The Solow Model in Action, Again

I’ve written many blogposts about the Solow Model in the past, and it remains one of my favorite workhorse models to teach at an introductory level. There are problems with the model, to be sure, and much better, updated versions are available. But if you want a very simple, but very powerful way of looking at the world, you could do a lot worse than the Solow Model.

Read my old posts about the Solow Model, if you like, or watch this video, or consider this description of the Solow Model that ChatGPT4 came up with:

The Solow Model is the lively symphony of an economy, showcasing how savings, population growth, technology, and the tune of institutions together shape its rhythm, while the constant drumbeat of depreciation subtly dictates the tempo of this economic dance.

By the way, if you’re wondering, this is the prompt that I used:

“Give me a one sentence description of the Solow model. The sentence must be short, in simple english, and written in a catchy style, but it must also be correct, thorough and succinct”

I wasn’t happy with it’s first pass answer, so I gave it an additional prompt: “Make it slightly longer if you need to, but the fact that institutions matter must also come through”, and the professor in me couldn’t resist one final prod: “And shouldn’t you be mentioning depreciation?”

And if you’ve seen the video, you’ll probably agree that ChatGPT4 has done a reasonably good job. But what is the point? The point is that being familiar with the Solow Model helps you understand why this chart is such a big problem:

What is the rhythm of the Japanese economy? One should take a metaphor only so far, but it does seem as if the rhythm is a little slow, no? And why is it slow? Well, one of the reasons is that population growth has been slowing down a fair bit in Japan:

In fact, as you probably can tell, it’s not just been slowing down – it’s actually declining!

And it’s not just Japan. Take a look at Italy, South Korea and Singapore:

And ask yourself what the future holds for these countries:

Italy and Japan, in particular, are the poster pensioners for demographic decline and its economic consequences. In both countries the fertility rate (the number of children a typical woman will have over her lifetime) fell below 2.1 in the 1970s. That level is known as the replacement rate, since it keeps a population stable over time. Anything lower will eventually lead to a declining population, something both Italy and Japan have suffered for about a decade. The median Italian is now 47; the median Japanese 49. Earlier this year, Kishida Fumio, Japan’s prime minister, warned that the country is “on the brink of being unable to maintain social functions” because of its baby bust.
But Italy and Japan are no longer the most extreme examples of demographic decline. In 2022 South Korea had a fertility rate of just 0.8. A rate below one means that the next generation will be less than half the size of its parents’. As recently as 2012 the un projected that South Korea’s population would shrink by only a fifth or so by the end of the century, from 52m today to 41m by 2100. More recent forecasts, however, suggest that the population will fall by more than half over the same period, to just 24m

So what?

Well, so the following:

  • Older people in your country will mean rising health expenditures
  • It will also mean lesser people of working age
  • More people drawing out of your pension schemes, and not enough young folks putting money in to them
  • Smaller workforce, which means lesser economic output, but also lesser patents – among other things

Are you tempted to laugh this off and say “Hah! There’s 1.4 billion of us, we don’t need to worry about this”? Consider China:

…the number of Chinese aged between 21 and 30 has already fallen from 232m at its peak in 2012 to 181m in 2021. The decline will accelerate rapidly in the 2040s, leaving China with fewer than 100m people in the same pool in the mid-2050s.

Take a look at the same chart as earlier, but now with only China and India added in:

Ask yourself: how much longer before we find ourselves where China is likely to be ten years from now? Before we start to see a rapid decline in young people of working age? I’d say we have about thirty years to go – around 2050 would be a safe guess. Note that demographics is hard, and forecasting what a country’s demographics are going to look like is even harder – all of which is to say that this is at best an educated guess on my part.

But if you are, say, in your twenties right now, you’re looking at retiring at around that mark, or a little later.

What do you think India is going to look like then? And what are we doing about it?

The Solow Model remains underrated!

An Economist Talks About PowerPoint

Not me, I hasten to add, but Tim Taylor.

He published some days ago a wonderful little blogpost, commemorating the 20th anniversary of an essay called “The Cognitive Style of PowerPoint: Pitching Out Corrupts Within“. It’s not a short essay, at 25 pages, but it is remarkably well written, full of lovely little anecdotes.

For example, did you know that Richard Feynman has a rant about bullet points?

