Tag: horizons

All for One, and None for All

Let’s say you are a student of economics, and have got placed with a mid-tier firm, and with a ho-hum salary to boot. Not what you were expecting at the start of placement season, and not as plum a placement as some of your peers.

Worse, the rules about placement mean that you can’t sit for any other firms that come on campus. Should you then try to get a job by searching on the labor market all by yourself? If you find a better offer, you can choose to not take the job your placement cell got for you.

How should you model this problem as a student of economics?

Two questions that you might want to begin with:

  1. At what level are you analyzing this question?
  2. Over what time horizon are you analyzing this question?

Let’s deal with the first of these questions.

  1. Should you be analyzing this question at an individual level or an institutional level?

    You might think that the answer to this question is fairly simple. Of course it should be at the individual level! What does any institution have to do with your career?

    But hang on for a second. You ditching the job that you got through the placement cell is you walking back on your word – and you will be seen as a representative of the institution. The firm in question will call up the placement cell breathing fire and brimstone about “the students from your institute”. The placement cell will attempt to placate the f&b breathers, and will, in turn, breathe f&b while haranguing the student in question.

    No “character certificate” will be issued to you, the institution will threaten. And not just now, it will say ominously, but forever more. Just you wait and see, good luck getting a character certificate from us for the rest of your career.

    Are you tempted to shrug your shoulders and say “So what?” I would be, in your place.

    But sit in your little time machine, go back to the start of your placement season, and imagine learning about some of your seniors. Learning what about them? That they remorselessly and thoughtlessly pulled the same stunt that you are thinking about. And as a consequence, that particular firm no longer comes on campus.

    Fair? Of course not. Of course not, that is, from your perspective back then. Now that the shoe is on the other foot, and now that it is you who might have to sacrifice a higher salary so as to give your juniors a better chance at placements, you don’t want to think about what is best for them. You want, of course, to think about what is best for you.

    In fact, you have always been thinking about what is best for you. At the start of the placement season, you disliked your seniors for having pulled this stunt. Now, you dislike your juniors, and so see no reason not to pull this stunt.

    Try drawing a 2×2 matrix and see if Uncle Nash deserved his Nobel.

    So, should you be analyzing this question at an individual level or an institutional level? Well, it very much depends on whether you’re about to sit for placements, or have been placed with a mid-tier firm, and with a ho-hum salary to boot.

    The truth, you see, is relative. Just as a politician will change their opinion about something depending upon which side of the speaker they are seated in Parliament, ethics when it comes to placement is an elastic, relative concept.

  2. And now for the second question: over what time horizon are you analyzing this question?

    What do you want? The highest possible salary that you can possibly get, right here and right now? In which case, of course you should withdraw from the offer made via the placement cell.

    But think of the costs of such a move too, not just the benefits. At the margin (for we are economists after all, are we not?) do we make it more likely that we will never be able to apply for a job to this company ever again? Do we make it more likely that the placement cell will not provide us assistance in the future as alumni?

    Let’s say you’ve asked a senior, a mentor, a professor for help in getting this new job. What message are you sending these people? If these folks are asked five, ten, fifteen years down the line about your reliability and trustworthiness – what might they say? How are they likely to react if asked, “Is this person someone who will keep their word? Does a handshake with this person mean that this person can be trusted?”.

    In other words, what signal are you sending to your network? The signal of reliability and trustworthiness, or that of a fickle chaser of immediate gratification?

    Might it make sense to stick around for a year, see what options come up after a year, and leave with a year’s experience under your belt? Might not that mean a pretty good jump, but with your relationship with the placement cell, the firm in question and your network intact? In fact, if anything, your network will have increased in size, for having worked in this firm for a year.

There are other factors to consider, of course.

