Wednesday, May 31, 2006

Quantum mechanics and information

Einstein hated the randomness of quantum mechanical systems. Now comes an approach that may imply that any theory that explains the fundamental properties of the Universe must be quantized and based on randomness.
Because there is a finest grain to information there has to be a finest grain to our experience of nature. This is why electrons are restricted to fixed energy levels in atoms, why light comes in pieces we call photons, and perhaps, ultimately, why the Universe seems to be made out of discrete particles.
Deep stuff. Would love to learn more, but until then, shall just marvel at a Universe that can behave in such a bizarre, yet logical way.

Tuesday, May 30, 2006

Kung-fu hustle

I plead guilty.

By the first commercial break, I was convinced this is the worst movie ever made. By the end of the movie, I changed my mind- I am sure there are worse movies around.

Actually, it was great fun. I began to feel better immediately after the first Kung-fu fight/dance, and I now think it was actually very good.

But it helps if you are a movie nut.

Arctic monkeys

Carried away by the hype, I went ahead and purchased this.

It is as good as they say it is- it has been a while since I found a rock album that I actually sat down and listened to.

The language is not a barrier- I got everything they were saying (or so I think). I think I need to listen to more Rock, and Indian stores now carry quite a few interesting albums: not just the easy-listening pap that is still so common.


A profile of Nokia as it changes CEOs.

As the leader in mobile phones, Nokia now has to take a broader view of the market, he believes.

Perhaps most surprising, however, is Nokia's 770 Internet Tablet, a hand-held computer that does not contain a mobile phone at all. Instead, it supports web-browsing, e-mail and voice-over-internet calls (using Google Talk software) via short-range Wi-Fi technology.

Another danger is that Nokia may alienate wireless operators, its main customers, by helping consumers get round their proprietary networks and instead supporting open, internet-based services such as Google Talk in its devices.

Managing the complexity of converged devices is difficult, Mr Kallasvuo concedes, but it also provides scope for differentiation, “and overall that's an opportunity.”

I can see how helping users navigate the complexity of a mash-up of devices can be a differentiator, but why would Nokia be particularly well-placed to do that? I have an N70, and while its a good camera-phone, its not as good at simple messaging as my previous phone was.

Monday, May 29, 2006

Reservations in India

Like millions of others, I have discussed this matter with friends, but I know precious little. However, it appears that the Supreme court is taking the matter up, so I better hurry and get my opinions out before they do.

So, here are my ill-considered thoughts. I don't know enough Indian history to base them on facts, so have tried to go back to basic theory. It would be great if someone who actually knows Indian history can tell me what makes sense here, and what is nonsense.

It appears to me that there are at least 5 possible arguments in favor of reservations/quotas:

