I was on my way back from watching an IPL game – RCB beat table toppers RR in a tense match at the Chinnaswamy. My phone battery had drained out, and so had my voice and the bus arrived later than usual, so I was not really following on what was happening in the second game of the double header Sunday – CSK v KKR. The college kid sitting next to match was watching it on his phone (with the commentary set on loudspeaker) but I was mostly lost in reading a book I had just picked up. That is, until, Ravindra Jadeja got out, and in walked a certain MS Dhoni, with two balls left to play.
I looked up from the book and asked him how many people were live on the Jio Cinema stream. He said 1.8 Cr. and as we were speaking, it spiked to 2Cr as MS marked his guard. Twice this season already, Dhoni’s presence at the crease has pushed the viewership on the streaming platform to record highs, and Chinnaswamy held its collective breath – fans in red and yellow alike – when he came out to bat with just a single delivery left to face. Every phone camera was out in the stands, making that innings probably the most documented 1*(1) ever in cricket. It was easier to get tickets to Taylor Swift’s Eras tour than the CSK v RCB game. Dhoni has always had a huge fan following, I don’t need to preach to the choir on that front. But the frenzy his mere sighting in these micro dose quantities has cooked up clearly defies any form of conventional cricketing logic. It does however speak to what I personally consider the most important concept to try and understand economics – scarcity.
Anyone who’s ever read up anything about econ, at whatever level of curiosity, has come across the point that economic decision making is driven by scarcity – of money, of time, of resources, of information. Price movements, in any market, should ideally be good indicators of scarcity (price goes up) or abundance (price goes down), and that is why when there are imperfect markets or markets fail, problems and crises arise, requiring intervention to solve those. Industries like art and fashion create it artificially to keep themselves going.
But back to the MSD phenomenon.
This season the craze feels different, primarily because even though the man himself is characteristically laconic about it, everyone is convinced it’s his last playing season in the IPL – the only form of cricket Dhoni is still active in. In a bit of friendly banter a good friend, pun grandmaster, host of the friendliest cricket podcast and marketing maven (not the kind Malcolm Gladwell conveniently made up for his book The Tipping Point, but the real kind) Tony Sebastian needled me saying “Sir please get off this hype train” when I posted some fawning Dhoni stuff.
Incidentally his statement made me think of why I was posting Dhoni’s stat this IPL after every innings. And then it struck me today when I did the thing that I am second most afraid of on a bus (the first is handing a large note to the conductor and getting berated by them) – talk to a stranger sitting next to me. It’s because all of us know, the number of times we will get to see him bat is now limited, the illusion of abundance that we had watching him in his early days is gone. And with limited supply comes the spectre of scarcity, the thing that forces us to make tradeoffs, to consider decisions more carefully, to prioritise even when we’d not necessarily want to. I have written about the scarcity of Federer v Nadal before, and this feeling is on similar lines.
Harvard economist Sendhil Mullainathan and psychologist Eldar Shafir published a book in 2013 titled “Scarcity: Why Having Too Little Means So Much” and in it they make the profound point that: “Scarcity is not just a physical constraint. It is also a mindset. When scarcity captures our attention, it changes how we think—whether it is at the level of milliseconds, hours, or days and weeks. By staying top of mind, it affects what we notice, how we weigh our choices, how we deliberate, and ultimately what we decide and how we behave. When we function under scarcity, we represent, manage, and deal with problems differently.”
That manifests itself in different ways in different situations. A few years ago I had heard Hollywood producer and the host of the Men In Blazers podcast, Michael Davies reflect on turning 50, when his co host Roger Bennet asked him about his birthday and how his summer was. Davies had said it now feels a little different because the realisation is hitting him that he has a finite number of summers left and it’s changing his decision making. We are at the same cusp with Dhoni, his scarcity is both a signal and an amplification of perhaps our own sense of it. It creates a sense of urgency and sometimes has the effect of making us focus on the now.
Maybe that’s what the MSD spike is about. As the popular song goes – enjoy yourself, it’s later than you think.
The opening lines of Petula Clark’s Downtown go thus:
When you’re alone and life is making you lonely / You can always go / Downtown / When you’ve got worries all the noise and the hurry / Seems to help I know
I have had my phases of life making me lonely, or worries weighing me down. And each time, I have found the perfect place to go is not necessarily downtown, it’s the market.
No seriously, I have used this hack since I was about 11 years old. It was one of those days when some existential question had got stuck in my pre-pubescent head and I was feeling utterly miserable despite the fact that I had had a rather decent day at school and was surrounded by people who loved me and people who I loved. I remember not being able to explain what was going through my mind, until I was sent to the market down the road on an errand – to get some veggies. When you are 11 that in itself might sound like an adventure, but what was astonishing was how my mood transformed when I went to the market. My previous visits had been with my dad and were strictly supervised, but this time I could look around and absorb the buzz. Suddenly just seeing people go about their lives all concentrated at one place made me feel lighter and feel alive; the question that was weighing me down long reduced to a fluff of a thought cloud, drifting away in the face of the heady winds of having glimpsed life itself.
The market is a mythical place in economics – a place, physical or abstract, where buyers and sellers meet. Where the primal forces – supply and demand – collide in their raw, unfiltered form, and from the chaos of transactions and bargains emerges the signal that is Price telling us what’s scarce and what’s abundant. Its physical form is incredibly life affirming, whether you go visit a flower market early in the morning, or see a video of an old Timey stock market where brokers are screaming offers at each other. They remain places of interest, who hasn’t gone to Istanbul and not been mesmerised by the allure of the grand bazaar? It has been the conduit through which everything from ideas, to genes, to diseases, to ideology have spread – whether it’s ancient Mesopotamia or modern Manhattan.
After all, as sociologist Georg Simmel had written in 1900 – “Exchange is one of the purest and most primitive forms of human socialization,” it creates “a society, in place of a mere collection of individuals.” And where else do we find exchange at a fundamental level than at the market.
During my days as a grad student in Philadelphia, I would often be exhausted by the weekend and slip into a sense of ennui so peculiar among PhD students (hey, what can I say, a doctorate is a super lonely affair) by noon on Sunday – regretting the week gone past, and dreading the one arriving in half a day. And every single time, to restore my sanity, there would be only one solution. I would walk down to the Reading Terminal market in downtown Philly. Not to buy anything in particular, although it offered a rich variety of things – from meat to mead, from groceries to gadgets – to buy from. I would go to just watch people interact in a market, to take in that unmistakable buzz of life itself that characterises the joie de vivre of the bazaar. And one stroll around the market aisles later, I would be rejuvenated, ready to take the world on again, my worries and my bothers left far behind.
What I picked up as an 11 year old has remained with me. As an econ student it resonates even more with me now, that the market is some kind of magic, a magic that makes your worldly botherations go POOF!
He is rightly heralded as the father of economics, but Adam Smith’s work was as much about philosophy and politics as it was about economics as we have come to know it.
