A Rare Ol’ Treasure Trove

After yesterday’s post, I asked some folks for their choice of textbooks that undergraduate students should definitely be reading before getting their BSc/BA degree in economics. And what a list we have, already!

If you are an undergraduate student, please bookmark this post, and keep coming back to it when you want book recommendations. And I would argue that even if you are not an undergrad student of economics, you might still want to keep checking on this post, because I will be updating it regularly.

In what follows, I have not mentioned who has recommended what. That’s simply because I’m writing this post out on the fly, and haven’t had time to format it, add hyperlinks or even figure out how I want to tabulate this data. More than one person has recommended some of the books on the list too, and that’s an additional complicating factor. Note that not all of them are textbooks, and some aren’t even books (they’re essays), but hey, when it comes to reading, there’s no bureaucratic stuffiness in these parts.

Folks who have read some of these books might wonder at the very broad political and economic ideology spectrum over here, but surely this is a plus and not a minus. As an undergrad student, read far and wide, and figure out over time what resonates and what does not (and why).

Finally, to everybody who took time out of their busy schedules to reply, thank you very much!

Here is this most magnificent list, in no order whatsoever:

  1. On the Wealth of Nations, by Adam Smith
  2. That Which We See and That Which We Do Not See, by Frederic Bastiat
  3. (Bonus points if you saw this coming) Economics in One Lesson, by Hazlitt
  4. Micro Motives and Macro Behavior, by Schelling
  5. Free to Choose, by Milton Friedman
  6. Both the Freakonomics books, by Levitt and Dubner
  7. Road to Serfdom, by Hayek
  8. Modern Principles of Economics, by Cowen and Tabbarok
  9. Public Finance and Public Policy, by Jonathan Gruber
  10. Economic Growth, by David Weil
  11. The Effect: An Introduction to Research Design and Causality, Nick Huntington Smith
  12. Economics Rules, by Dani Rodrik
  13. An Uncertain Glory, by Amartya Sen
  14. Everybody Loves a Good Drought, by P Sainath
  15. In The Service of the Republic, by Vijay Kelkar and Ajay Shah
  16. Of Counsel: The Challenges of the Modi-Jaitley Economy, by Arvind Subramanian
  17. In Spite of the Gods, by Edward Luce
  18. The Vision of the Anointed: Self-Congratulation as a Basis for Social Policy, by Thomas Sowell
  19. The Meaning of it All, by Richard Feynman
  20. Delhi Rape: How India’s Other Half Lives
  21. Principles of Economics, by Mankiw
  22. Intermediate Microeconomics, by Hal Varian
  23. Macroeconomics, by Dornbusch Fischer and Startz
  24. International Economics, by Dominic Salvatore
  25. Introduction to Econometrics, by Woolridge
  26. Complete Business Statistics, by Aczel and Sounderpandian
  27. Using Econometrics: A Practical Guide, by Studentmund
  28. Introduction to Economics, by Richard Leftwich
  29. Theory of Econometrics, by Koutsoyiannis
  30. Principles of Economics, by Koutsoyiannis
  31. The Worldly Philosophers, by Heilbronner
  32. Macroeconomics, by Alex Thomas
  33. Economic History of India, by Tirthankar Roy
  34. India After Gandhi, by Ramchandra Guha
  35. Macroeconomics, by Snowdon and Vane
  36. Causal Inference Mixtape, by Scott Cunningham
  37. International Economics, by Paul Krugman
  38. Capital, Vol. 1, by Karl Marx
  39. Classical Political Economy and the Rise to Dominance of Supply and Demand Theories, by Krishna Bharadwaj
  40. Three Essays on the State of Economic Science, Koopmans
  41. Universal/University Economics by Alchian and Allen
  42. Introduction to Econometrics, by Cristopher Dougherty
  43. Studies in Indian Public Finance, by M. Govinda Rao

Sowell and Roberts on Opportunity Costs

The essay that I linked to the other day, by Russ Roberts, contains a lovely little quote by Thomas Sowell: only trade offs, no solutions.

Four small words, but they contain one of the most important lessons in all of economics: opportunity costs are everywhere. Opportunity costs are literally the cost of the opportunity foregone. If you choose to spend the next fifteen minutes reading and thinking about this blogpost, then you’re not going to be able to do something else in those fifteen minutes. You could have taken a nap, you could have listened to songs, you could have watched videos on YouTube – but now, each of these is not going to happen, because you’re going to devote your attention to this blogpost.

That is the opportunity cost, to you, of reading this blogpost.

