Tuesday, December 24, 2013

"Economic bigotry" or the utter stupidity of minimum wage laws

There has been a lot of outrage over the arrest and detention of the Indian diplomat Devyani Khobragade, on charges of violation of contract to pay her maidservant the mandatory minimum wages as prescribed by local US law

A lot of "larger issues" have been discussed in the media...the treatment of domestic servants in Indian households in general, the sense of entitlement of the Indian elite, and the Indian bureaucracy in particular etc.

One thing that has escpaed comment is the minimum wage law itself.

At best what some commentators have noted is that the US minimum wage laws may be "too high" for Indians (with the famous comparison of the diplomat's own salary with the mimimum wage requirement)

For me though this misses the point ...it's not about whether the minimum wage is "too high" or "too low", it is that the minimum wage law is stupid.

It's not only that I disagree with it, or think it is unnecessary etc., it is that it is objectively speaking moronic.

Most people see minimum wage laws as a vanguard against rapacious employers greedily exploiting their innocent employees with a pitiable wage that is unfit for dignified living.

Such a formulation only makes sense if you think that the labor market is monopsonistic- that there are very few employers, and hence they can cartelise to keep wages low.

It is impossible to make that argument with a straight face about the market for domestic servants. Do we really believe that there are only a handful of people in India who have servants?

In fact, the market for domestic servants is probably one of the most free markets- people can easily move between jobs, prevailing market wages are widely known, the market is very liquid etc.

In such a market the price/ wage is a fairly accurate estimate of the productivity or value added or marginal benefit by employing that worker

All transactions in a free market are a two way street- both parties benefit from the transaction (indeed that is the only reason they are voluntarily participating in the transaction)

So a mandate or stipulation would cut both ways. You may feel a warm glow on being kind enough to stipulate a minimum amount for people to pay...but a minimum for wages is exactly identical to a minimum for productivity

What this means is that you believe that anyone who produces less than an arbitrarily decided minimum amount does not deserve a job...even if there are others who would willingly employ that person

Indeed that is the conclusion that most of the commentators are advancing (including people like Mihir Sharma who edits a business newspaper and Lord Desai who is a renowned economist)...that the Indian diplomats should do their housework themselves if they cannot afford to pay a servant as per the minimum wage laws.

Think of that for a second...they would rather than no one has a job, than someone has a job that pays them what they are willing to work for, but that people like Mihir Sharma deem as unfit for a dignified life. So they impose their notions of aesthetics and morality upon the rest of society to prevent other adults from engaging in voluntary exchange that does not hurt anyone else.

How is this any different from those who impose their notion of morality upon the rest of society to criminalize homosexuality? And yet it is the same people like Mihir Sharma who decry the Supreme Court verdict on 377 (which it has to be noted, did not criminalize homosexuality, but merely noted that the Constitutional way to change that law was by an act o Parliament rather than judicial review)

Normally, I avoid strong language or even a mention of personalities that I may disagree with. The reason I am doing so now is that I believe that the sanctimonious self-righteous arguments that these people are now advancing are nothing but sheer bigotry.

It is economic bigotry to say that a person who does not produce a basic minimum is unfit to have a job. That is the sum and substance of minimum wage laws.

Intentions do not matter. You may think that your only objective is to protect the distressed workers. But the truth is that your Galahad act consigns them to unemployment.

Intentions are no excuse...bigots may believe that laws against racial miscegenation, or sexual conduct are genuinely in the interest of the people whose behavio they control, but it is both nauseatingly paternalisitic and deeply bigoted.

Footnote: Of course a violation of any contract is punishable and to that extent Devyani Khobragade should be held accountable. My only point is that let's recognise that she is being charged for not following a stupid law.

Saturday, December 29, 2012

How to solve problems: The basic schema

In this post I want to layout a general schema for how I approach problem solving in different contexts. Most of what I lay out is my synthesis of underlying principles that have governed my own thinking about various issues,as well as a ton of material that I have read.

My aim will be to continually refine and update this post as I apply this to tease out my conclusions in problem solving for specific questions.

Again, not all of this is original and revolutionary- much of it has been ground covered by thinkers who have most influenced me such as Karl Popper, Friedrich Von Hayek, Charles Darwin etc.

Broadly speaking there are two types of problems- "simple" and "complex". I don't mean "easy" and "difficult", several things (such as the theory of relativity) are difficult but "simple" in that you need to invoke very few principles to explain a vast number of phenomena.

"Complex" problems have one or many of the following characteristics:

1. Several agents: Unlike simple problems, which involve only one or two agents, complex problems involve the interaction of thousands of agents. I use the term "agent" and not "person" to make this applicable to problem solving situations where there are entities that are not necessarily a human being but act as if they have purpose or agency (to use a technical philosophy term- any entity where a teleological explanation is the best way to describe and understand it). Corporations would be one example, genes would be another. An aspect to note is that these agents largely optimize for their interest- that is, they are "selfish". This does not mean there is no altruism. just that the primary purpose of each agent is usually self-interest.

2. Information having three properties- being big, local and transient: Unlike simple problems, the information needed to solve complex problems is massive. It is also local, that is the information is distributed among several entities, and there is no efficient way to engineer gathering and storing the data centrally. Thirdly the data is transient, in that it is continually refreshed- so even if you somehow managed to warehouse it centrally you would need to keep refreshing it so from an engineering standpoint it would not be computable realistically.

Here is the simple idea: Simple problems can be solved efficiently by an "intelligent designer", complex problems need to be solved by "evolutionary systems".


Simple problems have only a few agents, and information that can be centrally gathered and processed and is not local or transient. In such cases an intelligent designer can process such information and solve the problem.

For complex problems no single entity can solve the problem since they would not even be able to gather the information required to do so, and even if they did, they would not be able to realistically impose their will on multiple agents.

So such problems require a problem solving system- not a single designer.

What would be the characteristics of such a system?

1. Experimentation or hypothesis generation: When there is no single place to access data to solve a problem you need tentative conjectures at a solution. Hence the problem solving system should allow experimentation so that several attempts can be made at solving the problem. This is also important since whatever solution is found is also transient (since the information itself is transient). so a process of continual experimentation is required

2. Failure and feedback or error elimination: The second step of the problem solving is that experiments should be allowed to fail, since such failure conveys information. When a tentative conjecture is wrong, it should be allowed to quickly fail, so that agents can infer that the conjecture is wrong and retry with a different experiments. Error elimination leads naturally to proliferation of "good solutions". Proliferation can be accelerated with active efforts (this is the difference between natural selection and artificial selection)

The system that has these two characteristics is an evolutionary system. I am using evolutionary in the broad philosophical sense and not just in the biological sense. Any system that has experimentation or hypothesis generation by multiple agents, in environments that are rich with massive, local and transient information, and allow for error elimination and feedback is an evolutionary system.

So, whenever you need to solve a problem, ask yourself, if it is simple or complex. If it is complex, set up an evolutionary system i.e. setup a a system that allows experimentation, that has a feedback mechanism and which will ruthlessly eliminate errors.

Let me take a simplified example (simplified in terms of making a direct argument without much nuance for reasons of clarity of explanation) to illustrate my point on problem solving for complex problems:

Example #1: Problem statement: How should India's GDP growth rate be boosted?

This is clearly a complex problem. It involves literally a billion producers and consumers. The information needed is the consumer needs of billions of people in billions of markets (e.g., what kind of toothpaste do they want, how much will they spend on mobile phones, on steel, on movies etc.) - the information is massive, local (what people in Bhakti Park spend on movies is different from what people in Bandra will spend) and transient.

What is the evolutionary system needed: The free market

The market needs to be free to allow experimentation. A hyper regulated market, where entrepreneurs cannot experiment with different business models to serve customer needs will be unable to solve each piece of this problem. A free market will allow local experiments and innovations such as dabbawalas to serve hot food to consumers in Mumbai at work. 

