Category: Development Economics

India’s Institutions and Reasoning Using Principles of Economics

AshishLeave a comment

Shruti Rajagopalan has an excellent post out on Rahul Gandhi’s disqualification from the Lok Sabha. We live in polarized times, so it is inevitable that you will read this post (and her post) with your mind already made up on whether she is right or wrong. Thankfully, neither Shruti’s take on the issue, nor your opinion on Shruti’s take on the issue, is what I want to write about today. My post is, instead, on how a student of economics ought to think about this issue. Your conclusions from your thoughts, and whether they agree with your instincts, is a separate issue.

India’s situation is more a slow growing cancer that is infecting everything. India’s illiberal laws, a biased judicial decision and the Indian Supreme Court’s flawed guidelines on legislative disqualification, created a situation ripe for political opportunism. Consequently, Om Birla, the partisan speaker of the Lok Sabha, from the ruling BJP, has exploited his discretionary powers to disqualify the opposition leader.

https://srajagopalan.substack.com/p/did-modi-kill-indias-democracy-by

“Murder of democracy” and “The law followed its own course, so what’s the problem here?” are the two usual, and entirely predictable reactions from both sides of our shrill spectrum. I would encourage you to enlarge the frame of your analysis if you are a student of economics. You very well may (and as a citizen of this country, you should) have an opinion on what has transpired, but as a student of economics, begin where Shruti does. She begins, I’d say, by making two points. First, that institutions matter. And second, that our Indian institutions are in slow decay.

The first of these points is well understood by watching this video:

I’m not saying we live in North Korea, and I’m not saying we live in South Korea. The video tries to help you understand the point that for any country’s development, institutions matter. This point is made in this video by using the extreme example (as Tyler mentions more than once) of North and South Korea. Over time, countries with institutions that exist and function well will do better than countries without institutions, or those with institutions that do not function well.

What does “well” mean in this context? Well, that depends on what you are optimizing for. And in this case, we should be optimizing for having institutions that make India a better place. What does the word “better” mean in this case? Ah, what a can of worms that is!

But regardless of where you find yourself on The Great Polarization Spectrum, hopefully you will agree with me that India’s institutions do not run as well as they might. This is not about pre- and post- 2014. This is about viewing India’s institutions independent of which government is or has been in charge, and their (the governments’) causal impacts on the quality of India’s institutions. A simple question: do you think India’ institutions are perfect? If no, as a student of economics, you would do well to ask why, and you would do well to think of how they could be made better. Your definition of the word “better” is a function of what you think India should be optimizing for, of course.

Shruti asks more than a few questions in her posts, and answers them. You may wholeheartedly agree, or wholeheartedly disagree with her answers. The reason you will find yourself in extreme agreement (or disagreement) with her take is because of the consonance of your definition of the word “better” with her implicit definition of that word. But ignore, for the moment, her answer and yours. Let’s ask ourselves if we agree with the questions she has raised. Here they are:

  1. Does India become a better place because we have criminal defamation in India?
    Note that your answer shouldn’t be a function of this specific case. That is, you might be tempted to say “No!”, if you are a Rahul Gandhi acolyte. Or you might be tempted to say “Yes!” because you are a Narendra Modi acolyte. Both approaches are wrong. Regardless of the specifics of the current issue, and as a matter of principle, does the existence of criminal defamation make India better or worse? Whatever your answer, why? I’m not going to answer this question for you, nor should you ask anybody else to answer it for you. Read the relevant section from Shruti’s post, and try and figure out the answer for yourself.
  2. Does the disqualification of Members of Parliament because they have been convicted of a crime make India a better place?
    I’m going to sound like a broken record, but note that your answer shouldn’t be a function of this specific case. That is, you might be tempted to say “No!”, if you are a Rahul Gandhi acolyte. Or you might be tempted to say “Yes!” because you are a Narendra Modi acolyte. Both approaches are wrong. Regardless of the specifics of the current issue, and as a matter of principle, does the 2013 judgment by the Supreme Court make India better or worse? Whatever your answer, why? I’m not going to answer this question for you, nor should you ask anybody else to answer it for you. Read the relevant section from Shruti’s post, and try and figure out the answer for yourself.
    As a student of economics, note her use of economic reasoning in two different places in this section too. Here’s the first, and here’s the second.
    Are you confused about how the second is economic reasoning? She’s saying that incentives matter, and that this rule can be misused by a trigger happy Indian executive. Again, note that this is not about the specifics of the issue at hand. Regardless of who is in charge and who is in the opposition, how should we think about this issue in principle? Whatever your answer, why?
  3. How much power should the speaker of the union and state legislatures have?
    I’m once again going to sound like a broken record, and you know the drill by now. Here’s the relevant link.

My point in this post is to encourage you to do more of long term, principles based thinking.

  1. Get better at separating out the specifics of the issue, and learn how to uncover the underlying principle.
  2. Learn how to think about these principles in the abstract, and when doing so, learn to think about the long term consequences.
    • If you are confused about how “long term” you should be thinking, my suggestion would be to use the thumb rule that a little more long term than your current line of thinking is always a good idea.
  3. Learn to think about what the word “better” means to you, when you try and think about the answer to the question “How should we go about making India a better place?”
    • Always remind yourself of pt. 2 above while thinking through this question. Guard against the temptation to not do so.
  4. Learn to ask more often why other people have different definitions of the word “better”, and learn how to not be dismissive of their definitions. Always ask what might be the strongest arguments for their definition, and learn how to argue against those strongest definitions. This necessitates being a very good student of history, of culture and of philosophy. That’s a lot of hard work, and you’ll never be perfect at it.

