Why is economics important?

Or put another way, what is economics all about, and why should we be studying it?

I’ve been teaching economics for a number of years now, and the stock answer I get when I pose this question is generally a paraphrased version of the definition bequeathed us by Lionel Robbins. And that’s probably because some blessed cog in the Indian education system decided that that was the definition to go with in a textbook.

But no, scarce means and unlimited wants (or whichever remixed version of that song you have listened to) is not  the definition of economics.

Or shouldn’t be, at any rate.

Economics is about getting rich.

Most people recoil instinctively when they hear this, because we have a bit of a cultural stigma associated with getting rich. Rich in India is the big bad industrialist from Bollywood, or the cunning conniving politician, or the sly, evil hoarder.

Not always nowadays, thank god. The word rich also summons up images of start-ups these days, which is wonderful – but still, rich is not necessarily a “good” adjective.

And the reason  it isn’t a “good” adjective is because we view getting rich as a zero sum game. For every big bad industrialist, there is the poor struggling worker. For every cunning, conniving politician, there is the struggling-to-make-ends-meet-common-man. For every hoarder, there is the poor farmer. Which is what the phrase “zero sum game” means: for me to get rich, somebody somewhere must get (and stay) poor.

There existed a long time ago in England a man who would have shaken his head rather vigorously at the last sentence in the paragraph above. Trade, that man would have said, is anything but zero sum. I trade with you because I get rich. The magic is this: you trade with me because you get rich as well. Trade, slightly puzzlingly, leaves both of us better off.

Think about the last time you ordered a meal online. Maybe it was because you were in office and couldn’t cook a meal yourself right then, or maybe it was because you were at home but too tired to cook. In either case, it was too expensive in terms of time and/or money to cook a meal yourself. And so ordering a meal left you better off.

But did the restaurant suffer because you ordered that meal? Nope! It  too was better off because you ordered that meal. As, by the way, was Zomato or Swiggy that arranged for you to get that meal from that restaurant. And the guy from Delhivery who actually delivered the food. Nobody lost out on this trade. And nobody loses out on millions of these kinds of trades that take place every minute on every corner of the globe.

In fact, the more there are of these trades, the richer we are. And since both you and I are getting rich, both of us think its a good thing. And so allow me to amend that definition I put above by adding just one word to it:

Economics is about us getting rich.

And that’s a damn good thing.

 

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Understanding the Importance of GDP Growth

What is GDP all about? Why is it so very important, and why do economists spend so much time in tracking it? As we discussed in an earlier post, the GDP growth rate is one way of understanding how much more we produced in a given period compared to the last one.

So more is always good, right?

Well… not quite.

It’s a question I struggle to answer in the context of GDP growth, because yes, growth is good, but with qualifiers. It’s a little bit like saying that speed is good where a car is concerned, but too much of it can be quite disastrous.

And in a book that I have started reading recently, I came across a way of thinking about GDP growth in India that I quite liked:

In this book, I define the objective of India’s economic development as rapid, inclusive, stable and sustainable growth of national income, within a political framework of liberal democracy

(emphasis in original)

The book in question is “India’s Long Road” by Vijay Joshi, with the subtitle being “The Search for Prosperity”. Vijay Joshi has done all kinds of awesome sauce things over a long and distinguished career, and a 500 word limit will not begin to do justice to his many accomplishments. Suffice it to say that reading this book is well worth your time if you are interested in India’s growth story.

But to go back to the quote above: the author is saying, as is everybody else, that growth is important, indeed crucial, from an Indian context. That’s the rapid part. However, we also need to make sure that the growth is inclusive. Which means it’s not just important to bake a larger cake, but it is also important to make sure that every gets a slice (and preferably, as equal a slice as possible). There are many ways to accomplish this, and we don’t always do a perfect job in this regard but here’s the most important bit: we have to bake a larger cake first! Distributing a very small cake equally isn’t the point.

Stable implies growth that happens in steady fashion, not haphazardly, not in fits and starts. Put another way, steady growth over a decade is better than rapid growth for the first five years and no growth for the other five. Listen closely, and you can hear the sound of every RBI governor alive nodding his head ever so vigorously.

Sustainable would mean environmentally friendly. That’s a separate book in and of itself, but what we want is a rapidly growing country that has breathable air, drinkable water and arable land 100 years from now. Some might say that’s a contradiction in terms, but we won’t wake that particular beast just yet.

And the last bit? …within the framework of liberal democracy is treated as being almost axiomatic by Vijay Joshi, and in my opinion, rightly so. Sure, we grow slower as a consequence of our choice of a liberal democracy, but if that’s the price for political freedom, it is certainly worth it.

But I’d much rather that we work towards achieving rapid, stable, sustainable and inclusive economic growth within the framework of a liberal democracy, than achieving rapid GDP growth.

It’s a longer definition, but a better target.

 

What does economics have to say about (the emergence of) Mr. Trump?

