Reproducibility and Replicability

I and a colleague conducted a small behavioral economics and experimental economics workshop for our students at the Gokhale Institute. It was a very small, very basic workshop, but one of the things that came up was the reproducibility problem, or as Wikipedia puts it, the replication crisis.

The replication crisis (also called the replicability crisis and the reproducibility crisis) is an ongoing methodological crisis in which it has been found that many scientific studies are difficult or impossible to replicate or reproduce. The replication crisis most severely affects the social sciences and medicine. The phrase was coined in the early 2010s as part of a growing awareness of the problem. The replication crisis represents an important body of research in the field of metascience.

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

And further on in that same article:

A 2016 poll of 1,500 scientists reported that 70% of them had failed to reproduce at least one other scientist’s experiment (50% had failed to reproduce one of their own experiments).[9] In 2009, 2% of scientists admitted to falsifying studies at least once and 14% admitted to personally knowing someone who did. Misconducts were reported more frequently by medical researchers than others.

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

The basic idea behind replicability is very simple: you should be able to take the data and the code from the paper you are reading/reviewing, and replicate the results obtained. You don’t have to agree with the choice of method, or with the results or with anything – you should be able to replicate the results, that’s all.

One basic standard of economic research is surely that someone else should be able to reproduce what you have done. They don’t have to agree with what you’ve done. They may think your data is terrible and your methodology is worse. But as a minimal standard, they should be able to reproduce your result, so that the follow-up research can then be in a position to think about what might have been done differently or better. This standard may seem obvious, but during the last 30 years or so, the methods for reproducibility have been transformed.

https://conversableeconomist.blogspot.com/2021/01/the-reproducibility-challenge-with.html

Now (to me, at any rate) this is interesting enough in and of itself, but at the risk of becoming a little meta, reading the rest of Tim Taylor’s post is worth it because it raises so many interesting issues.

The first is a link to a lovely overview of the problem by Lars Vilhuber, published in the Harvard Data Science Review. It is relatively simple to read, and is recommended reading. For example, Vilhuber draws a careful distinction between replicability and reproducibility, and is full of interesting nuggets of information. I’ll list out the major ones (major to me) here. Note that I have simply copy-pasted from the link:

  1. Publication of research articles specifically in economics can be traced back at least to the 1844 publication of the Zeitschrift für die Gesamte Staatswissenschaft (Stigler et al., 1995).
  2. As the first editor of Econometrica, Ragnar Frisch noted, “the original data will, as a rule, be published, unless their volume is excessive […] to stimulate criticism, control, and further studies” (Frisch, 1933)
  3. …only 17.4% of articles in Econometrica in 1989–1990 had empirical content (Stigler et al., 1995)
  4. As Dewald et al. (1986) note: “Many authors cited only general sources such as Survey of Current Business, Federal Reserve Bulletin, or International Financial Statistics, but did not identify the specific issues, tables, and pages from which the data had been extracted.”
  5. Among reproducibility supplements posted alongside articles in the AEA’s journals between 2010 and 2019, Stata is the most popular (72.96% of all supplements), followed by Matlab (22.45%; Vilhuber et al., 2020) (Note: Do check figure 2 at the link. Fascinating stuff.)
  6. It was concluded that “there is no tradition of replication in economics” (McCullough et al., 2006).
  7. The extent of the use of replication exercises in economics classes is anecdotally high, but I am not aware of any study or survey demonstrating this.
  8. The most famous example in economics is, of course, the exchange between Reinhart and Rogoff, and graduate student Thomas Herndon, together with professors Pollin and Ash (Herndon et al., 2014; Reinhart & Rogoff, 2010). (Note to students: this is a fascinating tale. Read up about it!)

There is much more at the link of course, but Tim Taylor’s post does a good job of extracting the key points. I’m noting them here in bullet point fashion, but you really should read the entire thing.

  1. Economic data – our understanding of the phrase needs to change, because a lot of it is in fact not publicly available today.
  2. “Vilhuber writes: “In 1960, 76% of empirical AER [American Economic Review- articles used public-use data. By 2010, 60% used administrative data, presumably none of which is public use …””
  3. Restricted Access Data Environments is a new thing that I discovered while writing this blogpost. “…where accredited researchers can get access to detailed data, but in ways that protect individual privacy. For example, there are now 30 Federal Statistical Data Research Centers around the country, mostly located close to big universities.” We could do with something like this in India. Actually, we would be a lot happier with just dbie working the way it was supposed to, but that’s for another day.
  4. Data that is given by creating a sub-sample, data that is ephemeral (try researching Instagram stories, for example) and data that you need to pay for are all challenging, and relatively recent, developments.
  5. I worked for four years in the analytics industry, so believe me when I say this. Data cleaning is a huge issue.
  6. Tim Taylor writes five paragraphs after this one, but this is a glorious para, worth quoting in full:
    “As a final thought, I’ll point out that academic researchers have mixed incentives when it comes to data. They always want access to new data, because new data is often a reliable pathway to published papers that can build a reputation and a paycheck. They often want access to the data used by rival researchers, to understand and to critique their results. But making access available to details of their own data doesn’t necessarily help them much.”

