Minority Vs Majority

This latest article I read about balloon payments to clubs in the premier league who get relegated to bottom divisions causing an imbalance in providing equal chance to all clubs in the championship to be promoted has somehow coalesced my thoughts about other things I have been reading nowadays. These thoughts are about how inequality is rampant in all parts of the world and how different reasons/incentives contribute to economic inequality. It is not about inequity anymore. Not everyone gets a fair chance due to how the game is set up. World elites find a way to keep their supremacy and the rest of the world resists and these elites find a way to circumvent this to maintain the status quo.

If you look at the balloon payments that the relegated clubs receive (which is a payment of 90 mil pounds), it gives them a clear financial advantage to gather resources to equip themselves well to get promoted to the premier league. Looking back on the last few seasons there were clubs which went down and came back again fairly quickly i.e. in a gap of year or two. West Brom, Norwich city, Fulham to name a few. Looking at this season Fulham and Bournemouth seem to be on their way back to the premier league. What would have prompted the regulatory body to set up the game this  way to avoid fairness and equality? Why are the majority of the clubs losing out to a minority of clubs who somehow have a seemingly captive control over economic resources?

The other day I read an article in the latest issue of Atlantic about how the dictators around the world are helping each other out to circumvent the problems/pressures of the west to survive and become more dictatorial. Countries with dictatorial leadership used to face a hard time from the west due to economic sanctions placed on them. With cutting of trade relationships with such country the economic activity would slowly ground to a halt. This would create unrest in the said country and make it hard of the dictator to stay in power. The living standards would gradually decline, making the population miserable and would put the country in more disrepute as the dictator would use the force to check the populace. Not all dictators – especially the new ones – have the wherewithal to handle the unrest. The sanctions would wear them down. But now all dictators have come together to provide a solution to this problem. If economic sanctions are levied by the west on country X then the dictator of country Y will reroute the goods through his country to bypass the problems economic sanction would create. If the dictator is naïve then help is provided by experienced ones by way of providing military force, military know-how/tactics, propaganda machinery and how to use, etc. Few are amassing power and wealth to create deep inequality in the society. How does the world allow for a small political minority to dominate a majority of the population for personal economic and political gain?

Even in the democratic world, gaming the system has become easy. The US embassy website says that democracy is based on majority rule and individual rights.

Utilitarian philosophy also agrees with democratic principles. Utilitarianism says that society as a whole should pursue those actions which bring happiness to the majority of people. Statistics, though, are showing that it is the majority that is losing out to the minority on the economic front. Financial freedom, or at least lack of financial struggle makes up an important part of maintaining peace and prosperity in any society. If someone argued that there are many more such constituent parts that make up the core of peace and prosperity of a society then I would agree with them. Basic civil rights, law and order and virtues like sympathy, empathy, honesty, integrity and many more also have an equal part to play.

Now individual rights as a principle of democracy can be tricky to comment on. It is not a simple number game of majority votes. Individual rights are hard to specify and corrupting its quality is possible too. Take the right to education as an example of an individual right. What quality of education is one entitled to under their rights? Is it possible that different sections of the society, majority against minority, receive different quality of education? What if the elite minority gets significantly better education to stay ahead of the curve and remain elite? If the answer is yes then even though the individual right to education has been fulfilled it has not been executed to the benefit of the majority. Same can be said about individual rights to healthcare, law and order and other living standards.

Though democracy as a system of government is a noble idea it also goes against basic Darwinian principle of survival of the fittest. The fittest, read elite, want to remain elite and will do anything to maintain the status quo. May it be football or politics or the members who hold the seats in the governing council of your small residential society it is always minority over majority.

Anthrun Pahun Paai Pasarave

I know I am blogging after a long time. Since the last blog I have moved cities (I have shifted to Mumbai). Those who do not know the Marathi language might be wondering what the title of this blog means. 'Anthrun pahun paai pasarave' is a Marathi idiom which means that one should spend within his/her means or one should live within their means. I believe this idiom is losing its relevance in modern India/urban India. This 'thought blog' is about my thoughts about why its relevance is lost. 

I recalled this idiom when I encountered a workshop being conducted on parenting. The objective of this workshop was to help parents deal with issues of children. I can understand how some new issues which arise due to technology might need to be addressed and how parents might need to understand the magnitude of technology's impact and how to be on top of things, but parenting should not be a thing that needs to taught if one is reflective enough. If one has thought about how one was raised it should give enough head start on your parenting journey. There might arise a lot of questions here about the statements that I just made. What if I need to find a better way to raise my child? (this assumes that you have carefully evaluated your own up bringing). What if my parent was abusive and I want to know the proper way of raising a child? These questions, too, are justified for bringing forward the urge to attend a parenting workshop. I still believe one can make a reasonable judgement about ones parenting philosophy from just being reflective about how one was brought up.

