Large classes, small groups

You might want to read my previous posts about online education and learning before reading this. See this essay about the state of higher education in India, this about signaling and bundling in higher education, this about unbundling college and this about measuring efficiency in education.

In addition, Aadisht had a great comment about optionality and higher education, which really deserves a post in its own right – but you can click on the link in this paragraph and scroll to the bottom to read it for now.

All that being said, today’s post ties together the thoughts and deeds of three people whose thinking I try to follow very carefully when it comes to online education.

The role of community in education

Let’s begin with this tweet from one of them, David Perell.

Both the thread of which 4. is a part, and the Twitter thread referenced in 4. are worth reading.

But today, I wanted to focus on the community bit.

A quick reminder: my thesis is that college sells you three things. The education itself, the access to peer networks and the credentialing. If there is to be an online model that will work for colleges, it must successfully provide all three (and more) at the same price (or less) as college does today.

When it comes to peer networks, can they ever be as successful online as they have been offline?

That begs the question: have they been successful offline? And that is really two separate questions.

About Peer Groups

  1. Are peer groups worth the effort in the first place?
  2. Is there something special about peer groups you form in college?

With regard to the first, I’m going to take a pass on answering it in depth for at least two reasons. First, I know nowhere near enough sociology to be able to speak about this sensibly for any length of time. And second, isn’t the answer obvious?

About the second question, you might want to read this essay – a part of which is excerpted below:

As external conditions change, it becomes tougher to meet the three conditions that sociologists since the 1950s have considered crucial to making close friends: proximity; repeated, unplanned interactions; and a setting that encourages people to let their guard down and confide in each other, said Rebecca G. Adams, a professor of sociology and gerontology at the University of North Carolina at Greensboro. This is why so many people meet their lifelong friends in college, she added.

https://www.nytimes.com/2012/07/15/fashion/the-challenge-of-making-friends-as-an-adult.html

The entire essay is worth your time, but the crux of it is those three points above: proximity; repeated, unplanned interactions; and college life.

Anecdote Time

Two of the best years of my life were spent while studying for my Masters degree at the Gokhale Institute in Pune. There was a fair bit of reading/learning involved, but most of those two years were spent in just hanging out with a group of people I am still close friends with.

And of the three things that Gokhale Institute gave me when I purchased a Masters degree from it, it is this group of friends that I value the most. Then comes the degree, and the least important – as it turns out – was the learning itself.

Don’t misunderstand me – learning was and is important! It’s just that for me, sitting in a class and listening to professors talk wasn’t the best way to learn. I have learnt much more by speaking one-on-one with some professors, arguing heatedly and passionately about random topics with friends, and by reading/listening/viewing to stuff on my own time.

But therein lies a dilemma.

How to reconcile online education with forming your college gang?

Random bike rides, conversations at three in the morning sitting on a ledge on the hostel terrace, giggling at a joke while sitting towards the back of a classroom is not just an important part of college. In my personal experience, this pretty much was college.

And not just during the pandemic, but even beyond, the key challenge is to figure out ways and means to achieve something approaching the same experience in this brave new online world of ours.

What might be an answer to this conundrum? That brings me to the second person whose thoughts about online education matter to me, Tyler Cowen

Small Group Theory, via Tyler Cowen

If you are seeking to foment change, take care to bring together people who have a relatively good chance of forming a small group together. Perhaps small groups of this kind are the fundamental units of social change, noting that often the small groups will be found within larger organizations. The returns to “person A meeting person B” arguably are underrated, and perhaps more philanthropy should be aimed toward this end.

Small groups (potentially) have the speed and power to learn from members and to iterate quickly and improve their ideas and base all of those processes upon trust. These groups also have low overhead and low communications overhead. Small groups also insulate their members sufficiently from a possibly stifling mainstream consensus, while the multiplicity of group members simultaneously boosts the chances of drawing in potential ideas and corrections from the broader social milieu.

https://marginalrevolution.com/marginalrevolution/2018/06/best-analyses-small-innovative-productive-groups.html

If you are going to run an online course, or are going to be a student enrolled in an online course, the most important thing you can do is think long and hard about forming groups.

If you are the person running the course, you need to make the process of forming a group as friction-less as you possibly can. Without these groups, not only are drop-outs more likely, but the groups themselves are perhaps the bigger point!

Here’s Tyler Cowen again, in a separate post:

Remember Lancastrian methods of education from 19th century England? Part of the idea was to keep small group size, and economize on labor, by having the students teach each other, typically with the older students instructing the younger.

https://marginalrevolution.com/marginalrevolution/2020/05/my-weird-lancastrian-method-for-reopening-higher-education.html

The post I quoted from is about how college might reinvent itself in the era of the pandemic, but the larger point he is making – or at any rate, the point I choose to take away – is about how learning in small groups is better than classrooms.

And on a related note, the third person whose thoughts on online education I choose to take very seriously, Seth Godin:

Great guy. Chip and I went to business school together. He was the third youngest person in the class and I was the second youngest person in the class. He got five of us together and every Tuesday night, we met in the Anthropology Department for four hours. We brainstormed more than 5,000 business ideas over the course of the first year of business school. It was magnificent. It wasn’t official, it wasn’t sanctioned. It was just Chip said let’s do this, and we did. And he picked the Anthropology Department because he knew someone there and could get the conference room.

https://tim.blog/wp-content/uploads/2018/09/138-seth-godin.pdf

That is from an episode from Tim Ferriss’ podcast, in which he interviewed Seth (the whole episode is well worth your time), but the point that I remembered was about small groups.

Anybody who is going to try and do education online is going to have to get small groups going. Without it – in my opinion – it simply will not work.

But how do you form these groups?

I’m still thinking about the how, and the more I think about it, the more it seems as if there is never going to be a perfect answer. Forming groups is hard, and I think we need to make peace with the fact that groups may not always work out.

People won’t get along, people will drop out, quarrels will take place even among groups that develop close bonds – there are many, many things that can go wrong. But it doesn’t matter how long it takes and how many times groups have to be formed and re-formed – it is unlikely that you’ll get an education worth the name without the formation of a group, or community.