  1. It could be that you, or your family, have need for as much money as possible right away. Maybe you have a loan on your head, maybe there are health issues at play – who know? Life is tough, and none of us can know all that goes on in each other’s lives. Sometimes, jumping to a higher paying job maybe the right thing to do, even if it is the wrong thing to do. But in such cases, I would recommend that you have an off-the-record conversation with your placement officer and your mentor(s), letting them know that you’re jumping for personal reasons. Not only is that just fine, but you’re likely to get ongoing help and support.
  2. Maybe the firm in question isn’t the kind of work you want to do. I would still advise you to spend a year there, for you knew that when you sat for placements, surely?
  3. Maybe the location is an issue. You just don’t like Gurugram, or Bangalore is too far from home, or you might not enjoy the food in Kolkata, or something along these lines. I would still advise you to spend a year there, for that is no reason to give up on a job. Surely your word is worth more than that?

Finally, a thought experiment. What if the company that has hired you goes on to find later on that there is this other college that has much better students, and it makes sense to cancel the offers made to your Institute, and hire from there instead?

“Ho do you know they don’t do that anyway”, you might want to retort. And sure, I’m under no illusion that a firm will do what is best for itself. And believe you me, for all the “we’re one happy family” extended disco remixes that HR departments will play during your induction into a firm, firms can be pretty darn impersonal and ruthless.

But that’s my point: if that is the transactional view of the world that you hold, then go ahead and jump. Budget, of course, for the fact that this will be a two way street.

And if, on the other hand, you think this to be wrong, and that the word of the firm ought to mean something, well then. Do unto others…

There is, in conclusion, no “right” answer to the question of whether or not you should jump. There only needs to be clarity and honesty on your part when it comes to the answers to these two questions:

  1. At what level are you analyzing this question?
  2. Over what time horizon are you analyzing this question?

All the very best, and my thanks to the person who asked me this question.

Amol Agrawal on Autonomy and Institutions

The Supreme Court (SC) recently passed an order related to the appointment of the Chief Election Commissioner (CEC). Until now, the CEC was appointed by the president, based on the recommendation of council of ministers headed by the prime minister. The apex court has said the panel should include the leader of opposition and the chief justice of India as well.
At a broader level, the order has once again led to revisiting the old discussion on autonomy of public institutions in India. The public institutions, whether it is the Election Commission of India or any other, have been created to provide various public goods and services to the citizens. It is important that the institutions have autonomy to serve the desired goals; else, they will be captured by the State, defeating the purpose of creating these institutions.

https://www.financialexpress.com/opinion/true-autonomy-for-indias-institutions/3015117/

As per usual, please read the whole thing!

Is eating three gulab jamuns after lunch today a good idea?

Me today: hell yeah! Maybe a fourth?

Me thirty years down the line: How about skipping the gulab jamuns and having some salad instead, you greedy, focussed-only-on-the-present so-and-so!

Both answers aren’t wrong, per se. If I’m looking to make myself happy today, with not a thought to be given to seventy year old Ashish (assuming I make it to seventy of course), then yes, three gulab jamuns is a most excellent idea, and I would even be willing to listen to arguments for wolfing down a fourth one. In fact, the more gulab jamuns I have today, the less I need to think about seventy year old Ashish, because I’m more or less guaranteeing that he won’t be around!

Similarly, when evaluating policy, ask three questions:

  1. Is this the best way to do it, given what you are optimizing for?
  2. Is your answer the same regardless of what time horizon you have in mind?
  3. If no, are you optimizing for the short run rather than the long run? If yes, why?

In this specific case, for example, let’s assume that you agree with what the Supreme Court has done. Let’s say that you have agreed with it because you think this is best for India (however you define best). Does your answer change if Modi is not in charge? Does your answer change if the BJP is not in charge?

Similarly, let’s assume that you disagree with what the Supreme Court has done. Let’s say that you have disagreed with it because you think this is best for India (however you define best). Does your answer change if Modi is not in charge? Does your answer change if the BJP is not in charge?

If your answer changes in either case, you are optimizing for present circumstances, not for the long run. That is, you think this solution is good (or not good) given the situation we have in front of us.

