By Russ Nelson, on September 14th, 2010
The proper version of “ignorance is bliss” is actually “WHEN ignorance is bliss,” and it should be followed by “’tis folly to be wise.” That’s the short version of public choice economics, which points out that your vote counts for very little, and consequently justifies very little investment in making a quality vote. They call that “rational ignorance.”
Some economists go even further and say that because your vote counts for so little, you can vote emotionally rather than rationally. You can vote for a minimum wage because it makes you feel good, rather than voting against a minimum wage because it actually prices the worst workers (who need the most help) out of the market.
By Rok Spruk, on September 14th, 2010
A recent paper by Jennifer Hunt (link) finds that the increase in foreign-born graduates strongly contributes to the innovation in the United States:
“In this paper I have demonstrated the important boost to innovation per capita provided by skilled immigration to the United States in 1950-2000. A calculation of the effect of immigration in the 1990-2000 period puts the magnitudes of the effects in context.
The 1990-2000 increase from 2.2% to 3.5% in the share of the population composed of immigrant college graduates increased patenting by at least 81:3 = 10:4%, and perhaps by as much as 18%. The increase in the share of post-college immigrants from 0.9% to 1.6% increased patenting by at least 10.5% and perhaps by as much as 24%. The increase from 0.30% to 0.55% in the share of workers who are immigrant scientists and engineers increased patenting by at least 13% but probably by less than 23%.
While I find evidence for the crowding-out of natives in the short run, in the long run there is evidence for the reverse: that skilled natives are attracted to states or occupations with skilled immigrants. The results hint that skilled immigrants innovate more than their native counterparts, especially if they are scientists or engineers. If correct, the result could reflect higher education of immigrants within skill categories, or positive selection of immigrants in terms of ability to innovate. However, the effect of natives is not as well identified econometrically as the effect of immigrants.”
Thanks to New Economist (link) for the pointer!
By Ajay Shah, on September 14th, 2010
On VoxEU, there is a fascinating article titled China and India: Those two big outliers by Jesus Felipe, Utsav Kumar
and Arnelyn Abdon.
The interesting fact that they highlight is that both India and China are wise beyond their per capita GDP when it comes to the
sophistication and diversification of their exports.
The evidence that they show, on the change in export diversification, is quite striking:
|
China |
India |
| 1962 |
105 |
71 |
| 2007 |
265 |
254 |
| Change (times) |
2.52x |
3.58x |
In India’s case, in 1962, in the depth of India’s autarky, there were 71 commodities exported with `revealed comparative advantage’. By 2007, this number had gone up by 3.58 times. Both China and India are outliers (with excessively high values seen for export
diversification) when compared with other countries at the same level of per capita GDP on a PPP basis.
Explaining the unusual export diversification
One element of the explanation of diversification is sheer size. Continental India has a diverse array of locations. Coastal
Gujarat is a good location for processing crude oil for export, and Bihar is a good place for growing Litchis for export. By aggregating
both places into a single country, we get high levels of export diversification. A casual examination of their graph (Figure 2) makes
me think there is some support for this conjecture – positive outliers in the graph are big countries like the US and Germany; negative
outliers are small countries like Ireland and Finland.
Explaining the unusual export sophistication
Why does India do sophisticated export, well beyond what one would expect for its level of per capita GDP?
- Sheer size matters. Consider the distribution of a certain specific kind of knowledge across individuals in the country. Suppose
you set a high cutoff for the minimum knowledge required of that field in order to assemble a large sized firm. So if you want to build a large sized firm in that field, you need to recruit 1000 people who have this specialised knowledge in excess of this cutoff. In a country of 1.2 billion people, you have more draws from the same distribution. So even if the lay of the land is quite bad in the sense that most people have bad knowledge, the sheer size of the country enables the establishment of firms which require building groups with high end specialised knowledge.Consider the distribution of IQ. One in a thousand people have an IQ of above 146. To help fix your intution, it appears that GRE V+Q of 1450 is roughly IQ=146. In India, with a population of 1.2 billion, we have 1.2 million of them. These 1.2 million very smart people in the country can serve as a core around which extremely high quality firms can be built. These effects are accentuated by increasing returns to scale, and the operation of Metcalfe’s Law, in the gains from interaction and competition between these people within a country.