And what do these groups do?

… will be the topic of tomorrow’s essay, for I was part of an experiment that tried to answer this question – and I really liked the answer!

Unbundling College

I, along with the rest of the universe, came across this meme the other day:

dopl3r.com - Memes - Annual Streaming Price NETFLIX $108 hulu $72 ...

Today’s post is about explaining what is wrong with this image, but also why thinking about it really, really matters. Let’s begin:

Electricity and Education: More Similar Than You’d Have Thought

This Friday, I’ll be launching a new YouTube series on India’s electricity sector. Stay tuned for further details.

The reason I bring this up right now, is because one of the points we cover in that first episode is about how the electricity sector in India became much better after generation, transmission and distribution were “unbundled”.

And thinking about that point helped me frame a question about the education sector in India. I have written about this before, but I’ll expand upon that thought in much greater detail today: unbundling college.

The Typical College Bundle

What does the typical bundle in college look like? Something like this:

A student writes the entrance exam and gets in, attends classes, makes friends, writes internal examinations, gets an internship, gets placed, writes the semester end examination, gets the degree. And next year a new batch comes in, and we rinse and repeat. That, in a nutshell, is the higher education sector, at least in urban India.

One point worth emphasizing here: when I say peer networks, it is actually much more than that. Well, at any rate, it should be much more than that. Mentors, in particular, are best discovered in college.

Horizontal and Vertical Players

Ben Thompson had a lovely write-up many years ago about understanding Google

You really should read the article in its entirety, but here’s the quick takeaway: some firms, like Apple, are vertically integrated. Everything, right from deciding which kind of screw should be used in the construction of the latest iPhone, to the OS (that is, the software), to the in-store experience – everything is controlled by Apple. Hell, they don’t let you change the number of icons in the dock! It is a vertically integrated firm.

Other firms, such as Netflix, are horizontal. You can watch Netflix on Chromecast, on the Firestick, on your laptop, on your tablet, on your phone – Netflix honestly doesn’t care where you watch it, so long as you pay them their monthly fees. In fact, they will go out of their way to make sure that you can watch Netflix no matter what device you own. Netflix is a horizontal firm.

And that’s one way in which the forward I received the other day is wrong. Every other service on that forward is a horizontal firm. But Harvard? Entirely vertical. They control who gets in and how, they control what they’re taught and how, they control who gets the degree and how. They don’t even need to control the peer network: the Harvard alumni network is one of the reasons getting into Harvard is worth the effort, so naturally the alumni themselves will work to maintain the exclusivity. Entirely vertical!

But, Pandemic!

Now, the reason that forward exists, and the reason that forward became as popular as it has, is because there is more than a grain of truth to it, especially in the year 2020.

Take a look at it again:

dopl3r.com - Memes - Annual Streaming Price NETFLIX $108 hulu $72 ...

Most students in most colleges the world over are asking a very simple question: if we are to sit at home and watch videos, why restrict ourselves to what our college professors have to say?

I’m due to teach Principles of Economics to the incoming undergraduate batch at Gokhale Institute, for example. But why should students listen to me rather than watch videos from MIT’s OCW, or Marginal Revolution University, or Coursera, or edX, or Khan Academy?

Hell, for that matter, why should I bother coming up with a teaching plan when all I have to do is point students towards all of these resources?

And as the forward asks, or at least implies: if that is indeed the case, then why pay tuition fees this year? Not just Harvard students of course – every student is asking this question.

So What’s the Answer?

Well, microeconomics 101: a good place to begin is by asking what you’re paying for when you pay those tuition fees. And as I wrote in a blog post a while ago, you’re paying for much more than classes:

Now, the problem of education: when you buy a degree from college, you’re getting all three things.
College is a bundle: education | credentialing | peer networks

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

Harvard is not charging you money to teach you stuff you can learn elsewhere. Those guys – the people who run the place and the professors who teach there – they’re pretty good, y’know. They know you can learn that stuff elsewhere.

You are paying your local college an obscene amount of money for the other two things. Coursera might be able to give you a better econ prof than your local college, but Coursera can’t yet give you a certificate that carries as much weight as does the one from your local college. This is much more true if you sub in Harvard for your local college.

Or put another way, Coursera existed since before the pandemic. Yet enrollments happened in colleges, did they not?

Enrollments happened because people weren’t buying lectures.

They were buying access to the peer networks, and they were buying the certificate.

And Harvard – and most other colleges the world over – are effectively saying that the certificate is still as valuable in 2020 as it was in 2019. Arguably more so, and so no discounts.

OK, But What About Peer Networks? Surely A Discount There?

Um, well, no. And for two reasons.

First reason, this excellent argument from Tyler Cowen:

Perhaps the logical conclusion is that both the “social connections/dating” services of Harvard and the certification services of Harvard are strong complements. If you are certified by Harvard, but live on a desert island, or carry a contagious disease, that certification is worth much less. So it is hard to unbundle the services and sell the certification on its own, without the associated social networks. Nor is it so worthwhile to sell the social connections on their own. Harvard grads are socially connected to their dry cleaning workers as it stands, but that does not do those workers much good.

https://marginalrevolution.com/marginalrevolution/2020/07/signaling-vs-certification-at-harvard.html

Peer networks develop best when you go through intense, shared experiences. Both adjectives matter: just hanging about in a college without going through the same grind that everybody else is going through doesn’t cut it (skin in the game). And that grind must be intense, it can’t be an optional, laid-back thing.

So sure, the grind is going to be online this year, but it still is shared, and it still is intense. That’s what helps with the bonding, and that bonding is valuable enough for Harvard to get away by charging you USD 50,000.

Peer networks developed online can be an extremely valuable resource, by the way. Ask David Perell or Seth Godin, to name just two people.

Second, those peer resources stay with you for life. You develop them now, but they get even better with time than does wine! As your peer group grows and matures, the number of connections they open up increases exponentially. So even if you can’t meet your peer group in a physical sense, it still is an investment worth making.