  1. The beneficiaries are poor. Ensuring that they receive a certain percentage of the jobs available is a kind of redistribution from the relatively wealthy to the relatively poor. However, no-one is using this as the main argument in favor of reservations. The argument seems to be that people from the Scheduled castes/ Scheduled tribes (SC/STs), and now the Other Backward castes (OBCs) should be beneficiaries of reservation regardless of their current economic status.
  2. The beneficiaries are discriminated against. I considered this matter in this post. They are just as capable of doing the work required, but employers would rather not hire them. This, however, should be unsustainable in the long-run, because those employers who do overcome their aversion would be able to get good employees at bargain wages, and would, other things being equal, ouperform and outgrow their bigoted competitors.
    Perhaps the employers would love to hire them, but are afraid of the reaction from other employees and from customers? This is possible, and would be a good argument for reservations- the employers can now hire whoever they want, and can blame the government. However, almost 25 per cent of India’s population belong to the Scheduled castes and the Schedules tribes. With such a large population, it seems implausible that discrimination could be sustained in a competitive market for workers. (Hmm. But does India as a whole have a properly competitive market for labor?No- but thats mostly a rural phenomenon. More later)
    Also,this argument should imply reservations for Muslims as well- they are 12 per cent of India’s population, and are significantly worse off than Hindus, but I don't see any great demand for reservations for Muslims. If I were Muslim, this would have angered me quite a bit.
  3. The beneficiaries are not terribly capable- reservations gets them jobs that they would not have got in a properly competitive market, but this is not their fault e.g. because of neglect or degrading treatment in schools that prevented them from learning. I can imagine this possibility- esp in villages and small towns where there is just one school accessible to the poor, or when poverty makes it difficult for parents to move their kids. However, is reservations the solution for this problem? I am not sure.
  4. It takes a couple of generations for the effects of deprivation to be eradicated. Even if we assume that the beneficiaries were not discriminated against in school, they sure would not have been able to make the most of the opportunities that they had- their lives at home made it almost impossible. See the comments posted by "Steve" here for an impassioned voice in support of this view. I believe that growing up in a home full of books, with educated and knowledgable parents who let me think for myself, and who I could discuss stuff with, made me less of a dolt than I otherwise would have been. By bringing the most talented of people from the SCs/STs/OBCs into the professional class, even if they are not the best people for the job, you change the environment that their children grow up in, and prevent the formation of a permanent underclass based on caste.
  5. The wealthy and powerful are what they are at least partly because their ancestors were able to extract wealth from the ancestors of those who should now be beneficiaries of reservations. However, I am not convinced that is the case. India has long been a poor country, and most of the wealth is new- the result of technology- rather than inherited. It can be argued that even the African-Americans of today have gained economically from the horrors perpetrated on their ancestors- certainly you see plenty of modern Africans apply to migrate to the US, but hardly any traffic in the other direction. A similar point can be made regarding India. In pre-modern India, practically everyone, regardless of caste, was poor. The wealthy would have been mostly high-caste (unless muslim?), but most of the high caste people around would also have been poor. (Hmm.. yes, most Indians were poor, but still perhaps the differences in wealth today are largely explained by caste? e.g. did lower-caste people have access to work in the mills of Mumbai? Did they have access to schooling? Chris Dillow considers enclosures here)

Personally, I consider only points 3 and 4 to have any weight. Against these points, I can see some arguments against Reservations. They have been thoroughly discussed in the media, so I just glance at them:

  1. They are immortal: I cannot see any government at anytime being able to abolish them. Never.
  2. Reservations for OBCs in particular are troublesome because the very definition is unclear
  3. They ignore others who need help- muslims for example, who are also traditionally at least as oppressed as OBCs. And at all levels of society, women are worse off than men at the same level.
  4. They distract us from what matters: most Indians will never benefit from reservations. The 50% of Indian children who are malnourished will never be able to benefit, regardless of caste
  5. The entire idea of reservations, as well as the 50% upper limit that the Supreme Court set sometime back, epitomize the top-down, static, "quota and target" mentality of central planning. Another example is the Mumbai high court's ruling on mill lands. Grant McCracken offers a wonderful contrast.
  6. They misunderstand the nature of the problem: crimes of caste in India are based on differences in power, not wealth. They are no different from other crimes against marginalized people across the world. They can only be fought by redistributing power, not wealth. Wealth will follow.
  7. They misunderstand the nature of the solution: India is still a desperately poor country. We have no business fighting over the division of a pie we have not baked.

On balance, I am against reservations (what a surprise!), and especially against reservations in the private sector.

What would I suggest?

  1. More urbanization, more commercialization: "Stadtluft macht frei". Marx had several good things to say about the bourgeoisie. One was "It has created enormous cities, has greatly increased the urban population as compared with the rural, and has thus rescued a considerable part of the population from the idiocy of rural life." He goes on to praise imperialism- in the Communist Manifesto! Rural life subjects the individual to the collective. It encourages sanctimonious behavior, and helps perpetuate prejudice. This is typical of the village mentality. Fierce competition in commercial life puts huge pressures on businesses to not discriminate. Schools need to keep their students, and parents have a choice of schools. This is not a panacea, but is a necessary first step.
  2. More reservations (for how long?) in government services: especially in the Civil Service and the Police, coupled with moves toward limited government. Power remains very unequally distributed in India. For now, most Indians will remain in villages and small towns. The fact that some 22% of seats in the Indian parliament are reserved for SC/ST candidates helps. The intent is that vulnerable people in trouble should always have easy access to powerful people from similar backgrounds. This can prevent cruel crimes intended to "keep them in their places". However, this could also end as prophecied in this great book:
    Twelve voices were shouting in anger, and they were all alike. No question, now, what had happened to the faces of the pigs. The creatures outside looked from pig to man, and from man to pig, and from pig to man again; but already it was impossible to say which was which.
    To prevent this would require a conscious move towards a limited, watchdog government. A govrnment whose role would be to protect the rights of the individual- that creature that is so rarely seen in India.