- There is an odd upper tail in Indian human capital. Looking back 100 years ago, there has been a bizarre upper tail of very highly skilled people in India. Think Ramanujan: by rights, you would have never expected that kind of incredible knowledge to be found in a place like India. But pre-independence India managed to have incredible geniuses like Ramanujan, C. V. Raman, S. N. Bose and C. R. Rao — well before the post-independence push that created the IITs. Is this merely about size (a lot of draws) or was there actually a bizarre upper tail? On this subject, see India shining and Bharat drowning: comparing two Indian states to the worldwide distribution in mathematics achievement by Jishnu Das and Tristan Zajonc. Some fascinating estimates are shown in Producing superstars for the economic Mundial: The team in the tail by Lant Pritchett and Martina Viarengo, who estimate the number of 15 year olds in a country with a OECD PISA score of above 625, which is a
pretty good number. The US is estimated to have between 240,000 and 270,000 individuals in this rarefied zone. India has (a) A lot of people, (b) An abysmally poor mode, and (b) A strange upper tail. Putting these together, they estimate India has 100,000 and 190,000 individuals in this rarefied zone – which is incredibly impressive considering that the Indian per capita GDP is one-thirtieth of that seen in the US. This also tells me that we need to scale up the universities in India so that atleast 200,000 individuals each year are able to start a world class undergraduate education: it’s a real shame underutilising these kids. Aside: PISA > 625 is a much weaker condition than IQ > 146.
Some people bemoan the inequality of human capital that is found in India, i.e. the huge gap between this upper tail and the modal
value. But given that we have a low per capita GDP, would we rather have equality where everyone has low skills, or would we rather have an incredible upper tail in the distribution of knowledge, that is able to learn new technology, plug into globalisation, and power the country along?
This is also related to Albert Hirschmann’s theme of unbalanced growth: he had argued that growth involves developing an
`unbalanced’ capability (e.g. India and the software industry led by a small core of high end capabilities), and then harnessing the
benefits of the catchup by the rest of system (e.g. telecom reforms, mass scale computer programming education, broad business skills in running globalised firms out of India).
In a recent NBER working paper, Eric A. Hanushek and Ludger Woessmann offer interesting evidence about the tradeoff between `rocket scientists or basic education for all’. They say:
Both the basic-skill and the top-performing dimensions of educational performance appear separately important for growth. From the estimates in column 3, a ten percentage point increase in the share of students reaching basic literacy is associated with 0.3 percentage points higher annual growth, and a ten percentage point increase in the share of top-performing students is associated with 1.3 percentage points higher annual growth….
the effect of the top-performing share is significantly larger in countries that have more scope to catch up to
the initially most productive countries (col. 5). These results appear consistent with a mixture of the basic models of human capital and growth mentioned earlier. The accumulation of skills as a standard production factor, emphasized by augmented neoclassical growth models (e.g., Mankiw, Romer, and Weil (1992)), is probably best captured by the basic-literacy term, which has positive effects that are similar in size across all countries. But, the larger growth
effect of high-level skills in countries farther from the technological frontier is most consistent with technological diffusion models (e.g., Nelson and Phelps (1966)). From this perspective, countries need high-skilled human capital for an imitation strategy, and the process of economic convergence is accelerated in countries with larger shares of high-performing students.
Many countries have focused on either basic skills or engineers and scientists. In terms of growth, our estimates suggest that developing basic skills and highly talented people reinforce each other. Moreover, achieving basic literacy for all may well be a precondition for identifying those who can reach “rocket scientist” status. In
other words, tournaments among a large pool of students with basic skills may be an efficient way to obtain a large share of high-performers.
On a related note, it is very, very hard to create high end skills when starting from scratch. Witness the difficulties faced by China
which had to start from scratch after destroying the elite in the Cultural Revolution. When the economy is ready with demand for a
particular set of specialised skills, it may take decades to fill these gaps. As an example, by the late 1980s and early 1990s, it was
obvious that there is a giant opportunity for India in software exports and in BPO. But it took 10 years for the education system to
re-engineer itself to produce these skills in large quantities, and then make possible large numbers for IT/ITES exports. In similar
fashion, the NDA got going on raising expenditure on infrastructure by 2003, but last month, Vikas Bajaj has an article in the New York Times about shortages of civil engineers. It is convenient, in economic development, to have a pre-existing base of high-end skills ahead of time, before the phase of high growth arrives.
Size and economic development
The argument in this blog post has emphasised size. There are many other good things about size, such as economies of scale in the
domestic economy, and paying for the fixed costs of global firms in learning about a country in order to do business in it.
If size is such a good thing for economic development, why has it failed so far: as of 2010, why are India and China far behind OECD
levels of per capita GDP?