But that would be the wrong way to think about it. Why?

  1. Because one shouldn’t keep changing rules given circumstances. That’s the whole point of rules – that they stay the same regardless of situations.
  2. Because institutions that see an erosion of trust very quickly lose their credibility, and as a consequence, much of their effectiveness
  3. Because it is a ridiculously dangerous precedent to set – optimizing for present circumstances.

If you are a BJP supporter, resist the temptation to first think “Oh, this will make it more difficult to appoint a CEC who will be more sympathetic to the BJP today. That’s bad, and therefore this is bad.”

If you are a BJP opponent, resist the temptation to first think “Oh, this will make it more difficult to appoint a CEC who will be more sympathetic to the BJP today. That’s good, and therefore this is good.”

Your first thought should be “Regardless of who is in power, today or tomorrow, is this a good system in and of itself?” If the answer to that question makes sense, sure, go ahead and ask one of the two questions above, and move further with your analysis. But if your analysis indicates that your ideal first thought’s conclusion is different from your short term considerations, go with your first thought’s conclusion.

Why?

Because in the long run, gulab jamuns are bad for you.

Econ Ain’t About Money

A somewhat less sexy, but more accurate title would have been ” Economics Isn’t Just About Money”.

But the decision to jettison the word “just” is deliberate, and not just for the sake of a headline that makes you want to click through. It is, instead, to emphasize the point that economics is about so much more than just about making money.

I have some close friends to thank for inspiring this post, with whom I had a conversation about tomorrow’s blogpost. They told me that they had been under the impression that economics is about money, and to my surprise, that seems to be an idea that most people I have spoken to are comfortable with.

But these people I have spoken with, and whoever has taught them economics, have less than half the right answer. Economics isn’t about money alone.

I’d written a post a while back about Choices, Horizons, Incentives and Costs. And to me, that’s what economics is about.

No matter what you do in life, you have a range of choices to choose from. Should I watch Netflix for an hour or study for an hour? Should I read a couple of pages from a book, or should I quickly scroll through Twitter? Should I enroll in an engineering course, or should I pursue law instead? Should I start with the salad at a buffet, or should I start with desserts instead?

Life is all about choices, every single second of your life. Economics helps you be clear about your choices, and also helps you potentially expand your choice set. One option regarding the last question in the paragraph above, is to say neither, and fast instead. Be aware of your entire choice set, and only then set about choosing one.

Horizons is about thinking about the long term, rather than the short term. My favorite example in introductory economics is to ask my students if I should have a second gulab jamun for desserts after lunch today. I tell them that present day Ashish will definitely say yes, and seventy year old Ashish (assuming I live for that long) will definitely say no. Because the consequences of choices I make today truly matter in the long run, bur are underestimated in the short run.

Incentives are about what motivate you to do (or not do) things. Economics teaches you how to use your own incentives, and those of others, to Get Things Done. My favorite example comes from Tyler Cowen, who helps us understand how to use incentives to not be bored in a museum. Ask yourself, he suggests, which painting would you choose to steal from each room, to install in your own home – and you cannot choose more than one per room. Your incentives have flipped – now it’s not about “seeing” each and every painting having paid the price of admission, but instead about asking yourself which painting will look best in your home.

And costs are about the realization that nothing in life comes for free. No matter what you are doing, you could always be doing something else. Instead of having read this far (thank you!), you could have given up halfway through and watched funny cat videos instead. Opportunity costs are everywhere, and whatever your choice, it ain’t for free.

The point that unites each of the examples above is that none of them are about money! They are economics-y concepts: choices, horizons, incentives and costs. But what to have in a buffet, whether to have a second gulab jamun, deciding which painting to steal and watching cat videos are not about money.

You could put a monetary value to all of them using subjective valuations, of course, but some things shouldn’t have numbers attached to them. Not because they’re not important, but because they’re fundamentally unquantifiable. What price (and I’m not joking here) can you possibly put on a parent choosing to read a story to a child? Economists have an answer to this question, of course, but it isn’t one that I am entirely comfortable with, especially if it involves a definitive number.

