Category: Economics

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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Keynes on Economists

Keynes on what it takes to be an economist:

The study of economics does not seem to require any specialized gifts of an unusually high order. Is it not, intellectually regarded, a very easy subject compared with the higher branches of philosophy or pure science? An easy subject, at which very few excel! The paradox finds its explanation, perhaps, in that the master-economist must possess a rare combination of gifts. He must be mathematician, historian, statesman, philosopher–in some degree. he must understand symbols and speak in words. He must contemplate the particular in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man’s nature or his institutions must lie entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes as near the earth as a politician.

You might say he was describing himself. But he was referring to another master economist: Alfred Marshall.

Model Based Thinking

A brief reminder is in order here because from time to time, I do resort to very simple economic models. The utility of simple models in assisting thinking about complex matters is under-appreciated by most of us whose professional interests do not require model-based thinking. In the hard sciences, physicists and cosmologists commonly use models to clarify their thinking and illuminate the essential features of the complex theoretical subjects they study. Where the search space of a solution is unmanageable large, simulations based on simple models come in handy, such as in meteorology.

Elegant models are amazing things. That is why economists do it with models. The study of the real world would be too confusing if it were not stripped of all inessential details. The hard part lies in figuring out which bits to retain and which to discard while creating the model. Model building is an art and the product is often a thing of spectacular beauty and elegance. They illuminate and enlighten; they capture the imagination and make accessible features of the real world that would otherwise be lost in a haze of misapprehension. It seems to me that learning simple models has to be part of a well-rounded education. Children should be exposed to simple models and then taken through the logical deductions that the assumptions imply. But I will not digress into models and our education system for now. What I want to do is quote a passage from Paul Krugman, an economist whom I especially admire for his clarity of thinking and exposition, about how serious economics is done.
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LOSADS!

Law of Supply and Demand

Not to put too fine a point on it, but the law of supply and demand is a bitch. Stripped of all details it basically states that the price of something is determined by the interaction of the quantities supplied and demanded. Therefore (1) an increase of the quantity demanded, holding the supply constant, will increase the price; (2) an increase in the quantity supplied, holding the demand constant, will decrease the price; (3) a decrease in the quantity demanded, holding the supply constant, will decrease the price; and (4) a decrease in the quantity supplied, holding the demand constant, will increase the price.

Sing pretty songs, if you please, or dance nimbly invoking the gods, or pass sincere legislation to suspend the effects of that law. You would have as much success doing that as you would have in suspending the law of gravity and legislate against it effects. The law of supply and demand is not quantum mechanics and can be taught to the average 6 year-old with ease. Ignorance of the law should be a matter of shame, and willful disregard of the law by policymakers should be punished through public floggings.
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What and How

Mr Adam Smith

It is not just an article of faith among economists (such as yours truly) that markets allocate resources most efficiently under a set of set of assumptions; it has been mathematically proved by theoreticians and empirically demonstrated in thousands of well-documented instances. However, that does not make the proposition that markets work better than other mechanisms – such as command and control – any more intuitive or easy for people to appreciate. It is easy to misunderstand, misinterpret, and often misrepresent.
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Who’s the boss? — Part 2

When a pickpocket meets a saint, all he sees are pockets. Thus goes a well-worn Zen Buddhist saying. Our perceptions of the external world are filtered through our internal desires and motivations. This process is not linear; a powerful feedback mechanism is involved. How we apprehend the world out there depends on what our internal model of the external world is; and our internal model gets modified with fresh inputs from our filtered apprehension of the world. Regardless of which came first – whether we start off with an internal model and then examine the world, or whether we examine the external world first without prejudice and only later build an internal model – the cycle once initiated continues for the rest of an individual’s life. Who we are dictates how we perceive the world to be; how we perceive the world to be dictates who we are in the continual process of becoming.
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