Rearranging the deck chairs on the Titanic.
What an absolutely evocative expression. I cannot get that out of my head every time I muster up enough courage to read the newspapers. Most of those out there on the top deck are busy with something trivial while below decks the situationis dire.
Continue reading “The HMS Titanic”
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“.]
Open Letter to Buddhadeb Bhattacharya
Dear Chief Minister of West Bengal Mr. Buddhadev Bhattacharya:
I have come to learn that there is some possibility of renaming Park Street as Mother Teresa street and erecting her statue.
I think this is a very bad idea. The image of Kolkata has been forever tarnished as a result of Mother Teresa’s activities. For greater details on why this is so, I would urge you to read what some neutral observers have to say about the lady. I have a few articles on the subject and I recommend a book by a son of Kolkata — Dr Aroup Chatterjee’s “Mother Teresa: The Final Verdict” which I have reviewed here.
We in India are totally brainwashed to accept uncritically anything that is Western and white. Mother Teresa, motivated by missionary zeal, used the poverty of the poor of Kolkata to enrich her mission. While I do not deny that India has abject poverty, she used that poverty and showcased it around the world not to solve the problem but to evoke pity from affluent people so that they would contribute to the welfare of her mission, not for the welfare of the people she so ruthlessly used.
I urge you to carefully review the evidence and reconsider.
Sincerely,
Atanu Dey
I have followed the Mother Teresa phenomenon with a sick feeling in my stomach because of a number of reasons. The primary reason for me is that she epitomizes what is the fundamental flaw that led to what we see in India around us today. The flaw is in not thinking through things, of busying ourselves with the symptoms of an ailment rather than eradicating the cause.
Mother Teresa ceaselessly championed for uncontrolled breeding. She did her best to derail any serious attempt at addressing one of the primary causes of poverty in the developing countries, namely, the growth of human populations way beyond that which can be sustained at a humane level. All she wanted was that there be sufficiently large number of abjectly poor in a place so she could gather brownie points to assure her place amongst the sainted. As she honestly put it, if there were no poor, there would not be any reason for hermission to exist. The poor, she held, were blessed because they suffer.
I feel that she should be called Teresa, the Merciless. Millions will be forced lead miserable lives because of what she has done and the institutions she supported (the Vatican, primarily) and the institutions she has created.
I expect hate mail as a result of this post. But I hope that the writer of hate mail at least read some of the articles which I have provided the links to above. My request is that you send me hate mail only after you have honestly read the articles.
The Triple Point of the World at Zero Degrees Humanity
Rain
I keep waiting for the real monsoons to show up in Mumbai. Do they have any thunder and lightening and huge downpours around here or does this anemic occasional rain showers pass for the monsoons? Thank goodness that I went to Lonavla last weekend with a bunch of guys from work. As we entered the Western Ghats, we passed through the mother of all rain storms. Waterfalls by the hundreds cascaded down the rocky cliffs at the edges of the Mumbai-Pune highway. When we reached Lonavla, the downpour had created fast-flowing rivers of the narrow roads of the busy tourist town. Being situated in a hilly area, shortly after the storm ended, the rivers vanished and the narrow streets reappeared. Continue reading “The Triple Point of the World at Zero Degrees Humanity”
The Elephant’s Trunk
In a collection of essays called The Origin and Evolution of Intelligence (Scheibel and Schopf, eds.), Steven Picker’s article Evolutionary Biology and the Evolution of Language starts off with the assertion In Biology Uniqueness is Common and then immediately proceeds to give a stunning counterexample of that claim.
The elephant’s trunk is 6 feet long, 1 foot thick, and contains 60,000 muscles. Elephants can use their trunks to uproot trees, stack timber, or carefully place huge logs into position when recruited to build bridges. They can curl the trunk around a pencil and draw characters on letter-sized paper. With the two muscular extensions at the tip of the trunk, they can remove a thorn; pick up a pin or a dime; uncork a bottle; slide the bolt off a cage door and hide it on a ledge; or grip a cup, without breaking it, so firmly that only another elephant can pull it away. The tip is sensitive enough for a blindfolded elephant to ascertain the shape and texture of objects. In the wild, elephants use their trunks to pull up clumps of grass and tap them against their knees to knock off dirt, to shake coconuts out of palm trees, and to powder their bodies with dust. They use their trunks to probe the ground as they walk, avoiding pit-traps, and to dig wells and siphon water from them. Elephants can walk underwater on the beds of deep rivers or swim like submarines for miles, using their trunks as snorkels. They communicate through their trunks by trumpeting, humming, roaring, piping, purring, rumbling, and making a crumpling-metal sound by rapping the trunk against the ground. The trunk is lined with chemoreceptors that allow the elephant to smell a python hidden in the grass or food a mile away.