And that’s what I mean when I say that economics is about so much more than just money.

That still does not answer the question of what economics is about – I have written about it earlier, and will defend my answer in tomorrow’s post.

Airbnb and the Asymmetry of Information

Devon Zuegel (@devonzuegel on Twitter, and definitely worth following) was less than happy with Airbnb recently:

And so of course I thought about Akerlof (1970)

This paper relates quality and uncertainty. The existence of goods of many grades poses interesting and important problems for
the theory of markets.

Akerlof, G. (1970). The Market for “Lemons”: Quality Uncertainty and the Market Mechanism. The Quarterly Journal of Economics, 84(3), 488-500

It’s a paper that every undergraduate student ought to read. Not just economics undergraduate student, mind you, but every undergraduate student. Because it helps you get an understanding of many modern businesses today.

But first, a relatively simple explanation of the core idea of the paper:

Suppose buyers cannot distinguish between a high-quality car (a “peach”) and a “lemon”. Then they are only willing to pay a fixed price for a car that averages the value of a “peach” and “lemon” together (pavg). But sellers know whether they hold a peach or a lemon. Given the fixed price at which buyers will buy, sellers will sell only when they hold “lemons” (since plemon < pavg) and they will leave the market when they hold “peaches” (since ppeach > pavg). Eventually, as enough sellers of “peaches” leave the market, the average willingness-to-pay of buyers will decrease (since the average quality of cars on the market decreased), leading to even more sellers of high-quality cars to leave the market through a positive feedback loop.

Thus the uninformed buyer’s price creates an adverse selection problem that drives the high-quality cars from the market. Adverse selection is a market mechanism that can lead to a market collapse.

Akerlof’s paper shows how prices can determine the quality of goods traded on the market. Low prices drive away sellers of high-quality goods, leaving only lemons behind. In 2001, Akerlof, along with Michael Spence, and Joseph Stiglitz, jointly received the Nobel Memorial Prize in Economic Sciences, for their research on issues related to asymmetric information.

https://en.wikipedia.org/wiki/The_Market_for_Lemons#

Now, one way to understand the value of many businesses today is to realize that they’re solving asymmetry of information problems. Or at least, that’s how I think of it when I end up looking up the rating for a restaurant on Zomato in a unfamiliar part of town. I don’t know enough about this part of town, and I certainly don’t know this restaurant. Should I walk in for a meal or not?

I could always check if the people already inside are smiling or not, of course, but let’s face it, most of us will simply Zomato our way through this problem. Zomato is reducing the asymmetry of information problem. Successfully or not is a matter of opinion and perhaps controversy. But my argument here is that this is a potentially useful way of thinking about the problem: how to decide where to eat?

How to decide whom to recruit? Linkedin.

How to decide whom to trust? Look ’em up on Facebook, or Twitter, or Instagram, or wherever it is that people look up people these days.

How to decide which product to buy on Amazon? Check out the user ratings. In fact, sort by average user ratings! Yes, Amazon does provide this option.

How to decide which book to read? Goodreads.

How to… you get the drift, right. Part of the reason these firms are so highly valued by the public is because they solve the asymmetry of information problem.

And so does Airbnb. Or does it?

And that brings us back to Devon Zuegel’s tweet.

Every review left on Airbnb informs potential users about the quality of a stay at a particular host’s place. The more information they are able to glean from reviews left by previous users, the more they are likely to definitively transact…or not. That is, potential users will either stay at a particular place, or will definitely not.

Since Airbnb gets a cut from each transaction, but not from each no-stay, they have an incentive to put up only positive reviews. And that is the problem that we have to think about when we read Devon Zuegel’s tweets. Is Airbnb incentivized to leave only positive reviews up? Short answer: yes. Therefore, will they leave only positive reviews up? I’d say it’s a question of horizons, but it is also a question of the calculus.