If there are those amongst you who are considering getting into academia, and are wondering what field to specialize in, reproducibility and replicability are fields worth investigating, precisely because they are relatively underrated today, and are only going to get more important tomorrow.

That’s a good investment to make, no?

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.

Zeynep Tufekci on Metaepistomology

I know, I know.

Here’s what metaepistomology means:

“the theory of theory of knowledge”

And you should now be asking, “what does that mean?”

The latest post on her Substack (god, I can’t afford to subscribe to all the substacks I want to!) is a wonderful essay on how she learnt about the pandemic last year, and how she learnt about how to learn – but I’ll get to that in a bit.

First things first, who is Zeynep Tufekci?

Zeynep Tufekci (Turkish: Zeynep Tüfekçi; [zejˈnep tyˈfektʃi]; ZAY-nep tuu-FEK-chee) is a Turkish sociologist and writer. Her work focuses on the social implications of new technologies, such as artificial intelligence and big data, as well as societal challenges such as the pandemic using complex and systems-based thinking. She has been described as “having a habit on being right on the big things” by The New York Times and as one of the most prominent academic voices on social media by The Chronicle of Higher Education.

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

I learnt about her for the first time when I cam across a review of her book, Twitter and Tear Gas over on Aadisht’s blog. I haven’t read it yet, but I still remember this from his review, because it resonated a fair bit:

A point this book makes often is that digital tools mean that networked protests are enabled, and that protests can spring up much quicker than they used to. But prior protests used to be much more organised, because the threshold to start a protest used to be so high that it would take a long time and lots of organisation to hit it – and that meant that there would be an organisation capable of pushing for change after the protests. The digitally fuelled protests haven’t quite figured out what change to ask for, and how to push it, yet.

https://aadishtlogseverything.wordpress.com/2020/01/26/twitter-and-tear-gas-zeynep-tufekci/

(We also did a podcast about his review – and some other posts from his blog besides.)

But Zeynep’s writing reached another level altogether (both in terms of relevance and in terms of impact) during the pandemic. This, for example in the NYT (note the date!), or this from The Atlantic.

But her latest post, on the 31st of January, is worth pondering at great length. And that’s because while it speaks about the pandemic, and how she learnt about how serious it is going to be, it also contains lessons that are applicable everywhere else in life.


Please – pretty please! – read the whole post, but here are my key takeaways:

China’s attempts at downplaying human-to-human transmission and the WHO’s complicity in it are of course wrong, but this is also a good lesson in understanding why exponentials are worth learning about – if nothing else, at least because manufactured lies cannot stand up to the steep part of an exponential curve. And no matter your opinion about whether or not we underestimated the current pandemic and its impact, you should ask where else this lesson can be applied:

Let’s call this the Principle of “You Can’t Finesse the Steep Part of an Exponential,” after a Dylan H. Morris quote included in a previous article of mine trying to warn about the more transmissible variants.

https://zeynep.substack.com/p/lessons-from-a-pandemic-anniversary

Second, this sentence:

Let’s call this the “Principle of Always Pay Attention to Costly Action.” 

https://zeynep.substack.com/p/lessons-from-a-pandemic-anniversary

Principles of economics: incentives matter. Up until the point in time when Wuhan was locked down, China’s incentive was to try and suppress news about the upcoming pandemic. Wuhan being locked down was drastic action, yes, but it was also a signal. And the signal was that from here on in, China’s incentive was to warn the rest of the world about how severe and catastrophic (both in terms of health outcomes as well as economic outcomes) this virus was going to be.

Why did the incentive flip? Because the costs of downplaying the virus (in terms of being blamed for the origin, the suppression and therefore the inevitable spread) now outweighed the benefits.

Put another way, if China (if not through its statements, then through its actions) is signaling that its message has flipped, well, things must be really bad.

When it comes to political leadership, ignore what they say, and study what they do.

Political leadership doesn’t just mean governments. This applies to every single political unit, from the United Nations down until your family. Actions, as they say, speak louder than words.

Outrage and counter-outrage on Twitter is words. Action is action, and a far more reliable signal.