Tyler Cowen again:

Keep also in mind that the restricted Harvard services are probably only for one year (or less), so most students will still get three years or more of “the real Harvard,” if that is what they value. And they can use intertemporal substitution to do more networking in the remaining three years. It’s like being told you don’t get to watch the first quarter of a really great NBA game. That is a value diminution to be sure, but there will still be enough people willing to buy the fancy seats. Most viewers in the arena don’t watch more than three quarters of the game to begin with.

https://marginalrevolution.com/marginalrevolution/2020/07/signaling-vs-certification-at-harvard.html

If anything, Tyler Cowen’s analogy is slightly off the mark. The people who watch the NBA game in the stadium are never going to get in touch with each other twenty years down the line, much less depend on them for jobs or references.

So no, no discounts for reduced peer network benefits in 2020, sorry.

So far, Harvard can still justifiably charge you USD 50,000 – and they will.

So What Next?

Well, think of many vertically integrated colleges, all offering more or less the same kind of services:

… and ask yourself how we could introduce horizontal services into this structure. LinkedIn and Coursera attempt two separate models:

And those two models overlap more than you’d think. LinkedIn offers learning, for example.

But the real way, if you ask me, to think about how to unbundle college is by expanding our framework a little bit more:

This is a blog post, not an academic paper, much less a book. And therefore, forgive me for using catch-all terms here. By recruiters, I mean literally anybody who will work with graduates in any capacity: colleagues in start-ups, government, think-tanks, and yes, recruiters.

But the point of the framework I shared above is this: it will help us understand where change will come from, if at all it must.

Put another way, do you think $50,000 for Harvard (or whatever amount for whichever college) is too expensive? Then you need to explain how you can get the same things (or more) that a bundled college degree gives you for a lesser price with a different model.

How to get, that is to say, credentialing, peer networks and learning (and maybe more) for less than USD 50,000. That’s the million dollar question. And even if we come up with an answer, you’ll be up against the following:

  1. Colleges will be unwilling to change for two reasons.
    1. Why change something that isn’t broken? And college isn’t broken, from the perspective of the college.
    2. Inertia
  2. Firms such as Coursera and LinkedIn will struggle to replicate the “full-stack” experience that college has right now. And a piece-meal horizontal replacement will never be as valuable.
  3. Government will be unwilling to change the way college is structured right now
    1. Because of lobbying by colleges themselves
    2. Because too radical a change is a risky move, with unpredictable upsides and more than a little chaos in the short run
  4. Parents and students will not want colleges to change far too much, because the system as it stands right now is what enables jobs to come by.
  5. And that, finally, leaves recruiters. Or as I explained above, it is us: society. Until we (society) acknowledge the fact that college as a bundle has become too sclerotic, too expensive and too rigid for its own good, we can’t begin to change it.

And so, it ultimately comes down to this: we need to prove the inefficiency, and therefore the relative expensiveness of college as it stands today to society, before we can begin to talk about reforming it.

Well then, let’s get to proving the inefficiency of college as it stands today. That’ll be next up!

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

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

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

Let’s get started:

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

Notes from the Cowen-Roberts Talk about the Corona Virus

Russ Roberts and Tyler Cowen got together to talk about the corona virus some days ago, and what follow are my notes from reading the transcript. If you want to listen to the talk, or read the transcript, here is the link.

Excerpts above, my notes pertaining to the excerpt below.

 

I think Skype coffee is a really good thing. I recommend that to everybody. People you might normally have coffee with, get a cup of coffee and sit on Skype or Zoom and chat with them, and that way it’s not so bad. It’s not great, but it’s not so bad.

Skype or Zoom, and coffee or beer. Whatever works best for you, but socializing is important, and be sure to not under-rate it.

The understanding that it may be really some period of time before you are able to resume normal movements and interactions. Any given day it may seem fine, but what mental readjustment are you making?

The reason I excerpted this is because people here in India – at least the ones I speak to – seem to assume that everything will be back to normal in a matter of days, at worst a couple of weeks. I wish that were the case, but we’re going to be in for the long haul. At the absolute least, a month – almost definitely more. That’s the kind of timeline we’re looking at.

But nonetheless, if something is doubling every five to seven days, some very bad events are not so far away. But because they’re not vivid people, including a lot of economists I know, they’re not able to make that mental leap. I think my background with thinking about economic growth is a significant reason why I think I’ve seen some of the dangers here coming.

Take a look at the chart below (this is from Gapminder):

In particular, take a look at the horizontal axis. Each tick is a doubling, as opposed to the vertical axis, where each tick is the standard 10 units. The bubbles on the right are waaaaaay further apart than are the bubbles on the left. I said that, and you understood it, but your brain refuses to acknowledge or remember it, because we are a visual species, not a mathematically oriented one. Exponentials are hard for us to grasp, and we therefore can’t understand what doubling every five days means.

There seem to be many open questions, but the risks do seem to be rising and I would include the global front, the economic front. Tensions between the United States and China are much worse than they had been. China is calling it a virus from America. Trump is calling it the Chinese virus. It’s even possible, that’s the single worst outcome of all of these events.

If you’re confused about the how and the why, here’s a tweet:

And it’s as if we’re trying to put the economy in a coma, to cite an analogy Larry Summers gave. So I think we should be trying to put the economy in a coma. I’m okay with government doing that, but I think personally we need to be doing that quicker than what the government is up to.

In this blog post that I put up a while ago, a student had asked about how long we can afford a lockdown, implicitly asking what economic costs we were willing to tolerate to defeat this. Tyler Cowen’s response above is effectively saying that there’s no limit, no matter what the cost, this needs to be defeated. Or, if you want another way to put it: economic prosperity is the means to an end, not an end in itself.

I know one of my proposals is we should have things that make it more fun for people to be at home. So some of the entertainment companies are having free streaming on cable of some of their back catalog. Maybe that’s a marginal effect — but if it saves a few lives? So whatever we can do so that people are willing or indeed maybe even in some cases eager to stay home, making childcare issues easier.

