Month: January 2020

January 2020 Collated

Maybe you have noticed, and maybe you haven’t, but I’ve been trying to make my writing on EFE just that little bit more systematic.

Towards that end, this post is simply links to all of what I posted in the month of January 2020, separated out by category.

India

We started with a set of five articles about India in 2020, and then learnt about Makar Sankranti in the next set of weekly links about India. The next set of links is my favorite post of January 2020 – writing it helped me learn more about the Indian Constitution, and I hope this turns out to be an exercise I can come back to twelve times this year. A hat tip, once again, to Murali Neelakantan, for helping out with the links, so much so that I may well end up posting a bonus set of links! The last in the India series was about expectations from the Union Budget for 2020.

Technology

As in India’s case, we started with expectations from tech in the decade to come (although the last article in the set was quite interesting: predictions made in 2010 about the decade ahead). The next set of links, on the 14th of January, was about CES, and its evolution over time. We then took a look at the evolution of mainframes, and finished Tuesdays in January 2020 with a look at the evolution of personal computing.

RoW

For at least the first half of the year in 2020, we’ll be taking a look at countries in Europe, and trying to learn more about them. That, fingers crossed, will result in series of 20 free-to-read articles about each country by the end of June 2020.

But to begin with, keeping with the themes for India and Technology, we learnt about where the global economy might be headed this year.

We began the country series with Poland. We learnt about Poland’s modern history,  immigration and emigration in Poland in recent times, and her geopolitics in modern times. What next for Poland rounded off our set of articles about Poland in January 2020.

Ec101

Incentives, sunk costs, opportunity costs, choices and horizons. To me, these four things taken together are the very foundations of economics. Everything else comes after. There is in fact an earlier post about Choices, Horizons, Incentives and Costs as well on the blog – which only serves to reiterate how important I hold these four concepts to be.

The Rest

Click on the relevant links in the right sidebar to take a look at the Etc series, which comes out every Friday, as well as the selection of tweets on Saturday and the videos on Sunday for the month of January, 2020.

 

Thanks for reading!

Corporate panchayats, feni, finance and fiscal deficits

Five articles that I enjoyed reading this week, and figured you might as well.

  1. “Nearly 80% of the village’s estimated 36,000 residents enrolled as members in the movement, which, at that point, was a non-governmental entity. They were all given an electronic card based on economic status. Several benefits, from free medical treatment to discounted groceries, were delivered based on this categorization, undertaken solely based on the company’s internal surveys.In 2015, probably for the first time, a corporate house directly entered the electoral arena in India. It was Kitex. Despite a unified opposition, Twenty20’s candidates won 17 of the 19 gram panchayat seats, cornering over 70% of the polled votes.”
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    A corporate panchayat in Kerla. This was fascinating on so many levels!
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  2. “Vaz begins the tour with an introduction to feni and its history. Considered Goa’s greatest spirit, this colourless clear liquid is said to date back centuries; some believe coconut feni predates the Portuguese capture of Goa. A potent drink with a strong aroma, it is made with coconut or cashew. The cashew feni possesses a Geographical Indication registration since 2009 as a speciality alcoholic beverage from Goa.”
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    On feni tourism.
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  3. “Fiscal Deficit represents Net Borrowings by the Government in a year. Difference between the Debt and Liabilities at the beginning and at the end of a Financial Year also represents Net Borrowings during the year. Fiscal Deficit should therefore equal change in the Debt and Liabilities during the Financial Year. All government expenditure, revenues and debts are required to be carried out through the Consolidated Fund of India (CFI). If it is done so, the fiscal deficit of the Government should equal to the additional debt incurred during the year, all recorded in the CFI.”
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    A 29 point essay on the state of India’s fiscal deficit and debt, by Subhash Chandra Garg. The excerpt is of the first point in its entirety, and the rest of the essay is about why 1. doesn’t quite work. Great read!
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  4. “But what have the Nifty stocks done? 10 years ago, the Nifty had a bunch of stocks. Let’s run a thought experiment. If you had invested an equal amount (Rs. 10,000) in every single Nifty stock in January 2010 and completely forgot about it, what would have happened?”
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    The excellent Deepak Shenoy being, as usual, excellent.
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  5. “After all, according to National Accounts Statistics (NAS) that produce the estimates for national income, consumer expenditure is around 60 per cent of the GDP. Investment (or gross fixed capital formation, to be precise) is about 30 per cent of the GDP, and its growth rate has plummeted to less than 1 per cent according to latest estimates. And while government expenditure has grown at a high rate (around 10 per cent), it is only about 10 per cent of the GDP. Accordingly, growth in investment and government spending contribute 1.3 percentage points to the overall GDP growth rate, and so to get an overall 5 per cent growth rate, consumer expenditure should be growing at higher than 5 per cent.”
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    The rest of this thought-provoking piece by Maitreesh Ghatak explains why a fiscal push will almost certainly be a bigger bang for the buck than the official data might show. Macroeconomics is hard!

