Well, maybe the present. It is difficult to tell these days, except in the realm of politics, which is clearly headed back to the past the whole world over.
What am I talking about when I talk about the lawyer and the secretary, you ask? Here’s my new favorite assistant, Claude 3 (Opus) with an explanation:
In his famous example, economist Paul Samuelson describes a skilled lawyer who is also an exceptionally fast typist. Even though the lawyer can type faster than their secretary, it still makes sense for the lawyer to focus on legal work and let the secretary handle the typing. This is because the lawyer’s time is much more valuably spent on legal tasks, while the secretary’s time is most effectively used for typing. By each focusing on what they do best relative to their other abilities, they can achieve more together than if they each split their time between both tasks.
This is, of course, the idea of comparative advantage, an idea that econ students meet quite frequently in their studies. I explain it to my students by telling them about my love for eating and cooking good food. Why then, I ask my students, should we have a cook at home?
The reason we have a cook at home is because paying the cook her salary is what makes us rich.
As I explain in the post I have linked to above, having a cook at home frees up my time to write about the fact that I have a cook at home. And while it is true that I love to cook, I get paid for using my skills as an economist, not for sautéing french beans (butter, salt and garlic, that’s it, and maybe parboil the beans first, if you like. Heavenly, I tell you).
Underpinning the idea of comparative advantage is the idea of opportunity cost. Every hour that I spend sautéing french beans is an hour that I am unable to spend on writing blogposts. The more beans I saute, the less blog posts I write.
So even though I am very good (even if I do say so myself) at sautéing beans, I am better at writing blog posts. Or at any rate, society is willing to pay me more for blog posts about comparative advantage than it is willing to pay me for sautéing beans.
So, comparative advantage and opportunity costs – topics we have covered in the past here at EFE, and repeatedly. Why do I talk about them today?
So anyway, because of comparative advantage, it’s possible that many of the jobs that humans do today will continue to be done by humans indefinitely, no matter how much better AIs are at those jobs. And it’s possible that humans will continue to be well-compensated for doing those same jobs.
In fact, if AI massively increases the total wealth of humankind, it’s possible that humans will be paid more and more for those jobs as time goes on. After all, if AI really does grow the economy by 10% or 20% a year, that’s going to lead to a fabulously wealthy society in a very short amount of time. If real per capita GDP goes to $10 million (in 2024 dollars), rich people aren’t going to think twice about shelling out $300 for a haircut or $2,000 for a doctor’s appointment. So wherever humans’ comparative advantage does happen to lie, it’s likely that in a society made super-rich by AI, it’ll be pretty well-paid.
There’s thoughtful analysis, simple (but not simplistic!) explainers and there’s even a section towards the end that would have raised Truman’s hackles. This section talks about real and pressing concerns regarding inequality and adjustment shocks (a la Autor), and other reasons why even the techno-optimists should pause to ponder.
Please do go and read the whole thing, and as always, if you happen to disagree with Noah’s take, please do let me know why.
My congratulations to you if you are unaware of what I’m going to talk about in this blogpost. And not just my congratulations, I will be envious of you as well. I aspire to reach your level of moksha one of these days, and please, tell me how you did it.
But here’s the background:
To solve for their dietary preferences, we are today, launching a “Pure Veg Mode" along with a “Pure Veg Fleet” on Zomato, for customers who have a 100% vegetarian dietary preference. pic.twitter.com/xzV9y9IQbU
The pure veg fleet not only delivers only pure vegetarian food from pure vegetarian restaurants, but was also going to get different uniforms, as you can see in the tweet above.
Which, of course, means we have to talk about Google Buzz.
When Google introduced Buzz, its answer to Facebook and Twitter, it hoped to get the service off to a fast start. New users of Buzz, which was added to Gmail on Tuesday, found themselves with a ready-made network of friends automatically selected by the company based on the people that each user communicated with most frequently through Google’s e-mail and chat services.
But what Google viewed as an obvious shortcut stirred up a beehive of angry critics. Many users bristled at what they considered an invasion of privacy, and they faulted the company for failing to ask permission before sharing a person’s Buzz contacts with a broad audience. For the last three days, Google has faced a firestorm of criticism on blogs and Web sites, and it has already been forced to alter some features of the service.
E-mail, it turns out, can hold many secrets, from the names of personal physicians and illicit lovers to the identities of whistle-blowers and antigovernment activists. And Google, so recently a hero to many people for threatening to leave China after hacking attempts against the Gmail accounts of human rights activists, now finds itself being pilloried as a clumsy violator of privacy.
Did Google mean to violate the privacy of its users by launching Buzz? Of course not. Did it end up violating the privacy of its users? Of course it did.
Should a business aim to optimize for the privacy of its customers? Each one of us is entitled to our opinion in this case, but I have a very clear answer, personally, for this question. Yes, a business should optimize for the privacy of its customers
What if a tenant has told his or her landlord that they are vegetarian, when in fact they are non-vegetarian?
What if someone’s son or daughter has taken to eating non-veg, but hasn’t told their parents yet?
What if a housing society decides to ban entry of non-vegetarian food into the society?
You may have ethical, cultural, religious or political views about each of these scenarios. And because I’m writing this for an online audience, I’m sure you do have some or all of these views. I do too, of course.
But those views have nothing to do with the fact that people are free to have their preferences when it comes to dietary habits, and keep them private from whomsoever they like. You and I may disapprove or regret this state of affairs, but we do not get to unilaterally change said status. That’s my personal take, at any rate, and if you happen to disagree, I would love to know why.
What Zomato, or indeed any other business, does is its own business. I and everybody else in this country, we are all free to increase our patronage of Zomato for having started its pure veg fleet, or boycott them altogether for it. That is each individual customer’s own business.
But each person in this country ought to have the right to keep their dietary preferences private to themselves, or share it only with folks of their choosing.
The truth always lies somewhere in the middle. Maybe you’ve heard me say this before, but here’s where Zomato has ended up re: this situation
Update on our pure veg fleet —
While we are going to continue to have a fleet for vegetarians, we have decided to remove the on-ground segregation of this fleet on the ground using the colour green. All our riders — both our regular fleet, and our fleet for vegetarians, will…
So the pure veg fleet will continue to exist, but will be indistinguishable from the rest of Zomato’s fleet in terms of appearances. This will be counted as a victory and as a defeat by different representatives on both “sides”, and much outrage will manifest itself, to everybody’s all round satisfaction.