“Then we learned about “bullets”—little black circles in front of phrases that were supposed to summarize things. There was one after another of these little goddamn bullets in our briefing books and on slides”

Both the essay and the blogpost are full of lovely little anecdotes and points such as these. I especially loved Tim’s concluding paragraph:

I just think we would all be better off with slide presentations that have fewer bullet points, fewer pages jam-packed with words, and fewer detailed numerical tables that can’t be read by anyone more than 30 feet away. Presentations impose costs of time and attention on others. In successful presentations, your attention is attracted, rather than taxed, and the entire time feels well-spent.

Having sat through my fair share of presentations in both the corporate world and in the world of academia, I can attest to the fact that in “unsuccessful” presentations, one’s attention is taxed. Mine has been taxed far too often at far too onerous rates The applicability of the Laffer Curve to the real world might remain a matter of debate, but I have empirical evidence about its relevance to sitting through PowerPoint presentations.

Do read both, Tim’s blogpost and Tufte’s essay – and here are my additions to both of their suggestions:

  1. Consider doing away with presentations entirely as often as you can. You can replace it, as Tufte’s anecdote about Gerstner suggests, with a conversation, or you can go Amazon style and have people write brief notes instead. But avoid presentations when possible.
  2. Do. Not. Read. Out. The. Slide.
    I am a person capable of reading what is in front of me. Not everybody in your audience might be able to do so at all times, of course, but working on the assumption that they are, please don’t read out the damn slide.
  3. Answer the “So What?” question. The title of the slide should not just describe what is in the rest of the slide, but it should also answer the question “So What?”. Gokul Rajaram’s LinkedIn post, which Tim links to, speaks about titles in the second bullet point: “The title does most of the heavy lifting, which means it cannot be passive. It must be action oriented. Eg: not “Subscriber retention” but “Subscribers continue to be retained strongly”. even better “Net revenue retention continues to be > 100%”.”
    I’d go a step beyond and say it could be something like “Net Revenue Retention targets continue to be exceeded at >100% Levels”. Or “need to remain at”, or “get even better than” – or whatever needs to be done as a consequence of the data shown in the slide.
  4. A presentation is a complement, not a substitute. It is there to help you do your job better, it is not there to do the job instead of you. Use it as a reference to help you deliver your talk later. Use it as an inspiration for you to take off on whatever point you want to make. Use it to convey a feeling, a thought, or an emotion (and this is why images are better than words), but don’t use it as a way to for you to be lazy on stage. Quite the opposite, actually.
  5. Make sure that there is a double thank you moment at the end of your presentation. And I should be more specific – make sure that you thank the audience for having listened to you, and make sure that they end up thanking you for having delivered the presentation. Not for finally ending it.

Not Quite As Simple As One Would Like It To Be

Simple economic analysis can take you a very long way.

Not only do I hold this statement to be true, but it is one of the cornerstones of this blog. The idea that at its heart, economics is about a few important principles, and that the judicious application of these principles can take you a very long way – this idea has motivated nearly all of my writing on this blog.

But as with everything else in life, so also with this alluring, tempting idea. Every now and then, simple economic analysis can only take you so far, and you must wheel out the heavy artillery to make further progress.

In yesterday’s video, we heard John Cochrane talk about how if there is a problem, look first for the regulation that caused it. And there is more than an inconvenient iota of truth in that assertion. But between too much regulation and too little regulation lies that slippery little point of the optimum amount of regulation. Nobody knows exactly where that point lies, and it moves once you get close to it, but it is very much there. Finding it is all but impossible. Keeping it in sight once you find it is impossible.

But it’s there all right.

Consider housing.

The conventional wisdom has been that if restrictive zoning regulations are removed, ease of getting building and other permissions simplified, and taxes on construction lowered, it will increase the stock of housing of all kinds including affordable housing. This, in turn, will lead to lowering of house prices – “richer renters trade up into new luxe units, starting a chain of move-ins and move-outs that lower prices for modest homes”. This can be called the “trickle-down” theory of housing affordability. Instead, I’m inclined to believe that a meaningful dent in the housing affordability issue in the medium-term has to involve an increased supply of large volumes of public (or heavily subsidised) housing.

