Thursday, July 31, 2008

Uncertainty in Life and Economics

Long term plans we make are all based on estimates and wild guesses and the assumption of ceteris paribus (i.e. holding other things constant). But things barely remain the same. There are so many unknowns and we adjust to them as we go along with life. The curve balls of life may throw us out of track, make us question our faith if we are religious, and lose faith in our own selves. But the bottom line is most people know (at least in the East) that there are a lot of unpredictable events in life and we need to accept them and move on. There is such wonderful economics in this. The underlying assumption is that of non-omniscience and adapting based on events.
Laura Rosslyn from Battlestar Galactica says it beautifully “We try to give simple explanations for complex events because it gives us a sense that we are in control when in reality we are not”. It sounds philosophical, but there is profound economics in that statement. Economic models try to simplify everything in an attempt to arrive at some sense of control over complex networks of events while reality is far removed and gives us very little control over events. For every controllable event, there are dozens that cannot be controlled, and several others that are not even observed. So believing that models are accurate predictors is a big fallacy. At best they could be modest indicators about the direction of any economic activity.
This reminds me of the ideas in Matrix Reloaded and Revolutions. Nothing is stand alone. Each person is connected to the other through a complex web and everything is a consequence of choices we make, and what is obvious to most of us is the immediate choice and nothing beyond that. Likewise even in economics what is obvious is only what is immediately observable and observed. There are several variables that are not even observed. So for example, with the US data, surveys collect data on mean commuting time in different cities. The data needs to be adjusted based on cities. Commuting time in Lincoln NE will be completely different from that of New York City. Trying to make a comparison between such raw data would be meaningless.
Going back to unpredictable events, once we accept that things may not always go according to plan, economic decisions would have alternative plans and arrangements or even bail-out arrangements. Once uncertainty is included in economic models things become much easier to plan for. It is surprising that people do not see the connection between planning for their own lives and that of the economy. People make contingency plans for school admission, personal financial planning and such. Why do they not think in terms of unpredictability of economic events and complexity of economic models. I think Laura Rosslyn hit the nail on the head with her statement (above) that making things simple gives people a sense of control which does not exist if they believe in the complexity of economic variables and models. However, the truth is that, how much ever we model we do not dictate the course of the economy, and even if we did have temporary measures there would be consequences for every action. Newton’s third law always bears out. At best we can build a storm shelter, but the storm does rage on outside with or without our knowledge.

Monday, July 28, 2008

Lack of Foresight

OK! So, Everyone knows about monsoons in India. In fact the term itself represents heavy rains. It has been over 60s years since Independence, and even now when it rains we have to wade and swim in water to go where we need to, and this even in big cities like New Delhi. Imagine the plight of smaller more remote places. I know governments fail in delivery, especially successive Indian governments have failed to deliver on the rain water drainage front for more than 60 years now. Two weeks back when I was in Delhi, whole areas were water logged and traffic came to a stand still. Today in Ahmedabad, even within campus I am annoyed that I have to wade through ankle deep water to get to anyplace. I am relatively well off by being on campus, can't even begin to imagine the plight of those that live off campus and have to drive or take public transport to work. Responses to problems are knee-jerk rather than calculated and strategic, and the solution to one problem leads to problems elsewhere.
Take the Delhi metro construction for example. The idea is good that they are planning a metro to ease congestion and meet the demands of the growing population. However, the metro sites and planners seem to have grossly overlooked the fact that already congested roads are squeezed even tighter when the construction of the metro line implies that one side of the road is completely closed to traffic, thereby channeling two sides of traffic on a single lane and choking the roads. In addition, they have not planned for the monsoon season. Digging up roads has made the thoroughfare loamy and when it rains the areas are practically impassable due to water logging. Here in Ahmedabad as well, just outside of campus, a huge section of the road completely collapsed. It had been under some construction project, aka dug up! There is a complete lack of foresight with everything. Cities were not planned for population increases and all of this due to some romantic notion that people would prefer to stay in villages and not migrate from the rustic settings. Grrrr!! When mega cities are thought of by corporates, the politicians are afraid they will lose their rents and the bureaucrats are afraid they will lose their power and thus rents and so they stall the projects stating all kinds of silly reasons. After all the politicians and bureaucrats will lose their rents if people become richer in India. They have to be kept poor and divided along class and caste lines for the former to have the upper hand.
Neither does the government do a good job, nor does it want it give the job to private guys who will do a good job. The saddest part of all of this is that in spite of being a democracy people can do nothing about it in India. People do show their displeasure with regimes during elections, but the choice is after all between the frying pan and the fire.