Speaking of which…
It is our fate to live in the age of social media, so you will see a million takes about religious intolerance from both “sides” of this “debate”. Ditto for caste related aspects. And a million other things besides, I am sure. Here’s a useful tip:
Seven days is overkill, if you ask me. Twitter will find something else to lose its excreta over by tomorrow, don’t you worry.
I’ve just about gotten around to catching up on a lot of reading, and I finally got a chance to read this Scroll article:
“A few days later, Radha walked into a sprawling, glistening factory in Sriperumbudur, on the outskirts of Chennai. It had rows and rows of workers, most of them young women like Radha, bent over work tables on which were laid out tiny, metal parts. They were assembling iPhones – the most expensive and coveted mobile phones in the world – made by Apple, the second-richest tech company in the world.
The factory was run by Foxconn, a Taiwanese company that is the world’s largest contract manufacturer of electronics. For long, most of its phone production for Apple was done out of China. But in recent years, with the relationship between the United States and China coming under strain, Foxconn had been scouting for new locations for its manufacturing units. The town of Sriperumbudur, situated in Tamil Nadu, one of India’s most literate states, seemed like a natural choice. Home to over 500 companies, including manufacturers of electronics, auto components and chemicals, it has grown into an industrial hub in the past two decades.”
As always, please read the whole thing. In fact, an especial plea this around – please take the time out, and go read the entire article, and then come back and read this. If you’ll allow me to be greedy, take even more time out and have a contemplative cup of coffee before coming back here.
The Chart
Hasan, R., & Jandoc, K. R. (2010). The distribution of firm size in India: What can survey data tell us?. Asian Development Bank Economics Working Paper Series, (213)
This is one of my favorite charts to stare at, and often endlessly. It’s outdated now, of course, because it is from well over a decade ago. But even so, this chart tells a powerful story. The story it tells us is that we have failed to generate manufacturing based employment in our country. That is a problem because without a significant increase in the share of manufacturing in our GDP, it is unlikely that we will be able to meaningfully reduce poverty in our country.
The Blogpost
I’ve written about it already in the previous week, but just in case you haven’t already, please do go and read the whole thing. I know I’m assigning a lot of homework today, but if you can spare the time, rinse and repeat the whole contemplative cup of coffee routine too, after you finish reading the whole thing. Here’s one of the key paragraphs (to me) from the blogpost:
“One of the things we often argue about on these pages is that growth is the single biggest moral imperative for India at its stage of development. We can try to optimise for many other ideals and virtues, but if they come to us at the cost of growth, we must learn to ignore them. Because lack of growth will make even those ideals worse than where they are today. To illustrate this point, somewhat provocatively, I have made the point that we shouldn’t get rich at the cost of our environment, but we must also consider that staying poor doesn’t do any good for the environment either in the medium to long run. At our stage of development, we should only ask if our today is better than our yesterday. It is possible that our today isn’t ideal or it may be far from what the developed world might have at this moment. But that should be of limited concern to us. Because in trying to aspire for that ideal state or in trying to make that quantum leap to what a developed economy already has, we will put at risk the gradual increment that we can make every day.”
RSJ here is arguing for not making the perfect the enemy of the good. The good, in this case, is the fact that more women are getting employed than before, at least at the margin. The perfect, in this case, refers to the fact that working conditions at the Foxconn factory are, well, less than perfect:
“The activist said that often women would not use the toilets at the hostel and would instead wait until they reached the factory. “This obviously took a toll on their health,” he said.
The problem of health has boiled over into a crisis in the past. In 2021, hundreds of workers from the Foxconn factory went on protest and blocked traffic on the Chennai-Bengaluru highway after a food poisoning incident that resulted in 250 workers falling ill, of which 159 were admitted to a hospital. The workers also complained that their living conditions were unhygienic and demanded that their employers take immediate steps to improve them.
After the protests, the factory stayed closed for a few days, until the administration promised to make improvements in the hostels and ensure hygiene in food preparation.
Since then, the situation has improved, workers said. But some women still do not see the living conditions and the restrictions as satisfactory.”
So what should we as a society choose? Should we choose the good and sacrifice the perfect, as RSJ and Pranay suggest? Or should we choose the perfect and give up on the good, as the Scroll article might imply to some?
Leave aside for now the question of how society should choose, because figuring out effective preference aggregation mechanisms is, er, impossible. What is your preference if you have to choose between the good and the perfect? What should be your preference, and why?
Far be it from me to tell you what your answer should be, of course, because as far as I’m concerned, you should read the Scroll article, RSJ and Pranay’s newsletter, this blogpost and a hajjar other sources and come to your own conclusion. I’m old fashioned that way.
My job today is to help you build out a framework for you to arrive at an answer, and to provide you with a lot of different perspectives. If you end up agreeing with my framework, end up using it, and end up with an answer different from mine, all is good with the world, for we can then debate our disagreements and arrive at some sort of a synthesis, and what could possibly be better, eh? Like I said, I’m old fashioned that way.
The Book
“The first time I met Wu Chunming, she was working for a foreign company, making a thousand dollars a month, and living in a three-bedroom apartment in downtown Dongguan. The last time I saw her, two and a half years later, she was working for a Chinese company, making $150 a month, and living in a single room in a part of the city known for small shoe factories with poor working conditions. By every calculus that mattered, she had fallen a long way. But she was more serene than I had ever seen her. In a city where a Mercedes was the measure of all things, Chunming had somehow broken free and developed her own personal morality.
“Before I was always hungry,” she told me. “If I saw a sweater I liked, I would have to get it immediately. Now if I don’t eat the best things or buy the nicest things, it doesn’t matter so much. If I see a friend or a family member happy, then that is meaningful.” She was no longer panicked about being single at the age of thirty-two, and she had stopped having affairs with men she met online. “I believe I’ll become more and more beautiful, and more and more healthy, and my economic circumstances will get better and better,” she said.
Chunming hoped to have children someday, and she often asked me about American attitudes toward child-raising. “I would like a child to grow up to have a happy life and make a contribution to society,” she said.
“A contribution to society?” I asked her, startled. “What do you mean?”
“I don’t mean to be a big scientist or something like that,” Chunming said. “How many people can do that? I think if you live a happy life and are a good person, that is a contribution to society.”