But as a citizen of a country, any country, what else is there to do.

No?

Sharmaji ka beta, the global edition

Ashish2 Comments

ChatGPT on Why It Is Bad to be Rich

Ashish2 Comments

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 elicit.org, 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?

Why is it bad to be rich?

AshishLeave a comment

Navin asked this question on Twitter recently:

(My thanks to Mihir Mahajan for pointing the tweet out to me, and for requesting for a post on this topic)

My current plan is to answer this question over three posts. In today’s post, I’ll try and answer this question using a first principles approach. That is, without using Google, or ChatGPT3, or my notes and references, I’ll answer this question using nothing more than what I think are the basic, foundational principles of economics.

In tomorrow’s post, I’ll trawl through the internet (and make use of ChatGPT3), and throw in articles/blog posts I’ve bookmarked over the years that speak to this point. And finally, in the post the day after tomorrow, I’ll speak about books you might want to read about this topic.

But even before having written down a single word re: my first principles argument, here is my answer in short: it is wonderful to be rich.

Six principles, if you ask me, that you absolutely must learn if you are a student of economics (and note that whether you like it or not, everybody is a student of economics):

  1. Incentives Matter
  2. TINSTAAFL
  3. Trade Matters
  4. Costs Matter
  5. Prices Matter
  6. Externalities Matter

As I was telling somebody the other day, most – if not all – problems in economics can be thought of using these six principles. If you truly understand these six principles and all of what they imply, you will be able to reduce every economic problem you meet down to the application of these six principles. The applications may be nuanced, there may be more than one principle applicable, and you may have to supply a lot of caveats. But you’ll go a very long way towards tackling your problem of choice by starting with these six principles.

And I’ll fire my first salvo at Navin’s question by deploying the third principle in the list: trade matters.

People get rich by trading with other people. Sure, people have gotten rich in the past (and in some cases, even today) by expropriating property, through loot and through dacoity. But I hope you don’t think I’m ducking the issue by saying that’s not the focus of today’s post. My focus in today’s post is about people who get rich through peaceful, voluntary trade. This particular process of getting rich focuses on offering you, through entirely peaceful, non-coercive means, a trade.

You are free to evaluate the terms of this trade, and if they seem agreeable to you, you enter into this trade. Note that the only reason you do is because you think that doing so is to your advantage. You are better off for having done this trade, relative to the option of not doing so. And the person who offered this trade to you is presumably better off for you taking the other end of it, for why else would she have offered you this trade instead?

That’s a non zero sum game, and the more we play such games with each other, the better off we are. That’s what the principle of “Trade Matters” means, and that is what it entails: peaceful, voluntary trade leaves both parties better off, and the world is therefore better off for this trade having gone through. If, as a consequence, both parties get richer, that’s A Very Good Thing, and it is therefore good to be rich.

But remember that for some problems, the applications of these principles may be nuanced, and that there may be more than one principle applicable.

First, opportunity costs. TINSTAAFL stands for There Is No Such Thing As A Free Lunch, and even to a non-zero sum game, opportunity costs are very much applicable. In the context of international trade, your level of analysis matters. Trade might make sense at the level of the parties involved in the trade, but that doesn’t necessarily mean that everybody else is better off as a consequence:

Because in the case of trade between countries, as opposed to trade between individuals, there are people who will lose out. If a university in the United States of America hires me to teach online classes to the students over there, there isn’t a hypothetical amateur cook who is losing out. There is an actual person in that country who could have taught this course, but is no longer able to because of me.
The university that hired me is better off, because it is able to hire the services of a teacher for less money. To the extent that I do about as good a job as the person I replaced, the students are (at least) indifferent. And given how strong the dollar is, I am certainly better off!
But it is not enough to say that both parties in this trade are better off (I and the university). A complete economic analysis should also include the person in the USA who is out of a job, and I would argue that one should also include what I find myself unable to do here in India as a consequence of teaching that course abroad. Both of these are the opportunity costs of this trade, and a complete economic analysis should include these aspects as well

.https://econforeverybody.com/2023/01/10/so-no-one-loses-when-it-comes-to-trade-rightright-part-ii/

Trade might then, at the margin, cause an increase in inequality. You’d be surprised at how old (but still somewhat underrated) an idea this is, but the opportunity cost of more trade might well imply an increase in inequality. So you might well say that it is bad to be rich because the opportunity cost of you being rich is that somebody else is (comparatively) poor.

But be careful with how you proceed with this! It cuts both ways, this analysis. Is the opportunity cost of reducing inequality a reduction in the creation of wealth? When you attempt to reduce inequality by taxing the rich, you reduce their incentive to trade. And remember, they get rich by voluntarily trading with you, and if that trade leaves you better off, you’ve made yourself poorer in the bargain.

If you tax Amazon so much that Amazon decides it is better for them to shutter up altogether, have you made the world better off or worse off? I’d urge you to ignore your first, visceral take, and take a look at your Amazon app to find out how often you’ve ordered from Amazon in the past month before answering this question.

So I’d argue that it still is good to be rich – but it ain’t for free. But in my opinion, the price is worth it. One can, and one should, argue about what the appropriate level of taxation should be. One can, and one should, worry about tactics used by Amazon to make sure that they remain a monopoly provider of certain goods and services. One can, and one should, worry about whether Amazon pushes its employees a little bit too much. I’m not defending Amazon as a perfect company without flaws. But I very much am saying that the world is a better place because Amazon exists. There are costs that we bear for having Amazon in our midst, but those costs are worth it.