WHAT
In the beginning there was light. And then there was Adam Smith and his four book treatise ‘An Inquiry Into The Nature And Causes of The Wealth of Nations’ or the bible of economics, for short. The Scottish philosophy professor’s book was driven by his need to write down, in painstakingly observed detail, what made society tick. He was trying to answer the first ever economics question all of us ask – what makes the rich rich and poor poor? The concept of the ‘economy’, or for that matter, ‘economics’ was not commonplace yet in 1776 when the book came out. But his compendium effectively birthed the discipline as he provided a key insight that, to this day, remains the bedrock of all economic analysis. The idea of the ‘market’, where buyers and sellers exchange goods and services, as an abstract space, not just a physical one, and how the market is guided by the ‘invisible hand’ of self interest is fundamental to how virtually any idea in economics is articulated.
SO WHAT
Adam Smith’s The Wealth Of Nations is the most recognisable of all works in economics.
The most amazing achievement of Smith’s seminal work was that it provided the master framework for economic analysis. As Robert Heilbroner writes in ‘The Wordly Philosophers’ that Smith’s vision of a society’s interests organized purely by the pursuit of self interest reduced a ‘complex irrational world…to a kind of rational scheme where human particles are magnetized in a simple polarity toward profit and away from loss’. Having imagined the market, Smith offered the key insight that when it is left alone [by governments and regulators] and allowed to be regulated by competition, the market works best and produces the best outcomes for society as a whole. The history of the world over the next quarter of a millennia would be defined inexorably by that ideological tussle of whether [or not] and when should the market be left alone.
WHY SHOULD I CARE
If you have ever opened an economics textbook, Adam Smith generally finds immediate mention. As a part of society and the economy, as individual participants, wittingly or unwittingly we are all treading a philosophical path that Smith once illuminated with his writing. But it is unfair and incomplete to think of Smith as just ‘The Father of Economics’ and focus on his evangelism for the rational and free market guided by selfish motives. He also wrote The Theory of Moral Sentiments, where he talked about morality and how despite our inherently selfish nature, we as humans are endowed with sympathy and our social psychology is a better moral compass and guide than just pure rationality. It is the perfect complement to the ideas he espoused in The Wealth of Nations.
QUOTE SMART
The most recognizable and powerful Adam Smith quote will always be
‘It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages.’
The Wealth of Nations, Book I, Chapter II
And the perfect complement to it
How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.
If the origin of economics owed a huge debt to the work of Adam Smith, the shape of modern macroeconomics owes a similar one to one of the most remarkable people you will ever find in this field – John Maynard Keynes. On this blog, we usually refer to him as Lord Keynes, a nod to both his actual honorific and his standing among the greatest public intellectuals of the 20th Century, in not just economics, but in general. He was on air raid warning duty at Cambridge during the Second World War in the days of the blitz. He had a stint in India as a civil servant in the early 1900s. He was part of the Bloomsbury group, that famous free thinkers cabal that included, in his time, the likes of Virginia Wool, Clive Bell and EM Forster. He advised governments after the First World War when the Versailles treaty was being drawn up, he advised governments after the Second World War when a new global financial system was instituted at Bretton Woods. He was a speculator who dabbled in the stock market and the currency market, where he made money, almost lost all of it, and made it all over again. And he churned out book after book, in areas ranging from the currency problems in India to probability, at a frequency that would make Gangadhar Shastri aka Shaktiman feel a bit inferior.
This amazing ability of this Cambridge don, who had shown a curiosity about the economics and finance world from early on [he had figured out how to calculate interest at age 4 and ½ ], to see the big picture and connect the dots among the odds and ends that held the world together is what made him a visionary so confident that he wrote to Geroge Bernard Shaw in 1934 that he believed he was writing ‘a book on economic theory which will largely revolutionize – not I suppose at once but over the course of the next ten years – the way the world thinks about economic problems.’ Those would turn out to be eerily prescient words.
SO WHAT
That book Keynes wrote became the most famous tome in all of modern economics – The General Theory of Employment, Interest and Money, or it as it is sometimes simply called, The General Theory. It was the book that formalized how we perceive ‘the economy’ in the modern sense [we spoke about this in ‘E For Economy’]. The book was a result of what Keynes had observed on his tour of America during the Great Depression and the kind of policies that could solve problems such as depressions, specifically unemployment – a thorn on economists’ sides since forever. His conclusion was radical, even heretical by the standards back then. Economists had assumed that economic or business cycles were naturally occurring things and every bust is followed by a boom. But as the Depression got worse, Keynes argued that such a problem will not sort itself out because the economy is stuck in this strange spiral where people are out of work because no one is buying anything because people have started saving more and spending less because people are out of work and they are worried. Keynes demonstrated this link and warned that an economy in depression could stay there and never recover. The solution? Government spending. He reasoned that when businesses stopped spending, the government should
His most famous prescription is still a popular citation
‘If the treasury were to fill old bottles with bank notes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise…to dig the notes up again…there need be no more unemployment and with the help of repercussions, the real income of the community would probably become a good deal larger than it is. It would, indeed, be more sensible to build houses and the like; but if there are practical difficulties in the way of doing this, the above would be better than nothing.
The General Theory Of Employment Interest And Money
His point was that government spending would lead to a ‘multiplier’ effect – as The Economist describes it
‘[I]n the first instance this money would go to contractors, suppliers, civil servants or welfare recepients. They would in turn spend some of the extra income. The beneficiaries of the spending would also splash out a bit, adding still more to activity and so on…
WHY SHOULD I CARE
As it turned out, Keynes’ idea did indeed stand vindicated when, as luck would have it, the war came along and because of massive government spending during the war, the economies of America and Western Europe rebounded. This might sound like common sense but Keynes’ genius was putting those pieces together and focusing on the interlinkage. In fact, after the First World War, when the treaty of Versailles had imposed harsh reparations on the governments of Austria and Germany who lost the war, he had warned in his book – The Economic Consequences of the Peace – that this would cripple their economies and just as increased government spending can help an economy recover, drastically reduced government spending could induce a crisis. That’s exactly what happened in Germany which allowed the Nazis to come to power, and the rest, as they say, is a History Channel documentary every other night. In the modern age Keynesian economics has come to mean the use of fiscal stimulus – government spending – to help economies recover from recessions. And almost every economy, regardless of its economic philosophy, tends to use it. During the crisis of 2008, the US economy announced a trillion dollar plan to aid recovery. The risk of excessive or unsustainable government debt as a result of this still remains but as Keynes would have argued ‘It is better that a man should tyrannize over his bank balance than over his fellow citizens.’
QUOTE SMART
Interestingly, for a man whose ideas from almost eight decades ago still remain relevant as ever, Keynes did have an interesting observation
“The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.”