You’ll meet economists who tell you that housing can only be solved by removing as much regulation as possible. You’ll meet other economists who tell you that public housing is the only solution to the problem. And you’ll get bloggers like me, who will tell you that the truth lies somewhere in the middle. But by referring to Gulzar Natarajan’s (GN) excellent blogpost, let me explain to you why I think so:

  1. People in India think like much of the rest of the world, and are inclined to view housing as both a place to stay, but also as an investment asset. These are GN’s words, not mine, taken more or less directly from his blogpost, but they are worth repeating here. Yes the demand for housing is more than the supply, in many cities the world over, but that demand itself rather complicated to think about.
  2. For example, some people buy a house to stay in it. Others buy a house in order to sell it at a high price later, without ever having stayed in it. A Knight-Frank report form 2019 tells us, for example, that 25% of all residential houses in Gurugram are vacant. That number is almost 22% for Pune, 15% for Mumbai and about 10% or so for Ahmedabad, Bengaluru and Delhi.
  3. Who is likely to be able to afford to buy a house as an investment?
  4. Which types of houses will have higher margins?
  5. So the supply of what type of houses will go up?
  6. The answers most likely to be correct for the three questions above are “More affluent folks | luxury housing as opposed to affordable housing | Luxury housing”.
  7. By the way, Noah Smith has an excellent post (referenced by GN in his blogpost) that goes against the case I’m building here. It is, hopefully, free to read, and the link is here. Here’s an excerpt: “…you could probably get them to admit that if we built 10 market-rate (“luxury”) apartments for every resident of Austin, most of them wouldn’t get filled, and landlords would be forced to slash prices, and regular folks would have cheap apartments to live in”
  8. That is, Noah is saying that an increase in supply will get prices down eventually. And with reference to the excerpt, it’s not just “them” – I will also agree that prices will come down eventually. How long will the “eventually” take is one good question to ask in response. That is, how long before the price of those unoccupied apartments will come down? Will the rate of reduction be the same for all cities in all countries? Will class distinctions matter, for example? What about religion, what about caste and what about availability and affordability of public transport?
  9. Or as GN puts it: “We need to step back here a little bit. The starting conditions of the cities under consideration matter. For example, how segmented is the housing market, how do the prices in the different segments compare, what’s the likely profit differential between higher-end and marginal housing, what’s the marginal demand for higher end housing, how does it compare with the supply, how do the starting prices for each housing segment compare with the annual incomes of different population groups etc. Differences in each can generate entirely different outcomes.”
  10. There are many points to make over here, related to pricing, regulations, urbanization, public transport, urban sociology, and much else besides. But for the purposes of this blog post, I’ll leave you with just this one thought: economic models need to be rooted in the lived reality of whichever specific region you are modeling for. Noah isn’t wrong in his post, and neither is GN. But the “correctness” of their argument is very much dependent on whether they’re talking about Bombay or Austin.
  11. Context matters, in other words, and a good first pass answer as an economist always is “Well, that depends.”

Incentives Matter | What Are You Optimizing For?

Please, listen to the whole thing, but my EFE antenna really started twitching at around the 7:45 mark.

The truth lies somewhere in the middle, so I don’t agree with John Cochrane 100%, but as always, definitely worth a listen:

Econ Mentoring Via Twitter

As some of you may have noticed, I’m coming back from a rather long break from blogging. But it wasn’t just a break from blogging, it was also a break from social media. And there’s good news and there’s better news.

The good news is that I’m back to writing here. Well, good for me, at any rate – your mileage may vary. And the better news? I haven’t once felt like going back to social media. Facebook I gave up on a long time ago, while LinkedIn is a place I log in once every week or so.

But Twitter? Ah, Twitter. What a website it is. And yes, still is. Sure there’s outrage, and sure there is outrage about the outrage. And every now and then (and more now and less then, if you ask me) there is outrage about the outrage about the outrage. And there’s yelling, and name-calling, and abuse, and all the rest of it. You know the drill.

But there still exist parts of Twitter where people happily ignore everything else, and continue to cheerfully share facts, information, thoughts, ruminations and reflections. The challenge, of course, is to learn to happily stew about in these parts, rather than muck about in OutrageLand.

And since I have been unable to do as much, I currently snoop about on Twitter anonymously, looking for interesting nuggets, helpful threads, fascinating facts and the like, resolutely ignoring the call of the controversial.

All of which is a very roundabout way of saying two things:

  1. If you’ve tweeted at me and I haven’t responded, my apologies, but don’t hold your breath.
  2. Twitter threads on Saturdays will still continue, and I hope to get better at snooping around anonymously.

And so on to today’s Twitter thread:

If you know of mentoring programs from econ students the world over, please do share with the rest of us 🙂

Missing in Action Ought Not To Be Missing in Action

Missing in Action is the name of the excellent book on public policy written by Pranay Kotasthane and Raghu Sanjaylal Jaitley. I had reviewed it earlier this year, and my recommendation that you read the book is even more forceful now than it was in January.

Why? What has changed between now and January 2023?