And I picked Amazon as a stereotypical example here, but the argument is about the underlying idea, not about the specific organization. Trade matters, even after acknowledging that there are opportunity costs involved with trade.

We’re trading right now, you and I. You’re paying me with that most precious of all commodities in the year 2023: attention. And I can’t begin to thank you enough for having given me your attention so far, because I know that reading this ain’t easy. Pleasurable, hopefully, and worth your while – but not easy. And you’ve chosen to continue to pay me with your attention because what you’re getting in return – the pleasure you feel in tackling my arguments – is worth your while.

But how do you know that it is worth your while? You could have been doing something else with this time. You could have been learning how to code. You could have finished at least part of some project or an assignment. You could have picked strawberries. You could have milked a cow.

The point is that you could have been doing something that actually earns you cold hard cash, instead of reading this article. And it is your assessment of your own opportunity costs that allow you to continue reading this article. You know that you can ‘afford’ to spare the time required to read this article.

But how do you know this? You know it because you are part of a national (and global) economic system that depends upon the principle that ‘prices matter’.You have at least an implicit valuation of how much a minute of your time is worth, and you have made the rational decision to ‘spend’ this time reading this blog.

What is my point? My point is that we know how much it costs to enter into a trade only if we know how much that trade is worth to us, and we only know how much a trade is worth to us by having a sense of what we’re worth to society. Trade matters is a principle that works only if we know the price of a good or a service, and we know the price of a good or a service best in a free market economy. Deciding how much to produce something, and deciding at what price to sell it is a truly difficult problem to solve in an economy that is not based on markets.

So yes, trade matters, but so do prices.

But speaking of prices, it gets trickier still.

  1. What if you set prices to not just lure the buyer into buying your product, but at a price which is so attractive to buyers that your competitors cannot afford to match it? What if they go out of business as a consequence, leaving you as the only game in town? What if you then raise prices?
  2. What if you use patents to make sure that others cannot sell the same goods that you are selling? What if you abuse the patenting process to stymie the competition? What if you then become the only game in town, and raise prices to eye-watering levels?
  3. What if the price at which you sell the product you are selling does not take into account the damage done to the environment?
  4. What if the buyer isn’t aware of further purchases she might need to make for having bought your goods? What if she realizes later that the true price of the good in question is much higher?
  5. What if the buyer is tempted into buying the product because of shady marketing techniques?
  6. What if you lobby with the government to make sure that nobody else but you can sell the product that you’re selling? Will you then be able to charge a higher price?

Each of these questions merits a much deeper exploration than is possible in this blogpost (for those who are interested, or wondering, here are the topics you want to think about in the case of those six questions: monopoly | propoerty rights and patents | externalities | asymmetry of information | microeconomics/ behavioral economics | public economics). These topics would just be the start, there are many nuances to consider in each of the six questions. But for having raised these six questions, and the two separate arguments I’ve made in the last two sections above, here is my answer to Navin’s question about why it is bad to be rich:

It is bad to be rich if you live in a world without a fully operative price system, and/or a world in which non-voluntary trades can take place.

Interpret that sentence however you like, but begin to worry if you are convinced that there is only one interpretation, or if you are convinced that your interpretation is the only correct one!

I write on this blog for many reasons, but chief among them is a very personal reason. I would like my thinking, and my writing, to be become clearer and better over time. I’ll be the first to put my hand up and say that there are days on which I think I succeed in this endeavor, and there are days on which I don’t. But taken as a whole, I am convinced that I am a better thinker and writer than I was in 2016, which is when I started this blog.

Far from perfect, in case it needs to be said, but the benchmark isn’t perfection, the benchmark is Ashish of 2016. And on any given day, it is the Ashish of the previous day. One day at a time, as it were.

And one thing that has happened over these past six years is that I have become better at distilling in my own head what economics ultimately comes down to. Six microeconomic principles, and three big picture questions. I have outlined the six principles above, and I have written about the three big picture questions before, but here they are once again:

  1. What does the world look like?
  2. Why does it look the way it does?
  3. What can we do to make the world a better place?

Students who have learnt from me these past six years will be familiar with this list. But there is a crucial component that is missing in this list of six principles and three big picture questions: time. On my blog, I have attempted to get around this problem by speaking of an alternative framework, which I have shortened in my head to the CHIC acronym: Choices, Horizons, Incentives and Costs:

The trouble is, our brain isn’t always the best at interpreting incentives correctly, which brings us to the third key concept in economics: horizons. Or, if you have had enough nerd talk for one day, we could also call it the instant gratification monkey problem. Call it what you will, the problem is that we tend to prioritize choices that payoff in the short run, but create problems in the long run. If you’ve ever had that last “one for the road” drink, or ended up actually eating that second dessert (and who hasn’t?), you don’t really need an explanation for this. We tend to choose those options that payoff over the short horizon, and ignore the long term consequences.

https://econforeverybody.com/2018/05/03/choices-costs-horizons-and-incentives/

I have also written about time, and how it is ever-so-confusing to think about it in the context of economics. In my classes, I show students the circular flow of income diagram, and once they’ve understood it, I ask them to think of it as a video, rather than a still picture. That is to say, time matters.

Time matters.

Go and read the responses that Navin got on his original question on Twitter. I sent this essay that you are reading right not to some people, and they highlighted this same problem – they thought of intergenerational problems about being rich. Inheritance and the perpetuation of inequality across time, for example. Almost the entirety of my blogpost tomorrow, where I will share many articles that answer Navin’s question, focusses on this issue.

