Tag: economics

In Which AI and I help explain Philipp Strack’s Work

First of all, congratulations to Philpp Strack!

And for those of you wondering about what the J.B. Clark medal is all about, here is the background:

The John Bates Clark Medal is awarded by the American Economic Association to “that American economist under the age of forty who is adjudged to have made a significant contribution to economic thought and knowledge.” The award is named after the American economist John Bates Clark (1847–1938).

According to The Chronicle of Higher Education, it “is widely regarded as one of the field’s most prestigious awards… second only to the Nobel Memorial Prize in Economic Sciences.” Many of the recipients went on to receive the Nobel Prizes in their later careers, including the inaugural recipient Paul Samuelson. The award was made biennially until 2007, but from 2009 is now awarded every year because of the growth of the field. Although the Clark medal is billed as a prize for American economists, it is sufficient that the candidates work in the US at the time of the award; US nationality is not necessary to be considered

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

Now let’s say that you, as an enthusiastic student of economics, land up on the AEA page about the announcement. But less than halfway through the page, you begin to feel a familiar sensation. I pride myself on being able to express my thoughts reasonably well in English, but when you encounter a passage like this:

Strack’s rich extension of the canonical drift-diffusion model (with Fudenberg and Strzalecki, American Economic Review 2018) establishes a new benchmark in economics, psychology, and neuroscience for exploring the timing of choices. The extension incorporates uncertainty about payoffs and accounts for the selection of observed outcomes. This deeper exploration also gives rise to new statistical tests of the drift-diffusion model (with Fudenberg, Newey, and Strzalecki, Proceedings of the National Academy of Sciences 2020). These, and his other contributions, have gone far in building bridges between theory and behavioral economics as well as between theory and empirical work.

https://www.aeaweb.org/about-aea/honors-awards/bates-clark/philipp-strack

… there is only one appropriate response:

Source (I hate WordPress. This was supposed to be a GIF.)

You could ask your prof in college to talk about it, you might ask your friends, you could ask your seniors. But if you are an undergraduate (or postgraduate, for that matter) student of economics – or even a person genuinely curious about economics in general – whatay time to be alive:

Hi. Philipp Strack has won the Clark medal in economics for 2024. I am going to share with you a PDF file of the announcement, which also contains some background of his more important work.

I am an undergraduate student of economics in India, and have some familiarity with microeconomic theory. I am familiar with Hal Varian’s “Intermediate Microeconomics”, but not all of the chapters – I’m familiar with the chapters concerning producer theory, consumer theory, exchange, information asymmetry, game theory and a little bit about risk and decision making. I have had an introductory lecture in behavioral economics, and know about the field, but not in a lot of detail.

I would like you to act as a person steeped in the history of microeconomics – how it has developed over time, and what important theoretical advancements have helped develop the field. I would also like you to act as a person who is well versed in simplifying advanced microeconomic concepts for beginners like me. You like using analogies, and you like explaining using relatable metaphors. As a person who is an expert in simplifying concepts so that students can understand them, you like taking a concept, simplifying it, and showing how it relates to (and adds to) what a student already knows. You like asking a couple of questions to make sure that your explanation has been understood, and you ask if it is ok for you to proceed to the next explanation. You always explain only one concept from the PDF at a time, and you begin with the one that is easiest to “get”, and progressively move towards concepts with a higher level of conceptual difficulty. Your style is conversational, somewhat informal, always upbeat, but without sacrificing technical accuracy and comprehensiveness. Please go over the PDF, and begin explaining the first concept that you deem appropriate. Engage me in a conversation about it, ascertain how much I know about the topic, and structure your explanation accordingly. Once you think I have understood a concept well enough, given your explanation and follow-on questions, ask if it is ok to proceed to explaining the next concept in the PDF. At the end of our conversation, I should have not just an appreciation of Philipp Strack’s work, but also an understanding of how his research has advanced the field of microeconomics. If you can recommend further reading for us to converse about, that will be great (papers, blogs, textbooks, essays, anything is fine). Please begin.

