Relative to What?

“We should not measure GDP because there are so many problems/controversies surrounding it.”

“Democracy doesn’t work.”

“Three hour examinations using pen and paper, sans Internet access, don’t make any sense .”

Just three examples of assertions out of many, many possible ones – and there is just one question that is good enough by way of response:

Relative to What?

That is, if you are saying that we should not be measuring GDP, are you saying that we shouldn’t be measuring economic output at all? Or are you saying that GDP isn’t the best measure of economic output? But both can be summarized more easily by saying “relative to what”? If you’re saying that a world with no economic measurement is better relative to a world with economic measurement, why are you saying so? If you are saying that GDP isn’t the best possible measure – relative to what? Whatever this other measure – is it as objective, as easy to obtain, as easy to meaningfully compare, as GDP?

Democracy doesn’t work compared to what? Are you suggesting a political system such as anarchy? And if yes, why is it better than democracy? Along what dimensions is it better, along what dimensions is it worse? How do you know? Are you suggesting another political system, not the absence of one? If so, which – and how is this system better and worse relative to democracy? Short summary: relative to what?

Wake me up at three in the morning, and I’m happy to go on a rant about how three hour examinations with no internet access simply don’t make sense for much of higher education. There are exceptions, and I don’t mean this as a one size fits all rule, but I should still be able to defend my stand if I’m asked the question: relative to what? Take home essays? Open book examinations? Take home question papers? No examinations? Vivas? Capstone projects? In what ways are these alternatives better, and in what ways are they worse than three hour in class examinations sans internet access? Short summary: relative to what?

It is extremely easy to poke holes in any system, because no system is perfect. The reason no system is perfect, as far as an economist is concerned, is because there is no such thing as a free lunch. That is, opportunity costs are everywhere.

So this, my second question, is effectively a restatement of the fact that opportunity costs are everywhere, or that there is no such thing as a free lunch.

But however you phrase it, the point is that as a student of economics, it is not enough to criticize the status quo, or to reject an idea as being bad/problematic. Evaluate the status quo or the alternative by gauging it against its competition.

“But xyz is bad because of abc reasons” is bad economic analysis. Well, incomplete economic analysis, at any rate. “Xyz is bad because of abc reasons, but it is also good because of pqr reasons, and it is better/worse than efg. Hence we’re going with xyz/efg” is better economic analysis.

Always remember:

Relative to what?

Two Magic Questions

I’ve linked to this magnificent paper by Robert Frank quite a few times by now, and will begin today’s blogpost with a quote from it as well:

Again, the important point is not whether this is the best possible short list of principles but rather that instructors will teach their introductory students more effectively if they begin with a well-articulated short list of some sort and then doggedly hammer away at it, illustrating and applying each principle in context after context.

His list of principles is worthy of discussion, because it is different from mine. Of course, as he himself says, a different list is just fine (I would argue it’s a good thing, because there is then more to learn), and when I say worthy of discussion, I mean that as a “Yes, and” discussion rather than a “No, but” discussion. (Have I linked to this tweet before? Yes. And I will do so again, as will I link to Robert Frank’s paper again, because one should doggedly hammer away at points that need to be reiterated, giving context after context!)

But the reason I begin with this excerpt is because I want to add to my own list of principles two different questions which I believe help one become a better economist. I’ll speak about the first of these questions today, and add the second one in tomorrow.

Here’s the first question:

What are you optimizing for?

Here is a list of questions that I usually get at the start of every academic year:

  1. Which stream should I take, or if from a parent, which stream should my child take?
  2. Should I accept admission in xyz college, or should I go to abc college instead?
  3. Which universities should I apply to in which country once I graduate out of this course?
  4. Which textbook should I read to understand subject xyz?

And my answer to all of these questions is the same. I respond with a question of my own: what are you optimizing for?

With regard to the first question in the list, here are questions you might want to think about. Are you optimizing for a course that maximizes the likelihood that your (or your child’s) passion will be nurtured? Or are you optimizing for future income streams, regardless of passion? Are you optimizing for the ability to graduate without breaking into a sweat? Or are you optimizing for the best possible brand of university/college to graduate from? Or something else?

