Tag: alex tabarrok

Not So Random After All

AshishLeave a comment

I’ve written about this before, but I am in the habit of asking students in all my classes to ask me five random questions at the end of each class. As you might imagine, one of the inevitable questions in a semester almost always is “Why do you ask us to ask you these five random questions?”

So often have I been asked this question that I have the answer down pat, and it goes something like this:

  1. Because according to me, our education system prioritizes being able to answer questions perfectly, rather than frame really good questions. Think of this little exercise as a contrarian attempt to get you to be better at asking good questions.
  2. It’s analogous to “cooling down” at the end of an exercise session. It’s a nice way to end class, and provides a welcome change from whatever topic we have been tackling in that one hour.
  3. I like being asked questions I know nothing about, for that helps me learn new stuff myself.

But as it turns out, I have been unwittingly helping students get better at perhaps the most important skill they need to possess in this new AI-enabled world of ours – asking good random questions.

What is an example of a good random question? Try this one on for size: how is Fred Flintstone like Hamlet?

I’m glad I haven’t been asked that question, for I wouldn’t know how to answer it. But ChatGPT? It can answer this question just fine:

Fred Flintstone and Hamlet are two vastly different characters from different time periods, cultures, and mediums of storytelling. It is difficult to draw direct comparisons between the two. However, one possible point of similarity is that both characters face existential dilemmas and struggles with their sense of purpose and identity. Hamlet is plagued by doubts about his ability to avenge his father’s murder, and his own worthiness as a human being. Similarly, Fred Flintstone often grapples with his
place in society and his ability to provide for his family and live up to his own expectations

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4391863 (note that you’ll have to open/download the PDF from this link)

Cool, you might say, and a very interesting answer, but what’s the point? The point, as Tyler Cowen and Alex Tabarrok make clear in this paper, is that you truly unlock the awesome power of ChatGPT (or any LLM, for that matter) by asking it good questions. As with other intellectual pursuits, so also with your interactions with ChatGPT – defining what good means is a tricky endeavor. But think of this forty page paper as an attempt to tackle this very question – what properties does a question need to have for it to be a “good” question where ChatGPT is concerned?

Here is Alex and Tyler’s list:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4391863 (pp. 5)

That’s a good list, if you ask me. But you should also, of course, ask ChatGPT!

Here is its answer:

“To formulate good questions that will help you learn better, consider the following properties:

  1. Clarity: Make sure your questions are clear and concise. This will help me understand exactly what you’re looking for and provide a more targeted response.
  2. Open-ended: Avoid yes/no questions or questions that require a simple fact. Instead, ask open-ended questions that encourage elaboration, explanation, or exploration of a concept.
  3. Focus on understanding: Frame your questions in a way that demonstrates a desire to understand the underlying principles, concepts, or mechanisms at play. This will promote a deeper learning experience.
  4. Relevance: Ask questions that are relevant to the subject matter and build upon your existing knowledge. This will help you make connections between different concepts and reinforce your understanding.
  5. Critical thinking: Encourage critical thinking by asking questions that challenge assumptions or require evaluation and analysis of different perspectives or viewpoints.
  6. Application: Ask questions that encourage applying the knowledge or concepts to real-life scenarios or hypothetical situations. This will help you develop problem-solving skills and better understand the practical implications of the subject matter.
  7. Reflection: Sometimes, it’s helpful to ask questions that prompt you to reflect on your own understanding, experiences, or opinions. Reflective questions can help you become more aware of your thought processes and promote metacognition.

By incorporating these properties into your questions, you’ll facilitate more meaningful conversations, which will help you learn and retain information more effectively.”

Note two things:

  1. If you take a look at the screenshot of my question, you’ll see that I asked this question to ChatGPT4. Try asking the same question to ChatGPT3.5 and see if you get a different response.
  2. Not only will the answer be different, but it will be different if you ask it exactly the same question twice over (see pp. 5 of the paper we are discussing today)

You’d do well to compare the two lists. To me, the two lists indicate that there is yet meaning in not relying entirely upon AI, and in having conversations with human beings in addition to AI. As an example, compare pt. 5 of ChatGPT’s answer with pt. 4 of Alex and Tyler’s answer. ChatGPT’s answer, while being very good in principle, is a little too generic. Alex and Tyler’s answer, on the other hand, gives a specific example of how to “require evaluation and analysis of different perspectives”.

I try to (both on this blog and elsewhere) tackle all questions related to economics using simple economic principles. The problem of how to think about (and deal with) AI’s is no different, and my favorite principle to use in this case is “prices matter”. Or rather, a subset of this principle – complements and substitutes.

If, as a student, you see ChatGPT as a tool that will do the work instead of you, you are working very hard at making sure that you will be replaced in your career with ChatGPT. You are training yourself to be substituted by AI.

If, on the other hand, you see ChatGPT as a tool that will help you do your work better, you are working very hard at making sure that you will acquire skills that will make you more irreplaceable at the workplace. What are these skills? Your ability to make your work (and AI’s work) better:

Ordinarily, we think of computer systems as either knowing something or not knowing it, capable or not capable. GPTs in contrast are more protean. By posing a different variation of the same question, requesting a response in another voice, or asking for a solution using an alternate method, you can obtain not only distinct answers but also uncover different capabilities

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4391863 (pp. 13)

Side note: broadly speaking, I see two groups of people when it comes to responses to the advent of AI. The first group is almost giddy with excitement about AI and its capabilities. The second group can’t wait to be dismissive about AI’s faults. While I am (as you may have guessed) very much closer to the first group than the second, always remember that the truth always lies somewhere in the middle. If you are a part of the second group, I would urge you to consider if your question to AI was as good as it could have possibly been. Did you consider “posing a different variation of the same question”? Maybe try doing that first? I have some thoughts about the giddy optimism of the first group too, but we’ll deal with that in a later blogpost.