But how does all of this link to 'spend within ones means' and loss of relevance in modern India. To answer this one has to look to question(s) that might arise due to economic reasons. Imagine a scenario - a fairly common one in urban India - where both parents are working. Neither parent has enough time to pay attention to their child as much as one of their own parents did. I say this assuming that one parent - in most scenarios their mother - was not working full time and was fully dedicated to welfare of the child. A common characteristic of this parent was to dote on every aspect of the child. These aspects included every aspect of their nutrition  - when they ate, how much they ate and importantly what they ate - who they made friends with, how much time they spent on studies and outdoor activities and many more. As both parents work now-a-days, this level of attention to the child is not possible, though, I must say that technology is helping a lot. But, technology is a double edged sword and is a matter of a whole other discussion. 

The question arises of how have we reached this state of family dynamics. I think the answer is simple. It is economic precedent of 'more income leads to more development and higher standard of living'. The general assumption in economics being everybody view for higher standard of living. Is there an end to development? Can we freeze and accept a particular standard of living. Nothing in Economics, as far as I know speaks about curtailing. It is always about expansion. It is expansion of labour force which led to policies incentivising more people to seek work and encouraging both parents to work. Any policy made impacts more aspects than the one it intended to resolve. In this case one of the things that it has impacted is the parenting capabilities of an urban parent. At this point I must admit a couple of things. Firstly, I am not aware how many families in the rural areas have both parents working full time in which case a similar dynamic could be observed there too. Secondly, these kinds of policies have played the largest part at contributing to this change. There are many other changes that have happened as a consequence of changes in culture, technology, etc which were essential to the occurrence of this state of parenting. I think it is time for all stakeholders to step back and evaluate how much of 'expansion' is really necessary not only to make parenting more natural and intrinsic but also to evaluate which other areas of human life it has impacted. I suggest looking at 'Anthrun pahun paai pasarave' might not be a bad start. I must also say that I have seen many parents who are doing an excellent job despite the hardships they face as a consequence of the environment created by these policies and there are many more angles to view the parenting problems than the ones laid down above.

The Memory Problem

I have been reading a book by Joshua Foer called ‘Moonwalking with Einstein’. The book describes the journey of the author to the finals of the US Memory Championship. Through this journey the author shares his research on history of memory, more specifically memorization.

Over many years starting with my father and then my friends and finally with colleagues at work, I have had debates about importance of memory in academics. In India, to a large extent, even now (though dwindling at a rapid rate) rote learning is the method of “stuffing” information in the heads of students. Application of knowledge is given lesser importance and assessed sporadically. These debates have yielded mixed results. My father’s input had the first impact on me as a teenager. He said, “How can you meditate over an idea until you have memorized it?”. Friends and more importantly colleagues have argued otherwise.

Being in the education field modern curriculums emphasize less on memorization. The focus is more how a student will acquire that information and more importantly apply it. This last part has had unanimous acceptance everywhere. At the end what good is the education if one cannot apply it. But even here one cannot do away with memory. One still must recall, for example, Newton’s laws of motion to apply them. No one debates the importance of recall either. Bloom’s taxonomy clearly states that recalling is one of the fundamental skills that a student should possess.

The situation that I want to bring to notice is that the education system has confused rote learning with memorization. Memorization is often confused with rote learning with good reason as other methods of memorization aren’t known or not popular. As I have realized, by reading Joshua Foer’s book, is that there are many ways of memorization like ‘memory palace’ method, ‘person-action-object’ method, etc. These can very well be used to store information aiding in recall for application of knowledge.

The other situation is the dependence or reliance on technology to store information. Virtually every piece of information can be stored or can be found use technology. This has apparently altered our brains according to a psychiatrist friend of mine. The debate about memorization takes me back to the debate about whether automation is good for the economy, something I wrote about in one of my previous blog posts (see The Schumpeter Diagnosis). Is the change in learning environment due to change in one variable i.e. memorization good for us in the long run? Is reliance on technology for memory good for us in the long run? From Foer’s book we learn that there was similar uproar after the Gutenberg press was invented. Till that point in history the only method of gaining knowledge was by remembering things and reproduction of  any written work had to be done by hand. Hence, with printing press, one did not have to memorize content any more. They could store it externally, in books. Needless to say, it did not create much of a problem in the long run as people have become smarter and proliferation of books has led to education of the masses. But is it different this time?