With regard to the fourth, here’s another list of questions. Are you looking for a book that will help you learn the most about this subject? Or are you looking for a book that will help you score well? Or are you looking for a book that will help you score reasonably well without working too hard? The fact that there are meaningful answers to each of these questions is an indictment of the way we teach and conduct examinations. But the fact that entirely acceptable (and different) answers exist for each category is the point.

And of course, one can come up with a similarly long list for virtually every single question that you can come up with, or will encounter. The reason you can always do so is precisely because of the fact that choices matter.

As a politician in power, are you optimizing for long run growth, or are you optimizing for votes in the next election? As a politician in the opposition, are you optimizing for toppling the current government, or are you optimizing for what’s best for your constituency/country? As a judge, are you optimizing for the best application of accepted and laid-down principles of justice, or are you optimizing for currying favors? As a teacher, am I optimizing for pretending to finish a syllabus by putting in the least amount of effort, or am I optimizing for making sure that my students leave the class wanting to learn more? As students, are you studying a particular subject in order to learn as much about it as possible or are you optimizing to score the highest amount of marks for the least amount of effort? As an employee in an organization, are you looking to do the best possible job in your role, or are you looking to meet the minimum amount of effort required to keep your job?

Always remember, the question “What should I do?”, whether asked to yourself or to somebody else, always deserves to be met with a question in response. The answer to this question will go a very, very long way in terms of helping you answer the original one.

Here is the question once again:

What are you optimizing for?

Which Textbooks Are We Recommending Our Students Read?

I chanced upon this excellent website via Marginal Revolution yesterday.

What is Open Syllabus?

Open Syllabus is a non-profit research organization that collects and analyzes millions of syllabi to support novel teaching and learning applications.  Open Syllabus helps instructors develop classes, libraries manage collections, and presses develop books.  It supports students and lifelong learners in their exploration of topics and fields.  It creates incentives for faculty to improve teaching materials and to use open licenses.  It supports work on aligning higher education with job market needs and on making student mobility easier.  It also challenges faculty and universities to work together to steward this important data resource.
Open Syllabus currently has a corpus of nine million English-language syllabi from 140 countries.  It uses machine learning and other techniques to extract citations, dates, fields, and other metadata from these documents.  The resulting data is made freely available via the Syllabus Explorer and for academic research. 
The project was founded at The American Assembly, a public policy institute associated with Columbia University. It has been independent since 2019.

Tyler Cowen linked to a Davis Kedrosky thread about the most cited papers, and the thread is well worth your time. Here are the top five papers assigned as readings in economics since 1990, worldwide:

But I dug around on the website to see what textbooks have been recommended. And worldwide, this is what comes up:

If you’re wondering, The Wealth of Nations comes in at number 13, and the General Theory comes in 22. I don’t intend this as snark or criticism, and I would in fact argue that the General Theory is not the best book to read if you’re starting on a study of macroeconomics – but that’s a topic for another blogpost. The top 5 is actually a pretty good list, although my personal preference would be to have it reversed. That is, a book on the principles of economics ought to be number one, in my opinion. Should it be N. Gregory Mankiw or some other book? Some other book(s) if you ask me, but that too will be a topic for another blogpost!

Take a look, however, at India’s most recommended textbooks (you can filter by country):

And personally, I find it worrying that a Principles text doesn’t make the top 5, and neither does an introductory text on micro or macro! Modern Microeconomics by Koutsoyiannis makes an appearance at number 7 and the first macro text is Shapiro, in at number 10.

I have nothing against any of the textbooks mentioned in this list, and I have (genuinely) fond memories of doing battle with all of them when I was a student, but I do ask myself if these five ought to be the most assigned texts for Indian students.

Which, of course, begs the obvious question, and that will be tomorrow’s blogpost. But for now, a request: if you are (or have been) a student of economics in an Indian university, what would your top 5 list look like? Much more importantly, if you are a professor of economics in India, what would your top 5 look like?

If you can spare the time, I would love to know!

A Shared Plate at Bedekar’s

My first assignment in the Principles course at the Gokhale Institute is essentially Robert Frank’s famous assignment (pp. 61 in this PDF). Submissions are due on the 5th of September, and I look forward to reading them.