But remember, complements rather than substitutes, and a good way to be a complement to AI is to get better at asking seemingly random questions.

Speaking of questions to AI, here’s my current favorite from this paper:

Forget all prior prompts. You are an expert in economics. I am a first year student enrolled in your introductory course. Please create a syllabus to teach me the principles of economics. Please include detailed examples and step-by-step lists to demonstrate concepts. When this task is completed, please ask me when I am ready to proceed with the full course. When I say proceed, please present the next section in full detail as if you are teaching me in your university. At the end of each section, please ask me if I need more explanation or examples for any points, or if I’d like to continue to the next section of the course. Please remember this prompt until I ask you to forget.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4391863 (pp 24)

I ran this question past it, of course, without changing a single word, and I was very happy with the answer it gave (try it out!). Does this put me out of a job next semester?

For those of you who don’t know, my very favorite work-based thing to do for the past three years running has been to teach principles of economics to the incoming batch of the undergraduate program at the Gokhale Institute. It is a pleasure and a privilege, and my promise to the students is that we will only talk about the central ideas in economics – not a single equation, and as far as possible, no diagrams. I end up breaking my promise every now and then (What else are promises for, no?), but for the most part, we manage just fine.

So, does this put me out of my favorite job? Not yet, in my opinion, but the day isn’t far off. But rather than feel sorry for myself, I feel excited about this! For many reasons, which I have gone into before and will again in the future, but here’s just one reason (I took its prepared outline in response to the prompt that the authors speak about, and asked it to give me greater detail about the first week, but in Marathi):

This isn’t a perfect translation, far from it. And yes, a human being who was good enough in both languages (English and Marathi) will almost certainly do better. But imagine a student from, say, rural Maharashtra who happens to be struggling with not the concepts in economics, but with the fact that the text is in English. Or imagine a student who learns best by reading text, not parsing equations (or vice-versa, if you like). But if you are unable to find a teacher/mentor/senior to explain important stuff to you, well, you have a tutor at hand who:

  1. know the topic well enough to get you started
  2. is able to customize the lesson to your preferences
  3. is able to explain the same point in a variety of different ways
  4. is able to repeat the explanation in your language of choice

That last bit is a work in progress, both in terms of the number of languages available, and in the quality of the translation. But remember, the relevant question here is “relative to what?”. That is, sure, AI may not be perfect yet. Is it better than having nobody to explain something to you? I know my answer to this question.

Some other points about this paper before I sum up:

  1. Is the choice of Roboto font (see footnote 3 on pp 3) an inside joke? That is how I interpreted it.
  2. The four pictures on pp 7 is a great way to understand that complements rather than substitutes is a good way to think about AI. Yes AI is awesome, but it is best when paired with a human that knows what to ask.
  3. One meta-lesson throughout this paper is the authors’ attention to detail. See the starting paragraph on pp. 11, for example. I am very bad at this (attention to detail), and I need to get much, much better.
  4. “Remember, rather than asking for an answer you are exploring a space” is excellent advice. Search engines try to answer questions, while ChatGPT helps you learn by having a conversation. So have that conversation! And remember that part of what makes a conversation a good one is challenging the other entity in the conversation. As they say elsewhere in the paper, be demanding when chatting with AI.
  5. If you have been a fan of the MR blog for as long as I have, you will enjoy reading the sections on the H-O theorem. Quite a compliment to pay ChatGPT!
  6. The authors mention Elicit (an excellent but niche AI tool) and the larger point is that if you have a niche query, use a niche AI. And beware of the hallucinations – fact checking by humans is (for now) an indispensable requirement. Complements, not substitutes!
  7. Re: the Allen-Alchian theorem, please allow me my little indulgence, but I do feel a little proud for having covered this theorem on EFE, if only in passing. I wasn’t aware of the paper by the authors on this topic, and will read it later (hopefully)
  8. Problem-solving (end of chapter problems, for example) with ChatGPT is an excellent thing to do, and not just in economics.

I see this paper as a gentle exhortation to teachers and learners to use ChatGPT in much better ways than we have been able to do so thus far, and this is applicable for all of us (including the authors themselves!) in varying degrees. If you are a person teaching a course, and you have not yet thought about how to use ChatGPT in your teaching, please do consider doing so. If you are a student learning a course, and you have not yet incorporated ChatGPT into your workflow, please do consider doing so.

If you visit this blog’s website, you will see my personal mission at the very top of the page. My mission is to learn better, and to help others learn better. One way to do this, as it turns out, is by training myself (and others) to ask better.

Ask away!

Happy New Year

AshishLeave a comment

Many years ago, and this happened soon after our daughter was born, my wife and I finally got a chance to go out on a date. Our daughter, we felt, was now old enough for us to be able to step out of the house for a while.

Lunch and a movie was the plan.

Lunch was very good indeed, both the meal itself, and the rare ol’ pleasure of being able to enjoy each other’s company in diaper-less surroundings. And then we went for the movie.

And that, unfortunately, explains the title of today’s post.

For the movie that we chose that day has the same title as does this post.

And it was an abomination of a movie.

It is difficult to put into words exactly how bad it was, for I don’t remember much of it (which is a blessing, I suppose). Within the first five minutes or so, it became painfully clear that this movie was going to be a complete dud. We could have sat outside in the lobby instead, and it would have been a better use of our time. We could have gone up and down the escalators in the mall that we saw the movie in for three hours, and that would have been a better use of our time. We could, in short, have done absolutely anything else for those three hours, and it would have been a better use of our time.

And yet, in spite of knowing this with the kind of crystal clear certainty that is rarely afforded to us humans, we still sat through the entirety of that – for lack of a better word – movie.