There, that should make everyone mad!

Louis Uchitelle on Whirlpool

This post exists to point to this very cool article by Louis Uchitelle in the New York Times. When I discuss globalization, wages, and so on with others, I keep using this as an illustration of how even high wage countries can avoid a race to the bottom.

Brad de Long blogs the same article here

A poet

My favorite section of the Economist is undoubtedly Books and Arts, but when I begin reading an issue, I usually turn straight to the Obituaries.

Often, these commemorate famous people, the outlines of whose lives are already familiar, but the best obits are of the undeservedly obscure.

Too bad so many of these are hidden behind the pay wall.

Saturday, May 27, 2006

Child malnutrition in India

This is a shame.

Currently, India is home to the highest percentages of undernourished children in the world.

These chilling facts are part of a report prepared by the World Bank on the current malnutrition crisis in India. The prevalence of underweight kids among children in India is amongst the highest in the world, and nearly double that of Sub-Saharan Africa, it says.

The report notes that in in six states, Maharashtra, Orissa, Bihar, Madhya Pradesh, Uttar Pradesh and Rajasthan at least one in two children is undernourished. The latter four of these six states account for more than 43% of all underweight children in the country.

More than half of the child deaths take place due to major diseases: malaria (57%), diarrhea (61%), pneumonia (52%), and measles (45%). Child malnutrition is responsible for 22% of the country’s burden of disease.

Democracy is a great weapon with which to fight famines- inages of starving millions in the newspapers and on television can shame even a government into action. However, its a poor defense against mass hunger. The above is not really news- this has been the state of affairs for quite some time .

Its news like these that incline me to think that the current "debate" over reservations in institutes of higher education is a red herring. It appears that both sides are ignoring what matters- primary education, primary health care (how can children be dying of diarrhea in 2006?), basic infrastructure.

Friday, May 26, 2006

I love this image

Experimental evolution

Carl Zimmer writes about “Experimental evolution” in the Yale alumni magazine. As always, he writes clearly and entertainingly on a complex matter.

I was particularly intrigued to read this
“When a single phi-6 invades a host cell, it makes clones of itself. Its genetic material is inserted into the host, and the host begins producing copies of the virus's genes and pieces of the virus's protective protein shell. These chunks of genes and shell float around inside the microbe before assembling themselves into new viruses. All the new viruses are clones of the original invader, differing only by whatever mutations emerged as their genes were produced.”
I knew that viruses multiply by hijacking the host’s cellular machinery and then getting it to churn out copies of the virus, but I had no idea it worked by self-assembly of the genes and the coat. I thought viruses somehow emerged full-fledged from the host’s genes, but it’s not even a complete set of genes that is produced, but chunks of genes and viral coat that later assemble themselves.

However, I was surprised by how slowly the process works. Lenski’s bacteria took 40,000 generations to get double their rate of growth. On average, that is an improvement of just 0.0017% per generation! I thought evolution was much faster than that.

And I was momentarily defeated by this sentence
“Natural selection favored viruses that could use the proteins made by other viruses in the same cell”.
What does that mean? Once virus A and virus B have merged with the host’s genome, what identity do they retain?

I think he is saying that variants of the virus (of which A is an instance) that no longer carry the genes required to produce those “chunks of shell” have some advantage of variants that still carry those genes, but I am not sure how much of an advantage that is.

Ricardo on India and China

There have been interesting comments from John and Jay in response to my post on India and China. They got me thinking. The reason I believe that China’s growth is not an issue for India is, of course, Mr. David Ricardo’s theory of comparative advantage.

The theory itself is beautiful - a wonderfully subtle idea that requires no more than elementary arithmetic to understand. However, it is subtle. Most of the chatterati who comment on matters of international trade seem not have got it. Krugman calls it Ricardo’s difficult idea.

