Tag: economics

Getting Your Sources Right

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“Let’s start at the very beginning, a very good place to start”…

…isn’t just the start of one of my favorite songs. It is also excellent advice as regards where one should get one’s information from.

Let’s say you’re interested in economics, and learn, for example, that Bernanke, Diamond and Dybvig have won the Nobel Prize in Economics. Quite naturally, you wish to learn more about the work that they’ve done. How should you go about it?

Maybe Twitter is a good idea? What about the more popular newspapers in your country? Perhaps some news channels? Your econ prof, perhaps?

All excellent ideas, to varying degrees. But the very best place to start, if you ask me, will be the Nobel Prize website itself:

This year’s laureates in the Economic Sciences, Ben Bernanke, Douglas Diamond and Philip Dybvig, have significantly improved our understanding of the role of banks in the economy, particularly during financial crises. An important finding in their research is why avoiding bank collapses is vital.

https://www.nobelprize.org/prizes/economic-sciences/2022/press-release/

It’s always difficult to be sure as an economist, because we do love our jargon so very much. But I honestly do think that these two sentences can be understood by absolutely anybody who is able to read them. What was the Nobel Prize in economics awarded for this year? For helping society improve its understanding of what banks do in an economy. And especially so during crises. Plus, it is critical that we avoid bank collapses.

Well duh, you might think. I could’ve told ’em that myself. And I wouldn’t blame you for thinking so, for it really does sound obvious. But that, as it turns out, is true for quite a few Nobel Prizes that have been awarded in the past. They sound too simple to be worth even an assignment in college, let alone worthy of a Nobel Prize.

Here are three examples, drawn from one of my favorite books on microeconomics, ever:

The Cartoon Introduction to Economics, Volume I: Microeconomics, by Grady Klein and Yoram Bauman, pp 60
The Cartoon Introduction to Economics, Volume I: Microeconomics, by Grady Klein and Yoram Bauman, pp 49
The Cartoon Introduction to Economics, Volume I: Microeconomics, by Grady Klein and Yoram Bauman, pp 47

And neither the authors of this excellent book (which you absolutely must read if you have not yet) nor I are saying that the Nobel Prize is awarded for painfully simple ideas. What I’m saying is that it takes rare ol’ skill to take a look at the world around you, ask why it works the way it does, and figure out the answer to this question. More, to come up with ideas to make it a better place. And above all, to then put it as simply as possible, so that the world can both understand your idea, and then go about implementing it, if it chooses to do so. That’s special.

But to come back to the topic at hand, if you want to learn more about what they did, the Nobel Prize website is really the place to start. Once you’re done reading the very brief description, tackle the Popular Science Background write-up. And if you’re a glutton for punishment, slay the Scientific Background dragon next.

Read next the Wikipedia pages of the winners: here, here and here.

Then, and only then, start to take a look at what others have to say. Maybe you’ll agree with them, maybe you won’t. Maybe you’ll learn a little bit more. Maybe you’ll figure out that their opinions are wrong. Who knows?

But if you form your opinions on the basis of other people’s opinions, you always be playing catch-up. First do the hard work involved in forming your own, and then take it onto the battlefield of ideas, and test it.

Top Gear and The Division of Labor

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You may or may not agree, but I think Top Gear to be one of the best television shows ever produced. Yes, they were politically incorrect more often than not, yes they were occasionally outrageous and yes they courted controversy. But also, the show was of extremely high production quality and if nothing else, it made for excellent entertainment.

Phull paisa vasool, as they say.

But hey, Jeremy Clarkson, Richard Hammond and James May can also help us understand the importance of the division of labor.

What is the division of labor?

Here is the opening paragraph from an essay on the topic over on EconLib:

Division of labor combines specialization and the partition of a complex production task into several, or many, sub-tasks. Its importance in economics lies in the fact that a given number of workers can produce far more output using division of labor compared to the same number of workers each working alone. Interestingly, this is true even if those working alone are expert artisans. The production increase has several causes. According to Adam Smith, these include increased dexterity from learning, innovations in tool design and use as the steps are defined more clearly, and savings in wasted motion changing from one task to another.

https://www.econlib.org/library/Enc/DivisionofLabor.html

Two questions at play here, really. First, what is division of labor? It is “the specialization and the partition of a complex production task into several sub-tasks”. Second, what is the benefit to society of this concept? It is “the fact that a given number of workers can produce far more output using division of labor compared to the same number of workers each working alone.”

And over millennia, this division of labor has resulted in humans building ever more complex things in ever more affluent societies. This process has, of course, rapidly accelerated over the last two hundred years or so. But precisely because we have gotten so very good at division of labor, we have experienced yet another benefit of this concept:

The reason is that division of labor produces a cost advantage where none existed before—an advantage based simply on specialization. Consequently, even in a world without comparative advantage, division of labor would create incentives for specialization and exchange.

https://www.econlib.org/library/Enc/DivisionofLabor.html

This, to me, is an underrated point, and worthy of elaboration. Division of labor is (partly) specializing in a particular task, but the magical bit is that division of labor itself creates incentives for further specialization. Or, to put it another way, division of labor begets more division of labor, and more specialization.

