Category: Economics

My favorite village idiot joke goes – please stop me if you have heard this one – this way. Once upon a time, in a particular village, when offered a choice between a dime and a nickel, the village idiot would invariably grin and pick up the nickel and everyone would have a hearty laugh at the stupidity of the village idiot.

One day, a kind-hearted guy says to the village idiot, “You know, although a nickel is larger than a dime, it is only worth half a dime. You should pick up the dime.” The idiot says, “I know that. But if I pick up the dime, people would stop offering me the choice between taking a nickel or a dime, wouldn’t they? Who would be that stupid?”
Continue reading “Advantages of Being a Village Idiot”

A friend recently asked me for some advice on how to improve his understanding of economics. I asked my favorite advisor CJ to take a shot at it. Here is what he wrote, for the record:

Each of us has a unique learning style, of course. Here is mine.

Learning economics better requires reading. But here is the rub: one could read disjointed stuff on the web all day long and still not understand what it is all about. In fact, reading too much on the subject which is more in the “news” category is detrimental to understanding. Even reading the Economist will not help one understand economics any more than reading a lot of hospital news will teach one much about medicine. Continue reading “How to study economics”

It is common knowledge that the Indian economy which was securely imprisoned since independence in 1947 has undergone a radical transformation and has seen a departure from its dismal 3 percent “Nehru Growth” to a more respectable 6 percent and more since the 1980s. There is little room for debate on that fact. What observers appear to disagree on is what were the factors that led to the transition from the “Nehru Growth” to the present.

Very broadly speaking, here is a thumb-rule I use to figure out what factors led to the Indian economic growth 1980s onwards. List every policy—domestic, international, industrial, education, health, banking, etc—that Nehru and his descendents imposed on the economy. Systematically reverse the policy and as you do so, you see the economy accelerating. In other words, if your goal is to create a set of policies that would ensure economic stagnation and deepening poverty of a large economy, the shortest route for you would be wholesale adoption of all the Nehruvian policies. Conversely, the quickest method of figuring out what to do to for economic growth, is to take any component of the Nehruvian policy prescription and apply the reverse.

To the extent that Nehruvian policies have been reversed, India’s economy is prospering. If the economy has not attained its potential growth rate yet, it is because not all of the mindless Nehruvian (but I repeat myself) policies have been discarded yet. I have no doubt that the nation will become slowly wise eventually. How many hundreds of millions will suffer poverty in the meanwhile is a question that is best not contemplated.

What got me thinking about the “Nehru Growth” rate is a recent paper in “IMFstaffpapers: A journal of the IMF” by Rodrik and Subramanian “From ‘Hindu Growth’ to Productivity Surge: The Mystery of the Indian Growth Transition.”
Continue reading “From ‘Nehru Growth’ to Productivity Surge”

“Magarpatta City” lies in the south-east outskirts of the city of Pune in Maharashtra, my home state. Searching for place to live in led me to Magarpatta City yesterday. Since moving out of my Mumbai apartment in mid-February, I have been a homeless person leading a rootless life living out of a suitcase. February saw me in New Delhi, Nagpur (my home town), and Bangalore; March was spent in New York City, Long Island NY, Boston MA, and Newark DE; April I was in Berkeley CA, Saratoga CA, Seattle WA, and Tampa FL. Upon my return to India on May 3rd, I spent a few days in Mumbai and then came here to Pune with the idea of storing my suitcase for a bit and have a home for a couple of years.

Searching for a place to call home is not an easy task. You cannot refer to a directory of places available for rent because there is no such central depository of information. What information exists is fragmented and incomplete. There are listings in local newspapers but you would have to consult many sources published over an extended period. Given space limitations in newspaper classifieds, the information for any specific place is incomplete. You would have to call and/or visit to see for yourself what is on offer. Search costs add up and makes the market for rental housing needlessly inefficient. Where there are information imperfections of this kind, specialized services emerge. Rental property brokers step into the picture as specialized agents bridging information gaps manually.

Brokers have specific areas of the city that they operate in and have inside information on available places. To increase my chances of finding a suitable place, I had to engage through various sources, a set of brokers. Each has about a dozen properties to show. The process is time-consuming and frustrating because of a number of reasons. First, there are numerous levels of indirection. The broker is one link in a network of relationships. Broker A, for example, will call up an intermediate B who will in turn call up C who has the key to the apartment. When you go to see the property, a confluence of events have to occur such as the presence of B and C for you to actually look inside. At places, I have spent over an hour just waiting, while the actual seeing of the place took only about two minutes.

The second reason for the frustration is cultural, the inability to say no. I have a set of very specific criteria about the place I wish to rent. Somehow I get taken to see properties that don’t come anywhere close to what I have clearly stated I want. Why do they do that? Don’t they waste their time as well as mine? There has to be a rational explanation. I conjecture it has to do with conveying an impression that they have earned the commission they charge.

Brokers charge about two months’ rent as commission. If they were to show only those properties that meet the specifications, they would perhaps be able to show only one or two places. If that means you rent a place through a broker after he (or she) shows you only a couple of places, the impression could be that the commission is disproportionate to the work done.

The third reason for the frustration is structural. The market is fragmented. Information which could have been aggregated and made searchable is only present as knowledge in heads of various agents. The asymmetric information—renters don’t have information on the complete set of available properties—gives rise to ‘rent-seeking’ opportunities, the commission charged for the deal. Dis-intermediating in this situation would involve aggregating the information (which is currently held as private knowledge) and making it searchable but would result in a loss of income for those agents.

Imagine, for a moment, a more efficient system. Let’s say there is “Craigs List” type platform where landlords list their properties in detail including pictures of the insides and of the surroundings. The technology exists for making this list accessible and searchable to prospective renters from anywhere in the world at very lost costs. In a few minutes of searching, one identifies a set of properties and invests in going over to check out the places. If such were the case, I would have only seen three properties and spent about half a day. Instead, I have spent four days and seen about a dozen properties only two of which I would even remotely consider renting.

Is there a point in this renting story? Yes, a general point. The availability of technology is only a small part of the story of development. It is a necessary part but very small and far from sufficient. The technology has to be adopted. There are barriers to adoption of technology which go beyond affordability and appropriateness: adopting technology could hurt the entrenched interests of the existing system.

Using a web-based system to remove information asymmetries in most markets would eliminate rents that information brokers (and property rental brokers are information brokers) currently enjoy and therefore they can be relied upon to resist such an efficiency enhancing change. But then you may ask, how does any efficiency enhancing change come about at all when in practically all cases the vested interests would prevent the change? The answer: If the vested interests can find alternate and better roles in the new system, the change can occur. That is, if they can move up the value chain. Even after the implementation of an efficient web-based system, people would be required to help with the creation and maintenance of the list, of vetting prospective renters, etc.

Efficiency implies that less labor would be required, however. So instead of a dozen agents, I would need only one agent. In short, if the market does not expand, then there will be mass unemployment among property agents. But the market may indeed expand, both due to lower transaction costs and due to increasing population of tenants and landlords. Then again, in an expanding economy, there will be other opportunities for those who used to be property brokers. It is an old story repeatedly told: fewer secretaries when printers and word-processors became the norm but more programmers. What you lose on the swings, you gain on the slides.

So what about “Magarpatta City”, you may ask. I was coming to that. Tomorrow, shall we say?