Restaurants should be shut, but not takeaways, bars should be shut, but delivery of alcohol should be legalized, internet broadband should be a critical service, Netflix et al could chip in with some shows being made freely available – and so on. Note that there is always YouTube!

That’s the actual destruction going on is the relationships, the organizational capital, the intangibles that will decay. Not over two weeks, probably not over four weeks but over four or five months or longer. Then I think that’s a matter really of great concern.

I have only glanced through the book, not read it in detail, but reading this excerpt reminded me of The Third Pillar, by Raghuram Rajan.

This is from a Prakash Loungani review of the book: “Still, Rajan argues, markets and the state have usurped communities’ power, and the balance needs to be reset. Power must devolve from global and national levels to the community. Rajan notes that as machines and robots begin to produce more of our goods and services, human work “will center once again around inter-personal relationships.” Communities could well be the workplace of tomorrow.”

Not only is Rajan almost certainly right, but the current virus allows for an opportunity to the third pillar to be stronger than before. Governments and markets by themselves will struggle, community needs to come to the fore.

So I think the reopening decisions, especially in more bureaucratic corporations, it will be very hard for everyone to sign off and agree. Yes, we’re going to go ahead. There’s going to be an open Disneyland again. We’re going to have spectators at NBA games. The risk of bad publicity, social media storms against companies whether true or not, someone might have died as a result of going to a game. Over some time horizon social norms may shift and a lot of people might just say, “Look, we’re just going to take these chances and deal with it.” But I don’t think we’re close to that. And certainly, our legal system is not close to that. And human resources departments are not close to that.

You are responsible for five people’s jobs, and you need to sign a letter authorizing them to come back to work in mid-April. If you sign that letter, and they come to work, and they get the corona virus, then is it on your head? Would you sign that letter? What if it’s five hundred? Five thousand? 1.3 billion? Again, this will almost certainly last for more than two weeks.

I think the upside is to believe that at least biomedicine will be far swifter and better funded and less regulated, in the good sense of that word, and our response capabilities, when all this is over, for the next event will be far, far greater. We may overreact in some 9/11 kind of ways like we’ve done arguably with airport procedures, but if there’s one part of the economy that will get a huge, beneficial boost, I think it is our biomedical capabilities and our public health infrastructure.

If I may offer my two cents on this, specific to India: offices will now be very, very reluctant to buy desktops for their employees. I work in a college, and can attest to how many jobs are literally tied to their desk. Not as important as bio-medicine, but a change nonetheless. Second – and I hope this is true – classes will not be the same ever again.

Given that most people are not at all harmed by coronavirus, the safety of the vaccine has to really be very high. Right?

First, do no harm!

I think the thing I’m recommending for a lot of people now is to find a sphere of activity, no matter how small or how local, that you feel you can control and you can do at home and you can contribute to. This feeling of powerlessness may set in, that will cause people to panic more or become too depressed or just make them much less productive, or spread to their families, or maybe cause them to go out and want to get drunk and become a spreader in some manner, so really to think long and hard.

Teach something to somebody. If nothing else, teach into the void: create YouTube videos on a subject that you are an expert in. That’s my personal recommendation.

The degree of optimism or pessimism, it really seems to matter for economic stimulus.

Yup.

Buy the patent rights at auction, give them a huge prize, tens of billions of dollars, if they deserve it, I’m all for this. Even if you think it has no impact this time, this is not our last pandemic. It will matter for the next time around. I think those prizes should be large and credibly promised, and I would like to see us get on this.

Getting the incentives right for designing expensive-to-produce but needed-by-everybody medicines is very, very tricky. Even if you have read the entire transcript, please go back and read this section again.

Like they’re taking tools out of the toolbox from the last crisis. Things they thought should have been done and weren’t and saying now is the time to see I was right all along. It makes me very nervous. I’m seeing high levels of epistemic non-rationality. But that said, I really am not here trying to argue for doing nothing. I don’t think we can let all the cards fall to the ground. What’s your view on that?

I think of this as a statistician. When we have guests over, I and my wife often argue about how much food we should make/order. I usually argue for making too much, and she worries about leftovers. But here’s the thing: it’s almost impossible to get it just right. It’s a very hard problem to solve! So, if you must make an error, which one? Order too much or too little?

It’s the same problem at play here. We’re never – never – going to get fiscal policy just right. Give up that dream right now. You can either err by giving too much fiscal aid, or too little. What would you rather do? My personal opinion: the same as with the food. I’d rather have too much fiscal policy than too little. This time, you see, is different.

But that being said, the specifics are going to be a headache. Does anybody have the answers? Right now, no.

I think some schools will do online education well for a subset of classes and we’ll end up in a world where 20% of what is now done face to face will be done online and that will be cheaper and better. I fully get, you cannot do a face to face discussion humanities class that way, but I think we’ll see much more online education.

Again, that’s a good – nay, wonderful! – thing.

Going around and talking about redistributing the wealth, letting in so many more immigrants, whatever you think of those points of view, I think they will have much, much less social impact and we will be more inward looking, more nationalistic, less cosmopolitan. I think you’ll see this already.

Tribalism will rise, in short. And that’s a horrible – and tragic! – thing. But he’s right: it will rise.

I think there’ll be a huge wave of promiscuous sex once there’s the first break in the virus for instance.

Nothing will ever explain the principle of diminishing marginal utility better. Ever. Especially to undergraduate students.

Don’t trust everything you read out there. The degree of misinformation is very high. The degree of uncertainty from the best and most reputable sources is very high. There’s no magic bullet on how to figure out what’s going on. I can’t quite say, “Oh, trust the authorities.” It’s not exactly how it’s gone, but there’s not any single way to really know what’s happening. That’s very frustrating. I would say do your best and keep in mind that’s a highly imperfect endeavor. There’s a lot you won’t know and some of the things you think you know are probably wrong.

