The Chinese Tech Crackdown, Take 2

On Tuesday, I ended my post with this:

At the moment, and that as a consequence of having written all of this out, this is where I find myself:
China is optimizing for power, and is willing to give up on innovation in the consumer internet space. America is optimizing for innovation in the consumer internet space, and is willing to cede power to big tech in terms of shaping up what society looks like in the near future.
Have I framed this correctly? If yes, what are the potential ramifications in China, the US and the rest of the world? What ought to be the follow-up questions? Why? Who else should I be following and reading to learn more about these issues?

https://econforeverybody.com/2021/07/27/the-three-article-problem/

How might I have been wrong? V Ananta Nageswaran and Nitin Pai wrote posts recently that helped me learn about some answers to at least the first of my questions above.

Let’s find out how I might have been wrong!


Noah Smith had hypothesized that the tech crackdown is because China’s goals are about asserting its power internationally. And not soft power, but the tanks and boots on the ground type power.

China may simply see things differently. It’s possible that the Chinese government has decided that the profits of companies like Alibaba and Tencent come more from rents than from actual value added — that they’re simply squatting on unproductive digital land, by exploiting first-mover advantage to capture strong network effects, or that the IP system is biased to favor these companies, or something like that. There are certainly those in America who believe that Facebook and Google produce little of value relative to the profit they rake in; maybe China’s leaders, for reasons that will remain forever opaque to us, have simply reached the same conclusion.

https://noahpinion.substack.com/p/why-is-china-smashing-its-tech-industry

Nitin Pai disagrees:

Now, it’s unclear if the opportunity costs of talent are so stark in China that the government must crack down on consumer internet companies in order to incentivise people to get into hardware. But Smith’s explanation is consistent with the popular view that China’s leaders are astute and inscrutable strategists who think really long term.
..
..
My answer is simple: it’s about political power. In fact, if we frame the question differently, the answer becomes readily apparent: “Why is the autocratic leader of the Chinese Communist Party attacking media companies that directly reach almost everyone in the country?” Because size, reach and control of consumer data gives them narrative power comparable to what the Party has. Further, the ability to tap foreign capital gives them more freedom, albeit of the kind with Chinese characteristics. The Party doesn’t like that. And Xi likes it even less. That is why he moved aggressively to pre-empt a challenge to the Party’s narrative dominance and preserve its monopoly on power.

https://www.nitinpai.in/2021/07/27/why-china-is-attacking-its-consumer-internet-companies

Another way to think about it: it is about soft power, but the soft power that the CCP would like to project to its own people. There is only one storyteller that shapes the societal narrative in China, and anybody else who wants to play is going to be cut down to size. Ruthlessly.

(Of course, it is not just about soft power being projected to its own people. But nobody in China is crazy enough to want to play the hard power game with the CCP. That’s a well established monopoly. But Nitin is saying that the CCP wants all aspects of power to be within its complete control, soft and hard.)

As he puts it towards the end of his post:

It’s consistent with what it has been doing since Mao Zedong’s time: ruthlessly cutting down challenges to its hold on Chinese minds.
That’s it, folks. Nothing more to see here.

https://www.nitinpai.in/2021/07/27/why-china-is-attacking-its-consumer-internet-companies

Ananta Nageswaran also blogged about this yesterday:

In the meantime, a blog post by Noah Smith, an economics teacher and a (former?) columnist for Bloomberg wrote that China’s crackdown on consumer-internet companies was to ensure that China’s financial and intellectual resources were not diverted for creating low value addition. It did not strike him that such an explanation – if it were true – did not do any credit to China. It reeks of central planning and omniscience. Two, even if it were true and even if it was meant to be a benign explanation, malign explanations cannot be ruled and need not be ruled out.
Mutually exclusive explanations help keep the narrative simple and, two, it helps make the narrator appear smart because he/she has figured out the ultimate explanation. More often that not, reality is grey. Or, it has many shades.

https://thegoldstandardsite.wordpress.com/2021/07/28/fintech-edtech-and-china/

In other words, he’s saying that even if what Noah is saying makes sense, there is more to it than that. It’s not just the opportunity cost of having some of the best minds in China work on consumer tech. What else might it be? Ananta Nageswaran finds himself in agreement with Nitin Pai:

I agree. It is political power and the interpretation (of Xi and correctly so) that information (Nitin calls it mindshare) about people’s behaviour that these companies have give them the ability (and the chance) to set the narrative later, in Xi’s thinking, seizing it from the CCP.

https://thegoldstandardsite.wordpress.com/2021/07/28/fintech-edtech-and-china/

A minor point I would like to make here: I don’t think information and mindshare are the same thing, though they certainly are related. The information that tech firms have allows them to shape (sometimes in entirely unexpected ways!) the narrative, and therefore influence mindshare. Information is the tool and mindshare is the outcome – or at least, that is how I see it.

Please read Sanjay Anandram’s quotes from that blogpost too. I learnt about (and am going to shamelessly borrow) the RFRE principle.


So is it Noah’s story, or Nitin and Ananta Nageswaran’s? Regular readers know what’s coming next: the truth lies somewhere in the middle! Or at least, that’s my take, and it seems to be Ananta Nageswaran’s as well:

Of the three explanations that have been on offer, Noah Smith’s is the least persuasive. In some respects, Nitin and Sanjay are aligned and they diverge in some other aspects.
As always, the real motivation behind some of the recent decisions of the government in China will have elements of all three and more.

https://thegoldstandardsite.wordpress.com/2021/07/28/fintech-edtech-and-china/

To a student reading this: spectrum based thinking is a gift. Reasonable people can and should argue about where the truth lies, but always think intervals, never point estimates.

And having read all of the pieces that I have linked to across these two posts, I find myself in the same space on the spectrum as Ananta Nageswaran. That is, it’s not just the Noah Smith/Dan Wang argument at play (regarding which, Noah has updates. Scroll to the bottom of the post where he links to pieces that bolster his argument). But it is more about the CCP asserting its power.

Ananta Nagewaran ends with a Bruno Maçães quote: “the main players compete not under a common set of rules but in order to define what the rules are”.

It is a weird coincidence, but I just introduced some students to Frederich List yesterday. The more things change…

The Three Article Problem

I’ve been mulling over three separate columns/posts/interviews over the past few days. Today’s post was supposed to be me reflecting on my thoughts about all of them together, but as it turns out, I have more questions than I do thoughts.

Worse (or if you think like I do, better) I don’t even have a framework to go through these questions in my own head. That is to say, I do not have a mental model that helps me think about which questions to ask first, and which later, and why.

So this is not me copping out from writing today’s post. This is me asking all of you for help. What framework should I be using to think about these three pieces of content together?

All three posts revolve around technology, and two are about the Chinese tech crackdown. Two are about innovation in tech and America. And one of the three is, obviously, the intersection set.


The first is a write-up from Noah Smith’s Substack (which you should read, and if you can afford it, pay for. Note that I am well over my budget for subscribing to content for this year, so I don’t. But based on what I have read of his free posts, I have no hesitation in recommending it to you.)

