The Solow Model and China

If you don’t know what the Solow model is, here is a great place to get started:

There are 11 videos in that series, and if you can spare the time, please watch all of them. Just two a day (they’re not more than 5 minutes each), and you’ll be done come the weekend.

But in effect, here is what the Solow model says:

  1. Output for a nation is a function of three (actually four) things:
    1. Capital (K): Buidings, ports, dams… infrastructure, basically.
    2. Education Augmented Labor (eL): The amount of hours that a person is able to put in to their work, but with the built in assumption that an educated person is likely to be more productive than a person without education.
    3. Ideas: Read the paragraph below to get a sense of what this means in practice.

Think about this blogpost that you are reading. I wrote it using my laptop, which is my capital. I will spend about an hour (that’s my plan, I’ll update you towards the end of this post about how well it worked out) writing it, and that’s the labor that I’ll be putting into this post. The fact that I have been “educated” in economics should mean that this post will be easier to write for me than, say, a gardener. The gardener could have written this post as well, of course, but it’s safe to assume that she would first have had to learn about the Solow model, and that, presumably, would have taken longer.

So that’s K and eL where the output (this blogpost) is concerned. But now think about it this way: what if another person, with a similar level of economics education as mine were to write this blogpost instead of me? Would that person have chosen this video, and these paragraphs to explain the Solow model? Maybe they would have recommended some other video, or some other podcast, or chosen to share details of an online textbook in which the Solow model is explained. That’s one way to think about ideas.

And so when you combine the capital (the laptop), the labor (the time I spend on this blogpost, given my education levels) and the ideas (what I choose to put into this blog post, and how), you get the output you’re reading right now.

What if I double the capital? Will the blogpost be done in half the time? Say I have an external monitor attached to my laptop – will two screens mean finishing the blogpost in half the time? It will save some time, but not by a factor of two, surely. Trust me, I have tried.

What if I double the labor? Hire an assistant to write this blogpost with me? The way I work, trust me, it will probably take longer! What if I go get a post-doc, to augment my education? Will that save me time? The hysterical laughter you hear in the background is the response of any PhD/post-doc student anywhere in the world, and that sound means a loud and resounding no.

In a sense, the Solow model asks these and related questions, and answers them using some graphs and equations. Except, of course, the Solow model does it for not one guy writing one blog, but for an entire nation at a time. There is no sense in me explaining the whole model over here, for it would be a case of me reinventing what is already a very good wheel. Please watch the videos.


But the Solow model is a remarkably useful way to get a handle on the long run growth prospects of a country. Is India likely to grow in the future? Well, is it going to add to its capital stock? Yes. Is it going to augment it’s stock of education augmented labor? Yes. Is it likely to produce more ideas than it is right now? Yes. And so the growth prospects for India look reasonably good.

Of course, there is more to the Solow model. All of this holds true given a strong and stable political system, well established rules of law, and strong and capable institutions. But so long as you believe that these are likely to continue to be so in the Indian case, you should be bullish on India.

What about, say, Japan? It has a capital stock that is more in need of replacement than new construction ( a feature of the Solow model that we have not discussed here, called depreciation), so it is unlikely that it will grow its capital stock too much. Here’s an example of what I mean. What about it’s stock of education augmented labor? Well, the news ain’t very good. Ideas? Trending upwards, but not by much. So if I had to bet on which country would grow more over the next twenty years, I would bet on India, not Japan.

Bear in mind that this is a model, and like all models, it is an imprecise abstraction of reality. So it is possible that at the end of the twenty year period, we find out that I am completely wrong. But if you think the Solow Model is a reasonably good model, you ought to bet the way I did.


So what about China?

Well, now, that’s a whole different story, and one that Noah Smith talks about in a recent blog post. Long story short, he doesn’t think China’s growth prospects are that great.

But the story is a little more complicated than that. The Solow model is a good model, sure, but it’s not as if the Chinese authorities/experts aren’t aware of the problem. And in his blog post, Noah looks at arguments put forth by two people who know a thing or two about China, and analyzes them critically.

