Wednesday, September 23, 2009

Financial History

Currently reading a Financial History of the World - 'The Ascent of Money' by Niall Ferguson. Fascinating book walks through the development of some of the major financial instruments that we know today, starting with bonds (started in Italy in 16th century) and stocks (first stock exchange was born in Amsterdam in the 17th century).
And what intrigued me was that all of the early financial innovations seem to be exclusively from Europe - it seems a little unusual that though China and India together made up almost 50% of the world economy, there seems to be little by way of these innovations that came up from these economies. (Incidentally, in 1700, the Indian economy was the largest in the world)

One interesting parallel is from the bond markets. The earliest known bonds were floated by the city governments in Italy (Venice, Genoa etc) to fund wars, which were quite common in those days. In fact, the two major drivers that seemed to have led to bonds and stocks were clearly wars (expensive and risky ventures which had to be funded) and exploration (driven purely out of an urge to conquer new lands but more prosaically, to tap into newer resources to fund wars etc).

So this leads to the next question in the Indian context - from the 15th century to the 18th century, wars were regular fixtures all across India. How did the Mughal emperors and the Rajput kings fund these ventures and why did they not go to the people to raise funds? Two possible reasons:
1. The ruling classes in India were probably deeply networked with the landed classes and directly tapped into them for funds (in the form of taxes).
2. There was practically no middle-class (with disposable surplus that could be invested) that could be tapped for funds.

At the risk of over-generalization, both India and China were primarily pastoral economies at this stage - and while Europe was experimenting with financial and technological innovations, the Indian and Chinese were slowly on their way to decline. If nothing else - goes to show how an overtly centralized system of governance is doomed to failure.

Sunday, September 13, 2009

Health Care in India?

For most who follow the US politics, it is hard to miss the raging debate on the health care situation in the US. To me, this raised the obvious question - what about the state of health care in India? To begin with, it is almost laughable to talk about the 'state of health care' - and it is indeed a cruel joke. To make it worse, a cruel joke that has largely been ignored and as with most things in Indian political economy, it is convoluted. For one, it is the responsibility of the states (and not the Centre). And yet, you rarely hear anything of substance being done at the state level. As for the Centre, less said the better - the one big thing that the Health Ministry did achieve was a wholly pointless witch-hunt against smoking. Agreed that smoking is an area of concern in health policy, but it should not make it into any rational top-25 list of health issues in India.

In terms of numbers, the India's per capita expenditure on health is at around $91 (2007-08), as compared to Brazil ($1,520), China ($277) (see the country-wise number published by the UN). As I suspected, most of this comes from private spending - see this article from the Hindu for some very interesting (and depressing statistics). One very obvious conclusion - the state has failed miserably in the area of health care.

Saturday, July 25, 2009

Visible Hand?

Someone recently forwarded me an article calling for the disbanding of the Planning Commission. It was a typical libertarian argument that does not trust the government's ability to pretty much do anything of consequence. This line of thought does raise a valid objection - how would you expect the government, which does not have any direct stake in ensuring that scarce economic resources are optimally distributed in societies be expected to do that very function? It is tempting to believe that - especially if you look at the kind of people running our governments. So what is the alternative - you may ask. Do we leave it to the Invisible hand (i.e. the marketplace) to figure this out?
And this brings to a fundamental problem in these extreme political/economic schools of thought - with Libertarians on one side and the Communists on the other. One wants the Invisible hand while the other wants the Visible hand (i.e. the government/commune/labor unions - some organized form) to be the only one around. While the Communist experiment has blown up spectacularly, we are yet to see the Libertarian one at work.

Throughout modern history (at least after the initial euphoria of the industrial revolution settled down), some centralized authorities (king, democratic governments etc) have had to undertake a very visible, redistributive justice role. It has always been clear, even more so in the industrial world, that there is a section of the population that is not fortunate to be equipped with the same set of factor endowments as the remaining, more successful section. The former are almost doomed to be stuck in the vicious cycle of poverty while the latter can aspire to climb up the economic and social ladder. And in the absence of any redistributive function, it is almost inevitable that the poor would be squeezed even further.