Understanding Horizons, Understanding Time

The more I think about time, the more confused I get. The more I read about time, the more I cannot help but think about time.

In today’s post, I hope to be able to inspire you to get as confused about time as I am.

Before we get to the five links, here are some questions for you.

Should I have a gulab jamun after lunch today? If you are anything at all like me, your answer is likely to be a resounding “aye!”

Do you know who might want to say no? 70 year old Ashish (assuming I live to be that age) might not be such a big fan of I having that gulab jamun today.

Should 38 year old Ashish (for that is how old I am right now) listen to the entreaties of a 70 year old Ashish who doesn’t exist?

Well, if 38 year old Ashish wants 70 year old Ashish to have a chance of existing, I think it makes sense to ditch that damn dessert.

But, uh, good luck trying to convince 38 year old Ashish at 1.45 pm of the importance of thinking about the hypothetical existence of 70 year old Ashish.

That’s the problem of time discounting.

How important is the future, compared to the present?

Think of it in terms of gulab jamuns or interest rates offered to you by the bank, it’s the same thing. A weeekend trip to Goa (38 year old Ashish says yes!), or a fixed deposit in the bank (70 year old Ashish says yes!)?

Now: that was the easy bit. Let’s amp things up a little.

Do you wish your parents had saved a little bit more when they were younger? Hell, imagine if your grandparents hadn’t had that gulab jamun when they were young, and put the money in a fixed deposit instead. Go as far back in time as you wish, and imagine how important a rupee saved a couple of centuries ago would have been today – for you.

But, um, by that measure, shouldn’t you be saving every single rupee you can today for your child’s tomorrow? The argument holds whether you have children or not, by the way. If you wish your great-great-great-grandfather had been more financially responsible at age 27, when he was unmarried and without kids, then that goes for you today as well!

And all that being said, let’s get cracking with today’s set of links!

  1. “Time discounting research investigates differences in the relative valuation placed on rewards (usually money or goods) at different points in time by comparing its valuation at an earlier date with one for a later date”…
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    … says the very simple introduction to time (temporal) discounting on behavioraleconomics.com. While you’re on that page, also look up hyperbolic discounting.
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  2. “Someone with a high time preference is focused substantially on their well-being in the present and the immediate future relative to the average person, while someone with low time preference places more emphasis than average on their well-being in the further future.Time preferences are captured mathematically in the discount function. The higher the time preference, the higher the discount placed on returns receivable or costs payable in the future.”
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    That is from Wikipedia, and as homework, ask yourself if you should live life with a zero discount rate attached to most things.*
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  3. “What has become known as the “Ramsey formula” says that the rate at which one should discount an increase in consumption that occurs in the future depends on three key factors, elaborated upon below: our pure rate of time preference, our expectations about future growth rates, and our judgment about whether and how fast the marginal utility of consumption declines as we grow wealthier”
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    So here’s a way to understand the point above: I was in Europe on work recently. Should I have splurged on a three star Michelin meal in Paris? Or banked the money I might have spent over there and gone for three such meals when I was 70 instead? Will such a meal at age 70 hold the same importance for me as it does now?**
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  4. “When brain science was young, it was thought that the frontal lobe had no particular function. There were famous cases such as that of Phineas Gage, a railway worker who, in an explosion, had a long iron rod driven through the front of his brain. The rod was removed and Gage, miraculously, survived, seemingly with his intelligence, language and memory intact. Before long he was back at work.However, observation of others with frontal lobe damage soon revealed the cost – problems with planning, and also, strangely, a reduction in feelings of anxiety. What was the link between the two? Both planning and anxiety are related to thinking about the future. Frontal lobe damage leaves people living in a permanent present, and as a result they will not be bothering to make plans, so can’t be anxious about them.”
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    That is from a review of one of the finest books I have read, Stumbling on Happiness, by Daniel Gilbert. Read the book, please. I promise you that it is worth your (excuse the pun) time.
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  5. “But there’s an alternative path. Generations overlap, and so by doing more to empower younger people today, we give somewhat more weight to the interests of future people compared to the interests of present people. This could be significant. Currently, the median voter is 47.5 years old in the USA; the average age of senators in the USA is 61.8 years. With an aging population, these numbers are very likely to get higher over time: in developed countries, the median age is project to increase by 3 to 7 years by 2050 (and by as much as 15 years in South Korea). We live in something close to a gerontocracy, and if voters and politicians are acting in their self-interest, we should expect that politics as a whole has a shorter time horizon than if younger people were more empowered.”
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    Via Marginal Revolution, this lovely, thought-provoking essay by William Macaskill. As both the MR blog post and Macaskill are careful to point out, this necessarily implies that younger people should be more informed, for such a system to have even a shot at succeeding.

