Thoughtful economist

Albert O. Hirschman, 1915-2012 | Francis Fukuyama

How the Greek caused their own Economic collapse; possible lessons for India.

In this Vanity Affair piece, Michael Lewis explores the origins of the crisis in Greek economy and the role of group of extremely holy monks based out of the Vatopaidi monastery in Mount Athos. It has tremendous lesson for India as the culture and economy are remarkably similar.

Spite and Development

An interesting review of a World Bank Policy Research Paper by Fehr, Hoff and Kshetramade(1) which argues that "given the lack of effective institutions in a developing country, the key ingredients in a success story are endogenous contract enforcement and the ability of ordinary citizens to resolve coordination and cooperation problems."(2).

There is an old joke that a container filled with indian crabs can be carried without the lid, since all the other crabs will pull back any one which manages to reach to the top to escape. In this paper they define 'Spiteful preferences' are defined as 'the desire to reduce another's material payoff for the mere purpose of increasing one's relative payoff.' It seems that the World Bank would now want to make Indians more cooperative for economic development.

An interesting part of their results is that this spiteful behavior is allegedly prevalent more amongst the higher caste than the lower and especially in the north of India.

The author concludes by saying that these findings are perhaps common knowledge to the native which I agree and also asks the question of what next. I have no idea but if I had I will definitely tell and won't be spiteful :)

(1)Fehr, Ernst & Hoff, Karla & Kshetramade, Mayuresh, 2008. "Spite and development," Policy Research Working Paper Series 4619, The World Bank. 

(2)http://www.rediff.com/money/2008/oct/31guest2.htm

Commerce -> Math -> Science ->Trade -> Boom

We live in interesting times 

The financial crisis is just beginning according to some finance insiders, economists and journalists. One of the reasons for this crisis is the high amount of leveraged trading done by banks and other institutions. 

Leveraging means using tools to amplify your action. In a physical lever, we need to apply small force at one point to achieve a multiple of that force at some other location by pivoting on a fulcrum point.

Leverage in Physics

So to have the effect of X times a force F, you just have to apply a force F at another suitably chosen point. This is a powerful idea but has been around for millenia most notably used by Archimides in many of his inventions. Infact, he is said to have remarked that give me a fulcrum strong enough and I will move the world.

But the downsides of this is that if you make a small change in F, there will be X times the change on the other side. So a small error propogates multiplicatively in leveraged scenario. 

Though this is a crude analogy, but even in finance people started doing something similar. They did leveraged trades so as to need to only invest a small amount but hoping to get a bigger return. They failed to see the downside which is that their risk also balooned and also the fact that if everyone took such extremely leveraged position, the whole system becomes extremely fragile due to a small shock even though the chances of that shock occuring might have reduced.

Many of these financial instruments were results of using complex mathematical tools and methods which were traditionally developed to help in solving scientific and engineering problem. But primitive mathematics like number system and algebra were developed to facilitate trade and commercial activities. 

It is funny that first math developed from commerce, then it is used and developed spectacularly well in the field of science and engineering, but then the advanced math when applied back to the field of commerce seems to have backfired. 

Research like you don't need the money

The nobel prize in Chemistry announced this week was given to three researchers "for the discovery and development of the green fluorescent protein, GFP" However there is a fourth person who had a good contribution in the work and would have been one of the winners if his research grant would not have run out.

Douglas Prasher "isolated and copied the gene that makes the mysterious Aequoria Victoria jellyfish glow."

An interesting snippet from the story-

With the bills mounting at home, he took the job driving the courtesy van for the Huntsville dealership. He said he thought driving the van would be a good way to meet people and potentially make business contacts.

"He's very overqualified for the job," Bill Penney's service director, Bob Pruitt, said Thursday. "You don't get too many biochemical engineers wanting to be your porter, but he wanted to keep himself busy doing something."

On the other hand, Neel Kashkari a 35 year old engineer turned VP at Goldman Sachs turned distributor of $700 billion bailout plan had made the wise choice.

His first and only job in engineering was working on satellite technology at TRW, a Cleveland company later bought by Northrop Grumman. But when he looked into his future, he didn't like what he saw: several more years of grad school for a PhD, then a lifetime in research and development. He decided to go into business and focus on technology, earning his MBA from the Wharton School at the University of Pennsylvaniaand landing a coveted investment banking job with Goldman Sachs.

