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.

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 www.givewell.net. 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.

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.

Animal Spirits

http://www.mckinseyquarterly.com/Economic_Studies/Productivity_Performance/How_animal_spirits_destabilize_economies_2349

Charity?

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' ! 

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.

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?