And I learnt from this post about the criterion of embarrassment

The criterion of embarrassment is a type of critical analysis in which an account likely to be embarrassing to its author is presumed to be true as the author would have no reason to invent an account which might embarrass him.

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

If the guy giving you the bad news is embarrassing himself in the process, then the payoff from making the announcement must be more than the cost of being embarrassed.

If intellectual honesty is at a low premium today in society (and if you ask me, it has always been the case) then a leader being (or allowing others to be) honest isn’t about morality, it is about the cost calculus.

So, the thumb rule: if the leader of any kind of group fesses up, be very worried. Think of it this way: map out, consultant style, two axes about public announcements.

Is the announcement good news or bad news (that is, is the leadership that is making the announcement going to be benefit from it, or be embarrassed by it)?

Second: Is the news real and credible, or is it straight out of Narnia territory? (Detecting this is a skill, and we should all possess it)

That leads us to this chart:

Three things that you need to keep in mind:

  1. The upper left quadrant will rarely be an announcement. That is why one should study what leaders do, not what they say
  2. If what the leadership is doing (or saying) matches up with our assessment of how bad things really are, get really worried, and start preparing accordingly.
  3. The third is the second last sentence in Zeynep’s post: “Everything we needed to know to act was right there in front of us, but it required not just knowledge, but a theory of knowledge to turn it into actionable, timely information.”

And that, my friends, is the point of metaepistomology.

A Conversation With Rationality

I’d gone to the RTO the other day for some work, and I suppose you know what comes next.

I wouldn’t say it is impossible to get work done without the help of an agent, but it is certainly true that it isn’t a breeze either. And if one teaches opportunity costs, it makes sense to take the “help” of an agent. Sure you can do it yourself, but it then becomes eye-wateringly expensive in terms of time. And therefore, money.

And while I waited in the numerous byzantine lines to get my work done, I reflected, like every good economist should, on what could be done to reform the system.

Just ban agents, my understandably irrational brain screamed as a first pass solution. Why doesn’t the bureaucracy come up with a better process map that just gets out of the way instead, Cold Calculating Rationality suggested.

Because they aren’t incentivized to, C.C.R went on to reason, proceeding to shut me out of the conversation altogether. Although I was, truth be told, a very interested bystander by now.

But why aren’t they incentivized to – isn’t that the next logical question to ask, mused C.C.R.

I mean, won’t it make their job easier if they make their processes easier?

Well, yes, but they earn the same either way, no? It’s not like payments are linked to productivity increases.

How would they earn more?

Maybe through a Coasean solution in which there’s connivance with the agents, and they get a cut? That is, make the process impossibly cumbersome, and continue to keep it cumbersome, no matter what any well meaning committee proposes. That then facilitates agents stepping in and “helping” blissfully ignorant citizens get their work done faster – for a fee, of course.

They take a cut of the fee – and hey, there you have it! Bureacracts have an incentive – but not to simplify the system! They have an incentive to continue to clog up the system.

C.C.R needed a break at this point in time, so it and I played a couple of rounds of Fruit Ninja on my phone.

But why, C.C.R asked – for it can take only so many minutes of mindless swiping – would anybody want to be an agent? I mean, there are surely better, more remunerative ways to earn a living.

C.C.R. and I stared at each other in part jubilation, and part horror.

“There aren’t better ways, no?!”, we said in unison.

“I mean, if markets are weakly efficient, nobody would willingly work as an agent, surely”, said C.C.R triumphantly.

“And so”, C.C.R went on to say in that insufferably smug way that is its wont, “if you really want to reform the system, you need to create better employment opportunities everywhere else. Reforming this particular system is just putting a band-aid on a cancer. Because yes middle-mean are bad, but nobody grows up dreaming of being a middleman. Of course the middlemen, and that entire nightmare of a system is going to be up in arms if you seek to eliminate it. The lack of alternative, viable careers: that’s the real problem.”

“So, just more pro-growth policies, you’re saying?”, poor old irrational me asked timidly.

“Well, yes. Easy answer, tough implementation, I’ll concede that point”, replied C.C.R.

“I wonder where else we can apply this line of thinking”, I was about to ask C.C.R… but then it was my turn at the window, and I was so happy that I was finally done with the whole thing that I stopped thinking about it altogether.

So it goes.

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://econforeverybody.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.