Potentially the most underrated part of this conversation, and I’ll expand on this. First the obvious: treat everything you receive on WhatsApp as a joke. Discount most of what you read, particularly when received as forwards, in emails, in discussions. But, and this is where it gets hard, even stuff that you read on really reputed sites, treat with a pinch of salt. Not because the people who came up with that content want to lie to you, but because there is nobody on this planet who really and truly knows everything.

And that applies to this site too, of course. Read everything, trust nothing, and tread carefully. Macro is easy in comparison.

Once again, the link to the conversation.

 

 

 

 

 

Econ101: Policy Responses to a Pandemic

If you haven’t played it already, go ahead and give this game a try: The Fed Chairman Game. I have a lot of fun playing this game in class, especially with students who have been taught monetary policy. It usually turns out to be the case that they haven’t understood it quite as well as they think the have! (To be clear, that’s the fault of our educational system, not the students.)

But the reason I started with that is because the game always throws up a scenario that mimics a crisis, and asks you what you would do if you were the Chair of the Fed.

In this case, policymakers the world over are now staring at a very real crisis, and they need to be asking themselves: what should we do?


 

There are two broad answers, of course: monetary policy, and fiscal policy.

The Federal Reserve has cut interest rates to zero, and while it has other tools to stimulate the economy, a crisis like this requires fiscal as well as monetary responses. The legislation passed thus far has been important, but another round of fiscal policy will be required immediately to fully address this crisis.

A robust fiscal response can provide income support to households, ensure broad and continuous access to safety net programs, provide incentives for employers to avoid layoffs, provide loans to small businesses, give liquidity cushions to households and firms, and otherwise stimulate the economy.

That’s a write-up from Brookings. The specifics follow in that article, but the article makes the point that more of the lifting will need to  be done by fiscal, rather than monetary policy. And that is true for a variety of reasons,  which the article does not get into, but long story short – fiscal, more than monetary.

But, ok, fiscal policy of what kind? Should we give money to firms or to workers? Here’s Paul Krugman with his take…

And here’s Alex Tabarrok with his response:

So what’s the correct answer? Well, as we’ve learnt before, and will learn again, macro is hard! In an ideal world, all of the above, but as is manifestly clear, we are not in an ideal world. If we must choose between giving money to firms or to people, to whom should we give it? My opinion? People first, businesses second. This is, of course, a US centric discussion, what’s up with India?


 

Here’s, to begin with, a round-up from around the world – you can search within it for India’s response thus far.

Calls are getting louder for governments to support people and businesses until the new coronavirus is contained. The only questions are how much money to shovel into the economy, how to go about doing it, and whether it will be enough.

Already, officials from Paris to Washington DC are pulling out the playbook used in Asia for slowing the spread of Covid-19: they’re restricting travel and cracking down on public gatherings. While those measures have the potential to reduce deaths and infections, they will also damage business prospects for many companies and cause a synchronized worldwide disruption.

Here’s the FT from two weeks ago about the impending slow down:

Venu Srinivasan, whose company TVS is one of India’s largest makers of motorcycles and scooters, said the business had lost about 10 per cent of production in February owing to a lack of Chinese-made parts for the vehicles’ fuel injection system. He added that TVS has now managed to find a new supplier.

But Mr Srinivasan said he was bracing for India’s recovery to take longer than anticipated. “One would have expected a V-shaped recovery, but instead you have an L shaped recovery,” he said. “It’s been the long haul.”

R Jagannathan in the LiveMint suggests this:

This is how it could be designed. Any unemployed urban youth in the 20-30 age group could be promised 100 days of employment and/or skilling options paid for by the government at a fixed daily rate of ₹300 (or thereabouts, depending on city). At an outlay of ₹30,000 per person annually, the unemployed can be put to work in municipal conservancy services, healthcare support, traffic management, and other duties, with the money also being made available for any skill-acquiring activity chosen by the beneficiary (driver training for Ola-Uber, logistics operations, etc). All companies could be given an opportunity to use the provisions of the Apprentices Act to take on more trainees, with the apprenticeship period subsidized to the limit of ₹30,000 per person in 2020-21. If the pilot works, it could be rolled out as a regular annual scheme for jobs and skills. Skilling works best in an actual jobs environment.

 

He also mentions making the GST simpler, which the Business Standard agrees with:

Certainly, the rationalisation of GST will also affect government revenues. However, a simpler and more transparent system would allow greater collection and reduce evasion. The government will receive a windfall this year from lower crude oil prices. The moment to move on the structural reform agenda is now. The GST Council has done well to address the inverted duty structure in mobile phones. Further rationalisation will give confidence to the market that the government is serious about reforms. It was promised that GST would remain a work in progress, and that the GST Council would act often to improve it. So far, however, the changes have been marginal and haphazard. A more structured and rational approach, which outlines a quick path to a single rate, would pay dividends for the economy in the longer run. It would also be an effective way to manage the immediate effects of a supply shock such as is being caused by the pandemic.

Also from the Business Standard, a report on the government now considering (not happened yet) relaxing bad loan classification rules for sectors hit by the corona virus. That’s pretty soon going to be every sector!


 

Assorted Links about the topic – there’s more to read than usual, please note.

Here is Tyler Cowen on mitigating the economic impacts from the coronavirus crisis.

Here’s Bill Dupor, via MR, about the topic:

First, incentivize behavior to align with recognized public health objectives during the outbreak.

Second, avoid concentrating the individual financial burden of the outbreak or the policy response to the outbreak.

Third, implement these fiscal policies as quickly as possible, subject to some efficiency considerations.

Again, via MR, New Zealand’s macro response.

Arnold Kling is running a series on the macro response to the crisis.

Claudia Sahm proposes direct payment to individuals:

This chapter proposes a direct payment to individuals that would
automatically be paid out early in a recession and then continue annually
when the recession is severe. Research shows that stimulus payments that
were broadly disbursed on an ad hoc (or discretionary) basis in the 2001 and
2008–9 recessions raised consumer spending and helped counteract weak
demand. Making the payments automatic by tying their disbursement to
recent changes in the unemployment rate would ensure that the stimulus
reaches the economy as quickly as possible. A rapid, vigorous response to
the next recession in the form of direct payments to individuals would help
limit employment losses and the economic damage from the recession.

