, this would be a great place to start.

Lots of homework in today’s post:

  1. Watch Transatlantic (it is available on Netflix)
  2. Read The Worldly Philosopher, by Jeremy Adelman
  3. Read The Strategy of Economic Development, by Hirschman

Top Down Impositions of Cultural Norms and China’s Demography

The policy was both cruel and a blunder. Family-planning officials assumed that birth rates would spring back once controls were abolished. Alas, they re-educated parents too well. One child became the norm, certainly in cities. Consider another figure that should haunt leaders: 1.7. That is the number of children that, on average, Chinese women of child-bearing age call ideal. China’s ideal is one of the world’s lowest, far below the number given in Japan or South Korea. Chinese women born after 1995 want the fewest of all: 48.3% of them told the Chinese General Social Survey of 2021 that they desire one or no children. There is growing evidence that such attitudes are powerfully shaped by how people, and those around them, experienced the one-child policy.

https://www.economist.com/china/2024/03/21/chinas-low-fertility-trap

“The policy” refers to , of course, the infamous one child policy. Please read the entire article (assuming you can, because The Economist articles are often behind a paywall) – it is an eye-opener in many ways.

But my primary takeaway is how difficult it becomes to change culture, once it has been imposed. The last sentence of that excerpt is the worrying one, and not just in the case of China and the one-child policy.

Attitudes are indeed shaped by how experiences one has while growing up. And in the case of China and her demographics, it looks as if attitudes about families and (the number of) children will not be changing in a hurry, if at all.

India is, at best, twenty years away from where China (and most, if not all, of East Asia) is today. All the more reason to worry about India’s growth rates over the next two decades – her current demographic dividend is not a gift that will keep giving forever.

An Article, A Chart, A Blogpost, A Book and Some Thoughts

The Article

I’ve just about gotten around to catching up on a lot of reading, and I finally got a chance to read this Scroll article:

“A few days later, Radha walked into a sprawling, glistening factory in Sriperumbudur, on the outskirts of Chennai. It had rows and rows of workers, most of them young women like Radha, bent over work tables on which were laid out tiny, metal parts. They were assembling iPhones – the most expensive and coveted mobile phones in the world – made by Apple, the second-richest tech company in the world.

The factory was run by Foxconn, a Taiwanese company that is the world’s largest contract manufacturer of electronics. For long, most of its phone production for Apple was done out of China. But in recent years, with the relationship between the United States and China coming under strain, Foxconn had been scouting for new locations for its manufacturing units. The town of Sriperumbudur, situated in Tamil Nadu, one of India’s most literate states, seemed like a natural choice. Home to over 500 companies, including manufacturers of electronics, auto components and chemicals, it has grown into an industrial hub in the past two decades.”

https://scroll.in/article/1064027/indias-iphone-factory-is-keeping-women-workers-isolated

As always, please read the whole thing. In fact, an especial plea this around – please take the time out, and go read the entire article, and then come back and read this. If you’ll allow me to be greedy, take even more time out and have a contemplative cup of coffee before coming back here.

The Chart

Hasan, R., & Jandoc, K. R. (2010). The distribution of firm size in India: What can survey data tell us?. Asian Development Bank Economics Working Paper Series, (213)

This is one of my favorite charts to stare at, and often endlessly. It’s outdated now, of course, because it is from well over a decade ago. But even so, this chart tells a powerful story. The story it tells us is that we have failed to generate manufacturing based employment in our country. That is a problem because without a significant increase in the share of manufacturing in our GDP, it is unlikely that we will be able to meaningfully reduce poverty in our country.

The Blogpost

I’ve written about it already in the previous week, but just in case you haven’t already, please do go and read the whole thing. I know I’m assigning a lot of homework today, but if you can spare the time, rinse and repeat the whole contemplative cup of coffee routine too, after you finish reading the whole thing. Here’s one of the key paragraphs (to me) from the blogpost:

“One of the things we often argue about on these pages is that growth is the single biggest moral imperative for India at its stage of development. We can try to optimise for many other ideals and virtues, but if they come to us at the cost of growth, we must learn to ignore them. Because lack of growth will make even those ideals worse than where they are today. To illustrate this point, somewhat provocatively, I have made the point that we shouldn’t get rich at the cost of our environment, but we must also consider that staying poor doesn’t do any good for the environment either in the medium to long run. At our stage of development, we should only ask if our today is better than our yesterday. It is possible that our today isn’t ideal or it may be far from what the developed world might have at this moment. But that should be of limited concern to us. Because in trying to aspire for that ideal state or in trying to make that quantum leap to what a developed economy already has, we will put at risk the gradual increment that we can make every day.”