“Helping someone else through difficulty is where civilisation starts.” – Margaret Mead
The eastern coast of India, primarily the states of Odisha and West Bengal, were battered by one of India’s worst recorded cyclones in history on Wednesday (May 20th) night. Depressingly, yet predictably, Cyclone Amphan left a lot of devastation in its wake, uprooting trees, flinging power lines away, flooding streets and homes, knocking out phone and internet connectivity and causing death and distress. The metropolis of Kolkata was pretty badly hit, as were coastal villages in Odisha and hamlets in the Sunderbans (the mangrove forests that actually absorbed quite a bit of the cyclone’s intensity as it made landfall). The respective state governments had already prepped for a disaster and have moved to mobilise the usual rescue and relief machinery, but the extent of the destruction (which is still being assessed) suggests that their efforts may fall short, which while being bad news, has also served to energise volunteers who have started their own efforts for relief, rescue and rehabilitation.
In the context of a broader human nature narrative, this is at the same time almost predictably routine yet startlingly remarkable. And if we take an economics lens to it, it is even more so, offering us a valuable lesson and reminder. To understand what that is, we have to go back to a familiar story that does the rounds on the internet from time to time. In fact, especially since the outbreak of the coronavirus, it seems to have received a new fillip.
The story is one of anthropologist Margaret Mead who surprised a class of hers by telling them that the first evidence of civilisation was a healed femur (the thigh bone) found at an archaeological site dating back 15,000 years. She went on to elaborate to her puzzled audience that the fact was remarkable because a broken femur takes time to heal and that means whoever this person was, had to have been cared for and protected by their tribe for that period. That’s not usually the law of the jungle, where weaker and injured members of an animal tribe may often be left behind to fend for themselves and in most cases, those did not meet a pleasant fate.
The volunteers in the cyclone’s context – those who put their own lives in danger, or at the very least, face immense hardship to relay messages to people in dangerous areas, shift them to shelters, supply immediate relief items including food and medicine – are the femur healers of the modern economy. When disaster strikes, it often upsets our delicately organised economic and social order and threatens to tear it apart. Now, those studying economic systems as a whole often plug survival of the fittest sort of narrative assumptions on to the system and posit everyone as a rational actor who would safeguard their own self-interest. To them the volunteer’s behaviour would seem out of place. Just like that healed femur at that dig. But altruism need not be seen as an aberration in human behaviour in an economic context but as something that makes complete logical sense.
It’s a feature, not a bug.
Stranger Danger?
In his book, The Company of Strangers, Paul Seabright, who looked at the economy through the lens of evolutionary biology, puts that paradox in perspective saying:
It is hard to believe that something as complex as a modern industrial society could possibly work at all without an overall guiding intelligence… [t]his coordination comes about simply because of a willingness of individuals to cooperate with strangers in a multitude of small but collectively very significant ways.
Our lives are usually dependent on an economic system, a faceless, abstract framework that allocates resources. Individually, everyone is trying to meet their needs by being able to exchange, say, their labour for money, which in turn helps them transfer the goods they need to them. As Ha-Joon Chang puts it in ‘Economics: The User’s Guide’ “[money] is a symbol of…your claim on particular amounts of the society’s resources…” All of economics is about allocation of resources which usually have multiple uses and hence are scarce and thus should ideally be put to ‘efficient’ use. The economy in general around the world (regardless of how it is organised – through market forces or government intervention and planning) functions based on transfer of these resources and the output they produce.
Largely, those transfers are incentive based (the baker sells you cakes because she earns an income selling it not because she is a fan of The Great British Bake Off) and millions of these transfers through complex networks of marketplaces (both physical and abstract) make up the thing we call ‘the economy’, where you can go to the pharmacy and get that aspirin you wanted without having to worry about how it is made or who makes it, or get your skill set gainfully employed for which you get a fair compensation, or put your children in a good school that doesn’t require them to trek through two towns to get to. The system is almost a living breathing organism that functions largely smoothly thanks to strangers trusting each other (your employer may have done a background check on you, but in effect it is hiring a stranger, the same thing happens when you visit a new hairdresser or hop on to a plane where you personally know the crew, the pilot or the plane manufacturer) and continues its job of allocating and reallocating resources so that they find the best use for overall welfare.
However, during a natural disaster induced external shock, this system breaks down, primarily because the incentive structure that was generally driving it (profit) no longer works well.
The Odisha coast is battered by wind gusts nearing 200 kmph
During a disaster a rapid reallocation of resources is required (floods may have submerged the highways so you need water transport; the village hospital may be underwater so you need alternative access to doctors, medicines and facilities) and the existing system cannot engineer an immediate readjustment. Which is why, during the a disaster like this once in a generation cyclone, voluntary contributions (whether in the form of money or in kind – more on that in a minute) play a very crucial role. In terms of a system, a parallel one now needs to be set up which works on a different incentive structure and with different goals.
With A Little Help From My Friends Strangers
Natural disasters happen around the world and governments typically have disaster funds set aside (as well as emergency help to call on, from the defence and special forces, for example) to meet this need. The trouble is when once in a century kind of an event hits, those resources become woefully inadequate. That doesn’t necessarily signify a problem with governance, it is more likely a case of something that is impossible to anticipate and prepare for well in advance.
Altruism has often stumped neo classical economists who have tried to explain it in terms of rational cost versus benefit analysis but while it may not seem obvious at an individual level, as a collective it makes sense (remember Seabright’s ‘multitude of small but collectively significant ways’?).
The is a related question that often gets asked – whether donations should be in kind or in the form of money. There is a clear economic winner here – money is the ideal donation because it is the most fungible resource (it can buy what is needed whereas with in-kind donations sometimes the allocation is not as efficient – it will be unfortunate if say excess tins of baby formula reach a relief camp that has no babies whereas another teeming with babies is facing a shortage). Having said that, everyone may not have the ability to donate money and if they are in a position to offer other resources they have (labour, expertise, time, even knowledge) is perfectly valid.
Every one of you reading this who has donated (or is considering donating) either in kind or their time/effort and/or money for the relief efforts in Bengal and Odisha (or maybe for the migrant workers stranded on roads across the country) may have had different kinds of motivations (feeling good about yourself, a sense of national or humanitarian duty, empathy for the victims based on your own experiences etc) but all of them are usually driven by what psychologists call affect. But make no mistake, while those sentiments are perfectly valid and thoroughly admirable, the collective effort makes perfect rational sense too. The normal economic system has broken down and a parallel (and temporary) one needs to take its place because things are at risk. The breakdown also means temporary disruptions to supply chains which have ripple effects on markets outside the state. The daily milk you get delivered might become costlier for example, or as we found out in the early days of the Covid19 lockdown, your green grocer may run out of veggies. To battle this negative externality, helping the victims out even when it is a contribution you are making outside of your taxes actually becomes critical.
At its most basic an economic system should function where as many people as possible have their needs met fairly (welfare) and there is room for growth. A natural disaster is a spanner in those works. The machine can grind that spanner out over a long term but such a delay can be disastrous which is why intervention is needed to get the system up and running. In normal times, through the incentive of profit and self interest (Adam Smith style) a large number of strangers work together to make it function. But when times are unbelievably tough, those fragile links break down and we are down to another set of strangers who need to work under a new incentive system to put the pieces back together.