Well, lots of things, as is usually the case with the passage of time. But as regards this book, what changed was that I got to put parts of the book through a most stringent test: I used it as a textbook in a course on public policy. And not just any course on public policy – this was a course taught to 13-15 year olds.

It’s truly special, this cohort. They are young enough to not have their curiousity trampled upon by higher education, and old enough to be able to grasp ideas and concepts fairly quickly. Better still, they are old enough to draw parallels between what they’re learning and what they already know. And best of all, they do not hesitate to ask basic questions that adults would be embarrassed to ask.

“Wait, that makes no sense”, was a sentence I heard very often while teaching these students, and I reveled in how it was said without shame, worry or pretense. It simply was what it was: an admission that what had been heard did not make any sense, with an implicit demand to explain further.

And so for teaching these students, a musty old textbook full of diagrams, definitions and pompous declarations would make no sense. It would have to be a book that was rigorous in terms of its understanding, thorough in terms of its explanations, and light in terms of its treatment. And as I’ve explained in my review, this book does a very good job on all counts.

One reason it does so is because the book is very clear about what it is not. As they say in their introduction to the book, the authors are clear that this is not an academic work, not is it a work of journalism.

The book has, instead, stories. And in order to make sense of these stories, the authors make liberal (if you’ll forgive the pun) use of public policy frameworks. We learn about public policy, in other words, by looking at the world and by wondering why it seems to make no sense. In each chapter, the authors ride unfailingly to the rescue, armed only with their obviously wide reading and their deep expertise in public policy. One of my students made the observation that their “secret superpower” was sarcasm, and I wholeheartedly agree.

But having taught the course, I came away with a renewed conviction that public policy should be taught to as many people as possible, and at as early an age as possible.

Why as many people as possible? That’s an easy one to answer, and the authors of the book have themselves provided an answer to this question. It is because an India familiar with public policy will likely have three important features:

  1. Our governments are likely to be more accountable, since their policies will be better scrutinized than before
  2. We ourselves will be able to sharpen our demands from our governments
  3. A better understanding of public policy will raise the level of public discourse

The cynic in me will not hold his breath for the first two, and is inclined to burst into laughter as regards the third. But even he will admit that an India that is more familiar with public policy certainly won’t make things worse. And these days, I’ll settle for that.

And why at as early an age as possible? Because I spent the better part of a day walking my students through the eight ‘principles’ of public policy, and am convinced that my students are better equipped to make sense of the world around them.

Note that I said “are better equipped to”, and not “are now able to”. I don’t think most adults are able to make sense of all that is around them, in part because of our own biases, limitations and limited understanding. But also because the world around is both more complicated and grows ever more so with every passing year.

But if a book, and eight principles within a book, can help us become aware of our biases, limitations and limited understanding – and if the basic framework of public policy can make the world seem a little less complicated – well then, it is probably worth it. No?

So just these eight principles. That’d be my wish when it comes to the teaching of public policy to folks currently studying in school. And if, for having learnt these eight principles, they decide to venture forth in search of new adventures in the realm of public policy, well then. Kya hi baat hai.

Or if I could be allowed to borrow a phrase from Pranay: Mogambo khush hua.

Speaking of borrowing from Pranay, these are the eight principles:

  1. Unlearn what you know, and begin your analysis with a clean slate
  2. Good intentions do not guarantee good policies
  3. Sure India’s implementation of policies isn’t great, but sometimes the policies themselves aren’t great either
  4. Change is permanent
  5. There’s no public policy without economics. Other disciplines matter – a lot – but at the heart of public policy lies economic theory.
  6. There’s no escaping politics.
  7. There’s no good or bad policy; only better or worse outcomes
  8. One policy should target only one objective

I hope you’re curious about what each of these mean, and I hope that this curiosity translates into you buying the book and reading it. If you like, you can move on from this blogpost to this podcast, and then on to the book.

Especially if you happen to be in school. Please, pretty please, do read the book. And especially if you are in school, please feel free to email me with any questions you may have about what you find in the book.

I’m already missing being told “Wait, that makes no sense”, you see.

The What and The How

A really long break, I know, but I have half a good excuse for a small chunk of it.

For three weeks this past month, I taught a bunch of kids three different courses. The three courses had some overlap in terms of the students who attended each week, and a lot of overlap in terms of how the three courses covered the subject matter, but as with all of the previous times that I have taught in this program, I had a blast.

Much more importantly, so did the students have a blast. Best as I could tell, at any rate.