In other words, the crackdown on China’s internet industry seems to be part of the country’s emerging national industrial policy. Instead of simply letting local governments throw resources at whatever they think will produce rapid growth (the strategy in the 90s and early 00s), China’s top leaders are now trying to direct the country’s industrial mix toward what they think will serve the nation as a whole.
And what do they think will serve the nation as a whole? My guess is: Power. Geopolitical and military power for the People’s Republic of China, relative to its rival nations.
If you’re going to fight a cold war or a hot war against the U.S. or Japan or India or whoever, you need a bunch of military hardware. That means you need materials, engines, fuel, engineering and design, and so on. You also need chips to run that hardware, because military tech is increasingly software-driven. And of course you need firmware as well. You’ll also need surveillance capability, for keeping an eye on your opponents, for any attempts you make to destabilize them, and for maintaining social control in case they try to destabilize you.

https://noahpinion.substack.com/p/why-is-china-smashing-its-tech-industry

As always, read the whole thing. But in particular, read his excerpts from Dan Wang’s letters from 2019 and 2020. It goes without saying that you should subscribe to Dan Wang’s annual letters (here are past EFE posts that mention Dan Wang). As Noah Smith says, China is optimizing for power, and is willing to pay for it by sacrificing, at least in part, the “consumer internet”.

That makes sense, in the sense that I understand the argument.


The second is an excellent column in the Economist, from its business section. Schumpeter is a column worth reading almost always, but this edition in particular was really thought-provoking. The column starts off by comparing how China and the United States of America are dealing with the influence of “big” technology firms.

As the column says, when it comes to the following:

  1. The speed with which China has dealt with the problem
  2. The scope of its tech crackdown
  3. The harshness of the punishments (fines is just one part of the Chinese government’s arsenal)

… China has America beat hollow. As Noah Smith argues, China is optimizing for power, and has done so for ages. As he mentions elsewhere in his essay, “in classic CCP fashion, it was time to smash”. Well, they have.

But the concluding paragraph of the Schumpeter column is worth savoring in full, and over multiple mugs of coffee:

But autarky carries its own risks. Already, Chinese tech darlings are cancelling plans to issue shares in America, derailing a gravy train that allowed Chinese firms listed there to reach a market value of nearly $2trn. The techlash also risks stifling the animal spirits that make China a hotbed of innovation. Ironically, at just the moment China is applying water torture to its tech giants, both it and America are seeing a flurry of digital competition, as incumbents invade each other’s turf and are taken on by new challengers. It is a time for encouragement, not crackdowns. Instead of tearing down the tech giants, American trustbusters should strengthen what has always served the country best: free markets, rule of law and due process. That is the one lesson America can teach China. It is the most important lesson of all.

https://www.economist.com/business/2021/07/24/china-offers-a-masterclass-in-how-to-humble-big-tech-right

This makes sense, in the sense that I understand the argument being made. Given what little I understand of economics and how the world works, I am in complete agreement with the idea being espoused.


The third is an interview of Mark Zuckerberg by Casey Newton of the Verge.

It is a difficult interview to read, and it is also a great argument for why we should all read more science fiction (note that the title of today’s post is a little bit meta, and that in more ways than one). Read books by Neal Stephenson. Listen to his conversation with Tyler Cowen. Read these essays by Matthew Ball.

Towards the end of the interview, Casey Newton asks Mark Zuckerberg about the role of the government, and the importance of public spaces, in the metaverse. Don’t worry right now if the concept of the metaverse seems a little abstract. Twenty years ago, driverless cars and small devices that could stream for you all of the world’s content (ever produced) also seemed a little abstract. Techno-optimism is great, I heavily recommend it to you.

Here is Mark Zuckerberg’s answer:

I certainly think that there should be public spaces. I think that’s important for having healthy communities and a healthy sphere. And I think that those spaces range from things that are government-built or administered, to nonprofits, which I guess are technically private, but are operating in the public interest without a profit goal. So you think about things like Wikipedia, which I think is really like a public good, even though it’s run by a nonprofit, not a government.
One of the things that I’ve been thinking about a lot is: there are a set of big technology problems today that, it’s almost like 50 years ago the government, I guess I’m talking about the US government here specifically, would have invested a ton in building out these things. But now in this country, that’s not quite how it’s working. Instead, you have a number of Big Tech companies or big companies that are investing in building out this infrastructure. And I don’t know, maybe that’s the right way for it to work. When 5G is rolled out, it’s tough for a startup to really go fund the tens of billions of dollars of infrastructure to go do that. So, you have Verizon and AT&T and T-Mobile do it, and that’s pretty good, I guess.
But there are a bunch of big technology problems, [like] defining augmented and virtual reality in this overall metaverse vision. I think that that’s going to be a problem that is going to require tens of billions of dollars of research, but should unlock hundreds of billions of dollars of value or more. I think that there are things like self-driving cars, which seems like it’s turning out to be pretty close to AI-complete; needing to almost solve a lot of different aspects of AI to really fully solve that. So that’s just a massive problem in terms of investment. And some of the aspects around space exploration. Disease research is still one that our government does a lot in.
But I do wonder, especially when we look at China, for example, which does invest a lot directly in these spaces, how that is kind of setting this up to go over time. But look, in the absence of that, yeah, I do think having public spaces is a healthy part of communities. And you’re going to have creators and developers with all different motivations, even on the mobile internet and internet today, you have a lot of people who are interested in doing public-good work. Even if they’re not directly funded by the government to do that. And I think that certainly, you’re going to have a lot of that here as well.
But yeah, I do think that there is this long-term question where, as a society, we should want a very large amount of capital and our most talented technical people working on these futuristic problems, to lead and innovate in these spaces. And I think that there probably is a little bit more of a balance of space, where some of this could come from government, but I think startups and the open-source community and the creator economy is going to fill in a huge amount of this as well.

https://www.theverge.com/22588022/mark-zuckerberg-facebook-ceo-metaverse-interview

I think he’s saying that the truth lies somewhere in the middle, and god knows I’m sympathetic to that argument. But who decides where in the middle? Who determines the breadth of this spectrum, governments or businesses? With what objective, over what time horizon, and with what opportunity costs?


At the moment, and that as a consequence of having written all of this out, this is where I find myself:

China is optimizing for power, and is willing to give up on innovation in the consumer internet space. America is optimizing for innovation in the consumer internet space, and is willing to cede power to big tech in terms of shaping up what society looks like in the near future.

Have I framed this correctly? If yes, what are the potential ramifications in China, the US and the rest of the world? What ought to be the follow-up questions? Why? Who else should I be following and reading to learn more about these issues?

I don’t have the answers to these questions, and would appreciate the help.

Thank you!

Noah Smith Interviews Marc Andreessen, Part II

We pick up from where we left off yesterday:


My partner Alex Rampell says that competition between an incumbent and a software-driven startup is “a race, where the startup is trying to get distribution before the incumbent gets innovation”.

https://noahpinion.substack.com/p/interview-marc-andreessen-vc-and

Please listen to that podcast episode about Dominos thinking of itself as a tech company that happens to deliver pizzas. From another episode from that same podcast, this gem of an appropriate example:

In February 2013, Ted Sarandos, Netflix’s chief content officer, told “GQ,” “the goal is to become HBO faster than HBO can become us.”

https://www.delltechnologies.com/en-us/perspectives/podcasts-trailblazers-s01-e01-disruption-entertainment-industry/

As time passes, I am increasingly skeptical that most incumbents can adapt. The culture shift is just too hard. Great software people tend to not want to work at an incumbent where the culture is not optimized to them, where they are not in charge. It is proving easier in many cases to just start a new company than try to retrofit an incumbent. I used to think time would ameliorate this, as the world adapts to software, but the pattern seems to be intensifying.

https://noahpinion.substack.com/p/interview-marc-andreessen-vc-and

I hope he is wrong, for my sake, and for the sake of my alma mater, which is where I have chosen to work. But, um, I increasingly fear that he’s (surprise, surprise) right. Introducing technology has been hard in my workplace, but the fault lies with the culture of the workplace, not with the technology.