Airbnb will not last for very long if they pull down every single negative review, because that will destroy trust.

But:

  • every now and then…
  • particularly for really highly rated hosts…
  • especially during a pandemic…
  • will the odd negative review…
  • have a higher chance of being pulled down?

Nothing in life is ever black and white, and the truth lies somewhere in the middle. So no, Airbnb will not pull down every single negative review, but we also shouldn’t assume that it will leave every single negative review up.

More information in the hands of the consumer is a wonderful thing, and it does reduce the asymmetry of information. But who is providing the information to the consumers, and what are their incentives? What if the providers of the good/service are the ones that are making information available to the eventual consumers? Will that need to be regulated, and if so, how?

Zomato, LinkedIn, Uber, Airbnb – it’s a great time to be alive, because these firms, and many others like them, have provided for many services that would simply have not been possible otherwise. They have successfully reduced the asymmetry of information problem. But it’s not the end of the asymmetry of information problem, not just yet.

If anything, it just got more interesting.

Reflections on The Entrepreneurial State, by Mariana Mazzucato

The full title of the book is “The Entrepreneurial State: Debunking Public vs. Private Sector Myths“, and the author is Mariana Mazzucato, Professor in the Economics of Innovation and Public Value at University College London (UCL), and Founder/Director of UCL’s Institute for Innovation and Public Purpose.

The key point made in the book is that entrepreneurship is not – and should not – the responsibility of the private sector. Indeed, it cannot be the responsibility of the private sector.

Early on in the book, she makes the strongest case there is to be made for her thesis, by arguing that the United States of America has known this, and practiced this, for years on end. The rest of the world, she says, would do well to emulate the USA:

If the rest of the world wants to emulate the US model they should do as the United States actually did, not as it says it did: more State not less.

LOCATION: 372 (Note that the location refers throughout to the Kindle version)

There are a lot of excellent reviews out there already. See this one in the New York Times, for example. It is a mostly favorable review. Or, if you want a slightly more critical one, see this one in The Guardian. Indeed, there are many others out there.

I want to focus on three key points in this essay: horizons, incentives and spillovers. Let’s tackle each in turn.

Horizons

Moonshots is a word that has become increasingly popular over the last two decades, and it refers to projects or even ideas that have a relatively low chance of succeeding. The payoff, if these ideas succeed, is so large that that it may compensate for the relatively low probability of this actually happening. That, of course, is exactly what expectations are all about.

But for a firm, particularly one that may not have the luxury of time and money on its side, placing bets on projects that may not work out – and indeed most of them will not – is a rather risky thing to do. Money is an obvious constraint, but a less obvious one is time.

Firms just do not have the luxury of waiting while a project turns out to be successful… eventually. These kind of moonshots, then, are perhaps best handled, for this specific reason, by the state.

In fact, the point is even more nuanced, because a firm is much more likely to (if at all) invest in a moonshot project based on a specifically desired outcome. The word project itself is an indication of this fact – this is not “blue sky research” that we are talking about.

But blue sky research is important!

A core difference between the US and Europe is the degree to which public R&D spending is for ‘general advancement’ rather than mission-oriented. Market failure theories of R&D are more useful to understand general ‘advancement of knowledge’–type R&D than that which is ‘mission oriented’ (Mazzucato 2015). Mission-oriented R&D investment targets a government agency programme or goal that may be found, for example, in defence, space, agriculture, health, energy or industrial-technology programmes (Mazzucato and Penna 2015).

LOCATION: 1549

Governments need to focus, for the sake of their own economies, their domestic firms and their long term growth, on focusing on moonshot projects, precisely because firms are reluctant to do so. The state needs, in other words, to take risks that private firms will not.

Saying this is easy, but how to go about doing this?

That is, if governments need to tackle long-term low-probability-of-success and uncertain-outcome initiatives that are important, but unlikely to be taken up by the private sector, the question that then arises is: how?