Chang, Leslie T.. Factory Girls: Voices from the Heart of Modern China . Pan Macmillan. Kindle Edition.
Factory Girls is a book worth reading because it talks not about the industrial policy of China, but about the resultant sociology of China’s industrial policy. To the extent that you agree with the notion that the economic growth of a nation is the means to an end, it is a book worth reading. It is possible, of course, that you are of the opinion that economic growth is an end in itself. The book is still worth a read, because it is important to read books that offer perspectives which differ from your worldview. (My Twitter feed, for example, is absolute torture for me, but I force myself through it on a daily basis.)
Think of India (or any country, for that matter) as a player on a board of snakes and ladders. Industrial policy, when done well, acts as a ladder. But unintended outcomes of industrial policy act as snakes, pulling the country back down to problematic parts. In this framework, it is hard for me to not think of China as having taken ladder after ladder over the last thirty years or so, only to fall a fair way back in the last two years or so.
And so yes, it becomes important for India to replicate the high growth eras that China and some of the East Asian countries accomplished. But it becomes as important, if not more important, for us to avoid the metaphorical snakes on the latter stages of the board.
One should absolutely aspire to match (and inshallah, exceed!) China’s growth rates from twenty years ago. But one should also aspire to avoid India’s youth going all tang ping on us twenty years from now.
Easy to say, I hear you say, and I can guess what’s coming next. How exactly, you ask, do we go about doing this?
Should our takeaway from the Scroll article be that we should ask Foxconn to four-letter-word-beginning-with-f off? Should our takeaway from Pranay and RSJ’s blog post be to ask Scroll to four-letter-word-beginning-with-f off?
Regular readers should be rolling their eyes round about now, for they know what’s coming. All together now…
How about offering workers who have completed three years of work at Foxconn fully subsidized vocational training? Not three, but two instead, I hear the left liberals say? Not three but five, I hear the libertarians say? Well, have at it, ladies and gentlemen – figure out what the right time frame should be. Why, I might even go so far as to say that development economists should run RCTs to figure out the appropriate time frame.
How about offering soft loans to folks who want to build hostels near Sriperumbudur? Or offer timely transport? Or other mechanisms to ensure a thriving housing market that allows women workers to make their own choices about freedom, perceived safety, food quality, and other parameters?
How about offering additional tax breaks to companies like Foxconn contingent upon them (companies such as Foxconn) offering better working/living conditions to the workers? Or linking PLI payments to Foxconn’s customers to incentivize such compliance? After all, Apple is one of the world’s best when it comes to sustainability, recycling, and other initiatives, and as we all know, can press its suppliers.
I’ll happily confess to not knowing if these suggestions make any sense, or go too far, or not far enough. I’m a beanbag economist, let alone the armchair variety. I’ve never worked in a factory, or regulated one, or designed regulations for labor policies in one. So if you are going to say that I don’t know what I’m talking about, I’ll be the first to agree with you.
But I will say, and defend vigorously, this much:
Asking Foxconn to eff off is a bad idea, because god knows we need more manufacturing, more employment and more women’s participation in our labor force. Asking Scroll to eff off is an equally bad idea, because we’re missing the point if we ignore those in our society who point out the excesses of our new industrialization.
This is an ongoing process that will never stop, but updating and simplifying labor regulations to reflect the modern factory is crucial. We need to do this to encourage larger-sized, better run firms that are globally competitive and can offer labor protections. We need reforms that will make India a competitive manufacturing destination without, eventually, the twin crutches of PLI or treatment of labor that ignores globally hard-won rights. The working class women of Tamil Nadu featured in the Scroll article are shouldering enough of a burden in contributing to growth; it is time we step up too. And when I say we, I don’t mean just the government. I’d include economists, policy-makers, think-tanks, the media and yes, society at large.
What the bazaar cannot provide by itself, sarkaar and samaaj must.
Don’t dilute the dialectic, dial it up!
Let differing opinions and ground reportage be offered up in the media, let’s all of us read/listen/see ‘em, and let’s figure out a middle ground by participating in the market for ideas.
India needs, like it or not, Foxconn to teach us how China did it. India also needs, like it or not, Scroll articles to help us realize that Foxconn may well be pushing the boundaries of what is acceptable working conditions for labor.
Personally, I’m on team RSJ/Pranay on this one, because what India needs right now is a lot of industrialization. But I also worry about where this path might end up, and I’d like to keep an eye on what might go wrong in the years to come. And so I’ll disagree with Scroll for now, but I’ll celebrate the fact that I live in a country where Scroll publishes articles such as these.
It’s fashionable these days to say that labels are out of fashion, but I’m going to call this the liberal position.
And finally, if you disagree with either the label or what I think it stands for, let’s have a debate! That’s my job da, and I’m very much up for it.
“Mumbai is the wealthiest city in India. It contributes over 6% of India’s economy, 30% of its income tax, 40% of its trade, and 60% of its customs duties. Its per capita GDP in 2015 stood at $5,328, more than 3.3 times that of the country as a whole. And yet, half of the population lives packed into just 12% of the city’s available land.”
That is from a data rich (and yet pleasant to read) essay about Mumbai and it’s mad policies regarding real estate. Those mad policies are nothing new, some of them are more than a hundred years old, and they have been covered extensively in lots of different places. Not getting urbanization right is a sport that all countries play well – although you’ll certainly get a sympathetic nod from me if you argue that we in India play it better than most. Why, I come from Pune, and you need to come visit our city one of these days to understand just how good (bad is what I mean, but you knew that already) we have become in the last four to five years alone.