I’ll leave you with a hopeful and important reminder from Seabright’s The Company of Strangers:
As you are reading these words, somebody you have never met is working hard on your behalf. Almost certainly many people are working for you – an Indian farmer driving bullocks across his land so he can plant the cotton that will be made into the shirt you will buy sometime next year; a Brazilian farmer harvesting the coffee beans for your breakfast next month; a civil servant planning the road improvements close to that dangerous junction you pass on your way to work; a chemist synthesizing molecules to treat the illness that you still do not realize you have. These people do not know you, but they do not need to, even though your life, your health and your prosperity depend upon them. You have every reason to be grateful for the intimate links that tie them to you.
That is why you should be donating and/or helping in any way that you can. Because paying it forward is not a case of figuring out who precisely is being helped or what section of society has been impacted, it’s more universal than that.
Let the economic models keep plugging rationality to make them simpler to work with. The idea of civilisation is a little more sophisticated and a much higher ideal than capitalism. The fact that every airplane safety demonstration has to remind us to put on our own oxygen mask before helping others along with healed femur remains from 15,000 years ago are ample proof.
DONATE
If you wish to help here are few donation links (this is not comprehensive but the ones I could find and verufy)
We are all gonna die have to reconsider our conventional thoughts
Economic crises don’t always bring existential panic with them, or vice-versa, but ever so rarely, the worst stars align, a perfect storm brews, and a crisis hits that blows every bit of business-as-usual thinking out of the sanitised soap water of conventional wisdom that we have been washing our hands in. The current outbreak (actually now classified a pandemic* by the WHO) of the novel coronavirus (nCovid19) is one such which threatens to upend everything familiar about our lives we take for granted. The virus, which originated in Wuhan in China has become a full-blown global epidemic on the back of its exceptional infectiousness and the fact that there is no known cure at this time. Naturally, with a situation this extreme (there have been 5000+ confirmed worldwide deaths and counting), extreme measures have been called for or already implemented, whether it is severe lockdowns in China and Italy (two countries most devastated so far by the virus) or social distancing norms including cancellation of major events in many countries in Europe as well as the United States, India, Japan and South Korea.
All of that is well-reported. But, as with any extreme event, it is also serving to illuminate the human condition, which in turn might help us consider and reconsider the four biggest questions in economics. These are points of intense debate, and that intensity is likely to be ratcheted up as the virus infects more of us, but what it has revealed so far has been fascinating.
Here is a quick tour through four of them
Are people always rational?
This has been a long-standing debate in economics, where most models assume decision making is usually rational and confers on the decision makers hyperrational abilities of being able to assess costs and benefits. The models usually claim that behaviour on the aggregate approximates rationality and markets and the world in general works. However, panics, such as the ones induced by both information and misinformation about Covid19, can upend that delicate balance.
There were numerous stories about people hoarding toilet paper at supermarkets like there was literally no tomorrow. Add to this stories of panic buying of masks and hand sanitiser and an unsettling picture emerges where Homo Economicus seems to have lost its senses. Because these are items that the world wasn’t running out of, and with no specific supply concerns, there was no rational reason to hoard. Economist Jay L Zagorsky suggests in a piece in Popular Science that it is the manifestation of ‘zero risk bias’ – the evolutionary programming people have of trying to do something when they feel at risk and go for the lowest hanging fruit, eliminating a superficial risk entirely. (It’s also why yours truly often grips the armrest of a plane seat hard when there is turbulence.) Such behaviour does not tally with neo-classical economic models, although behavioural economics models study exactly these kind of anomalies.
The panics and the weird (almost self-harming) behaviour they induce are a reminder that when making policies for people, it’s useful to keep in mind that humans are often swayed by emotion, and logic might not always achieve the desired end. Just ask the guys in Hong Kong who pulled off an armed robbery to snag some toilet paper.
2. Modern economies need strangers to trust one another. What happens when it breaks down?
The modern economy runs on trust among massive numbers of strangers. Episodes like the current one expose that fragility. In macroeconomics, there are often scenarios where what might be optimising behaviour for an individual might actually be hugely counterproductive if everyone followed it. So, as governments advise people not to panic and maintain social distancing (avoiding gatherings, large groups and mass social contact) to slow the progress of the virus down (so as to have adequate facilities to treat those who do get affected), the problem remains that there will always be rogue individuals who will not follow the instructions.
They bring forth extra risk which complicates the matter of how these measures should be enforced. For example, in China many civil liberties were simply suspended, but that may not be an option or even desirable everywhere. It goes back to that question of keeping the fragile bond of trust intact. In times when people trust governments and institutions less and less, what the virus outbreak has exposed is how hard it is to put the trust genie back in the mutual coordination bottle.
3. What goods should be public?
There are, so far, no known remedies for Covid19. There are no vaccines either. Of course, around the world there are furious efforts on to develop a vaccine. Such efforts take time (we may be at least 18 months away from a viable vaccine) and more importantly require money. And then there is a version the age-old question: if and when a vaccine becomes available, should everyone get it or only those who can afford it? (The age-old question, if you are wondering, is what goods should be ‘public’ – that is available for everyone.)
In February 2020, the United States earned a lot of backlash when the Health And Human Services secretary Alex Azar suggested that they could not guarantee a vaccine, if developed, would be affordably available for all Americans. More recently, a German newspaper revealed that the Americans (and President Donald Trump) tried to lure a promising vaccine being developed by a private German company to be a ‘exclusive to the US’ product only by offering financial incentives. In both these cases, the fundamental need and effect of the vaccine being a public good is misunderstood. The vaccine ideally should not be exclusive (via price, patent or any other mechanism, such as, say, nationality) because everyone getting it would save lives and everyone in the world would be better off.
Meanwhile, research scientists who have sequenced the genome of the virus have been sharing their work for free so that others can build on it. Economics Nobel Prize winner Paul Romer pointed out that knowledge and innovations in an economy have “spillover effects” when shared widely because “Ideas…are non-rival goods: one person or from using an idea does not preclude others from using it too.” However, his concern was that ideas take a lot of initial investment to generate but are cheap to replicate which would disincentivise a private player from innovating. Marina Mazzucato, author and professor of economics at Sussex University, counters that by putting the ball firmly in the public goods court. She said at a presentation in 2015 “some of the greatest benefits to business from public R&D emerged when the goal of the investments was not commercialization per se, but solving grander societal and technological challenges”. Thus, there should be more public money that goes into fundamental R&D which then is shared widely. In times like these, the value of that school of thought becomes evident.
4. How Should We Measure Economic “success”?
And finally, with the virus having upended daily life as we know it, we have been forced to reckon with an important existential question – are materialistic things everything? The modern economy is built in large parts on the back of endless consumption, or more specifically discretionary consumption. Thanks to moves like closures of shopping malls, shutdown of movie halls (the US Box Office had its worst turnout in 20 years) and cancellation of sporting events, the likelihood of a global recession looks high as both consumption and (as a result of it) investment tank.