 

But hey, that’s as good an argument as any for the existence of this blog!

 

*Yes, you should, far as I can tell. But god, it’s hard!

**If you were wondering, the answer is no. I didn’t go for that meal. I wish I had though!

 

 

Understanding Poland’s Future

Making forecasts is a fool’s game, and while I’ll be the first to admit that the adjective in question is applicable to me more often than not, it’s not because of making forecasts!

This post, then, is not about quantitative forecasts about where Poland’s economy might go. It is, instead, about Poland’s recent trends that might continue in the near future, and what that would mean for Poland, and her neighbours.

  1. “The attractiveness of their promises are difficult to outdo, as they represent a long-desired ambition by Poles. However, on other issues the PiS is found wanting and at odds with the values and opinions of the majority of Poles. The conflict between local level activism and centralistic ambition will determine the course of the Polish politics in the next decade. Poland’s recent history surely should not let us think that the outcome is already known. ”
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    On how Poland’s recent political trends don’t bode well for the future.
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  2. “In 1989, it would have been considered utopian or plainly misplaced to imagine that, in 2019, most Polish people would live in the countryside despite only 10 per cent of the population working in agriculture. Today, the countryside is more than ever the ‘happening’ place in Poland. Four trends drive this phenomenon: re-ruralisation, de-agrarisation, de-urbanisation, and internal migration.”
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    This report came as a complete surprise to me. The notion, as an Asian and especially as an Indian, that urbanization will decline going forward was completely (pardon the pun) foreign to me. Also, the first time that I read about “water in the tap” – that’d certainly be my pick.
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  3. “The growth rate is predicted to continue slowly decreasing in the years to come and should reach -0.50% by 2035. The population is predicted to be 37,942,231 by 2020 and 36,615,500 by 2030.”
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    Those are literally the only two lines in the entire article about the future of Poland’s demographics. That being said, the article is still worth reading if you want to better understand Poland’s demographics today, about which I do not think we have learnt so far.
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  4. “They assert that the modern Polish Republic rests on “two pillars: the European Union and NATO,” and that these communities are not at odds with one another. This is the strategic balance this is needed to shield Poland. What it is pursuing at the moment is strategic imbalance. As the saying goes in Polish, “nie stawiaj wszystkiego na jedną kartę”—don’t gamble everything on one card.  ”
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    Broadly speaking, the article suggests that Poland cosying up to the United States of America might not be the best idea for securing Poland’s future, not least because it is subject to the whims and fancies of just one man.
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  5. “A few weeks ahead of COP24, the Ministry of Energy published a draft Energy Policy for Poland 2040, by the Ministry of Energy, with updated projections beyond 2030–perhaps the beginnings of a clearer path toward the green transition. The report provides a summary of Poland’s vision for eventually transforming the energy sector. Coal will remain a significant part of the energy mix through 2030 and decline more rapidly by 2040, shifting to nuclear power, renewable energy and high-efficiency cogeneration.”
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    A useful summary of Poland’s economics since 1989, its stellar performance in terms of achieving climate change goals until 2015, and then a tapering off of its enthusiasm – and some optimism about its targets in the two decades to come.

From Mainframes to Personal Computing: The Journey

From mainframes to desktops, from desktops to laptops, from laptops to phones, and from phones to watches. So far. As I said in the previous edition of Tech Tuesdays, my daughter doesn’t think of Alexa as a computer, but what is Alexa if not one?