Here are the concrete proposals, the entire paper is worth a read:

Automatic lump-sum stimulus payments would be made to individuals
when the three-month average national unemployment rate rises by
at least 0.50 percentage points relative to its low in the previous 12
months.
• The total amount of stimulus payments in the first year is set to
0.7 percent of GDP.
• After the first year, any second (or subsequent) year payments would
depend on the path of the unemployment rate.

 

Macroeconomics IS HARD!

Economics in the times of COVID-19, there is already a book. I learnt about it from Tim Taylor’s blogpost. I have not read the book, but will soon.

The NYT, two weeks ago, on the scale of the problem facing policymakers.

 

Scott Sumner on Parasite, Paris as a 15 minute city, and then the Coronavirus!

Five articles that I enjoyed reading this week, and figured you might too:

I’d actually prefer they not allow foreign language films in the best picture category, as they’ll never be judged on a level playing field. Alternatively, have three Oscars; best high-brow film, determined by highbrow critics. best middlebrow film, determined much like the current Best Picture, and best popular film, determined by box office receipts. The same film would be allowed to compete in all three categories.

The Godfather would have won all three, but I’m not sure any other film would have (Birth of a Nation?, Lord of the Rings III?)

Rear Window would have won highbrow and popular, but it wasn’t even nominated for Best Picture. LOL. Middlebrow people are the worst.

Scott Sumner being provocative – but notice that this is kind of how Filmfare Awards work!

Paris, the 15 minute city:

Even in a dense city like Paris, which has more than 21,000 residents per square mile, the concept as laid out by the Hidalgo campaign group Paris en Commun is bold. Taken at a citywide level, it would require a sort of anti-zoning—“deconstructing the city” as Hidalgo adviser Carlos Moreno, a professor at Paris-Sorbonne University, puts it. “There are six things that make an urbanite happy” he told Liberation. “Dwelling in dignity, working in proper conditions, [being able to gain] provisions, well-being, education and leisure. To improve quality of life, you need to reduce the access radius for these functions.” That commitment to bringing all life’s essentials to each neighborhood means creating a more thoroughly integrated urban fabric, where stores mix with homes, bars mix with health centers, and schools with office buildings.

 

In any crisis, leaders have two equally important responsibilities: solve the immediate problem and keep it from happening again. The COVID-19 pandemic is an excellent case in point. The world needs to save lives now while also improving the way we respond to outbreaks in general. The first point is more pressing, but the second has crucial long-term consequences.

Bill Gates on not just how to contain the coronavirus, but how to build better capacity for the next one. Worth two excerpts:

Pandemic products are extraordinarily high-risk investments, and pharmaceutical companies will need public funding to de-risk their work and get them to jump in with both feet. In addition, governments and other donors will need to fund—as a global public good—manufacturing facilities that can generate a vaccine supply in a matter of weeks. These facilities can make vaccines for routine immunization programs in normal times and be quickly refitted for production during a pandemic. Finally, governments will need to finance the procurement and distribution of vaccines to the populations that need them.

Check the info graphic out in the article as well.

Goldman Sachs now forecasts (nowcasts) -6% q/q AR growth in Q1, down from -0.5%.

Hmmmmm.

Speaking of which

2020 @PredictIt recession prediction market probabilities are now above 40% amid #Coronavirus concerns.

Quick Notes from Tyler Cowen’s Interview of Garett Jones

We’ll see how this goes, but a very quick introduction before we get started. A friend, Aadisht Khanna, has a blog with a very ambitious aim (and name): Aadisht Logs Everything. Every now and then, I speak to him about some of these posts, and we end up having a lot of fun talking about stuff we get reminded of as a result of he writing these posts and I speaking to him about them. They’re all available here, should you want to check it out.

But why not try and take quick notes on everything I see, read and here? The idea isn’t to write long and detailed posts – that’s happening on the blog, slowly but surely.

But an ongoing repository of my notes on stuff I have read, listened to, viewed, not to mention conversations I’ve been a part of – maybe that’s a good idea too? We’ll see how it goes.

We begin with the thing I read the most recently, which is an episode from what is probably my favorite podcast: Conversations with Tyler.

The episode I read most recently was the one with Garett Jones. Here we go.

  1. The first section was essentially about getting incentives right. The idea is simple, the devil lies in the details is the big takeaway for me, and that applies to practically everything in life.
  2. New Zealand’s contract for its central banker is a form of skin in the game, and that is a gloriously unexplored idea. My own take on this is what if professors were paid a part of their salary on the basis of students who chose to attend their class, and all classes were made optional in terms of enrollment and attendance? Refer to point 1 before you rush to criticize!
  3. The Rajya Sabha elections are staggered in much the same way, of course, and as I understand it, for the same reason as staggered elections in the House of Representatives, and I agree: it is an excellent idea.
  4. About Garett Jones and Tyler Cowen’s discussion re: governance in Europe, does it imply too much centralization, and isn’t that, on balance, a bad thing? Need to read up more about this.
  5. And Scott Sumner’s question about Switzerland is along those lines only, no?
  6. I haven’t read the book in question, but I found it interesting that one of the chapters was titled “The Big Benefits of a Small Increase in Democracy”. Either extreme isn’t desirable, in other words: not too much democracy, but not too little of it either. The Truth Lies Somewhere in the Middle!
  7. This was immensely thought provoking for me, along so many dimensions:

    That’s true, but that’s partly because the rich white elites are acting as the self-appointed representatives of other individuals and groups in society.

  8. Again, thought provoking, and the basis on which the point was made is added to the must-read list:

    Once he pointed out, in sort of the climax of the book, that long-run cooperation focusing on some kind of cultural norm and infusing that throughout the system was crucial to firm success, and that failed firms will be those often that failed to coordinate on a good equilibrium, I decided that was central to seeing not just how firms work, but how societies work as a whole.