The market should also allow failure. Bankruptcy laws that allow firms to go out of business painlessly will convey information to all other firms about what works and what doesn't.

No single person knows what is needed to boost India's GDP. the beauty of evolutionary systems is that no one person or entity needs to solve the problem. The evolutionary system harnesses the problem solving ability of a billion people, each one working on a minor piece of the problem, forever experimenting, failing and learning , and that's how the full puzzle is cracked.

A footnote: Nothing of what i have said is original. But it is worth repeating, for one reason.

Some people support free markets since "they work". They point to the example of the US vs. the USSR etc. here, the free market is portrayed as a necessary evil- I have heard several people say that while Communism is a moral ideal, it doesn't work since there is no incentive for people to work. In the view of such people, a free market is the solution to a human failing- that is selfishness. Not only do I think this is naive empiricism since there may be several other factors that may govern the success or failure of a nation's economy, it also misses the point- of taking only one aspect of what makes the economy an evolutionary system- namely the multiple (and selfish) agents. But this totally ignores the fact that even if people were not selfish, the information required to solve the problem would simply not be available to a central planning authority (such as the Planning commission)

Some support free markets on the grounds of political philosophy. Most libertarians would be of this worldview- that economic freedom is a basic human right. I am sympathetic to this point of view, and even share it.

But there is a deeper reason also for my support of free markets. My economics is determined not just by empirical evidence, or my political philosophy (libertarianism) but my my understanding of epistemology (the study of knowledge in philosophy). Not only do free markets work and uphold basic human freedoms, they are the only way to deal with the nature of knowledge in a complex economic world- where information is massive, local and transient. In a world of Martians of homogeneous, unchanging and few consumer preferences, central planning may be ok- but not so with the basic nature of human beings and the world we inhabit.

In my subsequent blogposts I explore this notion of evolutionary systems to address more nuanced problems than the one on free markets.

Saturday, September 29, 2012

An Indian in Indochina: A view from the "tributary"

For the next 6 months I will be based at Hanoi, Vietnam. I  will be capturing some of my experiences and reflections here in an occasional blogseries titled "An Indian in Indochina"

All modern nation-states require to construct a sense of identity and shared consciousness (of course, in a deeper sense, isn't all identity constructed?). Myth making, a historical revisionism and revivalism of a glorious past etc. are common ways that   elites use to construct such a sense of national identity among the larger population. 

In much of East Asia, the construction of national identity has also been animated by an impulse to resist the overwhelming and homogenizing influence of the historical hegemon of the region- China. 

China looms large in the consciousness of the Vietnamese sense of identity. Nationalist myths, not only in modern Vietnam, but in their history over thousand years, involve stories of men and women standing up to Chinese imperialism. (read this fascinating story of a sisterhood of women generals defeating the Chinese http://en.wikipedia.org/wiki/Trung_Sisters )

The Vietnamese self-perception is of a hardy and proud people, spiritedly resisting the rapacious and brutal Chinese forces, relentlessly seeking to pummel them into submission. 

Much of this is based on reality. In his deeply perceptive book- "When China Rules the World",  Martin Jacques wrote about how China is not a conventional nation-state, but has a character of a "tributary state". A tributary state is an imperial power, which perceives itself to be a rightful hegemon, but which is content to allow local rulers to wield administrative power as long as they acknowledge its supremacy. In ancient China, the neighbors- Korea, Japan, Vietnam etc. used to explicitly acknowledge this by paying tribute to the Chinese emperor. 

In many ways, this attitude seems to shape the conduct of Chinese foreign policy towards its neighbors even today. Indeed, Chinese accounts of the latest maritime disputes is bewilderment about the pesky tributaries not willingly accepting their status as inferior appendages of China, and having the temerity to stand-up to china instead. 

The fascinating thing is that though the national identity in East Asian countries is constructed in opposition to China, there is an implicit and un-self conscious acknowledgement of the centrality of China to defining their sense of self. 

Look no further than nomenclature for this. The Chinese name for China- "Zhongguo" - immodestly means "Center of the world". What is fascinating is that even the Japanese name for China- "Chuka Minkoku" also means "Center of the world" ! It's almost like the Japanese acknowledge the centrality of China. Similarly the Vietnamese also define themselves in relation to China- indeed the name Vietnam itself means "the south Viet" or "the land of Viets in the south", thus defining themselves in relation to their larger and more powerful neighbor. 

It is this curious dualism that is fascinating- the influence of China on culture and identity is undeniable, but its "soft power" is outweighed by its malign and arrogant "hard power". 

The most pithy quote to illustrate the modern Vietnamese identity toward China: In a conversation with a Vietnamese colleague I asked him if there was any residual anti-American feeling due to the Vietnam war. He replied "Now, we see the US as a potential ally. After all, we fought the US only for 20 years, and the French for only 200 years, but we have been resisting China for over 2000 years"!

Saturday, September 15, 2012

Why Ben Bernanke is like "Baasha"/ Rajinikanth

The Federal Reserve's move to undertake QE3 is one of the biggest intellectual and policy shifts in the field of economics.

In this post I try to explain the nature of the policy and how it will work, by using an analogy from a scene from South Indian superstar- Rajinikanth's most famous movie- "Baasha". Watch the total kvlt scene below (unfortunately could not get a clip with subtitles, but like several Rajini scenes you can figure out what's going on even if you don't speak the language)

So here's what happens in the scene: The girl (Rajinikanth's sister) goes to the owner of a medical college to seek admission. He then lewdly propositions her; she then goes crying to Rajinikanth, who joins her for the next meeting with the college owner.

When the guy still doesn't yield, Rajinikanth asks him if he can have a word with him alone. That's when he reveals himself to be "Baasha"- a renowned mafia don. Then you see the other guy abjectly surrendering, saying that Rajinikanth could not just have one seat in the college, but the entire college if he chooses to!

Notice that Rajinikanth does not actually have to do anything- he doesn't have to actually beat up the guy or even explicitly threaten him.  In fact once he knows that it is "Baasha", the rational reaction is to give him whatever he wants without putting up a fight, since resistance would be a costly exercise in futility. Hell, it's Rajinikanth, who could win a fight with him!

Ben Bernanke's strategy to solve the unemployment crisis (based on a revolutionary new policy framework in economics called "market monetarism")  is based on a similar idea.

In a recession of the kind that we see in the US now, the essential problem is a shortfall of demand- that people are not spending. This becomes a self-reinforcing cycle. As an example, if I own a cement factory, I will not produce much during a recession since people are not constructing homes; because I am not producing cement I don't employ too many people in my factory- leading to unemployment; this unemployment means people do not have enough money and hence will not construct homes, which means I will not produce cement, hence the cycle continues.

Hence we get stuck in a recession because people in the market have low expectations of demand. When people act as if there will be low demand, it becomes a self-fulfilling prophecy.

So what can we do to change people future expectations of demand?

Well the only entity that can do so is the Federal Reserve- an entity which is nearly as powerful as Rajinikanth!

Here's how it works.

Step 1: The Federal Reserve explicitly lays out its goal. Here the goal is to grow the economy by a certain rate to ensure that unemployment reduces (just as Rajinikanth makes it clear that he really really wants that medical seat)

Step 2: The Federal Reserve then hints at what it will do if the goal is not reached. In Rajinikanth's case the hint was that he would beat up the guy, in the Fed's case it is that they would 'print money' to buy mortgage backed securities to lower long term interest rates to encourage spending

Remember the Federal Reserve has unlimited power to print money, just as Rajinikanth has unlimited power to beat people up. Resistance is futile, you might as well expect that the superpower will achieve what he/it wants and behave accordingly.

Then the superpower doesn't even have to carry on it's threat! Rajinikanth does not actually have to beat up the guy...the Federal Reserve did not buy a single mortgage backed security, yet stock prices still went up!