We are an empowered species today, for most of us – not all, to be sure, but most of us – carry around with us more computing power than was used to send people to the moon. Not only do we take it for granted, but the programming itself is done at such a high level that we aren’t even aware that we’re programming a machine.

For example: when my daughter says to Alexa, “Set a timer for five minutes”, she’s really programming a computer to emit a series of beeps in three hundred seconds, starting now. But this wasn’t always the case. There was a time when people were excited about the fact that they could get a machine home into which they would have to laboriously (by our current standards) input a series of instructions for it to do certain things.

What kind of machines were these? Who made them, for what reason? What changed in terms of ease of use, design, and available accessories – and with what results for us, as society?

In today’s set of five links, we take a look at the answers to some of these questions.

  1. “At the time that IBM had decided to enter the personal computer market in response to Apple’s early success, IBM was the giant of the computer industry and was expected to crush Apple’s market share. But because of these shortcuts that IBM took to enter the market quickly, they ended up releasing a product that was easily copied by other manufacturers using off the shelf, non-proprietary parts. So in the long run, IBM’s biggest role in the evolution of the personal computer was to establish the de facto standard for hardware architecture amongst a wide range of manufacturers. IBM’s pricing was undercut to the point where IBM was no longer the significant force in development, leaving only the PC standard they had established. Emerging as the dominant force from this battle amongst hardware manufacturers who were vying for market share was the software company Microsoft that provided the operating system and utilities to all PCs across the board, whether authentic IBM machines or the PC clones.”
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    The excerpt above comes a long way into the Wikipedia article, and the correct way to read this article, if you ask me, is to scan through it, rather than read every single word. But the excerpt, for an economist, is the most interesting part, for it explains how Microsoft became Microsoft – because of an ill-thought out strategy by IBM!
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  2. “Although the company knew that it could not avoid competition from third-party software on proprietary hardware—Digital Research released CP/M-86 for the IBM Displaywriter, for example—it considered using the IBM 801 RISC processor and its operating system, developed at the Thomas J. Watson Research Center in Yorktown Heights, New York. The 801 processor was more than an order of magnitude more powerful than the Intel 8088, and the operating system more advanced than the PC DOS 1.0 operating system from Microsoft. Ruling out an in-house solution made the team’s job much easier and may have avoided a delay in the schedule, but the ultimate consequences of this decision for IBM were far-reaching.”
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    As economists, we’re interested in understanding the fact that we have the power to be vastly more productive now that we all have our own personal computers, sure, but we’re also interested in finding out why firms who were the giants of their time (lookin’ at you, IBM) didn’t make the transition over to being the giants of the personal computing era. We’re interested in this in and of itself, of course, but also so that we can apply these lessons to the giants of our time.
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  3. “The 90-minute presentation essentially demonstrated almost all the fundamental elements of modern personal computing: windows, hypertext, graphics, efficient navigation and command input, video conferencing, the computer mouse, word processing, dynamic file linking, revision control, and a collaborative real-time editor (collaborative work). Engelbart’s presentation was the first to publicly demonstrate all of these elements in a single system. The demonstration was highly influential and spawned similar projects at Xerox PARC in the early 1970s. The underlying technologies influenced both the Apple Macintosh and Microsoft Windows graphical user interface operating systems in the 1980s and 1990s.”
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    I learnt about this only while researching links for this series: the mother of all demos that inspired, essentially, what we know as personal computing today. Fascinating stuff!
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  4. “Now that computers were up and running with Microsoft’s operating system, the next step was to build tools to streamline the user experience. Today, it’s hard to imagine a world where computers didn’t run programs such as Microsoft Word, PowerPoint and Excel.These “productivity applications,” as Microsoft calls them, were revolutionary tools for getting work done. They automated many of the aspects of word processing, accounting, creating presentations and more. Plus, Microsoft’s deal with Apple allowed it to develop versions of these programs for Macintosh computers.Over the years, Microsoft has provided updates to the Office Suite, from additional programs (such as Outlook and Access) to additional features.”
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    Yes, this is a listicle, but a useful, mostly informative one. The excerpt above comes midway through the article, and the rest of the article speaks about Microsoft’s attempted move towards becoming a hardware focused firm, and the subsequent move towards being, well, a software focused firm under Nadella. We’ll be focusing on Microsoft next Tuesday, so consider this an appetizer.
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  5. “The iPhone’s potential was obviously deep, but it was so deep as to be unfathomable at the time. The original iPhone didn’t even shoot video; today the iPhone and iPhone-like Android phones have largely killed the point-and-shoot camera industry. It has obviated portable music players, audio recorders, paper maps, GPS devices, flashlights, walkie-talkies, music radio (with streaming music), talk radio (with podcasts), and more. Ride-sharing services like Uber and Lyft wouldn’t even make sense pre-iPhone. Social media is mobile-first, and in some cases mobile-only. More people read Daring Fireball on iPhones than on desktop computers.”
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    John Gruber rhapsodizing about  a whole variety of things, but mostly about how the iPhone was the culmination of the long journey that began with the move away from mainframes. It is exhilarating to realize how far we’ve come! Two weeks from now, we’ll also take a look at Apple’s long journey.