But everyone seems to understand that it is an inevitable recession that needs to be powered through in the interest of everyone’s well-being. To be sure, a worldwide recession will impact people across income levels and economies (if airlines go bust, ground crews lose jobs too!), but once again, perhaps it is a good time to examine where the balance lies between defining economic success just by the growth in material output in an economy. The absence of tourists in Venice has actually cleared the waters in the canals there. Makes you think, doesn’t it?
As 2019 Econ Nobel winners Esther Duflo and Abhijit Banerji wrote in Mint recently
“The key, ultimately, is not to lose sight of the fact that GDP is a means and not an end. But the ultimate goal remains to raise the average person’s—and especially the worst-off person’s—quality of life…Higher GDP is only one way to achieve this, and there should be no presumption that it is always the best one.”
The Covid19 outbreak has given us that forced pause to consider this important question. If an existential threat is reminding us to be kind to one another, or understand that we are all in this together, maybe the advice that Stephen Fry put out on Twitter:
“OK. Until this thing is over we’ve all got to be helpful, friendly and kind to each other, understood? Hatchets buried. Grievances forgotten. Disputes resolved. Feuds ended. Strangers smiled at. When the final whistle is blown we can go back to be being mean and beastly. Agreed?”
should become a permanent fixture even after that final whistle goes.
Surely, the real lesson of this epidemic is the kindness we accumulated along the way.
*What is the difference between an outbreak and a pandemic? You can’t spell pandemic without panic.
Each year, I post an econ themed dispatch from the Bengaluru Comic Con, arguably India’s biggest pop culture convention. The issues we have addressed in the past have mostly been about the fans who visit and consume the wares on offer – from comic books to art to merchandise to hot dogs. But this time let’s return to something I talked about in the very first dispatch from the very first con – the independent artist and her travails – but hadn’t paid a lot of attention to since.
Ars Gratia Artis?
The economics of art is usually complex, and frequently brutal. Superstar artists tend to earn disproportionately well, while many aspiring ones are eventually left in the dust. Such a phenomenon, seen often in creative industries (literature, movies, television etc.) and even sports (we have done a detailed post on tennis here), is called a ‘Winner Take All’ market in economics. The nature of such markets make competition skewed and unfair and what I discovered at the Comic Con this year was that rather than serving as a platform that could provide a level playing field, it only accentuated and amplified the problems that are a bane for the independent artist in the first place.
Independent artists are kind of like Batman. How? They are both independent contractors. Independent creators have to do it all themselves – from production of their merch to the logistics of transportation to other related administrative tasks. Then, to reach an audience and a market they need the equivalent of a bat signal. Gotham gladly pours tax dollars to set one up for the caped crusader. The artists usually have to pay an access fee. That fee allows them a small space in the market that is the convention where they will sell their wares.
And we have not even mentioned the opportunity cost of the amount of time and effort the individual artist has to spend to create the art she is selling. Practically, all of this cost needs to borne before even a single sale is guaranteed. In short, setting up as an independent artist at the Con has a huge fixed cost – the cost you bear regardless of your level of output. This creates a unique problem. Any other producer has significant avoidable costs they can wriggle out of in case they find the market doesn’t have demand for their product – they can run smaller production batches, for example. The artist has no such flexibility in such a scenario.
An independent artist stall at the Comic Con in New Delhi last year. (2017)
Cost busters
I have met some brilliantly talented artists over the last six years where I have been to all the six cons organized here, and many of them are just starting out, fresh out of art school, or probably still enrolled there. Think of them as being similar to aspiring tennis pros playing in Challenger tournaments spending their own money. (Incidentally, about half of those who can call themselves professional tennis players make losses – they spend way more than they earn in match fees and prize money.) Artists, similarly, don’t all make bags of money. That’s why those fixed costs, which can easily run up to Rs. 50,000 ($700), tend to be almost prohibitively cost for a lot of them. Nonetheless, driven by a passion for their work, the chance to interact with a community and cultivate a network of fans and patrons, many take the leap, sometimes pooling together their costs (sharing stall space for example).
The problem is, at the convention, sales don’t just happen on talent alone. Any pop culture market has a huge degree of bandwagon demand involved and that in turn depends on visibility and at least some rudimentary publicity. The convention seems to failing in its objective to provide those.
I watched it first hand this year at two stalls that friends of mine had rented. Rather than being an organized or a predictable market with transparent information, the setting became chaotic to a level that would make The Joker blush and make the actions Mad Max: Fury Road sane by comparison. One of them, Varsha, penned a post down in measured and thorough detail the issues that plagued the set up for independent artists at the convention.
To point out just two – a tiny allocation of space (2mX2m is the standard) whose price has increased way more than inflation, and infrastructural snafus (from lack of basics such as drinking water to potentially lost sales because of poor connectivity to do online transactions). Competitive markets aren’t supposed to have frictions like these. Discovery is an independent artist’s lifeblood (think music and Spotify) but with mislabelled or misallocated stall numbers and very little information on official pamphlets and communication at the venue, the search costs were unreasonably high for anyone actually even looking for a specific artist.
Imagine independent filmmakers going to a festival and the event editing out half their film, or providing them terrible projection facilities. Or tennis players being asked to compete on broken down courts or with no access to water during a match. I should mention that I have watched some of these artists first hand at not just this year’s event but over the last 4-5 years, and looking back it is clear that the issue is a systemic problem and not a one off. So, why does this happen?
Because of the oldest problem in economics – mismatched incentives. The convention provides access to two crucial resources for an artist – a captive audience and precious real estate amidst that audience. It is organized by a for profit concern and naturally they tend to design its economics to suit their objective. After all, to quote the most recognizable economist of all time, Adam Smith, “It is not from the benevolence of the butcher…that we expect our dinner, but from their regard to their own interest.” The convention organizers lock their revenue in early by taking fixed payment for stall spaces, and with their revenue not tied to the fortune of the stall’s sales, have no incentive to provide any facilitation that would improve the revenues for these artists. They aren’t necessarily doing this out of malicious intent, but probably are guilty of avarice. They have no skin in the game.
Thomas Wayne used privilege for good. Would the convention organizers do the same?
Which brings us to the last and existential point. Should the organizers be bothered about this? The answer might seem a resounding ‘no’ from a business perspective, but art is not business as usual. Artists add unique value to society, something that doesn’t always get captured in terms of monetary measures. And across the world, they are usually given subsidies or subsidised platforms. Like Thomas Wayne says to little Bruce in Batman Begins;
“Gotham’s been good to our family. But the city’s been suffering. People less fortunate than us have been enduring very hard times. So we built a new, cheap, public transportation system to unite the city.”
The Wayne family stepped up to use their position of privilege for good.
This is a chance for the convention to step up for the cause of the little guy and restore that uniqueness they bring to the event. Or, at the very least, change the incentive structure by, for example, getting into some kind of a partial revenue sharing arrangement. Sports stadiums and food sellers inside them are slowly beginning to learn the benefits of that – better food and lower prices for fans.
Coda
Every independent artist I have seen over the years has been nothing short of heroic in terms of their talent, and the difficulties they have to endure. But they can’t remove every obstacle themselves. Even superheroes need to be bankrolled. Just ask Bruce Wayne and Tony Stark.
