Tag: marginal revolution

Marginal Evolution

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That is an email I had sent to two of my friends, back in February of 2006. I’m sure Marginal Revolution must have been called plenty of things over the last twenty years, but “web resource”? Surely a record of sorts.

How I would like to tell you that I have read Marginal Revolution every single day since then. But even in the post truth era, that would be stretching things a bit. The remarkable bit, of course, is that it has been updated every single day since then – and for roughly three years before then.

I have no recollection of what post I read that day that made me want to share the URL with my friends. But I did go back and take a look at posts written on that day, and this delightful nugget cropped up:

“I am engaged and we are in the process of planning our wedding. There is a huge debate over what is OK to put in the invitations and what is not. My fiance and I have been living together for a little over a year and we aren’t planning on registering because we already have so much. So, monetary gifts would be great for us! Now, how do you put this in your invitation? A few suggestions have come up but we don’t want to seem rude or crass. Please help!”
Tyler: Oh, what a softball.  We have already blogged on the deadweight loss of gift-giving, here and here.  So my major advice is simply to read MarginalRevolution on a regular basis.  I can add only that if you are going to ask for money, set up a college fund.  Your kids-to-be are not yet experiencing the impatience of waiting for the money, which implies an arbitrage opportunity with g > r, or the growth rate of the funds greater than the rate of time discount.  Nor do I think that the mechanisms of Ricardian Equivalence will fully offset this transfer.  Got that?

https://marginalrevolution.com/marginalrevolution/2006/02/dear_tyler_prud.html

Consistently, delightfully weird, and thank god for some things not changing over time.

Other things have changed over time where the blog is concerned, of course. “Caught my Eye” has become “Tuesday Assorted Links“, for example. Or whatever day of the week it is, of course. We’ve had Markets in Everything, Those New Service Sector Jobs, and other long running series. We’ve had offshoots – textbooks, MRU (did you know it launched on the 5th of September?), a podcast and much else besides.

But the one thing that has remained constant is the fact that every single time I’ve visited the blog, I’ve come away with something I didn’t know earlier. And that’s been true for the last seventeen years in my case, and twenty for those lucky enough to have discovered the blog before I did.

I don’t claim to understand everything that I’ve read on MR, and I certainly don’t agree with everything written on it (what do you mean, give cash instead of gifts. Who does that?!). But I do claim, and with a lot of passion, that I have become a better student of economics for having read the blog for as long as I have.

Part of my motivation for starting EFE was to help other people fall in love with economics much the way I had over the years. And while there is a professor in Pune who is a major chunk of the reason I fell in love with economics, the other two reasons happen to be the co-authors of this blog. And certainly the inspiration to try and write daily comes from the fact that Tyler has written on MR every single day from August 2003 onwards.

2003. The year in which Federer won his first Wimbledon, and the year of the World Cup final That Never Happened. Hell, I was an undergraduate student in Fergusson College. And here I am now, father to a ten year old, with a blog of my own to try and post on daily – and MR continues on its own merry way, making the world a much better place, one small step at a time.

It is not for me to say whether the world has become a better place since then. But I can assure you that I have learnt a little about economics over the years, both because I’ve tried to read every single post written on MR, and because I’ve tried to write on EFE every single day. I’m less than perfect in both regards, and the failure is mine alone. But to the extent that I’m a better teacher today – be it ever so slightly – than in the year 2006, it is for the most part because of the inspiration that MR has provided over the years.

Two posts commemorating the twenty year anniversary on MR: here, and here.

Thank you for all that you’ve done, and here’s to the next twenty years. Cheers!

Tusks, Slavery and Economics

Ashish2 Comments

MRU.org is just a magical website if you are a student of economics, and one of my favorite videos on it is the one below. It’s only four minutes long, please do watch it if you haven’t seen it already:

The noblest of intentions, you’ll agree – but one of the most important lessons of economics is that the principles of economics really and truly matter. And in this case, the noblest of intentions had one of the most tragic outcomes possible.