The Union Budget: The past, the process and the expectations for 2020

There’s this nagging sense of dissatisfaction: I have spent more than my usual allotment of time coming up with today’s post, and that’s because I have still not been able to find the perfect way to kickstart today’s five links.

I was looking for a nice, easy-to-read and yet informative article about the Union Budget: what is the finance bill, what is the importance of Article 112, what is the process behind the budget being formulated every year, how the budget fits into the medium term fiscal policy – the works. Well, as it turns out, to the best of my knowledge, there is no article that fits (pardon the pun) the bill.

Hence the nagging sense of dissatisfaction. Still, on that rather dispiriting note, here we go: five links about the Union Budget

  1. Moneycontrol to kick things off, on the process behind the budget. Again, not great, but lets run with what we’ve got!
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    “”The budget is made through a consultative process involving ministry of finance, NITI Aayog and spending ministries. Finance ministry issues guidelines to spending, based on which ministries present their demands. The Budget division of the Department of Economic Affairs in the finance ministry is the nodal body responsible for producing the Budget.

    How is the budget made? Budget division issues a circular to all union ministries, states, UTs, autonomous bodies, departments and the defence forces for preparing the estimates for the next year. After ministries & departments send in their demands, extensive consultations are held between Union ministries and the Department of Expenditure of the finance ministry.”
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  2. “Boost to spending can revive the economy, which will improve the returns of equity mutual funds. However, a possible surge in inflation poses a key challenge. A careful tightrope walk is what is required.”
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    Macroeconomics – and I may have said this before, stop me if you’ve heard it – is hard. This article is a classic example of “On the one hand/ but on the other hand…”
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  3. “An MTBF is a set of institutional arrangements for prioritizing, presenting, and managing revenue and expenditure in a multiyear perspective. Such a framework enables governments to demonstrate the impact of current and proposed policies over the course of several years, signal or set future budget priorities, and ultimately achieve better control of public expenditure. An MTBF, therefore, does not refer solely to the actual numerical multiyear revenue and expenditure projections and restrictions presented alongside a given budget. Rather, an MTBF comprises all the systems, rules, and procedures that ensure the government’s fiscal plans are drawn up with a view to their impact over several years.”
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    MTBF stands for Medium Term Budget Framework. We’ve got one of our own! Dr. Vijay Kelkar helped prepare it. The point is this – and any corporate leader will tell you it’s importance – never look at a budget as a stand-alone exercise. It fits into a broader, more long term scheme of things. And we in India need to be aware of the more long term scheme of things. Except, uh…
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    “The idea at the time was that the Ministry of Finance would think on a one-year budget horizon, while the Planning Commission would think about deeper issues in public policy formulation wielding an array of different instruments. Now that the Planning Commission has been disbanded, we will need to build a medium-term budget system that incorporates both points of view. There is a need to clearly define the role and function of NITI Aayog in this new environment, so as to fill these gaps in the mainstream policy apparatus”
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    That excerpt is from a book that perhaps every student of economics should read: In The Service of the Republic, by Vijay Kelkar and Ajay Shah.
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  4. “However, data on revenue available so far suggests that the government has very little fiscal space for any significant growth stimulus. If the government’s off-budget liabilities (or withheld payments) are taken into account, the central government’s real fiscal deficit could end up being as high as 5.5% of gross domestic product (GDP) in the current fiscal year, a Mint analysis of public accounts suggests.”
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    This is old news to folks who have been following Union Budgets for a while, but might come as a surprise to those of you who are just now discovering the hidden delights of this sport: our fiscal deficit numbers aren’t – and haven’t been for a very long time indeed –  exactly crystal clear.
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  5. “To cut a long story short, there is very little that the government can do in the budget to revive the Indian economy. The government budget is, ultimately, a financial account. And financial accounts, ultimately, are financial accounts and nothing more. Keynes’s formula doesn’t always work, at least not in the way it should. ”
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    I’ve cut to the chase and excerpted the last paragraph from this excellent piece by Vivek Kaul, but you shouldn’t – read the whole thing very, very carefully indeed. I have a couple of points to nitpick here and there, but the broad thrust of the article I can’t help but agree with completely.