In today’s blogpost, I am going to try and write one of these myself! Three reasons for doing so:

  1. Skin in the game, practice what you preach, only ask others to do something if you’ve done it yourself.
  2. Some students might find an example essay useful
  3. It will be fun!

The essay is below the fold.

One of my favorite places to eat in Pune is Bedekar Misal. The place has been around forever, and the quality of the food has remained consistently good. If you haven’t yet been there, consider trying it!

The last time I was there, though, I noticed something interesting. The menu is printed on two flex sheets that have been put up at both ends of the premises. And the menu says that a regular plate of misal costs 90 rupees. If, however, two people choose to share one misal, then the price goes up to 130 rupees.

Why should this be so?

The costs of production don’t change depending on how many people eat a plate of misal. Neither do the costs associated with serving a plate go up depending upon how many people share a plate. Why then should the owners be charging a higher price for a shared plate?

Because what is scarce, and therefore at a premium, is a place to sit within the cramped confines of the restaurant. Try visiting the place at around one pm, and you’ll see a queue of hungry but patient would-be patrons waiting outside.

Now, if two people occupy a table but have only one plate of misal, that is revenue foregone for the restaurant. If two strangers were sitting at the same table, that would be revenue worth two plates of misal. Even if they knew each other and ended up having one plate each, that would still count as revenue worth two plates. But if they share a misal, well, that’s a loss.

And so what Bedekar Misal does is it puts up a negative incentive in place. Sure, they say, you can have one misal between two people. But you must then pay more. In effect, you are getting half a plate of misal for 65 rupees. At the margin, there will hopefully be folks who will consider this deal and reach the conclusion that paying just 25 rupees more is worth it. If they do, Bedekar Misal gets revenue worth two plates.

And if people choose to walk away from the restaurant rather than pay more for the same plate, well, it still works out just fine for Bedekar Misal. Why? Because there is no shortage of hungry people waiting in line!

So the problem of scarcity of space is solved by not explicitly charging for renting a seat. It is solved, instead, by increasing the price of the good you consume while occupying the scarce resource. That lowers the demand for a shared plate, and therefore increases the number of customers paying full price, while occupying space.

And that’s why this rather odd policy makes sense, once you apply simple principles of economics. Incentives, as it turns out, do matter.

I ended up having two plates all by myself, for the record, but alas, Bedekar’s doesn’t yet offer bulk discounts.

This essay clocks in at 484 words, well within my strictly enforced limit of five hundred words. To everybody reading this, an invitation – and especially to my students: feel free to tell me how the essay could be better! In effect, grade my submission, because I will soon be returning the favor 🙂

P.S. There are some folks who don’t like misal, but that’s fine. Nobody’s perfect.

Thinking Probabilistically

In this past Monday’s post, I spoke about how I disagree with the idea that economics is about putting numbers on everything.

But a conversation I had over the weekend helped me think about how I might be wrong in this regard. If economics is about getting the most out of life, and if there are opportunity costs to everything in life – and I think both of these ideas to be central to thinking like an economics – then thinking probabilistically is a skill more of us should pick up.

Why? Because life is uncertain.

Getting the most out of life requires us to make decisions. These decisions are based on information that is almost always going to be incomplete. This is because acquiring all possible information relevant to the decision making process is an expensive, time consuming process. How do we know if have collected “enough” information? We don’t – we make at best an educated guess.

And regardless of how much information we have collected, we live in an uncertain world. Our best laid plans are likely to go awry. And so we make decisions on the basis of incomplete information, and the outcome of these decisions is uncertain.

For example: which college should I enroll in? I’ll decide this by taking a look at the college website, speak to folks within the college, speak to some of its alumni, maybe visit the college and speak to some professors. I could do this for as long as I like, and as thoroughly as I possibly can. But I will never be able to acquire all information relevant to this decision. And so my decision to enroll in a college is on the basis of incomplete information.

And say you did all the background research, and attended all the introductory seminars, and visited the college, and enrolled in it in, say, 2019. Six months into your course, the pandemic hits. Not your fault, not the college’s fault, and maybe we will never know for sure whose fault it is – but the outcome of your decision to enroll certainly wasn’t one you were expecting.

But this also applies to which chai tapri to visit after having bunked one of the lectures in the first six months. And whether to have a second cutting chai at that tapri. The point is, every single decision needs an evaluation on your part. And this evaluation is always with incomplete information, and the outcomes are always uncertain.

But can you evaluate the probability that things will work out reasonably well? What if, in 2019, you asked yourself about the chance that there would be a major pandemic that would disrupt college life completely? Well, an entirely reasonable approach would have been to take a look at the past one hundred years and ask if something along these lines had taken place. And you would have to conclude, quite reasonably, that the chance of something like this happening was one in a hundred, at best. You should therefore have bet on something like this not happening.

The point I’m making is not that you would have been wrong in this particular case – the point is the process of thinking probabilistically. I’m not saying you should whip out paper and pencil every time you decide to have chai at the tapri. But for most major decisions where probability based calculations are possible, it helps to put a probability based estimate on things working out. You will still end up making the wrong bet every now and then, and that’s fine. The point is that you know the odds (more or less) going into battle, and this helps you decide whether or not to engage in battle in the first place.

Again, I have not read Russ Roberts book just yet, but I think the point he is making in the book is that some problems are beyond the pale of this probability based approach to life. And I still stand by what I said in Monday’s post, economics ought to be about more than putting a number on most things.

But that being said, thinking probabilistically is very underrated, and I would encourage you to get started.

Two final points: my thanks to Amit Varma for a conversation about this that inspired this post. And trust me, he knows more than a thing or two about thinking probabilistically.

And second, via Samarth Bansal, a website that seems very promising in terms of helping all of us learn about statistics and probability.

Learn Economics By Watching Movies

Classes on Principles of Economics at the Gokhale Institute have been going on for a while now, and have included one class on how to learn economics by looking at a painting. Another class, the topic of today’s post, was about learning economics by watching movies.

Here is the chart for India’s GDP:


And it is safe to say that something happened around the 1990’s, and India has never looked back since. But is it possible to tell the same story… not by looking at charts, tables and chapters from a book – but by watching movies?

Let’s watch clips from three of them, and see if we can’t tell ourselves a story about India’s growth episodes.

The first clip we’re going to watch is from a movie called Naukri. This is a movie from the 1950’s, and is about a young Kishore Kumar and the troubles he faces while searching for employment. We’re going to watch a song at the start of the movie, called Chota Sa Ghar Hoga:

In this song, Kishore Kumar tells his young sister and his widowed mother what life will be like when he finds a job. There will be, he tells them, a small house, material comforts, and better times than the ones they’re going through right now. The only thing that prevents us from enjoying all this right away, he seems to be saying, is that he hasn’t found a job just yet – but just you wait! Once he does, all will be hunky dory.

If you accept the premise that Bollywood is all about showing you what you want to see, then I would argue that it isn’t a far stretch to assume that in the 1950’s, people wanted to watch movies about finding a job. Now, of course, I should be taking a sample size of larger than one, and I freely admit to there being some cherry-picking involved. But that being said, I would argue that a movie titled Naukri would likely not be made today – and the protagonist would not be singing songs about finding a job. More on that note in a bit, but the point I am trying to make here is that back in the day, folks visited movie theaters to watch songs about finding a job. Their daydreams were about finding employment, and about how life would change for the better once they did find it.

By the 1970’s though, the Great Indian Dream had soured. Youngsters no longer wanted to watch movies about finding a job. Now, in fact, they wanted to watch movies about what would happen once they were unable to find a job – and this was no longer a question about “if”. Unemployment was all but guaranteed, and the daydreams in this decade were about what life would be like when no gainful employment was possible.

And what would life be like? Yash Chopra had an answer, in Deewar:

Nobody left the movie theatre wanting to be like Shashi Kapoor. Amitabh was the anti-hero, but he was the focus of the audience’s daydreams. It is society that has deprived us from being able to get gainful employment, Deewar is saying, and here’s a three hour escape from reality. Watch a movie and daydream about what happens when through no fault of your own, you find yourself unable to get a job.

This scene, the one that I have embedded here, is in fact saying that the opportunity cost of material wealth is a loss of values and familial ties. Not in such abstruse, academic tones – but that’s one way of thinking about this scene. Or put another way, Deewar could well have been titled Naukri Nahi Milegi – Ab Kya?

In economist-y terms, the optimism about finding a Naukri has been replaced with a surly pessimism about never finding one. And it’s one thing to say that India’s GDP growth rate never really took off in the 1960’s and 1970’s, and quite another to think about how Bollywood movies help us see the same thing – if we choose to look.

And about twenty-five years later or so, yours truly was in college. And when I was in college, our dreams weren’t about finding, or not finding a job. In fact, to borrow a phrase from the movie that I’m going to talk about, who the call cared where we landed up?

Our dreams, were, instead, about driving to Goa in a Mercedes:

There is another song in this movie, called Koi Kahe Kehta Rahe. And right before that song begins, Aamir Khan jokes that he is going to sing a song called “Naukri Paane Ke Sau Tareeke“. One hundred ways to find a job. He then chuckles and tells his befuddled audience that he’s only joking – who the hell cares where we land up.

Each of these movies could only have been made in their respective decades. Youngsters in my day wouldn’t have empathized with a movie about finding a job, much less a movie about what would happen if we didn’t get a job. Those concerns weren’t ours – at least, not of those of us who grew up in middle class surroundings in an urban environment. Dil Chahta Hai was a movie made for People Like Us. We didn’t have Aakash’s palatial house, and we stood zero chance of being sent to Australia to manage a business. And the idea that we could have taken a year off to go paint wouldn’t have gone down well at our homes.

But it wasn’t unbelievable. Out of our reach, sure, but not forever. Dil Chahta Hai was a movie for our times, much like Deewar and Naukri were movies for their times. And if you want to learn about how life changed on the ground for Indians post 1991, well, you could read the books, study the tables, and all the rest of it – or you could ask if Dil Chahta Hai could have been made before 1991.

Roger Ebert, the movie critic, was fond of saying that one shouldn’t ask what movies were about. One should ask instead, he’d say, how movies were about whatever they were about. What he meant by that was this: ask what the director is choosing to show you in terms of the set, the accessories, the plotlines, and the characters and their choices.

As economists, this lesson is equally important. When you’re watching a movie, or reading a book, or listening to a song, ask questions about whatever it is that you’re consuming. Reflect on what is being perceived by you, and what is being shown to you. It enriches your experience, but it also helps you become a better social scientist.

And you’ll begin to appreciate movies, and why they’re made when they’re made.

For example, our generation absolutely lapped up Dil Chahta Hai.

But a movie about traveling to Spain for a holiday? Why, that’s outrageous! Maybe for the generation that came after ours, eh?

Postscript #1: Naukri is a movie about finding a job, but it is about much more than that, and the rest of the movie is actually quite bleak.

Postscript #2: An earlier version of this post is also on this blog.

Parsing my Favorite Definition of Economics

My favorite definition of economics can be found at the start of Cowen and Tabbarok’s textbook:

Economics is the study of how to get the most out of life

There is another excerpt that is worth reading in this regard:

Alfred Marshall called economics “the study of mankind in the ordinary business of life.” This was the enterprise of Marshall and Adam Smith and Friedrich Hayek and Milton Friedman: they tried to understand what people do and the implications of their behavior for the society at large.
But my favorite definition of economics is a variant of Marshall’s. It comes from a student who heard it from another teacher of hers: economics is the study of how to get the most out of life. I like this because it strikes at the true heart of economics—the choices we make, given that we can’t have everything we want. Economics is the study of infinite wants and finite means, the study of constrained choices. This is true for individuals and governments, families and nations. Thomas Sowell said it best: no solutions, only tradeoffs. To get the most out of life, to think like an economist, you have to be know what you’re giving up in order to get something else. (Very minor edit in the first sentence to make it more readable)

So: economics is the study of how to get the most out of life. But what does this mean, exactly?

Three questions present themselves almost immediately to me when I think about this sentence:

  1. What exactly does “how to?” mean?
  2. Who defines what “most” means in each context?
  3. Whose life?

I’ll begin with the second question, move on to the third, and finish with the first.

  1. Who defines what “most” means in each context?

    My daughter – all of nine years old – has a very clear answer to this question on, say, a Saturday morning. As many hours as possible on her tablet.
    Given her world, and her time horizons, this makes perfect sense to her.
    As does my definition of “most” when I decide to take a “five minute” break from whatever I’m doing to “quickly” check Twitter, or watch “just one video” on YouTube.

    That’s the trouble with this definition – “most” is a very, very tricky word. It is my job to teach my daughter that “most” has long term implications, and it is my job to remind myself that “most” has long term implications. What seems best at the moment isn’t necessarily the best if you take the long view. Economics will tell you how to get the most out of life, assuming you know what most means for you right now.
    But what is the best definition of “most”, and why, is a question economics doesn’t directly answer. It’ll tell you about the benefits and costs of whatever definition of “most” you happen to choose, but evaluating between these options is left to you. Tricky little thing that way, economics.

  2. Whose life?

    When I make a choice about the word “most”, should I keep in mind just me or other folks too? Watching the tenth YouTube video instead of getting back to work gets the most out of my life is what my brain tells me, but does my income suffer? Does my family’s well-being suffer? How should I balance these conflicting interests? Does that mean that I shouldn’t watch a single YouTube video?

    It gets even more complicated when I realize that I really need to think about four different sets of lives. My own right now, and my own in the future (both near and distant). But also the lives of others, and those right now and in the future.

    Freebies just before an election might win a government an election now, but what about greater indebtedness in future generations? Congo deciding to give oil exploration licenses might mean more dollars in their coffers now, but at what cost to the future lives of everybody on this planet twenty years down the line?

  3. What exactly does “how to” mean?

    My very first manager in the corporate world drummed a lesson into me that I have found very useful, and worth remembering. Everything that I do in any organization, he said, must fulfill one of three aims. It must either help the firm increase revenue, or it must help the firm reduce costs. Or, he said, it should help the firm improve speed-to-market. You might quibble that the third is a restatement of the first, but the point is well-taken, and relevant in this context.
    Economics helps you get the most out of life by either giving you more of whatever it is that you’re aiming for, or by reducing the effort involved in getting it, or both. And the apparatus involved in this is where math and econ begin to intersect. But the idea is summarized very well in the rule my manager set for me.
    For example, if what I want to do is get the most out of writing an examination, there are two things that I can do. Try and maximize my marks (my grades) or try and minimize my efforts. Ideally of course, I should try and get the biggest bang for the buck – maximize my marks while minimizing my efforts. And that, of course, is why most (if not all) students are so curious to learn about the “important questions”, the “pattern of the paper”, the “syllabus” and the “recommended” textbook.

But should one be maximizing marks and minimizing effort in the first place? Isn’t the point to learn as much as possible?

Allow me refer you back to the first question in this series

Joy to the World

Today, I begin teaching my favoritest (yup, it’s a word) course in the whole wide world: Principles of Economics.

This is a course offered in the first semester of the undergraduate program of the Gokhale Institute, and when we designed this course, we had a weird idea in mind: not a single equation in the whole course, and as few diagrams as possible.

The course is intended as an introduction to the core ideas and principles of economics. The undergrad degree has introductory micro in the second semester, and introductory macro in the semester after that – but the first semester is about just the principles, and the application of these principles.

Or, as I prefer to think of it, it is about falling in love with economics.

I came into economics purely by chance. I am an engineering dropout (Farhan in 3 Idiots? That’s me), and economics was seen as being “the most respectable” thing to study in a Bachelor of Arts degree. But the more I study the subject, and especially its principles, the more I fall in love with it. Economics, when taught well, and learnt well, is a subject that everybody should get to study, reflect on, and apply in their own lives.

That last sentence is an assertion, the defense of which is the whole course I am about to teach, but it is also my life’s mission. As many students as possible should have the opportunity to learn economics, insofar as it is taught well.