One of the reasons they had a blast was because I used a lot of interactive tools, and this was one such:

Click on the link and try it out for yourself. It is, as the support page says, “a fast, powerful climate simulation tool”. And so we had fun trying to see what would happen if, say, coal was taxed more heavily. Or if, say, the transport sector saw much better rates of electrification. And so on and so forth. Have fun playing around with different scenarios, for that’s the point of this tool.

But after a lot of fun was had, and after a lot of scenarios were built, I had to put a dampener on the session. “This”, I gravely intoned, “is not public policy”.

What we have done, I went on to g.i., is build out scenarios. And while the best case scenario is a very pleasant thing to contemplate (relatively speaking, at any rate), it isn’t necessarily achievable.

In other words (still g.i.’ing, naturally), we may well know where we have to reach. Public policy, unfortunately, concerns itself with not just what the best scenario is, but also how realistic it is, and whether it is achievable at all in the first place.

In other words, “How > What” when it comes to public policy. Not always, and not necessarily, but it is a rather good heuristic when it comes to thinking about the subject.

The thing with teaching young (really young – I had the privilege of teaching 13-15 year olds) students is that you must learn to wait. You may know the next topic of discussion and you may know the correct answer to a question you yourself have asked, but you need to wait. Wait for them to process what you’ve said, reason things through, and then ask the inevitable question that will take the discussion forward.

And so I waited.

Until one of them asked, “But wait. Are you saying that this scenario is not achievable?”

And that allowed me to neatly segue into an article that – and let me be frank here – most adults would find boring. That’s not (at all) a slight on the topic, let alone the author. But quite a few folks would probably choose to skip over an article whose headline says “Free electricity ruined discoms. Now they will cause trouble in transition to renewables“. Especially when the subheading goes “When high tariff paying customers leave, discom finances will further deteriorate. Discoms, therefore, find ways to not allow open access to keep customers captive”.

Please do read the whole thing, but I’ve quoted the most important excerpt below:

If C&I (commercial and industrial) customers have ESG (environmental, social, and governance) mandates, they may prefer buying electricity from the renewable generating companies. As per the Electricity Act, distribution companies are required to grant “open access” when customers (largely C&I) and generating companies privately negotiate a deal, and want to use the network for transport of electricity. When the high tariff paying C&I customers leave, discom finances further deteriorate. Discoms, therefore, find ways to not allow open access to keep C&I customers captive. (Please note that abbreviations have been expanded to make this quote easier to understand)

Again, a wait, post an explanation of what the article was about.

Comprehension, horror and outrage all dawned at more or less the same rate on all the faces.


“Hang on a minute!”

“So you’re saying that…”

They had realized, for themselves, that the public policy re:electricity in our country was such that we end up making it difficult for our commercial and industrial users to switch to renewables. And why do we do so? Because this is the only segment (for the most part) that pays over and above their fair share. And so while we know what is required for a greener world, we choose to prioritize more greenbacks in our wallets instead.

With good reason, discoms might say, and they have a point. Well, in a manner of speaking. But you do see what I meant when I told my students that building out the scenario was the easy bit. Actually getting to a place where one can begin to implement all these policies?

Ah, what a very, very long road that is.

An introduction to public policy, if you ask me, should be taught to everybody while they are in school. That sentence deserves to be expanded into an entire blogpost, which is what I plan to do next.

Put Me Out of a Job – 2

Let’s begin with the second class today. Your outline mentions the topic “Time Management and Opportunity Cost”. Before we begin the class, outline a definition of both terms, and explain their importance to my life. When you focus on the importance of time management to my life, make sure that you remember I am an eighteen year old. Why should I bother with managing my time? I have my entire life ahead of me – time isn’t a constraint, surely? When then do I need to manage it?
Once you explain your answer to these questions, proceed with the outline as discussed, as per the format I have asked for.

You might think this (time management and opportunity cost) to be a weird topic for a second class in a course called “Principles of Economics”. You would certainly think it to be unconventional. Not the latter half of the topic – opportunity costs – but the first one. What does time management have to do with economics? Well, think of it this way – if you are an Indian student who has learnt economics, you have almost certainly come across Lionel Robbins’ definition, and have most likely memorized it back then.

Here it is: the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.

What is more scarce than time? We all have a limited amount of time, and we all have ends to achieve. The ends we would like to achieve in our lives are much more than the time that is afforded to us, and so we must choose which of these ends to pursue, and which to sacrifice. That’s a pretty good, and if you ask me, useful way to understand opportunity costs. The weirdness, or the unconventional choice (to some) of the topic, is a direct consequence of my request to ChatGPT from yesterday’s post:

Optimize for helping me understand the principles and their applicability to various aspects of my life (professional, personal etc), and it is fine if the outline doesn’t match what is usually taught in introductory economics textbooks. Given this, would you like to change your outline in any way? If yes, please show me the new outline. If no, please begin with the first class.