https://publicpolicy.substack.com/p/248-the-budget-line-is-real

RSJ here is arguing for not making the perfect the enemy of the good. The good, in this case, is the fact that more women are getting employed than before, at least at the margin. The perfect, in this case, refers to the fact that working conditions at the Foxconn factory are, well, less than perfect:

“The activist said that often women would not use the toilets at the hostel and would instead wait until they reached the factory. “This obviously took a toll on their health,” he said.

The problem of health has boiled over into a crisis in the past. In 2021, hundreds of workers from the Foxconn factory went on protest and blocked traffic on the Chennai-Bengaluru highway after a food poisoning incident that resulted in 250 workers falling ill, of which 159 were admitted to a hospital. The workers also complained that their living conditions were unhygienic and demanded that their employers take immediate steps to improve them.

After the protests, the factory stayed closed for a few days, until the administration promised to make improvements in the hostels and ensure hygiene in food preparation.

Since then, the situation has improved, workers said. But some women still do not see the living conditions and the restrictions as satisfactory.”

https://scroll.in/article/1064027/indias-iphone-factory-is-keeping-women-workers-isolated

So what should we as a society choose? Should we choose the good and sacrifice the perfect, as RSJ and Pranay suggest? Or should we choose the perfect and give up on the good, as the Scroll article might imply to some? 

Leave aside for now the question of how society should choose, because figuring out effective preference aggregation mechanisms is, er,  impossible. What is your preference if you have to choose between the good and the perfect? What should be your preference, and why?

Far be it from me to tell you what your answer should be, of course, because as far as I’m concerned, you should read the Scroll article, RSJ and Pranay’s newsletter, this blogpost and a hajjar other sources and come to your own conclusion. I’m old fashioned that way.

My job today is to help you build out a framework for you to arrive at an answer, and to provide you with a lot of different perspectives. If you end up agreeing with my framework, end up using it, and end up with an answer different from mine, all is good with the world, for we can then debate our disagreements and arrive at some sort of a synthesis, and what could possibly be better, eh? Like I said, I’m old fashioned that way.

The Book

“The first time I met Wu Chunming, she was working for a foreign company, making a thousand dollars a month, and living in a three-bedroom apartment in downtown Dongguan. The last time I saw her, two and a half years later, she was working for a Chinese company, making $150 a month, and living in a single room in a part of the city known for small shoe factories with poor working conditions. By every calculus that mattered, she had fallen a long way. But she was more serene than I had ever seen her. In a city where a Mercedes was the measure of all things, Chunming had somehow broken free and developed her own personal morality.

“Before I was always hungry,” she told me. “If I saw a sweater I liked, I would have to get it immediately. Now if I don’t eat the best things or buy the nicest things, it doesn’t matter so much. If I see a friend or a family member happy, then that is meaningful.” She was no longer panicked about being single at the age of thirty-two, and she had stopped having affairs with men she met online. “I believe I’ll become more and more beautiful, and more and more healthy, and my economic circumstances will get better and better,” she said.

Chunming hoped to have children someday, and she often asked me about American attitudes toward child-raising. “I would like a child to grow up to have a happy life and make a contribution to society,” she said.

“A contribution to society?” I asked her, startled. “What do you mean?”

“I don’t mean to be a big scientist or something like that,” Chunming said. “How many people can do that? I think if you live a happy life and are a good person, that is a contribution to society.”

Chang, Leslie T.. Factory Girls: Voices from the Heart of Modern China . Pan Macmillan. Kindle Edition. 

TMKK?

Factory Girls is a book worth reading because it talks not about the industrial policy of China, but about the resultant sociology of China’s industrial policy. To the extent that you agree with the notion that the economic growth of a nation is the means to an end, it is a book worth reading. It is possible, of course, that you are of the opinion that economic growth is an end in itself. The book is still worth a read, because it is important to read books that offer perspectives which differ from your worldview. (My Twitter feed, for example, is absolute torture for me, but I force myself through it on a daily basis.)