It appears to me that one problem with how the theory is usually presented is that it presents two static pictures- one snapshot taken “before trade”, the other taken “after trade”- and tries to show that both parties are better off with trade than they were before. The theory is hard to explain and hard to follow. I personally find it easier to follow theories when they are presented as stories.

I thought I would try and make a movie instead; show step-by-step how one scene plays out. Remember that this is a story- only one scenario, to show what may happen. A mathematical model, even one that uses only basic arithmetic, has the advantage that it captures a whole range of possibilities- it allows you to ask “what if”?

We begin with two countries: call them India and China. They are neighbors, separated by a high mountain range. There are no other countries in this world. They are perfectly ordinary countries, but the mountains make it difficult for them to trade with each other. They trade a few goods that can be produced only in one of them - Ivory from India, and Jade from China, and so on- but not much that matters to the man on the street.

The staple diet of both the Chinese and Indians is rice and vegetables. Assume that the same land can be used to grow either rice or vegetables. Some farmers in each country choose to specialize in cultivating rice, others specialize in growing vegetables.

What can we say about prices and costs in each country? Not much, but we can say this: in both countries, the expected returns to a farmer from growing rice on any given acre of land must equal the expected returns from growing vegetables on that land. If the returns from growing rice were greater, vegetable farmers would switch to cultivating rice: the supply of rice would rise, its price would fall; the supply of vegetables would fall, and its price would rise until returns are equal. If the returns from growing vegetables were greater, rice farmers would shift to growing vegetables, to similar effect.

Now imagine that an enterprising Chinese farmer discovers some technique that increases vegetable yields by 1/3, so that a given acre of land that could produce 3 tons of vegetables can now produce 4 tons, with no additional labor. Also assume that this technique can work only on Chinese land, so that it is unavailable to Indian farmers. What happens now?

Initially, only a few vegetable farmers in China adopt this technique, and they produce 1/3 more vegetables than they used to. As only a few farmers are using this technique, the supply of vegetables does not move up a whole lot. Prices stay about the same. The early adopters now earn 30% on each acre of land.

Seeing this, more and more vegetable farmers begin to adopt this new technique, and the prices of vegetables begin to fall. Assume that Chinese mums decide that since vegetables are now cheaper, their kids should eat more vegetables. That keeps prices, and returns, from falling too far. Also, farmers can grow 1/3 more vegetables on each acre. Revenues from any given acre of vegetables will fall only if prices fall by more than 25%. So, lets assume that the returns from growing vegetables on any given acre are still up even when all Chinese vegetable farmers have adopted this technique, and total vegetable production is up by 1/3.

Now, remember that returns from growing rice on a given acre of land must equal those from growing vegetables. As returns per acre of vegetable go up, returns per acre of rice must go up as well, or rice farmers will shift to growing vegetables. Rice output per acre is no more than before, so the only way returns from rice cultivation can increase is by an increase in the price of rice in China. Hence, the story so far: production of vegetables in China up, production of rice in China may even have fallen (as some Chinese rice farmers shift to producing vegetables), prices of vegetables in China down, prices of rice in China up. No change yet in India.

Isn’t this a beautiful story?

Now, enter India. As the price of vegetables in China fell, that in India remained unchanged. It is now worthwhile to haul vegetables from China to India. There is a flood of Chinese imports. Panic! Petitions to the Indian Government from Concerned Vegetable Farmers! The price of vegetables in India cannot rise above the price of vegetables imported from China.

However, note that the price of rice in China has now increased, and the production of rice has also fallen, while that in India is unchanged. Demand from India now actually increases the price of vegetables in China. That further increases the returns from growing vegetables in China, and even more Chinese rice farmers move into vegetables. That further increases the price of rice in China, and reduces the supply of rice.

The end is a bit of an anticlimax- you must have seen it coming for some time now: Indian vegetable farmers increasingly shift to producing rice. They export rice to China. The price of rice in China falls as Indian rice comes in. The prices of vegetables in India rise again as Indian vegetable farmers move into rice. Each country specializes in the production of the article that it has a comparative advantage in.