But the deeper point is the one that Russ Roberts makes in his blogpost – that nothing is ever for free, because even if you pay nothing else, you’re still paying in terms of opportunity cost. That is, this blog is free, and will always be free, but in another important and meaningful sense, it has never been free: you’re always paying with your time, and that time could have been potentially better spent elsewhere.

And that’s the point that Sowell is getting at, when he says only trade offs, no solutions. Because opportunity costs are omnipresent, and because there is no escaping them, economics can never give you a “solution”. At best, it can simply tell you that in order to do this, you have to give up that.

And this is true no matter what you’re talking about: it could be how you’re going to spend the next fifteen minutes, it could be your decision to get married (or not), or it could be your decision to abandon a particular course you’ve enrolled in midway through. If you find yourself asking others (or yourself) whether this is the best thing to do, you’re asking the wrong question – at least as far as an economist is concerned.

What is the cost, the economist will advise you to ask yourself, of continuing with this course, or deciding to marry this person, or of spending the next fifteen minutes reading this blogpost? Whatever it is that you would have done otherwise is the price that you’re paying to do this instead – and if the cost seems too high, well, you’re saying that the trade off is too expensive, and you should go ahead and do that other thing instead.

Opportunity costs, in other words, are everywhere. Or all costs then, in a sense, are opportunity costs.

But I do think Sowell put it best, and certainly the most pithily: only trade offs, no solutions.

Jakob Schneebacher’s Twitter Thread on Baumol’s Cost Disease

Via MR:

Past EFE posts on the topic.

Can Micro be Weird?

Donald Bodreaux has an excellent, truly thought-provoking write-up on the imposition of price floors.

…governments also sometimes attempt to push prices upward. When the intervention is designed to increase prices by outlawing the charging of monetary prices below some minimum, the intervention is called a price floor.

https://www.aier.org/article/on-the-negative-consequences-of-price-floors/

I usually explain price floors to my students by speaking about attendance requirements in colleges and universities. Think of it, I urge them (only somewhat in jest), as a price that you guys have to pay me. Even if you happen to not like my classes, and think me to be the most boring guy ever – and therefore don’t wish to pay me by spending your time – no can do. You must pay me with your time.

That’s a price floor.

So what might be the unseen consequences of a price floor?

Here’s where Donald Bodreaux’s 1 column gets truly interesting (apologies for the lengthy extract):

Suppose that the government imposes a true price floor in the market for pickles. The government declares illegal all purchases and sales of pickles at prices below, say, $10 per pound (which price, let’s assume, is above the market price that would prevail absent the price floor).
The first and most obvious effect of this price floor is that the quantity of pickles that consumers are willing to buy will fall; the quantity that consumers demand will be driven lower than it would be without the price floor. If pickle producers are economically naïve, this price floor will create a physical surplus of pickles as producers, attracted by the higher price, increase their production of pickles. But even the most naïve pickle producers will soon learn that consumers are willing to buy at the high price-floor not only fewer pickles than producers are willing to produce and sell at that high floored price, but even fewer than consumers were willing to buy at prices lower than the floored price.
Discovering themselves unable to sell all of the output they are willing to sell at the price floor, pickle producers reduce their production. They produce no greater amount of pickles than consumers are willing to buy at the high price floor. So while price ceilings always create shortages, price floors don’t always create physical surpluses.
Nevertheless, because price floors do always reduce the quantities that buyers wish to buy while increasing sellers’ willingness to produce and sell, price floors create a second negative consequence – namely, the need for some means to determine which sellers will be among the lucky ones to sell at the higher price and which sellers will not be able to take advantage of the higher price by actually selling units of output at that price.
This determination might be done by luck or random chance. Perhaps only those sellers who encounter consumers early will be able to sell, while sellers who get to market too late find no more buyers.
But luck or random chance is unlikely to operate for long. Eager to sell at the high price floor, sellers will compete for buyers in ways other than cutting prices. A third negative consequence of a price floor is, thus, that the quality of the price-floored good rises. Pickle producers might attach to each jar they sell “free” coupons for discounts on crackers or deli meats or beer. These producers might work harder to make their pickles even tastier. Such non-price competition for consumer patronage is an inevitable result of price floors.
Unlike with the quality reductions caused by price ceilings, the impetus to quality improvements caused by price floors perhaps seems to be a positive consequence rather than, as I’ve described it, a negative one. But negative it is when compared to what the situation would be absent the price floor.
It’s true that, given that consumers aren’t allowed to buy pickles at any price below $10 per pound, they like their pickles being even tastier or sold with discount coupons. But what consumers would like even more is to pay a lower price for a lower-quality product. Were there no price floor in place, consumers would reveal through their spending that the higher quality isn’t worth the higher price. Yet because lower prices are unlawful – that is, because consumers must pay the higher price if they want pickles – consumers settle for the second-best outcome of paying this higher price for a higher-quality product.
Price floors, in short, compel consumers to buy too few units but too much quality.

https://www.aier.org/article/on-the-negative-consequences-of-price-floors/ (Emphasis added)

And that’s why the title of this blogpost is what it is: can micro be weird?

