Microeconomics for all, by Paul Seabright

For the last half-century, the world’s leading universities have taught microeconomics through the lens of the Arrow-Debreu model of general competitive equilibrium. The model, formalizing a central insight of Adam Smith’s The Wealth of Nations, embodies the beauty, simplicity, and lack of realism of the two fundamental theorems of competitive equilibrium, in contrast to the messiness and complexity of modifications made by economists in an effort to capture better the way the world actually functions. In other words, while researchers attempt to grasp complex, real-world situations, students are pondering unrealistic hypotheticals.

https://www.project-syndicate.org/commentary/paul-seabright-criticizes-the-poverty-of-the-undergraduate-microeconomics-curriculum

Thus begins a short but hard hitting essay by Paul Seabright. Regular readers will know of him as the author of the magnificent “In The Company of Strangers“, but in today’s blogpost, we’re going to be speaking about the essay I just excerpted from. This essay was written back in 2013, but if anything, it rings even more true today.

Because what we teach in microeconomics has very little to do with reality, and that’s just the truth.


A typical course in micro will work its way through consumer theory, producer theory, markets, and then throw in a sprinkling of topics to round off an introductory course: a bit about externalities, a bit about asymmetry of information (and related topics) and maybe touch upon risk and intertemporal substitution.

But as Paul Seabright says, most of what goes on in research based in microeconomic theory is so much more than that. For example (and this is my point, not his), if you are a microeconomics faculty, will you be able to explain to your students during an introductory course what, exactly, was the seminal contribution of Hart and Holmstrom?

Here’s what I mean by that question: can you explain where, exactly, this fits in to what they’ve learnt thus far? Is this consumer theory? Producer theory? Information asymmetry? All of the above? And more? Motivating students to learn about their (Hart and Holmstrom’s) work ought to be the easiest thing in the world, given that most of them will be on the labor market soon, but I very much doubt if this comes up as a point of even cursory discussion in an intro micro course. (And this goes without saying, if I’m wrong about this, yay!)

Paul Seabright brings up a list of other topics besides the example I just mentioned: two-sided markets, risk analysis, inter-temporal choice, market signaling, financial-market microstructure, optimal taxation, and mechanism design.

In addition, he also brings up applications of microeconomic theory: antitrust analysis, auction design, taxation, environmental policy, and industrial and financial regulation, and speaks about how in terms of both the topics and their applications, econ students are being under-served.

The whole point of learning economics (micro or macro, or anything else, for that matter) is to be able to apply what you’ve learnt to the real world. An education in economics should, in other words, help you see the world like an economist does. And that would mean that one should be able to appreciate the world for what what works within it, and one should be able to identify problems with the world that economic theory might help you solve.

Unfortunately, the point of a micro course, more often than not, is simply to be able to solve enough problems so that one can score well in the semester end examination.

Which reminds me: I don’t think they learn about Michael Spence’s work either!


This really deserves a separate post, what I’m about to say next. But if I had to distill my post down to its essence: there are two ways to teach economics.

  1. Now that we’ve finished going through the textbook, let’s try and figure out if certain things about the world become more understandable.
  2. Here’s what the world looks like, and here is how economic theory helps.

The latter approach, in my experience, is so much better.

On Starting Salaries

I joined Genpact as a data analyst in the year 2006, fresh out of college. Genpact was one of the few firms that had visited our campus for recruitment that year, and I was lucky enough to be “placed” along with three other batchmates.

My starting salary? 3.75 lakh rupees, or INR 375,000/-.

I remember thinking how princely an amount this was back then, and I couldn’t for the life of me figure out how I could possibly spend whatever amount I got on a monthly basis. Of course, life very quickly taught me the same lesson that it has taught everybody else – so it goes.

But the reason I bring this up is because of a Finshots write-up that’s been shared with me a fair few times this past week:

₹3.6 lakhs
That was the typical salary paid out to a fresher in 2010 when they entered one of India’s top IT companies. Think — TCS, Infosys, HCL, and Wipro.
A decade later, they were still being paid roughly the same sum.
So technically, if you were to take into account inflation, freshers in 2020 were far worse than their counterparts back in 2010. And the salary hikes weren’t particularly enticing too.

https://finshots.in/archive/it-firms-great-resignation/

I’m not sure where they got the data from, but anecdotally, this sounds about right. I’ve been in charge of placements at the Gokhale Institute, where I work, for about four years now, and while we’ve managed to get firms on campus that pay substantially more, starting salaries for most firms at the entry level are at about this number, more or less.

