Development Economics course

I have signed up for the course on Development Economics offered by Marginal Revolution University. MRU is an initiative by Alex Tabarrok and Tyler Cowen (I am sure you have heard of Marginal Revolution blog before). The courses on MRU are free.

So far I am about 15% through the course and I have enjoyed it thoroughly, especially the optional module on people which is essentially a literature review. Some takeaways seem simple and intuitive even to the extent you have heard them often - ideas like human capital and importance of institutions like property rights. Other ideas can be counter-intuitive like geographical factors can be crucial so governance is not everything and charter cities by Paul Romer. The key is drawing a context to that in a structured flow.

My personal bias seems to be on liking ideas in practice / bottom-up (Townsend, Bauer, Easterly, Ostrom) than bold new top-down ideas (Sachs, Romer). The top-down ideas in my view may run execution risk and subversion of the core idea because of conflict of interest. For example, it seems Honduras government backed away from original plan for charter city. Bottom-up idea may not be useful if it's based on anecdata, but I think problem of anecdata is easier to solve than problem of subversion/conflict of interest. Works of Townsend and de Soto show that bottom-up can be connected to bigger picture. Maybe just paint me Hayekian for now.

The literature review module has a session on Partha Dasgupta on the topic of environmental sustainability by and measurement of well being beyond GDP. For example, if a poor country chopped down all the trees and sold all the wood, the country is notionally richer in GDP but surely poorer on sustainability. Amartya Sen also asks this question. Mandar pointed to articles rallying against rampant consumerism - to which my pushback is that the focus is misplaced, and rampant consumerism is a result of rampant focus on GDP growth when the world needs productivity improvement and GDP growth at the same time. Basically I need to read more about Dasgupta and Sen on this topic. So far there seem to be questions but no clear answers. Let me know if you have a pointer.

Aside, recently someone also shared this article by person involved in BetterBirth project. I liked the discussion on how some ideas spread faster and some - while equally or more beneficial - don't. One can draw a parallel to economic ideas and link it to making development economics ideas spread.

Coal price and China

China is being swept since last week by cold front, snowfalls and lowest temperatures since 1971. It's a double whammy - first, people need heating in larger amount so more coal is burnt to generate power. And second, due to snow blanket many supplies by road are disrupted resulting in shortage of coal.

Government can't ask people to freeze in the cold, even a communist one. So they are sending soldiers to load coal and re-establish the supplies from mines while the power and steel industries are scrambling to avoid shutdowns from shortage of coal inventory. To secure coal supplies Chinese power plants are buying from the spot market and hence the spot price has gone up by 22% from November and 40% from September.

The interesting part to me is how coal prices play out next. Chinese journalism not being very transparent, it is more susceptible to false rumours, or less effective at curbing them. So price fluctuations should be more pronounced from profiteering by speculative commodity traders. (I don't want to take either side - neither that of opacity of Chinese market nor profiteering from manipulative speculation. Just observing.)

sticky unemployment

Bill Gross, who was recently rated second as investor with most wisdom (behind Buffet), thinks that the developed world will not be going back to normal soon. In fact he calls the upcoming state a "new normal".

A 3% nominal GDP “new normal” means lower profit growth, permanently higher unemployment, capped consumer spending growth rates and an increasing involvement of the government sector, which substantially changes the character of the American capitalistic model.

Apart from warning about a lost decade similar to the Japanese one (which in fact has lasted more than a decade), Gross points out that financial stimulus is not same as real economy stimulus. He says that US government will be more involved in boosting consumer confidence by creating more jobs and putting money in their hands, most likely at lower efficiency than private enterprises. The trouble is - there is only a limit where fiscal deficit can go and the world is already abandoning the dollar from its reserve currency status.

Managing an economy purely from financial or economic point of view will never be enough. If you are representing people, you better listen to what they want. And most people fortunately or unfortunately, do not want change in jobs, salaries or skills at the speed of paper trade on electronic exchanges. Unemployment is sticky (takes longer time for rise/fall) and hence politically & socially dangerous if people start losing patience (see KAL's cartoon). Potential crisis lies in illiquidity of votes rather than capital.

Amazing how everything in economics finally ends up in some issue related to behaviour.

Related articles on The Economist:

• America’s public debt – Tomorrow’s burden, trouble in slow motion
  
• The long climb
  
• Unrepentant bears - You cannot print your way out of money
  

Update: Krugman argues for more stimulus starting from same line of stickiness of unemployment.

Bounded rationality

All our economics is based on the assumption of rational consumer behaviour. For example, consumer spending (and GDP) measure the volume of economy because every consumer is rational, and maximizes his/her utility from the incurred expense.

Turn the page to behavioural economics. We make decision from our bounded rationality. For example, we fear the low-probability high-drama incidents more. We are damn scared of radioactie leak from nuclear powerplant but not that much of a road accident. Even when we are told the probabilities, we are still guided by our fears rather than rationality.

I wonder then, is GDP or consumer spending as such, a good proxy for economic activity? How do we know if a given expenditure was useful or wasteful? And if spending is not a good proxy, what is?

Economists jokes

I was going through jokes on economists, starting from post on freakonomics blog. Following are few nice ones.

• A top reason to be an economist - When you are in the unemployment line, at least you will know why you are there.
• Microeconomists are people who are wrong about specific things; macroeconomists are people who are wrong about things in general.
• I asked an economist for her phone number....and she gave me an estimate.
• If you torture the data long enough, Nature will confess.
• Eighty percent of rules of thumb only apply 20 percent of the time (including this one).
• A physicist, a chemist and an economist are stranded on an island, with nothing to eat. A can of soup washes ashore. The physicist says, "Lets smash the can open with a rock." The chemist says, "Lets build a fire and heat the can first." The economist says, "Lets assume that we have a can-opener..."
• The First Law of Economists: For every economist, there exists an equal and opposite economist.The Second Law of Economists: They're both wrong.
• Talk is cheap. Supply exceeds Demand.

Joke-telling is not complete without bulb jokes.
Q: How many economists does it take to change a lightbulb?
A: Eight. One to screw it in and seven to hold everything else constant.

But Chicago School economists are different.
Q: How many Chicago School economists does it take to change a light bulb?
A: None. If the light bulb needed changing the market would have already done it.

Finally, Bentley's second Law of Economics: The only thing more dangerous than an economist is an amateur economist!

You have been warned.

links

Found few good reads.

Mostly Economics Blog:
Specifically - Moral hazard story retold, Economics of Citation, Irrational Exuberance, Who will guard the guards?

On Greg Mankiw's blog: Does money undermine community and Does free trade always do good?

Economist: Will USA fall on the same trend as the lost decade in Japan?

S Anand: Resolving the prisoner's dilemma (specifically, the 4 good traits of behaviour arriving from pure logic.)

Ajay Shah's blog: What happened in global food prices?

Perot Charts: http://perotcharts.com/home/

Optimist India

Economist comes up with fascinating charts on the frontpage.

Today's chart plots major countries on suicide rate and happiness index axes. General trend is the negative corelation between the two. Obvious, no? India beats that trend, with low suicide rate as well as low happiness index.

Apart from religious reasons, India is that outlier which lives on hope of better tomorrow in spite of accepting that there is not much today to be happy about. Probably, hope is the (best) thing to be happy about.