Note that we never even mentioned things like labor costs, and dumping, because all those are already captured in the returns.

The moral of the story is that firms compete not only with firms in the same business from other countries; they also compete with firms in different lines of business from their own country. As they grow, they need resources that those other firms also need. This pushes up resource prices for those other firms.

Firms’ growth depends not only on how efficiently they use resources (their productivity) , but on how efficiently they use those resources relative to how other firms from their country use them, and on how efficiently their direct competition in from other countries use their resources relative to other firms from their country. Its truly an emergent phenomenon.

That Ricardo was something else!

Tuesday, May 23, 2006

China and India

The New Economist points to a 3-part series on India, in the Financial Times, here and here.

Well worth reading, but why the comparisons with China? It makes sense to study China's performance in lifting its people out of poverty, and to seek lessons that apply to India, but the mercantilist assumption that China's successes are India's defeats needs to be put to rest. There is NO competition with China.

We do not compete with China for FDI:
The article (subscribers only) in the Economist that included the above graph points out:

"Uniquely, China combines a vast supply of cheap labour with an economy that is (for its size) unusually open to the rest of the world, in terms of trade and foreign direct investment."

I believe this openness is a good thing, both for the people of China, and for the rest of the world. However, I am not convinced that we need to follow the same path, and compete with China for FDI, in order to grow.

We need investment- that means either FDI or domestic savings. Probably even more important, however, is to apply the best technology that is available, and to create markets that provide incentives for our businessmen to use that technology well. Technology is non-rivalrous. Both China and India can benefit from the same technology.

We do not compete with China for customers:
Yes, some Indian companies do compete with some Chinese companies for customers, but countries do not compete with one another.

In the long-run, the people of a country consume what they produce.

We may import goods, and so consume what we do not produce, but that requires us to sell goods of equal value that we have produced. Our imports may exceed our exports, so that we run a trade deficit, but the difference becomes assets (debt/equity) that belong to foreigners. Eventually, they will want to sell those assets for goods that they can use- and we will run a trade surplus. (Admittedly, there are some lucky countries that manage to run trade deficits for long periods).

In 2004, the Chinese exported goods worth more than 1/3 of their GDP, but they imported goods worth almost as much. They are creating both supply and demand.

As China grows, their external sector will shrink relative to the rest of their economy. I suspect its economy will be far too large to be as tightly integrated with the rest of the world as Germany's is.

I think we need to stop worrying about being "left behind" by China. Our people need to escape poverty, and that requires economic growth. But the point is to grow as fast as we can- its not to "compete with China"

Professional Humility

HedgeFundGuy shows how it is done.

Chris Dillow works for Investors’ Chronicle, but has no comments on the latest market developments (at least for those who are not subscribers), but I think this old favorite of mine is quite apt.

Monday, May 22, 2006

The economics of Rock Concerts

Thanks to Tyler Cowen

What struck me was this bit

In a paper he wrote with Princeton graduate student Marie Connolly, he says concerts are now a much bigger source of income for major-league stars than CD sales.

"Only four of the top 35 income-earners made more money from recordings than live concerts," the paper says. "For the top 35 artists as a whole, income from touring exceeded income from record sales by a ratio of 7.5 to one in 2002."

Before the advent of illegal downloads, artists had an incentive to underprice their concerts, because bigger audiences translated into higher record sales, Professor Krueger argues.

But now, he says, the link between the two products has been severed, meaning that artists and their managers need to make more money from concerts and feel less constrained in setting ticket prices.

Professor Krueger says this tendency was spotted by David Bowie, who told the New York Times in 2002 that "music itself is going to become like running water or electricity".

Bowie has advised his fellow performers: "You'd better be prepared for doing a lot of touring, because that's really the only unique situation that's going to be left."

That reminded me of this remarkable essay (from 1996!) by Paul Krugman.

The royalties that the Four Sopranos earn from their recordings are surprisingly small; the recordings mainly serve as advertisements for their concerts. The fans attend these concerts not to appreciate the music (they can do that far better at home), but for the experience of seeing their idols in person. In short, instead of becoming a knowledge economy we became a celebrity economy.

Goes to show how far a smart man can see if he knows some economics!