What exactly is a constitution?

I searched for the simplest video I could find on what exactly a constitution is, and why a country needs one. This is what I could come up with.

Is there a video you know of that does a better job? Let me know!

And once again, a very happy Republic Day to you!

Bullshit finance, Muhammad Ali, Whatsapp Hacks, Bureacracy and Shenzen: Tweets for 25th January, 2020

 

 

 

Etc: Inequality, Gigerenzer, solstices, technology today, and Sir Abed

Five links that I read about recently that I figured you might enjoy reading too.

  1. “A decade ago, the writer Deborah Solomon asked Donald Trump what he thought of the idea that “all men are created equal.” “It’s not true,” Trump reportedly said. “Some people are born very smart. Some people are born not so smart. Some people are born very beautiful, and some people are not, so you can’t say they’re all created equal.” Trump acknowledged that everyone is entitled to equal treatment under the law but concluded that “All men are created equal” is “a very confusing phrase to a lot of people.” More than twenty per cent of Americans, according to a 2015 poll, agree: they believe that the statement “All men are created equal” is false.”
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    The New Yorker on inequality. I learnt about luck egalitarianism by reading this article, but it is a good overview of the topic more generally.
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  2. “There is a low-tech way design your portfolio. It’s simply called 1/N formula or equality heuristics. Simple divide your funds equally across funds. It sounds too simplistic for the complex world of finance, and unlikely to impress any investor from whom you are raising funds (unlikely to impress you if someone is asking for your money, saying 1/N is their portfolio allocation strategy). ”
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    A nice profile from Founding Fuel of Gigerenzer’s work, ideas and productivity.
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  3. “I’m informed, however, that this 20 minute error in the Hindu solar calendar is deliberate, and that this has been put in place for astrological reasons. Apparently, astrology follows a 26400 year cycle, and for that to bear out accurately, our solar calendar needs to have a 20 minute per year error! So for the last 1700 or so years, we have been using a calendar that is accurate for astrological calculations but not to seasons! Thankfully, the lunar calendar, which has been calibrated to the movement of stars, captures seasons more accurately!”
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    The catchily titled Noenthuda blog explains more about Makar Sankranti and the summer solstice.
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  4. “…few companies are pure “tech” companies seeking to disrupt the dominant cloud and mobile players; rather, they take their presence as an assumption, and seek to transform society in ways that were previously impossible when computing was a destination, not a given. That is exactly what happened with the automobile: its existence stopped being interesting in its own right, while the implications of its existence changed everything.”
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    Contextualizing technology today, by Stratechery.
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  5. “The idea is to give an extremely poor family an asset — say a cow or a goat or bees — that can increase its income over time. BRAC is hardly the first group to use this model; another prominent one is Heifer International. But BRAC combines the donation with a mix of services that has proved highly effective — including training and coaching on how to use the asset, cash grants to tide the family over while getting a new enterprise started, and help with health care and education.”
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    As the title of the blog post says, a profile of the most influential poverty fighter you’ve never heard of. Education matters!

Ec101: Choices matter!

We’ve, in our Thursday posts this year, learnt about incentives and costs. But, and this is a really, really big “but” – they become operational only when we live in a world where we’re able to choose.

Tyler Cowen and Alex Tabbarok – two people who have probably done more for educating people in economics than anybody else over the last thirty years or so – have written two of the best textbooks on economics available anywhere – one on micro and the other on macro.

In the book on microeconomics, they summarize ten different “big ideas” in economics: incentives, the invisible hand is the best kind of magic*, trade-offs matter, thinking on the margin matters, trade matters, wealth matters, institutions matter, business cycles are unavoidable, printing more money will lead to inflation and central baking is hard.