But, there is a warning. It is said that destruction of library of Alexandria set the world back by atleast a thousand years. Is destruction of external storage of information possible? If so, by how many years will humanity be set back? 

Bargaining and Perfect Competition

A few days back me and some friends my of mine got together for tea. Tea get togethers involve some good food, good conversations, and the obvious element ‘tea’. During this tea session the conversation twisted and turned from one topic onto to the other. One of the topics that my friend shared was how she cannot bargain while shopping and how her mother is excellent at it. As per my knowledge bargaining is done while street shopping and not while you shop in big stores or malls where you know the price of the item you buy by the price tag that accompanies it. The economics teacher in me ventured to ask her further about why she could not bargain and why she thought that her mother is good at it. This led me to understand something economists have known for a long time about how some markets function. It enhanced my understanding how the theory is enacted by its players in real time.

To give you a brief about the theory, markets can be of two major types; perfectly competitive and imperfectly competitive. It is better to explain these markets by their characteristics using examples. Firstly, a market is a place where buyers and sellers of product(s) come together. A market for a small business like a photocopier(copier) who provides you with paper copies of any printed material is an example of a business operating in a perfectly competitive market. Perfectly competitive markets display some characteristics which are as follows –
Firstly, there are many buyers and sellers in the markets. Secondly, the product offered by all the sellers is similar in its characteristics. Thirdly, it is very easy for anyone to enter or exit this market in the capacity of a seller. Finally, both the buyers and sellers are well informed about the market especially about the prices. Apply these characteristics to the copier business, one easily identifies that it is in a perfectly competitive market.

Imagine that an experienced bargain shopper wants to buy chappals in a street market. There are many shops who sell the chappals and many buyers who want to buy the product as well. This satisfies the first condition of perfect competition. As many vendors offer similar kind of chappals the second condition of perfect competition is fulfilled. Also, it is easy for anyone to set up shop at a street market, thus satisfying the third condition for perfect competition.

It’s only the information about the price of product that is not known. One of the main reasons why it so is because the market for chappals is not as big as the market for photocopiers. Hence, the seller has all the incentive to quote a higher price as the buyer is not aware of the price of the product. This will earn the seller higher profits whereas as the buyer will be at a loss for paying higher price. The only way the buyer can gain is buy discovering the price of the product. This will complete the final condition of a perfectly competitive market i.e. buyer and seller are perfectly informed about the market.

The way in which the price is discovered by the buyer (bargainer) is what we know commonly. The buyer approaches the first seller and asks for a price that is well below the selling price set by the seller. Bargaining ensues usually without a sale. The buyer then moves on to another seller but with the information about the price at which a seller might settle given that the products are similar. The process may be repeated with another seller till the price is discovered by the buyer leading to fulfillment of the final condition of a perfectly competitive market. Thus, those who complain that they cannot bargain in a market offering similar products should de facto accept a loss in that purchase.

The Schumpeter Diagnosis

I have been wondering about the validity of Creative destruction[1]. The concept has held true for a long time. Product and process innovation has led to new production units replacing the old in turn causing disruption in the labour markets. Labour associated with old manufacturing processes and/or products lose their jobs but new jobs are gained in the new production processes and/or products. In the time between loss and creation of jobs there will be a spurt in unemployment. The expectation is that the unemployed learn the skills to employ themselves in the new processes and/or products created. The bottom line is to improve productivity of labour and utility of the product to the consumer by creating new processes and/or products. But all throughout history labour has revolted against this creativity. And all throughout history the labour has been proven wrong in the long run. Creative destruction has undoubtedly led to improvement in living standards and economic well-being.

The question that I have is whether this relation will continue into the future. Until now people (labour) have been using machines (capital) to produce goods. But what if capital can produce goods without our help. There would be no need for labour. Labour will be replaced by capital without the need for them to upgrade their skills to adapt to new processes and/or products. This is what is being observed now with the advent of Artificial Intelligence (AI).[2] It is not as easy as saying all people will lose jobs immediately and the machines will take over completely soon. The structure of employment will change among other things. The jobs market might be characterized with few top level and middle level jobs and large number of low level jobs.[3] The disruption in labour market might be observed more in the developed or the so-called modernizing economies rather than in less modernizing economies. 

Coming back to the original issue of creative destruction, I doubt whether the modernizing world will be able replace jobs in the long-run. I had initially thought that we might have to get used to long periods of high unemployment rates i.e. high natural rate of unemployment but it might not be in single digits any more not due to frictional but incessant structural changes. Some countries, for example Switzerland, have already begun to see the impact of continuous technological improvements on employment. They have implemented Guaranteed Minimum Income schemes, where, as the name says, families are guaranteed minimum income by the government to counter the loss of income because of loss of employment [4]. To conclude, this time its different and creative destruction will not have a familiar outcome this time around or maybe there will only be destruction without creation in the long-run.