The first argument is that sure, China’s demographics are on a downward trend, but what if we raised the retirement age for Chinese workers? Would that not solve the problem? Noah says no, probably not, because firms made of exclusively old folks isn’t necessarily a good idea. I wholeheartedly agree.

What about adding to China’s urbanization, and therefore its infrastructure? After all, China’s urbanization rate is “only” 64%. The inverted quotes around only in the previous sentence is because we, in India, are officially at 31%, but as in the case of China, it very much is a function of how you define urbanization. But similarly, in China, the urbanization rate is actually way more than 64%, and the Lewis turning point has already taken place in China, or will do so any moment.

And about ideas, well, China is an even more complicated story. Noah makes the point that China’s industrial policy is essentially a one-man army that is trying something that has never been tried before, and Noah is betting on it not quite working out. And given the events of the last year and a half or so, it is hard to disagree.

And so the Solow Model would probably tell you that China is unlikely to grow as fast in the near future as it did in the recent past, and even if you take into account potential adjustments, it likely will still be the case that China’s growth rate will start to plateau.


Please, read the entire post by Noah. But if you are a student of economics who has not yet met the Solow Model, begin there, and then get on to Noah’s post – your mileage will increase considerably.

Housing in Singapore

“Solved” is, at the least, ambitious phrasing. But the video is well worth watching. Via Sahil Shaikh, a SYBSc student at GIPE

Learn Urbanization with Binoy Mascarenhas

There’s more than one way to skin a cat, and there’s more than one way to learn.

One of these ways is conversations. And so I decided to teach myself a little bit about urbanization, by speaking with a guy who’s been working in the field for a little more than a decade or so.

In this six part series (at least), Binoy Mascarenhas and I aim to speak about urbanization, and how it is a truly wonderful thing when done right.

Each episode will last for about 45 minutes, and the first one covered cities and Covid-19, a list of topics that future episodes will deal with, and Binoy’s list of cities in India that got urbanization wrong (among other things).

Delhi and Bangalore were obvious picks, but the third one might surprise you, especially if you are unfamiliar with the topic of urbanization (it’s Chandigarh).

In future conversations, you will learn about

  1. the impact of cities on the environment,
  2. urban densities
  3. mixed use neighborhoods
  4. transport policies and how they impact urbanization
  5. mistakes to avoid when doing urban planning

We speak about all of this and more in the video, and new videos will come out every Tuesday. Each video will have an associated set of links for you to read later, given in the description box below. I hope you take the time to read them, and I would love it if you would share your own links as well.

Here’s the video, please enjoy:

India and her cities

In the previous week, Livemint published an excellent article, titled “Why India has the fastest-growing cities“. Today’s post is a rumination on that article, and associated thoughts.

Urbanization, I unequivocally hold, is an good thing. This belief has come about as a consequence of learning development economics over many years. It has also come about because I have had the opportunity to read many great books about the topic, of which I think Ed Glaeser’s ‘The Triumph of the City‘ is by far the best one.

The reason I like that book so much is because it is an unapologetic paean to urbanization. It not just defends urbanization, it actively reveres it. And there is something to be said for that argument. Cities, when designed well, are worth revering! Watch this lovely TED talk by Jeff Speck, for example. The talk is ostensibly about how to make cities more walkable, but it covers a lot more ground than just that.

Here’s the most important reason, I think, that cities ought to be revered. It is because of their most important feature, and their most appropriate definition: they are labor markets, first and foremost.

What are cities?

Cities are simply a lot of people packed into a relatively tight space, most whom happen to be open to new job opportunities. That’s a paraphrased definition, and it is certainly not mine. The best way to truly understand what this means in practice is to read a lovely (but by Indian standards, prohibitively expensive) book by Alain Bertaud, called Order Without Design.