But as I pointed out in yesterday’s post, the regulatory capture and the cultural conformity of the higher education space in India means that most students (and their parents, or should it be the other way around) still prefer a “top” college.


A good test for how seriously an incumbent is taking software is the percent of the top 100 executives and managers with computer science degrees. For a typical tech startup, the answer might be 50-70%. For a typical incumbent, the answer may be more like 5-7%. This is a huge gap in software knowledge and skill, and you see it play out every day across many industries.

https://noahpinion.substack.com/p/interview-marc-andreessen-vc-and

Incumbents in higher education in India – the percentage of folks with computer science degrees? Let’s move on.


First, COVID is the ultimate cover for restructuring — what my friend and former CFO Peter Currie used to call “shake and bake”. It’s an opportunity for every CEO to do all the things he/she may have wanted to do in the past to increase efficiency and effectiveness — from fundamental headcount resizing and reorganization, to changing geographic footprint, to exiting stale lines of business — but couldn’t because they would cause too much disruption. The disruption is happening anyway, so you might as well do everything you’ve always wanted to do now

https://noahpinion.substack.com/p/interview-marc-andreessen-vc-and

75% minimum attendance, or else we reserve the right to say that you haven’t learnt enough to write the semester end examination. All classes in offline mode, only. Rote memorization tests in examination halls, with no textbooks/supplementary materials allowed. Laptops/tables/smartphones may not be used in class.

Here’s my question to those of us who work in higher education in India. Do we expect all these things to come back once the pandemic is behind us, or are we having thoughtful discussions about how the post-covid higher education field will look in India?

Today, because of the pandemic, we are at an extreme end of the spectrum which describes how learning is delivered. Everybody sits at home, and listens to a lecture being delivered (at least in Indian universities, mostly synchronously).
When the pandemic ends, whenever that may be, do we swing back to the other end of the spectrum? Does everybody sit in a classroom once again, and listens to a lecture being delivered in person (and therefore synchronously)?
Or does society begin to ask if we could retain some parts of virtual classrooms? Should the semester than be, say, 60% asynchronous, with the remainder being doubt solving sessions in classroom? Or some other ratio that may work itself out over time? Should the basic organizational unit of the educational institute still be a classroom? Does an educational institute still require the same number of in person professors, still delivering the same number of lectures?
In other words, in the post-pandemic world…
How long before online learning starts to show up in the learning statistics?

https://econforeverybody.com/2021/01/28/the-long-slow-but-inevitable-death-of-the-classroom/

And finally, Marc Andreessen’s response to Noah’s question about what advice he (Marc) would have for a young 23 year old American:

Don’t follow your passion. Seriously. Don’t follow your passion. Your passion is likely more dumb and useless than anything else. Your passion should be your hobby, not your work. Do it in your spare time.
Instead, at work, seek to contribute. Find the hottest, most vibrant part of the economy you can and figure out how you can contribute best and most. Make yourself of value to the people around you, to your customers and coworkers, and try to increase that value every day.

https://noahpinion.substack.com/p/interview-marc-andreessen-vc-and

The last sentence in that excerpt is another way of saying that the world is a non-zero sum game.

And I couldn’t agree more!


Noah Smith Interviews Marc Andreessen

Every now and then (and I wish it was more often), I like reading something so much that I don’t just take notes, I put them down here rather than in Roam. It forces me take more careful, structured notes, and the act of writing it all down allows for more thoughts to bubble up – which is the whole point, no?

Noah Smith’s interview of Marc Andreessen definitely qualifies. It was interesting throughout, and I related with some of the points/concepts more than I would have wanted to1.

Before we begin, a quick aside: most of my thoughts and reactions to the interview are because of what I do, and where I’m located. I am in charge of one course at my University, and am also in charge of placements. This University is located in India. So my excerpts, and my reaction to those excerpts are contingent on these two things.

We’ll follow the usual format: excerpts, and then my thoughts.


Consider the three primary markers of the American Dream, or more generally middle class success — housing, education, and health care. You have written at length on how all three of these success markers seem further and further out of reach for many regular people. I think — and you would agree? — that these three deficits are not only causing problems for how people live and how the economy functions, but are fouling our politics quite dramatically.

https://noahpinion.substack.com/p/interview-marc-andreessen-vc-and

Education, in India at any rate, can either scale, or it can maintain quality. It has never been able to do both. How to increase scale without losing quality, and how to maintain affordable quality without gaining scale – both of these are really, really difficult questions to answer. The impossible trilemma of higher education in India, as it were. The BSc programme at the Gokhale Institute is (in my opinion, and it is of course a biased one) affordable quality. Far from perfect, I’ll be the first one to admit, and could always be a whole lot better, but I genuinely do think we’re doing good work. But scaling is impossible. And we all know of educational institutes that have managed to scale really well, but don’t do so well when it comes to quality.

And when I say quality, it is very much a “you know it when you see it” definition I am going with. Not NAAC reports or percentage of students placed.


Housing, education, and health care are each ferociously complex, but what they have in common is skyrocketing prices in a world where technology is driving down prices of most other products and services.

https://noahpinion.substack.com/p/interview-marc-andreessen-vc-and

Before you begin to read the rest of this post, please do learn more about the Baumol cost disease effect. That is certainly one of the factors at play. This post is the probably the best essay to read about the topic, but be warned: micro, when done right is (also) hard.

This chart from the interview is easier to think about if you’ve studied the Baumol effect well:

https://noahpinion.substack.com/p/interview-marc-andreessen-vc-and

Software is a lever on the real world.

https://noahpinion.substack.com/p/interview-marc-andreessen-vc-and (note that the emphasis on “lever” is in the original)

The Archimedes reference is obvious, but that’s not the reason I want to focus so much on just this one sentence. How exactly is software a lever on the entire world? Marc gives the examples of Lyft and Airbnb in the interview, but they’re the outcomes for having deployed software. The inner mechanism (I think) is that software goes a very long way towards reducing transaction costs, search costs and therefore overall friction in economic transactions.

The guy driving the rickshaw, and waiting for a customer at a traffic intersection isn’t aware of the person two blocks away who is outside their apartment building, waiting for a ride. Search costs. These are minimized because of the app.

The whole “bhaiya, xyz jaana hai” – “Itna duur, itna late, double bhada” – “kya bhaiya, itna thodi lagta hai” song and dance is avoided (although not always in a way that is fair to the rickshaw driver). Transaction costs. These are minimized because of the app.

And so more transactions take place than they would have if Uber/Lyft/Ola had not been around. And the same is true for Zomato, or Swiggy, or Airbnb or… you get the picture. This (I think) is the lever at play. More gets done because software is involved.

There are legitimate worries about whether the system is always fair, always perfect – and the short answer is always “no”. A better question to ask is if the world is better for these services being around – and the short answer (I think) is “yes”. The best question to ask is how these services could be made better – and Andreessen has suggestions later on in the interview about this.