Elephants are the only living animals that possess this extraordinary organ.
If you like elephants, check out The Elephant Encyclopedia for a bunch of neat pictures. But you may ask why I am suddenly going on about elephants. This was prompted by a post on Rajesh Jain’s weblog on a dream device which combines the features of a Blackberry and iPod. To which Brian put a comment and asked whether we really need all-in-one devices. That got me to thinking about the elephant’s trunk and so this post.
To my mind, a device may have various functionalities as long as there is an underlying commonality to the supporting infrastructure that the device incorporates within itself. For instance, if the various functions require digital storage, retrieval, and decoding, then aggregating these functions on the same device that has at its core a huge amount of storage is logical. So you could combine digital diary functions with MP3 functions because they both share the same underlying hardware. Now add a communications function and you have a handheld PDA which plays MP3. Camera and picture viewer also logically follow since a PDA has to have a screen and so they are shared.
But then, an all-in-one device has the obvious disadvantage that Brian pointed out in his comment, namely, you lose the device and you are up the proverbial creek without the paddle. Well, in that case, the obvious evolution of the device is to use the device for retrival and communications alone and keep the storage function outside the device, say, on centralized servers that are unlikely to get stolen. Ultimately, if you have broadband connectivity, then you really don’t need to drag your own harddrive all over the bloody place. This has the other advantage of lower power requirements.
Indeed, most of computing could be moved to centalized servers and all you need is a retrieval device that is not complicated at all. Think about it.
Born Under a Wandering Star
As the song goes, I was born under a wanderin’ star. Lately my wandering has been confined to attending ICT for development shindigs around the country. But it gets mighty tiring. So I thought that it is about time to go see the world at large and renew my credentials as a truly homeless person. I suppose I am a gypsy at heart, a gypsy from a strange and distant land traveling on eternity road in search of … well, one can never be sure, can one?
This time I will be going round the world and plan to stop in Helsinki, Paris, London, Boston, New York, Washington, Atlanta, San Francisco Bay Area (Berkeley, San Jose, Saratoga, etc), and Seoul. I start mid-July and return to Mumbai around August 20th. The best part of my trip will be being back in California where I spent the best 20 years of my life so far, and being back in Berkeley would be the sweetest thing of all. As much as any place can be home to a homeless person, Berkeley is home to me.
I was born under a wanderin’ star
Home is made for coming from
Dreams for going to
Which with any luck
Will never come true…
Wheels are made for rolling
Mules are made to pack
I never seen a sight
That didn’t look better looking back …
Might can make you prisoner
The plains can bake you dry
Snow can burn your eyes
But only people make you cry …
That song is from an old western called Paint Your Wagon. There are three simple truths embedded in the quoted lines above. The first is about dreams coming true. See this quote about ideas and ideals for an elaboration of the notion that if you are lucky, your dreams will not come true. The second truth is that things always look better in retrospect. Time lends perspective. And finally, of all wounds, that caused by people hurt the most.
I think this one is fast running out of rhyme or reason, and I am getting all sentimental. So I should stop.
India’s Disposable Children
A couple of weeks ago, I had discussed A Matter of Rights in connection with the population problem and had concluded that post with
Does a person have a right to inflict pain and suffering on another person? If my action were to lead to immense suffering, and I plead that if you do not allow me to freely act you are impinging on some basic right I have, would you allow me that “right”? Or will you circumscribe my “right” to act as I please because otherwise it results in unnecessary pain and suffering to a human being?
Rural Economic Development and RISC
Nobel Prize winning economist Robert Lucas had remarked that once you start thinking about economic growth, it is hard to think of anything else. What are the causes of economic growth and how can the process be enabled is a question that has obsessively occupied some of the best minds in the world of economics and commerce.
The question takes on an unparalled urgency and importance when applied to the rural Indian economy because it presents an enormous challenge, and, consequently, presents an equally great opportunity for making a difference in the lives of hundreds of millions of people. India’s economic development is predicated upon India’s rural development because around 700 million Indians live in rural India. An astonishing one out of every ten living humans lives in rural India.
Rapid progress in GDP growth and globalization in the last decade has primarily impacted the urban economy. While software exports, business process outsourcing, etc, have helped urban economic growth, it has done relatively little for the rural economy.
Without rural economic development, India has little chance of achieving growth rates required to become a developed nation. Furthermore, economic development is both a cause and a consequence of urbanization. Clearly, in the Indian context, urbanization through further rural to urban migration is both unsustainable and socially disruptive. Therefore urbanization of the rural population will have to be achieved in the rural areas.