One key story lies in globalisation. Big countries feel they can get away with autarkic policies. They feel self-sufficient and are
prone to cut themselves off from the world. Policy makers in small countries don’t think they have a choice in trying to create a
domestic car industry, but their counterparts in places like Brazil or India or France feel they can experiment with industrial policy. Once this problem is solved — as seems to be partly the case with India and China where trade liberalisation has arrived though capital account liberalisation has not — big countries are no longer held back by autarkic policies. In addition, plugging into globalisation, by itself, yields world scale, and thus boosts certain dimensions of size.
Another story, emphasised by Lant Pritchett, lies in the extent to which India is not a single common market, and has thus squandered these potential gains from size. Conversely, as we strip away the legal and tax impediments against intra-India movement of goods, services, capital and labour, and as we bulk up on the infrastructure of transportation and communications, we will obtain returns to size which were not visible in the pre-2000 Indian GDP data.
Finally, on the role of size and sophisticated technological civilisation, see Insufficient data on Charlie’s Diary.
I am grateful to Lant Pritchett, Jishnu Das, Pratap Bhanu Mehta, and Josh Felman for comments and improvements on this post.
By B.P.T., on September 14th, 2010
At 7:45 AM EDT, the weekly ICSC-Goldman Store Sales report will be released, giving an update on the health of the consumer through this analysis of retail sales.
At 8:30 AM EDT, the Retail Sales report for August will be released. The consensus is that retail sales increased 0.3% from July, after a 0.4 increase last month.
At 8:55 AM EDT, the weekly Redbook report will be released, giving us more information about consumer spending.
At 10:00 AM EDT, the Business Inventories report for July will be released. The consensus is that inventories increased 0.6% from June, due to increases in factory inventories and wholesaler inventories.
 Join the forum discussion on this post - (1) Posts
By Rok Spruk, on September 13th, 2010
In the recent edition of Yale Economic Review (link), Ed Glaeser, Matthew Kahn and Jordan Rappaport ponder one of the most difficult and challenging puzzles of urban economics:
“The 2000 U.S. Census shows that the average poverty rate in American cities drops significantly , from about 20% to 7.5%, as you move from the CBD of a city to its suburbs. How can we tell that this connection between city residence and poverty comes from treatment – that is, cities make people poor – rather than from selection, where the poor disproportionately move to central cities? Here, the data support selection: although ghettos may exacerbate poverty, poor people move disproportionately to the center of the cit- ies, either when switching homes or moving to a new metropolitan area... Given the high proportion of the urban poor who are Black, one might think that inner-city poverty is really just another example of the segregation of minorities. However, [the authors] found that poor Whites have roughly the same central city – suburb poverty gap as Blacks, so it is unlikely that race plays an important role in the centralization of the poor.“
By Mark Alvarez-Anderson, on September 13th, 2010
As I articulated in my last commentary, artificially low interest rates brought on by loose monetary policy (i.e. the FOMC) causes capital to flow outward. Tightening – while sending interest rates upwards and exposing insolvencies outright – reverses this and capital flows back into the system, consequently lowing the natural rate of interest.
Dina Titus’ mistake – one which Republicans have made, too – is confusing a dollar leakage with a dollar shortage. The dollars are there; they’re just piled up in foreign reserves. You don’t want to re-create non-existent savings on a printing press.
Interest rates have to be set pursuant to the true supply of savings. The rate of interest represents the discount rate of future goods as against present goods. Presents goods are more valuable than are future goods. A credit transaction involves the exchanging of present goods for future goods.
If you asked me to get you an apple to eat and I said in fifteen minutes, you might be okay with that response. Suppose I changed it to one hour, or one year? Suddenly, you lose interest.
People would rather have an apple today than an apple ten years from now. Thus the rate of interest represents an agio placed on present goods over future goods. The borrower promises to pay back the lender with at least slightly more than an apple in the future. And that’s what the rate of interest represents. It’s the discount rate of future goods against present goods.
Interest rates that are set below their natural levels - only the unhampered free market can set interest rates pursuant to the true supply of savings - undermine savings and destroys future wealth. Consumption outstrips savings.
The problem here is not capital per se, but that capital is so inaccessible to the common person. This is due to previous economic policy which is being pursued with vigor by politicians like Dina Titus.
This problem isn’t cyclical, either; it’s structural. Until structural changes are made to Washington (not the private sector), there will be no economic recovery.
Whatever you do, don’t let politicians bribe you with your own money for votes. The federal dollars flowing into states is called political bribery. Dina Titus is complicit in wrecking the currency – i.e. your future – and needs to be held accountable. Her mistake? Conflating a dollar leakage with a dollar shortage.
By B.P.T., on September 13th, 2010
At 2:00 PM EDT, the Treasury budget for August will be released. The consensus is a deficit of $95 billion, which is larger than the historical average, but less than last August.