Try that prompt on for size in any AI of your choice (but please, pretty please, try and get access to one of the paid ones), and see where the conversation takes you.

Here is Claude with an explanation of the canonical drift-diffusion model, and how Strack’s contributions matter in this area of research:

Absolutely! Let’s break this down into more accessible terms.

Imagine you’re at an ice cream shop, trying to decide between two flavors: chocolate and vanilla. A basic economic model might assume that you’ll quickly choose the flavor that you prefer. But in reality, the decision process is often more complex.

The drift-diffusion model is a way of describing how people make decisions over time. Think of it like a mental tug-of-war. Each flavor has a certain appeal or “value” in your mind. As you consider your options, you accumulate evidence in favor of each choice, like weights on a balance scale. This process of gathering evidence is the “drift.”

However, this accumulation of evidence isn’t perfect. There’s some randomness or “diffusion” involved. Maybe you recall a fond childhood memory of vanilla ice cream, tilting the scale in that direction. Then you notice the rich aroma of the chocolate, pulling you back the other way.

Eventually, the evidence in favor of one option reaches a threshold, and you make your choice. The key point is that this decision isn’t instantaneous – it unfolds over time, and the timing of the choice can reveal important insights about your preferences and decision process.

What Strack and his colleagues did was extend this basic drift-diffusion model in some important ways. First, they incorporated uncertainty about payoffs. In our ice cream example, this could mean you’re not entirely sure how much you’ll enjoy each flavor. Maybe the chocolate looks appealing, but you’re worried it might be too rich.

They also accounted for the fact that we typically only observe the final choices people make, not the full process leading up to those choices. This is like seeing which ice cream you ultimately chose, but not knowing about your mental tug-of-war between chocolate and vanilla.

By building these realistic elements into the model, Strack and his team created a more powerful tool for understanding decision-making. They also developed new statistical tests that researchers can use to check whether real-world data fits the predictions of the drift-diffusion model.

The importance of this work is that it helps connect abstract economic theories to the nitty-gritty details of how humans actually think and choose. It’s a bridge between the idealized world of economic models and the messy reality of human psychology.

Does this help clarify what the passage is saying? Let me know if you have any other questions! And when you’re ready, we can dive into the next concept.

  1. AI isn’t a homework completion tool. I mean it is, but it’s like asking Marvin to open doors (high fives if you got that reference, and go read H2G2 if you didn’t).
  2. AI isn’t a teacher replacement tool (not yet, anyway), but it is already better than the teacher at personalizing explanations just for you, and in using examples that will resonate with you.
  3. “Explain this PDF to me” is a criminally short prompt. I’m not saying the prompt I designed is a perfect one, but make your prompts detailed. Give background about who you are, and what “role” you would like AI to play. Give context, outline your expectations, set the tone, share what levels of detail you are expecting, and continue to do so throughout your conversation.
  4. If you are a student with access to AI, there is no excuse for not learning well.
  5. If you are a student in a college or university right now, you have the opportunity to learn in ways that all of humanity up until this point never did, and it’s not friggin’ close.
  6. I cannot begin to tell you how much I envy you.

A Movie Review, A Question, and A Definition of Rationality

First, the movie review:

“Yeh buzdilon ki soch hai. Sach bolne waale ko agar dukh sahne ki himmat hai, toh dukh dene ki bhi himmat honi chahiye. Sachaai angaarey ki tarah hai – haath par rakho aur haath na jale, yeh kaise ho sakta hai?” (“Only cowards think like this. If the truth-teller has the courage to suffer pain, he must also have the courage to give pain to others. Truth is like a piece of burning coal on your hand.”)