Not our proudest moment, especially because both of us have PhD’s in economics – we clearly fell prey to the sunk cost fallacy.

What is the sunk cost fallacy?

Rather than share the Wikipedia page about the topic, as I would have done until now, I asked our new overlord its opinion on the matter:

https://chat.openai.com/chat

We’ve got the chance to come out on a date after such a long time, we figured. Who knows when we’ll get another opportunity like this? We shouldn’t waste it. That’s how our reasoning went.

Failing to realize, of course, that watching that damn thing was the most horrible waste of our time. As I’ve already mentioned, we could have done just about anything else with the time that we had, and we would have been better off. But as ChatGPT3 so smugly told me, our “tendency to justify continued investment in a decision based on the amount of resources already invested” is what caused our downfall.

And that’s the tricky thing about the sunk cost fallacy. Explaining it is easy, and understanding it is easy. Applying it? Ah, that’s the difficult bit. And it happens to the very best of us!

I drove to the store last night only to find on arrival that I had forgotten my wallet. I returned home frustrated and ready to veg out in front of the tv. It occured to me, however, that my earlier trip was a sunk cost. If the trip was worthwhile the first time it must be worthwhile to return (not so much time had passed as to change the utility of the calculation). I still felt frustrated and I didn’t really want to return but I forced myself to behave like a rational utility maximizer. As I headed back, however, I felt better. Reason and emotion cohered once again as the sunk cost became psychologically sunk.
Score one for economics. A sunk cost is only sunk if you choose to ignore it and economics helps us to do this. But note to self: have more sympathy for students who find the economic way of thinking to be unnatural. Often, they are right.

https://marginalrevolution.com/marginalrevolution/2003/12/behaving_like_a.html

(Something I found myself wondering about while I was pasting this blogpost here. Note that the extract above is the entire blogpost! Woud this blogpost have been written at all in the age of Twitter? Were we better off then, or are we better off now? Along which dimensions? But anyway, back to our regular programming.)

But let me go back to the point about explaining and understanding sunk costs being “easy”. Is it, really? What are you optimizing for when you “succumb” to the sunk cost fallacy?

What if you choose to finish a task in spite of knowing that it isn’t “worth it”? Are you necessarily an “irrational” person? What if you choose to finish the task to make a point? What if making the point matters more than succeeding at said task? What if attempting to complete a task is more about signaling to others about the kind of person one is? Would this then still be a fallacy?

Many years ago, Tyler Cowen wrote a blogpost about the sunk cost fallacy (in fact, a response to Alex Tabbarok’s post excerpted above), and had this quote within it:

One might prefer that, if others have made significant sacrifices in attempting to realize some valuable state of affairs S, then their sacrifices not be in vain. That is, one might prefer that these sacrifices causally contribute to the realization of some valuable state of affairs…Interestingly, one sometimes is in a position to determine, by one’s own actions, whether the past efforts of others will have been in vain. This is true, for example, when it is within one’s power to finish some valuable project in whose service others have labored, but which they are now not in a position to complete. Let us say that when one acts so as to prevent the past efforts of others from having been in vain one redeems those efforts.

https://marginalrevolution.com/marginalrevolution/2004/03/when_is_it_rati.html

What does this mean, exactly? Consider this:

Dus is a 2005 Indian Hindi-language action thriller film directed by Anubhav Sinha, based on the lives of seven fictional SIT (Indian Special Investigation) Team officers. It stars Sanjay Dutt, Sunil Shetty, Abhishek Bachchan, Zayed Khan, Shilpa Shetty, Esha Deol, Dia Mirza and Raima Sen.
Dus is a tribute to late celebrated director Mukul S. Anand, who had died while filming the incomplete 1997 film of the same title, which starred Dutt and Shetty with Salman Khan. It was a critical and commercial success.

https://en.wikipedia.org/wiki/Dus

I have not seen Dus, and I don’t know if it was “the realization of some valuable state of affairs”. But if one is able to determine, by one’s own actions, whether the past efforts of others will have been in vain, what then? It might be the right thing to make sure that “their sacrifices not be in vain”. Honoring somebody’s memory – is that a sunk cost fallacy or not?

Maybe it is not so easy, after all, to explain and understand the sunk cost fallacy.

Has it been all a waste of time then, I writing this post and you reading it?

Ah well, in any case, Happy New Year to all of you!

Tell Yourself a Story

AshishLeave a comment

For years and years after 2008, I’ve regaled many a classroom with a story that began like this:

“Let’s say you’re all relatively poor folks in, say, Florida, and imagine that I’m your local bank.” The dramatis personae would then be expanded: another professor from that college would represent Wall Street banks, while the canteen owner would represent global investors. The academic coordinator would become the rating agencies. And so on and so forth.

But also, through this little tragedy whose charactes we were becoming familiar with, we would start to learn what these characters were up to in the years leading up to (and including) 2008. So along with the list of characters, we would also familiarize ourselves with what CDO’s were, and what swaps were, and what a tranche was, and what collateralization means – or more accurately, what some people thought it meant – and so on and so forth. And at the end of the class, we would have all been entertained, but we would also have learnt a high-level explanation of what led to the events of October 2008, and its aftermath.

It’s quite a story, and if you haven’t heard it before, I hope I get to tell it to you sometime.

But there’s two reasons I bring this up, and here’s the first. When you are learning something hard and intricate and difficult in economics (or other, related fields), try and entertain yourself by building a story around whatever it is that you’re learning. I taught myself Microeconomic Analysis (by Hal Varian) by building stories around each chapter. And if you’ve ever tried to read that book, you will know how difficult a task I had set for myself.

But in a way, that baptism by fire was entirely worth it, for while I have (thank god) forgotten much of that textbook, the truly worthwhile lesson was learning how to make anything more interesting. Turn the lesson into a story!