So here’s a question I have been grappling with for a while: should I update my list of six principles (Incentives matter | TINSTAAFL | Trade Matters | Costs Matter | Prices Matter | Externalities Matter) to also include Time Matters? And if yes, how do I expound upon this principle?

Here’s another way of thinking about this issue – one of my objectives on this blog is to teach economics to anybody and everybody. So ask yourself this question – what do we need to do to simplify economics down to its absolute bare minimum? Will somebody who has learnt about economics by attending my classes, or reading my blog, be able to answer Navin’s question? And the short answer to this question is yes, they will. But in an incomplete fashion, because in the context of this question (and many others besides), time matters.

Time, as it turns out, really and truly matters. And for me to teach this principles, I need to try and understand it better myself.

Onwards!

Hedging, FDI, Poland and Malaysia

AshishLeave a comment

Noah Smith has a typically excellent explainer on the role of industrialization in Poland and Malaysia, itself only a single post in a long running series on the same theme. As one might expect if one is a fan of How Asia Works by Joe Studwell, the post begins by talking about industrial policy in South Korea. From that point of reference, he delves deeper into what made Malaysia and Poland grow so very vigorously over the past three decades or so. He also speaks about the limits of the strategies adopted by these two nations towards the end of this post, but more about that later on. For the moment, I would encourage you to read this post, and to subscribe to his Substack, as I have. Phull paisa vasool, guaranteed.

Also, because I simply cannot resist, a request to all of you to ponder this chart. How can one not want to learn macro after thinking about this chart?

But before we get back to Noah’s post, a brief segue into a post I wrote a while ago:

Here is how the placement process works in almost all colleges in India. If you sit for an interview, and you’re made an offer, you’re “out” of the placement process. There are variations to this rule, but in essence, the logic is that once you and the company have struck a deal, you can’t sit for any other firm that comes on campus later.
So here’s a conundrum for you: what if the company in October is a firm called HDFC, and it is offering you a package worth 8 lakh rupees (INR 800,000). The conundrum is that there is a very strong rumor (but it is, unfortunately, a rumor) that Google will be on campus next month, and they’ll be offering 20 lakh rupees (INR 2,000,000).
HDFC will pick up 20 students, but Google will pick up only 5.
Do you sit for the HDFC process or not?

https://econforeverybody.com/2021/02/01/so-what-are-forward-markets-what-is-speculation/

What is your answer to this question? If you were that hypothetical student, would you sit for the HDFC process, or not? I’d argue it comes down to whether you are looking ot maximize your ‘profits’ or minimize your ‘risks’. If you’re the sort of person who would like to play it safe – if having a job, any job, is more important to you than having the high paying job of your dreams – then you’re likely to sit for the HDFC job process.

Note that there is no right or wrong answer here. It simply is a question of your preferences.

All right, now back to Noah’s post.

Poland and Malaysia may not be as rich as Germany or Korea, but they’ve definitely escaped poverty. Countries like Bangladesh or Vietnam or Ghana or even Mexico would kill to have a per capita GDP of $30,000. That’s about the GDP of the U.S. in the early 1980s. Is it really fair to call that level of development a “middle income trap”? If you’re a poor country, and you have a reliable, dependable way of getting as rich as the U.S. was in the early 1980s, dammit, you take it. You don’t worry about whether that strategy will eventually make it harder to get as rich as the U.S. of 2023.

https://noahpinion.substack.com/p/the-polandmalaysia-model

The issue that Noah is speaking about here is about whether option A is better or option B is better. Option A is the South Korean way, as he mentions in the next paragraph after the one I have excerpted here. This is done by ‘building a bunch of world-beating high-tech manufacturing companies from scratch’ and it is, as he says, incredibly hard. The good news is that if you get it right, you can get seriously rich as a country. The bad news is that very few countries have managed to get it right.

What is option B?

An FDI-centric strategy, on the other hand, is simple and straightforward, almost cookie-cutter — you give all your people a high school education, you build some roads and electric power lines and sewage lines, you designate some Special Economic Zones, and you give foreign companies big tax incentives and investment incentives and regulatory incentives to come in and hire your plentiful low-wage workers to make electronics and automotive goods and other complex products for export. Voila! No need to build the next Samsung or the next Hyundai; the existing Samsung and Hyundai will do nicely.

https://noahpinion.substack.com/p/the-polandmalaysia-model

The analogy that I am trying to develop here is a fairly obvious one. Option A is like Google coming to your campus. Only a few jobs on offer, and we don’t yet know for sure whether Google will actually come on campus or not. In other words, a high risk strategy. If it pays off, well, whoopee. But on the other hand, if it doens’t pay off, you’re in deep doo-doo.

Option B is like HDFC coming on campus. Relatively speaking, you’re much more likely to succeed in this endeavor. The downside? If you succeed, it won’t payoff as much as succeeding with Option A. But just as there will be students who will prefer Option B, Noah says that some countries also ought to choose the Malaysia-Poland route. Sure the success here isn’t quite as ‘sexy’, but it also does come with lower risk. And this ought to be, for some countries, therefore a very attractive proposition.

So if Poland and Malaysia haven’t found the secret to getting rich quick, perhaps they’ve found the secret to getting upper-middle-class quick. That wouldn’t be a full general solution to the problem of industrialization, but it would represent an amazing advance over what we know now. If I were a poor country, this is what I’d be looking at.

https://noahpinion.substack.com/p/the-polandmalaysia-model

Risk-rturn trade-offs, industrial policy, opportunity costs and an introduction to finance, all rolled into one smorgasbord of a blogpost. I enjoyed writing this one!