The reason is that the cement manufacturer now knows that he may as well accept the fact that we are going to have higher demand. This is because if the Federal Reserve does not get the demand it wants in the economy, it is going to print money and buy cement itself! (albeit indirectly). The Fed can print enough money to buy over the whole world- so it's a credible promise/threat that it will increase demand

Given that there is going to cement demand in the country it's the rational thing for me to produce cement; which means I will employ people in my factory; which means they will have money to spend, which means they will construct homes, which means that I need to produce cement. The hitherto negative spiral is converted to a positive one. The market acts as if the monetary infusion has already taken place, and then the monetary infusion is hardly required! (hence the name 'market monetarism')

Never take on Rajinikanth. Never take on the Fed. Assume that they will get what they want, and change your behavior accordingly, resistance is futile.

Why I find this appealing than fiscal stimulus (i.e. the Government spending to increase demand in the economy), apart from grounds of economic ideology (which is that it involves Government interference in the economy which as a libertarian I am opposed to) , is it's beautiful aesthetic symmetry. Recessions are caused due to low expectations, hence what you need to do is to change expectations. Fiscal stimulus means you have to actually interfere, a 'market monetary' stimulus involves just credibly promising/threatening to interfere, that's enough to change expectations.

Market monetarism started as an idea proposed by a few intrepid bloggers- Scott Sumner, David Beckworth, Nick Rowe etc. and has now become Fed policy. We are witnessing one of the most consequential shifts in how we conceptualise the roles of institutions such as the Fed in the economy. These ideas require to be understood and popularised in the wider public so that we have more public discourse about these policies.

Monday, March 19, 2012

Intellectual climates and ideology

Scott Sumner put up a very thought provoking post recently- " What if Matt Yglesias had been born in 1955?"

The basic argument of the post is that ideology is largely shaped by the intellectual climate that one is exposed to. If that was all that the post asserted, that would hardly be earth-shattering insight. But the intriguing part was the transmission mechanism- how does intellectual climate shape ideology.

It is not a simplistic story of affiliating with the ideology that happens to be more prevalent when one is young.

Here's a paragraph from the post that shows it:

Liberals (in the American sense) seemed so illogical during the 1970s, so naive.  I suppose my younger readers are now shaking their heads in disbelief:  “Everyone knows the conservatives are the stupid party, and always have been.”  They’d point to global warming denial, creationism, irrational fears of hyperinflation, or claims that “the military isn’t that expensive,” and hence a good way to employ the youth of America.
Yes, I know all that, but everyone is shaped by what was happening when they were young.  I recall:
1.  Progressive hostility to the hard truths of cost/benefit analysis.
2.  Hysteria over chemicals in food, even though science didn’t back them up.
3.  Denial of the role of money in inflation and support for crack-pot solutions such as wage price controls (Yes, I know about Nixon, I’m talking intellectuals now.)
4.  Denial of the disincentive effects of welfare programs.
5.  Soft on communism.  By that I don’t mean pro-communist, I mean anti-anti-communist.  When I was young calling someone an “anti-communist” was basically an insult in liberal company.  If you called Mao or Castro a brutal tyrant you were viewed as an embarrassment; as something of a something of a McCarthyite.  Chilean economic policies were viewed as evil.  Now the Chilean socialists have adopted them.
6.  Denial that punishment deters crime.
And I could go on and on.  It seemed to me that liberals weren’t willing to engage in clear, hard-headed, logical thinking.
 Building on Scott Sumner's example, here is my explanation of the transmission mechanism is as follows:

1) Due to various factors (exogenous to this explanation) there is a particular ideology that is more anchored in logic and analytical thinking. For example in the 1950s, conservatism was the intellectual ideology. In the current decade, liberal/ progressive ideologues (in the US) are much more intellectually rigorous than most of their influential conservative counterparts
 2)  Based on your own propensity towards intellectual/ analytical / logical thinking, you would then affiliate with the group that best mirrors that. Hence, what you affiliate with is not an ideology, but people who are equally smart. The ideology is an incidental by product. This makes perfect anthropological sense too, quality of thinking is a signal for potential power (this is called "expert power" in behavioral sciences); and people tend to affiliate with others who show the capacity for such power
3) Then, do to in-group vs out-group reasons, you would double down and defend "your side" even when the intellectual climate changes. Witness the vast mass of Republican economists reduced to the level of having to defend the various lunacies of the party's current anti-intellectual idiot core (which Krugman calls having to play for "Team Republican")

I like this explanation since it makes sense anthropologically, and since it explains why the concentration of "intellectuals" shifts so much over time. It is not the ideology per se (one can be an intellectual conservative or liberal or libertarian). It is actually more about how we go about social and intellectual affiliations. This explains why an intellectual Scott Sumner growing up in the 1950s ends up as a conservative, while a Matt Yglesias ends up as a liberal

What would be interesting to investigate is how the intellectual climate itself shifts- what causes a massive concentration of intellectuals in one ideological group or the other

I can relate this to my own life. I was growing up in the 1990s in newly liberalizing India. The wages of a sterile socialism had hit us hard with the balance of payments crisis and the overall impending macroeconomic collapse of India. The rapid and visible change that I witnessed in the wake of economic liberalization, accompanied by the logically sound and rigorous arguments made for economic freedom (as opposed to the ridiculously trite and vacuous rhetoric of the left (" companies should work on a no profit, no loss basis"; "manual labor should be respected, so every worker in a company should be paid the same amount- from the CEO to a sweeper"!- believe me these were actual arguments at the time!)

A lot of my libertarianism was probably shaped by that

Wednesday, February 22, 2012

Why Obamacare's contraception mandate offends me...as a finance professional

The latest controversy associated with the Patient Protection and Affordable Care Act (aka "Obamacare") is the mandatory requirement for employers to provide health insurance for employees that includes coverage for contraception (for example, the birth control pill)

Predictably, there has been outrage in the US, with social conservatives raving about Obama's "War on religion" and even non-religious libertarians being unhappy with the imposition of a state imposed mandate upon people to undertake an activity that conflicts with their values.

But even if you're not outraged, on grounds of either religion or economic and civil liberties, the coverage of contraception by the insurance mandate does not make any sense from the standpoint of conceptual finance

Chicago economist, John Cochrane, explains it well:

" Critics are missing the larger point. Why should the Department of Health and Human Services (HHS) decree that any of us must pay for "insurance" that covers contraceptives?

I put "insurance" in quotes for a reason. Insurance is supposed to mean a contract, by which a company pays for large, unanticipated expenses in return for a premium: expenses like your house burning down, your car getting stolen or a big medical bill.

Insurance is a bad idea for small, regular and predictable expenses. There are good reasons that your car insurance company doesn't add $100 per year to your premium and then cover oil changes, and that your health insurance doesn't charge $50 more per year and cover toothpaste. You'd have to fill out mountains of paperwork, the oil-change and toothpaste markets would become much less competitive, and you'd end up spending more" 
Read the full article here

As a person who works in financial services, a pet peeve of mine is the use of a financial product for a purpose that is totally divorced from its raison d'etre

The use of insurance for a regular, predictable and small expense is just wrong, wrong, wrong!

As I have outlined elsewhere in this blog, the 2 main purposes of finance is to help deal with intertemporal tradeoffs and "states of the world". Savings, investments and loans are the most common device for intertemporal tradeoffs (if I don't need money today, but need it tomorrow- for example to retire to the Bahamas, I will invest or same the money; if I need it today (for example for a house or a car), but cannot fund it from immediate incomes or savings, I will take a loan)

Insurance is the financial product which finds use in managing different "states of the world". It is a means to manage risk; to deal with uncertainty. Death; accident or personal injury; loss of assets; large unanticipated expenses (such as an operation or chemotherapy) are good candidates

Birth control pills clearly fail this test. They entail a small, regular and entirely predictable expense as Cochrane says. Hence it should be funded purely through current incomes and savings.