Ec101: Links for 2nd January, 2020

Five links to help us better understand incentives

  1. Wikipedia gives us the inside dope on economic incentives.
    ..
    ..
  2. Quora remains a reasonably good place to get answers…
    ..
    ..
  3. The Econlib page on incentives is full of interesting snippets…
    ..
    ..
  4. But beware! Incentives aren’t easy to design!
    ..
    ..
    “Studies show that offering incentives for losing weight, quitting smoking, using seat belts, or (in the case of children) acting generously is not only less effective than other strategies but often proves worse than doing nothing at all. Incentives, a version of what psychologists call extrinsic motivators, do not alter the attitudes that underlie our behaviors. They do not create an enduring commitment to any value or action. Rather, incentives merely—and temporarily—change what we do.”
    ..
    ..
  5. A Forbes article that tells you how might mitigate some of the problems with incentive design.

EC101: Links for 7th November, 2019

  1. Idea Vodafone debt rating downgraded. Uh-oh.
    ..
    ..
  2. “When Arun Sarin, Vodafone Group Plc’s India-born former CEO, was charting the British telecommunications firm’s expansion into emerging markets in the mid-2000s, his home country with more than a billion potential phone users seemed a compelling choice.Sarin wasn’t alone. Norway’s Telenor ASA, Russia’s Mobile TeleSystems PJSC and Malaysia’s Maxis Bhd were also among a slew of companies that flocked to this fast-growing market. The carriers banded with local partners, bid for airwaves and licenses, spending billions of dollars to prepare their networks.

    But what once appeared to be their most-promising Asian wireless market has turned sour. Vodafone’s Indian venture with billionaire Kumar Mangalam Birla, saddled with $14 billion of debt, is said to be seeking to revamp its borrowings amid mounting losses and a tariff war. Tycoon Sunil Mittal’s Bharti Airtel Ltd. is rated junk by Moody’s Investors Service. In a market that had a dozen carriers two years ago, just three are left standing today — two of them, barely.”
    ..
    ..
    Here’s more context from Bloomberg.
    ..
    ..

  3. “Notoriously high levels of pendency of cases discourage those with limited influence and resources from approaching the courts for justice. Police stations, especially those in rural areas, make registration of complaints and first information reports cumbersome to help them manage their strike rates. Some websites expect visitors to read privacy policies and indicate consent by checking specific boxes before letting them browse pages. The notice is sometimes in an unfamiliar language. Immigration applications involve onerous paperwork that is lengthy and confusing.”
    ..
    ..
    Puja Mehra, author of the excellent “The Lost Decade” explains what sludge is, and why it matters in India
    ..
    ..
  4. All incentives matter, but some incentives matter more than others. That’s the basic takeaway, but please, I beg you – take the time to read this article in full. Slate Star Codex is just utterly magnificent.
    ..
    ..
  5. A fascinating article on the origins of the Amazon battery.

ROW: Links for 24th July, 2019

How to learn more about a country? Read a bit about it! In the process of writing up these ROW links, I plan to link to five articles (mostly random) about a country. The only thing that is common to them is that they’re all about one particular country.

And today’s country is Australia: I have not (yet) been to the country, but loved reading about it in Bill Bryson’s book, and loved hating the Australian cricket team (still do!). But on a more serious note, it is a country that I need to read more about.

In no particular order, or theme, five articles I read recently about Australia:

  1. “It’s on the matter of culture that Alan is most unconsciously revealing — unconsciously because Alan’s generation did not think of it as “culture” so much as of “character”. His upbringing was simple, in farming country near Gosford since swamped by housing. “I didn’t known what a steak was until I got to Sydney,” he recalls. “My mother knew how to cook rabbit 10 different ways.””
    ..
    ..
    How to not begin with an article on cricket? Alan Davidson, the original Wasim Akram – and a profile on him by Gideon Haigh. Please read, if you are a fan of cricket, Haigh’s book on Warne, called… “On Warne“.
    ..
    ..
  2. “Australia loves larrikins, as long as they are white, and polite, and display no flamboyance and voice no controversial opinions. Australia laments there is no colour in public life anymore, complains that sports-people show no personality in their interviews, and then punishes them the moment they do. Australia is willing to embrace Nick Kyrgios, as long as he becomes someone else.”
    ..
    ..
    From Australian sportsmen then, to Australian sportsmen now. Nick Kyrgios.
    ..
    ..
  3. “Australia will be a great nation, and a power for good in the world, when her head of state is a part-Aboriginal and her prime minister a poor man. Or vice versa.”
    ..
    ..
    Words written by Les Murray, who passed away recently. This article is via The Browser, and is worth reading for glimpses of Murray’s poetry, but also for an insight into Murray’s opinion about Australia.
    ..
    ..
  4. “It is commonly reported that the colonisation of Australia was driven by the need to address overcrowding in the British prison system, and the fact of the British losing the Thirteen Colonies of America in the American Revolution; however, it was simply not economically viable to transport convicts halfway around the world for this reason alone.[4] Many convicts were either skilled tradesmen or farmers who had been convicted for trivial crimes and were sentenced to seven years’ transportation, the time required to set up the infrastructure for the new colony. Convicts were often given pardons prior to or on completion of their sentences and were allocated parcels of land to farm.”
    ..
    ..
    Almost everybody who has attended a class I’ve taught on Principles of Economics knows the story – well, the story stands on somewhat weakened foundations.
    ..
    ..
  5. Finally, Professor Cowen picks his favorite things Australian. I am gloriously unaware of all of them.