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[1] Schumpeter, Joseph Alois. Capitalism, Socialism and Democracy. London: Routledge, 1992. Print.

[2] Ford, Martin. Rise of the Robots: Technology and the Threat of a Jobless Future. New York: Basic, 2016. Print.

[3] IBID

[4] IBID

Short-run, Long-run

I am currently reading a fascinating book called "Economics in one lesson" by Henry Hazlitt. It was first written in 1946 and remains a classic in Economics literature. Looking at the rate at which I publish my posts I can hopefully publish a review of this book sometime in the near future.

The book challenges various policy decisions made by the government in various areas. Among the two fallacies it examines one is about the capability of governments to evaluate the long-term consequences of their policies. The book argues that governments can't think of the effects (negative effects) of the policies they implement to fix short term problems that arise in an economic system. Some of the long-run effects of the myopic policies that the book examines are that of measures of protectionism, fixing unemployment and tax policies. 

This got me thinking on a peculiar case not mentioned in the book. It is that of climate change. Climate change was not of concern back in those days. Today the policy makers are aware of the effect that climate change will or can have in the future. Taking action on errant polluters could lead to large job losses in the immediate future. They know that implementing appropriate environmental restrictions on economic (and non-economic) activities will help achieve climate change objectives. Hence, in this case it would be wrong to say that policy makers do not know the long-term effects of policies they are going to implement. 

One fallacy in the book is that if so many fallacies existed in the policies implemented by the U.S government that it should have long term impact then why has the U.S prospered over the long-run. Now those who have read the book might argue that it deals with policies only for narrow interest groups, but that is not the case with all the fallacies that the book considers. Also, many of the policies discussed are simultaneously into play which should compound the negative effects of not considering the long-run consequences. This brings me back to the question. Why has the U.S been prosperous over the long-run?

Whatever I could decipher from the reading I have done till now tells me that there were parallel policies that were implemented which negated the effects of short term-ism. This conclusion is from the way U.S managed critical junctures in its history (ref: Why nations fail? by Darren Acemoglu and James Robinson) Also, managing the short term problems is necessary to keep a balance to lead to prosperity. Who is to say that leaving things to the market forces might not lead to some social disaster in the long-run?

Man City vs West Ham 28/08/2016

It was around 2 months ago that Pep Guardiola took over as the manager of Manchester City Football Club (MCFC). Jose Mourinho at Manchester United Football Club(MUFC) and Antonio Conte at Chelsea Football Club(CFC) had made it a season to look out for. These many top managers had not managed in the Premier League before. As of now the following managers have won the leagues in different countries. 

1. Jose Mourinho (MUFC) - Portugal, England, Italy and Spain 
2. Pep Guardiola (MCFC) - Spain and Germany 
3. Arsene Wenger (Arsenal) - England 
4. Antonio Conte (CFC) - Italy 
5. Jurgen Klopp (Liverpool) - Germany 
6. Ronald Koeman (Everton) - Netherland 
7. Claudio Ranieri (Leicester City) - England 
8. Claude Puel (Southampton) - France 

I am watching the above mentioned match. It's the end of first half and MCFC are already up 2 goals to Nil. West Ham players' body language is not very encouraging. They have suffered staggering number of injuries to some of their very key players at the start of the season. These include Dimitri Payet and Aaron Creswell among others.

The game till now was completely dominated by MCFC. Sharp passing, quick one-twos and great possession. All hallmarks of Pep's style of play. Going into the second half it seemed that West Ham will concede more goals.
Come second half things have changed and kudos to the Pundit who's views I read on Skysports.com. He was spot on. This Pundit said that things are different in England. In Spain, opposition does not start defending until opposition teams bring the ball till the half way line. This allows teams to "build their attack from the back".

In the second half West Ham have pressed high up the field while defending. The "build from back" backfired. Willy the goalkeeper was seen panicking with the passes. There are as many West Ham players in MCFC's half as many as MCFC players. This also got them a goal from Antonio. West Ham have also maintained a very high defensive and disciplined back five evidenced by the number of offsides in the second half. Raheem Sterling, Nolito, etc did not see as much of the ball as in the first half.

Slavin Bilic is a great manager but I am wondering whether MCFC is this predictable.

The curious case of recoveries in UK and US post recession

     Another article from The Economist that I found interesting was published under the section Free Exchange: "The price of getting back to work" (issue of February 1st 2014). 