Demand will go down with a higher price, sure, and suppliers will eventually reduce their supply given low demand. So far, so standard.

But remember that suppliers compete with each other, not with folks on the demand side – and so if you and I and five of our friends are pickle manufacturers facing high prices and low demand, we have to “do battle” with each other to sell our produce.

Facing low sales, will a producer’s natural response be an upping of quality? Discounts, freebies, and maybe the attempt to convince buyers that my product is of higher quality (marketing, branding) – but an actual increase in quality? But hey, that’s why studying micro can be fun – because it is weird!

This is covered in Paul Krugman’s textbook on micro too, where he cites the example of airlines upping the quality of service when faced with price floors set by international treaties. And, the textbook goes on to say, when prices were allowed to come down, so did quality.

So, long story short, yes, micro can be weird – but that’s what makes studying economics fun!

  1. quick question for grammar Nazi’s – should it be Bodreaux’s or Bodreaux’[]

On The Economics of Booking a Cab in an Indian City

Microeconomics for all, by Paul Seabright

For the last half-century, the world’s leading universities have taught microeconomics through the lens of the Arrow-Debreu model of general competitive equilibrium. The model, formalizing a central insight of Adam Smith’s The Wealth of Nations, embodies the beauty, simplicity, and lack of realism of the two fundamental theorems of competitive equilibrium, in contrast to the messiness and complexity of modifications made by economists in an effort to capture better the way the world actually functions. In other words, while researchers attempt to grasp complex, real-world situations, students are pondering unrealistic hypotheticals.

https://www.project-syndicate.org/commentary/paul-seabright-criticizes-the-poverty-of-the-undergraduate-microeconomics-curriculum

Thus begins a short but hard hitting essay by Paul Seabright. Regular readers will know of him as the author of the magnificent “In The Company of Strangers“, but in today’s blogpost, we’re going to be speaking about the essay I just excerpted from. This essay was written back in 2013, but if anything, it rings even more true today.

Because what we teach in microeconomics has very little to do with reality, and that’s just the truth.


A typical course in micro will work its way through consumer theory, producer theory, markets, and then throw in a sprinkling of topics to round off an introductory course: a bit about externalities, a bit about asymmetry of information (and related topics) and maybe touch upon risk and intertemporal substitution.

But as Paul Seabright says, most of what goes on in research based in microeconomic theory is so much more than that. For example (and this is my point, not his), if you are a microeconomics faculty, will you be able to explain to your students during an introductory course what, exactly, was the seminal contribution of Hart and Holmstrom?

Here’s what I mean by that question: can you explain where, exactly, this fits in to what they’ve learnt thus far? Is this consumer theory? Producer theory? Information asymmetry? All of the above? And more? Motivating students to learn about their (Hart and Holmstrom’s) work ought to be the easiest thing in the world, given that most of them will be on the labor market soon, but I very much doubt if this comes up as a point of even cursory discussion in an intro micro course. (And this goes without saying, if I’m wrong about this, yay!)

Paul Seabright brings up a list of other topics besides the example I just mentioned: two-sided markets, risk analysis, inter-temporal choice, market signaling, financial-market microstructure, optimal taxation, and mechanism design.

In addition, he also brings up applications of microeconomic theory: antitrust analysis, auction design, taxation, environmental policy, and industrial and financial regulation, and speaks about how in terms of both the topics and their applications, econ students are being under-served.

The whole point of learning economics (micro or macro, or anything else, for that matter) is to be able to apply what you’ve learnt to the real world. An education in economics should, in other words, help you see the world like an economist does. And that would mean that one should be able to appreciate the world for what what works within it, and one should be able to identify problems with the world that economic theory might help you solve.

Unfortunately, the point of a micro course, more often than not, is simply to be able to solve enough problems so that one can score well in the semester end examination.

Which reminds me: I don’t think they learn about Michael Spence’s work either!


This really deserves a separate post, what I’m about to say next. But if I had to distill my post down to its essence: there are two ways to teach economics.