And so, should the Planning Commission stay or go? Part of the problem, to me, appears to be the name - it sounds very Fabian Socialist and reminds everyone of the days when the Five-Year Plans tried to dictate the output levels in all sectors (from soaps to scooters to watches). And all they gave us was the Hindu rate of growth ! As to what they do now - it is clearly a mystery, since there is precious little planning that seems to be going on in the governments. Which makes the whole concept straight out of the 'Yes Minister'.

That function has, thankfully, come down significantly - gone are the days when the budgets used to announce the production targets for matchboxes! So what should the Planning Commission do - to start with, they should re-brand themselves as Economic Advisors, which would give them the necessary level of legitimacy while keeping them from causing too much damage in terms of policy making. There is definitely a case for a think tank type of body - so long as they are brave enough to balance diverse economic views and evaluate policy options for the government, which is what an advisory role ought to be doing.

Roses vs. Rice

The other day, happened to stop by at a florist to pick up some flowers. What stuck me was the price of flowers - an astonishing Rs. 10/rose. And this guy was doing brisk business - as are the other florists dotting the city. Go to the local specialty grocery (e.g. Namdharis) and you see all sorts of exotic fruits/vegetables flying off the shelves. And then you step out of this bubble - only to realize that the country, as is rest of the world, is going through a food crisis of sorts. A combination of events, ranging from the global economic downturn to global warming to rising prosperity have put the world on a slow trajectory of demand outstripping supply (much like oil and in time to come, water).Of course, not many of us actually notice the price of food anymore - when was the last time you tracked the price of onions or rice/wheat etc? In that sense, we are truly on the indifference curve, which in itself may not be an issue - so what if a small sliver of the population doesn't let the price of essentials drive consumption any more? However, what may be a problem is the fact that the demand for 'luxury' products like roses, exotic vegetables could be taking precious land and resources away from essential food products. Add to this the fact that these products show an overwhelmingly urban bias - which is probably leading to the agricultural land around the urban settlements increasingly moving towards these cash crops. That would drive up the prices of the essential produce even further - handing out a double whammy to the urban poor, who were driven to the cities in the first place to escape the lack of opportunities in the countryside.

And so this leads to the inevitable economics question - if this is what the market demands, who is anybody to blame? Indeed, you could even argue that this is the efficient markets hypothesis at work. After all, this line of argument goes - commodity exchanges are closest to efficient markets. Try telling that to the person who is struggling to make her ends meet in your urban neighbourhood (she is much closer than you think - look around and see the vast army of direct and indirect help that goes to make your uber-cool lifestyle uber-comfortable). And as the wedge between the haves and the have-nots keeps growing, we will see more of these phenomena around us. Over the course of history, first it was the ruling classes, then it was the landlords, who were then followed by the colonials, and now it is the sons and daughters of the great economic liberalization. In all this, I continue to marvel at the general ease with we continue to live with all these contradictions - we may have some of the worst records of child malnutrition records in the world and we have long been used to farmer suicides as a regular fixture of the economic and political landscape - do not forget that we are also one of the fastest growing wine producing countries in the world. Not to forget the Washington apples which are so conveniently available at our doorsteps throughout the year, all the way from across the world so that we can get our daily fruit fix. That we can import it from the USA, also frees up some more land around our cities so that the supply of roses and carnations can continue without interruption.

Tuesday, June 2, 2009

How charitable is charity?

The other day, there were a couple of volunteers from CRY (Child Relief and You) who were trying to solicit some donations from residents in our apartment complex. I observed a few interactions between the volunteers and the potential donors and it was an interesting example of the homo economicus in action:
1. The first unusual fact was that most people were distinctly uncomfortable talking to the volunteers. This, I thought, was unusual - assuming that one of the key objectives of charity is a signaling mechanism to your friends/neighbours, one would expect exactly the opposite behaviour. One would expect people to be want to be seen to be associated with a cause - thereby signaling 'noble intentions'. 
2. The second fact was that not a single individual was willing to take a critical view of the charity. Assuming that you are a rational individual seeking to maximize utility out of the money you have allocated for charity, you should be working towards identifying the best possible way to spend that money. On that count, CRY is probably not the best option - their overheads are at 21%, which essentially means that for every Rs. 1,000 - only 790 goes to the end beneficiary. 