Image Source: https://en.wikipedia.org/wiki/Snakes_and_ladders

Think of India (or any country, for that matter) as a player on a board of snakes and ladders. Industrial policy, when done well, acts as a ladder. But unintended outcomes of industrial policy act as snakes, pulling the country back  down to problematic parts. In this framework, it is hard for me to not think of China as having taken ladder after ladder over the last thirty years or so, only to fall a fair way back in the last two years or so.

And so yes, it becomes important for India to replicate the high growth eras that China and some of the East Asian countries accomplished. But it becomes as important, if not more important, for us to avoid the metaphorical snakes on the latter stages of the board. 

One should absolutely aspire to match (and inshallah, exceed!) China’s growth rates from twenty years ago. But one should also aspire to avoid India’s youth going all tang ping on us twenty years from now.

Easy to say, I hear you say, and I can guess what’s coming next. How exactly, you ask, do we go about doing this? 

Should our takeaway from the Scroll article be that we should ask Foxconn to four-letter-word-beginning-with-f off? Should our takeaway from Pranay and RSJ’s blog post be to ask Scroll to four-letter-word-beginning-with-f off?

Regular readers should be rolling their eyes round about now, for they know what’s coming. All together now…

  1. How about offering workers who have completed three years of work at Foxconn fully subsidized vocational training? Not three, but two instead, I hear the left liberals say? Not three but five, I hear the libertarians say? Well, have at it, ladies and gentlemen – figure out what the right time frame should be. Why, I might even go so far as to say that development economists should run RCTs to figure out the appropriate time frame.
  2. How about offering soft loans to folks who want to build hostels near Sriperumbudur? Or offer timely transport? Or other mechanisms to ensure a thriving housing market that allows women workers to make their own choices about freedom, perceived safety, food quality, and other parameters?
  3. How about offering additional tax breaks to companies like Foxconn contingent upon them (companies such as Foxconn) offering better working/living conditions to the workers? Or linking PLI payments to Foxconn’s customers to  incentivize such compliance? After all, Apple is one of the world’s best when it comes to sustainability, recycling, and other initiatives, and as we all know, can press its suppliers.

I’ll happily confess to not knowing if these suggestions make any sense, or go too far, or not far enough. I’m a beanbag economist, let alone the armchair variety. I’ve never worked in a factory, or regulated one, or designed regulations for labor policies in one. So if you are going to say that I don’t know what I’m talking about, I’ll be the first to agree with you.

But I will say, and defend vigorously, this much:

Asking Foxconn to eff off is a bad idea, because god knows we need more manufacturing, more employment and more women’s participation in our labor force. Asking Scroll to eff off is an equally bad idea, because we’re missing the point if we ignore those in our society who point out the excesses of our new industrialization.

This is an ongoing process that will never stop, but  updating and simplifying labor regulations to reflect the modern factory is crucial. We need to do this  to encourage larger-sized, better run firms that are globally competitive and can offer labor protections. We need reforms that will make India a competitive  manufacturing destination without, eventually, the twin crutches of PLI or treatment of labor that ignores globally hard-won rights. The working class women of Tamil Nadu featured in the Scroll article are shouldering enough of a burden in contributing to growth; it is time we step up too. And when I say we, I don’t mean just the government. I’d include economists, policy-makers, think-tanks, the media and yes, society at large.

What the bazaar cannot provide by itself, sarkaar and samaaj must.

Don’t dilute the dialectic, dial it up!

Let differing opinions and ground reportage be offered up in the media, let’s all of us read/listen/see ‘em, and let’s figure out a middle ground by participating in the market for ideas. 

India needs, like it or not, Foxconn to teach us how China did it. India also needs, like it or not, Scroll articles to help us realize that Foxconn may well be pushing the boundaries of what is acceptable working conditions for labor.

Personally, I’m on team RSJ/Pranay on this one, because what India needs right now is a lot of industrialization. But I also worry about where this path might end up, and I’d like to keep an eye on what might go wrong in the years to come. And so I’ll disagree with Scroll for now, but I’ll celebrate the fact that I live in a country where Scroll publishes articles such as these.

It’s fashionable these days to say that labels are out of fashion, but I’m going to call this the liberal position. 

And finally, if you disagree with either the label or what I think it stands for, let’s have a debate! That’s my job da, and I’m very much up for it.

Where will the next 1000 babies be born?