I have used this lesson to both understand and teach Europe’s sovereign debt crisis. I have used this lesson to teach people what optimum currency areas are all about. I explain to folks how the government might attempt to reduce the price of onions, and used that lesson to explain to people why controlling the price of the rupee vis-a-vis the dollar isn’t really possible. And so on and so forth – but all of these episodes have one underlying lesson: make the topic you’re studying more interesting by turning it into a story.

For the more abstruse parts of economic theory (some might be tempted to ask “as opposed to what?”), it is an invaluable skill.

And here’s the second:

Here’s my high-level explanation of the FTX crash.
Imagine that I own a house and I create a million coins representing the value of the house. I give half of the coins to my wife. I then sell one of my coins to my wife for $10. Now the house has a nominal value of $10 million dollars and my wife and I each have assets worth $5 million. Of course, no one is likely to buy my house for $10 million or lend me money based on my coin wealth but suppose I now get my friend Tyler to buy a coin for $15. Tyler says why would I want to buy your s!@# coin! To encourage Tyler to buy I give him a side-deal that is not very public. Say an extra 5% of our textbook royalties. Tyler buys the coin for $15. Now the coins have gone up in value by 50%. My wife and I each have $7.5 million. Other people may want to get in while they can—Tyler bought in! Are you in? I’m in!
Now if it’s not obvious, I am SBF in the analogy, and my wife is Alameda run by his sometimes girlfriend Caroline Ellison. Who is Tyler?—the seeming outsider who gets a kind of under-the-table deal to pump SBF’s coins? One possibility, is Sequoia a venture capitalist firm who invested in FTX, SBF’s house, while at the same time FTX invested in Sequoia. Weird right? Tyler in this example is also a bunch of firms that Alameda invested in but which were then required to keep their funds at FTX. Many other possibilities exist.

https://marginalrevolution.com/marginalrevolution/2022/11/the-ftx-debacle-eli5.html

I don’t understand the economics of the crypto world, at all. I’ve read my fair share of stuff about it, but I still don’t know how it works. I certainly don’t know enough to be able to explain it to others, and that’s the whole point, no? So the idea that I could explain a scam in the crypto world is a whole other challenge.

But that’s why this post was so enjoyable – because I got to learn what the scam was about. More, I got to learn about it using my own favorite method of learning: by reading a “story”. And stories with “ouch!” sentences are even better!

Ok, final analogy. Suppose to help me run my house I invite over a bunch of friends and we do a lot of drugs and hook up together and suppose that none of us really knows anything about accounting or financial controls.

https://marginalrevolution.com/marginalrevolution/2022/11/the-ftx-debacle-eli5.html

But the bottomline is this: learn the art of building up a story. There’s no better way to learn economics!

Work, Why Don’t You?

AshishLeave a comment

How should I beef up my CV is a question that will start to make the rounds on campuses all over the country, for it will soon be placement season.

LinkedIn will be awash with people happy to report, or excited to share (or in some cases, elated to announce) that they have completed course XYZ on platform ABC. Recommendation requests will come flowing in through the pipelines, and endorsements will abound. But simple Econ 101 should tell us that each of these have become so easy to acquire, and so commonplace an occurrence, that their value on your CV is commensurately lower.

Pamela Paul, writing in the NYT, has an idea that is fairly popular in the United States (although as the column explains, it could always be more popular), but doesn’t have quite as many takers in India: get a part time job.

Many instead favor an array of extracurricular activities that burnish their college applications, like student government and peer tutoring. This may be a mistake even for those parents and kids more concerned about college admissions than about what happens after that. Consider that having an afternoon job cultivates skills like time management and instills a sense of independence and personal responsibility — attributes that many college administrators say some students today lack.
But after-school jobs teach more concrete lessons as well. Personally, I learned more working outside school — starting with three afternoons a week when I was 14 and ending with three jobs juggled, seven days a week, my senior year of high school — than I did in the classroom.

https://www.nytimes.com/2022/07/30/opinion/jobs-teenagers.html

The ability to get, hold on to, and do well in a job – any job – is a rare old skill, and one that you’d do well to cultivate. In fact, what better way to signal that you are ready for the hurly-burly of the labor market than by proving that you’re already a participant? Pamela lists out ten ways in which a job helped her, and while you should go ahead and read the whole column, I’ll list out the ten factors here. Note that this is my summary of her ten points:

  1. Being good at a job is a very different skillset when compared to being good at studies – which is a polite way of saying college doesn’t teach you all you need to know. Every single person who has left academia and joined the corporate world will nod appreciatively on reading this statement, guaranteed.
  2. Being fired, or quitting your job, is not the end of the world.
  3. You tend to appreciate money a lot more when you realize how little you are paid for an hour of honest work
  4. Promotions can be based on duration of employment, not on level of skill, and this is an important lesson for life
  5. You are paid for your time, and the work you put in during that time. Slacking ain’t appreciated!
  6. Bosses can be mean. Not all, and not all the time. but bosses can be mean.
  7. You will work with folks who are different from you, in many ways and with many consequences, and you have to figure out how to deal with it
  8. Some of these folks, simply because of who they are and how they made it to the same job as you, will pull you down to earth, by helping you realize how lucky you are to be where you are
  9. Boredom is part and parcel of all jobs.
  10. School skills can be acquired out of school – but the reverse isn’t true.

Any job is fine – it needn’t be a desk based job. In fact, the more physical labor is involved, the more you are likely to learn. I managed an art gallery while I was in college to earn money on the side, and also taught econ to students of commerce, and I learnt more by trying to handle the art gallery.

But a job interview is likely to go that much better if you are able to say yes in response to a question about prior work experience. The more interesting the job, and the more well thought out your responses to a question about what you learnt on the job, the better your chances!