Mukherjee’s film lets us see – not through didactic monologues but through the natural, graceful unfolding of its narrative – that such thoughts may be very noble in theory, but that they can be damaging and self-defeating in certain situations. This makes Satyakam a difficult film to watch, as it draws the viewer into a quicksand of uncertainty and despair. (I can sympathise with the boy who fell asleep in the hall next to Ranjit Kapoor, especially if he’d already had a long hard day!) Throughout, there are counterpoints to Satyapriya’s unalloyed idealism, as the film repeatedly places him – and us – in morally hazy situations.

https://jaiarjun.blogspot.com/2011/04/mat-jaane-bhi-do-yaar-idealism-and-self.html

Second, the question.

The question comes from an excellent article that appeared recently in the 1843 magazine. The article is about RCT’s in general, and their development over time, but it is also about the place where RCT’s started and have continued to mushroom: Kenya. The context that you need to have for the question I am about to ask you is this excerpt:

Their [fieldworkers in RCT’s that is – Ashish] work is gruelling and often emotionally draining. They are paid a salary of $10-20 per day – not a fortune in Kenya. Field workers have been known to give their own money to recipients so that they can afford food, which can distort the outcome of a study. “When they got to the end of the month, they would just fabricate [the] data,” said Kingori, the sociologist. “The fact that these trials are designed in this way is setting them up to fail in real life. They are constantly being subverted by these field workers.” She told me of a case from a medical RCT in which a child died in one recipient family. A field worker agreed to substitute the family’s other child in the study, so that the household could continue to receive the treatment. Field workers told me that they’d heard stories of their peers filling in respondent surveys themselves, in order to hit their daily quotas. Many of these stories date from the early days of RCTs. Recently, IPA and similar organisations have improved their training and fraud detection. GiveDirectly told me that “data fraud and monetary fraud are…punished through contract termination.”

https://www.economist.com/1843/2024/03/01/how-poor-kenyans-became-economists-guinea-pigs

You are a fieldworker hired to do work for an RCT. You are not running the RCT, you are being paid to collect the data and submit it to the researchers. A family that is a part of this study loses a child. They beg you to not report this to the researchers, because then the family would no longer be a part of the RCT, and therefore would no longer be eligible to receive aid (receive treatment, in RCT lingo). Let’s say you choose to agree to their request. The RCT is screwed, but hey, at least the family will continue to receive help during a time of unimaginable distress.

Here’s my question: did you act rationally, or not?

Here’s a follow-up question for those of you who have formally studied microeconomics: according to the fundamental axioms of microeconomic theory, did you act rationally or not?

Third, the definition of rationality, as per microeconomics.

This definition is via Gemini (Google’ current name for it’s AI, although that may change by the time you read this, who knows):

“Here’s a breakdown of rationality as defined within the context of classical microeconomic theory:

Core Axioms of Rationality in Microeconomic Theory

Completeness: Individuals have well-defined preferences. When presented with any two options (bundles of goods, outcomes, etc.), they can express:

Preference for one over the other
Indifference between the two

Transitivity: If a consumer prefers A to B and B to C, then they must prefer A to C. This ensures consistency in preferences.

Utility Maximization: Individuals always strive to choose the option that gives them the highest level of utility (satisfaction, well-being). The concept of utility allows for comparison of different choices.

Self-Interest: Individuals are assumed to prioritize their own utility above that of others. This doesn’t necessarily imply selfishness, but rather that the individual’s well-being is their primary concern.

Implications of these Axioms

Predictability of Behavior: If we know an individual’s preferences and constraints (e.g., budget, availability of goods), and assume rationality, we can predict their choices.


Optimization: Rational individuals will allocate resources efficiently, always aiming to get the most value out of their choices given their constraints.


Responsiveness to Incentives: Changes in prices, income, or other constraints will lead rational individuals to adjust their behavior to maintain maximum utility.

Important Notes:

Narrow Definition: This definition of rationality is specific to microeconomic theory; it simplifies human behavior to make modeling and predictions easier.