And one indication of this, to me, is the fact that we’ve created a society in which we tell three middle-aged British gentlemen that they can spend about three decades and counting on creating ridiculous, over-the-top television shows that will entertain and enrage in equal measure. This – climbing dams in a car, dropping a car from the sky, taping a car on top of another car and playing football with cars, among other mad things – is what they should specialize in.

Not only will we lap it up, but we’ll pay for knock-offs, spin-offs and versions in different countries. This is going to sound faintly ridiculous, but imagine the three of them trying to pull this off in a hunter-gatherer society. Not a show about cars, of course, but a proposal that the rest of the tribe should get on with the business of hunting down food or foraging for it, while the three of them entertain the others with mad-cap capers. I suspect it wouldn’t have gone down well.

But today, we have enough of a surplus from other parts of society for us to be able to say that hey, a section of our 7 billion plus tribe should drop cars from the sky, and record it so that the rest of us can watch it and be entertained.

Which brings me back to another topic of discussion: perhaps you are of the opinion that surely this is not what we created our modern civilization for. All the efforts of the past thousands of year culminate in… “this?“, you might quite reasonably ask.

Well, this and the Laser Interferometer Gravitational-Wave Observatory. Specialization has resulted in us building tunnels over four kilometers in length so that we can detect gravitational waves that originated 1.3 billion light years away also.

Go back to the question embedded in the first sentence of this section: what did we create our modern civilization for? The question is “what”, not “how”. Economics doesn’t tell you what you should be optimizing for, that’s your business.

But if you have decided that what you should be optimizing for is having cars fall out of the sky, then economics can tell you how to go about getting this to happen. Economics will help you align the incentives, set the prices, deal with the unintended (is that the word I’m looking for?) consequences, and execute the trades necessary for the show (or the laboratory) to come to fruition, and stay popular.

But every time I watch an episode from Top Gear, I can’t help but wonder at how far we’ve come. You might wonder if the direction in which we’ve come is the right one, but you can’t help but marvel at the distance civilization has traveled.

What a time to be alive.

Learn Economics By Watching Movies

Ashish2 Comments

Classes on Principles of Economics at the Gokhale Institute have been going on for a while now, and have included one class on how to learn economics by looking at a painting. Another class, the topic of today’s post, was about learning economics by watching movies.

Here is the chart for India’s GDP:

Source: https://fred.stlouisfed.org/series/MKTGDPINA646NWDB#0

And it is safe to say that something happened around the 1990’s, and India has never looked back since. But is it possible to tell the same story… not by looking at charts, tables and chapters from a book – but by watching movies?

Let’s watch clips from three of them, and see if we can’t tell ourselves a story about India’s growth episodes.

The first clip we’re going to watch is from a movie called Naukri. This is a movie from the 1950’s, and is about a young Kishore Kumar and the troubles he faces while searching for employment. We’re going to watch a song at the start of the movie, called Chota Sa Ghar Hoga:

In this song, Kishore Kumar tells his young sister and his widowed mother what life will be like when he finds a job. There will be, he tells them, a small house, material comforts, and better times than the ones they’re going through right now. The only thing that prevents us from enjoying all this right away, he seems to be saying, is that he hasn’t found a job just yet – but just you wait! Once he does, all will be hunky dory.

If you accept the premise that Bollywood is all about showing you what you want to see, then I would argue that it isn’t a far stretch to assume that in the 1950’s, people wanted to watch movies about finding a job. Now, of course, I should be taking a sample size of larger than one, and I freely admit to there being some cherry-picking involved. But that being said, I would argue that a movie titled Naukri would likely not be made today – and the protagonist would not be singing songs about finding a job. More on that note in a bit, but the point I am trying to make here is that back in the day, folks visited movie theaters to watch songs about finding a job. Their daydreams were about finding employment, and about how life would change for the better once they did find it.

By the 1970’s though, the Great Indian Dream had soured. Youngsters no longer wanted to watch movies about finding a job. Now, in fact, they wanted to watch movies about what would happen once they were unable to find a job – and this was no longer a question about “if”. Unemployment was all but guaranteed, and the daydreams in this decade were about what life would be like when no gainful employment was possible.

And what would life be like? Yash Chopra had an answer, in Deewar:

Nobody left the movie theatre wanting to be like Shashi Kapoor. Amitabh was the anti-hero, but he was the focus of the audience’s daydreams. It is society that has deprived us from being able to get gainful employment, Deewar is saying, and here’s a three hour escape from reality. Watch a movie and daydream about what happens when through no fault of your own, you find yourself unable to get a job.

This scene, the one that I have embedded here, is in fact saying that the opportunity cost of material wealth is a loss of values and familial ties. Not in such abstruse, academic tones – but that’s one way of thinking about this scene. Or put another way, Deewar could well have been titled Naukri Nahi Milegi – Ab Kya?