Please go ahead and read the whole essay, it is full of delightful little nuggets and not-so-little laments. Did you know, for example, that urban planners planned to limit Mumbai’s population to a maximum of 3.4 million by 1980? This is like I planning to limit my weight gain to two hundred grams around the last week of the year, and I have the same success as Mumbai’s urban planners back in the day – we’re at about 25 million for the Mumbai metropolitan area now.*
And here’s another face-palm worthy statistic:
“The 1999 act is a marginal improvement over the original, but still doesn’t provide adequate incentive for investment. The annual 4% rental increase is below Indian inflation since 1999, below current Indian treasury yields, and far below the increase in demand or the increase in per capita GDP. At the allowable annual increase, the value of rent diminishes sharply over time. If the average Indian landlord received 30% of their income in rent in 1999, and received 4% annual nominal rent increases, they would be making only 8% of their income from rent on those units by 2021. Even more starkly, the act does not address the lag in rents from 1940 to 1999. A unit rented out under the 1947 rent act would have its rent pegged to 1940 prices until 1999, at which point a one-time 5% increase would be allowed, and a 4% annual increase thereafter”
But I wanted to focus on one particular thing in today’s post, and it is this excerpt:
However, the greatest beneficiaries of housing liberalization may be those who are least visible — those newly able to move into the city. One estimate found that migrants who move to cities in the Global South report increases in income as high as 30%. A separate RCT conducted in Kenya, meanwhile, estimated that households with family members who moved to Nairobi experienced an over 150% increase in income.
That is, the idiocy of our urbanization policies keeps people in poverty, and has done so since independence. How? By making it more difficult to migrate into India’s cities, that’s how. An unseen consequence of failed urbanization are the unseen poor, and that is an unseen tragedy.
Urbanization is, and remains, an underrated idea in India, and this has deep implications for our ability to overcome our challenges when it comes to eradicating poverty.
*Questions about my weight gain in the last week of the year will be deemed an invasion of my privacy, and will therefore be ignored. Go away.
“Yeh buzdilon ki soch hai. Sach bolne waale ko agar dukh sahne ki himmat hai, toh dukh dene ki bhi himmat honi chahiye. Sachaai angaarey ki tarah hai – haath par rakho aur haath na jale, yeh kaise ho sakta hai?” (“Only cowards think like this. If the truth-teller has the courage to suffer pain, he must also have the courage to give pain to others. Truth is like a piece of burning coal on your hand.”)
Mukherjee’s film lets us see – not through didactic monologues but through the natural, graceful unfolding of its narrative – that such thoughts may be very noble in theory, but that they can be damaging and self-defeating in certain situations. This makes Satyakam a difficult film to watch, as it draws the viewer into a quicksand of uncertainty and despair. (I can sympathise with the boy who fell asleep in the hall next to Ranjit Kapoor, especially if he’d already had a long hard day!) Throughout, there are counterpoints to Satyapriya’s unalloyed idealism, as the film repeatedly places him – and us – in morally hazy situations.
The question comes from an excellent article that appeared recently in the 1843 magazine. The article is about RCT’s in general, and their development over time, but it is also about the place where RCT’s started and have continued to mushroom: Kenya. The context that you need to have for the question I am about to ask you is this excerpt:
Their [fieldworkers in RCT’s that is – Ashish] work is gruelling and often emotionally draining. They are paid a salary of $10-20 per day – not a fortune in Kenya. Field workers have been known to give their own money to recipients so that they can afford food, which can distort the outcome of a study. “When they got to the end of the month, they would just fabricate [the] data,” said Kingori, the sociologist. “The fact that these trials are designed in this way is setting them up to fail in real life. They are constantly being subverted by these field workers.” She told me of a case from a medical RCT in which a child died in one recipient family. A field worker agreed to substitute the family’s other child in the study, so that the household could continue to receive the treatment. Field workers told me that they’d heard stories of their peers filling in respondent surveys themselves, in order to hit their daily quotas. Many of these stories date from the early days of RCTs. Recently, IPA and similar organisations have improved their training and fraud detection. GiveDirectly told me that “data fraud and monetary fraud are…punished through contract termination.”
You are a fieldworker hired to do work for an RCT. You are not running the RCT, you are being paid to collect the data and submit it to the researchers. A family that is a part of this study loses a child. They beg you to not report this to the researchers, because then the family would no longer be a part of the RCT, and therefore would no longer be eligible to receive aid (receive treatment, in RCT lingo). Let’s say you choose to agree to their request. The RCT is screwed, but hey, at least the family will continue to receive help during a time of unimaginable distress.
Here’s my question: did you act rationally, or not?
Here’s a follow-up question for those of you who have formally studied microeconomics: according to the fundamental axioms of microeconomic theory, did you act rationally or not?
Third, the definition of rationality, as per microeconomics.
This definition is via Gemini (Google’ current name for it’s AI, although that may change by the time you read this, who knows):
“Here’s a breakdown of rationality as defined within the context of classical microeconomic theory:
Core Axioms of Rationality in Microeconomic Theory
Completeness: Individuals have well-defined preferences. When presented with any two options (bundles of goods, outcomes, etc.), they can express:
Preference for one over the other Indifference between the two
Transitivity: If a consumer prefers A to B and B to C, then they must prefer A to C. This ensures consistency in preferences.
Utility Maximization: Individuals always strive to choose the option that gives them the highest level of utility (satisfaction, well-being). The concept of utility allows for comparison of different choices.
Self-Interest: Individuals are assumed to prioritize their own utility above that of others. This doesn’t necessarily imply selfishness, but rather that the individual’s well-being is their primary concern.
Implications of these Axioms
Predictability of Behavior: If we know an individual’s preferences and constraints (e.g., budget, availability of goods), and assume rationality, we can predict their choices.
Optimization: Rational individuals will allocate resources efficiently, always aiming to get the most value out of their choices given their constraints.
Responsiveness to Incentives: Changes in prices, income, or other constraints will lead rational individuals to adjust their behavior to maintain maximum utility.
Important Notes:
Narrow Definition: This definition of rationality is specific to microeconomic theory; it simplifies human behavior to make modeling and predictions easier.
Bounded Rationality: Real-life decision-making is impacted by imperfect information, limited cognitive capacity, and time pressure. The concept of bounded rationality acknowledges these limitations.
Ethics vs. Rationality: This rationality definition doesn’t address moral or ethical dimensions of choices. A “rational” choice could still be exploitative or harmful to others.”
Try taking stab at the question yourself. Then read what our new friends have to say about it. Here is Gemini’s considered opinion on the issue. Here is ChatGPT. Now that you’ve read their answers, see if you change yours!
Talk about it with your friends, with your professors, with your families.
And for homework, do watch Satyakaam. It is freely available on YouTube.
There is an impossible trilemma at play when it comes to writing explainers:
How does one manage to be simple, interesting and comprehensive all at once?
And the short answer to the question is that this isn’t possible. One can choose to be simple and interesting, but one must then give up on covering everything associated with a topic. One could choose to be interesting and comprehensive, but then one has to sacrifice simplicity. And finally, being simple and comprehensive is possible, but be prepared to bid adieu to being interesting.
Here’s the really bad news. None of us (present author included) manage to figure this out right away. When we create something – a blog post, a book, a video, an Instagram reel, etc., – we aspire to do all three things at once. Not only does this guarantee failure, but you may well end up achieving not one of the three goals.
And trust me, because I speak from many, many years of having experienced this, both as a consumer and a producer.
And that’s why I had a smile on my face while reading the introduction to We, The Citizens. Because the authors of the book are quite clear that it isn’t an academic tome that drones on and on and on. It is, instead, a book with a clear bias towards clarity and simplicity.
But they are quite clear about the fact that this book is also a starter, not the main course. Or, if you prefer, you should have two clear takeaways by the time you finish reading the book.
As a student, you should find your appetite properly and thoroughly whetted. Go read more books about public policy! Which ones, you ask? One of the three authors has a pretty good answer, you could begin there (and I talk more about this down below, so stay tuned). Or any other book of your choice, but please, do read more about public policy.
And the second takeaway as a doer is the one that the authors themselves leave you with:
Think of the rest of the book – the part between the introduction and the very last panel, as the answers to the questions one inevitably has:
What was this audacious dream (and why was it audacious)?
Why does the responsibility to fulfill it lie upon us (why doesn’t somebody else go and do this, yaar?)
Why do we have much work to do (75 years and counting and we still have work to do)?
The answers to these questions are given in a fashion that informs and entertains at the same time. And this alone is reason enough to buy the book, because very few of them (books, that is) manage to lie at the intersection.
And if you know your political history and current affairs, you will enjoy the many zingers that will leave you gasping, grinning and grimacing in equal measure. Even better, this holds true regardless of your political affiliation.
The book uses the same framework that we learnt about in Missing in Action:
In order to do this, they divide the world into three different aspects: the state, the market and society. Or, to use their terminology: sarkaar, bazaar and samaaj. Think of the individual, and the individual’s life, as being impacted by her interactions with these three ‘pillars’ of society. How do these pillars impact her? How do these pillars interact with each other?
But that framework is used, in this book, to introduce elements of public policy, economics (and related subjects) to the interested layperson, and that in an engaging, humorous fashion. The special trick that the authors manage is being able to do so without ever once appearing overly simplistic.
And if you think you know your economics (or your public policy, for that matter), you will still enjoy reading this book. I was wondering how to phrase this next bit, but I will outsource the job to the one and only Roger Ebert, who is talking about one of my all time favorite movies:
“The Princess Bride” reveals itself as a sly parody of sword and sorcery movies, a film that somehow manages to exist on two levels at once: While younger viewers will sit spellbound at the thrilling events on the screen, adults, I think, will be laughing a lot.
I very much plan on reading this book with my daughter, and taking my own sweet time over it. And I hope she sits spellbound as she learns the nuts and bolts of public policy, but I can assure you that her dad has already dished out an appreciative chuckle or two.
Why, the page of contents alone is worth the price of entry! Fun task for those of you who will read the book soon: can you spot Doordarshan, Ronald Coase, Times of India advertisements and Hayek in the page of contents? Funner* task: how many other references can you spot? And not just in the page of contents, mind you, but throughout the book. So even for those of us who are likely to think yaar, ye sab pata hai, the book is still worth a read.
Best of all, the concluding chapters do a good job of recommending books one might choose to tackle after having finished this one, beginning with In The Service of the Republic.
The one “complaint” I have about the book is that I found myself wishing for an extended “Here’s what you could read next” section. If you are, say, a twelve year old, you most certainly can (and should!) read this book, and then keep on reading many more books related to this topic. But which books? The answer will differ for all of us, and while there are some capital recommendations out there, they are perhaps a little bit too advanced for the younger reader.
But if I may be allowed a sly reference of my own, maybe the authors would consider “bridging” the gap between their own “capital” endeavor and these slightly more advanced lists? An intermediate book on public policy to bridge the gap, as it were.
On behalf of all of the readers of the book, present and future, allow greedy ol’ me to channel my inner Twist and ask the sirs (and the ma’am!) if we could please have some more?
Today’s post is a continuation of yesterday’s. We learnt in yesterday’s post about the problems with the upcoming delimitation exercise, and how the Southern States feel that they contribute “too much” to Union government taxes, and get “too little” in return. The reason the phrases in the previous sentence are in quotation marks is because there are major differences of opinion about whether this is the case or not.
Asking a politician about this question is a useless endeavor, at least in public, because they’re optimizing for answering the question in a way that maximizes their current electoral benefits. If it is more important (for the moment) to win state elections, they will say that it is true that states doth give too much. If it is more important (for the moment) to win national elections, they will say it is true that the Union government doth take too little. This is not a criticism of politicians, please note. It is an application of one of the simplest principles in economics: incentives matter.
And by the way, for those of you thinking I’m throwing shade at a particular political party, perish the thought. All politicians in all countries have done this in the past, regardless of their ideology, they’re doing it now, and they’ll do it in the future. You and I would do it too, in their place, for those have become the rules of that game. So it goes.
Well, can us economists do a better job? How do economists think of the answer to the question of how much is the “correct” amount to be transferred from a given state to the Union government? How do economists think of the answer to the next obvious question – how to think through vertical and horizontal devolution?
In today’s blogpost, I am going to try and answer this question, but in terms of frameworks, not in terms of data. My job today is to help you develop a framework about thinking through this issue. Once you have a framework, the data tends to make much more sense – or so some economists hope. I’m one of them.
Let’s begin!
Trade is a non-zero sum game
You’ve heard me say this before, and you’ll hear me say it again. Today is a good day to reiterate this point – it is as important as the point “incentives matter”:
Trade is a non-zero sum game
People just don’t get this point. When two parties engage in trade voluntarily, both parties are better off. When I pay the chai-tapri owner ten rupees for a cuttingchai, he’s grateful for the ten rupees I give him, and the lord knows I’m grateful for the chai I get in return. This is equally true for an overpriced cup of Americano at Starbucks. Sure it’s over-priced, over-roasted and over the top, but you know what you don’t see outside Starbucks? You don’t see Starbucks baristas kidnapping people and then forcing them to buy coffee (venti, naturally). It is voluntary trade, and the reason folks step in to a Starbucks is because they want to buy that coffee. The trade is worth it to them.
So I would urge you to think of the “problem” of the Southern states as a trade between the states and the Union government. We’ve heard from the Southern states side of this debate – they think they give too much to the Union. Well, if this is a trade, it is worth asking the obvious question.
What do the Southern states get in return?
There are two questions at play here, not just one. And it is important to think through both of these questions:
What do the Southern states get in return from the Union government?
What do the Southern states get in return by being a part of a Union?
Think back to the young man who plaintively called up his uncle from yesterday’s post. Everybody in that young man’s house contributes half their salary to run the house, and our young friend feels hard done by, because he earns the most (and therefore contributes the most). Worse, once the money is pooled in, he doesn’t get a bigger say in how it is to be spent – that decision is purely democratic. So he feels he pays in too much, doesn’t get enough in return, and doesn’t have enough of a say in how the money is spent.
But as an economist, I would urge him to be more holistic in his thinking. Young man, I might harrumph in his direction, should you not be accounting for the pleasure of having your friends stay with you? The emotional benefits? The security you get by staying together? The ability to call on the help of near and dear ones when the time arises? You may still feel hard done by, and maybe you should, that’s not for me to say – but I would urge you to do a complete cost benefit analysis.
The Cost Benefit Analysis Framework
Weird tangent alert – you’re going to feel I’ve flown off the handle here for a bit, but I’ll circle the discussion back to the topic at hand, I promise. But for now, let’s talk migration. Say you are an unemployed youth in a rural part of our country, with not much education. Should you migrate to the city in search of a job?
Here’s a framework to help you think through the answer to this question:
It looks like a pretty complicated picture the first time you take a glance at it, but all that it is really saying is this:
How much will you earn by living in the city?
How much do you earn now?
How much will it cost to be in the city?
How much does it cost to stay where you are?
Not just economic costs and benefits, mind you! Note the boxes that talk about psychic costs and psychic returns!
Net all of this out, and if you’re in the black, move to the city. If you’re in the red, stay where you are. Easy-peasy.
It never is that easy, of course, and cost-benefit lists aren’t always the answer. But us economists will always give poor ol’ Ross a sympathetic pat on the shoulder. He was wrong, of course, but still. Brownie points for using a framework (and god help you).
What framework can we use?
So, OK, here is where we are now:
Think of the delimitation and devolution exercise as a trade between the states and the Union government.
The Southern states are quite clear about the fact that they think they’re contributing too much.
But they should also think about what they’re getting in return from the Union government, and by being a part of the Union.
A cost-benefit analysis will help, as will a cost-benefit framework.
So let’s go find a framework!
And what framework am I going to use? I’m going to call upon the ideas of the great Canadian economist, Robert Mundell (and those of Peter Kenen). A very accessible discussion of these ideas is to be found in a lovely little essay by Paul Krugman, called Revenge of the Optimum Currency Area. The title is a play on important work done by Robert Mundell in the late 1950’s on the topic of Optimum Currency Areas (OCA’s).
What are OCA’s? Have you ever wondered why, say, all SAARC nations don’t have the same currency? If you are going to break out in spots and rashes at the thought of having anything at all to do with Pakistan, calm down, and think of why all the ASEAN nations don’t have a single currency. And then think of how and why all of the states in the United States of America chose to have a common currency.
What are the conditions, Robert Mundell was asking, under which having a common currency across different political jurisdictions is optimal. And (very) long story short, Paul Krugman’s take on the issue, courtesy Mundell and Kenen’s ideas, is this:
It makes sense to have the same currency (a monetary union) across political jurisdictions if:
These jurisdictions have labor mobility
These jurisdictions have capital mobility
These jurisdictions have a fiscal union
What if we “flip” this around? For those of you familiar with linear programming, think of the “dual”. It is not an exact analogy, I’ll be the first to admit, but try this on for size:
It makes sense to bear the costs of being in a fiscal union across political jurisdictions if:
These jurisdictions have labor mobility that proves to be beneficial
These jurisdictions have capital mobility that proves to be beneficial
These jurisdictions have a monetary union that proves to be beneficial
That is, so long as the net benefits that accrue from having labor mobility, capital mobility and being in a monetary union are more than the net costs of being in a fiscal union, it is more than worth it.
(This is worth emphasizing again: net benefits and costs. Sure there are costs to being in a fiscal union, but there are benefits too!)
Labor mobility means being able to count upon (freely!) accessing surplus labor from other parts of the country. Capital mobility means ditto, but for capital, not labor. And a monetary union is, of course, having the same currency across all states. What is the net benefit from all of these? So long as this is more than whatever the (actual and perceived) costs of being in a fiscal union are, well, all izz well.
But kahaani abhi baaki hai mere dost!
Heresy for an economist, but counting is problematic
My head hurts just thinking of the number of academic papers that can be churned out in terms of trying to quantify the previous section. We can keep the paper mills churning for years on end, and LinkedIn will drown in a deluge of “Delighted to share that our paper on…” messages.
But I would say that such exercises will ultimately be futile. Why, you ask? Here’s Paul Krugman’s take on this:
Now, what we need to say right away is that this “weighing” takes place only in a qualitative sense: at this point nobody says that the benefits of joining the euro are x percent of GDP, the costs y, and x > y, so the euro it is. Instead, it is more along the lines of arguing that Florida is a better candidate for membership in the dollar zone than Spain is a candidate for membership in the euro zone. This does not necessarily say that Spain made a mistake by joining the euro—nor does it necessarily refute the argument that Florida would be better off with its own currency! But the theory does at least give us some insight into the trade-offs.
And my own take is this: remember psychic costs and benefits from our migration example? Drill this into your head – just because these cannot meaningfully be measured doesn’t mean they don’t exist!
What are the psychic benefits of being in a monetary and a fiscal union? In English, if you prefer (and you should, because economics is a most unpoetic* language):
What are the psychic benefits of being part of a nation?
Equally, because being analytical requires being evenhanded, what are the psychic costs of being part of a nation? Factoring in the answers to these questions is impossible very, very difficult. So very impossible difficult, in fact, that I would be of the opinion that it cannot and should not be done.
So how to think of a solution?
Ronald, the OG, will tell us all about it on the morrow.
*It’s a word, and I will not be taking any questions.
Let’s say a young man calls you up. Could be your cousin, or your nephew.
I’ve got a problem, he says.
Temme, you say.
Well, it’s like this, he says. I work in an MNC in Bangalore, and make a lot of money.
Great, you say. What’s the problem?
Well, I stay with roommates, and it’s complicated. We were all together in college, and we’d sworn while in college that we’d be roommates. Problem is, all my friends earn nowhere near as much as I do. We’d sworn to live as one big happy family, so we’re all staying together, and that’s awesome. But…
Yeah, you say. But what?
Well, our motto was and is “All for one and one for all”. The problem is that what that ends up meaning is I contribute a lot to run our home, because I earn a lot more than the others. My contribution goes into a common “kitty”, proportionate to how much I earn. We all contribute half of our salary to run our home, but because I earn much more than the others, I contribute much more.
So what’s the problem, you yawn. If you contribute more, you should also get a bigger say in how that money is to be spent, no?
But that’s the problem!, comes the response from the other side. How the money is to be spent is not up to me. There, the principle is one person, one vote.
Wait a minute, you say. When it comes to pooling in the money, it is a function of what you earn. But when it comes to distributing the money, it is a function instead of how many of you are there?
Exactly, says the young, troubled whippersnapper. Now what?
If you contribute more, should you (or should you not) get a greater say in how your contribution is to be spent? And if not, should you be contributing more in the first place?
What is fair, what is just, what is desirable, and what is best? And for whom?
I don’t know if you’ve noticed, but there has been a bit of a kerfuffle recently about southern states saying it’s all very unfair. What exactly is unfair, you ask? Buckle up, because this is going to be a long ride.
The Background
Like I said, this is going to be a long story, but because this is one of the most important things we have to tackle as a country, let’s set about learning more about it. Let’s begin with the 42nd Amendment to the Indian Constitution:
Up until 1976, after every Indian Census the seats of Lok Sabha, Rajya Sabha and State legislative assemblies of India were re-distributed respectively throughout the country so as to have equal population representation from every seat. The apportionment was done thrice as per 1951, 1961 and 1971 population census. However, during The Emergency, through Forty-second Amendment the government froze the total Parliamentary and Assembly seats in each state till 2001 Census. This was done, mainly, due to wide discrepancies in family planning among the states. Thus, it gives time to states with higher fertility rates to implement family planning to bring the fertility rates down.
Even though the boundaries of constituencies were altered in 2001 to equate population among the parliamentary and assembly seats; the number of Lok Sabha seats that each state has and those of legislative assemblies has remained unaltered since 1971 census and may only be changed after 2026 as the constitution was again amended (84th amendment to Indian Constitution) in 2002 to continue the freeze on the total number of seats in each state till 2026. This was mainly done as states which had implemented family planning widely like Kerala, Tamil Nadu and Punjab would stand to lose many parliamentary seats representation and states with poor family planning programs and higher fertility rates like Uttar Pradesh, Bihar and Rajasthan would gain many of the seats transferred from better-performing states.
Let’s talk about a Lok Sabha constituency from Tamil Nadu, and a Lok Sabha constituency from Uttar Pradesh. If the Lok Sabha Member of Parliament (MP) from Tamil Nadu represents a 100 people (let’s assume this), how many people should the Member of Parliament from UP represent?
Should it be around the same number, 100? Is a little bit more OK? Is a lot more OK? At what stage do you say “whoa, this is too much!”? Let’s rephrase the question: should each state in our country send the same number of Members of Parliament to the Lok Sabha, or should larger states send a higher number of MPs? Larger defined in terms of total population, please note.
And one of the tenets of democracy is that each Member of Parliament should represent roughly the same number of people. We can’t have – or shouldn’t have, at any rate – a very large number of MPs representing very few people. Nor should we have a very small number of MPs representing very many people.
Malapportionment from 1971-2021 (based on census data till 2011 and author’s calculation thereafter) Source: Shruti Rajagopalan’s essay
This chart has been taken from Shruti Rajagopalan’s excellent essay, called Demography, Delimitation and Democracy. And what is shows us is one way to answer the question I have raised above. By her calculations, when the delimitation freeze ends*, Uttar Pradesh will have 12 to 13 seats short of what their population should merit. Or put another way, Tamil Nadu will likely have 11 seats more than what their population should merit.
Here’s another way of thinking about this: if a state has (say) x% of a country’s population, it should have (say) y seats in the Lok Sabha. If that be so, another state that has 2x% of a country’s population should have 2y seats in the Lok Sabha.
Why? Because otherwise, the second state will have a smaller number of MPs arguing for it in the Lok Sabha – smaller relative to the number of people in that state. And the first state, of course, will have a larger number of MPs representing that state in the Lok Sabha – a larger number relative to the number of people in that state.
As Shruti puts it in her essay:
One aspect of the “one person, one vote” concept, as envisioned by Ambedkar, was about granting every single Indian over 18 the right to vote in elections. India has adopted universal adult franchise since the birth of the republic in 1950. But to give the principle of “one person, one vote” any meaning, constituency sizes must be roughly equal. The random circumstance of being born in Bihar means that the constituency size is about 3.1 million, but if the same person is born in or moves to Kerala, the value of their vote increases because the constituency size is 1.75 million.
So in essence, each state should send a proportionate number of MPs to the Lok Sabha. And the number of these MPs should be proportionate to what? To the percentage share of the total population in each state. That way, we can make sure that each state gets proportionate representation in the Lok Sabha. Right now, there is an imbalance – the people of Tamil Nadu are over-represented, and the people of Uttar Pradesh are under-represented.
Of course, Tamil Nadu and Uttar Pradesh are used to represent, generally speaking, states in the less populous south and the more populous north respectively.
What is the scale of the problem?
Right, now that we have established this, let’s ask the next obvious question: how many people are there in each state in our country? Here’s one way to answer that question:
Here’s another way of putting it – the Indian Prime Minister is in effect the Prime Minister of the populations of all of these countries put together.
You know how we keep saying that hey, we have one-sixth of the population of the world in our country, and it is therefore unfair that we don’t have a permanent seat on the UN Security Council?
Uttar Pradesh can say the same thing (kinda – you know what I mean), but at the national level.
So What Are We Waiting For?