Sunday, May 21, 2006

Singapore's elections

Should have blogged about this long before now.

The reasons for the PAP's success are manifold, but the main one, as it never fails to remind voters, is that it has always kept its promise of efficient and clean government...

In part this is because of its obsession with seeking new talent, and its ruthlessness in turfing out established figures to keep its line-up of ministers and MPs fresh. Over a quarter of its candidates are new this time around; a similar proportion were new at the previous election, in 2001.

Private sector companies grow flabby and complacent over time- they have a hard time accepting outsiders, and need fierce competition to stay disciplined.
After 10 consecutive election victories in 40 years, how (and more importantly, why?) does the PAP stay clean and disciplined?
And unspeakably boring.

Wired Magazine on Bollywood

Via Newmark’s Door.

Sunday, May 14, 2006

Pandering to the masses

A joke!

A businessman boarded a plane to find, sitting next to him, an elegant woman wearing the largest, most stunning diamond ring he had ever seen. He asked her about it.
"This is the Klopman diamond," she said. "It is beautiful, but there is a terrible curse that goes with it."
"What's the curse?" the man asked.
"Mr. Klopman."

Saturday, May 13, 2006

Tall tales

In this review of Robert Fogel's "The escape from hunger and premature death", Angus Deaton points out:

Inventing a Wellsian time-machine to take us all back to eighteenth century England would be as good for our health as transporting us to the moon without spacesuits. Our bodies are simply too large to survive on the average food supply then available.
If we were so transported, of course, most of us would adapt quite quickly to meager rations by becoming thinner, but only the short would be able to survive, so that the average height of the population would shrink, though more slowly than average weight. (Emphasis added)

I wonder if this explains the commendable preference women have for tall men. In an environment of chronic food shortages, height (more so than weight, which could vary with circumstances) would be a credible signal that a male has consistently had access to abundant food. In a class-ridden society, the tall men would also be the ones at the top of the social pyramid.

As food shortages become a thing of the past, variation in height will come to be explained more by genes, and less by access to resources. When this becomes the case, will natural selection ensure that height becomes less of a factor in assessing the attractiveness of men?

Note: I know I have been obsessing about signalling, but I find the concept quite fascinating. May post a couple more times about this topic, but shall eventually exhaust myself. :-)

Afterthought: Probably not, at least if this is correct. In the past, the primary constraint on how many descendents a woman had was access to resources. What with plenty of cheap food, and birth control, this is no longer the case. However, preferences have been set by past conditions, and what were indirect indicators of the male's ability to gain access to resources now appear to be primarily "aesthetic". In such a situation, those preferences would probably perpetuate themselves, even if they no longer signal wealth. Or not..

Beautiful people are normal

Alex Tabarrok blogs about how, as we average out the faces of more and more people, the resulting composite face grows ever more attractive.
I remember reading somewhere (where??) that the reason for this is the same reason that Leo Tolstoy's gag in Anna Karenina ("Happy families are all alike; every unhappy family is unhappy in its own way") is true.
What do you think?

Tuesday, May 09, 2006

Of Birds and Men

In 1975, at almost the same time that Akerlof was trying to get his paper on asymmetric information published, Amotz Zahavi published his work on what he called the Handicap Principle. The basic ideas are amazingly similar, though Zahavi was an Israeli biologist who studied birds (babblers) in the desert.
Why do peacocks have those insane tails? They are beautiful, but extremely heavy, and liable to get caught in brush when a peacock tries to escape a predator. Natural selection would suggest that peacocks with longer and heavier tails would be more likely to be killed off, and would leave behind fewer offspring, and that eventually the tails would disappear, along with the males that bear them.
The standard answer used to be that the peahens (those damn females!) somehow acquired a taste for gaudy decorations on their males, and that this set off a “run-away” competition among the peacocks for ever longer and heavier tails. This ended when the benefit (in terms of more babies) of having a longer tail just equalled the cost (in terms of shorter life, and hence fewer babies).
The problem with this explanation is fairly obvious, once stated: how did the whole process get started? Females who prefer to mate with long-tailed males are asking for trouble. Their babies, if male, go through life with a heavy handicap. Natural selection should ensure that these females leave behind fewer descendents, relative to females with less expensive tastes, and they eventually go extinct, along with the tails that they liked so much.