Wishing Neel good luck in his bailout effort and hope Doug Prasher gets a more satisfying job soon.

Lack of Humility

Eric Shoenberg advises economists who act as public policy intellectuals to take in a dose of humility. I guess an apt reminder especially since the economics nobel is being announced soon!

Economics of Aid

This article surveys and discusses the most important work done in the field of economics today. And to my pleasant surprise, the author sees the work on studying ways to improve the actual positive impact of economic aid, done at the Jameel Poverty Action Lab at MIT, led by Esther Duflo and Abhijit Banerjee, as the one.
This part of their finding is very interesting :

"Banerjee estimates, conservatively, that $15 billion a year out of roughly $100 billion in annual development aid worldwide could be spent on programs that have been proven to work. Unfortunately, the actual figure is much closer to zero than to $15 billion."

It reminds me of Rajeev Gandhi's famous statement that only 15 paise out of 1 rupee spent by the government of India reaches the poor. The rest is lost in form of inefficiencies and corruption. And now this research shows that even out of the 15 paise that reaches them only 15 % is actually doing real benefit.

Ralph Nader

Yesterday was Ralph Nader night! The maverick politician and long time consumer rights crusader gave a small talk in our school.

Nader spoke about rising inequality in American Economy (e.g. the top 1% had the wealth equal to the bottom 50%!), the war in Iraq etc. He was witty, informative though he looked a bit old and fragile. He even gave 3 books espousing causes in which he is interested to everyone in the audience.
Since this talk was being held in the economics department, he talked about the rising corporatization of the field. He felt that economists nowadays are so engrossed in their quantitative and mathematical techniques that they are ignoring the empirical data. Economists point a healthy picture of US and world economy because the statistics show growth, but in reality there is a decline in the economic conditions of the common man and most of the growth were being cornered by the rich sections. While the argument does seem valid, there are economists like Amartya Sen who study parts of economy from the perspective of the poor and there seemed to me traces of anti-intellectualism in this.

Nader's viewpoint cannot be ignored and like all good politicians (at least in India), he was championing the cause of the weaker section. He did came out as a bit pessimistic but that might be to force the audience to react.

"The trouble with India"

A well thought article a lot of it being what we know already. Infrastructure should be India's top priority, but it shouldnt be at the cost of social sector reform. Thats what even Chandrababu Naidu has learnt.

Income Inequality : Indian Context

Dr. Charles Wheelan has written a thought-provoking article on Why Income Inequality Matters and it seems to be a must read for anyone interested in contemporary economics. He reitarates a very interesting observation in economics.


"In other words, we care less about how much money we have than we do about how much money we have relative to everyone else. In a fascinating survey, Cornell economist Robert Frank found that a majority of Americans would prefer to earn $100,000 while everyone else earns $85,000, rather than earning $110,000 while everyone else earns $200,000.

Think about it: People would prefer to have less stuff, as long as they have more stuff than the neighbors.

The point -- and this is still a nascent field -- is that a nation may be collectively better off (using some abstract measure of well-being) with a smaller, more evenly divided pie than with a larger pie that's sliced less equitably. Reasonable people can and should argue about that."

That's a very interesting observation which is very true both for the individual as well as nations. One of the reason for India's strong economic growth seems to be the "tournament effect" as seen by the way we (as seen in the media) are always comparing ourselves economically with the west and china.

But there is another point of relevance for India. India's Gini coefficient in that article is said to be 0.33 which means that we are a relatively equal society. But more than that, this also would be a point to rebut the views of certain section which believes that Nehruvian economics was responsible for all the ills of Indian economy upto the 90s and Manmohan Singh magically waved a wand of liberalization and all was light.

This criticism come mostly from the upper middle class which had the most to suffer in this era. For the rich, could go abroad and live that life, while the poor were just thankful to survive. The upper middle class believes that if the liberalization had started earlier, then they would have been able to enjoy the luxuries that they have now earlier.

But IMHO this is a false belief. Nehru's controlled economy probably led to the smaller but more equitable pie than the way Brazil developed. But of course, even my view is pure speculation but that is all that should be kept in mind by people who accuse Nehruvian policy of being the architect of India's economic misery.