Which, as the Finshots newsletter goes on to point out, is ridiculously low for 2022. And why might this be so?

Well, two ways to think about it. First, as the newsletter itself points out, it’s simple economics. There’s excess supply.

You see, India produces roughly 1.5 million engineering graduates every year. And IT firms hire around 200,000 people every year. This means the effective pool of applicants remains sizeable and IT companies continue to be spoilt for choice. Even others attributed it to cartelization, alleging that IT companies banded together to deliberately suppress salaries. But despite what you want to believe, the bottom line remains the same — Entry-level salaries simply did not budge a lot in the past decade and IT graduates were getting a bit angsty.

https://finshots.in/archive/it-firms-great-resignation/

It’s worth learning more about economics to help yourself understand what terms such as excess supply, homogenous goods, elasticity, cartelization, inefficient labor markets mean, because they help you understand why starting salaries are so low. Search for these terms online, on this blog, or begin with MRU videos, but help yourself by learning about these concepts if you are unfamiliar with them.

Or watch AIB videos!

If you ask me, do both. It’s a great way to learn econ theory and have a bit of fun.


But as the newsletter goes on to point out, things are changing, and they say this is because of three reasons: increased attrition, greater recruitment by start-ups and burnout from the pandemic. Each of three, I should add are inter-related, but I broadly agree with their explanation.

Average salaries are up, firms are paying more, and it’s a great time to be out there looking for a job. But, as the conclusion of the newsletter points out, it would seem that there is a recession looming on the horizon, and that may drag starting salaries back to square one.

How does one find out about the probability of a recession? Well, there’s lots of ways, but without being too meta, keep an eye out for the kind of questions that are being asked about the macroeconomic situation:

One data point doesn’t add up to much, I’ll admit, but there’s other ways to keep yourself abreast of the situation:

https://trends.google.com/trends/explore?q=recession&geo=IN

Or, once again, run searches online (this time for macroeconomics), or on this blog, or begin with MRU videos. Or all of the above, if you ask me.

But trust me on this: a good intuitive grasp of basic economics concepts goes a very long way indeed. And when it comes to wages, we all have skin in the game. (Read the book, if you haven’t already).

No?

Joel Spolsky on Camels and Rubber Duckies

I spent two weeks in May teaching a bunch of extremely enthusiastic kids economics and statistics. When I say extremely, I am not exaggerating. Somebody said their raised hands in response to questions that were asked in class were akin to popcorn going off in a pressure cooker, and I assure you that this is not hyperbole.

And when I say kids, I’m not exaggerating either. The youngest was in the 8th grade or standard, and the oldest was just about to enter their tenth grade/standard. Anyways, a lot of fun was had, and I hope I get to do this again.


I taught the kids two different one week long courses. One was on economics, and the other was on statistics. But along with these two courses, there were lots of other courses on offer, and one of them happened to be on AI/ML, taught by the excellent Navin Kabra. People like Navin can single handedly present excellent arguments for remaining on Twitter, and I would strongly recommend that you follow him if you are on Twitter.

During one of the many excellent conversations I had with him, he brought up an essay, and asked me if I had read it. The title is “Camels and Rubber Duckies“, and I hadn’t read it. But with a title like that, how could I keep away from it?

It’s a wonderful read, and I would strongly encourage you to read it, no matter how good your microeconomics basics are. It is engagingly written, liberally sprinkled with oddball humor, and explains a lot of concepts in microeconomics without making the subject boring. And trust me, this is difficult to do.

Here are my notes for having read it:

  1. Follow along with a spreadsheet and try and run the simple exercises yourself.
  2. He actually uses the word Visicalc, which is a lovely little rabbit hole in its own right
  3. The old Excel charts generate so much nostalgia. I’d forgotten the dull as death grey backgrounds, and the horribly jarring pink and blue colors.
  4. The law of demand, the calculation of profits, the maximization of profits, the meaning of consumer surplus, segmentation, inelastic demand, coupons, opportunity costs – and best of all, real world problems that occur when it comes to pricing software, all have been wonderfully explained.
  5. Focus groups and market research are also explained intuitively
  6. I realize this is a post from 2004, but he talks of RSS feeds and RSS readers! I shall use this opportunity to once again lament the passing away of Google Reader, the best social networking site cum RSS reader there ever was.
  7. Besides writing about camels and rubber duckies to help explain economics, he’s also come up with some products you’ve heard of, such as Trello, or Stack Overflow. Joel Spolsky is a person you want to learn more about.