In economist-y terms, the optimism about finding a Naukri has been replaced with a surly pessimism about never finding one. And it’s one thing to say that India’s GDP growth rate never really took off in the 1960’s and 1970’s, and quite another to think about how Bollywood movies help us see the same thing – if we choose to look.

And about twenty-five years later or so, yours truly was in college. And when I was in college, our dreams weren’t about finding, or not finding a job. In fact, to borrow a phrase from the movie that I’m going to talk about, who the call cared where we landed up?

Our dreams, were, instead, about driving to Goa in a Mercedes:

There is another song in this movie, called Koi Kahe Kehta Rahe. And right before that song begins, Aamir Khan jokes that he is going to sing a song called “Naukri Paane Ke Sau Tareeke“. One hundred ways to find a job. He then chuckles and tells his befuddled audience that he’s only joking – who the hell cares where we land up.

Each of these movies could only have been made in their respective decades. Youngsters in my day wouldn’t have empathized with a movie about finding a job, much less a movie about what would happen if we didn’t get a job. Those concerns weren’t ours – at least, not of those of us who grew up in middle class surroundings in an urban environment. Dil Chahta Hai was a movie made for People Like Us. We didn’t have Aakash’s palatial house, and we stood zero chance of being sent to Australia to manage a business. And the idea that we could have taken a year off to go paint wouldn’t have gone down well at our homes.

But it wasn’t unbelievable. Out of our reach, sure, but not forever. Dil Chahta Hai was a movie for our times, much like Deewar and Naukri were movies for their times. And if you want to learn about how life changed on the ground for Indians post 1991, well, you could read the books, study the tables, and all the rest of it – or you could ask if Dil Chahta Hai could have been made before 1991.

Roger Ebert, the movie critic, was fond of saying that one shouldn’t ask what movies were about. One should ask instead, he’d say, how movies were about whatever they were about. What he meant by that was this: ask what the director is choosing to show you in terms of the set, the accessories, the plotlines, and the characters and their choices.

As economists, this lesson is equally important. When you’re watching a movie, or reading a book, or listening to a song, ask questions about whatever it is that you’re consuming. Reflect on what is being perceived by you, and what is being shown to you. It enriches your experience, but it also helps you become a better social scientist.

And you’ll begin to appreciate movies, and why they’re made when they’re made.

For example, our generation absolutely lapped up Dil Chahta Hai.

But a movie about traveling to Spain for a holiday? Why, that’s outrageous! Maybe for the generation that came after ours, eh?

Postscript #1: Naukri is a movie about finding a job, but it is about much more than that, and the rest of the movie is actually quite bleak.

Postscript #2: An earlier version of this post is also on this blog.

Seeing like an economist

Ashish3 Comments

If you are a student who “has” to take a course in economics, you often end up approaching the subject as a necessary chore, and (let’s not mince words here) an utter bore. And not as a way to understand the world around you better.

I am, as you might imagine, a person with a strong and definitive bias in this regard, but I think this to be truly unfortunate.

This is the first slide of the presentation that I use when I give talks on introductory economics:

… and I think of the sentence at the bottom of the slide as being at least as important as the one at the top of it.

But in today’s blog post, I want to introduce to you a paper that teaches you how to see the world as an economist does… even if that world happens to be a prisoner of war camp!

Richard Radford was an economist who did lots of things as an economist, but his best known work is a short paper that he wrote in 1945. Radford was about twenty years old or so when World War II started, and he left his studies in economics and joined the British Army.

He was captured, and spent the rest of the war in a prisoner of war camp in southern Germany, called Stalag VII-A. Based on his observations while at the camp, he later wrote a paper called “The Economic Organisation of a P.O.W. Camp“

After allowance has been made for abnormal circumstances, the social institutions, ideas and habits of groups in the outside world are to be found reflected in a Prisoner of War Camp.

Radford, R. A. (1945). The economic organisation of a POW camp. Economica, 12(48), 189-201.

One of these social institutions, as it turns out, was markets.

What could prisoners of war in a camp in some war-torn corner of Germany possibly want out of a market in that camp? How might such a camp even function?

One aspect of social organisation is to be found in economic activity, and this, along with other manifestations of a group existence, is to be found in any P.O.W. camp. True, a prisoner is not dependent on his exertions for the provision of the necessaries, or even the luxuries of life, but through his economic activity, the exchange of goods and services, his standard of material comfort is considerably enhanced.
And this is a serious matter to the prisoner: he is not “playing at shops ” even though the small scale of the transactions and the simple expression of comfort and wants in terms of cigarettes and jam, razor
blades and writing paper, make the urgency of those needs difficult to appreciate, even by an ex-prisoner of some three months’ standing.

Radford, R. A. (1945). The economic organisation of a POW camp. Economica, 12(48), 189-201.

What might prisoners of war in a camp want out of a market? The same thing that every participant in all markets have ever wanted: to trade in order to make their lives better. I have something that you don’t, and you have something that I don’t, so let’s trade! So long as you get the fact that the word “you” in the previous sentence refers to everybody else in the market, and not a solitary person, you get why markets exist – yes, even in a P.O.W. camp!

How might such a market function? To quote Radford, “Very soon after capture people realized that it was both undesirable and unnecessary, in view of the limited size and the equality of supplies, to give away or to accept gifts of cigarettes or food. “Goodwill” developed into trading as a more equitable means of maximizing individual satisfaction.”

It’s one thing to memorize Lionel Robbins’ definition, and quite another to think about goodwill being undesirable and unnecessary in view of limited supplies. If this was a class instead of a blogpost, I would have spent time in asking students to think about why goodwill became undesirable and unnecessary. I would ask them to think about whether this was a good thing or a bad thing, and why. And I would then ask them to think about what this means for society at large, and the kind of modes of production and exchange that we have adopted over millennia. I invite you to do the same!

Read the rest of the article and see if you can answer the following questions:

  1. Why did cigarettes become money, and no other commodity?
  2. Were all cigarettes of the same quality? How did that affect the money supply?
  3. How did price mechanisms get established? That is, so many cigarettes for a bar of chocolate, and so many cigarettes for a jar of jam. What price a bar of chocolate in relation to a jar of jam? Does it matter if you are a smoker or a non-smoker? Why?
  4. Was the price of all commodities the same in all the barracks in this camp? If not, why not? If you were a prisoner in this camp (and happened to be a student of economics), how would you use this to your advantage? What about this lesson can you apply in your own life?
  5. How did mechanisms in the market develop over time? Did markets become more “efficient”? How should one judge the answer to this question?
  6. Could a market such as this have futures contracts? Why would anybody want such contracts? Were such contracts “fair”?
  7. How did demand and supply work in this market? What were the factors affecting demand and supply in this market?
  8. Did price fixing “work”? What lessons for the world outside?

Sit down with your friends/batchmates and read this paper, and try and answer these questions. Don’t worry about your answers being “right” or “wrong”, see if you can come up with some answers. Try and figure out why others have different answers, and see if you can come up with a list of what are the strengths and weaknesses of your answers and those of the others.

Trade, as it were, ideas in this little group of yours, and appreciate the fact that you can establish a market for ideas while reading about a market in a P.O.W. camp!

And if you can understand the key difference between your little idea market and the P.O.W. market, why, you’ve learnt to both see the world like an economist… and understood why you should care! 🙂

On Xi Jinping’s Stubborn Attachment(s)

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These are not good times for the credibility of China’s GDP growth targets. Just weeks after unveiling an ambitious target of 5.5% real GDP growth for 2022, the central government effectively ensured that target will not be met by requiring local governments to impose strict lockdowns to contain the spread of Covid-19. The restrictions cover most of China’s major cities, have had a clear negative impact on economic activity in March that will only worsen in April.

https://andrewbatson.com/2022/04/18/why-gdp-growth-targets-are-underrated/

So begins a thought provoking blog post on China’s growth prospects for this year, written by Andrew Batson. I’m a very (very!) amateur student of China, and follow a more or less random group of people on topics related to China – but Andrew Batson’s blog, I think, should definitely be on everybody’s list.

This one speaks about growth prospects in China this year, but so much else besides. Let’s learn a little bit about China by parsing through it.

The first point that he makes is that growth targets this year are all but likely to be missed. This, of course, is because of the lockdowns in Shanghai and other parts, and pretty much everybody knows that they’re not going well – and that’s putting it mildly. Targets were missed last year, and the year before – so why, one might be entitled to ask, should one have them at all in the first place?

There’s shades of Goodhart’s Law in the paragraphs that follow, and when I read the piece the first time, my blogging antennae were up. Aha, I thought to myself, one more post in an ever increasing canon. But the post then moves in (for me) an entirely unexpected direction, and in a way that makes it even more interesting.

Targeting GDP growth, Batson says, is not A Perfect Thing, but is, all things considered, Still A Good Thing Given The Alternatives.

https://andrewbatson.com/2022/04/18/why-gdp-growth-targets-are-underrated/

One way to understand Batson’s defense of GDP growth targets is by internalizing what I think is his key point: giving up on a GDP growth target doesn’t mean there will be no targets – it simply means there won’t be economic growth targets.

That is to say (and this is my understanding of his point), it’s not as if giving up on GDP growth targets will mean a very laissez faire approach to the economy. Instead, China will be set other, non-economic targets. Such as what, you ask?

…“regulatory storm” of 2021 with its multitude of highly interventionist policies aiming to reshape entire industries. Limiting the power of large private companies was even a fairly explicit goal: it’s probably not a coincidence that the main targets of last year’s political-regulatory campaigns were real estate and the internet, the two economic sectors that have created the biggest private-sector fortunes. All of this was certainly enabled by Xi’s dictum that there are more important things than GDP growth. The costs and economic downsides of the regulatory storm were put aside in favor of other goals.

https://andrewbatson.com/2022/04/18/why-gdp-growth-targets-are-underrated/

Regular listeners of Amit Varma’s excellent podcast, TSATU will no doubt be aware of the line “Politics is downstream from culture”. The quote is originally by Breitbart, of course, as Amit always points out. The reason I bring it up over here is because economic growth, if you ask me, is downstream of politics. In this framing, economic growth serves political needs, and those political needs are downstream of culture.