*I’ve paraphrased practically all of the big ideas, but this in particular is my phrasing, not theirs.

Two other asides before we proceed: in retrospect, it is interesting (at least to me) that at least one of their PhD’s (Tyler Cowen’s) and quite a few of their books are based literally on nothing more complicated than an exposition of these big ideas. There’s a lesson in there somewhere.

Also, they say that the biggest idea of them all is that economics is fun. I’d paraphrase that too: learning about the world is fun, and economics is a great tool to use towards that end.

Now, that allows for a neat segue to the topic du jour. At the very start of the book, even before the table of contents, they provide their definition of economics, one that I agree with wholeheartedly: economics is the study of how to get the most out of life.

Here’s the two word version: choices matter!

Unless we live in a society that is free to choose, at an individual level or otherwise, none of the other big ideas even come into play. So, to me, economics is first and foremost about being free to choose – and then about the benefits and costs of the choices that you make.

Which, I’d argue, means that learning about choices is plenty important. Ergo, this post.

  1. First things first. What is choice?
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    I chose (see what happened there?) this Quora post not because it is the “best”, but simply because it is so typical. Here’s what I think choice is: it is an admission of the fact that you can’t have everything. A particularly relevant example for me: what to eat from a buffet at a five star restaurant? With every passing year, “everything!” becomes an increasingly unrealistic answer. So choose those dishes that are likely to taste the best (maximizing happiness), or those dishes that are likely to cause the least harm (minimizing unhappiness) along some dimensions such as spiciness, oiliness or what have you.
    Or hey, do both at the same time! Choose the dish that is likely to taste the best and the dish that is likely to do the least harm. That’s half your micro paper right there – the rest is just math and diagrams. (I am kidding, of course, but only a little bit.)
    Choice is an admission of the fact that you can’t have everything, but that’s a good thing! It forces you to go with the best. Which paintings should you look at when you’re at the Louvre? “Every single one!” is unrealistic. Force yourself to choose, therefore, the very best of the lot. Constraints help you understand your own tastes better: aesthetics is, among other things, a matter of acknowledging the existence of constraints.
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  2. So having too many choices is a bad thing? It would seem so:
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    “It all began with jam. In 2000, psychologists Sheena Iyengar and Mark Lepper published a remarkable study. On one day, shoppers at an upscale food market saw a display table with 24 varieties of gourmet jam. Those who sampled the spreads received a coupon for $1 off any jam. On another day, shoppers saw a similar table, except that only six varieties of the jam were on display. The large display attracted more interest than the small one. But when the time came to purchase, people who saw the large display were one-tenth as likely to buy as people who saw the small display.”
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  3. But hang on. Of what use is an economics theory that doesn’t have a on-the-other hand angle? Tim Harford, as is so often the case, to the rescue.
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    “But a curious thing happened almost immediately. They began by trying to replicate some classic experiments – such as the jam study, and a similar one with luxury chocolates. They couldn’t find any sign of the “choice is bad” effect. Neither the original Lepper-Iyengar experiments nor the new study appears to be at fault: the results are just different and we don’t know why.”
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  4. And on a related note, have you heard of Herbert Simon and satisficing? This excerpt is from a Wikipedia article on Barry Schwartz’s book, The Paradox of Choice, but it is actually about Herbert Simon.
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    “A maximizer is like a perfectionist, someone who needs to be assured that their every purchase or decision was the best that could be made. The way a maximizer knows for certain is to consider all the alternatives they can imagine. This creates a psychologically daunting task, which can become even more daunting as the number of options increases. The alternative to maximizing is to be a satisficer. A satisficer has criteria and standards, but a satisficer is not worried about the possibility that there might be something better. Ultimately, Schwartz agrees with Simon’s conclusion, that satisficing is, in fact, the maximizing strategy.”
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  5. And the final word goes to Tyler Cowen. Or is it Herbert Simon all over again? Choices, choices.
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    “What if you asked people the following: do you wish to choose your own means of limiting your (subsequent) choices, or do you wish to let someone else, perhaps the government, do the work? I suspect the answers would overwhelmingly favor the former option, namely voluntary choice at the meta-level. And if you reexamine the experiments mentioned above, they are all about ways in which people voluntarily limit their own choices. Maybe you don’t wish to run your own cancer treatments, but you wish to choose the doctor who will.”