Bounded Rationality: Real-life decision-making is impacted by imperfect information, limited cognitive capacity, and time pressure. The concept of bounded rationality acknowledges these limitations.


Ethics vs. Rationality: This rationality definition doesn’t address moral or ethical dimensions of choices. A “rational” choice could still be exploitative or harmful to others.”

Try taking stab at the question yourself. Then read what our new friends have to say about it. Here is Gemini’s considered opinion on the issue. Here is ChatGPT. Now that you’ve read their answers, see if you change yours!

Talk about it with your friends, with your professors, with your families.

And for homework, do watch Satyakaam. It is freely available on YouTube.

All About Industrial Policy, Part 1

In 1961, India’s income per person was $86, South Korea’s was $94 and China’s was $76. India was right in the middle of a very poor pack of countries. India’s income per person today is around $2300, China’s is around $12,500 and Korea’s is around $35,000.

Rajan, Raghuram; Lamba, Rohit. Breaking the Mould: Reimagining India’s Economic Future (p. 47). Penguin Random House India Private Limited. Kindle Edition.

Pictures are worth a thousand words, no?

And as I always say whenever this chart comes up in a class I’m teaching, I don’t think it is possible to look at this chart and not ask “Saala, what did they do that we didn’t?”. And because I like to play around with words, I say that some of the students might also wish to ask what we did that they didn’t.

So what did they do?

They enacted “government policies directed at affecting the economic structure of the economy”, in the words of Joseph E. Stiglitz and Justin Lin Yifu. Or if you prefer shorter, simpler phrases, they had better industrial policy.

So what are these government policies directed at affecting the economic structure of the economy? Why are they needed, what effects do they have, who came up with them, and is there anything special about industrial policy as regards India? Let’s deal with each of these questions in turn, one at a time:

What is industrial policy?

Rapid sustained economic development, Rodrik and Stiglitz tell us, requires an explicit strategy.

And almost always since we came up with the idea of rapid (it’s not always been sustainable in more than one sense of the term, alas, about which more later) economic development, the strategy has always had one goal: how can we industrialize better?

Why industrialize at all is a fair question to ask, of course. And the answer is that it is painfully clear to us that you cannot hope to be a developed nation without industrializing first. This becomes clear by doing lots and lots of complicated econometric studies, or by looking at a chart with a lovely title.

It’s a chart called What The Fuck Happened in 1750? And the answer is industrialization. Industrialization happened, starting 1750. Or there and thereabouts, at any rate:

And so what we would like to do is make sure that as many countries industrialize as quickly as possible, so that the citizens of all countries can live a longer, healthier and more productive life. Or that’s the plan hope, at any rate.

So what is industrial policy? It is a policy aimed at industrializing a country as quickly as possible. And if you go and take a look at the India, China and South Korea chart again, you can now look at it as three separate industrial policy experiments. One of them clearly worked when it was implemented, one figured it out a little while later, while the third is beginning to hit its straps only now.

So did these three countries differ in terms of their industrial policy, or did they have the same type of industrial policy, but different qualities of implementation?

Think diets, if that helps. If three of your friends are comparing their weight loss, were they on different diets, and therefore lost weight at different rates? Or was it the same diet, with some of your friends being better at sticking to it? And in the case of the the countries, it turns out they were implementing wildly different types of industrial policy.

Which begs the question: how many types of industrial policy are there anyway?

Types of Industrial Policy

Dani Rodrik and Mariana Mazzucato present a framework for evaluating the different types of industrial policies in their paper, Industrial Policy with Conditionalities: A Taxonomy and Sample Cases. On pp 8 and pp9 of their paper, they present a simple framework, based on which I have created that picture you see above.