  1. Now that we’ve finished going through the textbook, let’s try and figure out if certain things about the world become more understandable.
  2. Here’s what the world looks like, and here is how economic theory helps.

The latter approach, in my experience, is so much better.

Derek Thompson on Unit Economics, Inflation and Start-Ups

By the way, he is worth following on Twitter, and you might want to sign up for his newsletter too.

On The Economics of Line Cutting

Robin Hanson is a person whose books, blog posts and tweets are all worth reading. You may not agree with him, some of his questions may raise your hackles, and some of his conclusions may make you want to tear your hair out, but those (to me) are arguments in his favor.

In a recent blogpost, Robin Hanson thinks about the economics of line cutting. This is a topic of some controversy at our household, for I and my wife have very different approaches to requests from strangers to cut in, while we are waiting in line.

My wife adopts a very belligerent stance, and is not at all open to the idea of allowing anybody to cut the line in front of her. It’s just too bad, she informs them, that you’re pressed for time, but my time is equally valuable. There is a line for a reason, she goes on to say, and surely it cannot be the case that our time (all those who are waiting in line) is less valuable. So please, she firmly suggests, get in line and wait for your turn.

I, on the other hand, am all about grimacing and waving the intruder ahead. I might shake my head and mutter under my breath about the unfairness of it all, but I’m willing to let people get ahead of me, especially so if they seem to be particularly harried.

Robin Hanson has some ‘advice’ for me:

While we like to claim that we are being nice, I suggest that we are avoiding confrontation. When someone makes an apparently aggressive move at our expense, we can either oppose them and risk a confrontation, or give in and avoid confrontation. Giving in is much easier for us when we have the excuse of how doing so is in fact us being nice.
We will often let people walk all over us as long as we can pretend we are thereby being nice. Even those tasked with enforcing rules against line cutting prefer to avoid confrontation. We all somehow seem to embrace the norm that those willing to risk confrontation should get their way, even if at others’ expense. We accept the dominance of the willing to try to dominate.

https://www.overcomingbias.com/2022/06/why-we-let-folks-cut-in-line.html

It is very hard to be objective about these things, but I do think it is likely that I am letting a person cut ahead of me because I willing to pay with my time to avoid confrontation. Don’t get me wrong, I would love it if I am willing to let people get ahead because I just am such a wonderful guy, but it is true to that I will go to great lengths to avoid confrontation.


But enough pop psychology about me – the reason I bring this blog post up (and my willingness to experience inconvenience to avoid confrontation) is to highlight an important lesson: costs and benefits apply to everything in life, not just monetary concepts.

Your choices (all of them, across all dimensions) come with costs and with benefits. Not all of them need have pecuniary consequences (that’s just fancy pants English for ‘related to money’). In fact, most of them will not have direct pecuniary consequences.

But once you realize that money itself is the means to an end, and not an end in itself, you begin to realize that you need to start thinking about costs and benefits in a much broader way than you have thus far – and that economics is about much more than ‘just’ money.

And so, yes, one can (and should!) think about the economics of line cutting.


I hope you never ask to cut ahead of me in a line, but if you see me grimacing, know that I would much rather that you didn’t, but I value my peace and quiet more than I do the two minutes that I will save. Or, at any rate, that’s my current equilibrium.

Who knows what the future will bring, eh?

On Starting Salaries

I joined Genpact as a data analyst in the year 2006, fresh out of college. Genpact was one of the few firms that had visited our campus for recruitment that year, and I was lucky enough to be “placed” along with three other batchmates.

My starting salary? 3.75 lakh rupees, or INR 375,000/-.

I remember thinking how princely an amount this was back then, and I couldn’t for the life of me figure out how I could possibly spend whatever amount I got on a monthly basis. Of course, life very quickly taught me the same lesson that it has taught everybody else – so it goes.

But the reason I bring this up is because of a Finshots write-up that’s been shared with me a fair few times this past week:

₹3.6 lakhs
That was the typical salary paid out to a fresher in 2010 when they entered one of India’s top IT companies. Think — TCS, Infosys, HCL, and Wipro.
A decade later, they were still being paid roughly the same sum.
So technically, if you were to take into account inflation, freshers in 2020 were far worse than their counterparts back in 2010. And the salary hikes weren’t particularly enticing too.

https://finshots.in/archive/it-firms-great-resignation/

I’m not sure where they got the data from, but anecdotally, this sounds about right. I’ve been in charge of placements at the Gokhale Institute, where I work, for about four years now, and while we’ve managed to get firms on campus that pay substantially more, starting salaries for most firms at the entry level are at about this number, more or less.