I am seeking to learn economics not to write an examination at the end of the semester in a college or university with this course. I am seeking, instead, to learn economics in order to apply it to various aspects of my life. Of course, as a student enrolled in a university, you may seek to optimize your learning geared towards doing well in a examination at the end of the semester, and that’s fine. Just let ChatGPT know accordingly, that’s all:

A minor tangent before we get back to our course. What if I asked you to change your course outline for these thirty classes to help me write an examination in an Indian undergraduate course? What would the new outline look like? In your answer, show me both outlines together, per lecture. That is, the first line in the description of lecture 1 (out of 30) should be your original lecture, and the second line should be the course tweaked for doing well in an examination, rather than applicability to various aspects of my life. Ditto for the second course, and so on and so forth for all thirty.

I won’t show you the whole output, but simply how the second lecture’s outline has changed:

Here’s a revised outline for the thirty lectures, with the original lectures designed for applicability to various aspects of life (Lecture A) and the modified lectures tailored to help you succeed in an Indian undergraduate economics course (Lecture B):
Lecture A: Time Management and Opportunity Cost
Lecture B: Opportunity Cost: Definition, Types, and Examples

ChatGPT-4’s Output (in part)

I know which one I prefer, and why. The good news, as a student, is that you can do both! Learn in order to score well in an examination, and also learn in order to figure out how to apply economics better in the case of your own life. Why should the two be different? Ah, some questions you should reflect upon, rather than ask ChatGPT.

Anyway, back to our lecture du jour. I asked ChatGPT to explain why it chose time management, and I do not think I would have asked that question as an eighteen year old. The older you get, the more aware you are of how limited your time is. And at least in my own case, the converse is also true. I count this as a mark in my favor – that while a good prompt may get a student going, said student will still need help and advice on an ongoing basis.

So far, at any rate.

Further proof of that fact that I’m not out of a job, just yet, is below. The context is that I read the answer, and felt it to be incomplete. So I prodded it a bit, and then just a little bit more:

I’ve often read the phrase “all costs are opportunity costs”. Please explain what this means. Remember that I know no economics, and as usual, give me one example from the Mahabharata, and one from a real-life situation

My professor wondered why the word “TINSTAAFL” hasn’t come up in your answers yet. I didn’t even know this was a word! Is he joking, or is this word relevant to what you’re telling me right now?

To be clear, it isn’t so much about the phrase TINSTAAFL, as it was about the fact that I felt its explanation to be incomplete. This prompted me (no pun intended) to ask it to be more thorough:

I have an ongoing request. I’m looking to make my professors job as easy as possible, or even make him, in some sense, redundant. Optimize your answer for thoroughness, and if you think you can’t fit all of what you want to say in a single output, end with a line that says, “I can tell you more, please let me know if you’re interested to know even more” This will always be applicable in our conversations.
Now, back to the second lecture’s outline. Expand upon the three sub-points from the broad contours. I am particularly interested in the third one, so give more details, explanations and background in the case of “recognizing and evaluating opportunity costs in decision making”

This is an important lesson in and of itself. Feel free to tell ChatGPT to give more (or less) detail, or ask it to modify how it gives you the answer (more examples | simpler language | write like person X | show your output as a debate between person X and person Y). Get your “teacher” to be the kind of teacher that you like to learn from!

With regard to your explanation of “Recognizing and evaluating opportunity costs in decision-making”, I’m confused about how to think about short term and long term factors while making my choices, and the short term and long term consequences of my choices. How should I think about this, what framework should I use, and is there an underlying principle at work here that I should know about?

I count this as a pretty important miss on ChatGPT’s part. My personal opinion is that you haven’t fully explained opportunity costs without talking about the importance of how your evaluation of opportunity costs changes given different time horizons. Time matters! ChatGPT actually agrees with me (see below), but only after prodding. And this after making explicit the fact that I was interested in learning about time horizons! And so I asked it again:

Is it useful to think of time preference as a separate principle of economics? More broadly speaking, how should a student of economics think about time preferences? Give me answers from a theoretical perspective, but also from an application perspective.