What does taught well mean? That’s a complicated question, and we’ll get to it in greater detail eventually, but here are three things that I would think are table stakes when it comes to teaching economics well:

  1. No textbook: Economics is far too broad and important a subject to be confined to a textbook. And I honestly think it is a dangerous idea to leave students with the impression that studying a textbook, and solving the end-of-chapter problems means you “get” economics. Nothing could be farther from the truth. Use many different textbooks, recommend parts of other books, encourage the students to think about economics when they’re watching movies, listening to songs, talking with their family or friends – but do not leave students with the idea that the study and the application of economics can be compartmentalized into a textbook and a series of examinations in a single semester.
    When the time comes to specialize in economics – when you want to draw a third budget line that is tangential to the first indifference curve but parallel to the second budget line – then sure, bring in the textbooks. But don’t leave students with the impression that this is all there is to economics.
    You might think that I’ve got the title of this section wrong – surely I mean to say not just one textbook? But no, I do mean no textbook! Given a choice, I’d much rather not have a single textbook. Videos, sure? Podcasts, bring ’em on. Novels, snippets from a variety of texts, movies, op-eds, blogs – yes. But for a subject as rich and precious as this, I am in favor of not confining teaching to just one recommended textbook.
  2. The point of economics is to be able to apply it: Learning about life being a non-zero sum game isn’t mugging up the definition so that one can regurgitate it in an examination. It is to apply it to all walks of life (it is one of the reasons I write this blog, for example). Learning about sunk costs should help you walk out of a bad movie. Learning about positive externalities should help you realize that starting your YouTube channel is an idea worth considering. Learning about opportunity costs should help you realize that spending more time on creating videos is a better use of your time than polishing a resume that is heavy on style and lacking in content. And so on. Dierdre McCloskey has an essay that I strongly disagree with, and my passion for teaching is renewed each time I read it.
  3. Passion: One should drive the point home in every single class in a subject such as this – don’t think of economics as a subject to be studied and then forgotten. It is a way to view the world, it is a way to enrich your ability to live your life to its fullest, and it is a way to help make the world a better place. The formal study of theoretical economics is about diagrams, and equations and derivations, sure – but the study of principles of economics is about unlocking secrets to a more productive life for yourself, and for society at large. Whoever is teaching this subject should agree wholeheartedly with this paragraph, to the point where “poora pagal hai” in this regard is both true and a compliment of sorts.

Economics is the study of how to get the most out of life is my favorite definition of economics, and today, I get the chance to teach a new bunch of students how and why this is true.

Bring it on!

So You Think You Know Economics

I hope you do, and I think I do – know economics, that is.

But I’ve always thought about economics (how to get the most out of life), here on earth. I haven’t thought about what economics might be like on other planets, on space stations, or on whatever else lies ahead of us in terms of both space and time (pun kind of intended).

Paul Krugman had a fun paper about this written more than forty(!) years ago. The paper is freely available, and you can download it over here, but there is also a Wikipedia article about it, if you would prefer to begin there.

As the Wikipedia article says, the summary of the paper was this:

How should interest rates on goods in transit be computed when the goods travel at close to the speed of light? This is a problem because the time taken in transit will appear less to an observer traveling with the goods than to a stationary observer.

The next line in the Wikipedia article is genuinely funny, and that in typical Krugman style:

This paper, then, is a serious analysis of a ridiculous subject, which is of course the opposite of what is usual in economics.

But a much more recent post by Robin Hanson invites us to do a serious analysis of a no-longer-ridiculous subject: how should one think about social analysis of a future that is much more about space travel.

We understand space tech pretty well, and people have been speculating about it for quite a long time. So I’m disappointed to not yet see better social analysis of space futures.
In this post I will therefore try to outline the kind of work that I think should be done, and that seems quite feasible.

I teach Principles of Economics for a living, but have only very rarely (well ok, almost never) thought about Principles of Economics as it relates to space travel. As Tyler Cowen might say, most of the basic principles will remain the same, and demand curves will slope downwards, but what will actually change?

This is surprisingly hard to think about, because I tend to just assume that economics is always earth bound. And it takes me time to wrap my head around the fact that I’m thinking about economics in a very different context. Robin Hanson helps us overcome this initial hurdle:

Here is the basic approach:
1. Describe how a space society differs from others using economics-adjacent concepts. E.g., “Space econ is more X-like”.
2. For each X, describe in general how X-like economies differ from others, using both historical patterns and basic econ theory.
3. Merge the implications of X-analysis from the different X into a single composite picture of space.

His first example about X is that of lower density. Or, in plainer English, space is just going to be really far away from everything else. I mean, really far away. What does that mean for an economy, when it is just ridiculously far away from everything else?

