On Competition and Ideas

The Dance of Creative Destruction

At the shining bright core of our galaxy of ideas lie a bunch of super-massive ideas that are tightly bound to each other. The core’s gravitational attraction holds the galaxy together, draws in stuff and transmutes them into higher elements.

Exploring the metaphor a bit further is interesting. At the center of galaxies dwell huge black holes which destroy both matter and time. And like the great god Shiva — the Mahadeva as Nataraja, the king of dancers, dancing the Tandava, the cosmic dance of creative destruction — the galaxy core produces novelty and thus advances the evolution of the entire galaxy. Black holes, just like Shiva, destroy time. Curiously, the Sanskrit word for time is the same for black: “kala”. The universe evolves because ceaseless change is imposed upon it through the dance of creative destruction.

Evolution. It is hard to escape the gravitational pull of the idea of evolution. The idea goes back into antiquity. But it was only recently (in terms of historical time) in the mid-1800s that Charles Darwin (1809 – 1882) pondered the biological variant of evolution and figured out the mechanism. It was natural selection. That is one of the superstar ideas that populate the core of our ideas galaxy. Everything that is known about biological evolution can be explained through natural selection.

The Transantiago Story

This story comes from the other end of the world but has lessons for any part of the world. It is “a parable about the combustible combination of optimism and ignorance.” Go read “Planning Order, Causing Chaos: Transantiago” by Michael Munger in the Library of Economics and Liberty.

Below the fold I have quoted the last part of the essay. If you wish to skip the article, do read the last bit.

Abolish the Haj Subsidy

A few days ago the Supreme Court of India admitted a petition challenging the subsidy for haj. (Link). The Rs 280 crore (~ US$ 60 million) a year subsidy for Muslims to visit Saudi Arabia, the petitioners claim, is not just unconstitutional but discriminatory.

Of Freedom, Markets, and the Future of India

Markets Work, Incentives Matter

The two broadest generalizations one arrives at from a study of economics are that markets work and that incentives matter. People respond to incentives because that is at the core of what it means to be rational. To the extent that humans are rational, their behavior is predictably in the direction that existing incentives point to. Trade between humans is rational because both parties in any voluntary trade benefit. The abstract mechanism which enables trade is called the market. Markets work in the sense that they maximize the gains from trade among an arbitrary number of entities. There are other methods of enforcing trade among people, such as the command and control mechanism often employed by communist governments. But they are at a distinct disadvantage relative to the market because the latter is based on the premise that rational actors respond to incentives.

The Fabulous $10 Indian Government Laptop

“Everything reminds Milton of the money supply. Well, everything reminds me of sex, but I keep it out of the paper,” wrote Nobel prize-winning economist Robert Solow in 1966 about Milton Friedman, another Nobel laureate economist, the father of monetarism.

Everything reminds me of India’s failed education system — and by extension — the stupidity of the government policymakers, bureaucrats and politicians included. Unlike Bob Solow, however, I cannot keep it out of my posts.

Food prices

“When you start getting wealth, you start demanding better nutrition and better food, and so demand is high, and that causes the price to go up.” That’s what George W Bush said in a press conference on May 2nd. The NY Times reports:

In response to the president’s remarks, a ranking official in the commerce ministry, Jairam Ramesh, told the Press Trust of India, “George Bush has never been known for his knowledge of economics,” and the remarks proved again how “comprehensively wrong” he is.

Global Poverty and the Cell Phone

A magazine article in the New York Times of April 13th has the rather mistaken and misleading title “Can the Cell Phone End Global Poverty?” (Hat tip: Abhishek Sarda). The article title is misleading because it doesn’t even remotely attempt to answer that question. It is instead about what is called a “human-behavior researcher” or “user anthropologist,” in this case someone who works for Nokia and essentially tries to figure out how people actually use their phones and thus how phone companies should design phones for greater usability.

Dr Adam Smith, I presume

The other I sat down to have a conversation with the spirit of Dr Adam Smith (1723-1790), professor of moral philosophy at the University of Glasgow and Fellow of the Royal Society of London and Edinburgh. A stellar observer of the human condition, his book, “An Inquiry into the Nature and Causes of the Wealth of Nations,” was published in the same year, 1776, as the Declaration of Independence of the United States. Opinion is divided on which of the two events is of greater importance for the subsequent evolution of the world we live in.

What follows is a rough transcript of our talk.

An economics moment

This is a personal post. Not exactly what I had for breakfast type of post but close.

I clearly remember the moment when a light went off in my head. Brian Wright was teaching and we were talking about EV and CV. Equivalent variation and compensating variation, and the related concepts of “willingness to pay” and “willingness to accept.” As I had come to economics rather late in life, I had had the opportunity to figure out some of the basic concepts in my head. But I did not have the vocabulary to fully express the ideas. So when I got the vocabulary, it was an “aha” moment.

I remember Brian posing the question: so PG&E (the local gas and electricity utility company) is going to string up high-tension cables above your backyard. You know that that increases health risks. That is that there are externalities. How much are you willing to pay to stop PG&E from doing so? And how much are you willing to accept to allow PG&E to do so? Note that in the former case, the assumption is that PG&E have the right to string high-tension cables over your backyard and you wish to stop them; in the latter case, you have the right and can disallow PG&E from stringing wires across your backyard. It’s a matter of who owns the rights.

The willingness to pay is bounded by how deep your pockets are but the willingness to accept is open-ended. If PG&E owns the rights,then most likely you are out of luck because you will not be able to pay them enough to deter them from going ahead. If you own the rights, then you can make a pretty neat pile of cash by holding out.

Ronald Coase showed that regardless of who owns the property rights, if there are no transaction costs, then bargaining among the parties is sufficient for the discovery of the economically efficient amount of pollution.

Sometimes I wonder. I wonder if we would continue to have the kind of problems such as Nandigram if basic economics principles were better appreciated by a large percentage of the population. I think a lot of coercion and violence could be avoided. But perhaps I place too much faith in rationality.

Education Spending

This is a follow up to the post on Indian spending on education abroad.

The actual spending may not be $13 billion annually but the argument does not change even if the figure was much lower. What matters is that it is indicative of a problem and we should be concerned about it. It should be noted that this spending is an outflow of resources. That in itself is not a bad thing, however. We need to ask if this is a net outflow in the education sector. That is, what is difference between the inflow and outflow.