So called "insurance" is not just unnecessary, it is counterproductive. All insurance involves paperwork (since to claim the money from the insurance company you need to show invoices) Hence there is a waste of time, money etc. in claims processing which will just push up insurance costs

As a libertarian, I am opposed to Government mandated health insurance in any case. But whether you are a social conservative or liberal; libertarian or socialist; the Obama contraception mandate should be opposed on grounds of its violation of the concepts of finance

Wednesday, October 12, 2011

In praise of "slavery" or Why education should be equity financed

As an avowed free market libertarian, I am, in general, opposed to Government intervention in the economy. Conceptually, an intervention can be justified only if the nature of the problem is a "market failure" , or if a "public good" has to be provided. Even in such cases, the intervention is justified if and only if the proposed intervention solves the identified problem without inducing unintended collateral damage.

Hence whenever any Government intervention is proposed the tests that I use are a) Is there a market failure? b) If not, are there gaps in financial markets that prevent the market from functioning and then c) Is the cost-benefit evaluation of the intervention better than laissez faire?

The reason I think about financial markets separately is that a well functioning financial market is an unstated assumption in free market theory. Markets for "real goods" can be hampered if people are not able to make intertemporal trade-offs (e.g., borrow money to start a company and then repay it later) or manage risk (e.g., insurance for different "states of the world"- investments may dry up if people think that a single event can wipe out their money)

Having laid out the conceptual framework let me get to a specific example: Recently when I contested the case for Government intervention in education by a friend, he asked me how I would view the problem? Without Government intervention (either by being the provider of free/subsidized education or being the payor by schemes such as school vouchers or Government mandated low interest rate education loans), wouldn't the market for education just collapse- perpetuating poverty since the poor will not have access to education?

The argument seems sound: While education is not a public good in the economic sense (since it is definitely excludable, though it is somewhat non-rival), for a poor person, the benefits of being educated are clear, but how would he ever raise the money to pay the fee?

Is there a gap in financial markets to provide the same? Why have student loans not solved the problem?

For that take a project finance view to education (that is, consider that educating a person is a project. An applicant comes to you (a financier) and asks you for money to finance his education. How would you view this proposal in purely financial terms?). What are the characteristics of this project in financial terms:

1. The payoff is real, but variable: Education definitely leads to an increased economic payoff to the beneficiary (i.e. the applicant). However the degree of benefit is highly variable (see the high distribution of income among all people that you attended school with). Hence the financial requirement is for risk capital, since the financier has to be willing to live with variable payoffs.

2. The payoff is deferred: The returns to education typically accrue after a time gap (for school education the gap is considerable- maybe as high as 15-25 years). Hence the financial requirement is for patient capital, the financier should be willing to defer his expectation on when his money would be returned

Hence from a project finance standpoint, the financier needs to provide patient risk capital. In finance, the capital that has this characteristic is not debt (that is loans) but equity. Equity implies taking a risk, and being content with getting the payback much later. But in equity, when the investment does payoff, you get a much higher return (unlike debt where the returns are fixed)

The missing gap in financial markets is that you cannot buy equity in people (such contracts are generally not allowed in law). If I could sell a part of myself (in financial terms) I may be able to raise the money needed for education.

Markets would arise where we could trade shares in people. Just as in financial markets for companies you have equity investors at various stages of financing, based on their own risk appetites and expertise (for example, angel investors for startups, venture capitalists for fledgling companies, private equity firms for different stages of growth, and the capital markets for more mature companies) we would have various investor profiles for investing in people too.

For example I may make a bet that out of 500 schoolchildren in a village in Bihar,my assessment is that at least 2-3 people may end up as high income earners. If I invest by taking a stake (say 50%) in each of them and pay for their school fees, they will owe me 50% of their income in perpetuity.

The crucial point here is that many investments may fail, but the successes could be so huge so as to justify the investments across the entire portfolio (just as VC and PE firms do with companies).

Such an investor, would at a later stage, offload some of his stake in specific people, to later stage investors. Financial aggregators would warehouse risk across multiple investments (for example, I will create a scrip tha is an aggregation across 10,000 IIT students which I will trade; this may raise the money to finance their MS/MBA in the US in top schools), just as mutual funds and other funds do for companies.

In industries of a "superstar" nature, such contracts actually exist! In an industry like book publishing, or music, the distribution of incomes is very high- successful people earn huge amounts (like  Lady Gaga or a writer like J.K. Rowling), unsuccessful ones end up with no money. Music companies or book publishers typically take up "rights", that is a percentage of the revenue from the sales of the book/ album. This is a equity like contract.

But such a contract would not be possible for the person's earnings as a whole- which is why they don;t exist for other industries.

Look forward to the day when such an innovation would be allowed!

Tuesday, October 11, 2011

Arthashastra and Antibiotics: Alternative approaches to disease control

The latest news in the public health sphere in India is the fear of a new antibiotic-resistant "superbug"- namely the NDM-1 gene http://bit.ly/rdihtz.

In many ways, this is the latest illustration of how we may need to try alternative approaches to the field of communicable disease control.

First, the context: "Superbugs" are newly evolved species of bacteria that are antibiotic-resistant. To defeat the menace of superbugs, we need to understand what fundamentally leads them to arise.

The answer is antibiotics itself! In essence. the mechanism is as follows: "Simple" forms of bacteria infect us, and if their effects are malign (not all bacteria are harmful to human beings), we seek to treat them with antibiotics.

The use of these antibiotics effectively causes the evolution of superbugs.

Now, it so happens that the rate of bacterial evolution is high. The "rate" of evolution is governed by 2 things- how often an organism mutates (scientists still do not understand what governs this) and how efficient natural selection is in weeding out "bad" mutations ("Bad" here refers only to the ability of the mutated organism to survive and reproduce, not to its effects on other organisms)

We don't have control on the first mechanism (that is, the rate of mutation)- it so happens that bacteria mutate really fast. But in using antibiotics, we are ensuring that "weak" or "bad" mutations are weeded out even more efficiently.  In other words, we are helping the superbugs develop faster!

Another way to explain this is to say that our use of antibiotics makes bacteria "want" to develop antibiotic-resistant forms (this is the shorthand that we often use, which is misleading since evolution has no agency, or purpose- it just is. But using this shorthand helps us understand the phenomenon better)

This is an arms race that we are condemned to lose- for example, the rampant use of methicilin  to treat staph infections led to the rise of MRSA (methicilin resistant staph infection), the use of vancomycin to treat MRSA then has led to the the evolution of VRSA (vancomycin resistant staph). We are chasing a moving target, one that moves much faster than we can.

But then, what choice do we have? Clearly, the answer cannot be to leave bacterial infections untreated.

An alternative approach is to actually help the evolution of less malign bacteria- to come to some kind of mutual accommodation with bacteria rather than look to vanquish them.

Let me use a concept from Kautilya's Arthashastra (the seminal text on the use of pragmatic realpolitik to achieve one's strategic goals) to illustrate the point.

In Arthashastra, Kautilya delineates 4 ways to deal with any adversary- "sama" (use of logic or argument), "dama" (gift, bribery or blandishment), "bheda" (sow dissension or confusion) and "danda" (use of force)

Fundamentally, our way of dealing with bacterial disease control is "danda"- destroy the adversary with force.

Now, that is a smart strategy only if the power asymmetry is disproportionately in your favor, and the costs of using force are low.

This is clearly not the case with the use of antibiotics.

So why not try an alternative approach- one inspired by "dama"? Can we bribe our way towards more benign forms of bacteria?

One radical approach in disease control (pioneered by the evolutionary biologist Paul Ewald) actually is looking to do that.

The basic concept to understand is on how diseases spread. Some diseases, like a common cold, are deliberately not virulent- the reason is that by not debilitating you severely, it can keep you up and moving, sneezing all the way so that you can infect other people (translation: help it survive and reproduce). Other diseases such as African sleeping sickness or malaria are virulent since by incapacitating us it increases the probability of its own spread (since the mosquitoes that spread it from one host to another can get to you easier if you are pushed to the brink of death and are unable to move).

So in many ways, the degree of virulence of a disease is determined by the modes of transmission.