What is common to online calls from the UAE and football match broadcasts *in* England?

I traveled to the UAE for work a coupe of times in 2018 and 2019. One of the most surprising things during both trips was the realization that online calls were banned in that country. So for example, calling my family back home in India over Whatsapp was not possible. Duo wouldn’t work, and neither would any other app (save for one weird app that I had never heard of before or since – Botim, I think it was called).

The pandemic meant that Zoom, Google Meet and MS Teams now work just fine (duh), but Whatsapp and FaceTime are still a strict no-no.

Why, you ask?

While Microsoft Teams, Zoom and Skype for businesses now enable remote work and learning, WhatsApp and Facetime audio and video calls are still banned, the official said. This means residents have to use the paid services provided by telecom operators in the country.

https://www.khaleejtimes.com/news/whatsapp-calls-in-uae-talks-to-lift-ban-continue

The key sentence is obviously the last one. The regulation is an attempt to get more people to use conventional (have we reached a stage where we ought to wonder if regular phone calls are still “conventional”?) methods, presumably to help those telecom companies recover their investments. That last bit is a surmise on my part, but hey, what else could possibly explain this?


But its not just the UAE, of course. Here’s England:

CRISTIANO RONALDO makes his long-awaited return to Manchester United this Saturday, in a match against Newcastle. Tens of thousands of fans will chant “Viva Ronaldo” from the stands of Old Trafford, but the match will not be televised live in Britain. Instead, fans not lucky enough to be in the stadium will have to turn up the radio or find an illicit online stream from a foreign broadcaster. The rest of the world can watch the game live. Why are British fans not allowed to?
Blame the “blackout rule”. On Saturdays only two matches in the Premier League, English football’s top flight, are shown live, at 12.30pm and 5.30pm.
The measure is supposed to encourage football fans to get off their sofas and support their local teams.

https://www.economist.com/the-economist-explains/2021/09/10/why-cant-english-fans-watch-ronaldos-return-on-tv

I have been watching EPL matches for the past two decades, but have been happily unaware of this rule. I’ve had friends and family both visit and stay in the US, but this rule never came up for discussion. Or at least, I have no memory of speaking/reading about this. But the similarity between the two things we have spoken about is striking, is it not?


In my introductory econ classes, I often speak about STD/ISD booth owners and how they effectively lost their business to those devices that you now carry about in your pockets.

https://upload.wikimedia.org/wikipedia/commons/6/6c/STD_ISD_PCO_India.jpg

I’m yet to meet a student who thinks that there ought to exist regulations that ban us from using our cellphones so as to protect the employment of STD/ISD booth owners.

As a certain French economist might have said, plus ça change, plus c’est la même chose.

No seriously, Macro *IS* Hard

It’s one of my favorite phrases while writing on EFE. And it is a favorite for a reason: it is true.

And today’s post is about an excellent essay by David Glasner, author of the excellent blog Uneasy Money.

I usually excerpt bits and blobs of whichever essay I am recommending to you, and I will get to that part eventually, but today, I want to spend some time in explaining why it is that I find macro so hard.

One, modeling a firm is hard enough. Trying to model an entire economy entails massive abstraction, and so whatever conclusions you reach are likely to be little more than informed guesses.

Two, time. A simple word, but with massive implications. You can call it what you like, but the basic simple point is that any project that lasts for more than a day is taking a bet on what the future is going to look like. And the uncertainty that is necessarily associated with the future means that your estimates are guaranteed to be wrong. Mostly correct if you’re lucky, somewhat off the mark if it is business as usual, and hopelessly off target if you’re unlucky.

Consider this from The Economist:

The dearth of chips is a consequence of the pandemic, which boosted demand from makers of electronic devices for those stuck at home during lockdowns. Car firms also underestimated the rapid pace of recovery this year. Expecting weak sales, in 2020 they pared back orders. Although carmakers spent $40bn or so on chips in 2019, that accounted for only a tenth of global demand, which puts them low in the semiconductor pecking order. This makes orders hard to reinstate.

https://www.economist.com/business/semiconductors-pose-an-unwelcome-roadblock-for-carmakers/21803287

Three, in my mind, used to be kind of related to two. Time also meant that much like your assumptions would eventually be wrong, so also would the assumptions of your suppliers and customers be wrong. And those assumptions being wrong would mean that all plans would need constant modification on an ongoing basis. Which makes the study of macroeconomics hard, but also endlessly interesting.