Rural India is caught in what is called a development trap. Because of lack of economic opportunities, incomes are low. Therefore they are unable to pay for goods and services that would enable them to increase their incomes. This leads to low demand for goods and services. Consequently, firms don’t find it profitable to do business in rural India. This leads to the inadequate provision of infrastructure, which in turn leads to lack of economic opportunities, and so on.
It is important to recognize that human capital is the scarce resource globally. Fortunately India is lavishly endowed with immense human capital. However, physical capital is in relatively short supply in India. The challenge therefore is to use the limited capital most efficiently to break out of the poverty trap by integrating the rural economy with the urban Indian economy and indeed the global economy.
Various models for rural economic growth have been proposed and implemented. Vinod Khosla and I have proposed a model which harnesses the power of the information and communications technology (ICT) revolution to accelerate rural economic growth. The model called Rural Infrastructure & Services Commons (RISC) has the potential for achieving the multi-faceted goals of sustainable development. It uses limited resources efficiently by focusing them in specific locations that are accessible to a sufficiently large rural population, such as that of 100 villages.
RISC provides the benefits of urbanization by making available to rural populations the full set of services and amenities that are normally available in urban areas. It brings the benefits of ICT and the increased access to global markets that globalization promises.
The model recognizes that rural populations face a number of inter-related gaps, not just the celebrated digital divide. Bridging them simultaneously with a holistic solution is more likely to succeed than any partial intervention can.
The model facilitates the coordination of the investment decisions of the private sector, the public sector, NGOs, and multilateral lending institutions. To achieve its goal, the model strikes a number of balances — between the local and the global, between planned infrastructure investment and market-driven service provision, between specialization and standardization. It does not require government subsidies for its continued operation, although the government does have a role in providing some critical functions such as risk alleviation, loan assistance, and enacting enabling legislation.
A typical RISC installation would provide services for about 100,000 rural people. These services, mostly but not all provided competitively by a large number of for-profit firms, will range from education, health, market making, financial intermediation, entertainment to government services, social services, etc. Since all services themselves require the infrastructural services such as power, telecommunications, water, physical plant, etc., large specialized firms will provide the infrastructure.
RISC obtains urbanization economies, which arise from the agglomeration of populations and infrastructure facilities. By installing RISCs to serve the rural populations of an entire state, economies of scale and scope are also obtained. Scale economies would be significant at each level of the model. At the infrastructure level, there are transaction costs associated with the necessary coordination between the firms providing the core infrastructural services. At the services level, the cost of the services will be inversely proportional to the quantity demanded and supplied.
A RISC provides a complete set of services and functions. Each service provider itself is a customer of other services co-located on the RISC. The banker uses the internet and postal services, and the internet service provider uses the banking and postal services, and so on. They make each other mutually viable and even possible. All these economies essentially lower the cost of service provision and, in a competitive market, makes them more affordable.
At a certain level of abstraction, the proximate causes of poverty can be seen as two gaps: the ideas gap and the objects gap. The objects gap is the lack of physical resources – too little land, too little capital stock, etc – that contribute to persistent poverty. The ideas gap is the lack of knowledge about how to make the best use of the resources available. Fortunately, the cost of knowledge goods has dropped precipitously due to the revolution in information and communications technologies. Bridging the ideas gap is a much easier task than ever before. RISC uses ICT intensively towards that end.
The transition from the concept to the actual implementation of the RISC model requires co-ordination of investment decision of the government and the large firms that provide the infrastructural elements. It is a non-trivial but surmountable challenge provided the political will and the vision exists among policy makers, private sector leaders, leading investors, and opinion makers.
Idol-worshipping gone haywire
This is a followup to the comments on my post on Gandhian Self-sufficiency.
It is more than a bit unfortunate that we have a tendency to immediately label any criticism of any person as a sign of disrespect. Any person whose image cannot withstand the harsh glare of honest criticism says something about the fragility of that image. The image takes on a aura of such holiness and awe that any hint of possible flaws is taken as sacrilegious. Taken to an extreme, this sort of idol-worshipping ends up with the worshippers lynching anyone daring to profane the sacred image.
For the record, I do believe that Gandhi was a giant of a man. But for all his greatness, he was still cut from the same cloth as you and I. The same human frailties, the same hopes and ambitions and fears. The difference between a Gandhi and one of us is one of size, not of substance. If we keep that in mind — not just about Gandhi but everyone — I do believe that we would have a useful working hypothesis. Those great big people are magnified images of ourselves. And that which magnifies the virtues, magnifies the flaws as well. An old Chinese saying says that the bigger the front-side, the larger the back-side. Continue reading “Idol-worshipping gone haywire”
Atanu Dey : Life is a Random Draw 