Well, ok then, a layperson might say. All this is good to know, and er, carry on and all that – but why don’t we just go ahead and, you know, change the distribution of the seats in the current Lok Sabha? If UP gets to send 84 MPs to the Lok Sabha, up that number. And If Tamil Nadu gets to send 39 MPs, well, adjust that number downwards. What’s the problem?
Well, the endowment effect, for starters. But more importantly, it’s all well and good to talk about demography and all that, but this is, after all econforeverybody. Sooner or later, rokdamust enter the building.
How does this country of ours function when it comes to finances? Well, back when we got independence, we decided that we would organize finance in the following way – states would get to levy some taxes, and they could spend that tax revenue on stuff they were responsible for, such as health, among other things. We call this Own Tax Revenue. The Union government would get to levy some taxes, and part of this revenue would be kept for the Union Government’s expenses (army related expenditure, for example, among other things). And there’s other complications, but we’ll skip that part for now.
But ah, there is a small part of one of the sentences in that last paragraph that hides a world of pain. Note that I said “part of this revenue would be kept for the Union government”. Now, the part that is not kept for the Union Government – how is it distributed to the states?
For example, let’s say the Union government collects 100 rupees in taxes.** How much should it keep with itself? Should it keep 40 with itself and give the rest to the states? Or should it keep 80 with itself and give 20 to the states? Or some other number? How do we decide? How should we decide?
Dr. Arvind Panagariya and his band of merry men and women shall answer this question for us in the months to come, as mandated by the law. They shall answer two questions (and do a whole lot of other things too, of course!)
How much should the Union government keep with itself?
Of what can be distributed to the states, which state should get how much, and why?
It is that second question that is tricky. Oh so very tricky. And figuring out how best to answer it is, as it turns out, what we’re all waiting for.
So How Do We Decide Which State Should Get How Much?
Of all of the taxes collected by the Union government, we first have to decide the split between what the Union Government keeps for itself and what is given to the states. This is called Vertical Devolution.
Then, of what is given to the states, we have to decide how much each state gets. This is called Horizontal Devolution.
The predecessors to Dr. Panagariya’s merry band came up with this formula:
The higher the population in a state, the more it should get when it comes to horizontal devolution. How important is this idea? It gets 15% weightage.
The larger the physical area of a state, the more it should get (15% weightage)
The greater the forest cover in a state, the more it should get (15%)
The poorer a state compared to average incomes in our country, the more it should get (45%)
The better a state at lowering it’s Total Fertility Ratio (demographic performance) the more it should get (12.5%).
The better it is at mopping up taxes, the more it should get (2.5%).
So while other factors apply, as they should, the primary consideration is this: the poorer a state, the more help it should get.
“Well, of course” you might say, channeling your inner Mahi.
And your inner Mahi would be right, of course. This is how it should be. Except, as our little story at the start of this blogpost helps us understand, it is a bit more complicated than that.
This is a multi-part series, to be continued! In later posts, we shall learn about how to think about this problem from an economic perspective, and how to think therefore about resolving the problem. But this point is worth emphasizing: if you are an Indian citizen, you should be thinking long and hard about this issue.
*Quite when the delimitation freeze will end is a matter of some conjecture. As Shruti says in her blogpost: “The Eighty-Fourth Amendment extended the 1971 census freeze on the total number of seats per state in the Lok Sabha/state legislatures until the publication of the census figures after 2026 (which is expected in 2031, unless the 2021 census is delayed so much that it is only published in 2026).”. I’ll go a step further and say that there is no guarantee, of course, that the 2031 census will be conducted as per schedule.
** How it collects these taxes is a story involving VAT, MODVAT, CENVAT, GST and other horrific acronyms. As with other inconvenient acronyms (such as, say, CRS) so with these acronyms in this blogpost. We shall simply assume that they don’t exist for now.
Consider this blog post your periodic reminder to read an essay called “The Course of China’s Rural Reform”, by Dun Runsheng.
Who was Du Runsheng?
Du Runsheng (Chinese: 杜润生; pinyin: Dù Rùnshēng; July 18, 1913 – October 9, 2015) was a Chinese military officer, revolutionary leader, politician, and economist. He has been hailed as “China’s father of rural reform”. From 1982 to 1986, he drew up the annual “Document No.1 of the Central Government” about rural reform, which promoted the development of rural areas.
Well, a lot of things, but this is relevant for us today:
Du Runsheng held the post of secretary general, Rural Work Department, in the Chinese Communist Party (CCP) Central Committee at the time the nation was founded. Concurrently he was deputy director of the Agriculture and Forestry Department of the State Council. After the Third Plenum of the 11th Central Committee of the CCP (1978), he held the post of director, Rural Policy of the CCP Central Committee, and director of the Rural Department, Research Center for Rural Development (RCRD), State Council, where he was mainly responsible for China’s rural economic reforms and development policy research. Du was often asked by the leadership to draft rural-related policy documents for the Central Committee of the CCP and the State Council. He worked in particular on the drafting of “No. 1 Documents,” which were issued continuously for five years by the CCP Central Committee, and which made outstanding theoretical and practical contributions, deepening rural economic reform and setting up the rural household contract responsibility system that advanced the market reform of the rural economy.
So how did China do it’s rural reforms? Please read the whole document to get a sense of how they went about it, but to me, the key words are “gradual”, “incremental” and “choice”.
Here is what he says about overcoming resistance to the proposals (all three are direct quotes from the document, please note):
First, the reform would not initially call for abandoning the people’s communes, but rather would implement a production responsibility system within them. This approach enabled many who would have opposed the change to accept it.
Second, the responsibility system could take a number of forms, among which the populace could choose. One did not impose one’s own subjective preference on the populace but respected its choice.
Third, the reform began in a limited region, where it received popular support, and then widened step by step.
We economists are very good at saying that Farm Reforms Must Be Implemented. And the political parties will be in complete agreement about the importance of these reforms depending on whether they are in power or otherwise. Learn to take both of these things as a given.
But as with any good idea, it is not its inherent quality alone that matters. It is also the manner of its implementation.
I am not for a moment suggesting that we copy what China did for its land reforms.
But I am very much suggesting that learning more about how China did it (and other nations besides) might help us.
Without a successful implementation of agricultural reforms, we don’t develop. Our problem is that we are all focussed on the phrase “agricultural reforms”. Not enough of us are focussed on the phrase “successful implementation”.
EconForEverybody 