Tuesday, April 29, 2008

The Economics of Religion

India is a crowded country - and that is nowhere more evident than in public places, even more in places like Tirupati, where the crush of people can be quite an experience. As India develops, aspirations grow and with that, the need to propitiate the gods on a regular basis. Apparently, there is a huge spike in pilgrimages immediately after examinations - with the growth of the knowledge society, it is increasingly becoming important to get a good education. And since access to good education is determined by exam performance, I suppose it stands to reason that people are willing to invoke any intervention, divine or other, that may be on offer. To top that, transport, accommodation etc are improving and becoming more affordable. The net effect is that there is a steady increase in the number of people making pilgrimages. That in turn, places a heavy burden on the infrastructure, not to speak of the deteriorating quality of experience for the individual pilgrims.
Which brings us to an interesting situation - is there anything that can be done to improve this? In a clear market situation, one would expect the supply to increase to cater to the increase in demand. But spirituality is clearly not an economic good - i.e. it does not seem possible for some other temple (or God) to step in and increase the supply! And since spiritual experience cannot (at least yet) have a monetary value, it is obviously not a candidate for the laws of conventional demand/supply. So what are the alternatives? Here are a couple - we are obviously treading on a very slippery slope - religion tends to bring out a lot of passion in lots of people:
1. Increase the temple user charges. In Tirupati, for example, there are various slabs you can pay to reduce your waiting time. In other words, the temple has tried to assign a monetary value to an individual's time and the individual's willingness/ability to stand in crowded lines in less than hospitable conditions. As purchasing power grows, the demand curve itself moves out - i.e. for the same price point, the demand is higher every year. One way to rein that in is to increase the user charges, a conventional market response. But this in turn, raises other tricky questions in an intensely religious country like India. Religion is treated like a public good - i.e. people tend to assume that everyone has an equal right to a spiritual one-on-one with their chosen God(s), which should normally make it difficult to increase rates. However, given the ability of Hindus to handle contradictions with ease and a deeply ingrained acceptance of elitism, this may come to pass sooner or later. In fact, the charges could even be dynamically determined based on the length of the queue - i.e. as the queue grows, the premium charges go up correspondingly, essentially capturing an increasing share of the consumer surplus.
2. Let the 'wisdom of crowds' make the decision. In other words, it is likely that some people will decide that all the pushing and jostling (not to mention frayed tempers) may not be a very spiritual experience and choose to stay away altogether - these are the people who would have decided that the total physical and mental cost of the pilgrimage may not be compensated by the spiritual upliftment. This is an interesting case of crowd-wisdom: if every pilgrim opts that line of thought, no one would actually go on the pilgrimage. The truth is somewhere in between - and it is not very clear what that equilibrium point would be and how that would be arrived at. Simplistically speaking, the break-even point would be where the cost of the total wait equals the spiritual returns - as the queue length increases, the cost of the total wait keeps on going up linearly and when it crosses the spiritual returns, the line should, logically speaking, terminate. The obvious problem with this is that there is no objective, standard measure of spiritual returns - it changes from one person to another.
3. As in any rational market mechanism, it may be that some other temple(s) may enter the 'market' to offer the same basket of spiritual benefits at a much lesser cost. This is not as inconceivable as it sounds, especially when it comes to religion where people are often willing to suspend rational thought processes - it takes a few myths to start drawing people from the larger places of worship to other alternatives. This may actually be the most plausible solution that may present itself and could even be positioned as cosmic intervention, making it the most politically correct alternative.

Remains to be seen what actually comes to pass - and the fundamental question remains, why is it that religion does not follow the conventional laws of economics?

Tuesday, April 15, 2008

Why are the Poor poor?

A few days back, we were talking about the notoriously unpredictable maids, which is probably a favourite talking point in our demographic profile. Not surprising, given that the maids/drivers (euphemistically known as the 'Support Staff') play a critical role in determining the quality of our lives. The common refrain is that they lack a work ethic (never mind the times when you log out of work on the excuse that your child is not well, which interestingly seems to coincide with a cricket match) or worse, they lack the foresight to calculate the long-term effects of such erratic behaviour. And so the reasoning goes - this is why the average maid or driver does not seem to stick around in any job for a very long time.

This whole line of argument sounds specious to me - you would expect the exact opposite from a rational being, especially where the costs of such behaviour can be enormous. When you are at the bottom of the economic pile, reason has it that you should be trying without any loss of focus, to climb up the ladder. Continuing along those lines, you should be maximizing the marginal utility of your time and money - the former by working as much as you physically can and the latter by ensuring an optimal consumption mix on current expenditure (e.g. food, shelter etc) as well as capital expenditure (e.g. investing in your child's education). But reality, as we know, is far removed from this rather 'utopian' view of poverty. And so the question arises, why do the poor tend to be more prone to taking drugs, unable to keep a job, do not send their children to school etc. I am not sure there are any clear answers (at least traditional economic theories do not seem to work in such cases).