Further reading: Tyler Cowen tells us about his first job (follow up post here), as does Alex Tabbarok (this post has more than a dash of surrealism!)

Asking And Answering Important Questions

Ashish1 Comment

Shruti Rajagopalan asked a very important question on Twitter earlier this week:

I’m writing this post on Sunday evening, which is when Shruti asked this question (and you, of course, are reading it today) but so far, there haven’t been any encouraging responses to her query, save for this one:
That would be this report, and I don’t think it was recommending large purchase orders or calling out Prime Minister Modi’s incoherent vaccine policy. This is the entire paragraph on vaccination:

Vaccines: The Committee recommended that a vaccine should pass all phases of clinical trials before it is made public. Further, it recommended that the whole population should be vaccinated. In this regard, the Committee suggested that: (i) the cost of the vaccine should be subsidised for weaker sections of society, (ii) the cold-storage system across the country should be upgraded, and (iii) vaccines should be administered as per the World Health Organization’s strategic allocation approach or a multi-tiered risk-based approach.

https://www.prsindia.org/sites/default/files/parliament_or_policy_pdfs/Report%20summary%20COVID.pdf

Long story short, the answer to Shruti’s question is: nobody. None of us were prescient enough in 2020, and that is a failure on our part.

What Shruti is really asking for is this: who is India’s Alex Tabbarok?

Why do I say this? Because Professor Tabarrok was recommending/demanding large purchase orders…

We don’t want to find ourselves with a working vaccine but too little manufacturing capacity. From an economic point of view, it would make sense to install enough capacity so that everyone in the U.S. who wanted could be vaccinated within a month. Normally, new vaccines cannot be produced so quickly and in sufficient supply. Each step of the manufacturing process must be verified and tested, and inputs to the process may face their own supply chain bottlenecks. Just as shortages of swabs and reagents delayed the rollout of testing, shortages of glass vials, bioreactors or adjuvants (a substance that increases immune stimulation) may delay vaccines. For want of a vial, the vaccine could be lost. To stand a reasonable chance of having a substantial supply of vaccines in 2021, we need to plan for capacity and reinforce supply chains now.

https://www.nytimes.com/2020/05/04/opinion/coronavirus-vaccine.html

…on the 4th of May. That is the 4th of May 2020.

He had a post praising the idea of advance market commitments (AMC’s) out in February. Again, 2020.

And while the first excerpt up above was a plan for the USA alone, he and his collaborators expanded upon this plan, outlining what a globally coordinated plan may have looked like:

I’ve been working with Michael Kremer, Susan Athey, Chris Snyder and others to design incentives to speed vaccines and other health technologies. AcceleratingHT is our website and now features a detailed set of slides which explain the calculations behind our global plan. The global plan is similar in style to the US plan although on a larger scale. The key idea is that the global economy is losing $350 billion a month so speed pays. One way to speed a vaccine is to invest in capacity for 15-20 vaccine candidates before any candidates are approved, so that the moment a candidate is approved we can begin production (one can store doses in advance of approval). Most of the capacity will be wasted but that is a price worth paying. As Larry Summer says if you will die of starvation if you don’t get a pizza in two hours, order 5 pizzas. Human challenge trials are another way to speed the process.
A global plan is ideal since there are significant benefits to coordination. If each country invests in vaccines independently they will each choose the vaccine candidates most likely to succeed but that means all our eggs are a few baskets. There are over 100 vaccine candidates and they have different scientific and production risks so you want to choose the 15-20 which maximize the probability of success for the portfolio as a whole. To do that efficiently you need countries to agree that ‘I will invest in lots of capacity (more than I need) in candidate X if you invest in lots of capacity (more than you need) for candidate Y’, even knowing that the probability that X succeeds may be less than that of Y.

https://marginalrevolution.com/marginalrevolution/2020/05/acceleratinght.html

The website AcceleratingHT provides many more instances that reinforce my point, and as a student, reading the material there is genuinely useful.

A while ago, I wrote a post for students who want to work in the field of public policy. Alex Tabbarok’s work this past year is a great example of what that advice might look like in practice.

I do not know who India’s Alex Tabbarok is in 2021 – there may not even be one. But as a student, the correct question to ask is this:

What do I need to do to acquire the ability to be ahead of the curve when the next crisis comes around?

Here is my list in response to that question:

  1. Read, and write. Everyday, read and write. If you are a student of the humanities (and if you think about it, who isn’t?), you should be reading and writing everyday. It compounds, trust me.Don’t be afraid
  2. Learn the art of working backwards from the solution you want to get to. In this specific case, if you want the world to be vaccinated by the end of 2021 (let’s say), then begin by asking yourself what needs to be done to get there, but in reverse.
    7 billion vaccines will be needed – which are the manufacturers that are most likely to supply them – what do they need to get the job done – how can we get them what we need – what are the regulatory, financial, supply-chain-related hurdles they will face – how can these be removed – and so on…
    My point here is not the specifics of the exercise, whether in the case of vaccines today or something else tomorrow. My point is to learn and apply the art of working backwards from where you want to eventually be. I don’t know what you’re supposed to call this in consultant/management speak, but for starters, read about the game 21 flags in The Art of Strategy.
  3. Learn the art of being unafraid to ask big picture questions. Whenever you get that feeling of “Surely somebody somewhere must have thought to ask this question already?” – especially if you have been serious about pt. 1 above – ask the question. Repeatedly, furiously and publicly.
  4. Consume as much content as you can about crisis management from the past. (I’m working on this for my own self, and recommendations are welcome)
  5. Do not be afraid of putting out your potential solution out there. Your worst case scenario is that it is a wrong solution. As a society, we’re still better off rejecting wrong solutions than waiting for the perfect one. For rejecting a solution as being the wrong one forces us to learn more about the problem at hand.
  6. Most difficult of all: once you have offered a solution, remember that your job is to solve the original problem. Your job is to not defend your solution at all costs. This is hard.