Mazzucato offers two points in this regard that I found interesting:

Block (2008, 188) identifies the four key characteristics of the DARPA model:

1. A series of relatively small offices, often staffed with leading scientists and engineers, are given considerable budget autonomy to support promising ideas. These offices are proactive rather than reactive and work to set an agenda for researchers in the field. The goal is to create a scientific community with a presence in universities, the public sector and corporations that focuses on specific technological challenges that have to be overcome.

2. Funding is provided to a mix of university-based researchers, start-up firms, established firms and industry consortia.

3. There is no dividing line between ‘basic research’ and ‘applied research’, since the two are deeply intertwined. Moreover, the DARPA personnel are encouraged to cut off funding to groups that are not making progress and reallocate resources to other groups that have more promise.

4. Since the goal is to produce usable technological advances, the agency’s mandate extends to helping firms get products to the stage of commercial viability. The agency can provide firms with assistance that goes well beyond research funding. Part of the agency’s task is to use its oversight role to link ideas, resources and people in constructive ways across the different research and development sites.

LOCATION: 1808

In effect, she is suggesting that government alone cannot do this, it needs to be a “scientific community” that is decentralized, has autonomy, sets the agenda, and applies Darwinian principles (see point 3). Hmm, sounds familiar. Different context, but a similar lesson!

And elsewhere in the book, her example of how Japan did this in the 1970’s is instructive:

The general point can be illustrated by contrasting the experience of Japan in the 1970s and 1980s with that of the Soviet Union (Freeman 1995). The rise of Japan is explained as new knowledge flowing through a more horizontal economic structure consisting of the Ministry of International Trade and Industry (MITI), academia and business R&D. In the 1970s Japan was spending 2.5 percent of its GDP on R&D while the Soviet Union was spending more than 4 per cent. Yet Japan eventually grew much faster than the Soviet Union because R&D funding was spread across a wider variety of economic sectors, not just those focused on the military and space as was the case in the Soviet Union. In Japan, there was a strong integration between R&D, production and technology import activities at the enterprise level, whereas in the Soviet Union there was separation.

LOCATION: 1142

And…

Equally important were the lessons learned by Japanese people that went abroad to study Western technologies for their companies, and relationships between those companies and US firms. These companies benefited from the lessons of the US (hidden) ‘Developmental State’, and then transferred that knowledge to Japanese companies which developed internal routines that could produce Western technologies and eventually surpass them.

LOCATION: 1156

So, bottom-line: the state has to get in this business, but it can’t “go” it alone. There needs to be a community of academicians, researchers, firms, scholars – and as the example of Japan shows, this community needs fostering, and horizontal collaboration.

Or, if you prefer to put it simply, this is going to be hard.

Incentives

Academia suffers from the same problem that government bureaucracy does in India: the incentives are all wrong. Both are about risk minimization.

A professor in a college has no incentive to try and do something new, something risky, something innovative. Why, if you think about it, should she? Your best case scenario is that it works, but you get no upside for it: remember, wages aren’t a function of what you do, they are a function of how long you have been in the system. Your worst case scenario is that what you tried to do blows up in your face. So why take the risk?

And it is the same, of course, with a government bureaucrat. And that makes the conclusion of the previous section even more problematic, for where, exactly, are you going to unearth government bureaucrats willing and able to make this happen?

I’m all for the state being more entrepreneurial. I buy into the idea. But I worry, especially in a country like India, about the feasibility of it, for hey, incentives matter!

In a blogpost I had written earlier this year about the budget, I had touched upon this point:

Here is Ninan’s solution:

“Is there a solution? Yes, railway engineers of old like the metro builder E Sreedharan, builders of government companies like D V Kapur and V Krishnamurthy, and agricultural scientists like M S Swaminathan have shown how they made a difference when given a free hand. Vineet Nayyar as head of Gas Authority of India was able to build a massive gas pipeline within cost and deadline in the 1980s. The officers who are in charge of Swachh Bharat and Ayushman Bharat, and the one who has cleaned up Indore, are others who, while they may not match China’s speed, can deliver. Perhaps all we have to do is to spot more like them and give them a free hand.”