I’m two days in, where I’m the “student” and ChatGPT my teacher. Today’s class wasn’t great. I don’t think ChatGPT’s output was good enough to stand on its own, and it needed additional prompts to deliver what I would consider to be a good introduction to the concept of opportunity costs, its many nuances and its many applications. It wasn’t bad, but it was far from being good, in my opinion.

Should I take this as a sign that I need to get better at writing prompts, or should I take this as a sign that AI isn’t good enough to replace me yet? How should I change my mental model about whether the average student in a typical college can learn better from AI?

If you are a regular reader of EFE, you know what’s coming next: the truth always lies somewhere in the middle.I need to get better at writing prompts, yes, but also AI isn’t good enough to replace me yet. Both of these things will change over time, of course, but for the moment, less than ten percent into the course, I am inclined to think that I am not out of a job, just yet.

And even better, the complements over substitutes argument just got stronger – I’ll be a much better teacher of a course such as this the next time I get to teach it. Tomorrow we tackle “Supply and Demand: Basics and Market Equilibrium”.

I’ll see you in class tomorrow!

Put Me Out of a Job – 1

Let’s say you’re a student who is going to start learning economics in the coming semester (starting July 2023). Let’s assume that you’ve never learnt economics in a classroom before, save for a brief introduction to it in high school. If you chose to learn from an LLM instead, how should you go about it?

Leave aside for the moment the question of whether you should be doing so or not. The question I seek to answer over many blog posts is whether you can do so or not. Whether or not this is a good idea for you depends in part on my abilities to add to the value that an LLM generates for you from such a course. And once these thirty (yes, thirty) blog posts are written out, I’ll write about my thoughts about whether a student still needs me in a classroom or not.

My current thinking is that I would still be needed. How much of this is hope, and how much dispassionate analysis is difficult to say right now. For that reason, I would like to tackle this problem at the end of this exercise. For the moment, I want to focus on helping you learn economics by teaching you how to learn it yourself, without the need for a human teacher (online or offline).

In each post, I’ll give you a series of prompts for that particular class. I will not always give you the output of these prompts – feel free to run them as they are, word for word, or tweak them as per your likes, fancies and hobbies.

My motivation in this series is twofold. One, to find out for myself just how much better ChatGPT is than me at teaching you principles of economics. Second, to help all of you realize that you ought to hold all your professors (myself included!) to a higher standard in the coming year. We have to do a better job than AI alone can, along all dimensions – let’s find out if we can.

Buckle up, here we go.

Here’s my first prompt:

Remember, LLM’s work best when you give really detailed prompts. Note the following:

  1. I began by giving some information about myself – my limitations as regards economics, where in the world I come from, and what my interests/hobbies/passions are.
  2. I specified what I’m looking to learn from the LLM.
  3. I specified the quantum of output required (thirty classes).
  4. I specified how broad the output should be.
  5. I specified how I would like the answer to be customized for me
    • I would like to learn about economics by relating it to what I like to read about in any case (use examples from the Mahabharata)
    • I would like to learn about economics by relating it to real life situations.
    • It is amazing to me, regardless of how many times I experience it, that it “gets” what I really mean in spite of having phrased my question using really bad grammar.
    • The specific examples aren’t the point, the idea is the point. Learn calculus by relating it to mandala art, for example. Learn history by relating it to dance forms. Learn geography by relating it to food from different parts of the world. A teacher in a classroom cannot possibly do this for all the students, because of the size of the class, and because a teacher cannot possibly know your hobby in as much detail as you can. Make good use of AI!
  6. Should the examples from the Mahabharata be chosen for how prominent the examples were in the text, or should they be chosen for their relevance to economics? My preference is for the latter, and I made sure the LLM knows this. Ditto for the real life examples.
  7. I ended with a meta-prompt, that will stay true for the next thirty (or more questions) – ask if I need to learn more, and only then proceed with the next class.

Should you copy this prompt, word for word? Of course not! For one, you may not want to learn economics, but rather a different subject. The underlying principles still holds. You may not like to read about the Mahabharata, for another. You may want only ten lectures, not thirty. Or you may want two hundred! Feel free to tweak the prompt to suit your requirements, but it helps to “get” how to go about thinking about the structure of the prompts. That’s the point.

I took a look at the outline of the thirty course lecture series it prepared for me, and it was not bad at all. But I had a follow-up request:

Now, you might think that you need to know economics in order to judge the output, and tweak your request. And sure, you’re right that it will help. But regardless, even if you cannot judge the quality of the output, surely you know enough about what and how you want to learn. My apologies for going all meta on you, but if you don’t know enough about the supply side of the market, surely you know what you would like as a consumer – at least in part. So feel free to help the LLM become a better teacher by telling it more about you.

