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: http://en.wikipedia.org/wiki/Emissions_trading) 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. www.econtalk.org (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?