Software is alchemy that turns bytes into actions by and on atoms.

https://noahpinion.substack.com/p/interview-marc-andreessen-vc-and

A lovely way to think about what software does, when used well.


Everywhere software touches the real world, the real world gets better, and less expensive, and more efficient, and more adaptable, and better for people. And this is especially true for the real world domains that have been least touched by software until now — such as housing, education, and health care.

https://noahpinion.substack.com/p/interview-marc-andreessen-vc-and

The Baumol effect has some potentially disturbing implications:

When we recognize that all prices are relative prices the following simple yet deep facts follow:
If productivity increases in some industries more than others then, ceteris paribus, some prices must increase.
Over time, all real prices cannot fall.

https://marginalrevolution.com/marginalrevolution/2019/05/the-baumol-effect.html

As a society it appears that with greater wealth we have wanted to consume more of the goods like education and health care that have relatively slow productivity growth. Thus, preferences have magnified the Baumol effect.

https://marginalrevolution.com/marginalrevolution/2019/05/the-baumol-effect.html

But I think what Marc Andreessen is (in effect) saying is this: sure, even accounting for the Baumol effect, are there ways to reduce search and transaction costs in education, healthcare and housing? And if yes, can we drive down prices in these sectors while maintaining (or even increasing!) quality? That’s the power and potential of software.

And yes, each one of us will react with differing levels of skepticism to the proposition. That’s fine, and I’d say desirable. But the idea is worth thinking about, no? (And if you say no, it’s not, I’d love to hear why you think so.)


It’s more the importance of communication as the foundation of everything that people do, and how we open up new ways for people to communicate, collaborate, and coordinate. Like software, communication technology is something that people tend to pooh-pooh, or even scorn — but, when you compare what any one of us can do alone, to what we can do when we are part of a group or a community or a company or a nation, there’s no question that communication forms the backbone of virtually all progress in the world. And so improving our ability to communicate is fundamental.

https://noahpinion.substack.com/p/interview-marc-andreessen-vc-and

Remember the “If you’re the smartest person in the room, you’re in the wrong room” quote2? The potential advantage of Clubhouse, Spaces (or whatever it will be called on all the apps that copy the concept) is that it solves for the geographic constraint when it comes to your menu of rooms to choose from. That’s what makes Twitter so great too – you never have to worry about being the smartest person on Twitter (and I mean that in the nicest way possible!).

It is a great time to be young and angry about the quality of the education system, because the internet can solve some of your problems better than was ever possible in the past.


It’s so striking that in our primarily textual technological world, people are instantly enthusiastic about the opportunity to participate in oral culture online — there is something timeless about talking in groups, whether it’s around a campfire 5,000 years ago or on an app today

https://noahpinion.substack.com/p/interview-marc-andreessen-vc-and

At the Gokhale Institute, we were lucky enough to listen to a talk by Visvak where he spoke about some of the positive aspects of Clubhouse during the recent elections in Tamil Nadu. The ability to listen to, and possibly chat with, people with skin in the game who are actually Doing The Work, is truly remarkable. And again, what we have isn’t perfect, and it could be better, and there will be problems. The question to ask is if the world is better with Clubhouse (and it’s imitations) or without? And the better question to ask is how to improve upon it. But when I have the opportunity to listen to Krish Ashok talk about food on Twitter Spaces, and I see people just straight up ask Krish Ashok to host a Spaces about chai – well, what a time to be alive. No? (And if you say no, it’s not, I’d love to hear why you think so.)


Substack is causing enormous amounts of new quality writing to come into existence that would never have existed otherwise — raising the level of idea formation and discourse in a world that badly needs it. So much of legacy media, due to the technological limitations of distribution technologies like newspapers and television, makes you stupid. Substack is the profit engine for the stuff that makes you smart.

https://noahpinion.substack.com/p/interview-marc-andreessen-vc-and

I don’t exactly disagree with Marc Andreessen over here; but I have a lot of questions. I’ll list them here:

  • Substack is a substitute for blogs or newsletters, but with the additional ability to charge payments from subscribers for some (or all) of your posts. Is that a good definition of what Substack is?
  • Not all Substack writers will initially get enough paying subscribers. In fact, I think it is safe to say that most will never get (enough) paying subscribers. If the first sentence in the excerpt above is to be agreed with, what other incentive is at play for “enormous amounts of new quality writing” to come through? This is not intended as sarcasm or implied criticism – I really would like to know.
  • Especially in India, I completely agree that legacy media makes you stupid. It is the middle part of that sentence that I am not so sure about: I do not think it is just the technological limitations of distribution technologies that is at play. It’s a much broader question, but what other factors would you think are at play, and how does Substack help mitigate those other problems?
  • Is bundling inevitable on Substack? Shouldn’t it be? How will this play out? Will Revue stand a better chance as a bundle because it can be combined with so many other offerings?

This isn’t a complete list of questions, and I am not sure of the answers. But this is the part of the interview that I understood the least, for sure.


A longish excerpt in a longish post, but a very important one:

M.A.: My “software eats the world” thesis plays out in business in three stages:
1. A product is transformed from non-software to (entirely or mainly) software. Music compact discs become MP3’s and then streams. An alarm clock goes from a physical device on your bedside table to an app on your phone. A car goes from bent metal and glass, to software wrapped in bent metal and glass.
2. The producers of these products are transformed from manufacturing or media or financial services companies to (entirely or mainly) software companies. Their core capability becomes creating and running software. This is, of course, a very different discipline and culture from what they used to do.
3. As software redefines the product, and assuming a competitive market not protected by a monopoly position or regulatory capture, the nature of competition in the industry changes until the best software wins, which means the best software company wins. The best software company may be an incumbent or a startup, whoever makes the best software.

https://noahpinion.substack.com/p/interview-marc-andreessen-vc-and

For a great, and relatively early example of this playing out in practice, please listen to this podcast episode:

One simple viral video drove a pizza company to reinvent itself as a tech company. Walter Isaacson tells the story in this episode of Trailblazers.

https://www.delltechnologies.com/en-us/perspectives/podcasts-trailblazers-s01-e03-fast-food-delivery/

See this, for example, from the transcript:

So this is the part of the Domino’s story that struck me more than anything, when he simply declared for all to hear, we no longer think of ourselves as a pizza company. We think of ourselves as a technology company. I said, excuse me? Well, turns out, they’re headquartered in Ann Arbor, Michigan. They’ve got 800 people working in headquarters. Fully 400 of those, half of their headquarters employees, are engaged in software analytics and big data. They really– once they finally got the product right, they really are, from this point going forward, as much a technology company as they are a food company. And many of the initiatives have to do with making it as easy, as convenient, as kind of natural and impulsive almost to order Domino’s, much more so than any other pizza company.

https://www.delltechnologies.com/en-us/perspectives/podcasts-trailblazers-s01-e03-fast-food-delivery/

But, but, but – and this is where the “what I do and where I’m from part” really comes into play – has higher education in India successfully (or even partially) gone through Marc Andreessen’s three stage transformation?

Short answer, no.

Long answer: because “assuming a competitive market not protected by a monopoly position or regulatory capture” doesn’t apply in the case of higher education in India (yet). See this, this, this, and this from earlier on in EFE.