What Am I Optimizing For on EFE in 2023?

AshishLeave a comment

Six principles, three big picture questions, and three bonus questions.

Anybody who’s attended a principles class taught by me knows what is coming next. It is my deeply rooted conviction that almost every single problem/concept/idea in economics can become more relatable by simplifying it down to one out of these twelve things: six principles, three big picture questions and three bonus questions. If you get the hang of these twelve things, you can go a very long way in terms of both understanding what economics is about, and how economics can be used to make the world around you a slightly better place.

And while mastery over these twelve things will likely take a lifetime – and almost definitely more than that – familiarity with them isn’t so difficult. And my aim is to write blogposts – in one way or another, and as much as possible – centered around one of these twelve things.

Not just blogposts, but we’ll leave that for aother day. For today’s blogpost, a simple list of what these twelve things are.

First, the six principles:

  1. Incentives matter
  2. TINSTAAFL – There is no such thing as a free lunch
  3. Costs matter
  4. Trade matters
  5. Prices matter
  6. Externalities matter

If I’m teaching a class in a semester at a college, I would dearly like to spend as much time as possible in speaking about just these six principles. Different teachers the world over may have a slightly different list, but I would be surprised if there were to be no overlap at all between two different lists. We may define concepts within these principles slightly differently, we may disagree on some of the underlying mechanisms, but here’s a nice way to think about my list. I am more than willing to listen to arguments about what I really should be adding to my list, but you’ll have to do a lot of convincing to make me remove an item from this list.

These six principles really do define economics for me. They can be expanded upon in multiple ways, a million derivatives can be constructed, there are endless tangents that can be drawn, and the nuances for each can be separate books in their own right. But at it’s heart, these six principles do most of the weight-lifting when it comes to economics.

Next, the three big picture questions:

  1. What does the world look like?
  2. Why does it look the way it does?
  3. What can we do to make the world a better place?

I don’t much like the artificial divide of the subject into “micro” and “macro” economics, but if you like, you can think of the six principles as a way to think about an introduction to microeconomics, while these three questions are a way to get started on thinking about macroeconomics. Depending upon how you want to go about answering the third question, there is yet a further division that is possible, between short term macroeconomic fluctuations and long term growth theory. But we’ll get to that in a bit.

But you can’t really begin analyzing macroeconomics without having a sense of what the world looks like today. Which countries in the world are doing well today, and how do you define “doing well”? Which countries in the world are not developing as rapidy as one would have hoped for? A comparative analysis of what the world looks like is where the study of macroeconomics should start.

At which point, the second question comes into its own. Why is Afghanistan doing so poorly when compared to its peers (howsoever defined), or when compared to its neighbours? Is it because Afghanistan is a landlocked country? Are all landlocked countries poor? If not, why not? Is it because of natural resources in Afghanistan? Is it because of geo-politics? Is it because of colonization? Does religion have a role to play? The list of questions is nowhere near complete, and this is just one nation. We can go on and on like this for all nations – and multiple careers have been spent on answering only parts of one question for just one nation.

And then we come to question number three, the most vexatious question of them all. Just two little words in that sentence, but what a world of (intellectual) pain they bring forth into the world.

“What can we do to make the world a better place?”

Who is we? What form of government works best to make one’s own country a better place? Is the answer to this question always the same regardless of the stage of development? Is your answer based on ideals and hope, or on empiricism? For which part(s) of the world and in which time period?

Does the word better mean the same thing to all people? Are we in a better world when everybody has access to a washing machine? Or are we in a better world when we don’t generate more carbon emissions? Can we have both? If yes, how?

These three questions define macroeconomics for me. Most of what we do in big picture economics (a term that I prefer to macroeconomics, for reasons I’ll get into in a later blogpost) can be thought of using this framework.

There are many good things that have happened as a consequence of blogging regularly here on EFE. But one of the best things to have happened is that I’ve been able to come up with three additional questions – questions that I find myself asking ad nauseam, both to myself and of other people:

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

That first question, strictly speaking, isn’t really a question economics can answer. What you are optimizing for is a question that requires deep introspection, and the answer likely comes from either other domains, or from a place that will perhaps forever lie beyond the fartherest probes of academia. But I will say this much – it is impossible to proceed further in economic analysis of any kind, without clarity about the answer to this question.

The second question here really is just another way of saying opportunity costs. But it is surprising to see how easy it is to forget that opportunity costs are real. This is particularly true in the case of public policy, but “relative to what” is a question that more people need to ask of themselves (myself included).

And finally, that most problematic of all questions: time. Just when you think you’re done with intellectual wrestling, trying to answer that third question can often bring you all the way back to square one. Is your answer to the first two questions the same over all time horizons?

I could have optimized for playing (judge me all you like) Subway Surfers instead of writing this post, because I was optimizing for relaxing myself. Or that, at any rate, is the story I tell myself when I give in to temptation. That choice is the best for me (if at all) only in the very short run. That is, over a very short horizon. So is playing yet another round of Subway Surfers really the best thing that I can do? Back, as I said, to square one.

India can optimize for (extending PMGKAY/ reviving the old pension scheme / pick whichever topic makes you the most uncomfortable), and ask yourself why what India is optimizing for. Ask what the opportunity costs of doing so will be. And finally ask if your answer (whatever it may be) remains the same if you ask what is best for India over the course of the next two years. What about two decades? What about two centuries? Which is the best timeframe to use to answer this question, and whatever your answer, what are you optimizing for? Back, as I said, to square one!