It went ahead and gave me the refined output, and also the broad contours of the first class. Here are the broad contours of the first class:

Again, note that I am quite excited about how this class is shaping up, because if economics is, indeed, the study of how to get the most out of life, Arjuna’s choice to fight in the Kurukshetra war is an awesome way to get some really thought-provoking questions in for discussion. But this may not be your cup of tea – so feel free to brew your own cuppa of econ, by customizing it to what you like the most (Avengers? Cricket? RRR? Bharatnatyam? Junk food? Anime? Go for it!)

I did have follow-up questions:

And based upon its answer to this prompt, I had yet another clarificatory question:

Note that your conversation will be (I would go so far as to say should be) different. You will have different questions, different prompts, different things that make you curious. And that’s not just fine, that is the whole point. Depending on how carefully you read its output, and depending on how probing and detailed your questions are, you can keep just this first class going for a long, long time. How long? That’s up to you!

Here are two examples:

You can, of course, ask it to answer any (or all) of these five questions. Ask it to create ten (or twenty, or a hundred) instead – and as a student, assume that this is how us professors might well be “coming up” with questions for your tests, assignments and exams.

Here are more, and note how they get wilder (more random?) with each passing question:

In each of these cases, you don’t have to have trust in, or agree with, the answer given by the LLM. Treat the output as a way to get you to think more deeply, to challenge what has been said, to verify that the answers are correct, and to have further discussions with your peers and with your (human) teachers, whoever they may be.

Note to myself (and to other teachers of an introductory course about the principles of economics):

  1. How can we do a better job than this in the classroom…
    • Without using AI (we’re substitutes)?
    • By using AI (we’re complements)?
  2. What is missing from the LLM’s output (this is assuming you’ve tried these prompts or their variants)?
  3. What stops us from recommending that students do this in class on their own devices, and we observe, nudge and discuss some of the more interesting output with everybody? That is, how does teaching change in the coming semester?

Feedback is always welcome, but in the case of the next thirty posts, I think it is especially important. So please, do let me know what you think!

On Sludges

I had (and have) sympathy for Navin, but I have to confess that I did enjoy reading this tweet, because it is very much a teachable moment:

Why is this a teachable moment?

Because firms have an incentive to make it as difficult for you to “leave”. They make it as easy, painless and frictionless as possible for you to “join”, and they make it as difficult, painful and, well, friction-full as possible for you to leave.

Here’s Richard Thaler and Cass Sunstein on this phenomena:

Perhaps the most basic principle of good choice architecture is our mantra: make it easy. If you want to encourage some behaviour, figure out why people aren’t doing it already, and eliminate the barriers at a standing in their way. If you want people to obtain a driver’s licence or get vaccinated, make it simple for them, above all by increasing convenience.
Of course this principle has an obvious corollary: if you want to discourage some behaviour, make it harder by creating barriers. If you want to make it harder for people to vote, forbid voting by mail and early voting, and reduce the number of polling stations (and place them far away from public transportation stops). While you’re at it, try to make people spend hours in line before they can vote. If you don’t want people to immigrate to your country, make them fill out a lot of forms and wait for months for good news in the mail (not by email), and punish them for answering even a single question incorrectly. If you want to discourage poor people from getting economic benefits, require them to navigate a baffling website and to answer a large number of questions (including some that few people can easily understand).

Nudge, by Richard Thaler and Cass Sunstein, Chapter 8, pp 151, Kindle Edition

And they have a term for it too – sludge:

Any aspect of choice architecture consisting of friction that makes it harder for people to obtain an outcome that will make them better off (by their own lights).

Does not getting spam mails in his inbox make Navin better off, by his own lights?

Yes, of course!

Does the design of the unsubscribe (I’m being generous here) form add friction to the process of Navin obtaining this outcome?

Yes, of course!

That’s sludge in action.

And once you “see” it, you begin to spot it everywhere. Newspapers and magazines make it difficult for you to cancel your online subscriptions and banks make it difficult for you to file a complaint with the banking ombudsman, to give you just two examples. I’m sure you can think of many more from your own life, and Chapter 8 of the book Nudge has many, many other examples. Please read the whole chapter (and if you’re willing to humor me, the whole book).

And finally, this might resonate with people of a certain age (or maybe, even now, all ages?):

If you have the Monday blues, and now have an irresistible urge to drop everything else and watch the whole episode instead, it’s S04E04.

You’re welcome.