The current levels of unprecedented flood damage in the Indian state of Kerala – its worst in almost a century – have triggered an equally unprecedented humanitarian effort that involves government and non government agencies and individuals alike to help the affected areas get back on to their feet. In the context of a broader human nature narrative, this is at the same time almost predictably routine yet startlingly remarkable.
In his book, The Company of Strangers, Paul Seabright, who looked at the economy through the lens of evolutionary biology, puts that paradox in perspective saying:
It is hard to believe that something as complex as a modern industrial society could possibly work at all without an overall guiding intelligence… [t]his coordination comes about simply because of a willingness of individuals to cooperate with strangers in a multitude of small but collectively very significant ways.
The current situation in Kerala is a somber reminder and a chance to examine this idea, its sources of resilience and fragility, and draw lessons in cooperation for the future. However an unfortunate byproduct of the polarised times we live in have been silly remarks that at best are uncharitable towards the relief and rescue efforts and at worst disparaging what we should all be taking for granted as basic decent human behaviour. This post is not about dissecting that argument (the remarks are so bad, they deconstruct themselves in effect). This is about taking a look at why we tend to react the way we do to natural disasters of this magnitude and why altruism should not be seen as an aberration in human behaviour in an economic context but as something that makes complete logical sense.
It’s a feature, not a bug.
Our lives are usually dependent on an economic system, a faceless, abstract framework that allocates resources. Individually, everyone is trying to meet their needs by being able to exchange, say, their labour for money, which in turn helps them transfer the goods they need to them. As Ha-Joon Chang puts it in ‘Economics: The User’s Guide’ “[money] is a symbol of…your claim on particular amounts of the society’s resources…” All of economics is about allocation of resources which usually have multiple uses and hence are scarce and thus should ideally be put to ‘efficient’ use. The economy in general around the world (regardless of how it is organised – through market forces or government intervention and planning) functions based on transfer of these resources and the output they produce.
Largely, those transfers are incentive based (the baker sells you cakes because she earns an income selling it not because she is a fan of The Great British Bake Off) and millions of these transfers through complex networks of marketplaces (both physical and abstract) make up the thing we call ‘the economy’, where you can go to the pharmacy and get that aspirin you wanted without having to worry about how it is made or who makes it, or get your skill set gainfully employed for which you get a fair compensation, or put your children in a good school that doesn’t require them to trek through two towns to get to. The system is almost a living breathing organism that functions largely smoothly thanks to strangers trusting each other (your employer may have done a background check on you, but in effect it is hiring a stranger, the same thing happens when you visit a new hairdresser or hop on to a plane where you personally know the crew, the pilot or the plane manufacturer) and continues its job of allocating and reallocating resources so that they find the best use for overall welfare.
However, during a natural disaster induced external shock, this system breaks down, primarily because the incentive structure that was generally driving it (profit) no longer works well. During a disaster a rapid reallocation of resources is required (floods may have submerged the highways so you need water transport; the village hospital may be underwater so you need alternative access to doctors, medicines and facilities) and the existing system cannot engineer an immediate readjustment. Which is why, during the Kerala floods, voluntary contributions (whether in the form of money or in kind – more on that in a minute) have taken centre stage. In terms of a system, a parallel one now needs to be set up which works on a different incentive structure and with different goals.
Natural disasters happen around the world and whether it is Puerto Rico or Palakkad, governments typically have disaster funds set aside (as well as emergency help to call on, from the defence and special forces, for example) to meet this need. The trouble is when once in a century kind of an event hits, those resources become woefully inadequate. That doesn’t necessarily signify a problem with governance, it is more likely a case of something that is impossible to anticipate and prepare for well in advance.
Enter volunteers.
Altruism has often stumped neo classical economists who have tried to explain it in terms of rational cost versus benefit analysis but while it may not seem obvious at an individual level, as a collective it makes sense (remember Seabright’s ‘multitude of small but collectively significant ways’?).
The other question going around has been about whether donations should be in kind or in the form of money. There is a clear economic winner here – money is the ideal donation because it is the most fungible resource (it can buy what is needed whereas with in-kind donations sometimes the allocation is not as efficient – it will be unfortunate if say excess tins of baby formula reach a relief camp that has no babies whereas another teeming with babies is facing a shortage). Having said that, everyone may not have the ability to donate money and if they are in a position to offer other resources they have (labour, expertise, time, even knowledge) is perfectly valid.
Every one of you reading this who has donated either in kind or their time/effort and/or money in the Kerala floods rescue effort may have had different kinds of motivations (feeling good about yourself, a sense of national or humanitarian duty, empathy for the victims based on your own experiences etc) but all of them are usually driven by what psychologists call affect. But make no mistake, while those sentiments are perfectly valid and thoroughly admirable, the collective effort makes perfect rational sense too. The normal economic system has broken down and a parallel (and temporary) one needs to take its place because things are at risk. For example, if an epidemic were to break out as the flood waters recede, it could be a public health threat not just in the state but outside it too. The breakdown also means temporary disruptions to supply chains which have ripple effects on markets outside the state (your sea food dinner might become costlier for example) and so on. To battle this negative externality, helping the victims out even when it is a contribution you are making outside of your taxes actually becomes critical.
The Gulf states who have announced help for Kerala are not just doing it out of niceness, it is important for them that a key link in their value chain (migrant workers for an economy that desperately needs them) is not disrupted in the long term.
At its most basic an economic system should function where as many people as possible have their needs met fairly (welfare) and there is room for growth. A natural disaster is a spanner in those works. The machine can grind that spanner out over a long term but such a delay can be disastrous which is why intervention is needed to get the system up and running. In normal times, through the incentive of profit and self interest (Adam Smith style) a large number of strangers work together to make it function. But when times are unbelievably tough, those fragile links break down and we are down to another set of strangers who need to work under a new incentive system to put the pieces back together.
I’ll leave you with a hopeful and important reminder from Seabright’s The Company of Strangers:
As you are reading these words, somebody you have never met is working hard on your behalf. Almost certainly many people are working for you – an Indian farmer driving bullocks across his land so he can plant the cotton that will be made into the shirt you will buy sometime next year; a Brazilian farmer harvesting the coffee beans for your breakfast next month; a civil servant planning the road improvements close to that dangerous junction you pass on your way to work; a chemist synthesizing molecules to treat the illness that you still do not realize you have. These people do not know you, but they do not need to, even though your life, your health and your prosperity depend upon them. You have every reason to be grateful for the intimate links that tie them to you.
That is why you should be donating and/or helping in any way that you can. Because paying it forward is not a case of figuring out who precisely is being helped or what section of society has been impacted, it’s more universal than that.
Why is that the case? What is that driving force? It isn’t really clear cut; you could call it altruism, you could call it humanity, you could call it feeling good about oneself, but whatever it is, it is a feature worth preserving.