In one way, this is exactly what I have been doing in any case these past six years – writing blogs about these topics. A little bit of circular logic is involved here, of course. If I say that this framework:

six principles | three big picture questions | three bonus questions

can be used to think about any topic in economics, maybe I say I’ve been writing about this because I now think about those blogposts that I have written using this framework.

Be that as it may, writing here on EFE has convinced me that this framework can be used to think about all questions in economics, regardless of whether you have been formally trained in the subject or otherwise. And my attempt, this year, is going to be to think about as many questions as I can, explicitly using this framework. Of course I’ll benefit, but hey, as the sixth principle reminds us, externalities matter. You’ll benefit too!

Or is it the other way round?

Mostly Awesome, Except When It Is Awesomer

Ashish5 Comments

I really do not know where to begin. Should I focus on authors or on topics or on interesting academic papers or ???

Let me begin on my thoughts first. I have been reading a bit on what leads to development and growth in a country. It has traditionally been studied by people studying development economics (or dev eco as it is popularly called in campuses). It seeks answer to one question:

What are the causes of growth? Sustainabale growth?

This topic has always been at the centre of economic research. There are numerous ways economists have analysed growth and its factors. I would discuss the different factors in my next blogs.

https://mostlyeconomics.wordpress.com/2007/04/20/finance-irrelevant-for-growth/

So began a blog that I think every single student of economics in India should subscribe to. For those of us who have been following Amol Agrawal’s blog, Mostly Economics, for a while, it’s easy to reflect on all of what he’s written over the years since 2007 and realize that he was as good as his word.

For the last fifteen years, Amol has indeed focussed on factors that have influenced growth. His very first post on his blog, which I have excerpted from above, was written all the way back in 2007, and touched upon a point that was clearly a sore one for him: the paucity of research on the role of finance in development. If you are looking for just one source that has diligently shared resources on this topic, you’re in luck, because that is exactly what Mostly Economics is all about.

This might sound like an exaggeration, but I really do mean this – if you want a treasure trove of material on research on this very broad (and very important!) topic, you could do a lot worse than trawl Amol’s blog for specific variations of this topic. This search, I maintain, will give you a better starting point than this one. Of course, you should narrow it further still by choosing a specific topic or a specific central bank, but – forgive me, I’ve always wanted to say this, and since I’ll almost certainly never write a textbook, this is my only platform to say so – I leave that as an exercise for the reader.

But I’m not joking when I say this – Amol’s blog is without question the single best repository when it comes to a very careful curation of content that is still plugging away at answering the question that he raised in his very first blogpost. And taken together, the sum of those blogposts is an invaluable resource to equip yourself with when you start to study macro/monetary/growth/development in India.

What explains the rather weird title of today’s post? It is a (rather horrible, admittedly) attempt at wordplay on his original title. But that does still beg the question – what explains the mostly in Mostly Economics?

Well, the blog is called mostly economics but as I mentioned at the start I am going to write on some topics that interest me. Cricket is one of them. No matter how the performance of the Indian Cricket team, I try and keep updated on the latest the sport has to offer.

https://mostlyeconomics.wordpress.com/2007/04/27/time-for-some-cricket/

Here’s the link to all the blog posts that Amol has written on cricket. How often do you read a blog in which you’ll meet a post on India’s Minsky moment in cricket? What is the intersection set of people who will love the reference from both perspectives? Or a post about Greece being bailed out by the… ICC? Or about the similarities between cricket and the subprime crisis? There’s ton more where this came from, and as someone who tries to figure out ways to make learning economics fun, exciting and is therefore always looking for “hooks”, Mostly Economics has been a rare ol’s treat.

The nature of sharing interesting links and information online has changed over time. Blogs have been replaced with Facebook updates, and those eventually gave way to tweets. And (I’m writing this on the 19th of December, at 10.30 pm, India time, so who knows what all has taken place by the time you read this) once Elon is done with Twitter, something else may come along. But the cantankerous old uncle in me cracks a rare ol’ smile at the sight of a carfeully curated, regularly updated blog that has been plugging away, year after year at a singular task – to help all of us understand the factors that influence growth in the world in which we live.

And so bad English or not, I’ll reiterate the sentiment – the blog is mostly awesome, save for when it is awesomer.

Amol, thank you!

On India’s Wu Liu

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Wu liu, in Chinese, is “the flow of things”, and is apparently the Chinese word for logistics:

Logistics covers transportation, warehousing and the management of goods. Its Chinese translation, wu liu, literally means “the flow of things”. But that flow within the country is costly and cumbersome. Much of the investment in infrastructure has gone to lubricate exports. Now, as China’s government shifts its focus to consumption at home it is finding that the domestic logistics industry is woefully inefficient.
Logistics spending is roughly equivalent to 18% of GDP, higher than in other developing countries (India and South Africa spend 13-14% of GDP) and double the level seen in the developed world. Li Keqiang, the prime minister, recently echoed industry’s complaints that sending goods from Shanghai to Beijing can cost more than sending them to America.

https://www.economist.com/china/2014/07/12/the-flow-of-things

This is an old report from The Economist – it came out in 2014. I’m not quite sure how much better China’s logistics sector has gotten since then, but back in 2014, India was also able to come up with similar statistics:

Indeed, the Financial Times reported in November 2014 that one French company finds that the cheapest and easiest way to send parts from Bangalore to Hyderabad, a few hundred kilometres apart, is to send them first from Bangalore to Europe, and then back from Europe to Hyderabad. It isn’t as if there isn’t a decent highway between the two cities; but the moment that a truck hit a state border, it has to stop and wait. According to the World Bank, Indian truck drivers spend a fourth of their time on the road waiting at the tax checkpoints that mark state borders. Factor in the time they spend in queues to pay highway tolls, and they spend less than 40 per cent of their time on the road actually driving. And that’s when the roads are good. Moving stuff around India costs this country’s manufacturers more than they spend paying their workers, the FT reports. Even India’s lower-than-low wages can’t make up for the dent logistics costs make in our competitiveness.