That’s slavery. Now let’s talk about elephant tusks. Specifically, burnt and powdered elephant tusks:

If you visit Nairobi National Park, you will see rhinos, hippos, and giraffes, all within sight of the city skyline. You also will see an organized site showing several large mounds of burnt and powdered elephant tusks. They are a tribute to the elephant, and along with the accompanying signs, a condemnation of elephant poaching.
Starting in 1989, the government had confiscated a large number of tusks from the poachers, and as part of their anti-poaching campaign they burnt those tusks and placed the burnt ashes on display in the form of mounds. There are also several signs telling visitors that it is forbidden to take the ashes from the site. There have since been subsequent organized tusk burns.
In essence, the government is trying to communicate the notion that the elephant tusks are sacred, and should not be regarded as material for either commerce or poaching or for that matter souvenir collecting. “We will even destroy this, rather than let you trade it.”

https://marginalrevolution.com/marginalrevolution/2023/06/elephant-tusks-incentives-and-the-sacred.html

If you have seen (or are already familiar with) the video, how might you make use of your knowledge to think about this problem? Will burning these tusks make the situation better, or worse? Tyler answers the obvious question in his post:

“The economist of course is tempted to look beneath the surface of such a policy. If the government destroys a large number of elephant tusks, the price of tusks on the black market might go up. The higher tusk price could in turn motivate yet more poaching and tusk trading, thus countermanding the original intent of the policy.”

Why does he say that the “higher tusk price could in turn motivate yet more poaching”? Why does he not say it will motivate more poaching? Well, he’d have to calculate the elasticity of the supply curve to make a definitive statement one way or the other.

Read the rest of his post for some typically delightful Tylerian takeaways, including an academic paper called “Elephants“.

But whether it is the poaching of elephants or the slave trade, there is a deeper question at play here which Tyler alludes to towards the end of his post. But before we get there, a little anecdote which I once read in a cookbook. I’ve forgotten which cookbook (of course!), but the idea was that while in the process of cooking dinner for everyone, the author would simply fry some onions and garlic to start with. The aroma of these ingredients being fried would let everybody know that dinner was Being Prepared.

That is, Something Was Happening, And That’s Good Enough For Now.

Why do I bring this up now? Because in some cases, under some time horizons, and for some areas of optimization, a non-optimal response from an economic theory perspective may actually be… optimal.

Should vaccines be free or not? Should healthcare be free or not? Should education be free or not? If this raises your hackles, go with these: should tusks be burnt or not? Should slaves in a slave market be purchased and then set free or not?

Well, in the first set of questions, ask these additional questions: should be free or not for whom? For how long? Are you optimizing for more people staying alive and healthy, or are you optimizing for the fiscal health of the government? What if the long term fiscal health of the government allows you to save more lives in the future? What if giving vaccines away for free allows you to save lives that are here and present now? Will the government be able to run such programmes efficiently? Is it worth running these programmes even after knowing that governments can’t run these programmes efficiently? Why? Why not?

Or as Tyler puts it:

Many non-economists think only in terms of the sacred and the symbolic goods in human society. They ignore incentives. Furthermore, our politics and religious sects encourage such modes of evaluation.
Many economists think only in terms of incentives, and they do not have a good sense of how to integrate symbolic goods into their analysis. They often come up with policy proposals that either offend people or simply fall flat.

https://marginalrevolution.com/marginalrevolution/2023/06/elephant-tusks-incentives-and-the-sacred.html

Wisdom in balancing these two perspectives, he ends his post, is often at the heart of good social science (and, I would add, therefore at the heart of good policymaking). Or, as I like to put it, the truth always lies somewhere in the middle.

Economists would be better off if they didn’t use only economic analysis all the time. Non-economists would be better off if they used economic analysis some of the time. The trick lies in knowing when to stop in the first instance, and when to start in the second instance.

If only we had definitive answers to both, life would be so much easier.

But then again, I would then have had no reason to write here on EFE either.

So it goes!

Do border regions have better food?

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Do border regions have better food? What exactly counts as a border region? The parts of the United States near Canada? The best food in Italy is not obviously at the (rather skimpy) borders. China and India might be the best food countries in the world, but because they are so large most of their cuisine is not “border cuisine.” So I say no.

https://marginalrevolution.com/marginalrevolution/2022/11/requests-from-benedikt.html

As always, read the whole post – and in particular, the Wikipedia link to James Steuart (not a typo). But given my deep love of all things gastronomical, I wanted to expand on this point a bit.