Whether It Will Rain Tomorrow Or Not Is A Solved Question

… although it does still depend on which part of the world you live in. But such minor niggles aside, weather forecasting is now very, very good. Or so says the latest Our World in Data article:

https://ourworldindata.org/weather-forecasts

Weather forecasting has been a hard won (and hard fought!) battle. Did you know, for example, that the HMS Beagle was famous for more than just the one obvious thing?

Vice-Admiral Robert FitzRoy FRS (5 July 1805 – 30 April 1865) was an English officer of the Royal Navy and a scientist. He achieved lasting fame as the captain of HMS Beagle during Charles Darwin’s famous voyage, FitzRoy’s second expedition to Tierra del Fuego and the Southern Cone.

FitzRoy was a pioneering meteorologist who made accurate daily weather predictions, which he called by a new name of his own invention: “forecasts”. In 1854 he established what would later be called the Met Office, and created systems to get weather information to sailors and fishermen for their safety

https://en.wikipedia.org/wiki/Robert_FitzRoy

But over time, forecasts the world over have become better and better, and today we can count upon real time forecasts being made available literally by the second:

Faster speeds are crucial: the Met Office now chunks the world into grids of smaller and smaller squares. While they once modeled the world in 90-kilometer-wide squares, they are now down to a grid of 1.5-kilometer squares. That means many more calculations need to be run to get this high-resolution map. The methods to turn the observations into model outputs have also improved. We’ve gone from very simple visions of the world to methods that can capture the complexity of these systems in detail.

The final crucial factor is how these forecasts are communicated. Not long ago, you could only get daily updates in the daily newspaper. With the rise of radio and TV, you could get a few notices per day. Now, we can get minute-by-minute updates online or on our smartphones.

https://ourworldindata.org/weather-forecasts

Well, most of us can, but all of us can’t:

And that, as it turns out, is a problem, because you are much more likely to work in agriculture in a low income country, and are therefore that much more dependent on accurate and timely weather forecasts. Alas, you are unlikely to get these forecasts, precisely because you are a poor agricultural worker.

So what can help? Take a wild guess:

A recent paper published in Nature documented a new artificial intelligence (AI) system — Pangu-Weather — that can perform forecasts as accurately (or better) than leading meteorological agencies up to 10,000 times faster.6 It was trained on 39 years of historical data. The speed of these forecasts would make them much cheaper to run and could provide much better results for countries with limited budgets.

https://ourworldindata.org/weather-forecasts

Factory Girls, The Indian Edition

Pranay and RSJ’s excellent newsletter speaks about an aspect of Industrial Policy in India that is going to be quite tricky: our ability to adapt to increased participation by women in our labor workforce:

The article is here; you won’t miss much if you don’t read it. It follows the predictable style of beginning with the personal story of an anonymous woman who moves from her village to work at Foxconn and using her story as a springboard pans out to the wider issues it wants to highlight – restrictive working conditions, poor food, low pay, long hours, semi-skilled work, lack of unions – you get the gist. All of it is made somewhat more poignant because these are all young women from underprivileged backgrounds who, anyway, have had odds stacked against them in their relatively young lives. This is a particular strand of reporting that always has currency in India and, prima facie, very hard to counter.

https://publicpolicy.substack.com/p/248-the-budget-line-is-real

As usual, please read the whole thing. I find myself in broad agreement with the points being made in it, because as far as I’m concerned, it really boils down to two key questions:

  1. What are you optimizing for?
  2. Relative to what?

And what we should be optimizing for is (as their newsletter points out) growth of the Indian economy, and greater participation by women in our labor workforce. This will not happen smoothly, perfectly or instantaneously, and the process will often involve many teething issues of many different kinds.

Second, conditions in these factories (and in the residences that have been constructed for the workers) may not be great, sure, but relative to what?

“…farm productivity in India is among the lowest in the world, and we have made the point that it is necessary for us to shift our workforce away from agriculture. We have lamented that for us to avoid ‘jobless’ growth, we need low-skilled manufacturing jobs in plenty so that we get the flywheel started, which will eventually lead to higher-skill – higher-value jobs over time. If a Foxconn factory helps us solve these issues right away, we should ask ourselves what more we can do to help them set up more factories. And not write tired old articles whose central thesis has been disproved in our own lifetime.”

https://publicpolicy.substack.com/p/248-the-budget-line-is-real

I couldn’t agree more. We need to shift our workforce away from agriculture, and we need more women – many, many, many more women! – to join the workforce. We do not know which ways will work and which won’t, but we simply do not have the luxury of closing down some routes.