But especially see this! College, as I’ve written in this post, is a bundle. It sells you the learning (Coursera), the signaling (LinkedIn) and the peer network (Starbucks):

If you want to go up against college as a business, you need to sell the same thing that college is selling. And the college sells you a bundle.
A business that seeks to do better than college must do better on all three counts, not just on learning. All of the online learning businesses – Coursera is just one very good example – aren’t able to fill all of the three vertices just yet.
And that’s why education hasn’t been truly shaken down by the internet just yet:
Because college today is more about signaling than it is about learning, and because when you pay money to a college, you are getting a bundle.

https://econforeverybody.com/2020/03/12/signaling-bundling-and-college/

And partially by regulatory capture (UGC approved degree, yay!) and partly by cultural conformity (Sharmaji ka beta went to IIT. Whaddya mean, you will learn from YouTube. Kuch bhi!) we still celebrate getting into a “top” college.

Since “top” colleges know this, there is no incentive for them to change. And since ed-tech firms in India also know this, they design excellent software that is designed simply to get students into these colleges3.

And so we in the education sector in India continue to wait for the revolution.


Phew! That’s enough for today. I’ll be back tomorrow with Part II of my reflections on this interview.

  1. about which more below[]
  2. Was it really by Confucius? I don’t think so.[]
  3. that is a sweeping generalization, yes. I’m more than happy to be corrected on this. Please tell me more about ed-tech firms that are about learning for its own sake, not about entrance examinations[]

Ooh those tricky poverty lines

Noah Smith had a rather exasperated blogpost (or newsletter post) out recently about Jason Hickel.

Hickel, an anthropologist by training, has two major theses about the world:

He believes that global poverty reduction is a myth, and
He believes that degrowth is the best solution to environmental problems.
Both theses are wrong. And not just wrong in the “Ackshually, sir, you don’t have the facts quite right” sense, but wrong in consequential, potentially dangerous ways. In this post I’m only going to push back against the first of these two narratives; I promise I will write more about degrowth later, and in the meantime you can read this and this.

https://noahpinion.substack.com/p/against-hickelism

As usual, please do read the whole thing.

In that post, Noah Smith refers to an article by Hickel in The Guardian a couple of years ago. Here’s an excerpt:

What Roser’s numbers actually reveal is that the world went from a situation where most of humanity had no need of money at all to one where today most of humanity struggles to survive on extremely small amounts of money. The graph casts this as a decline in poverty, but in reality what was going on was a process of dispossession that bulldozed people into the capitalist labour system, during the enclosure movements in Europe and the colonisation of the global south.
Prior to colonisation, most people lived in subsistence economies where they enjoyed access to abundant commons – land, water, forests, livestock and robust systems of sharing and reciprocity. They had little if any money, but then they didn’t need it in order to live well – so it makes little sense to claim that they were poor. This way of life was violently destroyed by colonisers who forced people off the land and into European-owned mines, factories and plantations, where they were paid paltry wages for work they never wanted to do in the first place.

https://www.theguardian.com/commentisfree/2019/jan/29/bill-gates-davos-global-poverty-infographic-neoliberal

I honestly don’t know where to begin in terms of refuting just this excerpt, let alone the rest of the essay, but thankfully, I don’t really need to. Noah Smith takes on part of the burden in his essay already, and Max Roser also pads up in this essay:

You can see this more clearly in the chart below. Clicking on the ‘relative’ button shifts the chart from absolute numbers to percentages. Whilst the proportion of the world’s population living in extreme poverty has been falling consistently since 1820, it is only in recent decades that this has translated into a decline in the number of people living in extreme poverty.

https://ourworldindata.org/extreme-history-methods
The chart above is absolute numbers, while the one below is in percentage terms. Both charts are from the essay by Roser linked to above. Here is the link again.

Look, much remains to be done in our battle with poverty. Much, much more. The fight is nowhere close to finishing, and we still aren’t sure about how to best reduce poverty – and by we I mean even the best of economists, no matter how you measure “best”. But this fact is incontestable: the world is better off today than it was a century ago, and that by various measures. One of which is the fact that poverty levels are down. By how much, by which yardstick, for which country and why – all are questions worthy of debate. Your answer about the magnitude of reduction in absolute levels of poverty might differ from mine, as might your choice of poverty line. It might also differ in terms of proximate cause.

But not the direction. Your answer about the direction when it comes to reduction of poverty ought to be the same: lower.

What’s Up with the World Outside of Covid-19?

Yash Agarwal, ex-student and good friend recently shared this link on Twitter.

The last line of the article shared by Yash goes like this:

What is starting today is a new age of technological wonder, the Great Acceleration.

https://spectator.us/topic/great-acceleration-looking-forward-post-covid-age/

The background to this is that Tyler Cowen had written a book some years ago called The Great Stagnation. The basic thesis in that book is that innovation was slowing down, since the low hanging fruit in terms of technical innovation had already been picked. But the book also spoke about how this was not to say that innovation was forever going to be slow – it’s just that it had slowed down around then.

He wasn’t the only one, by the way. There were quite a few folks who were less than impressed with technological progress aobut a decade ago. Everybody has heard of the comparison between Twitter and flying cars, but there’s much more where that came from:

In the 2010s, we largely decided that we were in the middle of a technological stagnation. Tyler Cowen’s The Great Stagnation came out in 2011, Robert Gordon’s The Rise and Fall of American Growth came out in 2016. Peter Thiel declared that “we wanted flying cars, instead we got 140 characters”. David Graeber agreed. Paul Krugman lamented the lack of new kitchen appliances. Some economists asked whether ideas were simply getting harder to find. When the startup Juicero came out with a fancy new kitchen appliance, it was widely mocked as a symbol of what was wrong with the tech industry. “Tech” became largely synonymous with software companies, particularly social media, gig economy companies, and venture capital firms. Many questioned whether those sorts of innovations were making society better at all.
So it’s fair to say that the 2010s were a decade of deep techno-pessimism.

https://noahpinion.substack.com/p/techno-optimism-for-the-2020s

By the way, on a related note (although this deserves its own post, which will be out tomorrow) you may want to read this post by Morgan Housel in this regard.

In any case, Covid-19 has in some ways accelerated innovation, and that’s the point that Bruno Macaes1 is making in the article above.

Take transportation and energy: the demand for driverless cars and delivery vans boomed last year because people were fearful of getting infected. In response companies quickly scaled up their plans. Last October, for example, Waymo announced the launch of a taxi service that is fully driverless. Walmart announced in December its plans to use fully autonomous box trucks to make deliveries in Arkansas later this year. As retail goes online as a result of the pandemic, massive delivery volumes are now placing greater pressure on others to follow suit.

https://spectator.us/topic/great-acceleration-looking-forward-post-covid-age/

Note that without Covid-19, we would be having debate about automation, jobs and how technology is promoting inequality. That may well be true. But this is precisely why we study opportunity costs in college!


Perhaps the most interesting (to me) advance this past year has been in terms of we humans understanding how protein folding happens. Understanding is perhaps the wrong word to use (and note that I know as much biology as forecasters know about the future), but we have trained machines to understand it.

At CASP14 DeepMind produced an advance so thorough it compelled CASP organizers to declare the protein structure prediction problem for single protein chains to be solved. In my read of most CASP14 attendees (virtual as it was), I sense that this was the conclusion of the majority. It certainly is my conclusion as well.

https://moalquraishi.wordpress.com/2020/12/08/alphafold2-casp14-it-feels-like-ones-child-has-left-home/

As I understand it (and please note once again that I am no expert) this has the potential to change by orders of magnitude how we approach the treatment of a variety of diseases in this century.