But as any experienced HR professional will tell you, spotting them is very difficult, even in the corporate world. And as any corporate CEO will tell you, giving these talented folks a free hand is even more difficult. And as any student of government bureaucracy will tell you, achieving the intersection set of these two things in a governmental setup is all but impossible.

And so what we need to study and copy from China is not so much anything else, but lessons in achieving, and sustaining, excellence in government bureaucracy. Or, if you prefer, how to improve state capacity.

In short, quality of government, not size of government, is what matters for freedom and prosperity.

https://econforeverybodyblog.wordpress.com/2020/02/17/how-to-think-about-the-budget/

That point resonates even more in this context: fostering an ecosystem led by the government is dead in the water without either the proper incentives, or at least bureaucrats who are able to work through poorly designed incentives. It is a hard problem, state led entrepreneurship, and made harder by the problem of incentives.

Spillovers

Or externalities, if you prefer. It doesn’t matter how hard the problem is, the payoffs are worth it!

Ruttan (2006) argues that large-scale and long-term government investment has been the engine behind almost every GPT (general purpose technology) in the last century. He analysed the development of six different technology complexes (the US ‘mass production’ system, aviation technologies, space technologies, information technology, Internet technologies and nuclear power) and concluded that government investments have been important in bringing these new technologies into being.

LOCATION: 1570

(Note: emphasis added)

If those GPT’s are the outcome of general, as opposed to specific, R&D, sign me up. They are magnificent positive externalities. Indeed, elsewhere in the book, Mazzucato points to how almost everything produced by Apple today simply could not have been produced without an entrepreneurial state:

LOCATION: 2326

The final point that I’ll make relates to how Mazzucato proposes “capturing” some of these externalities:

Where an applied technological breakthrough is directly financed by the government , the government should in return be able to extract a royalty from its application . Returns from the royalties , earned across sectors and technologies , should be paid into a national ‘ innovation fund ’ which the government can use to fund future innovations . Granting a return to the State should not prohibit the dissemination of new technology throughout the economy , or disincentivize innovators from taking on their share of the risk . Instead it makes the policy of spending taxpayers ’ money to catalyse radical innovations more sustainable , by enabling part of the financial gains from so doing to be recycled directly back into the programme over time .

Location 3735

Mazzucato does present alternative schemes to the one shown above, but this is the one that strikes me as being the one with the most promise, if administered well, with appropriate risk-mitigation built in. But again, saying that is much easier than actually getting it done.

But all the being said, one simple fact is inescapable: India needs to be thinking about how to get something like this off the ground, and ASAP.

For that reason alone, more of us should be reading this book.

Understanding Horizons, Understanding Time

The more I think about time, the more confused I get. The more I read about time, the more I cannot help but think about time.

In today’s post, I hope to be able to inspire you to get as confused about time as I am.

Before we get to the five links, here are some questions for you.

Should I have a gulab jamun after lunch today? If you are anything at all like me, your answer is likely to be a resounding “aye!”

Do you know who might want to say no? 70 year old Ashish (assuming I live to be that age) might not be such a big fan of I having that gulab jamun today.

Should 38 year old Ashish (for that is how old I am right now) listen to the entreaties of a 70 year old Ashish who doesn’t exist?

Well, if 38 year old Ashish wants 70 year old Ashish to have a chance of existing, I think it makes sense to ditch that damn dessert.

But, uh, good luck trying to convince 38 year old Ashish at 1.45 pm of the importance of thinking about the hypothetical existence of 70 year old Ashish.

That’s the problem of time discounting.

How important is the future, compared to the present?