  1. Tyler’s first question is worth thinking about (what exactly counts as a border region?), and the way I choose to define it more or less defines the direction in which this post is going to go. A border region, for the purposes of this post, is where a confluence of two or more cultures is observed. That is a ridiculously loose definition, I know, but this is a blogpost, so please let’s go with this for the moment.
  2. Does that definition necessarily mean better food? Well, that requires a definition of the phrase “better food”, but more variety and a greater degree of syncretism can reasonably be expected.
    • Think Massaman curry in Phuket, for example. Read this paragraph from that Wikipedia article to get a sense of what I’m trying to get at. This spice, frequently used in both Chinese cuisine and coastal Indian cuisine(s) is another good example.
    • Will the food in Chennai be necessarily better than in the interior parts of Tamil Nadu? Not necessarily, but it will be more varied in terms of influences, and especially as a tourist, that’s a good thing. It’s a good thing in general too, if you ask me!
  3. A confluence of culture is likely to be positively correlated with greater commerce, and that is likely to imply higher rent for real estate. Higher prices will imply a greater incentive to be better at making and selling food, so the quality will likely be higher (so long as you know where to look and how to choose). You could make the same point for costs of labour.
  4. More trade is also likely to imply fresher ingredients, and therefore better food.

What else am I missing?

So my answer would actually be yes, but it very much depends on how you define “border cuisine”.

Is There Such a Thing as Development Economics?

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Alex Tabbarok says no:

I used to think there was such a thing as development economics. There are still richer and poorer countries, of course, but is there a “development economics,” a special type of economics for poor countries? I don’t think so. Maybe there once was. In the twentieth century, divergence in per-capita GDP increased big time and it was a burning question why poor countries weren’t on the same development path as the developed nations. Starting around 1990-2000, however, we have seen convergence. Most countries are now on the same path. Poorer countries and richer countries are becoming more alike, sometimes for good and sometimes for bad.

https://marginalrevolution.com/marginalrevolution/2022/08/there-is-no-such-thing-as-development-economics.html

Here’s the Wikipedia article on what constitutes development economics:

Development economics is a branch of economics which deals with economic aspects of the development process in low- and middle- income countries. Its focus is not only on methods of promoting economic development, economic growth and structural change but also on improving the potential for the mass of the population, for example, through health, education and workplace conditions, whether through public or private channels.

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

Both Alex’s definition and the Wikipedia definition focus on how low- and middle- income countries need a different kind of economic theory when it comes to growth in these parts of the world. But why do these countries need a special kind of economics?

I suspect an answer most economists would agree on (talk about courting controversy!) is that these countries are likely to have a poorer quality of institutions and property rights. The legal system may not work as well as intended and the quality of political institutions might be worse along at least some dimensions, and that’s just for starters. So it’s not so much the case that a special kind of growth theory is needed, but that some of the assumptions underpinning the model are fundamentally different.

But as Alex mentions in his post, these assumptions may not be applicable, because convergence has taken place. The post is difficult to extract from, and I would recommend that you go ahead and read it in its entirety. But perhaps the most surprising thing in Alex’s latest post is the fact that this convergence has happened because poorer countries have caught up, more or less – but also because richer countries have become worse along some dimensions:

More generally, poorer and richer countries face many of the same problems today: infrastructure, low-skill workers and technological change, climate adaption and so forth. Is the latest paper on cash transfers, pollution, or corruption about a poor country or a rich country? It’s hard to tell. Poor countries still have their own unique problems, of course, but those problems are best analyzed by country rather than by income category. India is not the same as Thailand or Peru. I see little that unites poor countries under the rubric development economics.

https://marginalrevolution.com/marginalrevolution/2022/08/there-is-no-such-thing-as-development-economics.html

And anecdotally, I’m sure we’ve all experienced ways in which poorer countries are not just better off than before, but also have materially better institutions and processes.

The question is, does that then mean that there is no longer such a thing as development economics?

I would disagree with Alex’s stance, and say that development economics very much remains a relevant subject, and that for two reasons.

First, because with convergence, we’re not answering the same question that we were earlier – it is not so much about the fact that we need to focus on how to have poor countries grow faster, but just about how to make the world grow faster. There still remain, to be clear, countries that remain poor, and even within countries that have developed faster, there are regions that remain poor – but the focus of development economics should be different today than it was, say, in the 1960’s.

But that brings me to my second point. I define development economics slightly differently. When I take classes on development economics, I say that this is a subject that tries to find out the answer to three questions:

  1. What does the world look like?
  2. Why does the world look the way it does?
  3. What can we do to make the world a better place?

And viewed from this framework, it is the answer to the first question that has changed from about sixty years ago. Figuring out why it has changed is now a fascinating part of development studies. And the lessons one can learn by thinking about this helps us try and figure out what we can do to make the world a better place. To give you just one of many possible examples, you might want to think about which factors helped South Korea grow so rapidly in the last six to seven decades, and then ask which of these factors are replicable in an Indian context today. Not all factors will be applicable, and India today is not what India was back then, nor is it today what South Korea was back then.