  9. If you ask me, Seth Godin and Tyler Cowen should have a conversation, and we should get to listen to it/read it. Here’s one reason, here’s the second, and what follows is my third:

    JONES: Yeah, that’s the thing — figuring out which things within capitalism — what is it about living in a free society with competitive markets where, at least in our youth and middle age, we feel a need to sell ourselves as valuable creators. There’s something about that that probably is what’s most valuable for boosting cognitive skills. It’s a sort of demand-side desire to try to use our minds in socially productive ways. And I think in communism, we can —

    COWEN: So marketing makes us smarter?

    JONES: That’s what I would say, yeah.

  10. Chad Jones, Paul Romer and diminishing returns reminded me of this book, and this TED talk.
  11. Isn’t this one more reason to admire Tyler Cowen more as well?

    Oh, that’s so hard. I’d say Buchanan because he . . . Tullock had more weird ideas. Buchanan took the time to do something that I personally am not that skilled at and not that interested in, which is building an intellectual empire, building an organization and a culture that shares those ideas. And that’s really how you get important ideas into an ecosystem, by taking the time to build an organization, to build a culture, to work with people, and Buchanan did that. That gave him a power that Tullock couldn’t quite have.

  12. And isn’t this a a macro-description of point 11, applied to a nation?

    There is this case that America, at its top 20 percentile of experience — it’s been a nation that’s been built on a hope and vision, not American exceptionalism in that it’s something you’re endowed with, but it’s an American exceptionalism in the sense that it’s something that people create. And a sense of adventure that is central to the American experience. You could think of it as a pioneer. It’s a mixture of a pioneering spirit with an element of strong social capital.So to me, of course, the Mormons then are the embodiment of this. They’ve got this strong social capital, strong enough to stand up to other people, but at the same time, willing to take huge risks and endure great persecution in order to build a new world.And that’s an extreme version of what Americans have done for quite some time. It’s this rare blend of social capital and adventurousness at its best times. And that’s not just a 0.1 percent experience; it’s more like 20 to 30 percent of the US experience. And that’s something that a lot of countries just never get.

Ec101: Choices matter!

We’ve, in our Thursday posts this year, learnt about incentives and costs. But, and this is a really, really big “but” – they become operational only when we live in a world where we’re able to choose.

Tyler Cowen and Alex Tabbarok – two people who have probably done more for educating people in economics than anybody else over the last thirty years or so – have written two of the best textbooks on economics available anywhere – one on micro and the other on macro.

In the book on microeconomics, they summarize ten different “big ideas” in economics: incentives, the invisible hand is the best kind of magic*, trade-offs matter, thinking on the margin matters, trade matters, wealth matters, institutions matter, business cycles are unavoidable, printing more money will lead to inflation and central baking is hard.

*I’ve paraphrased practically all of the big ideas, but this in particular is my phrasing, not theirs.

Two other asides before we proceed: in retrospect, it is interesting (at least to me) that at least one of their PhD’s (Tyler Cowen’s) and quite a few of their books are based literally on nothing more complicated than an exposition of these big ideas. There’s a lesson in there somewhere.

Also, they say that the biggest idea of them all is that economics is fun. I’d paraphrase that too: learning about the world is fun, and economics is a great tool to use towards that end.

Now, that allows for a neat segue to the topic du jour. At the very start of the book, even before the table of contents, they provide their definition of economics, one that I agree with wholeheartedly: economics is the study of how to get the most out of life.

Here’s the two word version: choices matter!

Unless we live in a society that is free to choose, at an individual level or otherwise, none of the other big ideas even come into play. So, to me, economics is first and foremost about being free to choose – and then about the benefits and costs of the choices that you make.

Which, I’d argue, means that learning about choices is plenty important. Ergo, this post.

  1. First things first. What is choice?
    ..
    ..
    I chose (see what happened there?) this Quora post not because it is the “best”, but simply because it is so typical. Here’s what I think choice is: it is an admission of the fact that you can’t have everything. A particularly relevant example for me: what to eat from a buffet at a five star restaurant? With every passing year, “everything!” becomes an increasingly unrealistic answer. So choose those dishes that are likely to taste the best (maximizing happiness), or those dishes that are likely to cause the least harm (minimizing unhappiness) along some dimensions such as spiciness, oiliness or what have you.
    Or hey, do both at the same time! Choose the dish that is likely to taste the best and the dish that is likely to do the least harm. That’s half your micro paper right there – the rest is just math and diagrams. (I am kidding, of course, but only a little bit.)
    Choice is an admission of the fact that you can’t have everything, but that’s a good thing! It forces you to go with the best. Which paintings should you look at when you’re at the Louvre? “Every single one!” is unrealistic. Force yourself to choose, therefore, the very best of the lot. Constraints help you understand your own tastes better: aesthetics is, among other things, a matter of acknowledging the existence of constraints.
    ..
    ..
  2. So having too many choices is a bad thing? It would seem so:
    ..
    ..
    “It all began with jam. In 2000, psychologists Sheena Iyengar and Mark Lepper published a remarkable study. On one day, shoppers at an upscale food market saw a display table with 24 varieties of gourmet jam. Those who sampled the spreads received a coupon for $1 off any jam. On another day, shoppers saw a similar table, except that only six varieties of the jam were on display. The large display attracted more interest than the small one. But when the time came to purchase, people who saw the large display were one-tenth as likely to buy as people who saw the small display.”
    ..
    ..
  3. But hang on. Of what use is an economics theory that doesn’t have a on-the-other hand angle? Tim Harford, as is so often the case, to the rescue.
    ..
    ..
    “But a curious thing happened almost immediately. They began by trying to replicate some classic experiments – such as the jam study, and a similar one with luxury chocolates. They couldn’t find any sign of the “choice is bad” effect. Neither the original Lepper-Iyengar experiments nor the new study appears to be at fault: the results are just different and we don’t know why.”
    ..
    ..
  4. And on a related note, have you heard of Herbert Simon and satisficing? This excerpt is from a Wikipedia article on Barry Schwartz’s book, The Paradox of Choice, but it is actually about Herbert Simon.
    ..
    ..
    “A maximizer is like a perfectionist, someone who needs to be assured that their every purchase or decision was the best that could be made. The way a maximizer knows for certain is to consider all the alternatives they can imagine. This creates a psychologically daunting task, which can become even more daunting as the number of options increases. The alternative to maximizing is to be a satisficer. A satisficer has criteria and standards, but a satisficer is not worried about the possibility that there might be something better. Ultimately, Schwartz agrees with Simon’s conclusion, that satisficing is, in fact, the maximizing strategy.”
    ..
    ..
  5. And the final word goes to Tyler Cowen. Or is it Herbert Simon all over again? Choices, choices.
    ..
    ..
    “What if you asked people the following: do you wish to choose your own means of limiting your (subsequent) choices, or do you wish to let someone else, perhaps the government, do the work? I suspect the answers would overwhelmingly favor the former option, namely voluntary choice at the meta-level. And if you reexamine the experiments mentioned above, they are all about ways in which people voluntarily limit their own choices. Maybe you don’t wish to run your own cancer treatments, but you wish to choose the doctor who will.”