It might seem like a rather weird topic for a blog called Economics for Everybody to think about, but what explains the rise, and the seemingly inevitable ascent to the Presidency of the USA, of Mr. Trump?

This blog post isn’t about the politics of Mr. Trump, endlessly fascinating a topic though it is. It is instead about an attempt at looking at the economic factors that caused this phenomenon to occur at all.

And one cause is related to this:

Of the jobs lost during the recession, about 60 percent of them were in what are called “mid-wage” occupations. What about the jobs added since the end of the recession? Seventy-three percent of them have been in lower-wage occupations, defined as $13.52 an hour or less.

That is pulled from a book written by Tyler Cowen, called Average is Over. Read the whole book, it is worth the price of admission. But the trend that is highlighted in this book is the trend that is causing the rise and rise of Mr. Trump.

One, there are likely to be fewer jobs for all of us in the future. Two, those jobs that do exist are not going to pay very well at the bottom of the pyramid. One shouldn’t describe a book in two sentences, but that’s the quick summary of Average is Over.

Here’s the thing, though: machines don’t vote. People do. And who do you think those seventy-three percent in the block-quote above are going to vote for? For the guy who promises to cure their problems by – well, by curing their problems.

Mr. Trump’s solutions might not win him an academic degree in economics, but that’s not the race he’s running. The race he’s running is being judged by the people who have mostly lost in this era of globalization, and according to some of them, he’s doing just fine. If this “disenchanted” group turns out to be large enough, and motivated enough, Mr. Trump stands a very real chance of becoming President Trump by year end.

The disenchanted workers of the globalization era is not a new idea, far from it. And there is a lot more to the idea than what has been written here. The reason I’m writing about it now, and the reason I’m highlighting this one factor above all else,  is because old theories are beginning to receive fresh validation,  and that makes it an exciting time to be an analyst.

Being a global citizen right now, on the other hand, might well raise the demand for blood pressure pills.

Why do Bhai’s films never fail?

I haven’t seen Sultan yet, and I may end up not watching it, but I have seen my fair share of Bhai films (it’s only a matter of time before it becomes a genre by itself, capital B and all). And they’re entertaining, there’s no doubt about that.

As an economist who’s learnt about rational human beings though, there’s a lot that causes befuddlement where Bhai movies are concerned. In this post, though, I’m just focusing on one of these aspects: first weekend prices for Bhai movies.

Apparently, they’ve gone as high as 1200 per seat. Now, you might say, if you’re a Bhai acolyte, that it’s just because demand tends to be so high for His films. But it’s not just high demand (and this is what this post is all about), it’s also about inelastic demand.

Us economists are big on elasticity, and you’re about to find out why. Elasticity (or sensitivity) is simply the percentage by which demand goes down when prices go up. If, for a little change in price, there is a very large change in demand, we say a good is very price elastic. If, on the other hand, no matter what the change in price, demand stays the same, we say a good is very price inelastic.

Think cigarettes. Or Bhai films. Same story.

Now, demand can change because of a lot of things. It can change because income goes up or down, for example. A family that sees a drop in income might cut back on eating out (high income elasticity), but will not cut down on medicines (low income elasticity). It can change because the price of other goods goes up or down (drinking lesser chai because the prices of sugar have gone through the roof, or drinking more coffee because the prices of chai have gone through the roof).

All of these are examples of demand for a good changing (or not) because of a change in the price of that good, an associated good, or income. And that’s all elasticity is.

Of course, as recent events have proved, the demand for Bhai’s films is inelastic insensitive to what he says as well, but that’s a whole different story, okay?

Why selling anda bhurji will never make you the next Bill Gates

There’s this anda bhurji wala in Pune who I think makes the best bhurji going around.

 

That’s not true, of course, and I know that. Your run-of-the-mill eggs, same masalas, same dishes, nothing out of the ordinary. But hey, I’ve been eating there for over three years now, and there’s a level of familiarity that’s been built up over time.

 

But if he were to start charging double the rates overnight for his food – then no matter how good he is, and no matter how long I’ve been eating there, I’ll change shops. I’ll get more or less the same food, at almost the same level of quality and hygiene, and for half the price. What’s more, I won’t even have to look very far. Pretty much just stop at the next bhurji shop, and I’m set.

 

Of course, the bhurji wala knows this as well as I do, and therefore doesn’t raise prices at all over his competition, let alone double them. His regular customers love his food, but at that price. Charge more, and we’re going to move, because what have you got that others don’t?

 

And when you sell stuff that others do, and there are many “others”, and finding the “others” isn’t difficult at all, than you have it tough, because you’re selling in a competitive market. And let nobody tell you otherwise, selling in competitive markets is tough.