Hence, if we were to attack not the disease directly, but the modes of transmissions, we can effectively bribe the infections towards lower virulence.

For example if we spend our medical research money, not on developing antibiotics, but on cleaning water supply or on providing mosquito nets, there is evolutionary pressure on the infectious agents to move towards lower virulence, since for their own spread they need us to be moving around. History also suggests this- when cholera outbreaks spread from Peru to Ecuador (where the water supply was poorly protected), the bacteria became more virulent; when it moved to Chile (where the water supply was much better protected), it became less virulent since it needed people to be alive and mobile, in order for it to spread. (Source: Survival of the Sickest by Sharon Moalem)

Effectively this is a policy of accommodation with the infectious agents- we will not fight you, we will cooperate with you to help you spread, but you need to make your effect on us more benign! By bribing them thus, we may have a far better chance at survival.

I was thinking about this also when I was watching the movie "Contagion". Communicable disease control is really hard- the movie brought out the point not only of the large scale destruction that a single "Black swan" (low probability, high impact) event can bring about, but also that even after a "cure" is discovered, the time to market is so high due to the stringent requirements on testing by the FDA, as also the scale of production and distribution required.

We need multiple approaches to deal with this problem, and the wisdom from the Arthashastra of how deal with adversaries may have useful pointers on what kind of approach we may consider!

Tuesday, March 15, 2011

Stocks and flows: Why Larry Summers is right...but should be ignored

It's not often that I write in favor of an avowed Keynesian. But much of the criticism of Summers on his remarks about the economic impact of the earthquake that has caused severe destruction in Japan is based on stuff that he simply did not say (put it down as a case of "What you read, and what you don't read! :). 

Here's what he said: 

Monday, March 14, 2011

The Black Swan: Technique, transcendence and the artistic endeavour

Jai Arjun Singh (Jabberwock) had a very interesting post on the parallels between "The Black Swan" and "The King's Speech" http://jaiarjun.blogspot.com/2011/03/double-bill-reluctant-king-paranoid.html .

Here are my own unstructured thoughts on the Black Swan, which I personally loved:
  • More than anything else, for me the movie was about the nature of the artistic endeavor itself. When I was at IIM, I remember that during a lecture, in a very interesting diversion, my strategy professor was telling us about how artists differ from "normal" people in that they get "obsessed". What is but a fleeting glance, an ephemeral emotion for us, becomes the center of their attention, something they get fixated with (think of the indulgent detail with which the Impressionist painters would bring their subjects, drawn from everyday images, to life). In the Black Swan the extent of this obsession is amplified for dramatic effect, but at the core, like all good works of art, it conveys a deep insight: of how the nature of the artistic endeavor is inherently obsessive
  • Secondly, the movie brings out one theme of art that is of particular interest to me, what I call the interplay between "Technique" and "Transcendence". Could truly beautiful art arise out of following rigid rules? Isn't there something inherently contradictory about being "creative" and being rule-bound? Not really. In Douglas Hofstadter's works, he vividly illustrates how it is false to think of these two as a dichotomy; that technique, when properly employed would be in aid of the transcendent nature of art. Creativity arises in how rules are employed not necessarily in flouting them. The requirements of meter for poetry, for following the note patterns of a raga in Indian classical music, of techniques in editing and camera work in cinema, enhance and aid the creativity, rather than hinder it. However, while technique aids creativity,  art cannot be explained by invoking technique alone. A reductionist view of art, in terms of the technique used to create it, would not capture it wholly. That "extra" dimension, which is so difficult to describe, but easy to perceive when it is present, is "transcendence". In the Black Swan too, the limitation of Nina as an artist is the same, flawless technique, but lacking that transcendent quality to take it beyond technique alone. As a theme, I think this interplay between technique and transcendence is on of the most fascinating aspects to bring out in any work about art, and the Black Swan does it very well.
  • Every work of art is an idea. One of the things that I judge a work of art by is if this form of art was the most appropriate vehicle to convey the idea that the artist wanted to share. Every type of art has its own distinctive property- cinema's is the "moving image", paintings are about an arrested image, music is about emotion in sound, and a novel is a complex meditation on the human condition, where the artist has the luxury of discarding the constraints of both space and time , while cinema is bound by it. A movie length of 1 minute, has to take 1 minute to show, it is a real-time medium. Movies cover a longer time span by "cheating", by not showing something that transpired. With a novel, on the other hand, the writer can spend several pages just describing what happened in a fleeting second. There is no requirement to stay married to the actual time (or even space) of the real world, while cinema has to stay very close to it( the most cinema can do is "slow-mo" cameras for time, zooming for space, but that is far less rich than the lens that a writer can use. The greatest writers use this distinctive quality of cinema very well. Good writers always use this aspect of the novel well, the most celebrated example in the modern novel would be James Joyce's Ulysses, even later writers like Ian McEwan (one of my favorites from the current crop) meditate about a single instant of time or a focal point in space, and with rich and vivid description invite the reader to experience it more wholly than we even do on real life. A novel is the writer's way of making the reader experience the full force of his obsessive fixation of what would otherwise be an ephemeral experience. In fact, I think this is why most movies made from books fail to impress. the clichéd explanation that is parroted is that with a book you could imagine the visuals yourself, while a movie does not allow that, but that does not satisfy me for several reasons: a) How much time do we really spend visualizing what we are reading about? b) I see no reason to assume that my imagination would always necessarily lead to a more vivid visual than that of a director and c) If that were the case, everything should be a book, movies will always be an inferior medium! Rather I think it is because the nature of a particular story or idea required all the tools that only a novel could provide, and that the inherent limitations of cinema for that particular purpose, is what prevents the movie from having the same impact as the book. Similarly, cinema has its own distinctive advantages (multiple perspectives, moving images etc.), and a great movie could choose to use them. It is for that reason that a movie like say, The Shawshank Redemption, while being very entertaining a truly awesome movie, would never be something that I cite as the best cinema, because the nature of that story idea would better be served by a novel rather than a movie. It is a lengthy meditation of a prisoner's  journey and of the nature of liberty and confinement- the protagonist's undying quest for liberty and the patient and persistent way in which he pursues it, the sense of community that the prisoners develop even among themselves, and how releasing a prisoner after prolonged confinement makes him an alien in the outside world, with the prison being where he is free and the outside world being where he is confined etc.! Hence you will notice that the movie has to pause several times for expository dialogue. Don't get me wrong, it is an awesome movie (I even list it among my favorites), but it might have worked even better as a book. The Black swan, on the other hand, needed to be a movie. To convey how her obsession leads to madness, it required the viewer to shift perspectives from the "empathetic stance"- perceiving the world from the standpoint of the  ballerina and what she was experiencing to the "voyeuristic stance" - viewing it as an outsider. The dramatic effect and emotional arc of the movie requires the viewer to toggle between these stances continually. To achieve that in a book requires a clumsy shift from a first person narrative (when we need to experience it from the POV of Natalie Portman) to a non-participant third person omniscient narrative voice (for the voyeuristic stance) which would be much more forced and unnatural. In a movie, on  the other hand, it is achieved by the simple device of changing the camera angle!- pointed at Natalie Portman (for the voyeuristic stance), or placed the way she would view it (for the empathetic stance)! Also, the nature of the story, as a ballerina's work, her technique and the need to transcend technique, needed visual storytelling. Hence, I liked Black Swan, not just because it was a well made movie, but also since to be everything that it could have been, it HAD to be a movie
  • Lastly, one shout out for the performances, but more crucially for the casting.  An excellent performance requires good acting, but is not only about acting. The physicality of the actor in bringing out the personality of the character is also very important (as an aside, this again, is something movies can do far more efficiently than books do; if a character such as that of Natalie Portman in the Black Swan needs to be shown as vulnerable and frigid, juxtaposed with the vivacious, sexy and mysterious character of Mila Kunis, the mere casting of the frail Natalie Portman, and the sultry looking Mila Kunis accomplishes that far netter than reams of description in a novel). The pale faced Natalie Portman as the metaphorical "White Swan" and the dark skinned, alluring Mila Kunis as the "Black Swan" was pitch perfect casting. And no portrays vulnerability better than Natalie Portman anyways.
All in all, an outstanding movie!