But David Glasner’s post raised a point that is well worth thinking about:

When contesting the presumed necessity for macroeconomics to be microeconomically founded, I’ve often used Marshall’s partial-equilibrium method as a point of reference. Though derived from underlying preference functions that are independent of prices, the demand curves of partial-equilibrium analysis presume that all product prices, except the price of the product under analysis, are held constant. Similarly, the supply curves are derived from individual firm marginal-cost curves whose geometric position or algebraic description depends critically on the prices of raw materials and factors of production used in the production process. But neither the prices of alternative products to be purchased by consumers nor the prices of raw materials and factors of production are given independently of the general-equilibrium solution of the whole system.
Thus, partial-equilibrium analysis, to be analytically defensible, requires a ceteris-paribus proviso. But to be analytically tenable, that proviso must posit an initial position of general equilibrium. Unless the analysis starts from a state of general equilibrium, the assumption that all prices but one remain constant can’t be maintained, the constancy of disequilibrium prices being a nonsensical assumption. (Emphasis added)

https://uneasymoney.com/2021/08/04/general-equilibrium-partial-equilibrium-and-costs/

That’s…a convenient assumption, at the very least, even for an economist.

It gets worse (or if you enjoy thinking about this sort of thing, better):

Unless general equilibrium obtains, prices need not equal costs, as measured by the quantities and prices of inputs used by firms to produce any product. Partial equilibrium analysis is possible only if carried out in the context of general equilibrium. Cost cannot be an independent determinant of prices, because cost is itself determined simultaneously along with all other prices.

https://uneasymoney.com/2021/08/04/general-equilibrium-partial-equilibrium-and-costs/

Towards the end of the post, David Glasner helps us understand why comparative-statics are extremely limited tools.

Very briefly (please do read the entire post),

1. the fact that you must begin in a state of disequilibrium,

2. plus the fact that the movement towards some (potential) equilibrium will take time,

3. and finally, the lack of a guarantee that changes in this dynamic system will move us towards equilibrium…

… imply that one should use partial-equilibrium analysis only when fully aware of its limitations.

As David Glasner reminds us, none of this is new or path-breaking, but as students of economics, it is helpful to remind ourselves that, well, macro is hard.

Help Me Understand This, Somebody…

A fellow Puneri citizen sent out this tweet yesterday:

It was hard not to be snarky, and I didn’t even bother trying to resist:

But in my day job, I try to be an economist, and so I have questions. Just two of them, and they’re fairly simple ones. Here they are:

  1. He (or SII) was free to set the price, correct? Free market economics: let the seller decide the price, and let the buyer decide if she wants to buy at that price.


    So the price now stands reduced by a whopping 25%. Does that mean that it was set too high in the first place?


    That is, let us assume that SII is able to increase capacity expansion at a price of 300 per dose. Also assume that it can make a normal or “super” profit at this price – then was 400 not too high?


    If we assume that he was going to earn an extra 100 rupees per vaccine sold, and that he was going to sell say 200 million vaccines to the states, that’s 200 million into 100 rupees.1

    I don’t want to do the math, but were we ok with at least that much “extra” money going into the Poonawalla coffers until yesterday?

    If yes, why?


  2. Unless, of course, that was not the case, and capacity expansion will suffer at a price of 300. A raise in the minimum wage will mean switched-off air-conditioning, correct? Well, in that case, is it not our moral duty to ask him to take the price back up to 400? Because if the opportunity cost of his philanthropy is reduced capacity expansion, isn’t that worse?

(By the way, all this is taking the assumption that SII “needs” the proceeds from the sale of this one vaccine alone to fund capacity expansion. That may or may not be true. And this also assumes that this is the only vaccine that SII will be producing and selling, which is obviously not true. Even in this “best-case” scenario, my questions hold up – if we do a full reckoning, they become even more important!)

If it is the first point above, us economists must explain why we think it is ok for those 100 rupees (per dose) to go into SII’s coffers.

If it is the latter, there ought to be a stream of op-eds beseeching Mr. Poonawalla to roll back his offer, for that would be truly philanthropic.

Which will it be?

And I know I said only two questions, but forgive me my greed, and let me ask one more: what is the definition of “transparent pricing”?

  1. Where do I get that number 200 million from? Who knows? I assumed that for the 960 million people in total who become/continue to be eligible on the 1st of May, he gets to sell only 200 million doses to the states. And yes, I am assuming only a single dose for these 200 million. Since nobody knows what the quantities are actually going to be, this is as reasonable an assumption as any other. If anything, this is a very conservative estimate. No?[]

What is common between the AER and markets in Nashik?