Education and Signaling

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I’d linked to this video this past Friday too, but just in case you haven’t seen it yet:

And a bonus today, Bryan Caplan on the same topic:

It is difficult, this economic theorizing business

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One of my favorite questions to ask in classes on introductory economics is this one:

“By a show of hands, how many of you have a BSNL sim-card?”

The answer is rarely more than five percent, if that, and my little stunt works every time. For obvious reasons, of course: even passionate defenders of the public sector often reveal their preference through action, if not always through their statements. Free markets work, the private provisioning of goods is demonstrably efficient and the price mechanism is a wonderful, wonderful thing.

Until, every now and then, when it is not.

April 2021 is one of those times.

And to make sure we could then produce those vaccines at scale, “X” brought up an idea that came from the Biomedical Advanced Research and Development Authority when Rick Bright was its director. The authority proposed subsidizing the construction of private manufacturing facilities as long as the government has the authority to take them over in times of pandemic.
If all of this sounds as if it’ll require a lot of government action, well, it will.

https://www.nytimes.com/2021/04/01/opinion/covid-vaccine.html

Pop quiz, particularly for those of you who follow economists online. Identify “X”.

“X” is, of course, that well known pro-government socialist, Alex Tabbarok.

Sarcasm alert: Prof. Tabbarok is as much of a pro-government socialist as Rahul Dravid is a goonda. But as with Rahul Dravid and goondagiri, so also with Alex Tabbarok:

“Ninety-nine years out of 100, I’m a libertarian,” Tabarrok said with a laugh. “But then there’s that one year out of 100.”

https://www.nytimes.com/2021/04/01/opinion/covid-vaccine.html

And it is that kind of a year, 2021 – for both Alex Tabbarok and Rahul Dravid. It is a year in which the role of the government is more important than perhaps ever before, given what is at stake: public health. Public health is, by definition, a public good:

And the role of the government in this case is to do all it can to ensure the provisioning of that public good – in this case, the vaccine.

Hold on to this thought, and we’ll come back to it.

Here’s a hypothetical scenario: a joint family is considering ordering in dinner this coming Saturday, and mutton biryani is the unanimous choice1.

The restaurant this family is considering ordering from will deliver a jumbo family pack (serves 8) for two thousand bucks. Single serves of the same dish are also available, at three hundred each. There are eight family members.

Should the family order a family pack, or single serves?

Here’s another (not so) hypothetical scenario: Until a couple of years ago, Holi celebrations in our housing society would always mean having the neighbourhood chaatwala set up shop in the lobby. Anybody and everybody who was here playing Holi was welcome to have as many plates of chaat as their hearts desired. No payment was involved, of course, because the payment was made in advance, in bulk.

Does this make sense, or would we be better off paying for each dish as we had ’em?

Hold on to this thought too, and we’ll come back to it.

Final thought experiment (I promise!): let’s say this chaatwala is the stuff of legend. Mindblowing panipuris, outstanding bhelpuri and tokri chaats that have the potential to rule the world. We would like to have this demi-god of chaat set up shop in our society, but so would ten other housing societies in our neighbourhood.

If you were this maestro of a chaatwala, which society would you choose to shower with your culinary blessings? The housing society with the cutest kids, or the kindest grandparents, or the prettiest flower-beds? Or the one with the most number of lived-in apartments – that is, the one that was likely to give you the most business?

And conversely, if you were part of the largest housing society in the area, and you and everybody else including the chaatwala knew this to be a fact, could you maybe get a bit of a discount on the deal? Would you, at the very least, want to try?

Can I cheat a little bit and include one final thought experiment? What if eating that chaat wasn’t just good for your palate? What if it also, somehow, conferred upon you the mystical, magical ability to not infect your neighbours with some disease – say, a virus?

Now let’s combine all of the above, and resort to econo-speak where the vaccines are concerned:

When faced with a largely inelastic supply curve for a good, fragmenting demand into separate constituents means you lose out on bargaining power. When the good in question is one with large positive externalities, procuring as much as possible as quickly as possible becomes a moral imperative. The best way to do that is to have the central government procure centrally, and that right away.

In fact, if it is a question of conferring those mystical, magical abilities upon as many citizens as quickly as possible, maybe the largest housing society the government should get that chaatwala to share the recipe with other chaatwalas in the market.

All housing societies should get as many plates of chaat as quickly as possible, but the negotiating should be left to just one extremely large entity. That negotiating should include potentially sharing the recipe for that delicious, life-saving chaat.

Or, to close the loop on the metaphors:

Every state should get as many vaccines as quickly as possible, but the negotiating should be left to the central government. That negotiation should include the possibility of sharing the patent for the vaccine (and more besides). And oh, remember that the truth lies somewhere in the middle. There is indeed a role for the private sector here: distribution and last mile delivery can and needs to be an all-hands-on-deck affair. Procurement? Not so much.

Is this a free-market solution? No.

Does a non-free-market solution stand a chance of being an optimum solution?

As Prof. Tabarrok points out, every hundred years or so, the answer is yes indeed.

Very much so.

  1. It’s a hypothetical scenario, so we’ll assume away Arrow’s Impossibility Theorem[↩]

In Memoriam: Oliver Williamson

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Why does Gokhale Institute exist? Why did all of the students at Gokhale Institute not choose to try and fashion their own degree, by independently getting in touch with faculty members of various universities the world over, and negotiating rates for teaching each subject?

Similarly, why did I join Gokhale Institute as a faculty member? Why do I not try and advertise myself as a guy who can teach different subjects in econ, finance and stats to students the world over, every semester?