Thursday, March 10, 2011

Why dictators should study Game Theory!

One of the (over)hyped features of the revolutions in the Arab world has been the role played by social media. Several articles have outlined how social media have made spreading information much faster, which has helped mobilize people to protest against the regimes. This is particularly important since these countries do not have an independent "regular" media.

However, overcoming the "coordination" problem is just one of the 2 problems that an individual faces in deciding to protest against the regime. For an individual to decide rationally that he can protest he needs to overcome 2 problems of information asymmetry

1. The "coordination" problem: Where and when the protests will be held
2. The "common knowledge for confidence" problem: For me, as a rational individual, to decide to protest, I need to know there are several other protesters. The reasoning is simple, if I am going to be one among only a handful of protesters then the dictatorship would crush the protest ruthlessly. If on the other hand I am among half a million protesters the dictatorship would be unable to do so.

Note that every individual faces the same issue. Hence what is required for a successful protest is that I know there are other protesters, and that they know the same. They should know, that I know, that they also want to protest and I should know that they know the same. Hence there should a "common knowledge" about the desire to protest for me to be able to have the confidence to protests myself. 

The role of social media is actually as important in overcoming the latter, as the former problem. When I post about the protest on Twitter or Facebook, and someone "Likes" or Retweets my message, we automatically have common knowledge.

The answer, if you are Mubarak, seems intuitive, shut down social media! However, with a little game theory you can show that this would actually be counterproductive! (the Game Theory blog "Cheap Talk" showed this well in their post http://cheeptalk.wordpress.com/2011/01/28/cutting-off-communications-in-egypt/. However they have not talked about the former problem, and how shutting down social media would affect that )

The reasoning is as follows. The regime would not shut down social media unless their assessment was that the protests could be large-scale. But this is precisely the information that i as an individual protester seek!- whether the protests are going to be large-scale or not (and that everybody else is aware of the same!), because that is when it is rational for me to protest too! In other words, the regime has successfully consolidated all the private signals of protest, into one big public signal. Hence, paradoxically, the act of shutting down social media makes its role even more efficient in terms of overcoming the "common knowledge for confidence" problem- everyone instantly knows that everyone else is keen to protest and that they all know the same!

But, hang on, would it still not achieve the purpose of preventing the protesters from overcoming the coordination problem (the first problem outlined above)? Granted, they all now have the confidence to protest, but in the absence of social media, how would they know when and where to go? In which case, isn't shutting down social media still effective?

The answer is No, and it is due to a concept called "focal points" (which was first popularized by Malcolm Gladwell).

Consider this thought experiment: If I told you that you were supposed to meet someone in Paris the next day. I do not tell you the time or the place. The only thing that you know is that the other person has the same information. What would you do? Most people would decide to go to the Eiffel Tower at 12 noon. This is because when we have to solve coordination problems in the absence of information there are some "default" solutions that we inexorably converge towards, as we expect others to arrive at the same default solution.

Hence, when social media is shutdown, and I know there is no way to communicate with my legion of fellow protesters (I know it is a legion now by the regime's act of shutting down social media), I will protest in the famous focal point-  namely, Tahrir Square at 12 PM!

Note, that again the act of the dictatorship has been counterproductive- it ensures that every single protester converges upon the focal point, where it might have been that they would have been more dispersed otherwise!

S the act of shutting down social media helps the protesters solve both the coordination problem and the common knowledge for confidence problem, more efficiently, and optimally, than they otherwise would have!

But what should the government have done? Not doing anything would have still led the protesters to solve the problem using social media.

There were 2 options to consider. One is that given that the protesters would necessarily converge upon the focal point, to focus only on preventing people from getting there e.g., in blocking key arterial roads to Tahrir Square.

The other option is to use misinformation. Just as bad money drives good money out of circulation ( Gresham's law), bad information would drive good information out of circulation, if the Government had used social media to spread rumors about the size and nature of protests, and confused people with multiple and contradictory views of where protests would occur, that might have helped. this is however difficult to pull off since people typically automatically have a quality filter in social media networks (since you decide whom to follow or friend).

The collapse of these repressive regimes was inevitable, but by their ham handed actions driven by lack of knowledge of Game Theory, they hastened their own demise. Cheers to that!

Wednesday, October 28, 2009

The "Williamson- Dawkins" synthesis- the opposite mental shifts that evolutionary biology and economics had to make

This year's Nobel prize for economics was awarded to 2 economist's looking at hitherto under-explored questions in economics- Williamson won it for his work illuminating the conditions under which it is efficient to organize economic activity in the form of a firm (extending the work first done by Ronald Coase) - while Elinor Olstrom was distinctive in her exploration of the mechanisms by which spontaneous bottom up order could solve complex economic problems (such as the "tragedy of the commons") without central fiat by the state, by creating self enforcing rules and free institutions.

Williamson's work is particularly intriguing.An exploration of the way the economy functions shows that its most obvious feature is that people organize themselves into firms. However, the focus of economic theory has largely been on the actions of self-interested individuals and their interactions in the free market.

One of the big shifts in modern economic thinking is to see evolutionary biology as a better analogue to understand the economy as compared to physics (which is where economics borrowed most of its conceptual frameworks from, including the notion of an "equilibrium" et al).

( As an aside "The Origin of wealth" by Eric Beinhocker is a fantastic book to understand how the economy can be best understood with biology rather than physics as an analogue; what he terms as "complexity economics")

To bring out some aspects of the analogy- individuals in an economy work to maximize their own utility (or self-interest). Analogously, genes, in evolutionary biology work to maximize their own interest (i.e. survival)

The fascinating thing is, just as under most circumstances, it is optimal for the "selfish gene" (to use biologist Richard Dawkins evocative term) to organize itself into, well, an organism to ensure its survival (i.e. maximize its selfish interest)- it is also in the interest of utility maximizing individuals to organize themselves into firms to carry on economic activity.

The interesting contrast is that both fields made opposite mistakes historically. Economics got the unit of analysis right- i.e. individuals, but paid scant attention to the emergent phenomenon i.e. the firm. In biology, the emergent phenomenon was well understood (i.e. the study of living organisms), but they got the fundamental unit of analysis wrong (by trying to understand how actions of an organism are in its interest, while the right question to understand was how actions of an organism were in the gene's interest)

Evolutionary biology, has of course now embraced the notion of gene-centered analysis while studying organisms. Post the Williamson award, one would expect economics to pay far more attention to the study of firms, while being rooted in analysis of individual utility maximization

Extending the counterfactual- what if Netaji had survived?

As a history enthusiast, one of my favorite techniques in historiography is the use of counterfactual history. Counterfactual history posits and answers "What if" questions. (See the link http://en.wikipedia.org/wiki/Counterfactual_history for an overview)

As a technique, it is a good forcing mechanism to think through and assign the relative importance of a particular event to influence the course of actual history.

An interesting counterfactual that was posed recently was by the Indian historian Ramachandra Guha. Writing in the Telegraph, he posed a the intriguing question- What if Netaji had returned home to India after WW2- how would the course of Indian history been different?