Also, Pakistan cannot learn the same lessons that India might, because the ground reality in both countries is different in terms of resources, climate, geography, population, income levels, political institutions and so much more. And Sri Lanka will have a different set of lessons that are applicable, and all the African nations is a whole other story… and well, so on. Alex mentions this in his blogpost, of course.

But while it is true that there is little that unites poor countries today under the rubric of development economics, I don’t take that to mean that there is no such thing as development economics. Rather, I would argue that this simply means that the low hanging fruit in development economics have been picked, and development economics has now become an even more challenging and interesting field than before.

But “what can we do to make the world a better place?” will forever remain a valid and urgent question, so development economics, for me, will remain a fascinating subject to think about.

Economist Writing Everyday

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That’s a blog I came across thanks to MR, and if you’re a student learning about economics, this is very much the kind of blog you should be reading.

Why?

  1. Updated regularly, which should serve as inspiration
  2. Written in an easy, conversational style (ditto)
  3. A lot of interesting blogposts that serve to help you think through concepts you may have learnt recently (students who’ve just embarked on macro might like reading this post, for example)
  4. And a meta point that I’m going to spend the rest of this blog post on, so please continue below the fold 🙂

One post that Tyler Cowen himself linked to in his post on MR was this one, about academic publishing:

There are a lot more people writing academic journal articles.
There is a lot more well-executed economic research.
The teams of co-authors on papers/projects have become much larger.
The number of journals whose prestige is commensurate with a tenured position at an elite school has grown slower than the total faculty employed by elite schools.
Economics research has become more expensive and labor intensive.

https://economistwritingeveryday.com/2021/05/31/academic-publishing-how-i-think-we-got-here/
  1. I’ll get to my thoughts about this in just a bit, but I want to spend a little bit of time in helping you learn how to draw parallels.
    1. Those points noted above, they work just as well if you replace journals with universities, and faculty with applicants.
    2. Further reading, if you’re now suddenly interested in the topic. Also ask yourself if your answer changes depending upon whether you’re in Harvard or not (or have been published in a top-tier journal or not – same thing, for the purposes of this post)
    3. “Where else can this be applied?” is a question that should be front and center when you’re learning a new concept is the larger point I want to make.
    4. So when you learn about the pyramid in publishing, ask if it can be applied to the world of student applications. To, say, the IPL. To, say, becoming a “top lawyer”, or a “top doctor”…. you get the drift.
  2. The rest of the post is a wonderful explanation of how to build a simple model to help you arrive at the equilibrium. More people should learn this skill, and more universities should teach this skill!
  3. The author’s conclusion? More papers should be published by top journals, which is tantamount to saying more students should be accepted by Harvard. Who is right? Mike Makowsky or Tyler Cowen? Why? If your answer is both, what makes student applications different from paper submissions? What a wonderful set of questions to think about!
  4. This blog (not just the blogpost, the blog) gets better from here on in because they’ve published a follow-up post on this topic!
    1. It’s written in “yes, and” style, rather than a “no, but” style, which is a lovely thing to see
    2. It asks this question: “As an academician, what are you optimizing for?” And employing the concept of division of labor, Jeremy Horpedahl argues that if you’re the kind of academician who likes to teach, maybe it’s ok to not be published in a top 5 journal. If you’re the kind of academician who likes to research, on the other hand…
    3. Homework: how does this work in the case of student applications?
  5. And all this from just two posts on the blog! I’ve subscribed, of course, and I would strongly recommend you to do the same.
  6. I’m going to be a little greedy, and give one final recommendation. This post on Identifying Ideas That Motivate You is great reading for young would-be researchers.

Asking And Answering Important Questions

Ashish1 Comment

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Here is my list in response to that question:

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

Notes on “Snap-Back and Gone-Forever Goods”

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The actual title is a bit longer than that: “Snap-Back and Gone-Forever Goods: Understanding the COVID Recession’s Economic Winners and Losers“.

Tyler Cowen had shared this link on MR a couple of days ago, and I really liked this blog post for two reasons: one, a great framework that I can use in the coming semester for teaching Principles of Economics (more about the framework in a bit), and two, it speaks about higher education towards the end of the post.