As I said, the book is expensive, but I can recommend three freely available online resources that you might want to read, listen and watch instead.

When I quit my job in the analytics industry in 2009, it was because I wanted to switch over to academia. Switching over to academia meant that I had to come to Pune. Now, Pune is my hometown, and I love it to bits, but the reason I had to come to Pune is because there were many more jobs in academia in this city than any other city in India.

Conversely, if you are looking to set up a college, a student exchange program or a university, Pune is the best place to do so, precisely because of the paragraph that precedes this one.

That’s what Alain Bertaud means when he says this:

“Sometimes when I read the papers of my fellow urban planners, I get the sense that they think cities are Disneyland or Club Med. Cities are labor markets. People go to cities to find a good job. Firms move to cities, which are expensive, because they are more likely to find the staff and specialists that they need. If a city’s attractive, that’s a bonus. But basically, they come to get a job.”

“All the jobs are in the cities” is a phrase that you will hear often enough in India, but reading Alain Bertaud’s book helps you understand that the statement is actually tautological.

But, if you think about it, and to the extent that you agree with what is written above, we’re committing a moral crime by not glorifying urbanization. Strong words? Maybe. But, I would argue, true words as well.

Urbanization in India

But then how come urbanization in India is only 31%? If all the jobs are in the cities, and people in India are crying out for jobs, why aren’t they all moving to India’s cities?

There are three responses to that.

First: we make it difficult, expensive and to begin with, potentially unremunerative for people to migrate to India’s cities. Difficult because of a whole host of laws and regulations that hamper and hinder the development of efficient urban labor markets. Expensive because of poor urban planning which means housing and transport are not cheap for first generation immigrants into India’s cities. And potentially unremunerative because a lot of our welfare schemes require their targeted beneficiaries to be citizens of rural, rather than urban India.

Second, they are too moving away from villages! Hop into an Uber in your city, and take the time out to speak to your driver. More likely than not, your driver is likely to have the following characteristics. He will be a he, he will have a parcel of land back home in his native village, and he’ll have come to the city in search of a job. That he is a he is an indictment of our culture and our labor market. That he has a parcel of land back home is an indictment of our lack of reforms when it comes to land. And the fact that he is working as an Uber driver (services) rather than in a factory (manufacturing) is an indictment of our lack of reforms when it comes to labor and land market laws. But, to loop back to the start of this paragraph, people are certainly leaving India’s villages.

Third, in spite of it being difficult, expensive and potentially unremunerative, they are migrating, but to areas just outside our country’s cities. And therein lies a trifecta of tragedies: of policy design, of incorrect measurement and therefore of a poor urban experience.

The Livemint article…

 

… has been written by three people: Kadambari Shah, Vaidehi Tandel and Harshita Agarwal. All three of them work at the excellent IDFC Institute, located in Mumbai. One reason I use the word excellent that is relevant to today’s blog post is the fact they produced a very interesting report, a somewhat abridged version of which is this article, that came out in Livemint a while ago.

In that article, they gave us India’s original definition of urbanization, as it was defined in the year 1961.

“India’s three-tiered census definition of ‘urban’—at least 5,000 inhabitants, density of 400 people per sq. km or more, and at least 75% of male working population engaged in non-farm activities—was first framed in 1961 by then census commissioner Asok Mitra.”

By this three-tier definition of urbanization, we’re at 31%. That is, roughly one-third of our population is urbanized, and the remaining is not.

But does that mean that the remaining is rural (and somehow agrarian)?

No!

Because of what we discussed above, in the section “Urbanization in India”, folks migrate out of villages, but not to India’s cities. They migrate to areas just outside of India’s cities: the so-called satellite towns.

So what’s the big deal?

Well, if you stay out of the local municipal corporation’s limit, it is not obligated to provide you the following services: “town planning, slum improvement, public amenities including street lighting, parking lots, bus stops, solid waste management, building regulations and fire services.”

Sure, of course not, you might think. It won’t be, for example, the Pune Municipal Corporation’s job, but that of the satellite town’s corporation. Ah, but because it is a town (a census town, to use the government’s definition), it will not be covered under the definition of an Urban Local Body (ULB). It will, instead, be a Regional Local Body (RLB).

And the RLB doesn’t need to provide (you might say cannot provide, given financial and other capacity constraints) the services mentioned above.

So What?

So:

  • Urbanization is good, even great
  • We don’t have enough of it in India
    • Because we make it difficult for people to move
    • When they do move, we make it difficult for them to find jobs
    • They still move, but we don’t measure the movement well enough
  • We don’t measure it accurately enough because our approach to the measurement is wrong, and woefully out of date
  • As a consequence, when (and if at all) folks attempt to urbanize, they don’t get the kind of urban amenities that they so desperately need.
  • All of this is assuming, of course, that urban amenities are provided, and ably so, by municipal corporations – but a blog post should only be so long, hey?

On the first Monday of March, we’ll come back to the topic of urbanization and India once again.

 

 

 

 

Understanding Poland’s Future

Making forecasts is a fool’s game, and while I’ll be the first to admit that the adjective in question is applicable to me more often than not, it’s not because of making forecasts!

This post, then, is not about quantitative forecasts about where Poland’s economy might go. It is, instead, about Poland’s recent trends that might continue in the near future, and what that would mean for Poland, and her neighbours.

  1. “The attractiveness of their promises are difficult to outdo, as they represent a long-desired ambition by Poles. However, on other issues the PiS is found wanting and at odds with the values and opinions of the majority of Poles. The conflict between local level activism and centralistic ambition will determine the course of the Polish politics in the next decade. Poland’s recent history surely should not let us think that the outcome is already known. ”
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    On how Poland’s recent political trends don’t bode well for the future.
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  2. “In 1989, it would have been considered utopian or plainly misplaced to imagine that, in 2019, most Polish people would live in the countryside despite only 10 per cent of the population working in agriculture. Today, the countryside is more than ever the ‘happening’ place in Poland. Four trends drive this phenomenon: re-ruralisation, de-agrarisation, de-urbanisation, and internal migration.”
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    This report came as a complete surprise to me. The notion, as an Asian and especially as an Indian, that urbanization will decline going forward was completely (pardon the pun) foreign to me. Also, the first time that I read about “water in the tap” – that’d certainly be my pick.
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  3. “The growth rate is predicted to continue slowly decreasing in the years to come and should reach -0.50% by 2035. The population is predicted to be 37,942,231 by 2020 and 36,615,500 by 2030.”
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    Those are literally the only two lines in the entire article about the future of Poland’s demographics. That being said, the article is still worth reading if you want to better understand Poland’s demographics today, about which I do not think we have learnt so far.
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  4. “They assert that the modern Polish Republic rests on “two pillars: the European Union and NATO,” and that these communities are not at odds with one another. This is the strategic balance this is needed to shield Poland. What it is pursuing at the moment is strategic imbalance. As the saying goes in Polish, “nie stawiaj wszystkiego na jedną kartę”—don’t gamble everything on one card.  ”
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    Broadly speaking, the article suggests that Poland cosying up to the United States of America might not be the best idea for securing Poland’s future, not least because it is subject to the whims and fancies of just one man.
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  5. “A few weeks ahead of COP24, the Ministry of Energy published a draft Energy Policy for Poland 2040, by the Ministry of Energy, with updated projections beyond 2030–perhaps the beginnings of a clearer path toward the green transition. The report provides a summary of Poland’s vision for eventually transforming the energy sector. Coal will remain a significant part of the energy mix through 2030 and decline more rapidly by 2040, shifting to nuclear power, renewable energy and high-efficiency cogeneration.”
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    A useful summary of Poland’s economics since 1989, its stellar performance in terms of achieving climate change goals until 2015, and then a tapering off of its enthusiasm – and some optimism about its targets in the two decades to come.

Tech: Links for 24th December, 2019

Beginning today through until the 31st of December, I’ll link to five pieces from each category that I enjoyed collating this year. There’s no science or overt logic to any of them: I’m just going to scroll through the posts, and replug those that I enjoyed re-reading. Hopefully, next year, I’ll get a little more scientific about it. Happy holidays!

  1. Let’s help ourselves understand Stratechery and it’s Aggregators concept.
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  2. I wish the world would get more excited about Oumuamua!
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  3. I hope to be working (from a writing papers viewpoint) on urbanization in the coming year.
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  4. I am an unabashed fan of Google, and it’s products. With some caveats, about which I hope to write in the coming year. But kudos to them for doing what they do, especially in education!
  5. Five great reads from The Ken.

India: Links for 9th December, 2019

Five rather eclectic links from a variety of issues pertaining to India. Also, my apologies about the delay in posting today! I’m traveling a fair bit, and there may be some delay in posts this week.

  1. Surjit Bhalla and Karan Bhasin present the other side of the story when it comes to the release (or lack of it) of the NSO consumption survey.
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  2. The Scroll sheds light on a little known issue today: austerity in marriages in India in the years gone past – enforced by the government!
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  3. Anupam Mannur and Pranay Kotasthane make the important, but not well known point that Bangalore needs more firms (and more people!) not less.
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  4. Via Mostly Economics, a lovely write-up about the fish traders of Madras.
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  5. 18000 birds died in Rajasthan recently. Here’s why.

EC101: Links for 28th November, 2019

  1. “The zeroth step, of course, is being open to the process of unlearning. We come with our own biases, shaped by our varied experiences and perceptions. But our experience or knowledge is not always indicative of the macroreality. An unrelenting hold on what we have already learnt is the equivalent of the sunk cost fallacy in economics.”
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    Pranay Kotasthane has a new newsletter out, and it is worth subscribing to. Stay humble and curious is the gist of his zeroth lesson, and the other points are equally important. Go read, and in my opinion, subscribe.
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  2. “China is still a one-party state, but it owes much of its current prosperity to an increase in liberty. Since Mao died, his former subjects have won greater freedom to grow the crops they choose, to set up businesses and keep the profits, to own property, and to move around the country. The freedom to move, though far from absolute, has been transformational. Under Mao, peasants were banned from leaving their home area and, if they somehow made it to a city, they were barred from buying food, notes Bradley Gardner in “China’s Great Migration”. Now, there are more rural migrants in China than there are cross-border migrants in the world.”
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    The rest of this article from the Economist is about migration to the cities – and I find myself in complete agreement – many, many more people in India need to live in her cities. But also see this!
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  3. “Mazzucato traced the provenance of every technology that made the iPhone. The HTTP protocol, of course, had been developed by British scientist Tim Berners-Lee and implemented on the computers at CERN, in Geneva. The internet began as a network of computers called Arpanet, funded by the US Department of Defense (DoD) in the 60s to solve the problem of satellite communication. The DoD was also behind the development of GPS during the 70s, initially to determine the location of military equipment. The hard disk drive, microprocessors, memory chips and LCD display had also been funded by the DoD. Siri was the outcome of a Stanford Research Institute project to develop a virtual assistant for military staff, commissioned by the Defense Advanced Research Projects Agency (DARPA). The touchscreen was the result of graduate research at the University of Delaware, funded by the National Science Foundation and the CIA.”
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    Mariana Mazzucato, about whom more people should know, on the role of the government in today’s economy.
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  4. “Back in the early 1970s, Xerox had figured out a strategy to block competitors in the photocopying business. It took out lots of patents, more than 1,000 of them, on every aspect of the photocopy machine. As old patents expired, new ones kicked in at a rate of several hundred new patents each year. Some of the patents were actually used by Xerox in producing the photocopy machine; some were not. There was no serious complaint about the validity of any individual patent. But taken as a whole, Xerox seemed to be using the patent system to lock up its monopoly position in perpetuity. Under antitrust pressure from the Federal Trade Commission, Xerox in 1975 signed a consent decree which, along with a number of other steps, required licensing its 1,700 photocopier patents to other firms.”
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    Timothy Taylor adds grist to the anti-patent mill.
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    “Thinking about how to facilitate a faster and broader dispersion of knowledge and productivity gains seems like a potentially important part of explaining the current economic picture and suggesting a policy agenda.”
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    That’s the concluding part of the blog post. Just sayin’!
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  5. Every time I begin to think I kind of understand macroeconomics

RoW: Links for 11th September, 2019

  1. “Bangkok has 9.7 million automobiles and motorbikes, a number the government says is eight times more than can be properly accommodated on existing roads”
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    As an Indian, this is a somewhat reassuring read, in the sense that misery loves company!
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  2. A little vague, but I got to learn what sanuk means.
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  3. “The rapid expansion of the middle class among India’s 1.3 billion people has prompted Thai authorities to upgrade their estimates of Indian visitors. At least 10 million are now expected to arrive in 2028, a more than five-fold increase on 2018 visits. That sort of growth trajectory would mimic the rise of Chinese tourists, who jumped from 800,000 in 2008 to more than 10 million last year.”
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    I can account for three out of those 2 million.
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  4. “Obesity has reached alarming levels in Thailand, which ranks as the second-heaviest nation in Asia, after Malaysia. One in three Thai men are obese, while more than 40 percent of women are significantly overweight, according to Thailand’s national health examination survey.”
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    This was, to me, rather surprising.
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  5. “A couple of generations ago, Thais were rural folk who ate at home and took pride in offering food to the monks, but as they have moved to the cities they are likely to grab a polythene bag of curry on the way home to reheat. There is almost a stigma attached to cooking for yourself. “There is an embarrassment about spending time in the kitchen, it is seen as old-fashioned and a sign that you haven’t made it.”
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    On why Thai street food in Bangkok is so delicious. The article is about much more than that, but this was my main takeaway.

Tech: Links for 22nd August, 2019

  1. “1. first bionic hand with a sense of touch that can be worn outside a laboratory
    2. development of a new 3D bioprinting technique, which allows the more accurate printing of soft tissue organs, such as lungs
    3. a method through which the human innate immune system may possibly be trained to more efficiently respond to diseases and infections
    4. a new form of biomaterial based delivery system for therapeutic drugs, which only release their cargo under certain physiological conditions, thereby potentially reducing drug side-effects in patients
    5. an announcement of human clinical trials, that will encompass the use of CRISPR technology to modify the T cells of patients with multiple myeloma, sarcoma and melanoma cancers, to allow the cells to more effectively combat the cancers, the first of their kind trials in the US
    6. a blood test (or liquid biopsy) that can detect eight common cancer tumors early. The new test, based on cancer-related DNA and proteins found in the blood, produced 70% positive results in the tumor-types studied in 1005 patients
    7. a method of turning skin cells into stem cells, with the use of CRISPR
    the creation of two monkey clones for the first time
    8. a paper which presents possible evidence that naked mole-rats do not face increased mortality risk due to aging”
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    That is an excerpt from an excerpt, but I found the list astonishing. These are advancements from only the field of biology, only from 2018… and as the article goes on to say, only from January 2018. Remarkable. I know very little of how life sciences work, but the article was very informative on that score.
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  2. Do Uber and Lyft contribute to congestion? Note the funding agencies.
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  3. Benedict Evans on whether Netflix is a TV business or a tech business.
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  4. This link comes via MR, and Tyler Cowen said it is Tiebout Twitter. I prefer Voting With your Tweets.
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  5. “But perhaps he also sensed that power in society is shifting from the institutions he oversaw, to those that distribute private capital—it wouldn’t be the wrong read, even if it’s an unsettling one.”
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    A not altogether pretty look at the VC industry and its evolution over time.