Rarely does one get to quote Brietbart in one paragraph and then follow it up with a supporting quote that references Lenin, but hey, welcome to 2022:

…China’s Leninist political system, which is organized around mobilizing officials to direct social transformation. As Ken Jowitt put it: “The definitional tendency of Leninist regimes [is] their attempts to control and specify the substantive dimensions of social developments, not merely the framework within which such developments occur.”

https://andrewbatson.com/2022/04/18/why-gdp-growth-targets-are-underrated/

As Andrew Batson goes on to argue in the following paragraphs, de-emphasizing growth targets in a liberal political framework is very different from de-emphasizing them in a Chinese set-up. The focus on growth for its own sake is very different from the focus on growth to serve other aims. Batson argues that Deng Xiaoping was optimizing for economic growth, and that Xi Jingping is optimizing for national greatness. National greatness includes, but never as a primary target, economic growth.

But that pursuit of national greatness, perhaps, has been taken too far in Chin’s case:

In December, when when Xi chaired the annual Central Economic Work Conference, the signal was clear: the priority is now the “stability” of the economy.
Since then, various political slogans and campaigns have been much less in evidence and the focus has been on more practical short-term measures. Senior officials have even promised not to introduce policies that “adversely affect market expectations”–effectively admitting that they had been doing just that in the recent past.

https://andrewbatson.com/2022/04/18/why-gdp-growth-targets-are-underrated/

I’ve said it before, and I’ll say it again, and this is applicable to individuals as much as it is to nations. Be very clear about the answer to that irritatingly simple question:

What are you optimizing for?

Why Studying Economics is Worth Your Time

Ashish1 Comment

My way of unwinding at the end of the day is to watch YouTube videos. I suspect I’m not the only one, and yes, I’m well aware of how it’s not the best thing to do before one falls asleep, but it’s a habit that has, well, stuck.

So it goes.

Yesterday, one of the videos I ended up watching was this one:

I came across Veritasium thanks to a recommendation I received sometime last year, and if you aren’t familiar with this channel, I strongly encourage you to look it up. You might also want to read up about the person behind the channel, Derek Muller.

These waves were detected at the Laser Interferometer Gravitational-Wave Observatory. They have a shorter name, thankfully: LIGO.

The design and construction of LIGO was carried out by a team of scientists, engineers, and staff at the California Institute of Technology (Caltech) and the Massachusetts Institute of Technology (MIT), and collaborators from over 80 scientific institutions world-wide that are members of the LIGO Scientific Collaboration.

https://www.ligo.caltech.edu/page/about

Here’s just one of many astounding facts from the LIGO website:

At its most sensitive state, LIGO will be able to detect a change in distance between its mirrors 1/10,000th the width of a proton! This is equivalent to measuring the distance to the nearest star (some 4.2 light years away) to an accuracy smaller than the width of a human hair.

https://www.ligo.caltech.edu/page/facts

Here’s a photo of the laboratory:

Source

Here’s what I found remarkable, as a student of economics: even if one assumes that there was only one person from each of these 80 scientific institutions that worked on this project, it still means that there were 80 people whose job it was to create really, really long tunnels (four kilometers in length!) that would have one trillionth of the normal atmospheric pressure, so that they could detect almost imperceptible gravitational waves that started their journey 1.3 billion light years away. If all this sounds mind-boggling, well, it is.

But think about those 80 people for a minute. Our civilization has become wealthy enough, over many millennia, that we’re able to say to those eighty people that they can spend a significant chunk of their careers on building long tunnels to try and check on barely detectable phenomena that actually took place a really, really long way away.

Was there a time in our past when humanity could afford to dedicate human labour, money and other resources to a pursuit such as this one? You and I may have different opinions about whether we should or not (and I think we should), but I think we can all agree that it is remarkable that we can.

And on that note, read The Company of Strangers:

Homo sapiens sapiens is the only animal that engages in elaborate task-sharing—the division of labor as it is sometimes known—between genetically unrelated members of the same species. It is a phenomenon as remarkable and uniquely human as language itself. Most human beings now obtain a large share of the provision for their daily lives from others to whom they are not related by blood or marriage.

Pg 4, Introduction, The Company of Strangers, by Paul Seabright

And because most human beings now obtain a large share of the provision for their daily lives from others to whom they’re not related by blood or marriage, they are free to do other things with their time. Some of us write blogs on economics, while others build really, really large tunnels to detect barely perceptible gravitational waves. Others create videos about these really long tunnels. But none of these proposals would have gone down well in earlier times, because there were more urgent and pressing tasks at hand, such as growing enough food for everybody to be able to eat.

And so while the completely amateur fan of modern physics in me appreciated learning more about LIGO, the economist in me was struck by how impressive a fact it was they we have the ability to dedicate so much resources to the development of this laboratory.

Again: you and I may have different opinions about whether or not we should be building these laboratories, or sending people to the moon (or Mars, soon enough!), or everything else that we get up to these days. But the fact that we can is truly remarkable.

And don’t forget Derek Muller! Isn’t it remarkable that I, sitting in the comfort of my living room, can cast a video off of my phone on to my television, and watch an excellent video about the LIGO laboratory without having to pay a cent to Derek?

I only learnt of Derek’s existence last year, and I can guarantee you that he is blissfully unaware of mine. And yet, the society we live in has made it possible for me to learn about his work, and this video in particular. I pay YouTube Rs. 189 every month so that I and five other members of my family can watch YouTube videos without being bombarded by ads, but that money apart, I had to pay nothing more to enjoy this video – and by all accounts, Derek is able to do fairly well for himself by putting videos out there for people to watch and learn from.

How did we get from hunter-gatherer societies to here? How did division of labor help? Was agriculture a wonderful, welcome development, or was it all a big fat mistake? What about the development of kingdoms, the advent of religions, the desire to educate our young, the development of the study of physiology and eventually health and medicine, and so, so many other things? What explains how and why we were able to do all of these things, and so many more? If we could reset the clock and play the movie all over again, would all of these things happen, or not? Could we do an even better job? If so, how?

Economics is about so much more than graphs and diagrams and equations (that stuff is important too, of course, but there is so much more to this field than just that).

Every now and then, economics is also about taking a step back while watching a wonderfully well made video, and just reflecting on how far we’ve come as humanity. Yes, there is a lot that remains to be done, and yes, we’ve often taken one step forward and two steps back. And yes, we’ll probably figure out how to take ten steps back in the near future.

But for the moment, I find it remarkable that at least eighty people got together and built a pair of really, really large tunnels to detect Very Small Movements.

That’s division of labor, that’s economics, and it is a truly remarkable thing to think about.

And it’s just one of many, many reasons to study economics.

About Teaching Python to Students of Economics

Ashish4 Comments

This is a bit of a rushed post, my apologies. I hope to come back to this post and do a better job, but for the moment a placeholder post and a request:

Read the whole thread (including the responses). We (and by we I mean not just all of us at the Gokhale Institute, but higher education in economics in India) should be building out more courses of this nature.

If anybody is already doing this, please do get in touch. I would love to learn more about how to try and start something like this for my university.

Can Undergraduates Be Taught To Think Like Economists?

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The title of today’s blogpost has been copied, word for word, from a blogpost I had linked to earlier (the fifth link in this post).

It’s been about two and a half years since I read that post. I would still like to believe that Deirdre McCloskey was wrong, and that you can too teach undergraduates to think like economists. But well, perhaps the truth lies somewhere in the middle.

A common goal for principles of economics courses is to teach students to “think like economists.” I’ve always been a little skeptical of that high-sounding goal. It seems like a lot to accomplish in a semester or two.

https://conversableeconomist.blogspot.com/2019/03/can-undergraduates-be-taught-to-think.html

Both Tim Taylor and Deirdre McCloskey (whose essay I excerpt from below) aren’t saying that you can’t teach economics to undergraduates. You most certainly can, and you don’t need to run a fancy-pants model to ascertain this. What they are saying, however, is that it is one thing to teach them the principles of economics. It is quite another to teach them to apply these principles in their lives, at all times.

Bower thinks that we can teach economics to undergraduates. I disagree. I have concluded reluctantly, after ruminating on it for a long me, that we can’t. We can teach about economics, which is a good thing. The undergraduate program in English literature teaches about literature, not how to do it. No one complains, or should. The undergraduate program in art history teaches about painting, not how to do it. I claim the case of economics is similar. Majoring in economics can teach about economics, but not how to do it…. (Emphasis added)

http://www.deirdremccloskey.com/docs/graham/natural.pdf

It is one thing to teach opportunity costs. And most students we’ve taught will tell you the definition. The “good” students will tell you three different definitions, from three different textbooks, and maybe cite a couple of academic papers that ruminate about what the definition means. Well, great. Do these students apply the concept of opportunity costs in their daily lives? Do they ask themselves if this (whatever this may be) is the best use of their time, and what are they giving up in order to do this?

Does winning matter more than learning? Does winning matter more than doing? If you end up defeating somebody else – a person, a team, a tribe, a party or a nation – what do you gain? And to go back to the previous paragraph, was it but a Pyrrhic victory?

Consider this hypothetical:

Let’s say there’s two teams in some corporate environment somewhere. And for whatever reason, these teams don’t get along well together. Both sides believe that they’re in the right, and the other side is in the wrong, and we’ve reached Mark Twain territory.

Are they going to go to their manager(s) and ask them to resolve this issue? Sure, it may seem like a good idea initially. But said managers, I can assure you, have things to do. Deliverables to, well, deliver. Teams to manage. Projects to initiate. Other people to manage. And so the manager(s) might listen to both teams long list of complaints once, perhaps twice.

But eventually the price mechanism will come to the party. The more the two teams spend time on this, rather than on work, the more expensive the situation becomes for the enterprise. Because a commodity that is limited (time) is being spent on non-productive work (productive, in this case, can be thought of as remunerative).

Since the whole point of the firm’s existence is to maximize revenue, this will not be tolerated for too long. The manager(s) will eventually say one of the following:

  1. Figure it out yourselves, but get the work done, for that’s what matters. Or else.
  2. Let’s reallocate, forcibly, both teams on to other projects. This will usually be accompanied with a mental note to themselves that truly important projects in the future should not be given to these team members. For obvious reasons.
  3. Or let’s shut down the project, because the point of a firm is to do the work that earns one the money. Start something new, with a new set of people.
  4. Now, since the team members are old enough to know that eventually pts 1 to 3 will occur, they usually swallow their differences and get the work done. Sure, bitching about the other team will happen in bars and pubs in the evening, and sure the other team won’t be called home for dinner anytime soon. But in the workplace, professionalism will win out, due to the price mechanism. In more explicit terms, they will get the work done because they know that otherwise they will be fired.

The reason all of this will happen is because these team members will have families, responsibilities, loans to pay off. The money they will lose out on by losing their jobs is far too important, and the threat of losing out on their income forces them to behave professionally.

The opportunity cost argument comes into play. Playing politics may be good for your ego, but it ain’t good for your wallet. But that lesson comes with age, it doesn’t come from attending principles of economics classes.

A nineteen-year old has intimations of immortality, comes directly from a socialized economy (called a family), and has no feel on his pulse for those tragedies of adult life that economists call scarcity and choice. You can teach a nineteen-year old all the math he can grasp, all the history he can read, all the Latin he can stand. But you cannot teach him a philosophical subject. For that he has to be, say twenty-five, or better, forty-five. …

http://www.deirdremccloskey.com/docs/graham/natural.pdf

Adults don’t necessarily grasp the argument that the opportunity cost of politics is work. But they understand the rules of the game called life. They do understand that the opportunity cost of politics is an increase in the probability of losing their wages. And so they still practice politics, but more covertly. Not, in other words, an ideal situation if the system is trying to optimize work, but hey, better than overt politics.

How to get students to understand that the opportunity cost of politics is learning? That the opportunity cost of politics is not getting fun projects done? That the opportunity cost of resolving arguments, or adjudicating who said what to whom and when is not being able to start other fun learning based projects? There’s no price mechanism at play, there’s illusions of immortality (they don’t get that time is limited), they don’t have the responsibility of putting food on the table (they come from a socialized economy called a family), and they haven’t experienced the tragedies of adult life.

To them, winning a political argument against the other side is the best use of their time.

Principles of economics, if taught well, and if learnt well, should in theory help you understand that the opportunity cost of politics is work. Philosophy should in theory teach you that good work is better than bad politics.

I’ll say this much: I was convinced that Deirdre McCloskey was wrong when she said that you couldn’t have undergraduates do economics, even if we taught them economics.

Now?

I hope.

The Positive Externalities of Writing a Blog Post

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If I ever meet Zeynep Tufekci, a beverage of her choice is due to her from me.

Last week’s post about her take on metaepistomology bought forth two very pleasant consequences. Whether they were intended or not is a question I myself have been grappling with, but I shall deal with that question (and that story) later on this week.

About those consequences:

  1. A student from the BSc program at the Gokhale Institute wrote in asking if we could have a discussion about metaepistomology – and you’ll permit me a self-congratulatory pat on the back for getting folks interested in a word as daunting as that. This of course means that I will have to spend a fair chunk of my time today reading up about metaepistomology myself, but I know that can only be a good thing.
    …
    (Or do I?)
  2. Another student from the same program asked why a course on philosophy wasn’t a part of the program in a formal sense. To which I had no good answer, beyond saying that the course constraints were such that it could not be fit in.

Which, let’s be upfront and honest, is no answer at all. So, the topic of today’s blogpost: if there were to be a summer school, or a workshop, or a weekend course – whatever – on philosophy at the undergrad level, what all should it contain?

I don’t have a formal training in philosophy, having never taken the subject in my own undergrad days. It wasn’t on offer, I am sad to report, when I was doing my Masters. But I have tried to read a little bit here, and a little bit there, and have jotted down the list below as a starting point. Note that I have tried to ask what should be included in a summer school for students of economics who are studying philosophy for the first time, rather than first time students of philosophy. Also not that I am a complete amateur: please, point out obvious omissions!

That, I’m guessing should be more than enough for a 30 hour introduction, and the reading list is already monstrous.

So when I ask of you, what am I missing, I’m really asking the following: who/what would you include (and why) and who/what would you remove (and why). If there is anybody reading this who could help, please do write in.

Thank you!

Understanding Google

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Out of all the tech companies that I have written about so far, Google is far and away my favorite, and one that I always have wanted to work at (at some margin, I still do).