Which, as the Finshots newsletter goes on to point out, is ridiculously low for 2022. And why might this be so?

Well, two ways to think about it. First, as the newsletter itself points out, it’s simple economics. There’s excess supply.

You see, India produces roughly 1.5 million engineering graduates every year. And IT firms hire around 200,000 people every year. This means the effective pool of applicants remains sizeable and IT companies continue to be spoilt for choice. Even others attributed it to cartelization, alleging that IT companies banded together to deliberately suppress salaries. But despite what you want to believe, the bottom line remains the same — Entry-level salaries simply did not budge a lot in the past decade and IT graduates were getting a bit angsty.

https://finshots.in/archive/it-firms-great-resignation/

It’s worth learning more about economics to help yourself understand what terms such as excess supply, homogenous goods, elasticity, cartelization, inefficient labor markets mean, because they help you understand why starting salaries are so low. Search for these terms online, on this blog, or begin with MRU videos, but help yourself by learning about these concepts if you are unfamiliar with them.

Or watch AIB videos!

If you ask me, do both. It’s a great way to learn econ theory and have a bit of fun.


But as the newsletter goes on to point out, things are changing, and they say this is because of three reasons: increased attrition, greater recruitment by start-ups and burnout from the pandemic. Each of three, I should add are inter-related, but I broadly agree with their explanation.

Average salaries are up, firms are paying more, and it’s a great time to be out there looking for a job. But, as the conclusion of the newsletter points out, it would seem that there is a recession looming on the horizon, and that may drag starting salaries back to square one.

How does one find out about the probability of a recession? Well, there’s lots of ways, but without being too meta, keep an eye out for the kind of questions that are being asked about the macroeconomic situation:

One data point doesn’t add up to much, I’ll admit, but there’s other ways to keep yourself abreast of the situation:

https://trends.google.com/trends/explore?q=recession&geo=IN

Or, once again, run searches online (this time for macroeconomics), or on this blog, or begin with MRU videos. Or all of the above, if you ask me.

But trust me on this: a good intuitive grasp of basic economics concepts goes a very long way indeed. And when it comes to wages, we all have skin in the game. (Read the book, if you haven’t already).

No?

Joel Spolsky on Camels and Rubber Duckies

I spent two weeks in May teaching a bunch of extremely enthusiastic kids economics and statistics. When I say extremely, I am not exaggerating. Somebody said their raised hands in response to questions that were asked in class were akin to popcorn going off in a pressure cooker, and I assure you that this is not hyperbole.

And when I say kids, I’m not exaggerating either. The youngest was in the 8th grade or standard, and the oldest was just about to enter their tenth grade/standard. Anyways, a lot of fun was had, and I hope I get to do this again.


I taught the kids two different one week long courses. One was on economics, and the other was on statistics. But along with these two courses, there were lots of other courses on offer, and one of them happened to be on AI/ML, taught by the excellent Navin Kabra. People like Navin can single handedly present excellent arguments for remaining on Twitter, and I would strongly recommend that you follow him if you are on Twitter.

During one of the many excellent conversations I had with him, he brought up an essay, and asked me if I had read it. The title is “Camels and Rubber Duckies“, and I hadn’t read it. But with a title like that, how could I keep away from it?

It’s a wonderful read, and I would strongly encourage you to read it, no matter how good your microeconomics basics are. It is engagingly written, liberally sprinkled with oddball humor, and explains a lot of concepts in microeconomics without making the subject boring. And trust me, this is difficult to do.

Here are my notes for having read it:

  1. Follow along with a spreadsheet and try and run the simple exercises yourself.
  2. He actually uses the word Visicalc, which is a lovely little rabbit hole in its own right
  3. The old Excel charts generate so much nostalgia. I’d forgotten the dull as death grey backgrounds, and the horribly jarring pink and blue colors.
  4. The law of demand, the calculation of profits, the maximization of profits, the meaning of consumer surplus, segmentation, inelastic demand, coupons, opportunity costs – and best of all, real world problems that occur when it comes to pricing software, all have been wonderfully explained.
  5. Focus groups and market research are also explained intuitively
  6. I realize this is a post from 2004, but he talks of RSS feeds and RSS readers! I shall use this opportunity to once again lament the passing away of Google Reader, the best social networking site cum RSS reader there ever was.
  7. Besides writing about camels and rubber duckies to help explain economics, he’s also come up with some products you’ve heard of, such as Trello, or Stack Overflow. Joel Spolsky is a person you want to learn more about.