Sharma, Mihir. Restart . Random House Publishers India Pvt. Ltd.. Kindle Edition.

As I mentioned, I don’t know how the Chinese logistics sector has evolved since 2014, but India’s logistics sector needs to improve out of sight for us to become internationally competitive. And not just internationally competitive – even when it comes to domestic shipping of goods, there is a lot of scope for improvement:

“At the all-India level, the proportions of the produce that farmers are unable to sell in the market are 34 per cent, 44.6 per cent, and about 40 per cent for fruits, vegetables, and fruits and vegetables combined,” finds the committee on Doubling of Farmers’ Income. This means, every year, farmers lose around Rs 63,000 crore for not being able to sell their produces for which they have already made investments.
But, except for cold storage, the country is lagging in all other agri-logistics required to bring the produce from farm to markets. If plugged, the sector can create over 3 million jobs, a majority of which will be at the village level, says the State of India’s Environment in Figures 2018.
Although this seems to be a good show on the state of cold storage in the country, but it should be underlined that the existing cold storage capacity is confined mostly to certain crop types and not integrated with other requirements. In fact, close to only 16 per cent of the target set for creating integrated pack-houses, reefer trucks, cold storage and ripening units has been met. This means, there is an overall gap of about 84-99 per cent in achieving the target on improving the state of storage and transportation of the farm produce. Out of these, the country is far-far behind in meeting the requirement of integrated pack-houses, reefer trucks and ripening units.

https://www.downtoearth.org.in/news/agriculture/poor-post-harvest-storage-transportation-facilities-to-cost-farmers-dearly-61047

And that’s just agriculture. Taken as a whole, the logistics sector in India is rife with inefficiencies, and for many reasons:

A decade ago, the state of India transport and logistics was abysmal. The movement of goods within the country was an arduous and expensive affair. Serpentine queues at Interstate borders, random documentation checks, multiple regulatory checkpoints, tax compliance issues and poor infrastructure meant that India’s trucks had one of the slowest average speeds [20 to 40 kilometres per hour] and lowest distance covered in a day [250 to 400 kilometres] compared to developed countries [60 to 80 kilometres per hour and 702 800 kilometres per day respectively]. It also meant that Indian trucks spent about 60% of their time on the roads. Moreover the logistics sector was a complex beast with more than 20 government agencies, 40 partner government agencies, 37 export promotion councils and 500 certifications. All these factors combined made the cost of logistics in India much higher than most of her big trading partners.

https://twitter.com/anupammanur/status/1577483121183707136

Currently, we transport about 4.6 billion tonnes of goods worth 9.5 lakh crore rupees every year, and we do that through three different ways: coastal freight, road freight and rail freight. I got these statistics from a recent report on the Capitalmind website:

https://www.capitalmind.in/2022/11/how-india-transports-goods-is-changing/

And as the report goes on to say, this break-up is problematic because its much cheaper to transport stuff by rail or by water than road:

https://www.capitalmind.in/2022/11/how-india-transports-goods-is-changing/

Check the third graph in the Capital Mind article to see how the development of the Indian logistics sector defied economics – that is to say, over time, we’ve ended up transporting more by road than by rail! Except, of course, this isn’t in defiance of economics, it is because of it. Last mile connectivity is still poor in India, as most metro riders in this country will tell you. Plus, the fact that we’re transporting people and goods using the same infrastructure is a problem.

All of which is to say that we don’t transport stuff quickly, cheaply and seamlessly in our country. And that’s a amajor reason behind why we are not internationally competitive, and needlessly expensive in terms of domestic consumption. All of us, myself included, would do well to go over the broad countours of our National Logistics Policy. In addition, take a look at the associated e-book, and also read this interview of Vinayak Chetterjee on this issue. If India is to grow as rapidly as possible in the long run (and it must), getting our logistics right is an integral part of the puzzle.

This stuff matters, and if you are a student of economics in India, you absolutely must be familiar with our logistical challenges. They are many, they are inter-related, and solving them isn’t easy.

Lebenskunst

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I was part of a small but fascinating discussion at The Fat Labrador Cafe yesterday (about which more in tomorrow’s post). The idea was to speak about under-rated/counter-intuitive ideas in economics, and a session that was supposed to last for an hour ended up starting at a little after nine pm, and going on well past eleven pm!

One of the ideas that I thought would be under-rated and counter-intuitive was that cities are magical places. Not only, it turns out, was this not under-rated and counter-intuitive where the audience was concerned, but it was almost quotidian. Huh, but also yay!

I’ve said it before, and I’ll say it again: cities are awesome, fantastic and brilliant, and we need many more of ’em on our planet.