DONATE
If you are looking to donate towards the relief and rescue for Kerala, here are a couple of useful links:
Black Panther is the richest superhero on earth. That is because of the abundance of Wakanda’s (the fictional country T’Challa aka Black Panther is the ruler of) Vibranium reserves – a mineral deposited into the country from a meteor strike thousands of years ago. It is the only country that has this super versatile and super strong mineral which can be used to make many things, including a certain famous shield. Vibranium is incredibly valuable because of those properties, its going rate estimated at $1 million for a 100 grams. Wakanda’s wealth and prosperity as a country as depicted in Black Panther’s first live action screen outing is because of the reserves of this valuable resource that it has. So far, economically, the narrative sounds familiar.
Wakanda has a valuable resource, the resource in turn fetches wealth and drives innovation and development. But it is Wakanda’s contrast to a majority of resource rich countries in Africa is what is interesting. In 1993, British economist Richard Auty coined a term to explain this seeming paradox (why resource rich countries seem to be underdeveloped or suffering from anaemic economic growth). He called it the ‘Resource Curse’.
Economic development models at their simplest are about how a country uses its resources in the most efficient manner. It is possible that a country doesn’t have all the resources it needs to be able to produce the things its citizens need. This is where trade comes in. David Ricardo introduced the idea of comparative advantage where he suggested that economies should produce what they are comparatively better at producing and exchange surplus of those goods/services for importing the goods/services they need but can’t efficiently produce. Now this model holds up pretty well when economies have multiple types of resources (India doesn’t have huge oil reserves so it imports oil while being able to produce low cost IT services very efficiently, which it exports) but a puzzling thing economists have noticed is that when a country or economy is heavily dependent on one key resource its economic growth and standard of living progressed slower than similar countries.
Under Ricardo’s logic, this should not have mattered; whether you are comparatively good at one thing or five, countries should be able to grow and prosper through trade, even if it is one commodity. But the correlation that studies observed between countries dependent on one commodity and their state of being was one of increased domestic strife, and even, ironically, given that we started this discussion with the Marvel movie of that name, civil war. This paradox was called the resource curse.
To cite a few cases, Sierra Leone’s main export is diamonds (it has some of Africa’s most abundant diamond deposits) and the country faced a prolonged civil war with people seeking control over the diamond trade. Such diamonds, mined under duress and sold by warlords for profit in international markets are what are called ‘Blood Diamonds’. And before you ask, yes that is exactly the issue the Leonardo DiCaprio movie dealt with. Currently there is a bloody civil war on in the Central African Republic (30-40% of whose exports are diamonds) because of, yup you guessed it, diamonds. Being blessed (cursed?) with one commodity does make the item valuable for the producing country if it can control it. And countries often do. Whether it is Saudi Arabia with oil or these African countries with diamonds or Wakanda with their (fictional) Vibranium, control (who gets to mine it, who gets to sell it, what price is it sold at etc) of these resources are usually in the hands of the kings or the governments. Not coincidentally, all these countries tend to be dictatorships where private enterprise either works hand in glove with typically corrupt government officials or does not exist. The result – benefit of only a few and no trickle down of development to the poor who might be, say, workers at the mines – manifests itself as the resource curse.
A much cited study in 1995 (‘Natural Resource Abundance and Economic Growth’ by Jeffrey Sachs and Andrew Warner) found that “economies with abundant natural resources have tended to grow less rapidly than natural-resource-scarce economies”. The explanation was that when economies are heavily dependent on windfall gains from that one valuable resource (oil, minerals, diamonds or whatever other real world equivalent you want to think of) have rampant corruption, more ‘extractive’ institutions (a term popularized by Daron Acemoglu & James Robinson in their book ‘Why Nations Fail’ by which they mean political institutions that have concentrated power and economic institutions that are ‘structured by this [political] elite to extract resources from the rest of the society), risk instability that could lead to civil unrest (or worse, civil war), and exhibit very high income inequality. The upshot was that they tend to grow more slowly.
There is another aspect of the resource curse that becomes a problem when the commodity is super valuable – the country itself becomes a target. The Inca empire in Peru had been accumulating gold for ages but had a fairly equitable society by all accounts until the Spanish found out about them. The Bolivians were similarly targeted by the Spanish conquistadors because they had huge deposits of silver. Wakanda in the comics world has been targeted too (most notably by the villainous Doctor Von Doom) which is why King T’Chaka in his speech points out how Wakanda is vulnerable. And of course, there are no limits (and possible fragments of truth) to the conspiracy theories of America invading countries because of oil.
A third problem is that of opportunity costs. Countries become so focused on one industry diverting all factors of production there that other sectors suffer. For example, if all Wakandans mined Vibranium all year, who’d lay the roads or treat their sick? It is a contributor to the lopsided development. The trouble with this all eggs in one resource basket approach is that if and when the commodity crashes there can be severe consequences for the economy. Saudi Arabia has been facing it as oil prices have crashed to historical lows lately. So has Venezuela which is suffering from shortages of essential items and hyperinflation.
In their superb book Why Nations Fail, Daren Acemoglu & James Robinson talk about the case of Cameroon to illustrate all three aspects of this problem. Cameroon discovered oil in 1977 (when oil demand was growing rapidly) and diverted a lot of its resources to producing oil. There was a huge economic boom but two things happened – 2/3 of the money (or rent) earned from oil went to the government who spent it on between 1978 & 1986 on high “[p]ublic sector wages” & subsidies. As Acemoglu & Robinson write
The government, based on a temporary increase in oil revenues, embarked on an unsustainable boom in consumption and investment, much of which was in “white elephant” projects with little social value. The crash came in 1986 and in 1988 Cameroon entered into a structural adjustment program with the IMF.
The crash was the crash in oil prices.
But, by Bast’s grace, Wakanda seems to have avoided that fate. It doesn’t have dilapidated infrastructure (try arguing with Shuri that her country’s infrastructure is *not* the most advanced in the world), or an ancient healthcare system (traditions seem to effortlessly fuse and exist with modernity), or widespread starvation or any signs of income inequality. So, does that mean there is no such thing as the resource curse? Or has Wakanda some unique lessons to offer to those who wish to avoid it? The short answer is that it is a mix of both things.
Some counter evidence to the resource curse was presented by Christa Brunnschweiler in a 2008 paper (‘Cursing the Blessings? Natural Resource Abundance, Institutions, and Economic Growth’) where she said they found a “positive direct empirical relationship between natural resource abundance and economic growth”. In plain English, that means economies with greater resource wealth grew faster than resource-poor countries during the period that she studied (1970-2000) which includes a time period Sachs and Warner studied as well. They even found those economies to be less, not more, susceptible to civil war.
They seemed to have discovered what we could call The Wakanda Effect. Subsequent research has shown that while there is evidence of correlation between slow growth (plus unrest) and resource abundance, it is most pronounced when the country depends on exporting the said resource. That means that the country usually doesn’t develop much else in terms of comparative advantage and remains on a path to inequitable growth. How is Wakanda different? From the evidence we have in the film, Wakanda is not dependent on exporting Vibranium; in fact, it actively discourages it. Early on in Black Panther, a key plot point revolves around spies and arms dealers who want to smuggle Vibranium out of the country. It instead has used its copious reserves to develop technology – more efficient electricity generators, public transport powered by Vibranium, healthcare systems that seem to derive their main healing power from the Magic mineral. The result is that the quality of life in Wakanda is bordering on phenomenal.