The second point brings me to a big problem inherent with the whole charity industry. It is obvious that charity is required in any society, because clearly there are areas which have not been served by the market. And like any market driven solution, it is healthy to have multiple competing charities and let the invisible hand allocate the charity money optimally among these charities (the standard libertarian argument) - however there are obvious flaws here:

a) Any market clearing system arrives at a price-clearing equilibrium through a process of trial and error (think stock markets) which is essentially an iterative exercise of identifying and closing out information asymmetries between the consumers and the suppliers. This works best when there is a clear feedback loop (e.g. in case of the stock market, it is the returns for the punter from her stock purchase). This is very difficult in case of charities - since you have little/no idea of how your charity performed (which is the fact that the market by-passed this area to begin with). In our case, we do not have a clear way of judging whether CRY was better than say, Asha or World Vision (or any of the other umpteen charities that focus on some area of child welfare).

b) A market place for charities would work if there is a clear way of evaluating multiple options (back to the stock market analogy - the stock-price and historical-returns are indicators for evaluation). In addition to CRY, the solution would have to be have all the 'competing' charities displaying their alternatives at the same time/place so that the confused residents could have had a go at it in a more rational way (something of a stock market for charities). Obviously, that again is not possible.

So what is the answer - as with every economic transaction, two major factors matter:
1. Approach each such alternative with a healthy dose of scepticism. Don't be afraid to say No to a charity if you think they do not fit your criteria.
2. Do enough background research on charities before you decide to give. One interesting resource to check out in this direction is Ultimately, there is no substitute to information/data driven decision making.
And so the question now is - does this take away the romantic element of charity? The impulsive, feel-good nature of giving spontaneously? Perhaps, but remember that two entire 'industries' have been built around tapping this very human emotion - and they are begging and charity.

Tuesday, April 28, 2009

Sustainability and Individual Choice

One area where individual choice almost always goes up against is the concept of Sustainability. Sustainability essentially means providing not just for ourselves (as in individual economic agents here and now), but also ensuring that we do not 'steal' from the future generations - something that stacks up completely opposite to the traditional individual notion of utility maximization - unless of course you assume that the agent has figured out the future costs of her current choice and applied a fair discounting factor to come to the 'true' utility !
Human beings are notoriously short-sighted when it comes to weighing the larger social costs of their individual actions - the routine economic argument has been that all these negative externalities need to be priced, which would translate to the true economic cost of individual decisions. Obviously, this has never been implemented in the case of global warming and carbon footprint. Assuming that a pricing mechanism is discovered (it is a subject of hot debate as we speak: there are questions of implementation, enforcement etc. Pretty much impossible to implement/enforce in the current global economic and political landscape.
So what is the way out?
OPTION-1: The Hayekian and the libertarian (they rarely seem to differ) opinion would be to lay the facts in front of the people (i.e. remove information asymmetries) and then leave it to the individual moral standards and the forces of the market to figure out a 'sustainable solution'. Utopian is putting this mildly.
OPTION-2: The top-down approach starting with governments, international bodies etc. coming out with a solution framework. Here again, you ought to be suspicious - what makes these government bodies (even though they may be 'experts') any better at arriving at the right answer? Governments have rarely been able to work together on a bilateral basis, leave alone a global scale - why should this be any different?

So both are equally bad - and then what is the answer? Is there one at all? We all need to be optimistic (what is the alternative?!) Probably some combination of the two (a regulatory body and a pricing mechanism) - remains to be soon what that is and how it will come about. 

And so - what is the carbon footprint of this blog? And if I do not touch this blog again and Google does not delete my data, then this blog will occupy some bytes on some storage device unto perpetuity. So what is the true economic cost of all this? Food for thought.

Thursday, April 16, 2009


I went to a cobbler todayfor a minor repair to my shoe. Should not have costed more than Rs. 10 but the guy asked me for Rs. 25. Fully aware that he was overcharging, I ended up paying him the full amount. So, did I do the right thing? 

1. I distorted the market by skewing the price equilibrium. Or did I? Perhaps I just put a price on my consumer surplus and instinctively decided that Rs. 25 was not a bad deal at all.