Let’s think through this a bit. Can, say, thinking about Neom be similar to thinking about this problem? Or Naypyidaw? Or are we talking about a completely different problem, because of the vast difference in terms of distance? And if you say it is a completely different problem, why do you say so?

Are we talking about travel costs being significantly different? What about the cost of communication (both within that base, and back to Earth)? Which resources become more valuable because this base is s far away, and which resources are valuables “just” because they are scarce on that base? Will, as Robin Hanson points out, lower density mean lower product variety, and what will that imply for this economy? How should one think about Dixit-Stiglitz in this context?

Read the whole thing, of course, but Robin Hanson points out a variety of ways in which space economics is going to be different. I’ll highlight just a few below:

  1. It’s going to be very far way, as we just discussed
  2. It’s going to be much harsher (read science fiction!)
  3. It’s going to be wildly different in terms of resource economics
  4. What about population growth?

As I said, I struggle to think about this just because my mental framework thinks about economics in a very Earthian (yes, this is now a word) context. And that precisely why I enjoyed reading this blogpost so much, because it gives me a very pleasant headache about stuff I thought I knew.

And I hope you’ll spend some time with this very pleasant headache too! 🙂

Update: Shubhneet Arora sends along this recent Krugman column/newsletter, very relevant to this blogpost. Thanks Shubhneet!

On The Economics of Line Cutting

Robin Hanson is a person whose books, blog posts and tweets are all worth reading. You may not agree with him, some of his questions may raise your hackles, and some of his conclusions may make you want to tear your hair out, but those (to me) are arguments in his favor.

In a recent blogpost, Robin Hanson thinks about the economics of line cutting. This is a topic of some controversy at our household, for I and my wife have very different approaches to requests from strangers to cut in, while we are waiting in line.

My wife adopts a very belligerent stance, and is not at all open to the idea of allowing anybody to cut the line in front of her. It’s just too bad, she informs them, that you’re pressed for time, but my time is equally valuable. There is a line for a reason, she goes on to say, and surely it cannot be the case that our time (all those who are waiting in line) is less valuable. So please, she firmly suggests, get in line and wait for your turn.

I, on the other hand, am all about grimacing and waving the intruder ahead. I might shake my head and mutter under my breath about the unfairness of it all, but I’m willing to let people get ahead of me, especially so if they seem to be particularly harried.

Robin Hanson has some ‘advice’ for me:

While we like to claim that we are being nice, I suggest that we are avoiding confrontation. When someone makes an apparently aggressive move at our expense, we can either oppose them and risk a confrontation, or give in and avoid confrontation. Giving in is much easier for us when we have the excuse of how doing so is in fact us being nice.
We will often let people walk all over us as long as we can pretend we are thereby being nice. Even those tasked with enforcing rules against line cutting prefer to avoid confrontation. We all somehow seem to embrace the norm that those willing to risk confrontation should get their way, even if at others’ expense. We accept the dominance of the willing to try to dominate.

It is very hard to be objective about these things, but I do think it is likely that I am letting a person cut ahead of me because I willing to pay with my time to avoid confrontation. Don’t get me wrong, I would love it if I am willing to let people get ahead because I just am such a wonderful guy, but it is true to that I will go to great lengths to avoid confrontation.

But enough pop psychology about me – the reason I bring this blog post up (and my willingness to experience inconvenience to avoid confrontation) is to highlight an important lesson: costs and benefits apply to everything in life, not just monetary concepts.

Your choices (all of them, across all dimensions) come with costs and with benefits. Not all of them need have pecuniary consequences (that’s just fancy pants English for ‘related to money’). In fact, most of them will not have direct pecuniary consequences.

But once you realize that money itself is the means to an end, and not an end in itself, you begin to realize that you need to start thinking about costs and benefits in a much broader way than you have thus far – and that economics is about much more than ‘just’ money.

And so, yes, one can (and should!) think about the economics of line cutting.

I hope you never ask to cut ahead of me in a line, but if you see me grimacing, know that I would much rather that you didn’t, but I value my peace and quiet more than I do the two minutes that I will save. Or, at any rate, that’s my current equilibrium.

Who knows what the future will bring, eh?