Sunday, July 27, 2008

Economic Growth Vs Bomb Blasts

Does greater economic growth imply fewer bomb blasts? I have been thinking about this ever since I started graduate school three years ago. As a Sociology major in undergrad I was taught theories that said that people were driven to a life of crime because they were poor and uneducated. So, they were forced to a life of crime beginning with petty theft to satiate hunger and pretty soon move on to bigger crimes. I have also heard this logic elsewhere about Islamic terrorists that fundamental groups target vulnerable young men and brainwash them into committing acts of terrorism and make them believe fanatical ideas. If we remove the poor economic conditions of these people through growth will there be crime no longer? So, if there is overall economic growth especially in these impoverished pockets where crime is rampant will that drive crime away? I do not see a major connection between education and terrorism at least. The marginal thief is maybe one who was forced by poverty into thieving, but recent acts of terrorism across the world have revealed that the perpetrators are well educated individuals who even have socially respectable lives. This also negates the poverty theory. 
I can understand the power of deep rooted convictions. I have been butting heads with several highly intelligent people with misguided ideas that communism is a success, so I can understand the role of persuasive but wrong ideas and ideology. However, I do think to some extent at least full stomachs can be less easily persuaded by ideas of suicide bombings than empty stomachs. It would be even better if the full stomach and other purchasing power comes in the form of reward for hard work. That way, one is not indebted to the provider. Maybe economic growth is the solution to the bomb blasts and other such violence in India and other developing countries. So! Full steam ahead in the war against terrorism, let markets rule!! As for such acts in already developed countries, I do not have an answer. Even the solution of markets I think is just a partial solution. I am not advocating an all out state sponsored war against terror or anything like that. I just believe that when individuals' lives are intertwined economically, and they are aware of the network connection, it would be in their self-interest to ensure that no harm comes to the trading partner. I know its a simplified model, but hey! its somewhat better than the model of perfect competition we read in micro. 

Friday, July 25, 2008

Markets in everything

If you believe your blog posts are being plagiarized here is a way to find out. Not only does Copyscape provide some free service, they also have a premium paid service based on your needs. Now! This is a wonderful way markets think of everything. I am pleased because, the last few days I have heard enough market bashing and how individual entrepreneurs do not act on opportunities unless the government bangs their heads together and forces them to work together to benefit everyone. I am very happy to see that entrepreneurs always find profit opportunities without the state breathing down their necks. Besides, how else can spurious discoveries be made? Ah! I love markets. 

Hattip:  Sudipta through Deesha

Thursday, July 24, 2008

Where are all those numbers?

The past couple of months I have been in India working on my dissertation. Part of my efforts have been towards finding good quality data and trying to reconcile numbers. What I keep stumbling upon is the 3% hindu rate of growth (real) which was the norm until the late 80s. My committe, at my presentation in April, was surprised that we call this a low growth rate and urged me to dig deeper. Have been at it since then and what I find is that source after source quotes the same numbers, and it just does not make sense to me. If I simply go by OLS (Optical Least Squares) it does not seem possible that suddenly in the 90s, hitherto absent entrepreneurship suddenly presented itself  to take the country to close to 9% real growth rate. The problem with many transitioning economies is that, as soon as they embrace free market ideas, they do not really do that well cause the required institutions are not present. This has not happened in India. Much as the popular press and politicians like to lament growing poverty in India, absolute poverty rates have actually gone down from close to 50% at Independence to about 26% now. I am not saying that's trivial. Indeed 26% of a billion plus people is a staggering number, but it needs to be noted that it is not half a billion but about a quarter which is a significant achievement for a developing country like India.
My dilemma right now is this. Firstly, if the 3% is an over-estimate and there are problems of measurement, how did the capacity to go upto 9% suddenly emerge in the last two decades or so? The best guess is that it was all underground and outside of the legal structure thanks to onerous policies and regulations. Some estimates say that the black economy in India is as big as the legitimate sector. I am inclined to believe those numbers although I do not know how these numbers can be validated or verified. One pointer would be the revenues from Voluntary Income Disclosure Scheme of 1997. Close to Rs.336.9732 billion was declared as previously unreported income and Rs.97.2902 billion was paid as taxes on the above income. That is quite significant, however it is not considered very significant compared to actual volumes of black money in the economy. If all of this is true then why was the poverty rate close to 50% and not closer to 25% or even lower? Were the poverty estimates also so wrong all along? 
On the other hand, if the 3% is an under-estimate, where was all the true prosperity these past few decades? Even if income estimates do not show it, people's lifestyles and consumption patterns would show it. Agreed there were several controls on all kinds of consumption goods, many of them were not even produced. If entrepreneurs made money what did they do with all the money? I guess a 94% peak marginal tax takes care of some and the rest goes underground into numbered untraceable accounts. I wonder how much gold hoarding existed, especially since people could not openly consume more. There were also gold import restrictions. Here is a real puzzle! How do we reconcile India's growth numbers from the past??

