The Demand and Supply of Fines and Corruption

supply-and-demandA comment on the last piece prompts this tiny lesson in microeconomics.

“Corruption is one big pain point in the economic growth of a country. I have this funny idea but would like your inputs from an economists perspective. If things get costly it reduces its demand. Can corruption be made costly? This may increase compliance. Just to illustrate. If we raise fine for a fault, say traffic violation, which suppose today is Rs 500 to Rs 5000. Today the violator gets away by paying Rs 100 to traffic police. This is 20% of legal cost. If the penalty is 5000 and assuming traffic police acts rationally thereby asking for bigger bribe…won’t that deter future violations by the offender? Here I presume that traffic police will act smart knowing fully well that offender isn’t going to pay 5000 but at the same time he himself won’t settle for just Rs 100 and may raise ‘price’ to Rs 200 or 300. This is effective 100-200%% jump in bribe money that may pinch offender at some point in time. Pls throw some light.”

To start off, let’s examine the statement “If things get costly it reduces its demand.” In lay terms, that is true but economically speaking, prices don’t affect the demand or the supply of a product. To understand why not, we have to clearly understand what economists mean by “demand” or “supply” and distinguish them from “the quantity demanded” and “the quantity supplied.” Continue reading “The Demand and Supply of Fines and Corruption”

The Wealth of Nations — Part 1


Warren Buffett
In his 2016 annual letter (pdf, 28 pp) to the shareholders of Berkshire Hathaway, Warren Buffett makes this observation about America’s economic dynamism.

One word sums up our country’s achievements: miraculous. From a standing start 240 years ago – a span of time less than triple my days on earth – Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers.

“You need not be an economist to understand how well our system has worked. Just look around you. See the 75 million owner-occupied homes, the bountiful farmland, the 260 million vehicles, the hyper-productive factories, the great medical centers, the talent-filled universities, you name it – they all represent a net gain for Americans from the barren lands, primitive structures and meager output of 1776. Starting from scratch, America has amassed wealth totaling $90 trillion.”

Buffett is right about the factors that create wealth — ideas (or human ingenuity), ambition, the free market system, and the rule of law. Let’s explore some of these in more details.
Continue reading “The Wealth of Nations — Part 1”

Private Goods, Club Goods and Public Goods

Lighthouse at Point Reyes
Lighthouse at Point Reyes

Charging home owners’ association dues based on the size of the property is common practice in many places across the world. Is that economically efficient and is it equitable? The short answer to the question raised by reader Mr Baransam1 is yes. The longer answer needs to start with distinguishing different categories of goods that are produced, traded and consumed.

Private Goods

The most common category are called “private goods.” These are formally defined by being “rival” and “excludable.” The rivalrous characteristic arises from the fact that one’s consumption of the good precludes any other person from consuming it. If you eat an apple, that apple is not available for consumption by others. Excludability means that one can be prevented from consuming the good. You can lock up the apple and exclude others from consuming it.
Continue reading “Private Goods, Club Goods and Public Goods”

Getting There from Here

You can't always get what you want
No way, Jose.
James Burke tells a story about a time when he and his team were lost in some place in Ireland. This was before Google maps and mobile phones. They asked a local for directions to some place who replied in all seriousness, “To get there, I wouldn’t start from here.”

The humor in that statement arises from the fact that to get anywhere at all you have to start from where you are, and not some ideal place that you are not at. You have to make do with what you have, and not what you should ideally have to get the job done but in fact you don’t. Continue reading “Getting There from Here”

Ludwig von Mises on Socialism

lvm-human-action“A man who chooses between drinking a glass of milk and a glass of a solution of potassium cyanide does not choose between two beverages; he chooses between life and death. A society that chooses between capitalism and socialism does not choose between two social systems; it chooses between social cooperation and the disintegration of society. Socialism is not an alternative to capitalism; it is an alternative to any system under which men can live as human beings. To stress this point is the task of economics as it is the task of biology and chemistry to teach that potassium cyanide is not a nutriment but a deadly poison.”

Source: Human Action. Ludwig von Mises. Yale University Press. 1949, 1998, 2010

Thomas Schelling (April 14, 1921 – December 13, 2016) RIP

schellingthomas-cCelebrated economist Thomas Schelling died today at the age of 95. He was the recipient of the 2005 Nobel Memorial Prize in Economic Sciences for “having enhanced our understanding of conflict and cooperation through game-theory analysis”. I note his passing because he was instrumental in my recognizing that I belonged to his tribe — that I was at heart an economist. Mere accident led me to pick up his book Micromotives and Macrobehavior (1978) at the Sunnyvale Public Library sometime back in the early 1990s. He received his bachelors degree in economics in 1944 from UC Berkeley, my alma mater.  Continue reading “Thomas Schelling (April 14, 1921 – December 13, 2016) RIP”

Happy Birthday, Ludwig von Mises

ludwig-von-misess-quotes-3Today, Sept 29th, is the 135th birthday of Ludwig von Mises (1881-1973).

I consider Mises to be one of my gurus. Just to be sure, I used the word guru very seriously — one who dispels the darkness (gu) of ignorance through the radiance (ru) of knowledge. I have been reading his magnum opus Human Action (1949) and The Ultimate Foundation of Economic Science (1962) religiously.

Who was he? “Ludwig von Mises was one of the greatest economists and political scientists of the twentieth century. He revolutionised the understanding of money, inflation and recessions; comprehensively refuted the arguments for socialism; and provided a devastating critique of the methodologies of mainstream economics. His contributions to the Austrian School laid the intellectual groundwork for thinkers such as F. A. Hayek, Murray Rothbard and Israel Kirzner.” Continue reading “Happy Birthday, Ludwig von Mises”