     Post 2008-09 there was a slump in GDP of both the economies. The American GDP bounced back relatively quickly but the employment in contrast suffered a more a dramatic decline. In case of Britain it was completely opposite; the GDP declined quickly without much downturn in employment as compared to US. The picture below taken from that very own article will help in visualizing the scenario. 

    

     Here I would like to quote what Paul Bowles has written in his book Capitalism - a short history of a big idea. He mentions business cycles under Capitalism and Crisis. 

     "In the boom period of the cycle the profit expectations are high and investment is high. The demand for labor is high and as a result unemployment falls and wages start to bid up. However, after a while, the rise in wages eats into the capitalists profits and creates a 'crisis'; the crisis of profitability. This is solved by capitalists reducing their investment levels, with the result that growth falls and unemployment increases until workers are disciplined to accept lower wages; at this point profit expectations pick up and the whole cycle is repeated".

     Though this maybe the central idea of a business cycle many aspects about the paragraph above can be debated. If this general idea is applied to the situation seen in the graph, the puzzling thing is, the divergence in the unemployment-GDP relation in the Britain and US economies.

    According to the The Economist article the US had a normal recession whereas Britain didn't and it can be explained by what they call 'productivity puzzle'. In US the weak demand, which accounts for output loss led to shortfall of jobs. In contrast in Britain falling demand has been accompanied by strange decline in workers' productivity. Falling productivity cushioned the economy against large jobs losses, since more workers were needed to do the same amount of work. As it reflected the loss of productive capacity, it led to higher inflation. The annual inflation in Britain has been double that of US since late 2007. 

   

This is where the even more interesting part comes in. Bill Martin and Robert Rowthorn, of the University of Cambridge, argue that this productivity puzzle has an opposite causation effect: 'wages did not fall in response to declining productivity; declining productivity was instead a consequence of falling real wages'. Putting it simply; as the nominal wage rise in Britain was 1.6% and inflation was more than 3% the real wages fell by 7.8% making the labor cheaper than the prices of goods and services. Hence the moderately high inflation was the difference between a jobless recovery and a job-filled one.

   

China's Economy

As mentioned in my introduction I am going to share what I read and experience. Well most of my reading nowadays is from some interesting books I have collected related to economics and my subscription to "The Economist".

I read an article in 'The Economist' ( issue of January 25th 2014, pg 59), under the Finance and Economics section. The title of the article is "China's economy - In three parts". The author of the article says that to understand China's economy, it would be helpful to think in threes. Three forms of growth: in supply, demand and credit.

The part that interested me the most was the one about how credit is spent. According to Richard Werner of Southampton University, credit spending can be divided into three categories.

1. Credit can be spent fruitfully on new capital and infrastructure which increases the economy's productive capacity. Lending of this kind adds to both demand and supply which results in higher economic growth without higher inflation.

2. Credit can also be spent wastefully, either on consumption or on misconceived projects such as coal mines without markets. These loans add nothing to the economy's productive capacity, but they do add to the demand. They make a claim on the economy's goods and services, without adding to its ability to provide them. Credit of this kind results in higher inflation, increasing nominal GDP but not real GDP.

3. The third kind of credit is speculative kind. It is spent on existing assets, real or financial, in the hope that these will rise in value. Because these assets exist, they can be purchased (and repurchased) without adding directly to GDP or straining the economy's capacity to produce new goods and services. Credit and asset prices then chase each other, even as consumer prices remain flat.

The author states that the lack of inflation suggests that growth in credit should be of the third kind (Speculative). The article considers the data as of 2013. Then if the author has eliminated the first kind of credit spending, then it means that China has failed to add much in terms of productive capacity. We ( Indians ) have not been known to spend credit the way China has. This leaves me the question: What kind of credit expenditure are our financial authorities doing? With inflation rising and growth slowing are we spending credit wastefully?

Also, credit expenditure expands the banks balance-sheets. The author mentions that Chinese financial authorities have accepted that the bank (especially mid-tier banks) balance-sheets are overstretched and they will carry out the necessary measures to encourage the flow of credit to 'real economy'.

Other than the above part there are certain statistics that have been mentioned about China that I find fascinating.

1. The working age population of China shrank by 2.44m in 2013, having already fallen by several million the year before. This is a demographic turning-point dubbed 'peak toil' ( interesting use of words ).

2. Last year China's output of services contributed 46% of GDP, finally overtaking the output of its industry which stood at 44%. In China Services are known as tertiary sector whereas agriculture and industry are considered primary and secondary respectively.