Let’s get started:

  • “Due to the impending COVID pandemic, businesses, except for essential ones, simply had to shut down. People were essentially forced to stop buying things they actually wanted to buy.”
    ..
    ..
    It almost sounds trite put this way, but us economists are so used to thinking in terms of whether it is a “demand-side” problem or a “supply-side” problem that it makes sense to remember this: this one is neither! Folks are (more than) willing to supply, and folks are (more than) willing to buy – in most cases. We’ve imposed on ourselves, as a society, restrictions that prohibit such exchanges from taking place.
    ..
    ..
    There will be knock-on effects, some of which are already visible. And that will then take us into familiar territory (supply shock, demand shock etc). But a crisis due to a pandemic is fundamentally different!
    ..
    ..
  • First is the distinction between purchases of what I’ll call “Snap-Back” goods and services and those that are “Gone Forever.” In the Snap-Back category are things that we couldn’t buy during the heaviest COVID lock-down period, but these purchases were simply delayed.
    ..
    ..
    Simple frameworks are such lovely, beautiful things. I think all of us in India experienced “Snap-Back” goods – and to a lesser extent, services – with the winding down of the nationwide lockdown. The number of Amazon deliveries in my own household is proof enough for me. Of course, services such as the ones offered by The Urban Company, for example, is another story altogether – but still, the point remains. “Snap-Back” goods ought to be a thing, especially in 2020.
    ..
    ..
  • ““Gone Forever” goods and services, in contrast, are just like the term suggests: gone forever. Like me, you may have foregone several haircuts during shelter-in-place because you didn’t want to get (or give) coronavirus to your barber.”
    ..
    ..
    Anybody who knows me will know that haircuts isn’t the most appropriate example! But enough of splitting hairs, the point is well taken. There are certain goods and services (am I wrong in thinking that it will be mostly services) that will be “gone forever”.
    ..
    ..
    That being said, the nomenclature chosen here is slightly unfortunate. One might get the impression that the good or service in question will not be provided at all, except that is of course not true. It is just the case that business for the barber in question was bad during the lockdown. Fingers crossed, business will return to normal once things get back to normalcy – whenever that may be. And of course, if things open up without a vaccine/cure, business will be lower than would otherwise have been the case. But it still will not be “Gone Forever”.
    ..
    ..
  • “Economic booms and busts cause average incomes to rise and fall. As a result, businesses that sell a good or service that people purchase during good times and bad, like haircuts and toothpaste, are more insulated from recessions. Businesses that sell the Fountain Powerboat 32 Thunder Cat speedboat (see below, retail price $400,000), and other goods whose sales depend on people having a lot of money on their hands, fare poorly in a recession.”
    ..
    ..
    Tyler Cowen himself had made the point some months ago that certain business will probably not outlast this recession, and mentioned how that may not, on balance, be all that bad a thing. I’m paraphrasing, see the exact quote here. Would the world be worse off if we produced less Fountain Powerboat 32 Thunder Cat speedboats in the years to come?
    ..
    ..
    To be clear, I do not at all mean to suggest that Bruce Wydick will lament the potential passing of these speedboats. I am simply suggesting that some luxury goods not being produced may not be the worst thing ever (and yes, I am well aware of the macroeconomic implications).
    ..
    ..
Sourced from: http://www.acrosstwoworlds.net/?p=1176
  • This, above, is the simple framework I was referring to at the start of today’s blog post. 2×2 matrices are far too prevalent in management schools, and not prevalent enough in economic textbooks, and this was therefore very welcome indeed. But not just because of that! It really does help clarify my thinking.
    ..
    ..
    I need to note that Bruce Wydick has explained what income elasticity of demand is before showing this figure. I haven’t, but a simple Google search will help you learn what the income elasticity of demand is. Alternatively, click here to read about it, or watch this video.
    ..
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  • First things first: it is interesting that all of the upper left quadrant is services, and not goods. In fact, I’m hard pressed to think of a single good that would fall in this bracket. Maybe seasonal fruits that you won’t get again until the same season comes back next year (mangoes being a classic example in India, of course). Can you think of any other goods that are “gone forever”?
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  • And now onto higher education.
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    “Enrollments in higher education are typically thought of as a normal good, and estimates of income elasticity are typically slightly inelastic (slightly greater than 1.0), meaning that for each 1 percent increase (decrease) in income, enrollments increase (decrease) by about 1 percent.”
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    That’s from this link, which I got by reading the blogpost we’re taking notes for. Worth keeping in mind for what follows.
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  • “What this means is that the data show college-bound kids keep going to college even in recessions.”
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    That quote is in the context of the income elasticity of education. I have two points to raise in this context, though:
    • First, as Bruce Wydick himself explains earlier on in the blogpost, this year is an example of supply and demand being willing, but markets still not clearing. That is, this time is different. Under normal circumstances, sure – but enrollment may drop because of other factors than change in income.
    • Second, bundling! When you buy an education from a college, you’re buying the signal that you have learnt, you’re buying the learning itself and you’re buying the peer networks you develop because you attend college.
      The current pandemic means that you need depend on college for only the first of these three goods: learning itself, if it is to be online, can happen through multiple online providers, and peer networks in the physical sense is unlikely to happen at least through 2020.
    • Combine the inevitable drop in nationwide income with the fact that only one out of the three “goods” from a college being up for sale, and you reach the conclusion that enrollment will likely suffer this year.
  • The reduction will of course be different for different countries, and different once again for colleges within the same country. But at the margin, my model of the world tells me to expect either a lower number of applications, or a lower number of enrollments – or both.
  • But this article is worth a read and a bookmark for the framework alone!