Industrial policy depends, they say, on the answer to these four questions:

  1. What type of firm behavior are you targeting through your industrial policy?
    • Do you hope to ensure equitable access to the products and services that will result from your industrial policy?
    • Or do you hope to direct firms’ activities towards socially desirable goals?
    • Or do you hope to get the successful firms to share their returns with you, the government (via royalties, perhaps, although other options are also available)
    • Or do you plan to require that profits be mandatorily reinvested into productive activities?
  2. How do you plan to work out the conditionalities associated with the program? Are they up for negotiation, or are they cast in stone?
  3. Is the upside from the program split? Is the downside split? (When I say split, I mean between the firm in question and the government).
  4. Finally, what about measurement criteria?

Using this framework, Rodrik and Mazzucato say, you can figure out the type of industrial policy at play.

Here’s how their framework can be applied to the case study of the now famous Oxford/AstraZeneca vaccine program, for example:

https://drodrik.scholar.harvard.edu/sites/scholar.harvard.edu/files/dani-rodrik/files/conditionality_mazzucato_rodrik_0927202.pdf, Table 2

So all right, there’s industrial policy, which is about industrialization, and South Korea seems to have done a better job of it than China and India (so far), and that’s because they used a type of industrial policy that worked better. Speaking of types, there’s lots of different types possible. But it still begs the question: what was South Korea’s industrial policy, exactly?

South Korea’s Industrial Policy

Understanding South Korea’s industrial policy requires a book length treatment, and there are more than a few that have tried to tackle the subject. As you might imagine, it is difficult to compress all of that material into a single blog post. But here’s what can be said:

  • South Korea’s industrial policy was inspired in part by the Meiji Reformation in Japan
  • The Meiji Reformation was in part based on the historical school of economics from Germany.
  • This historical school took part of its inspiration from… and this might surprise you a bit… Alexander Hamilton(!)
  • In particular, you might want to focus on a specific report:

One that has become especially well known was the ‘Report on the Subject of Manufactures’ submitted to Congress in 1791. In the report, he stressed that the United States needed to develop its manufacturing sector in order to grow its economy, bolster its military, secure its sovereignty, increase productivity, and absorb labour. He also stressed that industrialization was necessary to avoid being disadvantaged in trade with European nations, especially Great Britain, the industrial superpower at the time. The way to do this, according to Hamilton, was for the United States to protect and nurture its manufacturing sector through active use of industrial and trade policy. More specifically, industrialization was to be achieved by strategically applying tariffs and import bans on imported manufactured goods.

Hauge, Jostein. The Future of the Factory: How Megatrends are Changing Industrialization (p. 35). OUP Oxford. Kindle Edition.

And so the outline of South Korea’s industrial policy was to protect and nurture its manufacturing sector. Here are two questions worth asking:

  1. Protect it from whom?
  2. Nurture it for what purpose?

It is the answers to these questions that helps us understand where India and South Korea differ in terms of their industrial policy from the second half of the twentieth century.

The Carrot and The Stick

Both South Korea and India, you see, were clear about the answer to the first question. Both of their domestic industries needed to be protected from foreign competition.

But their answer to the second question could not have been more different. South Korea said that the protection and the nurturing was necessary so that South Korean firms could one day become world-beaters.

India, on the hand, ended up protecting its domestic manufacturers in perpetuity. Or least until 1991, at any rate.

We have names for both policies (of course we do). The South Korean policy was about export promotion – protect domestic firms until they learn to play with the big boys on their own turf. The Indian policy was about import substitution – if you’ve ever seen a mollycoddled spoilt Indian kid, that was India’s domestic firms until 1991. (As always, it’s a more complicated story than that, but hey, this post is long enough already. Some other day, maybe, we’ll dive deeper into this)

In other words the South Koreans got their incentives right – they held out the carrot, but didn’t hesitate to wield the stick when necessary. The carrot was pretty much whatever it was that the South Korean firms asked for – cheap labor, state supported finance, guaranteed power, great roads, you name it.