India needs a hefty plate of chuqu, and fast. Chuqu?

Chuqu:

The pay for hard labor is low—often lower than the official minimum wage, which ranges between fifty and eighty dollars a month. Work hours frequently stretch beyond the legal limit of forty-nine hours per week. Get hurt, sick, or pregnant, and you’re on your own. Local governments have little incentive to protect workers; their job is to keep the factory owners happy, which will bring in more investment and tax revenue. But suffering in silence is not how migrant workers see themselves. To come out from home and work in a factory is the hardest thing they have ever done. It is also an adventure. What keeps them in the city is not fear but pride: To return home early is to admit defeat. To go out and stay out—chuqu—is to change your fate.

Chang, L. T. (2009). Factory girls: From village to city in a changing China. Random House., Location 151, Kindle Edition

India, Urbanization and Poverty

“Mumbai is the wealthiest city in India. It contributes over 6% of India’s economy, 30% of its income tax, 40% of its trade, and 60% of its customs duties. Its per capita GDP in 2015 stood at $5,328, more than 3.3 times that of the country as a whole. And yet, half of the population lives packed into just 12% of the city’s available land.”

That is from a data rich (and yet pleasant to read) essay about Mumbai and it’s mad policies regarding real estate. Those mad policies are nothing new, some of them are more than a hundred years old, and they have been covered extensively in lots of different places. Not getting urbanization right is a sport that all countries play well – although you’ll certainly get a sympathetic nod from me if you argue that we in India play it better than most. Why, I come from Pune, and you need to come visit our city one of these days to understand just how good (bad is what I mean, but you knew that already) we have become in the last four to five years alone.

Please go ahead and read the whole essay, it is full of delightful little nuggets and not-so-little laments. Did you know, for example, that urban planners planned to limit Mumbai’s population to a maximum of 3.4 million by 1980? This is like I planning to limit my weight gain to two hundred grams around the last week of the year, and I have the same success as Mumbai’s urban planners back in the day – we’re at about 25 million for the Mumbai metropolitan area now.*

And here’s another face-palm worthy statistic:

“The 1999 act is a marginal improvement over the original, but still doesn’t provide adequate incentive for investment. The annual 4% rental increase is below Indian inflation since 1999, below current Indian treasury yields, and far below the increase in demand or the increase in per capita GDP. At the allowable annual increase, the value of rent diminishes sharply over time. If the average Indian landlord received 30% of their income in rent in 1999, and received 4% annual nominal rent increases, they would be making only 8% of their income from rent on those units by 2021. Even more starkly, the act does not address the lag in rents from 1940 to 1999. A unit rented out under the 1947 rent act would have its rent pegged to 1940 prices until 1999, at which point a one-time 5% increase would be allowed, and a 4% annual increase thereafter”

But I wanted to focus on one particular thing in today’s post, and it is this excerpt:

However, the greatest beneficiaries of housing liberalization may be those who are least visible — those newly able to move into the city. One estimate found that migrants who move to cities in the Global South report increases in income as high as 30%. A separate RCT conducted in Kenya, meanwhile, estimated that households with family members who moved to Nairobi experienced an over 150% increase in income.

That is, the idiocy of our urbanization policies keeps people in poverty, and has done so since independence. How? By making it more difficult to migrate into India’s cities, that’s how. An unseen consequence of failed urbanization are the unseen poor, and that is an unseen tragedy.

Urbanization is, and remains, an underrated idea in India, and this has deep implications for our ability to overcome our challenges when it comes to eradicating poverty.

*Questions about my weight gain in the last week of the year will be deemed an invasion of my privacy, and will therefore be ignored. Go away.

A Movie Review, A Question, and A Definition of Rationality

First, the movie review:

“Yeh buzdilon ki soch hai. Sach bolne waale ko agar dukh sahne ki himmat hai, toh dukh dene ki bhi himmat honi chahiye. Sachaai angaarey ki tarah hai – haath par rakho aur haath na jale, yeh kaise ho sakta hai?” (“Only cowards think like this. If the truth-teller has the courage to suffer pain, he must also have the courage to give pain to others. Truth is like a piece of burning coal on your hand.”)