Join the forum discussion on this post - (1) Posts
By Rok Spruk, on September 10th, 2010
An intriguing empirical finding from the institutional perspective of economic development from Daron Acemoglu, Simon Johnson and James A. Robinson (link):
“Botswana has had the highest rate of per capita growth of any country in the world in the last 35 years. This occurred despite adverse initial conditions, including minimal investment during the colonial period and high inequality. Botswana achieved this rapid development by following orthodox economic policies. How Botswana sustained these policies is a puzzle because typically in Africa, ‘good economics’ has proved not to be politically feasible. In this Paper we suggest that good policies were chosen in Botswana because good institutions, which we refer to as institutions of private property, were in place…
Why did institutions of private property arise in Botswana, but not other African nations? We conjecture that the following factors were important. First, Botswana possessed relatively inclusive pre-colonial institutions, placing constraints on political elites. Second, the effect of British colonialism on Botswana was minimal, and did not destroy these institutions. Third, following independence, maintaining and strengthening institutions of private property were in the economic interests of the elite. Fourth, Botswana is very rich in diamonds, which created enough rents that no group wanted to challenge the status quo at the expense of ‘rocking the boat’. Finally, we emphasize that this situation was reinforced by a number of critical decisions made by the post-independence leaders, particularly Presidents Khama and Masire.”
By Claus Vistesen, on September 10th, 2010
Kay-Yut Chen and Marina Krakovsky have earned their colours as behavioural economists at Hewlett Packard in the HP Labs and in in their new book Secrets of the Moneylab they present the gist of their research over the past 20 years. The book is a run-through of the most salient aspects of behavioural economics and its applications and since behavioural economics is all about designing (clever) experiments, the book oftentimes presents itself as an experimental handbook of their main results. As such, this is not an academic book but more so a how-to guide for business practitioners on how to implement lessons (and even experiments) of behavioural economics in a business context. Yet, the book never descends to the lower levels of the 10 Steps to Business Success type of books and always steers clear of making pretentious profit promises for the eager business man. This is a welcome plus and means that the stories are presented in a credible way.
The book covers a number of classic results in behavioural economics and especially the chapter on fairness reveal some well known, but often forgotten, truths about human nature. For example; the tendency to punish others so that they don’t get the better deal even though refraining from it would give you the best of two possible outcomes is a result that defies conventional economic logic. The experiment is detailed in Solnick and Hemenway (1998) and involves participants from the Harvard School of Public Health who are asked whether they would prefer one of two options:
1. You earn $ 50.000 and the other earns $ 100.000
2. You earn $ 100.000 and the other earns $ 250.000
Even under the condition of identical price levels in both contexts half the participants chose option 1 which is a result traditional neo-classical economics using homo economicus as the representative agent would have difficulties explaining. Another interesting passage concerns the collective intelligence and how tapping into it can lead to superior forecasts of market performance, demand figures, sales etc. Personally, I believe this is very important and while the collective intelligence is always noisy and contains a lot of dead ends, understanding how to harness it is becoming a key parameter for business success today.
However, all this has a catch.
Experimental economics and the study of human behavior is all well and good, but my feeling is that we still have too small an overall sample size to really be confident of its conclusions. The work of Chen and Krakovsky is of course a step in the right direction here, but does it matter whether you run the experiment above in Denmark or the US, is there a difference across time or age groups of the participants etc. These questions essentially address the robustness of the results and while some of the experiments have indeed been tested in many contexts, the replication of results is something I think is important as we move on from here.
Is it a Buy Then?
Behavioural economics is ultimately about what people do under a given set of controlled circumstances rather than what they should do given an idealized pre-determined model and I think economists would be wise to take this lesson to heart. The economic profession should take due note not only of the actual results, but also the implied shift in methodology which is a consequence of working with behavioural economics.
The nobel prize winning economist George A. Akerlof finishes his preface of the book stating that Secrets of the Moneylab is economics at its best. This is a tall order, but after having read it I am inclined to agree with him. Behavioural economics maps an important alternative way to do economics and Secrets of the Moneylab is a fine representation of this tradition.
–
Full Disclosure: If this reads as a plug, it is because it is a plug. However, please note that regardless of whether the book does well, poorly or somewhere in between I have no financial stake in it. The book goes on sale in Europe in October.
Join the forum discussion on this post - (2) Posts
By B.P.T., on September 10th, 2010
At 10:00 AM EDT, the Wholesale Trade report will be released for July, showing inventory levels for wholesalers in the United States.
|
|
Most Popular Posts