His conjectures are pretty interesting, he states that Netaji would probably have started his own party which would have evolved as a leftist alternative to the Congress, posing a formidable electoral challenge. (Read the full article at http://www.telegraphindia.com/1091010/jsp/opinion/story_11578156.jsp)

Extending the counterfactual- I surmise the following about the policy direction that India would have evolved towards:

  • Economy: More free market capitalism with an emphasis on wage goods, as compared to planned State directed economy
  • Foreign policy: Less "internationalist" and more pragmatic & militarist
  • Social fabric: Continued to be secular, with social welfarist measures targeting disadvantaged groups
  • Governance structure: More unitary system- with no linguistic states
  • Political system: A weak and faltering democracy
Some of these seem very counterintuitive, but my argument is as follows:

I feel that a viable leftist alternative to Nehru, would have reduced his own influence within the Congress, pushing it to a slightly right of center party. We forget that unlike its modern avatar- the Congress (I), the INC at the time of independence was a party with vigorous internal debate and multiple points of view. Nehru was undoubtedly the most popular leader, but it was because he was unchallenged as a vote getter, that he was able to shape the Congress into a leftist party with little resistance. With a charismatic Netaji as an opposition force, it would have been far more difficult for Nehru to completely takeover the Congress policy agenda. Right leaning leaders such as P.D. Tandon and Rajaji, would have carried more weight than they did. Also, right leaning Congressmen and the royal classes who left the Congress to form the Swatantra party, would have continued within, due to the real threat of a complete socialist takeover by Subhas Bose, creating further pressure for the Congress to be right of center. This would have led to a Congress party that is more private sector and free-market friendly. This coupled with the likely militarist posture of Bose given his INA-background, would have also probably led to a foreign policy that was more "pragmatic" and "nationalist" than "internationalist" ( as any move to be dovish would have been easily allowed Bose to present himself as a strong, decisive military leader, particularly after the China war).

Given that both Bose and Nehru had a secular outlook, it is unlikely that social policy would have been radically different. In terms of governance structure, I think the lack of viable pan-India alternative to the Congress, facilitated the capture of the opposition space by regional/linguisitic forces. The map of modern India culd have looked very different if 2 national parties were present as alternatives for voters.

However, the Nehruvian takeover prevented anti-democratic tendencies from gaining ground on both the right and the left. As Pavan Verma explains in his superb book "Being Indian", democracy flourished in India initially paradoxically due to the anti-democratic ethos of the elites!- since they allowed it to take root with the hubristic notion that they would have access to power far more easily than the poor. A strong leftist alternative, would have scared the ruling classes into proactive measures to secure their fiefdoms, challenging democracy.

A stronger challenge would have probably arisen from the left in the form of Bose himself- unlike the Anglophile Nehru, it is unlikely that Bose had a deep philosophical commitment to democracy itself (after all he did seek to forge alliances with the Axis powers). A restless Bose might have mounted a direct challenge to the democratic structure, with a combination of revolutionary leftist politics and military muscle (with a band of loyal INA soldiers).

Like all counterfactual history- this is very speculative. However, it actually underlines how central Nehru was to the evolution of modern India- with just one viable alternative leader- the nature of the Indian state could have looked very different.

Unconscious weirdness as an indicator of friendship

Totally random post:

I was speaking to a my roommate and close friend of 8 years last night, when he was telling me about how when he is alone he likes to pretend that he is a baby and acts like he is crying!!!

As weird as that is, as I reflect, I find that i know some extraordinarily weird quirk of nearly every person that I am close to.

Here is my random theory- everyone is weird, but keeps it closely guarded. When we are truly close to someone, we feel comfortable in revealing our weird side to them.

The degree of closeness of the friendship is proportional to the extent to which we can exhibit our weirdness

As I was thinking of the last statement- I was contemplating if I should tweet or blog about this. Given the weirdness of my post itself- and that I have several mere acquaintances reading my tweets, while most readers of my blog are close friends, the choice was obvious!

Sunday, August 23, 2009

"The counterintuitive economics of Marwari weddings"- or “ The social distortions caused by lack of organized finance”

Two of my friends got married recently- one a Marwari and the other a South Indian Brahmin. Both are roughly of similar economic status- but the contrast between their weddings was striking- my Marwari friend had an ostentatious wedding with exorbitant ‘gifts’ from the bride’s family, while my other friend’s wedding was a much more simple affair, with no garish display of wealth or expectation of dowry of any kind.

As I thought about it, this seems fairly typical- most business families have ostentatious weddings and the practice of dowry is highly prevalent, while with most service-class families, the weddings are much more low key and dowry is practically non-existent.

To explain this I have a theory (as usual!). Ostentatious weddings are actually a low cost strategy! And dowry is in the interest of the woman!

Both of these phenomena can be explained as necessary evils in the absence of well-functioning organized sources of finance.

Consider the first question: Why do business communities have ostentatious weddings? On the face of it, it seems like an unnecessary expense- a large cost incurred with no obvious benefit- something which does not make ‘economic sense’

In economics, very often, if there is a significant cost incurred with no apparent direct benefit, the explanation is ‘signalling’

In a system, where organized sources of finance (like banks) did not exist, most finance for business was sourced from other members of the community. An ostentatious wedding is a low cost way for a businessman to signal his credit-worthiness (or more broadly to signal the overall reputation of his business). The purpose of signaling is to reach a ‘separating equilibrium’ (as in a strategy that cannot be copied easily and hence helps in distinguishing or separating the pretenders from the rest). Choosing a wedding as the means to achieve the separating equilibrium is actually lower cost for the truly credit worthy- since it is a one-time expense where several people of the community can be signaled to simultaneously

This incurring of a seemingly unnecessary cost to act as an ostentatious signal is also found in nature, most vividly with the showy peacocks. The vivid colors of a peacock are a ‘waste’ of genetic resources (which could have been ploughed more productively into more food or genetic material) and it also increases its risk of being spotted and hunted down by predators. But it is precisely that which makes it a powerful signal!- the peacock is signaling to its potential mate- that it is so superior genetically, that it can afford to waste genetic resources on ostentatious displays of beauty, which not only do not add to its survival chances (the peacock’s tail does not have any direct utility for survival), but actually reduces them (with the risk of being preyed upon). The right amount of signaling is of course one that maximizes the net benefit(too much signaling is costly and could lead to the death of the peacock by being hunted by predators , too little could lead to it not being able to attract a peahen which means it cannot pass on its genes)

A showy wedding is the human equivalent of a peacock’s tail.

Now to the second question- on why business families have a practice of dowry- my theory is that it was actually in the interest of the women!

It has been argued by several others- that dowry was actually an efficient means of wealth transfer to daughters. This makes sense, it would be better to transfer wealth to the daughter at the time of her wedding, when she is to leave her father’s house, rather than will it to her, since it would only cause disputes between her and her brothers, without the benefit of resolution by the father.

While this explains why dowry may have existed, it does not explain why it is much more prevalent in business as opposed to service-oriented families.

To that, my hypothesis is that dowry is a way to secure the future of the sub-unit (of the daughter and son-in-law) in the larger construct of the joint family.

To understand this, consider the trajectory of a typical family business’s expansion- a member of the family expands the business by opening ‘his’ unit (e.g. if the family runs jewelery shops, one of the sons would open a new shop- which he would operate)

Starting these units requires upfront capital investment, and it makes sense for money to be transferred at the time of the wedding, so that the son-in-law has enough money to strike out on his own, thus securing his stature and importance within the joint family.

Both of these social phenomena would not exist had there been access to organized sources of finance- credit worthiness would then be solved for by screening (as in the use of more sophisticated criteria by a bank to assess credit worthiness) rather than by signaling alone (Note: Signaling and screening are the 2 solutions to the classic problem of asymmetric information in economics)

Similarly, a businessman would have relied upon a bank, VC or PE fund for project finance for his new venture, and would not have required dowry as a source for the upfront capital investment.

I find this particularly interesting, since in my last project I came across several sub-optimal economic choices when access to finance was denied- its fascinating to see social evils also owe their origin to the same reason.

Thursday, July 16, 2009

Short fiction: The train

She stood there next to the doorway on the tube, a stylish Gucci bag slung casually over her shoulder, her formal suit & briefcase indicating that she was employed in a high profile corporate job. “Must be an investment banker”, I mused; as she self-assuredly communicated succinct instructions to some underling on her sleek mobile phone. I watched her, fascinated, impressed by her confidence and poise.