Not a joke, that is a genuine question.

The AER, by the way, is the American Economic Review. Getting published in the AER for an economist is like a cricketer getting to a century in a Test at Lords. Although drawing this analogy does remind me of what Harsha Bhogle said about Sachin and the Lord’s honours board.1. Nashik, of course, is a city in Maharashtra.

So what’s the reason for the title of today’s blog post?

Exhibit A:

Exhibit B:

Amid rising Covid-19 cases in Maharashtra, the Nashik district administration has now issued new restrictions to limit people from visiting the markets unnecessarily. The people in Nashik will now have to pay ₹5 per person for an hour every time they visit any market in the city. news agency ANI reports.

https://www.livemint.com/news/india/new-covid-19-restrictions-in-nashik-now-pay-rs-5-for-hour-long-market-visit-11617154785051.html

In the boring but functional language of the economist, no free entry in these markets anymore.2.

What should we anticipate in terms of effects of such policies? Why? Are these policies good, or bad?

  1. Frivolous visits to both markets become rarer than before. In both cases, that was the intended outcome.
  2. In Nashik’s case, the price isn’t just 5 rupees, but also the time that you will have to spend waiting in line before you can cough up the fie rupees. Plus, the fine print says that if you end up spending more than one hour, you will have to pay 500 rupees as an additional fine.
  3. 1000 dollars is steep even by American standards. It is just completely out of reach for most of the rest of the planet. 5 rupees is nowhere close to being a back-breaking amount for most Indians. Does that make the AER price too high and the Nashik price too low? I think so, but that then begs the question of what the price should be in each case.
  4. You’ll “bunch together” a number of separate visits to the market. You won’t just pop down to the market to buy half a litre of milk in the morning and then pop back later in the day for some onions. You’ll combine the two trips. That is the intended outcome, so this is a good thing! But in the case of the AER entry fee, you’ll want to “get your money’s worth” – which means there is a chance that your paper will end up being longer than would otherwise have been the case. This is nobody’s idea of a good idea!
  5. Neighbours might get together and deputize one person to go get the shopping done. Again, that’s wonderful! Authors will get together too, that is, co-authorship will go up. Free <cough> rider <cough> problems?
  6. At the margin, sellers in Nashik’s markets are incentivized to figure out home delivery options. Again, wonderful! Since getting published in the AER is anything but a perfectly competitive market (just the one seller, by definition), AER has no such incentive. But the substitution effect will come into play, no? Other journals will see more papers being submitted. And if those journals raise prices, then fewer papers will be submitted all around. Personally, I don’t see this as such a big problem.3

(Here’s Tyler Cowen on other, related points about the AER pricing.)

As a student of economics, you should be able to see the similarity between both of these pricing calls, and also see the differences. That allows you to begin to think through whether these will, in fact, be good ideas or not, and why. I’m sure that there are many other points to think about in both cases.

If you are a student of microeconomics (and who isn’t, really), it might be worth your while to think about what I am missing in my analysis. Please, feel free to let me know!

  1. Sachin famously never managed to score a century at Lord’s, and therefore his name isn’t up on the Lord’s honours board. Harsha Bhogle apparently asked whose loss it was, Sachin’s, or Lord’s[]
  2. To be clear, the AER thing was an April Fool’s joke.[]
  3. To be clear, research may not go down. The attempt to publish that research will. And I’m ok with that![]

On X-Inefficiency

Yesterday, I wrote this in my summary of Bloom and co-authors’ paper on productivity in India:

Economists tend to not buy into this because they assume that profit maximization implies cost minimization
So in other words, if firms are not minimizing costs by adopting good management practices, it is because “wages are so low that repairing defects is cheap. Hence, their management practices are not bad, but the optimal response to low wages.”

https://econforeverybody.com/2021/02/23/notes-from-does-management-matter-evidence-from-india-by-bloom-et-al/

… which brought to mind of the topic of X-inefficiency, for the second time this year. The first was when Tyler Cowen wrote about it in January. Here’s Wikipedia:

X-inefficiency is the divergence of a firm’s observed behavior in practice, influenced by a lack of competitive pressure, from efficient behavior assumed or implied by economic theory. The concept of X-inefficiency was introduced by Harvey Leibenstein

https://en.wikipedia.org/wiki/X-inefficiency

X-inefficiency, in essence, is the idea that the economic theory idea about efficient firms in efficient markets is perhaps a little overblown. Here’s a quote from the paper itself:

The simple fact is that neither individuals nor firms work as hard, nor do they search for information as effectively, as they could. The importance of motivation and its association with degree of effort and search arises because the relation between inputs and outputs is not a determinate one. There are four reasons why given inputs cannot be transformed into predetermined outputs: (a) contracts for labor are incomplete, (b) not all factors of production are marketed, (c) the production function is not completely specified or known, and (d) interdependence and uncertainty lead competing firms to cooperate tacitly with each other in some respects, and to imitate each other with respect to technique, to some degree.