Think of it in terms of gulab jamuns or interest rates offered to you by the bank, it’s the same thing. A weeekend trip to Goa (38 year old Ashish says yes!), or a fixed deposit in the bank (70 year old Ashish says yes!)?

Now: that was the easy bit. Let’s amp things up a little.

Do you wish your parents had saved a little bit more when they were younger? Hell, imagine if your grandparents hadn’t had that gulab jamun when they were young, and put the money in a fixed deposit instead. Go as far back in time as you wish, and imagine how important a rupee saved a couple of centuries ago would have been today – for you.

But, um, by that measure, shouldn’t you be saving every single rupee you can today for your child’s tomorrow? The argument holds whether you have children or not, by the way. If you wish your great-great-great-grandfather had been more financially responsible at age 27, when he was unmarried and without kids, then that goes for you today as well!

And all that being said, let’s get cracking with today’s set of links!

  1. “Time discounting research investigates differences in the relative valuation placed on rewards (usually money or goods) at different points in time by comparing its valuation at an earlier date with one for a later date”…
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    … says the very simple introduction to time (temporal) discounting on behavioraleconomics.com. While you’re on that page, also look up hyperbolic discounting.
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  2. “Someone with a high time preference is focused substantially on their well-being in the present and the immediate future relative to the average person, while someone with low time preference places more emphasis than average on their well-being in the further future.Time preferences are captured mathematically in the discount function. The higher the time preference, the higher the discount placed on returns receivable or costs payable in the future.”
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    That is from Wikipedia, and as homework, ask yourself if you should live life with a zero discount rate attached to most things.*
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  3. “What has become known as the “Ramsey formula” says that the rate at which one should discount an increase in consumption that occurs in the future depends on three key factors, elaborated upon below: our pure rate of time preference, our expectations about future growth rates, and our judgment about whether and how fast the marginal utility of consumption declines as we grow wealthier”
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    So here’s a way to understand the point above: I was in Europe on work recently. Should I have splurged on a three star Michelin meal in Paris? Or banked the money I might have spent over there and gone for three such meals when I was 70 instead? Will such a meal at age 70 hold the same importance for me as it does now?**
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  4. “When brain science was young, it was thought that the frontal lobe had no particular function. There were famous cases such as that of Phineas Gage, a railway worker who, in an explosion, had a long iron rod driven through the front of his brain. The rod was removed and Gage, miraculously, survived, seemingly with his intelligence, language and memory intact. Before long he was back at work.However, observation of others with frontal lobe damage soon revealed the cost – problems with planning, and also, strangely, a reduction in feelings of anxiety. What was the link between the two? Both planning and anxiety are related to thinking about the future. Frontal lobe damage leaves people living in a permanent present, and as a result they will not be bothering to make plans, so can’t be anxious about them.”
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    That is from a review of one of the finest books I have read, Stumbling on Happiness, by Daniel Gilbert. Read the book, please. I promise you that it is worth your (excuse the pun) time.
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  5. “But there’s an alternative path. Generations overlap, and so by doing more to empower younger people today, we give somewhat more weight to the interests of future people compared to the interests of present people. This could be significant. Currently, the median voter is 47.5 years old in the USA; the average age of senators in the USA is 61.8 years. With an aging population, these numbers are very likely to get higher over time: in developed countries, the median age is project to increase by 3 to 7 years by 2050 (and by as much as 15 years in South Korea). We live in something close to a gerontocracy, and if voters and politicians are acting in their self-interest, we should expect that politics as a whole has a shorter time horizon than if younger people were more empowered.”
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    Via Marginal Revolution, this lovely, thought-provoking essay by William Macaskill. As both the MR blog post and Macaskill are careful to point out, this necessarily implies that younger people should be more informed, for such a system to have even a shot at succeeding.

 

But hey, that’s as good an argument as any for the existence of this blog!

 

*Yes, you should, far as I can tell. But god, it’s hard!

**If you were wondering, the answer is no. I didn’t go for that meal. I wish I had though!