Lebenskunst, The Economist magazine tells us, is the art of living well. Wiktionary has an even better translation, calling it the art of life. But whatever the definition, The Economist’s ranking of the world’s most liveable cities places Vienna at the top.

https://www.economist.com/graphic-detail/2022/06/22/the-worlds-most-liveable-cities

It is, after all, an index, and that means that you can choose to argue endlessly about which metrics are included and which aren’t, what weights have been given and what should have been the weighting instead, about how liveability isn’t all that measurable and especially comparable, and on and on and on.

The index rates cities along thirty different factors, bucketed into five different categories: stability, health care, culture and environment, education and infrastructure. Note that the article we’re talking about is from June, but that doesn’t really matter for us today. The good news, for the most part, is that “global activity is only around one-sixth lower than before the virus emerged. This is reflected in the global average liveability score, which has bounced back to something approaching normality.”

Of course, parts of the world have done worse compared to the pre-pandemic era. Almost all Chinese cities are worse off, although that is not at all surprising. Re: India, the bad news is that not a single Indian city comes in the top ten, and the good news is that not a single Indian city comes in the bottom ten! A summary of the report is available to read here, once you share your email address with the EIU. No Indian city makes the list of the cities that moved up the most in the rankings, nor does any Indian city make the list of cities that dropped down the most.

The full report costs an insane amount of money, and there’s no way I am paying for it, but you might want to just take a look at a Wikipedia article, as I did, for more information. I wasn’t aware of Numbeo, and obvious concerns about quality of data aside, it is a very interesting project.

Take a look at India’s data, it is fascinating. Pune comes in at number 2, which fills me with pride, and also with worry about what is up with the rest of India’s cities. If we’re at number 2…

Two Sides of the Same Model

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Yesterday’s post and today’s post are really talking about the same thing (or the same model, to be a little bit pedantic), but it’s a little bit like that story about the blind men and the elephant.

Which model? This one:

The Solow–Swan model or exogenous growth model is an economic model of long-run economic growth. It attempts to explain long-run economic growth by looking at capital accumulation, labor or population growth, and increases in productivity largely driven by technological progress.

https://en.wikipedia.org/wiki/Solow%E2%80%93Swan_model

Ask yourself a simple question: which countries in the world today are likely to see reasonably rapid growth over the course of the next three decades or so?

As a person whose job it is to teach people introductory economics, I’m not as interested in your answer as much as I am in your framework for coming up with your answer. No matter whether you say India, or China or Nigeria or Indonesia or any other nation of your choice – why do you choose the set of answers that you do? What is your model for doing so?

And whatever model you come up with, and whatever specification of the model you deem most appropriate, it should have the following ingredients:

  1. People. No country can grow if its labor-force isn’t growing. Duh.
  2. Capital. More machines, more output. Also duh.
  3. Technological progress. It’s not just people and machines, but it is how efficiently you use them, and the quality of your ideas about how to use them. Not so duh, and often underrated.
  4. Quality of education. A close cousin of the third point, if you think about it. Definitely not duh, and a pet passion (and peeve!) of mine.
  5. Quality of institutions. See this video for an explanation. The very opposite of duh, and massively underrated almost always.

So: my pick for a country that is to grow rapidly over the course of the next three decades would have to tick most, if not all of these boxes. And yesterday’s post was about understanding the point that where India is concerned, her rate of growth is somewhat likely to be constrained by her inability to dispense quality education efficiently and at scale, and by the quality of her institutions. We also need to ramp up our capital stock (our infrastructure). Or put another way, if we try to maximize growth without getting these things right, it’s going to create more problems for us down the road.

A warm welcome to Shruti Rajagopalan, who launched her Substack yesterday. Her first post, and indeed her general focus on her entire blog, is about paying more attention to India. Bad puns that are actually good is an underappreciated art form, so a high five is in order for the name of the blog too! (Update: Mihir Mahajan very kindly pointed out that this is actually a song. I obviously hadn’t heard it before, and in case you haven’t either, here you go. Thanks, Mihir!)

Her post is about a lot of things about why (and how) one should pay more attention to India. But the first two sections of her essay are what I want to focus upon here:

  1. “India’s population will peak in 2065. Compare this with China, where the population will peak next year.”
  2. “Smartphone penetration in India since 2010”

If Gulzar Natarajan yesterday spoke about capital, the quality of education and the quality of institutions (2,4 and 5 from my list above), think of Shruti’s post as a discussion about people and technological progress (1 and 3 from my list above). And a great way to learn about the Solow Model is to first learn about it, and then think about India in the context of the Solow model. Which, of course, is what these two posts are trying to do.

Take, in other words, the model out of the diagrams and the math, and apply it to the world around you. And a great place to begin is here, in India!

Shruti’s post is worth reading (and worth using as a teching tool) because it also speaks about labor mobility (or the lack of it), and capital mobility also. And soft power too, if you want even more! So do give it a read, and bookmark her blog, or add it to your RSS reader.

P.S. The very last section of her blogpost speaks about how to get started on learning more about India. I’d add at least two points to her list, the first because it is a passion of mine. If you want to learn more about any country, learn more about its food. Which ingredients are used at what time of the year, and why? What are the popular dishes in different parts of that country, and why? What do food taboos and food habits have to do with the culture, the sociology and the religions of that country? It’s a great way to learn more about different countries, and especially true for India. If you haven’t seen the light yet, and are therefore not as besotted with food as I am, consider music instead.

Or dance, if you like. Or textiles. But pick an entry point that you like, and read/see/travel optimizing for that entry point. But most of all, haffun – that’s the whole point, after all.

And for anybody who’s struggling with the Solow Model, trust you me, you can have fun while slogging through it all. This post is the proof!