 

Ec101: Understanding Opportunity Costs

I mean, come on. Who doesn’t understand opportunity costs?

The cost of the next best alternative, of the opportunity foregone. We could have told you this in our sleep.

So answer me this (and please don’t cheat):

“Imagine that you have a free ticket (which you cannot resell) to see Radiohead performing. But, by staggering coincidence, you could also go to see Lady Gaga – there are tickets on sale for £40. You’d be willing to pay £50 to see Lady Gaga on any given night, and her concert is the best alternative to seeing Radiohead. Assume there are no other costs of seeing either gig. What is the opportunity cost of seeing Radiohead? (a) £0, (b), £10, (c) £40, or (d) £50.”

  1. That is from Tim Harford, and is unfortunately behind an FT paywall. But here’s the original paper.
    ..
    ..
    “We were surprised by the diversity of opinion regarding the value to which the
    term “opportunity cost” applies. As Table 2 indicates, the most popular answer
    was $50, with 27.6% of respondents choosing this answer. The second most
    popular answer was $40, with 25.6% of respondents choosing this answer. The
    third most popular answer was $0, with 25.1% of respondents choosing this
    answer. The correct answer, $10, was the least popular, with only 21.6% of
    respondents choosing this answer. In essence, the answers given to us by well trained economists appear to be randomly distributed across possible answers.” (Emphasis added)
    ..
    ..
    So what did you guess?
    ..
    ..
  2. People got plenty upset about the whole thing – check the comments, especially,
    ..
    ..
  3. “I don’t have any quarrel with Alex’s economics; as far as I can see this point is semantic. (I’ll also admit that my gross perspective on opportunity cost is somewhat anachronistic; it is one reason why mainstream economists work directly with consumer surplus.) What disturbs me is how few economists gave $50 or $40 as the right answer; the actual answers were close to randomly distributed. Most Web-based sources appear confused on the net vs. gross issue, but at least they hover across the $40 and $50 options.”
    ..
    ..
    Economists don’t always agree, but it mostly comes to down to splitting hairs? If only it were so
    ..
    ..
  4. “This paper analyzes the relationship between opportunity costs of waiting and bribery in rationing by waiting situations. Assuming that a uniform waiting time clears the market for any given bribe and the bureaucrat chooses a bribe to maximize profit, the market equilibrium is characterized in terms of individual valuations of the good and opportunity costs of waiting. If individual valuations take discrete values and opportunity costs of waiting are uniformly distributed, then in an equilibrium individuals with low costs of waiting choose to wait while those with high opportunity costs pay the bribe”
    ..
    ..
    While traveling on India’s highways, have you ever seen trucks waiting by the highway for no apparent reason?
    ..
    ..
  5. For interested students, a big fat list of examples, drawn from multiple walks of life.

Ec101: Links for 9th January, 2020

Five articles on sunk costs today.

  1. First up, a somewhat basic introductory article. Feel free to skip it if you’re sure you know what sunk costs are (pausing only to note that it is not so much the knowing that matters with sunk costs, but remembering to apply it)
    ..
    ..
  2. “The United States has invested much in attempting to achieve its objectives. In addition to the many millions of dollars that have been spent, many thousands of lives have been lost, and an even greater number of lives have been irreparably damaged. If the United States withdraws from Vietnam without achieving its objectives, then all of these undeniably significant sacrifices would be wasted”
    ..
    ..
    The quote itself is a quote (if you see what I mean) from this paper, which is a wonderful rumination on sunk costs. Read Taleb on the subject (and not just his tweets!)
    ..
    ..
  3. This entire post by Alex Tabarrok is very short (and I have linked to it before, I think), but it is worth reading. Especially the last sentence: do think about it, if you are an economics student.
    ..
    ..
  4. “Once your model of choice is at all complex, no one knows what a sunk cost means any more. So a theoretical scolding of those who honor “sunk costs” is not completely well-defined. That being said, there is still the empirical question of whether most people attach too much weight to previous plans and have a status quo bias. The experimental evidence suggests that we are more rigid than we need to be. The propensity to honor previous commitments may have efficiency properties, but we cannot discard this proclivity when we ought to.”
    ..
    ..
    The bottom line from Tyler Cowen’s post on the topic. He was responding to Tabarrok’s post above.
    ..
    ..
  5. “Suppose that you are trying to pursue a morally worthy goal, but cannot do so without incurring some moral costs. At the outset, you believed that achieving your goal was worth no more than a given moral cost. And suppose that, time having passed, you have wrought only harm and injustice, without advancing your cause. You can now reflect on whether to continue. Your goal is within reach. What’s more, you believe you can achieve it by incurring—from this point forward—no more cost than it warranted at the outset. If you now succeed, the total cost will exceed the upper bound marked at the beginning. But the additional cost from this point is below that upper bound. And the good you will achieve is undiminished. How do the moral costs you have already inflicted bear upon your decision now?”
    ..
    ..
    I am reminded, very strongly indeed, of the Mahabharata. That is the abstract of this paper.