Tag: aer

Read, Listen, and Observe. Then Write.

I don’t know how I missed reading this paper earlier, but a conversation this past week helped me land up on a lovely little paper written by Hal Varian, called How to Build an Economic Model in Your Spare Time. The paper was written in 1997, but was published again in the AER in 2016, and the editor’s introduction is worth reading, excerpted below:

Originally published in Volume 41, Number 2, Fall 1997, pages 3-10. Hal Varian (born 1947) is widely known by professional economists for his pathbreaking work in the economics of information and networks. Many more know him as the author of two bestselling microeconomics textbooks, one written for undergraduate college students and one designed for advanced graduate students. Through his research and his books, Professor Varian’s ideas have influenced a generation of economists. In this paper, Professor Varian outlines how he approaches the task of building an economic model to explain an observed phenomena or solve a problem. His words are encouraging advice for graduate students and young economists learning how to “practice the art” of economics. Professor Varian offers a number of tips ranging from how to choose a topic, when to read the literature, and even to how to effectively manage your bibliographic citations. Professor Varian’s advice has passed the market test as this paper remains one of the most referenced and downloaded papers in The American Economist’s backfile. However, after including the paper on a course reading list several years ago, one doctoral student pointed out to this editor that Professor Varian fails to explain how to find the “spare time” that he references in the title!

Varian, H. R. (2016). How to build an economic model in your spare time. The American Economist, 61(1), 81-90.

It is a very short paper, and the faint hurrahs that you might hear in your neighborhood come from tortured souls who will no doubt be relieved to hear that there isn’t a single equation in this paper. Tortured souls (myself included), in this context, are those who have had to plod through Hal Varian’s graduate text. He mentions this text in the paper, and his undergraduate text (which is a lot more fun to read). In fact, his ruminations about how that undergrad book came to be form one of the most important takeaways from this paper for me.

But my favorite bit from the paper is about “where to get ideas from” in order to write a paper. Hal Varian says that one shouldn’t look to academic journals as a source (and I agree), but look at pretty much the world itself:

My suggestion is rather different: I think that you should look for your ideas outside the academic journals- in newspapers, in magazines, in conversations, and in TV and radio programs. When you read the newspaper, look for articles about economics. . . and then look at the ones that aren’t about economics, because lots of the time they end up being about economics too.
Magazines are usually better than newspapers because they go into issues in more depth. On the other hand, a shallower analysis may be more stimulating: there’s nothing like a fallacious argument to stimulate research.

Varian, H. R. (2016). How to build an economic model in your spare time. The American Economist, 61(1), 81-90.

This was written in 1997, remember – that explains the now-quaint advice about magazines. There’s also a reference to a JEL CD later on in the paper, for those of you interested in ancient history. But if you are a student wondering “what to write about”, this is excellent advice. Look at the world, and write about what puzzles you about it. Forget papers, entire books can come out of this (very fun) exercise.

And if you’re looking for a concrete example, the unbelievably prolific Matt Levine obliged us in a recent podcast with Longform, where he spoke about how he came to write about the aluminum “scam”. What is the aluminum scam, you ask?

During the summer of 2011, officials at the London Metal Exchange got an unexpected complaint from The Coca-Cola Company. The amount of physical aluminum in storage was piling up, said a representative of the soda maker, and, along with it, so was the expense of buying the metal for beverage containers.
The culprit, as Coke saw it, wasn’t simple supply and demand—in fact, there was plenty of aluminum sitting in warehouses. It was the shrewd tactics of Goldman Sachs, the bank that owned a network of metal-storage facilities in the Detroit vicinity, where waiting times for extracting aluminum were longer than ever. Every day those metal bars sat idle, Goldman’s warehouse company effectively drove up the premium amount that aluminum producers could charge for delivering supplies to beverage-packaging factories, a cost that amplified the expense of the actual metal and, thus, the prices Coke and others paid for soda cans.

https://www.cnbc.com/2014/06/03/how-aluminum-became-a-cash-cow-for-goldman.html

If you want to find out whether it actually was a scam or not, you might want to read Levine’s column on it, which you can find here. TL;DR? Hanlon’s Razor. But the point is that if you’re looking to write an academic paper (or a Bloomberg column) on commodities, the place to look is the mainstream media, not obscure journals on commodities trading.