But if you are anything like me, you are also curious to know about what else has been going on this past year. Again, before we proceed: this post is about the “what” in terms of scientific advancement. Tomorrow is a rumination about the “why”.

First, I’d referred to this interview in an earlier post, an interview of Patrick Collison by Noah Smith. It refers to some of what we have been speaking about, but much more as well:

I think the 2020s are when we’ll finally start to understand what’s going on with RNA and neurons. Basically, the prevailing idea has been that connections between neurons are how cognition works. (And that’s what neural networks and deep learning are modeled after.) But it looks increasingly likely that stuff that happens inside the neurons — and inside the connections — is an important part of the story. One suggestion is that RNA is actually part of how neurons think and not just an incidental intermediate thing between the genome and proteins. Elsewhere, we’re starting to spend more time investigating how the microbiome and the immune system interact with things like cancer and neurodegenerative conditions, and I’m optimistic about how that might yield significantly improved treatments. With Alzheimer’s, say, we were stuck for a long time on variants of plaque hypotheses (“this bad stuff accumulates and we have to stop it accumulating”)… it’s now getting hard to ignore the fact that the immune system clearly plays a major — and maybe dominant — role. Elsewhere, we’re plausibly on the cusp of effective dengue, AIDS, and malaria vaccines. That’s pretty huge.

https://noahpinion.substack.com/p/interview-patrick-collison-co-founder

Second, Caleb Whitney has a lovely blogpost on this topic, and shares with us this chart – and if this chart isn’t beautiful, I do not know what is.

The tiny red vertical line tells you when the cause of the disease was identified, and the tiny green vertical line tells you when the cure was licensed in the United States of America. And now think of what happened with Covid-19!2

There’s much more in that post, and there’s more on Patrick Collison’s website, Matt Clancy’s reading list, Matt Clancy’s Substack, and this blogpost by Eli Dourado. I am sure there is more I have missed – much more! – but isn’t that only reinforcing my point?


It is easy to get caught up in the short term pessimistic narrative, and be overwhelmed by it. It happened to me last year, as I am sure it did to many, many other people on this planet. I gave up on what until then had been my proudest achievement in terms of my work: posting here every single day.

But on a personal level, the past year has also taught me this, and I have Morgan Housel to thank for the central insight: the seeds of calm are planted by crazy.3

So when things are really bad and grim (and again, this is not over yet), look to the bright side. And not just because it’s a good thing to do! But also because the bright side is likely to be brighter precisely because of everything else being so goddamn dark.

Tomorrow, I’ll attempt to answer a question I have, and I am sure you do as well: why?

  1. I don’t know how to type out a c with a cedilla in WordPress, my apologies[]
  2. Please note, covid-19 ain’t over yet, especially here in India. That’s not the point though. The point is to ask if the kind of progress we have made this past year would even have been possible in the past.[]
  3. The reverse is also probably true, more’s the pity[]

The Solow Model in Action

One of the most useful models to know when you are thinking about the long term growth prospect of any nation is the Solow model. Or as Marginal Revolution University refers to it in what I think is the best video available about the topic online: The Super Simple Solow Model.

Anybody can (and everybody should) see all the videos in that series. What I’m going to attempt to do in today’s post is try and explain to you how to think about the Solow model, and also speak a little about why it (the Solow model) matters.

I’d written a series of short posts about the Solow Model about four years ago: if you (like me) prefer reading to viewing, here they are, in order:

  1. The difference between the long run and the short run
  2. How to think about long term growth
  3. What does capital mean in the context of economics?
  4. Small economies, big economies
  5. The importance of institutions
  6. Understanding depreciation

Now, today’s essay is not so much about the model, but about how to use the model to think about the real non-ivory-tower world.

I often say in classes that economic models are like photographs taken by smartphone cameras. They are abstractions of reality. They can’t possibly capture all the nuances, hues, details and features of whatever it is that you are photographing. And looking at the photograph gives you an idea of what it might have been like to actually be there – but you cannot possibly ever experience it yourself.

Similarly, a model is an abstraction of reality. It cannot possibly capture all that you need to know about the real world. And using a model as a crutch to get to grips with reality is like seeing a photograph and imagining yourself there. As a thought experiment, it’s fun. As a way to reach policy decisions, it is fraught with risk. 1


Noah Smith came up with an excellent post recently about the Global South, which triggered this essay. His essay is a must read, and in a loosely chronological sense, it speaks about the history of convergence in the world. More to the point, it helps one understand the point I was trying to make above:

Economists generally agreed that instead of unconditional convergence, countries showed “conditional convergence” — that poor countries could only reach parity with rich ones if they had broadly similar institutions and levels of human capital . The subtext was that poor countries just didn’t have what it took to become rich. On the political left, this was of course taken as evidence that developing countries were being held down by neocolonialism, or at least that the capitalist global economic system didn’t have what it took to lift nations out of poverty.

https://noahpinion.substack.com/p/checking-in-on-the-global-south)

But the story soon gets better:

Since the mid-1990s, developing countries began to converge toward levels of income of advanced countries. This process accelerated and became strongest in the 2000s…[This] is not driven by advanced nations lowering their growth performance but rather by developing countries raising theirs…Essentially, the entire distribution of growth amongst rich countries has remained stable over time; in contrast, the entire distribution of poor country growth has shifted up.

https://www.cgdev.org/sites/default/files/new-era-unconditional-convergence.pdf

And today, as Noah points out, the world is a much, much better place than it was about seventy years ago. Nations, particularly those in South East Asia, that would simply not have been thought about as having rapid growth prospects are today all but developed nation status (he mentions Malaysia, Laos, Vietnam and Bangladesh in particular) – and a great way to understand my little series about the Solow model and the MRU video is by reading this essay and reflecting on it.


But the basic point of the Solow model is this: growth matters. It is, in fact, the only thing that matters:

Broad-based growth, defined as the process that raises median income, is far and away the most important source of poverty reduction. There is no instance of a country achieving a headcount poverty rate below 1/3 of its population (at moderate poverty line of $5.50) without achieving the median consumption of that of Mexico. This is not to say that there do not exist anti-poverty programs that are cost-effective and hence should be expanded, or, conversely, that there are anti-poverty programs that are not cost-effective (or even have zero impact on poverty) and should be cut back or eliminated. Analyses of these types of programs would enable a more efficient use of resources devoted to poverty reduction. But large and sustained improvements in global poverty will almost certainly have to focus on how to raise the productivity of the typical person in a poor country, which is a key source of national income growth.

https://econofact.org/poverty-reduction-and-economic-growth

I came across this quote in an essay by Gulzar Natarajan, and the rest of the essay is worth reading in its entirety – but I’ll resist talking about it today – maybe tomorrow!


  1. Let me be clear: I am not criticizing modeling as an endeavor. I am simply stating that it has its limitations.[]

What does the future look like, and how should you think about the answer to that question?

I came across this tweet a while ago, and found it quite funny:

I have asked this question myself while interviewing candidates, and the reason I ask it is not because I want to get a definitive answer from the student. Prediction is a mostly pointless activity. It is because I want to understand what factors the interviewee includes in her analysis.