It avoids the opportunity costs problem as well as what Tim Harford called ‘a theory of government banditry’ in his book ‘The Undercover Economist’. He cites the economist Mancur Olson, who imagined governments as roving bandits whose only incentive is to maximize their own short term gain and invest virtually nothing for the future or the long run. That is where Wakanda’s administrative system is portrayed as almost utopian [T’Challa or the council of Elders have no such designs, they seem to only want better quality of life for their subjects] and with an agenda for innovation and development.
You might argue here that real resources are not as versatile or all powerful like the fictional Vibranium. But the lesson here isn’t about discovering Vibranium, it is about what the country decides to invest its wealth earned from the resources into. That is what sets Wakanda apart. Set in this alternate reality of Afrofuturism where theirs is a country that hasn’t been colonized or pillaged, Wakandans seem to have a progressive credo about economic development, despite the minor squabbles that seem to exist among the different tribes. The curse, then, seems to be something that is less of an inevitability and more of a trap – something that can be avoided. The secret sauce might be to have an inclusive and optimistic agenda like Wakanda does.
I often teach classes to undergraduate students introducing them to the core ideas in economics. And invariably the one idea I center all the discussion around is the concept of efficient utilization of limited resources. Every problem, economic or otherwise, can be framed as a challenge that involves devising a way to do the best possible with the resources at hand.
From microeconomic issues like how much should a firm produce in each of its production runs to macroeconomic conundrums like what kind of goods and services an economy should produce given the resources it has. These resources, in economic parlance, are called factors of production, or factors, for short. Distilling the economic problem down to its essence this way allows us to take an interesting look at many phenomena and inform our thinking about them. For this particular post, we are going to use this particular lens on a rather interesting (hopefully!) subject – Roger Federer.
Every professional tennis player grapples with an economic problem. They are trying to use their abilities (resources) to make a living. The better they use them, the more they earn. But every tennis player also has their idiosyncrasies and limitations, strengths and weaknesses, or what economists would call constraints. Economies have a theoretical production possibilities curve, a depiction of all the different things they could produce given the level of resources if they made the best use of them. For the sake of simplicity, you can visualize this as a two dimensional graph like the one below, if you consider a hypothetical Economy that produces only two goods.
There is an opportunity cost involved in terms of giving up on one good if it wants to produce more of the other good (because limited resources, remember?) and this cost keeps getting steeper. So, what does it all have to do with tennis in general and Roger Federer in particular? Imagine Roger Federer as an economy whose output is tennis success that has two elements – aesthetic beauty and on court advantage. He has managed to produce both in ample amounts in the twenty years he has been a professional seemingly expanding his ‘production possibility curve’, in effect producing more beautiful tennis as well as more success.
Is there a trade off between the two, you ask? Tennis is a competitive sphere and because Federer’s typical style is slightly artistic and not as muscular, many of his opponents have tried to take advantage of his weaknesses to be able to beat him. Losing too often would mean the Federer Economy would lose growth and without it there isn’t anything valuable to offer. Robert Solow, The Nobel Prize winning economist, did a lot of work in the area of economic growth and he came up with a simple explanation of the two routes available to achieve economic growth – using more factors or combining the existing factors smartly to increase productivity (the ability to produce output). That’s efficiency for you – doing the best you can with what you have. Raghuram Rajan, the former RBI Governor all around handsome economist, once memorably summarized this at a speech at IIT-Delhi saying, “[Solow] showed that the bulk of economic growth did not come from putting more factors of production such as labor and capital to work. Instead, it came from putting those factors of production together more cleverly, That is, from what [Solow] called total factor productivity growth. Put differently, new ideas, new methods of production, better logistics – these are what lead to sustained economic growth.”
This is particularly instructive if you are a tennis player visualizing yourself as an economy. Your ability and opportunity to ethically increase the factors you have at your disposal is next to nil. A Federer can’t take performance enhancing drugs, or grow a third hand to play a double handed forehand or create a set of clones of himself like The Great Danton in The Prestige and send each one to play a different tournament to keep fresh. There is only one Federer. So, he has in the recent past used the second bit suggested by Solow – total factor productivity growth – to achieve efficiency and keep delivering the goods.
During his early dominant years, specifically between about 2004 and 2009 when he was winning a scarcely believable 95% of his matches on tour, he was young and in peak physical condition, which made him ready to take on all comers and beat them. More importantly, his success meant he usually got advantageous draws and schedules as the top seed at a tournament thus helping him economize even further.
This, and the subsequent diagrams are taken from a superb interactive feature that swissinfo.ch put out to celebrate Federer’s 20 Grand Slam titles.
But, as with every fast growing economy, Federer faced a slowdown where his magical combination of aesthetically pleasing tennis and phenomenal on court advantage could not be delivered with the same ferocity or frequency. Federer had to reinvent his total factor productivity which was clearly in decline.
In tennis, if you don’t win a lot of your service games, your success won’t amount to much. See if you can spot here, where the Fed economy faced a recession and also how and when he bounced back.
2013 was particularly brutal on him, and he had been written off as a Grand Slam prospect (where you have to win 7 five set matches to be champion, unlike the tour events which typically needed 6 wins in three setters) just as he had been back in 2002. He went back and cut down his schedule and worked on his game.
But it was an injury in the second half of 2016 that seemed to spark a total reset. He spent five months away from the game because of a knee injury and returned from the layoff having honed his major weapons – his serve and his forehand – which he used to devastating effect. He was spending less time on court and using that advantage to produce more beautiful tennis.
The result has been unprecedented success for a mid thirties tennis star in a sport where sustained success past the age of thirty is exceedingly rare. After his win at the Australian Open last night, he mentioned the technical adjustments he has been making. To compensate for his slowing reflexes he has been trying to put the ball in play in positions where it takes a fraction of a second longer for the opponent to return the point, thus buying himself that valuable resource of time.
Robert Solow would be proud of that total factor productivity adjustment. Federer doesn’t need to be lightning fast, given that he faces a biological limit, but he can slow his opponent down to swing the equation in his favor. The result? An increase in both the aesthetics and the on court advantage. Crucially, he keeps gunning for a strategy that minimizes his on court time. He knows this is a limited resource at his age and you can sometimes see him almost strategically not going all out on games when he doesn’t want to pick a fight he knows he can’t win quickly.
Most spectacular economic success stories across history (for example, Japan and its meteoric rise from the ashes of World War II devastation) have been a result of brilliant innovation that improved the efficiency of existing resources to levels otherwise not thought to be possible. The Federer Economy is no different in that regard.
And therein lies a little inspiration for all of us.
[The great graphs I have quoted and more brilliant visualizations can be found here.]
It's the Market, Stupid! 