Thursday, July 10, 2008

Incentives as usual

I am staying on campus at this place that is essentially run by the Central Government. Although, the academics is mostly without government interference there is a huge bureaucracy here that reeks government management. Let me take the simplest case of the lady who is in-charge of housekeeping activities in my dorm. She is responsible for 5 floors of rooms (about 30 rooms) and bathrooms. Each room is about 8x10 and each floor has 2 lavatories and 2 shower stalls. This lady is supposed to sweep and mop every room and clean the bathrooms everyday. It takes about 5 minutes to sweep and mop a room, and she has a small register occupants are supposed to date and sign. I have been here about a month now and the bathrooms have been dirty all through. Although she is given cleaning supplies, she barely uses them and cursorily pours water all over the place to make it seem clean. The very first day, she walks into my room and even before she begins to clean, asks for a bribe shamelessly. This morning she asked me to give her clothes for her daughter. Complaints to the management are no use, because the worst is that she gets a scolding. There is no incentive for her to work. 
As a Central government employee she has job security, pension and other benefits, none of which are tied to her work. Whether she does her job or not, she cannot get fired and since she knows she has a job for life she does not really care and shirks on the job. Since Independence at least, a government job has been the most coveted one especially for these reasons. It is as good as unemployment insurance schemes where individuals are paid to remain jobless. In addition they have learned to seek bribes and ask for them openly without any shame. If I refuse to give a bribe to this lady, I am called cruel and lacking in humanitarian values, especially because she is poor and needs our help. C'mon already! She shows me a glossy picture album of her daughter's wedding and tells me there is a DVD as well if I want to see it. Lets even assume that she is in debt cause of the wedding expenses, why does that obligate me to pay her a bribe? I am more than willing to give her a cash gift if she does extraordinary on her job. She is not even doing her job much less do something over and above to make me reward her for her efforts. On the contrary she is inconveniencing me by not working, cause I am having to maintain my sense of cleanliness by cleaning the bathrooms for myself at least. 
Give them incentives to work please!! 

Monday, July 07, 2008

Why does a Coasian bargain not work here?

The last few days I have been staying at the dorms in the premier management school of the country. In addition to being an outsider in the very personal social structure of this campus, I have been facing problems due to simple externalities. A girl next door likes to play very loud music beginning midnight going on until 2am or 3am. In addition, this campus (like several campuses across India) comes alive only at night, i.e., group meetings and socializations happen mostly in the middle of the night, which is in itself surprising cause classes start at 845am at least for the first years. So, at the time when the rest of the world goes to sleep, these dorms are abuzz with activity. Actually abuzz with activity is an understatement as citizens of this closed community are prone to random loud group chants and blood curdling yells (I am not exaggerating) in the middle of the night. These are also externalities; however let me go back to my initial point about the loud music in the middle of the night. As individuals have single rooms and pay for them, I am guessing private property exists. No amount of requesting and complaining seems to mitigate the problem of loud music in the middle of the night. My very humble request was met with a rude “The music will be on for another couple of hours until I am up”, and the girl walked away. How do you approach anything like a Coasian bargain in this situation? What rewards can I offer in return for some quiet in the nights? Right now in sheer frustration I am forced to judge this person as being deficient in some basic manners and etiquette. There must be an economic solution to this situation besides legal enforcement (not that I have much to go in the way of legal recourse). I have been sleep deprived ever since I got here and do not think I can go any longer and be my usual productive self.

Friday, July 04, 2008

It takes various iterations....

.. to force alien concepts upon reluctant minds. I am understanding the real meaning of this statement that Pete makes all the time. The past few weeks in India, I have managed to increase my Blood Pressure every time I engage in any kind of conversation with anyone on any topic or issue that is even remotely connected to Economics. I have managed to get a sore throat, a head ache and a general sinking feeling. I am willing to argue my points of view with intelligent people who hold valid criticisms and questions about the efficacy of markets. In such instances all I need to do is point out that governments also suffer from the same problems and they accept my point and we have an enjoyable discussion, each holding out own position, while disagreeing with the other's. The problem is with those that are sure they and the government are always right. The problem is that academics (barring a few) are also very heavily left leaning and hence discussions are always about market failure. 

I cannot understand how people can support an anti-market stance even after they observe how much more richer we are since liberalization in the early 90s. For close to 50 years most people of the country were poor. Now there are fewer poor people, sure there are inequalities, those are observed in all transitioning countries. The only reason the poor of India seem very poor is because there are more richer people now, while in the past there were probably a handful rich ones. I do not deny that the ground realities are still such that there are millions of poor people in India. People seem to think that blocking private enterprise will make more money available to the poor. What they do not see is that private industry and competition have increased per capita income in spite of the population being over a billion and that several people have successfully transitioned out of poverty or lower class to at least middle class.