But Rodrik and Mazzucato’s framework comes into play here, because access (pillar 1) was given to export oriented firms, based on strict and non-negotiable conditionalities (pillar 2), with explicit and clear measurement standards (pillar 4):

The capacity to export told politicians in Japan, South Korea and Taiwan what worked and what didn’t and they responded accordingly. Since exports have to pass through customs, they were relatively easy to check up on. In Japan, the amount of depreciation firms were allowed to charge to their accounts – effectively, a tax break – was determined by their exports. In Korea, firms had to report export performance to the government on a monthly basis, and the numbers determined their access to bank credit. In Taiwan, everything from cash subsidies to preferential exchange rates was used to encourage exporters.

Studwell, Joe. How Asia Works: Success and Failure In the World’s Most Dynamic Region (pp. 76-77). Grove Atlantic. Kindle Edition.

And if the measurement in pillar 4 didn’t come up to the expected level, pillar 3 kicked nito play, and how:

North-east Asian politicians then improved their industrial policy returns through a second intervention – culling those firms which did not measure up. This might have meant a forced merger with a more successful firm, the withdrawal of capital by a state-directed financial system, withholding – or threatening to withhold – production licences, or even the ultimate capitalist sanction, bankruptcy. Since the 1970s, there has been much talk about state industrial policy in western countries being an attempt to ‘pick winners’ among firms, something that most people would agree is extremely difficult. But this term does not describe what happened in successful developing states in east Asia. In Japan, Korea, Taiwan and China, the state did not so much pick winners as weed out losers.

Studwell, Joe. How Asia Works: Success and Failure In the World’s Most Dynamic Region (p. 77). Grove Atlantic. Kindle Edition.

India? We have the Industrial Disputes Act, which makes it difficult for us to shut down loss making firms, let alone those firms that are not exporting.

The protection to labour in larger firms is extremely high in India and translates into excessively high effective labour costs. As an example, Chapter V.B of the Industrial Disputes Act of 1947 makes it nearly impossible for manufacturing firms with 100 or more employees to lay off workers under any circumstances. Such high protection makes large firms in labour-intensive sectors, in which labour accounts for 80 per cent or more of the costs, uncompetitive in the world markets. Small firms, on the other hand, are unable to export in large volumes.

Panagariya, Arvind; Bhagwati, Jagdish. India’s Tryst With Destiny . HarperCollins Publishers India. Kindle Edition.

So we’ve learnt:

1. What Industrial Policy is…

2. What types of industrial policy there are…

3. What South Korea’s Industrial Policy looked like back in the day…

4. The importance of negative incentives in designing effective industrial policy (and that India sucked at getting the negative incentives right)

OK, cool. So CTRL-C and CTRL-V the South Korean awesome sauce idea into India and we’re sorted. Right?

Right?

To be continued tomorrow!

On Greater Reflexivity in Economics

I had the honor (and I use the word advisedly) of moderating a talk given by Dr. Vijayendra Rao at the Pune Public Policy Festival, held at the Gokhale Institute of Politics and Economics. While there was much more going on in his presentation, it was based in part on a paper called “Can Economics Become More Reflexive?”, available here.

What is reflexivity, and what is reflexivity in the context of economics? This is a rare instance where Wikipedia isn’t useful, because its answer to the first question isn’t very useful. Worse, its answer to the second question is very far from what Dr. Vijayendra Rao had in mind!

What Dr. Rao means when he speaks about reflexivity in economics is a “method that necessitates an intimate relationship with the field”. It is, as he puts it, an attempt to minimize the distance between the researcher and the subjects of their research. Even better is Mario Small’s explanation of a related concept, cognitive empathy: “the ability to understand a person’s predicament as they understand it”.

But what does this mean in practice – the ability to understand a person’s predicament as they understand it? Here’s a question for you: if I described the lives of a small family in Dhaka who stayed in a slum, and who had migrated to the city in search of employment, and further told you that they earn less than a dollar a day, what would you say was their biggest economic problem?

Your answer would likely have been the same as mine: poverty. Humor me, and answer this question as well: why are they poor? You might be a little puzzled, but I’m guessing you will say it is because of a lack of income.

That, at any rate, is what I would have said before I read a book called Portfolios of the Poor. But the introductory chapter of the book makes clear the fact that while lack of income is obviously a problem, so is the fact that the income is also irregular. And it gets worse – incomes are not just low and irregular, but they are also unpredictable.

Imagine, for example, that your annual income is halved from here on in. That’s a problem, right? But now also imagine that you will get your annual income only three times this year. Not monthly payouts, you see, but lumpsum payments three times in 2024. And not once every four months – these payments will be made at random times through the year. Maybe all three in January 2024 and none for the rest of the year. Or maybe one now, and two in December with nothing in between. How do you plan your expenses? How do you plan your savings? What instruments do you use for both of these problems?

Once you begin to think about these questions, let alone try to figure out how to frame them and answer them, you begin to understand the meaning of the phrase “the ability to understand a person’s predicament as they understand it”.

That’s reflexivity.

Another way to understand reflexivity is to think about process rather than outcomes. An economist who runs a model on data collected by somebody else has the outcome (collected data), but often has very little idea about the process that generated this data. And missing out on the process that generated the data means you risk losing out on a rich tapestry of detail and nuance that would make your analysis so much better.

A wonderful example of this is MR Sharan’s work:

Younger economists are increasingly spending time in the field to collect data and test interventions, and some display a great deal of cognitive empathy in how they approach their work. MR Sharan (2021) has written a marvelous account of ten years of travel in rural areas of the Indian state of Bihar, interacting closely with local activists and trying to understand the inner workings of village government. The book, which is meant for a general audience, is less an ethnography than a memoir but it brings into sharp focus
the challenges faced by citizens, particularly those from disadvantaged groups in accessing government programs. This embedded, empathetic approach is apparent, albeit implicitly, in Sharan’s research (Sharan and Kumar, 2021) where he and his co-author Chinmay Kumar analyze data from 100,000
village-level politicians in Bihar to examine the provision of public goods to lower castes. They find that leaders matter – when a lower-level lower caste representative reports to a high-caste representative, lower castes receive poorer access to public goods. However, a grievance redressal system instituted by the government is accessed more by lower-caste representatives to counter this discriminatory provision.

https://documents1.worldbank.org/curated/en/485771643376160320/pdf/Can-Economics-Become-More-Reflexive-Exploring-the-Potential-of-Mixed-Methods.pdf

We’ve covered MR Sharan’s wonderful book here, but the point that Dr. Rao is making here isn’t just the fact that the book is wonderful – it is the fact that the notes that eventually led to the book also made his research better. That is to say, “participant observation can be en extremely valuable tool for economists and can result in quantitative findings that are cognitively empathetic”.

My alma mater, the Gokhale Institute of Politics and Economics, was at one point of time second to none when it came to note-taking during fieldwork. Sadly, the art seems to have withered away over time, both within the Gokhale Institute but also more broadly. The fact that I was able to talk about reflexivity and the need for it in both economics and economics research, and that I got to do so at the Gokhale Institute was two treats in one, for which I am grateful. Getting around to read this paper, and being able to talk about it with Dr. Vijayendra Rao made it an even more remarkable experience.

Please do read the paper, and please do think about the need for reflexivity in your research – it is currently an underrated idea, and let’s try and change the status quo!

On True Roles

Arnold Kling has a nice post up on his Substack about “The True Role of the Central Bank“.

He was asked recently about three ideas that he (Arnold Kling) is known for, and these are the three that he came up with:

  1. Subsidize demand and restrict supply: Government intervention might well be thought of as the subsidization or provisioning of what the market fails to provide. But in practice, he says, the political process tends to be controlled by incumbent producers or owners. These guys are going to lobby the government for subsidized demand and restricted supply. He cites the example of housing: subsidize demand (subsidized home loans, for example), and restrict supply (zoning restrictions). Might higher education be another? Do we end up restricting the supply of quality higher education, and subsidizing demand for it by giving subsidized student loans?
    If you distrust the private sector, now would be a good time to say, “Hah! See? Big bad incumbents derail well-meaning government”
    If you distrust the government, now would be a good time to say, ”Hah! See? Government is as corrupt as big bad incumbents”
    If you agree that incentives matter, you might want to think about how to redesign various systems with better incentive design front and center. But that’s boring work. Saying “Hah! See?” is much easier.
  2. His second idea is that “price discrimination explains everything”. Given high fixed costs in so many different industries (especially Internet-based businesses), the marginal cost of serving an additional consumer is zero. So if marginal-cost pricing makes no sense, what to do? Announce Big Billion Day sales, for example. How’s that price discrimination, you say? That’s just low prices all around for all goods, you say? Well, what about the rest of the days in the year, when the Big Billion Day sale isn’t around? Who do you think is buying then? Are those folks paying the same price for the same good? And that’s just one example. You could teach a semester’s worth of micro by using nothing more than the Amazon app on your phone!
  3. And his third idea is to do with the true role of the central banks. In the 2008 financial crisis, he says, the main concern of the Fed wasn’t forestalling a recession, but rather to focus on the health of the primary dealers. Or more simply put (although you should read the whole blog, as always), the central bank’s top priority is “always going to be enabling the government to borrow more money”. His last paragraph is worth quoting in full:
    “The Fed’s job is to make sure that the Treasury can market its debt. For that purpose, it has to be much more concerned with keeping banks healthy than with hitting a target for inflation, unemployment, nominal GDP, or any other supposed goal.”

Fascinating ideas, all of them. But the last one in particular mad me think about the phrase “the true role” more generally.

What is the true role of:

  1. Educational institutes?
  2. Hospitals?
  3. The Patenting System?
  4. YouTube?
  5. Students?

Ask yourself, and the people around you, these questions. And add to the list! Try answering them yourself. See if the answers differ, and ask yourselves what that reveals about the items on these lists, and about the respondents.

Prompts To Get You Going on Learning With AI

I’m assuming, in today’s post, that you have some knowledge of both economics and of economists, and that you are a student from India.

Feel free to copy these prompts word for word, but the major reason for doing this is to give you ideas about how you might go about constructing prompts yourself. Try modifying these prompts by choosing a different economist, specifying different time periods, or tweaking it however you like. Feel free to go meta too, as one of the prompts below does. But the idea behind this post, which itself is a continuation of yesterday’s post, is to help you learn how to use ChatGPT as your own personal tutor.

What if Paul Krugman could be asked to give you ten introductory lectures in economics?

See what kind of answer you get, and feel free to ask follow-up questions before asking ChatGPT (in this case, aka Paul Krugman) to move on to the next lecture. Note that the “Yes, I do.” in the prompt below is in response to ChatGPT asking me if I had any questions. Also note that these aren’t necessarily the questions I would ask of ChatGPT myself – I’m trying to think of myself as a first year undergraduate student, and am framing my questions accordingly. If you would like to ask slightly more advanced questions, please do so, by all means. And of course, that cuts both ways – feel free to ask simpler questions!

I followed up with another question:

And then on to the second lecture:

Again, if you like, begin with these exact prompts and see where they take you. But I would encourage you to make changes to these prompts to suit your own learning style better (“recommend only podcasts or YouTube videos”, for example).

If only I could have used this next prompt about twenty years ago. Pah.

And if all else fails, go meta:

I know that you’ll be able to come up with better prompts, more suited to your learning style. The idea behind this post is just to get you started. The more you converse with AI, the better your prompts will get, and the better a conversation you will end up having.

The ability to have a personal tutor who can customize learning pathways suited to your interests is what makes this such an exciting time to be a student. For example:

What a great time to be a student!

Getting Your Sources Right

“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

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

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

Seeing like an economist

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! 🙂