Learn the art of asking “but why?” when you read mainstream media, and if you do it long enough, you’ll realize that you’ve become an economist, like it or not.

My thanks to Pranav R Satyanath for recommending this paper to me.

What is common between the AER and markets in Nashik?

Not a joke, that is a genuine question.

The AER, by the way, is the American Economic Review. Getting published in the AER for an economist is like a cricketer getting to a century in a Test at Lords. Although drawing this analogy does remind me of what Harsha Bhogle said about Sachin and the Lord’s honours board.((Sachin famously never managed to score a century at Lord’s, and therefore his name isn’t up on the Lord’s honours board. Harsha Bhogle apparently asked whose loss it was, Sachin’s, or Lord’s)). Nashik, of course, is a city in Maharashtra.

So what’s the reason for the title of today’s blog post?

Exhibit A:

Exhibit B:

Amid rising Covid-19 cases in Maharashtra, the Nashik district administration has now issued new restrictions to limit people from visiting the markets unnecessarily. The people in Nashik will now have to pay ₹5 per person for an hour every time they visit any market in the city. news agency ANI reports.

https://www.livemint.com/news/india/new-covid-19-restrictions-in-nashik-now-pay-rs-5-for-hour-long-market-visit-11617154785051.html

In the boring but functional language of the economist, no free entry in these markets anymore.((To be clear, the AER thing was an April Fool’s joke.)).

What should we anticipate in terms of effects of such policies? Why? Are these policies good, or bad?

  1. Frivolous visits to both markets become rarer than before. In both cases, that was the intended outcome.
  2. In Nashik’s case, the price isn’t just 5 rupees, but also the time that you will have to spend waiting in line before you can cough up the fie rupees. Plus, the fine print says that if you end up spending more than one hour, you will have to pay 500 rupees as an additional fine.
  3. 1000 dollars is steep even by American standards. It is just completely out of reach for most of the rest of the planet. 5 rupees is nowhere close to being a back-breaking amount for most Indians. Does that make the AER price too high and the Nashik price too low? I think so, but that then begs the question of what the price should be in each case.
  4. You’ll “bunch together” a number of separate visits to the market. You won’t just pop down to the market to buy half a litre of milk in the morning and then pop back later in the day for some onions. You’ll combine the two trips. That is the intended outcome, so this is a good thing! But in the case of the AER entry fee, you’ll want to “get your money’s worth” – which means there is a chance that your paper will end up being longer than would otherwise have been the case. This is nobody’s idea of a good idea!
  5. Neighbours might get together and deputize one person to go get the shopping done. Again, that’s wonderful! Authors will get together too, that is, co-authorship will go up. Free <cough> rider <cough> problems?
  6. At the margin, sellers in Nashik’s markets are incentivized to figure out home delivery options. Again, wonderful! Since getting published in the AER is anything but a perfectly competitive market (just the one seller, by definition), AER has no such incentive. But the substitution effect will come into play, no? Other journals will see more papers being submitted. And if those journals raise prices, then fewer papers will be submitted all around. Personally, I don’t see this as such a big problem.((To be clear, research may not go down. The attempt to publish that research will. And I’m ok with that!))

(Here’s Tyler Cowen on other, related points about the AER pricing.)

As a student of economics, you should be able to see the similarity between both of these pricing calls, and also see the differences. That allows you to begin to think through whether these will, in fact, be good ideas or not, and why. I’m sure that there are many other points to think about in both cases.

If you are a student of microeconomics (and who isn’t, really), it might be worth your while to think about what I am missing in my analysis. Please, feel free to let me know!