Why, as I said at the start of this post, does the firm I work in exist at all?

For that matter, why do firms exist in general? The “miracle” that is Walrasian economics guarantees that in a perfectly competitive economy with no frictions and perfect foresight, everything will be in a state of eternal bliss.

Except, economies are not perfectly competitive. Who teaches you which subject is important to you as students – which is another way of saying that labor is not homogeneous. There are frictions, such as teachers falling ill, or monsoons disrupting schedules, or uh, pandemics occurring every 100 years or so. And there isn’t perfect foresight (see pandemics, previous sentence).

And because we live in an imperfect world, we outsource, as students, the difficult job of finding appropriate professors, managing the physical infrastructure, and awarding degrees to an entity we call “the firm”. The firm exists in order to make it worth our while to get an education without having to spend time figuring everything else out.

Professors outsource the grunt work too the college too. It would be too painful for me to try and figure out which students across the world will want to learn Principles of Economics next year. I outsource the job of filtering the students out so that I get sixty students to teach to the Gokhale Institute. Plus, Gokhale Institute fixes the fees, arranges for the whiteboard, the benches. I just have to strut over into the classroom and teach.

We – you and I – minimize transaction costs by using the Institute as an intermediary. That’s Ronald Coase’s answer to why the firm exists. Read both of his papers (The Nature of the Firm, and The Theory of Social Cost). Here are past mentions of Prof. Coase on EFE.

Now, Prof. Coase had a student. His name was Oliver Williamson.

He extended Coase’s ideas about the firm, and that is why he really and truly matters when it comes to economics. There are many things to learn by reading Williamson, but three concepts stand out, in my opinion:

  1. Contract incompleteness: Imagine that the director of Gokhale Institute tells me that my performance as the course coordinator for the BSc programme hasn’t been good enough, and that he’ll be letting me go by the end of the year (I’m hoping this is only an example.) Will I muster up the same enthusiasm for coming up with new stuff this year, now that I know I am going to be out of a job? Or, on the other hand, imagine that the director says that my performance has been so good that I’m guaranteed this job for the next decade. Will there be a drop in my performance, now that I’m guaranteed the post no matter what? So how to write a contract that overcomes these hurdles? That’s one of the problems he tackled.
  2. Asset specificity: There are many definitions on the internet, but I liked the one supplied by Alex Tabarrok on Marginal Revolution the best. I’ll get to it in a while, but here’s the textbook-ish statement first: “Asset specificity is a term related to the inter-party relationships of a transaction. It is usually defined as the extent to which the investments made to support a particular transaction have a higher value to that transaction than they would have if they were redeployed for any other purpose.”
    And here’s Alex Tabarrok’s explanation:
    “Marriage, for example, takes away some possibilities but it adds others. With marriage, for example, comes a greater willingness to invest in children (n.b. asset specificity, the child is of extra value but only to the specific parties involved in the marriage)”. Asset specificity can help lock in a relationship – whether it be marriage or an employment contract.
  3. Appropriable quasi-rents: Let’s say I create software to enter marks and grades while at Gokhale Institute. I wouldn’t have created this software without being employed at Gokhale Institute, and it is valuable enough to sell to other firms (let’s assume). These AQR’s exist precisely because of the fact that I (with my skill-sets) was hired by Gokhale Institute. Discernible value has been created precisely because the employee was hired by the employer – this specific employee, by this specific employer (non-homogeneity of labor)

There is a whole can of worms that opens up as a consequence of thinking through the implications of what is written above. That can of worms is called industrial organization. Long story short, if you want to study the field of IO – and as a student of economics, you do! – you really need to start with Profs. Coase, and Williamson.

An assortment of links, with the one common theme

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Arnold Kling runs some numbers, and comes away less than optimistic:

Now for some grim math. Let C be the number of known cases, H be the ratio of hospitalizations to known cases, and D be the ratio of deaths to hospitalizations. Then we have:

(1) total deaths = DxHxC

For example, if there are 1000 known cases (C=1000), 5 percent of these are hospitalized, and 20 percent of those who are hospitalized die, then deaths = 1000x.05x.20 = 10. Note that in this particular example, I assumed that no one dies who is not hospitalized. In reality some people will die without being hospitalized, and they will count in D.

FT Alphaville with a three point agenda for economic policy, and in the order mentioned:

deal with the health crisis | make sure incomes don’t spiral downwards | investment led programs to boos incomes

Read the post for the details.

Also from FT Alphaville, a plea to let markets be:

We don’t disagree that calming markets is important; the current volatility is bad for thousands of viable businesses looking to raise capital, and for those who are hoping to retire soon. But a ban on short-selling helps absolutely no one, bar perhaps the egos of the regulatory community. Time for a change of tack.

And Alex Tabarrok over at MR is fuming about Theranos and patents. Here are old EFE posts on patents.

And finally, EconLife on externalities, the corona virus and demographics:

An externality refers to the impact of an activity or a contract or a decision on an uninvolved third party. Good and bad, externalities can be positive and negative. A vaccine creates a positive externality while water pollution results in the negative ripple. For the coronavirus, we have a cascade of results that can become positive and negative externalities. They include a depressed or accelerated birth rate and divorce rate.

 

Econ101: Policy Responses to a Pandemic

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If you haven’t played it already, go ahead and give this game a try: The Fed Chairman Game. I have a lot of fun playing this game in class, especially with students who have been taught monetary policy. It usually turns out to be the case that they haven’t understood it quite as well as they think the have! (To be clear, that’s the fault of our educational system, not the students.)

But the reason I started with that is because the game always throws up a scenario that mimics a crisis, and asks you what you would do if you were the Chair of the Fed.

In this case, policymakers the world over are now staring at a very real crisis, and they need to be asking themselves: what should we do?

