Category: Economics

Global Poverty and the Cell Phone

A magazine article in the New York Times of April 13th has the rather mistaken and misleading title “Can the Cell Phone End Global Poverty?” (Hat tip: Abhishek Sarda). The article title is misleading because it doesn’t even remotely attempt to answer that question. It is instead about what is called a “human-behavior researcher” or “user anthropologist,” in this case someone who works for Nokia and essentially tries to figure out how people actually use their phones and thus how phone companies should design phones for greater usability.
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Dr Adam Smith, I presume

The other day I sat down to have a conversation with the spirit of Dr Adam Smith (1723-1790), professor of moral philosophy at the University of Glasgow and Fellow of the Royal Society of London and Edinburgh. A stellar observer of the human condition, his book, “An Inquiry into the Nature and Causes of the Wealth of Nations,” was published in the same year, 1776, as the Declaration of Independence of the United States. Opinion is divided on which of the two events is of greater importance for the subsequent evolution of the world we live in.

What follows is a rough transcript of our talk.
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An economics moment

This is a personal post. Not exactly what I had for breakfast type of post but close.

I clearly remember the moment when a light went off in my head. Brian Wright was teaching and we were talking about EV and CV. Equivalent variation and compensating variation, and the related concepts of “willingness to pay” and “willingness to accept.” As I had come to economics rather late in life, I had had the opportunity to figure out some of the basic concepts in my head. But I did not have the vocabulary to fully express the ideas. So when I got the vocabulary, it was an “aha” moment.

I remember Brian posing the question: so PG&E (the local gas and electricity utility company) is going to string up high-tension cables above your backyard. You know that that increases health risks. In economics terms, negative externalities accompany this action. That raises two questions.

  • How much are you willing to pay to stop PG&E from doing so?
  • And how much are you willing to accept to allow PG&E to do so?

Note that in the former case, the assumption is that PG&E have the right to string high-tension cables over your backyard and you wish to stop them; in the latter case, you have the right and can disallow PG&E from stringing wires across your backyard. It’s a matter of who owns the rights.

The willingness to pay is bounded by how deep your pockets are but the willingness to accept is open-ended. If PG&E owns the rights,then most likely you are out of luck because you will not be able to pay them enough to deter them from going ahead. If you own the rights, then you can make a pretty neat pile of cash by holding out.

Ronald Coase showed that regardless of who owns the property rights, if there are no transaction costs, then bargaining among the parties is sufficient for the discovery of the economically efficient amount of pollution.

Sometimes I wonder. I wonder if we would continue to have the kind of problems such as Nandigram if basic economics principles were better appreciated by a large percentage of the population. I think a lot of coercion and violence could be avoided. But perhaps I place too much faith in rationality.

Education Spending

This is a follow up to the post on Indian spending on education abroad.

The actual spending may not be $13 billion annually but the argument does not change even if the figure was much lower. What matters is that it is indicative of a problem and we should be concerned about it. It should be noted that this spending is an outflow of resources. That in itself is not a bad thing, however. We need to ask if this is a net outflow in the education sector. That is, what is difference between the inflow and outflow.
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Knowing Basic Microeconomics — Part 2

This is a follow up to the previous post on Knowing Basic Microeconomics where I had claimed that micro theory is essentially codified common sense and that it is never too late to learn a bit of microeconomics. Many people have written to me (and some commented on the post) that they would like references to some work that makes micro theory accessible to the lay person.

I am not familiar with what is available and therefore I am not qualified to answer that question. I have read a few non-academic books on economics but they are the type that attempt to address the concerns that are usually macro in nature. I find macroeconomics only mildly interesting. But macro stuff (dare I call it nonsense?) is what you normally read in the popular press — stuff about the business cycles, interest rates, unemployment, inflation, etc. Pundits on TV and newspapers are always going on about GDP growth rates and how the developing economies are doing and what will happen in the year 2030 or some such remote date. I find it uninteresting because most of those stories are “just so” stories and everyone has his favorite.
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Of Kakistocracies, Principals, and Agents

Enclaves of Private Luxury

Just off the expressway from Mumbai, on the road leading into Pune, you see huge billboards advertising new housing developments with fancy names like “Whispering Pines” and “Orchard View” crowding each other, promising idyllic lifestyles of lavish comfort. They convey very urgently a palpable sense of how rapidly the market for private luxury dwelling is blossoming thanks to increased salaries and easy housing loans.

These billboards reflect the increased aspirations of the growing upper middle-class in India. Curiously, one set spoke to a deeper and disturbing reality. One billboard said, “Power Cuts? No problem. We have 24-hour generator backup.” Another one down the road said, “Water Shortage? Have a shower. We have our own water supply.”
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Knowing Basic Microeconomics

Smart people think alike. Or at least they reach similar conclusions. Take Charlie Munger and me. We reached the same conclusion about the importance of microeconomics. Seriously though, I think it is a crying shame that people in general don’t have even a nodding acquaintance with the basic principles of microeconomic theory.
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The AN-WWTSD-MFGTT

Why is the US so Cheap? – Part 2

This is a response to the comments on the last post “Why is the US so Cheap?” I had argued that the US is more efficient in producing stuff compared to India. The people in the US are more productive because they don’t face as many hurdles – they have bigger and better machines, they use more energy, they have more economic freedom, and so on.

Economic freedom is a matter of policy. Policy is made by people who are entrusted to do so. Determining who the policymakers are in an economy is part of the political process. The political system evolved as a historical process from a set of initial conditions which are to a large extent a random draw. Smart people figured out the set of rules that the economy would play under. It is my belief that differences in the performances of economies arise from the differing set of rules that economies adopt. One set of rules may allow greater economic freedom to the people relative to the government; another set may allow the government control over most of what an individual is allowed to do. I believe that the US is successful (to the extent that it is) primarily because it got the rules worked out better (not perfectly, though) than the others.
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Does the NREGS Cause Inflation?

It makes sense to know a bit of economics, just as it is good to know how to do arithmetic. You don’t need to get yourself a PhD in mathematics in some area like topology or Lie groups. You just need to know basic arithmetic so that you can do your everyday figuring by yourself, so you know whether someone short-changed you or not. Thus spoke Joan Robinson: “The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.”
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Why is the US so Cheap?

A Simple Question

A friend of mine in California asked me one of those questions which seem simple on the surface yet is anything but. One of the “top women in storage” as a leading business publication had rated her, she had gone home to Ireland for the Christmas holidays. In an email detailing how everyone was and what happened in Ireland, she concluded by asking, “So, Mr Economist, tell me why is the US so cheap?” The context of her question included the price-levels of various places she is familiar with such as the US, Western European countries, NZ, and Australia. My own comparison of Indian and US prices adds further validity to that question since I find that the US is cheap relative to India. Why is it so?
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