It’s just – and this is a personal thing, may not work for everybody – cool.

The only reason I say this at the outset is to make sure that you’re aware of my biases!

Here we go:

I often ask this question in classes I teach in microeconomics, or introductory economics:

“What is Google’s business?”

The default answer is almost always “search”. At which point of time, I have a follow-up question: identify for me one person who has paid Google to run a search.

In fact, if anything, Google seems to go out of its way to keep Google search free. And if running a search is not to be paid for, it can’t be much of a business, right?

So what is Google’s business?

But suppose we say that Google is primarily an advertising company. That changes things. The U.S. search engine advertising market is $17 billion annually. Online advertising is $37 billion annually. The entire US advertising market is $150 billion. And global advertising is a $495 billion market. So even if Google completely monopolized US search engine advertising, it would just own 3.4% of the global advertising market. From this angle, Google looks like a small player in a competitive world.

What if we frame Google as a multifaceted technology company instead? This seems reasonable enough; in addition to its search engine, Google makes dozens of other software products, not to mention robotic cars, Android phones, and wearable computers. But 95% of Google’s revenue comes from search advertising; its other products generated just $2.35 billion in 2012, and its consumer tech products are a mere fraction of that.

That’s Peter Thiel, in From Zero to One. The context in which he wrote this apart, what matters is the fact that he’s absolutely right about the fact that Google earns a vast amount of its revenue from advertising, not running searches.

But what are advertisers paying money to Google for? To provide digital real estate, in which ads can be shown, and the impact of these ads can be measured better than ever before in history. And advertisers are willing to pay because Google understands its users better than anybody else. Why does Google understand its users better than anybody else?

Because we have some combination of the following as part and parcel of our daily lives

Google Maps | YouTube | GMail | Android | Chrome OS | Chrome Browser |

But here’s the thing: we don’t pay for any of these. By that logic, we aren’t Google’s customers. But advertisers are Google’s customers and that makes us Google’s… products.

 

 

So here is the kicker. Android, as well as Chrome and Chrome OS for that matter, are not “products” in the classic business sense. They have no plan to become their own “economic castles.” Rather they are very expensive and very aggressive “moats,” funded by the height and magnitude of Google’s castle. Google’s aim is defensive not offensive. They are not trying to make a profit on Android or Chrome. They want to take any layer that lives between themselves and the consumer and make it free (or even less than free). Because these layers are basically software products with no variable costs, this is a very viable defensive strategy. In essence, they are not just building a moat; Google is also scorching the earth for 250 miles around the outside of the castle to ensure no one can approach it. And best I can tell, they are doing a damn good job of it.

That was Bill Gurley, in 2011, on his own blog.

All those products that I listed above? They weren’t build to generate revenue for Google (although that may be changing now), they were built to make sure that Google continued to attract, and track, eyeballs.

That allowed Google to continue to sell advertisements, which is where it makes the bulk of its money from. And they’ve refined the signal-to-ads cycle, as Ben Thompson calls it, better than anybody else:

Google dominates every aspect of this cycle, and every announcement at IO accrued to it:

On the signal side:

  • Their mobile apps are both the best, and the most popular, and they work best with a Google+ account
  • Their browser is the best, and the most popular, and it works best with a Google+ account
  • Their maps are the best, and the most popular, and they work best with a Google+ account
  • Their video website (YouTube) is the best, and the most popular, and it works best with a Google+ account
  • Their mail service (GMail) is the best, and the most popular, and is a Google+ account

And they simply own online advertising, with the best, and most popular, search ads, 3rd-party ads, and display ads.

But for the longest time, Google was a hammer in search of a nail.

 

 

Google was by far and away the best search engine in the late 1990’s – it wasn’t even close. But – and it was a big, painful “but” – how to make money? Enter economics, Google style:

Googlenomics actually comes in two flavors: macro and micro. The macroeconomic side involves some of the company’s seemingly altruistic behavior, which often baffles observers. Why does Google give away products like its browser, its apps, and the Android operating system for mobile phones? Anything that increases Internet use ultimately enriches Google, Varian says. And since using the Web without using Google is like dining at In-N-Out without ordering a hamburger, more eyeballs on the Web lead inexorably to more ad sales for Google.

The microeconomics of Google is more complicated. Selling ads doesn’t generate only profits; it also generates torrents of data about users’ tastes and habits, data that Google then sifts and processes in order to predict future consumer behavior, find ways to improve its products, and sell more ads. This is the heart and soul of Googlenomics. It’s a system of constant self-analysis: a data-fueled feedback loop that defines not only Google’s future but the future of anyone who does business online.

And so Google has become a company that has changed how to think about business in tech: give away cool products for (nearly) free, in exchange for your information, that is then sold on to advertisers.

A useful way to think about Google is that you are Google’s product, not its customer. Think of it this way: if you aren’t paying for something, how can you possibly be a customer?

Facebook and Google both have the same model: ad-driven.

There are many, many things to unpack as a consequence of thinking about this business model, and we’ll get to all of these things in the weeks to come.