 

There are two broad answers, of course: monetary policy, and fiscal policy.

The Federal Reserve has cut interest rates to zero, and while it has other tools to stimulate the economy, a crisis like this requires fiscal as well as monetary responses. The legislation passed thus far has been important, but another round of fiscal policy will be required immediately to fully address this crisis.

A robust fiscal response can provide income support to households, ensure broad and continuous access to safety net programs, provide incentives for employers to avoid layoffs, provide loans to small businesses, give liquidity cushions to households and firms, and otherwise stimulate the economy.

That’s a write-up from Brookings. The specifics follow in that article, but the article makes the point that more of the lifting will need to  be done by fiscal, rather than monetary policy. And that is true for a variety of reasons,  which the article does not get into, but long story short – fiscal, more than monetary.

But, ok, fiscal policy of what kind? Should we give money to firms or to workers? Here’s Paul Krugman with his take…

And here’s Alex Tabarrok with his response:

So what’s the correct answer? Well, as we’ve learnt before, and will learn again, macro is hard! In an ideal world, all of the above, but as is manifestly clear, we are not in an ideal world. If we must choose between giving money to firms or to people, to whom should we give it? My opinion? People first, businesses second. This is, of course, a US centric discussion, what’s up with India?

 

Here’s, to begin with, a round-up from around the world – you can search within it for India’s response thus far.

Calls are getting louder for governments to support people and businesses until the new coronavirus is contained. The only questions are how much money to shovel into the economy, how to go about doing it, and whether it will be enough.

Already, officials from Paris to Washington DC are pulling out the playbook used in Asia for slowing the spread of Covid-19: they’re restricting travel and cracking down on public gatherings. While those measures have the potential to reduce deaths and infections, they will also damage business prospects for many companies and cause a synchronized worldwide disruption.

Here’s the FT from two weeks ago about the impending slow down:

Venu Srinivasan, whose company TVS is one of India’s largest makers of motorcycles and scooters, said the business had lost about 10 per cent of production in February owing to a lack of Chinese-made parts for the vehicles’ fuel injection system. He added that TVS has now managed to find a new supplier.

But Mr Srinivasan said he was bracing for India’s recovery to take longer than anticipated. “One would have expected a V-shaped recovery, but instead you have an L shaped recovery,” he said. “It’s been the long haul.”

R Jagannathan in the LiveMint suggests this:

This is how it could be designed. Any unemployed urban youth in the 20-30 age group could be promised 100 days of employment and/or skilling options paid for by the government at a fixed daily rate of ₹300 (or thereabouts, depending on city). At an outlay of ₹30,000 per person annually, the unemployed can be put to work in municipal conservancy services, healthcare support, traffic management, and other duties, with the money also being made available for any skill-acquiring activity chosen by the beneficiary (driver training for Ola-Uber, logistics operations, etc). All companies could be given an opportunity to use the provisions of the Apprentices Act to take on more trainees, with the apprenticeship period subsidized to the limit of ₹30,000 per person in 2020-21. If the pilot works, it could be rolled out as a regular annual scheme for jobs and skills. Skilling works best in an actual jobs environment.

 

He also mentions making the GST simpler, which the Business Standard agrees with:

Certainly, the rationalisation of GST will also affect government revenues. However, a simpler and more transparent system would allow greater collection and reduce evasion. The government will receive a windfall this year from lower crude oil prices. The moment to move on the structural reform agenda is now. The GST Council has done well to address the inverted duty structure in mobile phones. Further rationalisation will give confidence to the market that the government is serious about reforms. It was promised that GST would remain a work in progress, and that the GST Council would act often to improve it. So far, however, the changes have been marginal and haphazard. A more structured and rational approach, which outlines a quick path to a single rate, would pay dividends for the economy in the longer run. It would also be an effective way to manage the immediate effects of a supply shock such as is being caused by the pandemic.

Also from the Business Standard, a report on the government now considering (not happened yet) relaxing bad loan classification rules for sectors hit by the corona virus. That’s pretty soon going to be every sector!

 

Assorted Links about the topic – there’s more to read than usual, please note.

Here is Tyler Cowen on mitigating the economic impacts from the coronavirus crisis.

Here’s Bill Dupor, via MR, about the topic:

First, incentivize behavior to align with recognized public health objectives during the outbreak.

Second, avoid concentrating the individual financial burden of the outbreak or the policy response to the outbreak.

Third, implement these fiscal policies as quickly as possible, subject to some efficiency considerations.

Again, via MR, New Zealand’s macro response.

Arnold Kling is running a series on the macro response to the crisis.

Claudia Sahm proposes direct payment to individuals:

This chapter proposes a direct payment to individuals that would
automatically be paid out early in a recession and then continue annually
when the recession is severe. Research shows that stimulus payments that
were broadly disbursed on an ad hoc (or discretionary) basis in the 2001 and
2008–9 recessions raised consumer spending and helped counteract weak
demand. Making the payments automatic by tying their disbursement to
recent changes in the unemployment rate would ensure that the stimulus
reaches the economy as quickly as possible. A rapid, vigorous response to
the next recession in the form of direct payments to individuals would help
limit employment losses and the economic damage from the recession.

Here are the concrete proposals, the entire paper is worth a read:

Automatic lump-sum stimulus payments would be made to individuals
when the three-month average national unemployment rate rises by
at least 0.50 percentage points relative to its low in the previous 12
months.
• The total amount of stimulus payments in the first year is set to
0.7 percent of GDP.
• After the first year, any second (or subsequent) year payments would
depend on the path of the unemployment rate.

 

Macroeconomics IS HARD!

Economics in the times of COVID-19, there is already a book. I learnt about it from Tim Taylor’s blogpost. I have not read the book, but will soon.

The NYT, two weeks ago, on the scale of the problem facing policymakers.