In Memoriam: Oliver Williamson

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

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

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

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

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

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

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

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

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

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

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

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

Two articles from Bill Gates about Covid19 that are worth reading

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The first is an AMA:

A therapeutic could be available well before a vaccine. Ideally this would reduce the number of people who need intensive care including respirators. The Foundation has organized a Therapeutics Accelerator to look at all the most promising ideas and bring all the capabilities of industry into play. So I am hopeful something will come out of this. It could be an anti-viral or antibodies or something else.

One idea that is being explored is using the blood (plasma) from people who are recovered. This may have antibodies to protect people. If it works it would be the fastest way to protect health care workers and patients who have severe disease.

And speaking of convalescent blood therapy, this is also worth reading:

A simple and medically feasible strategy is available now for treating COVID-19 patients, transfuse blood plasma from recovered patients. The idea is that the antibodies from the recovered patients will help the infected patients. The idea is an old one and has been used before with some success.

And this is the second article by Bill Gates, worth reading in full, and so I will not provide an excerpt. Consistently applied restrictions on movement across the entire country, a clear strategy on how to prioritize testing, and a clear plan on developing a treatment and a vaccine are the key takeaways. Applicable mostly to America, or written with America in mind, but really works across the entire planet. India has applied the first of these as well as she could have.

 

Five articles about – what else – the corona virus

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Please read this one, even if you choose to not read the others. This is important. Alex Tabbarok in MR about the mathematics of large gatherings in the times of corona.

Now here is the most important point. It’s the size of the group, not the number of carriers that most drives the result. For example, suppose our estimate of the number of carriers if off by a factor of 10–that is instead of 20,000 there are just 2000 carriers in the United States. In this case, the probability of at least one carrier at a big event of 100,000 drops not by a factor of ten but just to 45%. In other words, large events are a bad idea even in scenarios with just a small number of carriers.

And via MR, this read:

The veteran of numerous global health crises, from SARS to bird flu to Ebola, Ryan points out that incredibly aggressive measures by China, South Korea and Japan appear to be bringing outbreaks in those countries under control.

“There’s clearly an indication that a systematic government-led approach using all tactics and all elements available seems to be able to turn this disease around,” he says.

He has been pleading with governments around the world to prepare for the new coronavirus before it shows up at their door — or to spring into action when it does arrive.

That’s what Hong Kong and Singapore did.

Both quickly set up systems to try to identify and treat every case in their territory. Hong Kong developed diagnostic tests and rapidly deployed them to labs at every major hospital in the city. At one point in February, Hong Kong had 12,000 people in quarantine. Singapore’s prime minister called for calm and assured residents that all health care related to the disease would be free.

Both Hong Kong and Singapore continue to find a few new cases each week, but they’ve avoided the explosive outbreaks that have occurred elsewhere.

And a silver lining:

COVID-19 is a massive global economic and health challenge, having caused >3500 global deaths as of this writing (Mar 8) and untold economic and social disruption. This disruption is only likely to increase in coming days in regions where the epidemic is just beginning. Strangely, this disruption could also have unexpected health benefits — and these benefits could be quite large in certain parts of the world. Below I calculate that the reductions in air pollution in China caused by this economic disruption likely saved twenty times more lives in China than have currently been lost due to infection with the virus in that country.

The psychology of the virus:

If you’re feeling overwhelmed as you try to assess what this all means for you and your family, know that this is a normal and perhaps even useful response. “The adjustment reaction is an emotional rehearsal, getting you psychologically ready to cope if you have to,” Peter Sandman, an expert on risk management, has written. “It is also a logistical rehearsal; it’s how you start figuring out what to do and how to do it.”

And finally, not an excerpt, but a useful catch-all guide to the corona virus from The Atlantic.