And the reason I begin with this in today’s post is because two really and truly excellent pieces worth reading were gifted to us earlier this week.

First, Noah Smith interviewed Patrick Collison.

N.S.: So, what are the three things that excite you most about the 2020s?

It’s hard to restrict to three! But here are the first that jump to mind:

First, the explosive expansion in access to opportunity facilitated by the internet. Sounds prosaic but I think still underestimated. Several billion people recently immigrated to the world’s most vibrant city and the system hasn’t yet equilibrated. When you think about how YouTube is accelerating the dissemination of tacit knowledge, or the number of creative outsiders who can now deploy their talents productively, or the number of brilliant 18 year-olds who can now start companies from their bedrooms, or all the instances of improbable scenius that are springing up… in the landscape of the global commons, the internet is nitrogen fertilizer, and we still have a long way to go — economically, culturally, scientifically, technologically, socially, and everything in between. I challenge anyone to watch this video and not feel optimistic.

Second, progress in biology. I think the 2020s are when we’ll finally start to understand what’s going on with RNA and neurons. Basically, the prevailing idea has been that connections between neurons are how cognition works. (And that’s what neural networks and deep learning are modeled after.) But it looks increasingly likely that stuff that happens inside the neurons — and inside the connections — is an important part of the story. One suggestion is that RNA is actually part of how neurons think and not just an incidental intermediate thing between the genome and proteins. Elsewhere, we’re starting to spend more time investigating how the microbiome and the immune system interact with things like cancer and neurodegenerative conditions, and I’m optimistic about how that might yield significantly improved treatments. With Alzheimer’s, say, we were stuck for a long time on variants of plaque hypotheses (“this bad stuff accumulates and we have to stop it accumulating”)… it’s now getting hard to ignore the fact that the immune system clearly plays a major — and maybe dominant — role. Elsewhere, we’re plausibly on the cusp of effective dengue, AIDS, and malaria vaccines. That’s pretty huge.

Last, energy technology. Batteries (88% cost decline in a decade) and renewables are well-told stories and the second-order effects will be important. (As we banish the internal combustion engine, for example, we’ll reap a significant dividend as a result of the reduction in air pollution.) Electric aircraft will probably happen, at least for shorter distances. Solar electricity is asymptoting to near-free, which in turn unlocks other interesting possibilities. (Could we synthesize hydrocarbons via solar powered atmospheric CO2 concentration — that is, make oil out of air — and thereby render remaining fossil fuel use-cases carbon neutral?) There are a lot of good ideas for making nuclear energy safer and cheaper. France today gets three quarters of its electricity from nuclear power… getting other countries to follow suit would be transformatively helpful in averting climate change.

There’s lots more! New semiconductor technology. Improved ML and everything that that enables. Starlink — cheap and fast internet everywhere! Earth-to-earth travel via space plus flying cars. The idea of urbanism that doesn’t suck seems to be gaining traction. There’s a lot of good stuff on the horizon.

https://noahpinion.substack.com/p/interview-patrick-collison-co-founder

I know I say this every other day, but please – pretty please with a cherry on top – do read the whole thing. And subscribe to Noah Smith’s Substack, and follow him on Twitter, and follow Patrick Collison on Twitter, and read the page titled Advice on his website.1

There are many, many, many things to appreciate about Patrick Collison, but the thing that has stayed with me the longest is a tweet of his, that helped me understand how to approach Twitter (and therefore life):

Wonderful advice, and I’ve taken it to heart.

But you need the “No, but” approach in life too. Not so much to disagree with other people, but to constantly ask yourself how you might be wrong, and to think about what needs changing for the better.

And a wonderful essay that speaks about precisely this came out this week as well:

The Decadent Society came out in hardcover about three weeks before Italy’s hospitals were overwhelmed by the coronavirus and lockdowns began to descend across the Western world. So it was probably not the ideal time to bring out a book arguing that our era is defined by drift, stalemate, boredom and repetition, that Francis Fukuyama’s “end of history” is still with us thirty years after he declared its advent, that our society is more likely to glide slowly toward dystopia than to leap forward toward a renaissance or plunge into catastrophe. Surely here was something new, here was history come again, here was the shock, the crisis, the un-simulated Reality, the hinge from one age into the next. Surely the pandemic meant the end of decadence, whatever else it meant.

In the Zoom interviews with which I finished up my book tour, I usually half-conceded the point. Yes, this was a real crisis, death taking off its masque amid the partygoers, stalemate giving way to disaster, Reality Itself suddenly pushing fantasy and simulation aside. But at the same time, nothing about a temporary crisis necessarily alters long-term patterns. Plagues can open new chapters in history, but it all depends on how people respond to them, what kind of responses are possible, and which pre-existing trends they accelerate or blunt. Would our decadent institutions, when tested, crumble, taking us deeper into crisis, closer to collapse? Would the shock of pandemic spark a new era of technological innovation, or midwife a new age of political reform? Or would stagnation reassert itself, or even deepen, in the aftermath?

https://douthat.substack.com/p/the-pandemic-and-the-decadent-society

I haven’t yet read Ross Douthat’s book, but he refers to the four horsemen of the decadent society in his essay: stagnation, sterility, sclerosis, and repetition.2

And this essay is a larger examination of the same question: where do you see the world in the future, but now viewed not through the prism of sunny optimism that imminent technological advances can bring you, but also through the prisms of institutional, cultural and demographic pessimism.

This point, in particular, stood out for me:

Lyman Stone recently calculated that there would be 5.8 million more babies if the U.S. had just maintained its pre-Great Recession birthrates; the pandemic is likely to subtract at least several hundred thousand more, with similar trends in Europe.

Yes, it’s possible to hope that the optimistic economic scenario described above will speed a fertility rebound. It’s possible to look at developments in U.S. family policy and see our political system slowly, slowly coming round to taking those issues seriously. Maybe there’s a big turnaround waiting to happen here: Maybe in a Biden boom there will be a battery-powered minivan in every driveway, piloted by a remote-working parent, and simply stuffed with kids.

But to the extent that the fertility collapse is connected with the struggle to transition to adulthood, the struggle to form stable romantic partnerships, it’s also easy to see how the coronavirus’s negative effects could linger — how a lost period for courtship and marriages, a retreat from physical reality and real-world intimacy in crucial years for both, could reverberate through the next decade and beyond.

https://douthat.substack.com/p/the-pandemic-and-the-decadent-society

I sincerely hope he is wrong about this, and I genuinely think that he is, but is it a point worth thinking about and a factor worth including in your analysis of the future?

Absolutely.


Reading both essays will absolutely not help you get the answer to the question of what the future will look like. Nothing will, because the future will remain resolutely unknowable. But both essays will help you get started on which factors you might want to use in your analysis of the question. And will be very informative about why the people who helped make both essays happen think the way they do.

And therefore I’d recommend that you read them. Multiple times over, preferably.

  1. I’ve linked to it before, and I’ll gladly link to it again, it’s that good[]
  2. It is fascinating to me how in the excerpt above, he refers to this quartet as drift, stalemate, boredom and repetition. The first three words have changed, and if you ask me, for the better. The fourth is, well, repeated. I would love to ask Ross Douthat if that was deliberate – and if so, well played, sir![]

Macroeconomics and Arguments

The best way to learn is by arguing with somebody.