As she spoke, she momentarily removed the cooling glasses obscuring her eyes. I was startled to see a visible ugly gash near her eye marring the otherwise flawless face. A purple wound- still capturing the violence with which she was struck-it was obvious that she had been brutally hit (“by an abusive boyfriend or husband?” I thought to myself). “How can a girl, so obviously accomplished and confident, allow herself to be subject to such callous brutality”, I thought. Her eyes wandered briefly in my direction, and she realized that I had noticed it.

Her face colored, as she felt exposed; her humiliation revealed to a total stranger, privy to her worst demons by nothing more than a passing glance. Her expression was a confused mixture of annoyance & defiance; annoyance at my inadvertent violation- as if by just realizing her predicament, I had transgressed some unspoken boundary between strangers; a facade of defiance- by pursing her lips; the show of emotional strength belied by the pain in her eyes.
She melted, as she realized from my expression by own embarrassment. My silent empathy was wordlessly acknowledged by her, a shared experience of an intensely personal nature, amidst the chaos of a noisy train.

I was confused as to how to react. My hand half-outstretched, unsure whether to offer comfort; and confused if that presumptuous act would break the tenuous bond that we had built. Would I embarrass her by indiscreetly acknowledging the intimacy of our brief encounter? My confusion led inexorably to inaction, as I got down at the next station- the deep & ineffable interaction likely to leave a lasting impression despite its ephemeral nature.

The creaking doors shut slowly, our gazes locked with each other, as she evanesced along with the train, her eyes still mirroring her pain & gratitude.

I never saw her again after that day.


Catastrophe strikes!: No tickets are available from Bhutan to India for next 2 weekends! Wll be stuck here indefinitely, wihtout being able to meet family for close to a month.

Depressed mood leads (as always) to Urdu poetry. Here are snippets of this poignant poem by Faiz Ahmed Faiz, soulfully rendered by Abida Parveen (I've included only the first and last verse which best describe my state of mind!)

Nahin nigaah mein manzil to justujoo hi sahi,
Nahin visaal mayassar to arzoo hi sahi.

If the destination eludes sight, let the search be;
If union defies attainment, let the longing be.

Dayaar-e-ghayr mein mehram agar nahin koi,
To Faiz zikr-e-watan apne ru-ba-ru hi sahi.

In this abode of strangers, if no confidant exists,
Then Faiz! Let the invocation of homeland, with yourself be.

Tuesday, July 7, 2009

Pattern-recognition, not data-crunching (or why my mother is as accomplished as Kasparov)

Practically everyone thinks their mother is the best cook in the world. Let me assert that all of them are wrong, because my mother is clearly the best!

The distinctive feature of my mother’s cooking is her inventiveness. She can literally concoct new dishes with a dizzying array of ingredients across different cuisines. Succulent Indian vegetables & spices would add just the right amount of tanginess to a continental dish; a mélange of Mexican ingredients would find themselves in the midst of Indian roti-curry. And these disparate ingredients would all somehow come together to make culinary magic!

Truly good cooking then is not so much about knowing a wide array of recipes; it is really about knowing how ingredients work together. It is an art of being able to work with rules or ‘good moves’. This article (http://www.slate.com/id/2219243/pagenum/all) I read recently also talks about the same- master chefs are not storehouses of a zillion recipes, they are artists who can compose something new by creative application of heuristics that they pick up over the course of time. Cooking is hence, a pattern-recognition and not a data-crunching problem.

I remember reading an article about chess players that pointed to a similar thinking process. Grandmasters and professional chess players are expert pattern recognizers, not people with either elephantine memories or faster computational ability.

2-3 observations indicated this: Chess pros were no better than laymen or amateurs in rearranging chess pieces on a board that they were shown, if the pieces were randomly arranged (making it an ‘illegal’ position in chess). This showed that superior memory is not the cause for the difference in chess ability.

Similarly, self-reporting by chess pros showed that they had not evaluated more moves than amateurs before deciding their move. So it wasn’t even faster data crunching that explained the difference.

The true difference was in the pattern recognition- chess pros evaluated less ‘bad’ moves than amateurs. It is almost as if they had developed (or were born with) a filter that left out bad moves, just as amateurs would not evaluate illegal moves.

It is this knowledge of heuristics that distinguishes good chess players- they probably would be thinking stuff like “never sacrifice a pawn after castling if you’ve lost a knight”, “use a rook to check, with a knight threatening the opponent’s queen” and so on, just as a great cook must be thinking “Use cardamom with sautéed vegetables only if either tofu or mushroom is part of the salad” etc.

In fact, this would likely be the case with all art- it is the application of a wide range of ‘rules’ in varied permutations. We probably would not be able to identify all the rules, neither would a true artist be able to articulate them. But subconsciously, they are working with patterns, and therein lies their wizardry

The new feminist agenda: Eat rice, not rotis!

My time in Bhutan has left me with time to blog once again. After a 2 year hiatus (after heroically managing to put up all of 4 posts), I hope to blog regularly this time.

In the tradition of ‘Freakonomics’, my latest musing is a wacky hypothesis on the reason for south Indian women being more socially empowered than those from the north.

Marxist methodology always seeks to explain social behavior and phenomena (the ‘superstructure’) in terms of underlying ownership of economic resources (the ‘base’)

With that thought- here’s the wacky hypothesis: South Indian women are more empowered since the South is (predominantly) rice growing, while the North is largely wheat growing.

The cultivation and harvesting of rice is something that women can (and do) participate in, since it requires deft work to remove the paddy from the fields, unlike wheat, whose harvesting requires heavy labor.

Women are thus part of the wealth-generating, productive employment in the south, which would lead to greater power and say even on social issues.

Secondly, the consumption of rice as compared to wheat also favors greater female empowerment.

Cooking rice has huge economies of scale (in terms of time invested) - cooking for 8-10 people (the typical size of a joint family) does not take much more effort than cooking for 2-3 people. It is possible for a woman to cook the rice and have her meal with the rest of the family

With wheat (as in roti, chapatti etc.) however, the cooking process does not have any economies of scale. Cooking 20 chapattis requires nearly 20 times the effort of cooking a single one. This coupled with the fact that Indians like to have their food hot, means that women have to spend their time slaving away cooking one roti after another for the family, and will end up having their own food only after everyone else is done.

The effect of this on a male child in the house too, is that he sees his mother as subservient to the male members of the family, hence retarding the rate of change & female empowerment

Bhutan itself is largely rice growing (over 60% of the population here grows rice). Unsurprisingly, women in Bhutan are highly empowered, owning most of the land & running most of the businesses. Even socially, they have an equal status with the men.

It will be interesting to see if women are noticeably more empowered in other rice-growing countries in the world (Vietnam, Philippines etc.)

Saturday, May 26, 2007

Blink before you think!

We human beings like to think of ourselves as rational beings. It gives us the comforting feeling that there is a method to our madness. Most of our decisions are however based on ‘gut-feel’; the elaborate arguments that we give for them are mostly convenient explanations that we think of after we make up our mind. (To sound intellectual and philosophical, let’s give it the technical name: ex-post facto justification).

I read the book “Blink: The Power of Thinking Without Thinking”, by Malcolm Gladwell recently, where the author takes over 200 pages to establish that spontaneous decisions are often as good as - or even better than - carefully planned and considered ones!

So Man is not ill-served by the ‘trust instinct-to-hell-with-logic’ approach, we can all happily continue making random decisions and pretend that we followed a step-by-step logical approach, this process works perfectly well!

Hmmm, but a thought…is it that since we know that this is the process that we follow ( viz of arbitrarily making a decision and then justifying it) we have just found a convenient explanation to establish that that’s actually ok!
Is it just an ex-post facto justification of… well, ex-post facto justification!

I found this uproariously funny, and this is what probably passes off for humour among philosophers ( can’t you just imagine a bunch of white haired men with no fashion sense rolling on the floor laughing while talking of ‘ex-post facto justifications’ and the ‘ad-hominem’ fallacy!).

Which is the sort of reason why philosophers never get laid!