EC101: Links for 18th July, 2019

Some news: the Gokhale Institute of Politics and Economics (where I work) recently started an undergraduate program in economics. I can’t tell you how excited I am at the opportunity to teach young people economics. Hopefully – although I cannot commit to this yet – I will be able to keep you updated with what we’re trying that’s different, and what I learn through the process of teaching in this program.

In honor of this first batch of students, though, here are five links from two people who have inspired me, and countless others, to both learn and teach economics. Marginal Revolution: thank you.

  1. What should I read to learn economics?
    ..
    ..
  2. What’s the shortest description of economics as a field of study?
    ..
    ..
  3. How soon is too soon to start teaching economics?
    ..
    ..
  4. Can skating teach you about economics? Well, uh, it’s complicated
    ..
    ..
  5. The most important lesson in economics I have ever learnt, and can ever teach.

 

As I said, I hope to update this blog regularly with lessons I have learnt, of many sorts. And fingers crossed, I will be able to do so. Here is the syllabus, in case you are interested.  In the meantime, if you have suggestions, comments, feedback – please do let me know.

Thanks.

EC101: Links for 27th June, 2019

  1. “Total Expense Ratio aka TER means cost incurred by a fund house to run a fund. It includes management fee, legal fees, registrar fee, custodian fee, distributor fee etc. The major part of the TER consists of management fee followed by distributor fee. The TER is calculated daily and will be deducted by AMCs on the same day, which means your NAV includes the impact of fees on your fund.”
    ..
    ..
    A good article to help you understand how mutual funds make money, what the new SEBI regulations mean for retail investors, and how dependent the mutual funds are (as of now) on the distributor.
    ..
    ..
  2. “…Say’s Law provides a theory whereby disequilibrium in one market, causing the amount actually supplied to fall short of what had been planned to be supplied, reduces demand in other markets, initiating a cumulative process of shrinking demand and supply. This cumulative process of contracting supply is analogous to the Keynesian multiplier whereby a reduction in demand initiates a cumulative process of declining demand. Finally, it is shown that in a temporary-equilibrium context, Walras’s Law (and a fortiori Say’ Law) may be violated.”
    ..
    ..
    Econ nerds only – and perhaps the even stranger beasts called macro-econ nerds only. David Glasner gives us a view of Say’s Law that may actually be (gasp) Keynesian in nature.
    ..
    ..
  3. “Why incentives? Economics is based on the premise that incentives matter. Incentives can help by increasing or decreasing the motivation to take up a certain activity, by changing the cost or benefit of the activity. If someone were to pay John enough for each time he hit his steps goal, he would likely begin walking, perhaps even enthusiastically. After all, health consequences are in the distant future, but cold, hard cash can be given in the present. ”
    ..
    ..
    That is from this link – you’ll actually have to download and read the PDF. This excerpt is useful to me because it essentially says that behavioral economics is, well, economics.
    ..
    ..
  4. “This view goes something like this – there are no priors (in fact, you discredit experience as being biased – after all you guys have been doing development for decades and we still have poverty and misery in abundance) >> and therefore conventions, latent wisdom, and experience counts for little >> therefore there are no theories >> so we need evidence on everything >> how better to create evidence than look for data >> so let’s do experiments (RCTs) or mine administrative data and understand reality and design evidence-based policies.”
    ..
    ..
    Gulzar Natarajan is less than pleased with Raj Chetty’s new course at Harvard (the first item from 23rd May, 2019’s posting), and I am very inclined to agree with his views. Empiricism is slightly overrated today.
    ..
    ..
  5. “The Baumol effect predicts that more spending will be accompanied by no increase in quality.
    The Baumol effect predicts that the increase in the relative price of the low productivity sector will be fastest when the economy is booming. i.e. the cost “disease” will be at its worst when the economy is most healthy!
    The Baumol effect cleanly resolves the mystery of higher prices accompanied by higher quantity demanded.”
    ..
    ..
    Alex Tabarrok over on Marginal Revolution is on a spree with the Baumol Effect, and having followed his series, I’d say with good reason. It upends several things in microeconomics that we might have taken for granted.