Classes are boring, reading is passive, and videos are both of these things. But when you meet somebody who is well informed, thoughtful, respectful of your viewpoint but is willing to argue with you, well: Merry Christmas.

I’m well aware that social media leaves one with the impression that none of these things are true these days, but that is just our tendency to search out the bad, rather than the good.

When I teach courses in behavioral finance, for example, I often show a discussion between Richard Thaler and Eugene Fama:

That is not the point of today’s blogpost, but it is still a video worthy of your time, whether you’re interested in the topic or not. These two gentlemen (Nobel Prize winners both of them) hold diametrically opposite views when it comes to the efficiency of markets. But they spend a little over forty minutes here, engaged in perfectly civil conversation with each other, without once ceding an inch to the other’s viewpoint. The point isn’t the fact that we’re left without a clear understanding of who is right and who is wrong. The takeaway is that it is entirely possible to argue without turning the argument into a shouting match.

It is, as nine pm teaches us every night in India, a vanishing art.

Macroeconomics is a subject that lends itself to vigorous debate for a variety of reasons. One, and let us be clear about this, nobody has the slightest idea about what works and what doesn’t when it comes to macroeconomics. Yes, really.

Two, counterfactuals are impossible to come by, and so you can engage in endless games of but-have-you-considered.

Three, every macroeconomic crisis that I have had the opportunity to study as it has unfolded has led to all of what is listed below:

  1. Some old theories have been vindicated
  2. Some old theories have been falsified
  3. All theories have been updated
  4. We still don’t know quite what is going on

What’s worse is that the first two points depend almost entirely upon one’s point of view. And again, no, I am not making this up.

But I am not saying that this makes macroeconomics “bad”. This is precisely what makes it fascinating!

And the example du jour comes from two economists who love arguing with each other: Noah Smith and Tyler Cowen. The topic? President Biden’s proposed stimulus.

Blanchard’s argument that Biden’s bill is too large rests on the idea that this amount of spending will cause the economy to “overheat” — in other words, that inflation will rise. To prevent this, he suggests shrinking the size of the bill and financing more of it with taxes.

https://noahpinion.substack.com/p/covid-relief-isnt-stimulus-its-social

This is a point made by Larry Summers as well, by the way. For a good summary, see this Vox article.

Noah Smith’s point, and it one worth considering, is that this recession isn’t like the others. We say that every time there is a recession, by the way, but Smith’s point this time around is that the spending shouldn’t really be thought of as a stimulus, it should be thought of as social insurance:

If you get a check during a pandemic, you’re not going to go out and spend it at restaurants and bars, because…well, there’s a pandemic. Instead, you’re more likely to stick it in the bank, pay down debt, or pay the back rent that you owe.
In a normal recession, this is exactly what we don’t want people to do. We want them to take their government checks and go out and spend them, to restart the virtuous cycle of economic activity! But in a pandemic, it’s fine.
It’s fine because what we’re trying to do with COVID relief isn’t actually pump-priming — it’s retroactive social insurance. Some people, through no fault of their own, took a big hit from a risk that only a few people were paying attention to. In order to relieve those people’s suffering, we are giving them money that they can use to pay rent and buy necessities, as well as money to pay down debts so they have a bit more financial security.

https://noahpinion.substack.com/p/covid-relief-isnt-stimulus-its-social

The rest of the post is worth reading, because it identifies potential flaws in the argument he is making, and provides reasoned counter arguments. So well is this done that you begin to side with him…

…until you read Professor Cowen:

Leave aside the political question of how aggressively to pursue an agenda of a larger, more activist government (and keep in mind that I am more libertarian than many of the participants in this debate). Take a Big Government as a given. History shows that consumption still ought not be the priority.

It’s not as if there aren’t obvious candidates for alternative investment: green energy, broadband and public-health infrastructure for the next pandemic, to name a few. Yes, I am familiar with the argument that spending the extra trillion or so now will make it possible to spend more trillions later, including on such policies. But whatever kind of complicated political story you might tell, the basic laws of economics have not been repealed. Increasing current expenditures does, in fact, involve foregone future opportunities.

https://marginalrevolution.com/marginalrevolution/2021/02/investment-investment-investment-how-to-think-about-the-biden-stimulus-proposal.html

And his concluding paragraph is an excellent teacher at work, because he goes back to the Principles of Economics:

I say you can divide the commenters here into two groups.  Those who produce complicated arguments about why opportunity cost reasoning does not apply here, and those who stress the relevance of the opportunity cost of allocating another trillion dollars or two.  I believe that once you recognize that distinction, you know what to do with it next.

https://marginalrevolution.com/marginalrevolution/2021/02/investment-investment-investment-how-to-think-about-the-biden-stimulus-proposal.html

To which a pro-stimulus (or pro social insurance) person might say, “But people first!” Does that argument hold true? If this stimulus results in runaway inflation a couple of years down the line (students of the Indian economy might recall the years 2009-2013, so we’re not talking hypotheticals here), then was the stimulus in fact worth it? How do we balance this argument against the very real need to provide a stimulus today?

I am completely unsure about what the correct answer is – and that is my point in today’s post.

How can one not be fascinated by macroeconomics?

EC101: Links for 31st October, 2019

  1. “To make this easier to navigate, I’ve grouped the publications by one measure of influence, academic citations per year since publication. The categories are not indications of the quality of the research, just its academic influence to date. Within categories, I’ve ordered studies chronologically.”
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    A useful set of links: 100 of Michael Kremer’s most popular papers.
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  2. “Moreover, the key target of economic policy, Gross Domestic Product (GDP), doesn’t provide much help. So with a view to ‘remastering’ macroeconomics, in a new ING report, produced with the help of John Calverley, Carlo Cocuzzo and I investigate how GDP could be remixed. We pay particular attention to the impact of the rapid digitalisation of the economy that has been gathering momentum over the past 25 years. Pursuing the music analogy, our focus is on a digital remix of GDP.”
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    I’m not a big fan of the concept of GDP in the first place, but that being said, this article helps us understand how the digital economy might perhaps be underrated in national income.
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  3. “Nigeria, like other countries in sub-Saharan Africa, is facing a demographic boom. By 2050, its working-age population will have increased 125 percent. At current GDP growth rates, the local labor market will be unable to absorb all the new entrants. One way for Nigeria to reduce this pressure, and make the most of remittance and skills transfers, is to promote new legal labor migration pathways with countries of destination across the globe.”
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    A useful overview of the Nigerian labor market and how it might be made more effective Applies in part to India as well, I’d argue.
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  4. “Trouble is, the rescue is entirely fictional. The only reason it’s even being attempted is to delay — as long as possible — the collapse of this large shadow lender. Such an event, as S&P Global said in a rare show of plainspeak by a credit appraiser, could be powerful enough to deliver a “solvency shock” to India’s troubled banks. Neither the lenders, nor the Indian government, wants to contemplate this grim prospect. Hence, the make-believe restructuring.”
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    Andy Mukherjee explains the mess that is Dewan Housing. Not only is this not going to end well, I’d argue that there are a lot many more skeletons about to tumble out of the closet.
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  5. “The march of technology means oil’s days are numbered. And for the good of the planet, that transition has to happen as fast as possible. But it doesn’t mean the people who gave their lives to getting energy out of the ground should have to suffer.”
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    Noah Smith on the second order effects of the slowdown in demand for oil.