2. So what does my consumer surplus consist of - obviously my time (this guy is just outside my office and I clearly do not have the time to hunt around for different suppliers of this commodity service and settle for the best, market clearing price) and also - here is where it gets tricky - an altruistic driver in me, which goaded me to give the extra money. Adam Smith in his 'Theory of Moral Sentiments' mentioned this very sense of altruism - see below for the opening lines from the book.
"How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it. Of this kind is pity or compassion, the emotion we feel for the misery of others, when we either see it, or are made to conceive it in a very lively manner. That we often derive sorrow from the sorrows of others, is a matter of fact too obvious to require any instances to prove it; for this sentiment, like all the other original passions of human nature, is by no means confined to the virtuous or the humane, though they perhaps may feel it with the most exquisite sensibility. The greatest ruffian, the most hardened violator of the laws of society, is not altogether without it."

3. The extra Rs. 15 will obviously make a lot of difference to him (many times more than what it would to me), while I came away not unhappy either. In that sense, the collective utility of the two players (the cobbler and me) was at a higher level than before the transaction.

And of course, what would the Buddhist say is - this whole transaction only served to satisfy my ego and in that sense, it was not 'skilful' ! 

Tuesday, April 14, 2009

Cognitive Bias... contd

Following up on my earlier observation, the plan is to be able to 'listen' to completely polarized viewpoints. With that in mind, have subscribed to two podcasts:
1. (as libertarian as it gets ....)
2. After looking for some time for a liberal opinion (i.e. left of centre), finally settled on LSE lecture series. Not the best option, but at least it provides a counter-balance to Econtalk.

Two quick conclusions (fairly obvious):
1. Social sciences can be very, very grey - probably this is what makes it interesting.
2. In areas like economics (esp. political economics), this greyness injects a huge element of uncertainty in all decision making. Again makes for interesting intellectual stimulation - at the same time, makes public policy a complicated affair.

All this serendipity has led to a plan to start reading 'Theory of Moral Sentiments', the 'other' book that Adam Smith wrote. Essentially a broad canvas covering the entire moral, ethical and economic framework for human and social thought and action. Should be an interesting read. Econtalk is also carrying a book discussion and might join in.

Wednesday, April 8, 2009

Get the rich?

'Get the Rich' is on the cover of the latest issue of the Economist. While much has been written about what caused the current crisis, how to avoid it and so on (and hence I have avoided that completely on this blog), a handful have also pointed out that none of what has precipitated was illegal. Which in turn begs the question - is the current favored approach of regulating our way out of this mess the right answer? 
It is blindingly obvious that the primary driving force behind all this was individual greed which when aggregated into a collective phenomenon (as shareholders, as corporations) can steer any society into a wrong turn. And this is where something curious happens - individual cognitive biases get aggregated into lemming-like behavior (there are road-signs beseeching people not to take the turn and yet whole economies refuse to even look at them because it does not fit in with the prevailing 'conventional wisdom'). 
And now that we all know that we took the wrong turn and we have ended up at the edge of the cliff, the blame game is going on - 'moral outrage' comes out of the woodwork. The obvious reaction is to find someone to blame - the last Economist cover was 'Get the rich' (delicious irony that, given Economist's general proclivity towards a libertarian outlook). And this poses an interesting question for society at large - while it is relatively easy to define financial incentives for behavior and also define the legal boundaries, it is devilishly hard to reward a whole class of moral actions just as it is hard to punish morally reprehensible actions. For instance - I doubt if we can define incentives for socially moral behaviour (like giving to charity, apart from the limited effect of tax incentives) and equally, define disincentives for behaviour that is not moral (e.g. you own an extremely expensive car - while you clearly could have settled for a cheaper car and given the incremental money to a charity. Are you morally justified to make that choice?).

All this raises an interesting question on Utility - while it has been used in microeconomics to explain rational individual behaviour, how relevant is it as a moral standard? Arguably, if there are no price externalities of any action, good or service, every individual is fully justified in maximizing utility. But this assumes that 'concepts' like conscience, social value systems etc. can somehow can be translated into the price - something this clearly absurd. A good example is the global warming issue and how individual behaviour affects global warming. Assume that we manage to create a perfectly efficient carbon trading market which will then enable every individual to maximize his/her utility without any externality (pretty much impossible, but this is how the libertarian argument runs) - will that then justify an extremely rich person to buy an extremely expensive car or any such objects of conspicuous consumption, given that there is enough poverty going around? If yes, is it morally acceptable and if not, is there a notion of natural social justice on the grounds of moral compassion that would frame what is universally acceptable as right or wrong? Obviously there is no notion that is remotely possible. So where does that leave us? 
Should we just make these judgments as individuals, with the assumption that there is a moral fabric with characteristics (e.g. compassion) that is define us as a species? How do these 'compete' with the process of Darwinian natural selection?