There is an emerging point of view that the "biggest cause for poverty may be poverty itself". See this article "The Sting of Poverty" that appeared recently in the Boston Globe. The main thrust of this argument is that it is not a question of a lack of opportunity or self-discipline - but given the multitude of their problems, there is no clear incentive in trying to resolve one/some of them. There is not enough data or studies to prove that this is actually the case - but it does seem like a plausible explanation for the seemingly odd behaviour (defined in economic terms). And if it is indeed true, then this could have implications on public policy. For instance, it becomes clear that targeted schemes (like mid-day meal schemes) may not be the most optimal allocation of resources since these schemes just end up targeting one part of a multitude of problems - and moreover, that solution may be too small in comparison to the overall problem of poverty to have any discernible impact. A better alternative could be to give the poor money and let them make their choices (the NREGS is one scheme which could be unwittingly moving in that direction). Easier said than done - since such a policy prescription has its own issues - the important ones being, how do you measure outcomes in such cases and more importantly, hand- outs may end up creating a disincentive to work.

Either way, this promises to be an increasingly interesting area of work, one that could determine welfare policies down the line. At the very least, this alternative is questioning the conventional wisdom of microeconomics that has dominated the landscape so far.

Monday, April 7, 2008

The Economics of Vegetables

Yesterday, happened to visit a "farmers' market" - the amateur economist in me noticed several things, which I am not sure has been covered by the economists. If you visit any such market in India, you would have noticed a few things:
1. There are a very large numbers of sellers, mostly selling an assortment of vegetables. The stocks that the individual sellers carry are fairly small (around 20-25kgs), obviously a sensible strategy since they need to get rid of the entire stocks within a day or two. The optimal mix and quantities is a matter of trial-and-error but how many chances does the vendor have?
2. While some vegetables (e.g. potatoes, onions et al) could last a few days, much of their stocks (e.g. greens, tomatoes etc) would not last more than 1-2 days. Should the mix combine the two types as a hedging strategy? Curiously, you do not see this very often.
3. There is definite lumpiness in demand - while weekends/ holidays tend to be busy, weekdays are almost always slow. Should the vendor then stock more at the beginning of a weekend? How much more?
4. There are extreme cases of a specific vegetable/fruit that is in demand for a specific purpose (e.g. festival) - in such cases, there is a huge spike in demand in the run-up to the festival day, followed by a complete collapse in demand. In such a scenario, how much should a street vendor buy from the wholesaler to sell?
5. The supply chain until that point (i.e. to the suppliers to these vendors) is reasonably well- organized, with bodies like the APMC, setting wholesale prices. One could assume that these prices, in turn, set the floor-price for these vendors. Is cost-plus pricing the right thing to do in such a case?

All of the above must present a highly complex problem to the vendors who are obviously not equipped with any of the fine mathematical tools(!) that have been foisted by the economists. And yet, they seem to be doing reasonably well - not quite sure if they are able to maximize their profit function, but their survival itself demonstrates a keen sense of the market, including discerning its intra-day fluctuations and the ability to react them rapidly. A few trips to such markets throw up some interesting observations:
1. At the beginning of the day, the prices tend to fluctuate quite a bit - with the variation markedly higher for perishables (e.g. tomatoes as against potatoes). The strategy must be to grab as much of the consumer surplus as possible before the market settles down on a price. What the vendor is betting on is quite simple - most buyers would not have the time/inclination to do an extended search for each vegetable to compare prices etc.
2. However, as the day progresses, prices tend to settle down - presumably, at some point above the floor price. The network effects (exchanging notes between themselves, buyers transmitting the information during the process of haggling) probably come into play - and the curious thing here is why these sellers do not turn this information flow into a oligopolistic situation (by price-fixing). Wonder why that happens.
3. The toughest part for the seller, undoubtedly, comes towards the end of the day. She needs to make decisions on how much to carry for the next day, or worse, if the stocks will not last till the next day, when to start dumping at below the marginal cost (i.e. the floor-price). In all this, she needs to ensure that she has recovered her total costs (which could be the sum of her procurement costs and all other overheads, including the travel costs, payoff to the local tout etc)

By now, it is obvious that these vendors are subject to the most brutal, unforgiving form of 'market economics'. And so the question of the welfare-seeker would ask - are there any interventions that are possible to make their lives a little easier? One alternative could be to do a price-setting exercise for the entire market on every day. Obvious implementation issues are - how would this be done (perhaps a committee - but we all know where committees lead) and more importantly the principal agent problem (how can you ask the sellers to set a price without equal representation from the buyers?) All these have upstream effects on the supply chain, all of which makes it an extremely volatile and hence risky industry for all the parties involved (producers, wholesalers, retailers).

In India, such interventions are routinely exercised in cases of food grains (much in the news of late, thanks to inflation), but not much seems to have been done where markets are localized (producers and consumers are typically within a 100km radius). This comes with a simple disadvantage that the supply chain participants are not a vocal enough political force and are hence bypassed by the democratice process.

One obvious intervention could be to invest in better storage facilities (e.g. cold storage) at all levels in the supply chain to help smooth out the supply/demand imbalances. The other intervention could be to create a information network (say using mobile phones) whereby prices are exchanged between the various parties (between sellers as well as between buyers/sellers), removing some of the price distortions.

Interestingly enough, the supermarket chains may be helping in the process - while they do take the market away from the street-vendors, they do bring improved stability of demand further up the supply chain. But the politics (and economics) of the supermarket chains in India is another story altogether.

For now, the street vendor deserves a little more respect - no amount of mathematical modeling can even begin to capture the mind-boggling number of variables and decision matrices that they seem to process effortlessly to eke out a living - may be the 'rational choice theory' is actually an non-oxymoron 'instinctive rational' choice theory !!