Leibenstein, Harvey. “Allocative Efficiency vs. ‘X-Efficiency.’” The American Economic Review, vol. 56, no. 3, 1966, pp. 392–415. JSTOR, http://www.jstor.org/stable/1823775

By the way, the entire paper is worth reading, because it contains multiple delightful nuggets. The Hawthorne effect, which I mentioned in yesterday’s blogpost makes an appearance, and it also helps one understand why microeconomic textbooks are a very poor way to learn about the real world. Consider this delightful quote, for example:

One idea that emerges from this study is that firms and economies do not operate on an outer-bound production possibility surface consistent with their resources. Rather they actually work on a production surface that is well within that outer bound.

Leibenstein, Harvey. “Allocative Efficiency vs. ‘X-Efficiency.’” The American Economic Review, vol. 56, no. 3, 1966, pp. 392–415. JSTOR, http://www.jstor.org/stable/1823775

OK, so people and firms are both not as efficient as econ textbooks make them out to be. This is not, to put it politely, headline material in the non-econ world. What might be potential solutions?

In situations where competitive pressure is light, many people will trade the disutility of greater effort, of search, and the control of other peoples’ activities for the utility of feeling less pressure and of better interpersonal relations. But in situations where competitive pressures are high, and hence the costs of such trades are also high, they will exchange less of the disutility
of effort for the utility of freedom from pressure, etc

ibid

In English, this means the following:

  • Government offices are unlikely to be as productive as private sector offices
  • Surround yourself with folks who are go-getter types
  • And this is my take: figure out for yourself a good boss/manager/mentor who will push you, but in a non-zero sum way

This last part is all but impossible, but oh-so-important.

In any case: x-inefficiencies. An underrated topic from micro!

Where else could this be applicable?

A great question to ask as a student of economics – well, really, a student of anything – is “where else is this applicable?”

Because learning the definition is one thing, understanding its application is another. Understanding the applications, its costs and its benefits, and being able to transfer the idea over on to other domains and sectors – well, that is something else altogether.

Consider MPN, for example. That’s mobile number portability. Something that we take for granted these days. Although Indian readers might be interested to know that we are one of only two countries to use the donor-led system, rather than the recipient led system.

Now, students of microeconomics will (should) know that this encourages competition, because substitutability goes up. I don’t need to be locked up with one service provider for my entire life, in fear of having to update my number among my contacts every time I change service providers. It also therefore ensures that operators will provide better service, because customers have the ability to “vote with their feet”.

So far, so obvious.

But as I said up top, the real challenge as a student is to ask yourself, where else can I use this idea?

Can, say, education be made more competitive? Can and should students be allowed to switch colleges midway through acquiring a degree? Or can we have unbundling of colleges where you can buy courses from a variety of different colleges to make your own degree of choice?

Sucheta Dalal asks the same question in an excellent article on Moneylife – but with the focus being on account portability in banks.

What is the most effective solution to poor service, mis-selling and harassment by banks which are entrusted with your hard-earned savings? Simple. Bank account portability; or the ability to vote with your feet and switch to a better bank. The idea of bank account portability, which will truly force banks to compete for their customers, has been on the cards since 2012, when the Reserve Bank of India (RBI) initiated the process of creating unique customer identification code (UCIC). Since then, almost every hurdle to implementation—technology issues, high costs, absence of unique codes, etc—having been substantially addressed; but account portability is nowhere on the cards.

https://www.moneylife.in/article/bank-account-portability-what-is-preventing-this-game-changing-move-for-customers/62915.html

The rest of the article speaks about why it is an excellent idea (duh!), how most of the groundwork has already been done (awesome!) and how the incumbents think it is a really bad idea (double duh!).

Incumbents will always – always! – find reasons for why “it just can’t be done”. But anything that makes a sector more competitive, and more responsive to its consumers, is by definition A Good Thing.

Or so we teach in micro, at any rate.

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

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!
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  • 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.
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    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.
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  • ““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.”
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    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”.
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    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”.
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  • “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.”
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    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?
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    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).
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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.
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    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!