Thursday, March 26, 2009

Cognitive Bias

On my recent trip to the library, I picked up 'The Intellectuals' by Paul Johnson, which is turning out to be an interesting satirical history of some of the biggest intellectuals of the West. When I googled the author, he turns out to be a conservative writer. And the book is turning out to be a conservative's paradise with broad swipes at all the major thinkers/intellectuals who are revered by the leftist establishment (he is particularly harsh on Rousseau and Marx). It is quite a witty book and definitely worth a read.
But the book got me thinking on the whole area of cognitive bias. I am clearly left-leaning (the type classical liberals despise) and would normally not venture into any conservative literature (e.g. Hayek, Schumpeter etc would normally not be on my list). Which raises a rather disturbing question - are we all victims of cognitive biases in the realm of ideas? This is especially relevant in the social sciences (economics included) where ideas tend to be clustered around major schools of thought. I read somewhere that your biases are firmed up by 25 and once that happens, we tend to gravitate towards our preferred bias, leading eventually, to group-think. And so I have decided to have a go at the liberal school of thought and at the very least, try to listen to their ideas. 

This just might be some harmless label in the space of ideas - but as it is with a lot of issues in the realm of social sciences, they extend into the real life itself. One example of this could be that someone like me would typically be suspicious of any policy that tries to push markets in, which is actually the cognitive bias pre-supposing a certain kind of outcome(s) which follows a market driven approach. Such a line of thought is obviously flawed but then this is the thing about cognitive biases - they trick you into believing that you are exercising your rational choice(s). 

Why we all tend towards such biases is equally fascinating - one theory is that it is born out of an evolutionary necessity, which goes like this - since you need to make split-second decisions (for the early humans, this could mean the difference between life and death), you cannot rely on using all the available data to arrive at a rational choice outcome. You have to rely on your gut instincts and these in turn, are developed over time based on your past experiences, learning from your elders, peers etc. Which was all fine when the sphere of activity was limited to dodging the next predator and hunting for food but now that we are all occupied in the sphere of conflicting ideas (and even ideologies), it is a whole new ballgame.

And finally, the recommendation on 'The Intellectuals' - worth a read, if nothing else for his acerbic wit. 

Wednesday, February 25, 2009

One more on the Economics of Begging

Thanks to Slumdog millionaire, people should now realize that begging is somewhat of an organized industry, at least in pockets (I suspect in most big cities). Given that, it probably makes sense to avoid giving, at least if you are at a busy intersection. The reason is obvious - your rupee is not going completely to the sympathy-generating person who has triggered the act - it is covering the rent that the alm-seeker has to pay to be able to be there in the first place. That is, if he/she is not just an 'employee' of the 'owner' of a begging business. In which it is even worse, since your rupee is going towards the recovery of investment that the 'owner' has made in building his business - right down to the costs incurred in the abhorrent act of dis-membering the person(s). And so the economic lesson here is this: Walk away from a situation where an alm-seeker is actively seeking alms since you will end up paying for all the externalities involved in getting the alm-seeker to that place. A better alternative would probably be to surprise someone who is not actively seeking alms but is clearly in need. How to identify that in the absence of a signalling mechanism is a different matter altogether. Suffice it to say that this is the paradox in  economic transactions (where information asymmetry is involved - which pretty much covers almost all transactions): to make a transaction happen between two parties (buyer-seller; seeker-donor), there is a certain amount of signalling that is required to bring the two together, which in turn - injects additional costs to the transaction, which in the strictest economic sense is non-value added. 

Saturday, January 10, 2009

Mass Intelligence

There is an interesting debate that just finished on the Economist - topic is Mass Intelligence. The debate topic is: "This house believes that in its appetite for culture, the world is wising up more than it is dumbing down." See the link for the entire debate - an interesting topic and in many ways, relevant in our day and age, while many of us try to define what is best for our children - from 'enforcing choices' like TV vs. reading vs. computer games etc.

Thursday, January 8, 2009

Economics of Begging?

More on the Economics of Begging - as usual, there seems to be quite a complex set of incentives that drive begging. The most interesting analysis is from Tyler Cowen (Discover your Inner Economist), who also runs an interesting blog:
Also, see a discussion on this topic on: