Numbers — 4

No one reading this is likely to be suffering from malnutrition, illiteracy, lack of health care, lack of drinking water, and any of the marvels of modern technology such as digital gizmos and jet travel. That is so because we are sitting on top of a very large pyramid at the bottom of which are the toiling thousands of millions. The top of the pyramid is mostly populated by the white people of affluent western advanced industrialized countries but they are not alone. The economic elite in poor underdeveloped countries around the world also rest content on the top of the pyramid.
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Numbers – 3

Joel Cohen’s book How Many People Can The Earth Support should be required reading for Indian policy makers. Here is more from the introduction:

The unprecedented growth in human numbers and in human power to alter the Earth requires, and will require, unprecedented human agility in adapting to environmental, economic and social problems, sometimes all at once. The Earth’s human population has entered and rapidly moves deeper into a poorly charted zone where limits on human population size or well-being have been anticipated and may be encountered. Slower population growth, along with many other improvements in human institutions and behaviors, would make it easier for people to retain control of their fate and to turn their attention from the numbers to the qualities of humankind.

These themes have consequences for action. Stopping a heavy truck and turning a large ocean liner both take time. Stopping population growth in noncoercive ways takes decades under the best of circumstances. Ordinary people … still have time to end population growth voluntarily and gradually by means that they find acceptable. Doing so will require the support of the best available leadership and institutions of politics, economics and technology to avoid physical, chemical and biological constraints beyond human control. Migration can ameliorate or exacerbate local problems, but at the global level, if birth rates do not fall, death rates must rise.

India’s population problem is a sort of tragedy of the commons and there is little chance that ‘ordinary people will voluntarily and gradually’ solve this problem. The incentives simply don’t exist, even if the knowledge and the understanding existed about the social disaster of excessive population, for individuals to act for the social good.

The solution to India’s population problem has to “make sense” to those who produce the children. That is, they have to have an incentive to produce the socially optimal number of children. I have worked out a simple mechanism that would solve this problem. Details at — when else — 11.

[Continue on to part 4 of Numbers.]

HMS Titanic — 3

Those in charge of the Titanic disregarded the warnings. And those who were not in charge were blissfully unaware of the fact that those in charge were not fully competent.

The Titanic had sealed its own fate by the cavalier disregard to those ice warnings by their Marconi operators. Particularly the last two, from the Maseba at 7.30pm and the Californian after 11pm. Had they paid attention to them they would have seen they were heading straight into an icefield.[Source]

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Numbers — 2

A few years ago, my college at UC Berkeley was searching for a dean. Prof. Joel Cohen was invited to check out the College of Natural Resources. I asked him about his book How Many People Can the Earth Support? (1995) over lunch.

A few years ago, he said, a journalist had called him up saying that he was doing a piece on world population and wanted to know from Joel how many people could the earth support. Joel told the caller that he could not answer that question off the top of his head. It could take him a few days and why didn’t he call back in four or five days.

It took Joel three years to definitively answer that question and a fine job he did, in my opinion. The book was published in 1995. I quote from the introduction:

Though the future is hazy, much that is very clear can be known about the present. First, the size and speed of growth of the human population today have no precedent in all the Earth’s history before the last half of the twentieth century. Human numbers currently exceed 5.7 billion and increase by roughly an additional 90 million people per year. Second, the resources of every kind (physical, chemical and biological; technological, institutional and cultural; economic, political and behavioral) available to people are finite today both in their present capacity and in their possible speed of expansion. Today’s rapid relative and absolute increase in population stretches the productive, absorptive and recuperative capacities of the Earth as humans are now able to manage those capacities. It also stretches human capacities for technological and social invention, adaptation, and compassion.

Like in all other things, humans have a limited capacity for compassion too. When resources are severely limited, the thin veneer of civilization is easily scraped off to reveal the underlying unyielding will to survive at the expense of others.

[Continue to part 3 of Numbers.]

HMS Titanic — 2

The HMS Titanic was a giant of a ship. It was doing 21 knots that fateful night.

Now it was 9.40pm, and still the ice warnings came. At no time had Captain Smith or the senior officers ordered a cautionary reduction in speed, or had gone to the trouble of having extra lookouts posted, something which Captain Lord of the Californian had already performed before he called it a day and brought his own vessel to a halt in the ice. When you put-together the ice warnings Titanic had received that day, it revealed that there was an ice-field 80 miles long directly in her path, and only two hours away if the current speed were maintained. Surely somebody in the next couple of hours must realise that Titanic is steaming at full-speed into an ice-field which has already made other vessels to heave-to for the night?

The warning messages kept coming in. Ice ahead. John Phillips was the radio operator in the Marconi room busy at the controls of the transmitters, sending messages to Cape Race in North America.

. . . under the immense pressure of sending commercial traffic, and at the same time having to cope with incoming warnings and messages, he snapped, as the nearby Californian sent an ice warning to Titanic. “Shut up, shut up. I am busy. I am working Cape Race.” Phillips’ now infamous snub highlighted how the commercial traffic had priority over the warnings. Perhaps if the Marconi men had not been so busy sending messages, the Titanic would never had foundered. But all of the previous warnings didn’t stop that happening either, so a last minute aversion was unlikely.

[Continue on to part 3 of HMS Titanic.]

Numbers

Exponential growth can be a terrifying thing. We all know the story of the king who was foolish enough to grant a boon to one who was familiar with the concept of exponential growth. To recount, the king said, “Ask and I will grant it to you.”

The man said, “All I want is a few pennies. I want one penny on the first square of a chess board, two pennies on the second square, four pennies on the third, eight pennies on the fourth, and so on till we reach the 64th square of the chess board.”

The king, like our present day innumerate kings, was immensely relieved. Here was this idiot asking for pennies when he could have asked for a ton of gold.
“Done,” said the king and asked his minister to make the arrangements.

The minister soon reported that he had finished counting the total amount the king had promised and it turned out to be around 184,467,441,000,000,000 or $185 million trillion. The annual GDP of the
US is $10 trillion. It would take the US about 18.5 million years to get that amount together.

~~~~~~~~~~~~~~~~~~~~~~~~~~~

We are talking large sums when exponential growths are concerned. It does not matter what the value of the exponent is. It could be as little as 2%. In a matter of just 35 years, the world population of 6 billion would increase to 12 billion at a 2% growth rate. It is estimated that it took all of human history till the year 1804 CE for human populations to hit the billion mark. The latest billion was added to the human population in about 12 years — a million times faster.

World Population

Population      Year    Interval
----------      ----    --------
1 billion       1804    all of human
                        history
2 billion       1927    123 years
3 billion       1960    33 years
4 billion       1974    14 years
5 billion       1987    13 years
6 billion       1999    12 years

India’s population was around 350 million in 1947. Now we have three times as many people alive in India. Bihar, UP, Rajasthan, and MP make nearly 45% of India. They are also among the poorest states of India.

India has more people than all of Africa,North America and South America combined. And all these people, more than a billion,
or around 17% of all humanity, are jammed into only 2.4% of the world’s landmass.

It is crowded as all heck and still every year we add more people than the population of Australia.

Population in India density has risen concomitantly with the massive increases in population. In 1901 India counted some seventy-seven persons per square kilometer; in 1981 there were 216 persons per square kilometer; by 1991 there were 267 persons per square kilometer–up almost 25 percent from the 1981 population density. India’s average population density is higher than that of any other nation of comparable size. The highest densities are not only in heavily urbanized regions but also in areas that are mostly agricultural.

[Source.]

[Continue to part 2 of Numbers.]

It is transaction costs all the way – Part 2

In my last post I claimed that the fundamental role of ICT is reduction of transaction costs. What, you may ask, is transaction costs? The answer is this: pretty much everything is transaction costs, with a little bit of physical stuff thrown in.

In California, you can buy a loaf of bread for about $2. The basic materials that go into the making of the bread — wheat, primarily — is about $0.07. Then there is some energy required for baking it and transporting it. Add a dime for that. The total material cost is therefore about 17 cents. The difference between the cost of the inputs and the price of the product is the value added. In our case, it is $1.83. That is, about 92% of the price of the bread is value added.

How do you allocate the value added in this case? Most of it has to be assigned to services — from the marketing of the bread, to the stocking of it in the store shelf. The cost incurred in bringing a loaf of bread to the market (less the cost of the material, the fuel and labor involved in the baking and transportation) is transaction costs.

Of course, costs seen from a different angle are revenues and incomes. And part of revenues are profits (if prices exceed costs.) The generalization of these costs are transaction costs.

Transaction costs are ubiquitous. Consider what happens in any organization, say a car manufacturing firm. Cars are produced by people using machines to transform steel and other stuff. If you add up the costs — labor, material, and machines — the car would not cost all that much. But when you add the fact that there are other people employed by the car firm who have nothing to do with the manufacturing of cars, you realize that they represent transaction costs. For instance, you have managers, and accountants, and secretaries, and human resources divisions, … the list goes on. They all represent transaction costs. And the greater the transaction costs, the higher the cost of production. Why do firms exist? Because they reduce transaction costs.

Ultimately, one can explain pretty much all organizations as an attempt to systematically reduce transaction costs. Economies of scale, scope, and agglomeration themselves arise from the reduction of transaction costs.

Information and communications technologies reduce transaction costs. Here is a simple demonstration of that. The next time you make a phone call, ask yourself what it would have cost you if you could not have made that call.

For instance, I called the store to find out if they had indeed installed the AC in my apartment. (They had not.) If I could not have made the call, I would have had to spend at least two hours and a lot of money to travel to the store to find out that information.

I will continue to ramble on the transaction costs theory of the universe in the next few posts. As they say on the radio, stay tuned.

It is transaction costs all the way – Part 1

It is worth pondering this question: What exactly is the role of ICT in any economy?

This week, I would like to address myself to that question in detail. The answer can be succinctly stated as: It reduces transaction costs. It will take a pretty long time to explore that answer. But first a few personal experiences to set the stage would be appropriate.

Today I called up a local store which sells “white goods” (major appliances such as washing machines, etc.) I wanted to order an air-conditioner. Could I order the AC over the phone, I asked when the phone was finally answered by someone. I was told that I had to come down personally and bring cash. Will they accept a debit card? No. Will they deliver today? They can’t tell me that until I had paid and only then will they check to see if the department that does the delivery has the capacity to deliver today.

I drove to the bank to withdraw the cash. At the bank, the line for withdrawing cash was immensely long. I could not use the ATM because the amount I needed was above the ATM cash withdrawal limit. It took me a half hour before I had the cash in hand.

Next step: drive to the store. The closest branch was in Shivaji Nagar. I told the driver the address and we proceeded to drive the four or five kilometers to the store. It was on ‘L.J.’ road. The traffic was bad, as usual. The driver did not know where L.J. road was. We asked for directions from various taxi drivers. We traveled with hope thinking that this time the directions were right. In about 45 minutes, we had reached the store. It was closed because that branch of the store is normally closed on Mondays. I could not have found this out without going to the store. This was in Mumbai, the commercial capital of India.

I had spent about 2 hours in trying to buy something that in a different setting (for instance in California) it would have taken me all of 5 minutes and that too from the comfort of my home: I would have checked the prices of ACs on the web and ordered it online and paid for it with my credit card. Instead, after about 2 hours of frustration, I was still without what I wanted.

This little episode is indicative of a depressingly large set of similar experiences. The features of this set almost always include having to spend an inordinate amount of time searching. The search cost of locating a place is non-trivial. Street addresses don’t exist. You could be looking for a place with an address with reads “122/1/B Lajpat Nagar II”. You reach 121/1/B. And then you discover that 122 is not adjacent to 121 but is somewhere else altogether. Sequential numbers are not physically close. The house numbers are in the order in which the plots were registered, for instance. Once I spent about an hour hunting around for a place in Lajpat Nagar in Delhi. I am sure that I was not the first — nor I was the last person — to waste time and energy (gasoline) trying to locate an address there.

Another feature common to all the episodes includes transportation. On Saturday last, I was invited for dinner at a house that was about 5 kilometers (3 miles) from the Andheri local train station. I took a bus from the station. It took about 50 minutes for the bus to cover the 5 kilometers. Traffic moves about 8 kms an hour in the city of Mumbai, and at the breakneck speed of 18 kms an hour average on the nation’s highways.

Traffic is not the only thing that is slow. The movement of payments is an important function in any economy. I had to pay my brother Rs 25,000. I mailed him a check to Nasik without asking him first. He called to say that it will take about 3 weeks for that check to clear and so it would be good if I could send him cash or do a wire-transfer.

Cash is inconvenient to handle and carrying large sums is stressful. For furniture shopping, the only acceptable form of payment appears to be cash. Part of the reason is of course tax avoidance. But the slowness with which checks clear could have something to do with it as well.

There are a few things that one can do at a macroeconomic level to push the economy towards its potential such as fixing the monetary and fiscal policy. But they are limited instruments. Fundamentally, what really puts the brakes on the machinery of the economy is a very large number of very small grains of sand which are individually ignored but together form a very potent force. These grains of sand arise from what can only be said to be the overall culture of the economy.

It is an unfortunate fact that the Indian economic culture is dismal and unless that changes, India’s economy cannot reach its potential. Becoming aware of the problem is fundamental to the solution, of course.

In the next piece, we will explore what ICT can do to remove the sand from the Indian machinery.

[Continue reading part 2 of “It is transaction costs all the way“.]