Zahavi offered an alternative answer- one that was initially rejected by leading biologists like John Maynard Smith and Richard Dawkins, though it has now become the new textbook answer.

He argued that the tails were a form of advertising. The males carrying those tails were signaling to females: “Look at me. I am carrying this heavy handicap, and yet have reached maturity. My genetic endowment must be terrific.”. Again, the tails are beautifully symmetric, and the peacocks display their tails when wooing females. Any parasitic infection or disease could damage the tail in a way that would compromise its symmetry and lustre, and be easily visible to the female. Hence, the male is also demonstrating that he is free from infection, and so has a robust immune system. This is a signal that those who are less fit, genetically speaking, cannot afford to mimic. An unhealthy male that tries to grow a long and heavy tail will quickly become dinner.
Hence, the tail is nature’s solution to a problem of asymmetric information. The females need to judge the genetic quality of the males, but the genetic fitness of the males is unobservable. Unlike in the case of the second hand cars, not even the seller (the males) can easily know the condition of the goods. In such a case, a female that can detect reliable signals of genetic fitness- ones that inferior males would not find it worthwhile to mimic- is likely to have a higher proportion of offspring by “high quality” males than females who cannot detect such signals. Their offspring are likely to flourish, inspite of their handicap, and the genes that enable the females to discriminate among males will grow more common in the population. As such females come to grow more numerous, males find it necessary to display their fitness in ever more blatant manner, just as in the previous model.

The Zahavi’s book is wonderful. More on this, later.

On Advertising

In this elegantly written article from 1997, John Kay describes how Economists’ attitudes towards advertising have changed. Early 20th century Economists shared a common prejudice against advertising. This began to change in 1970, when the Quarterly Journal of Economics published a 13-page paper that won George Akerlof the 2001 Nobel Prize in Economics. This after The American Economic Review, The Review of Economic Studies, and the Journal of Political Economy had all rejected the paper- the first two said that the paper was too trivial to be worth publishing, and the third that if the paper were correct, then Economic Theory would have to be changed.
Tim Harford discusses the same paper here .
The basic idea is remarkably simple. Imagine there is a market for some good which varies in its quality. For simplicity, assume that there are just 2 quality grades- some are exceptionally good (Peaches), others are exceptionally bad (Lemons). Buyers would pay Rs 1000 for the peaches, but only Rs 100 for the lemons. Sellers would happily sell a peach for Rs 800, and a lemon for Rs 40. 50 per cent of the goods are peaches, 50 per cent are lemons (all these assumptions can be relaxed in more complex models).
Under these circumstances, you would expect the sellers and buyers to both be happy- they trade peaches for some price between Rs 800 and Rs 1000, and lemons for some price between Rs 40 and Rs 50.
However, assume that sellers know whether their goods are peaches or lemons, but the buyers cannot tell. Now, imagine that you are a buyer. You know that you have a 50 per cent chance of ending up with a lemon. Hence, you are willing to pay no more than Rs 550 (=0.5*1000+0.5*100) for the product. At this price, you will come out ok in the long run. This is true for all buyers.
However, no seller would sell a peach at that price. All those who have peaches and would like to sell them withdraw from the market, leaving only those who have lemons to sell. The buyers quickly realize that they are ending up with far more lemons than they expected, and further drop the price that they would be willing to pay. This downward spiral ends until buyers pay no more than Rs 40, and only lemons remain in the market.
This is a market failure- you have people who want to sell something (the peaches), and people who want to buy what they have to sell, and the two can even agree on the price, but no trade results.
What can save the situation is if those who have the peaches can somehow signal to the buyers the true condition of their goods, and if the signal is either somehow impossible to fake, or if it is one that those who have lemons would not find it worthwhile to mimic.
How can this be arranged? Well, just one solution is that I could arrange to sell my peach to an intermediary who has the means to inspect my goods and evaluate its worth- a car dealer in the case of second-hand cars. The dealer, by investing in his brand through heavy advertising, an expensive showroom in an exclusive part of town, and so on, signals to potential buyers that he has made a major investment in the market and needs lots of referrals and repeat customers to recoup that investment. He can thus be trusted to care about his customers’ interests. Similarly in any market where one participant (apartments, loans, insurance, understands the quality of the product better than the other (Asymmetric information).
That brings us back to John Kay’s article.
What do you think? Comments from those who have experience of these matters would be especially welcome. :-)