 

Because you’ve only got to sell what others do as well as you. Because you can’t charge higher, because the minute you do, all you customers switch, the ungrateful so-and-so’s. And because you and everybody else sell stuff that can be easily found by everybody. How do you get out of the game? Well, sell products or services that nobody else can (or will) build – iPhones, for example. Or at least convince people that what you’re buying is fundamentally different [link to product diversification article here].

 

And the reason this is a tough business is two fold: one, since everybody is selling what everybody else is selling, this is a very, very thin margin business. You will make hardly any money on every unit sold. Second, because this is a low margin business, it will likely remain a low margin business – nobody is going to “revolutionize” the anda bhurji business because there ain’t much to revolutionize.

 

So think twice before entering a competitive market as a seller, because it’s a tough old world out there. On the other hand, don’t pay all that much for a product in a competitive market, because hey – why would you?

 

But do try the bhurji at the stall I was speaking about. It’s the Famous Bhurji Center, in the lane opposite E-square multiplex. It’s just, like, the best ever.

Where should you go to find out more about Indian inflation?

What is India’s current inflation rate?

Well, which India are you talking about? Are you talking about people like you and I, consumers? Or are you talking about big fat factories and how their costs are going up? Which kind of consumers? Those who live in the cities, or those who live in the villages? So complicated is our country, it turns out, that we don’t report just one inflation number. But the two that we tend to report and focus upon the most are the ones that I’ll be discussing here.

First: WPI, or the Wholesale Price Index. On the page that’ll open if you click on that link, click open the link for the WPI Press Release, and in the PDF, look out for the “annual rate of inflation”. At the time this post was written, inflation was at 0.79% for the month of May. In English, what that means is prices of commodities that are typically used in production were 0.79% more in May 2016 than they were in May 2015.

What about us consumers? Well in this case India reports the Consumer Price Index. On this website, on the left hand side, choose Annual Inflation Rates (Base: 2012, Current Series).

At the time of writing this post, information up to the month of May, 2016 was available. If you mirror on the website everything as shown above, you should get the lastest values for CPI in India.

So inflation in India for the month of May was at 5.76%. That is, prices for goods that consumers tend to purchase were 5.76% more in May 2016 than they were in May 2015. Urban consumers, as you can see, were slightly better off compared to rural consumers, in the sense that inflation was higher in the rural areas.

The idea was to show you where to go if you want to find out for yourself about how inflation in India is reported. We’d encourage you to play around with both of these websites, and try and make sense of the data, and get more familiar with it.

As we discussed in the previous post, though, always keep in mind that measuring inflation is a very complicated, and therefore very approximate task. Some things were way more expensive in May 2016 compared to May 2015 (think tomatoes) while some were actually a little cheaper (last year’s cellphones, for example). The reported number is an average.

And that’s inflation where India is concerned.

What, exactly, is inflation anyway?

How would you calculate how the cost of living has gone up for people who live in your family? Well, one way could be for you to keep an eye on everything that your household consumes, and track how the prices of all of those things change over time.

 

So, that would include food, clothing, fuel, electricity, medicines, medicines, household consumables, eating out, movies, electronic goods, cable bills, internet bills, toys… and you could go on and on and on.

 

Of course, each of those are categories. Within vegetables you’d have to measure the price of cabbages, potatoes, tomatoes, chilis, coriander, spinach, bhindi, and on and and on. Long story short, you’d have to measure a lot of things.

 

Oh but hey, if you’re measuring your cost of living as one number, it won’t do to just measure how the price of things have changed. For example, if the price of one lemon was 2 rupees in July, but is 4 rupees in August, that doesn’t mean your cost of living has doubled, now does it? Because lemons are a very small part of your family’s total monthly expenses. So it’s not just measuring price changes, but it also involves figuring out the size of the impact of these price changes on your total expenditure.

 

Now, assuming you could do that, try expanding your analysis to your family and your neighbour’s family. The grandfather in your neighbour’s house may be taking a medicine that none of you do, while there may also be a baby in that family and so you have to think about diapers and baby food and what not. In essence, double the work.

 

Now, assuming you could do that, try doing it for everybody in your neighbourhood. Remember, your neighbourhood will involve people such as a watchman, whose consumption basket is likely to be wildly different from yours. It’ll involve people with varied economic background, varied tastes and varied consumption patterns – and therefore many, many more goods need to analyzed minutely on a month-on-month basis. Now, assuming you could do that…

 

Your suburb.

Your city.

Your district.

Your state.

Your country.

 

Here’s the point. Whatever inflation number is being reported right now is an educated guess, and nothing more. That’s not a criticism of the people who are involved in putting that number out there – I doubt a better job can be done. It simply is a statement of fact. So complicated is our world, and so many, many hajjar things are being produced in it every day, that using one number to track how prices in the economy are changing just doesn’t make sense.

 

But when we say we measure inflation in India (or any country) for that matter, that is what we essentially do: we say that prices have (on average) changed by x% over a particular time period. In the next post, we’ll find out where inflation is reported, and what to make of it.