Mukherjee’s film lets us see – not through didactic monologues but through the natural, graceful unfolding of its narrative – that such thoughts may be very noble in theory, but that they can be damaging and self-defeating in certain situations. This makes Satyakam a difficult film to watch, as it draws the viewer into a quicksand of uncertainty and despair. (I can sympathise with the boy who fell asleep in the hall next to Ranjit Kapoor, especially if he’d already had a long hard day!) Throughout, there are counterpoints to Satyapriya’s unalloyed idealism, as the film repeatedly places him – and us – in morally hazy situations.

https://jaiarjun.blogspot.com/2011/04/mat-jaane-bhi-do-yaar-idealism-and-self.html

Second, the question.

The question comes from an excellent article that appeared recently in the 1843 magazine. The article is about RCT’s in general, and their development over time, but it is also about the place where RCT’s started and have continued to mushroom: Kenya. The context that you need to have for the question I am about to ask you is this excerpt:

Their [fieldworkers in RCT’s that is – Ashish] work is gruelling and often emotionally draining. They are paid a salary of $10-20 per day – not a fortune in Kenya. Field workers have been known to give their own money to recipients so that they can afford food, which can distort the outcome of a study. “When they got to the end of the month, they would just fabricate [the] data,” said Kingori, the sociologist. “The fact that these trials are designed in this way is setting them up to fail in real life. They are constantly being subverted by these field workers.” She told me of a case from a medical RCT in which a child died in one recipient family. A field worker agreed to substitute the family’s other child in the study, so that the household could continue to receive the treatment. Field workers told me that they’d heard stories of their peers filling in respondent surveys themselves, in order to hit their daily quotas. Many of these stories date from the early days of RCTs. Recently, IPA and similar organisations have improved their training and fraud detection. GiveDirectly told me that “data fraud and monetary fraud are…punished through contract termination.”

https://www.economist.com/1843/2024/03/01/how-poor-kenyans-became-economists-guinea-pigs

You are a fieldworker hired to do work for an RCT. You are not running the RCT, you are being paid to collect the data and submit it to the researchers. A family that is a part of this study loses a child. They beg you to not report this to the researchers, because then the family would no longer be a part of the RCT, and therefore would no longer be eligible to receive aid (receive treatment, in RCT lingo). Let’s say you choose to agree to their request. The RCT is screwed, but hey, at least the family will continue to receive help during a time of unimaginable distress.

Here’s my question: did you act rationally, or not?

Here’s a follow-up question for those of you who have formally studied microeconomics: according to the fundamental axioms of microeconomic theory, did you act rationally or not?

Third, the definition of rationality, as per microeconomics.

This definition is via Gemini (Google’ current name for it’s AI, although that may change by the time you read this, who knows):

“Here’s a breakdown of rationality as defined within the context of classical microeconomic theory:

Core Axioms of Rationality in Microeconomic Theory

Completeness: Individuals have well-defined preferences. When presented with any two options (bundles of goods, outcomes, etc.), they can express:

Preference for one over the other
Indifference between the two

Transitivity: If a consumer prefers A to B and B to C, then they must prefer A to C. This ensures consistency in preferences.

Utility Maximization: Individuals always strive to choose the option that gives them the highest level of utility (satisfaction, well-being). The concept of utility allows for comparison of different choices.

Self-Interest: Individuals are assumed to prioritize their own utility above that of others. This doesn’t necessarily imply selfishness, but rather that the individual’s well-being is their primary concern.

Implications of these Axioms

Predictability of Behavior: If we know an individual’s preferences and constraints (e.g., budget, availability of goods), and assume rationality, we can predict their choices.


Optimization: Rational individuals will allocate resources efficiently, always aiming to get the most value out of their choices given their constraints.


Responsiveness to Incentives: Changes in prices, income, or other constraints will lead rational individuals to adjust their behavior to maintain maximum utility.

Important Notes:

Narrow Definition: This definition of rationality is specific to microeconomic theory; it simplifies human behavior to make modeling and predictions easier.

Bounded Rationality: Real-life decision-making is impacted by imperfect information, limited cognitive capacity, and time pressure. The concept of bounded rationality acknowledges these limitations.


Ethics vs. Rationality: This rationality definition doesn’t address moral or ethical dimensions of choices. A “rational” choice could still be exploitative or harmful to others.”

Try taking stab at the question yourself. Then read what our new friends have to say about it. Here is Gemini’s considered opinion on the issue. Here is ChatGPT. Now that you’ve read their answers, see if you change yours!

Talk about it with your friends, with your professors, with your families.

And for homework, do watch Satyakaam. It is freely available on YouTube.