Thursday, May 04, 2006

In Bangalore

I am in Bangalore, to attend my cousin's wedding. He is a great guy- I am sure he will have a wonderful marriage.
The wedding, though, is something else. Watching everyone work this hard has frazzled my nerves. Time for a nap.
Won't post much until I return to Mumbai.

Wednesday, May 03, 2006

Pearl Jam

They have a new album out. Newsweek has the story.

Eddie Vedder writes songs on a manual typewriter, carries important papers in a 1940s suitcase, keeps his credit cards in a plastic Batman wallet and wears his beat-up lumberjack boots over a pair of blue argyle socks. He prefers to talk politics rather than Pearl Jam, and has a 21-month-old daughter who likes to sing Daddy's new single, "World Wide Suicide," during play group. "She dances around singing 'Suicide, suicide'," says Vedder, "and I have to wonder what the other parents are thinking."

Tuesday, May 02, 2006

On discrimination

I don’t recall where I first encountered Gary Becker’s work on Discrimination, but it must have been at least 7 years ago. I remember that it helped turn me from a statist to a near-Libertarian. Recent developments in India have led me to think again on this topic, and a long discussion with a friend helped me realize that I had failed to fully appreciate the nuances of Becker’s insight. I had long thought that his contribution was akin to that of the little girl in "The Emperor's New Clothes"- to make people see the obvious.
If you happen to know more on this matter than me (and that cannot be hard!), add your comments. Here is Becker himself.
As I understand it, Becker’s main point is that discrimination is costly. If I employ a person X when Y would have done a better job, I punish X but I also incur a cost- the additional output I would have enjoyed had I hired Y. If I do not incur such a cost, I cannot be said to be discriminating (except on ability!). In a competitive market, a firm that has a taste for discrimination would be out-competed by firms that do not discriminate. Hence, discrimination must fade away.
What did NOT strike the youthful me, ever optimistic as I used to be, is that this requires markets, and efficient ones at that. I did not ask the obvious questions- does this result always hold? If not, when might it break down?
I can now appreciate at least a couple of fairly obvious issues that could potentially spell trouble for this story:
  • What happens when the customers themselves have a taste for discrimination (such as when a customer would rather not be served by a salesman of a particular community or race), and these customers are collectively very wealthy compared to customers who do not wish to discriminate on this basis? Would an equilibrium be set up where both the inequality and the discrimination survive?
  • What happens when employees would rather not work with people from a particular race or community? When the employer legitimately fears that his other employees would shirk so much that the superior performance of his new hire would be rendered naught? Or even be driven down as a result of harassment by the other employees?

Does this mean that it is possible for discrimination to survive more or less indefinitely? Heck yeah- we Indians managed to practice one form of discrimination for a very long time indeed.

Does it mean that we would be fools to rely on markets for escape from these barriers? No, I don't think so. I just think that this indicates the issue is not as simple as I once thought. I think our markets were insufficiently developed. Becker's model required that the market be impersonal- that buyers and sellers could not collude to enforce norms regarding who they hired and at what rates. It required that that states stay out of the market place and not place their forces at the service of those who seek to maintain the status quo. In a country like pre-20th century India, where most people lived in very small villages and had little choice in where they could work, who they could purchase their essentials from, and who they could borrow from, where the state stood ready to punish anyone who challenged the status quo, none of these conditions were met. It was a very stable equilibrium indeed.

I think it is, instead, a lesson in how unnatural good markets are, and how many norms have to be left behind even to arrive at a position where people are profit maximizing. Its too often argued that the impersonality of markets is a strike against them, and that profit has overtaken all other considerations in matters of business- but it is the entirely too personal nature of traditional societies that makes it possible for participants to make decisions that do not maximize profits, and that again allows discrimination to survive.

In the beginning

Here I am. Now what?