Poverty in Pragati

As promised, I have an updated and expanded version of my post on The Poverty Numbers at Pragati. From my blog post, I have subtracted some things in the interest of space – the discussion on the recall period being most prominent. More importantly, I have added some things, so you should read the Pragati piece even if you’ve read my post.

I have referred to some papers in the Pragati article. Here are the original links to those:

  • The Tendulkar Report on the methodology on estimation of poverty.  Suresh Tendulkar, by the way, was an excellent free market economist.
  • Angus Deaton’s 2008 paper on why Indians are consuming fewer calories is here (PDF link). Look at pages 53 onwards for discussion on the calorie decline.
  • Deaton’s other paper on how the divergence between the NSS data and the CPI affected poverty numbers is here.
  • All of Deaton’s work on poverty can be viewed here.

The Journalism of Outrage

After retiring from the Supreme Court, Justice Markandey Katju now heads the Press Council of India, a role that everyone knows is a sinecure.  Nonetheless, he has managed to stir up a controversy by saying nasty things about the competence of Indian journalists. He also wants additional regulations on newspapers.

 We don’t have to agree with his proposed solution to recognize that he is right about the quality of Indian journalism. Take, for example, last week’s outrage of the week.  Apparently, little children are dying in hospitals of West Bengal.

If you read news reports like this, you will “learn” that the “death toll” in the hospitals has reached 45. You will also learn that the Chief Minister has not woken up to the gravity of the crisis,  has parried the questions asked of her, while her minister  of state for health has made light of the crisis. The Governor, you will learn, has taken the government to task on the question.

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Avatar, Technology and Steve Jobs

I recently watched Avatar. The movie is set in a future  where humans have colonized other planets. The protagonist, Jake, is an ex-marine who has lost the use of his legs in war and is confined to a wheelchair. (Apparently, he has not been able to obtain treatment that would make him whole because his insurance wouldn’t pay for it. Of course, no matter how advanced  a society we visualize, we can’t help imagining that it will face the same problems we do.) He’s taken a job with a company that intends to mine the planet Pandora  for a rare mineral, but they are facing resistance from a sentient species Na’vi that have a deep and abiding connection with the planet’s flora and fauna.  Jake is given the ask of infiltrating into the Na’vi  ranks. This is achieved by taking a backup of his mind and installing it in the body of a Na’vi-human hybrid and sending him to live among the Na’vi.  Jake ends up liking the Na’vi way of life so much that he switches sides, eventually leading the Na’vi in their violent resistance to the aggression of the humans. Jake prefers to abandon his human form, choosing to live the rest of his life as a Na’vi with his love.

 What accounts for the attractions that the Na’vi lifestyle held for Jake? Supposedly, it is the fact that the Na’vi were much more in tune with “nature”  than the humans. But that doesn’t explain why Jake felt so comfortable in a Na’vi skin. Wouldn’t abandoning your human body and taking on another one be a profoundly umm… alienating experience?  To put it in another way, while being “in tune with nature” may explain the happiness the Na’vi experience, it doesn’t  explain why Jake felt so comfortable switching.  It also doesn’t explain why the viewer would be expected take the side of the Na’vi. Why would an artificially constructed nature be more attractive to us than our technologically enhanced lifestyle that should be more familiar and hence more “natural” to us?

 The more likely explanation is that Jake was attracted to the Na’vi experience because it was a path to escape from the limitations his disabled body imposed on him.  It was either taking on a Na’vi body, or a human lifestyle that was enhanced through machines. In the movie, humans have access to large robot-like war machines  that are controlled by a human standing inside .  And if you think of it, Jake’s disability is beside the point.  Set against what the Na’vi were “naturally” capable of, all humans were handicapped.

 Perhaps the point of Avatar was that the Na’vi lifestyle was better because they were more peaceful? Yeah right. Yes, they were more peaceful, but the last 20 minutes of the movie was taken up in a violent war where both sides used the best possible weapons available to them. The humans used their magnificent flying machines, while the Na’vi  were mounted on their 100% natural, organic, tamed birds.  If the denouement of the Avatar story had involved the Na’vi winning over the hearts and minds of humans by demonstrating the superiority of their peaceful, harmonious lifestyles, it would have been a different matter, but the fact that the makers felt it necessary to end the movie with a special-effects laden war tells us a lot about what we, the viewers, like.

 I didn’t mean this post as critique or even a review of Avatar, though it might be 600 words too late to put in that disclaimer. Instead, my intention is to understand the appeal of Avatar for the viewer, and through it, to investigate what exactly we seek when we seek to go back to nature. The yearning for “nature” has always been a little fake. Peter Drucker noted over five decades back that even when Americans went camping, they took along an entire van full of modern amenities.

 Perhaps what we are looking for in a more “natural” lifestyle is some combination of elegance, simplicity and a more human scale. We are looking for technology to enhance our capabilities, but in a way that is elegant, simple and seems within our control. When we achieve that, it seems more “natural”; our tools seem more like an extension of our bodies rather than an intrusion on them.

 Put in another way, it was only fitting, and yes, “natural” that someone like Steve Jobs who set out find enlightenment in India, failed and found only chaos, then went back and found it while developing elegant, simple devices that extend human capabilities without overwhelming us.

The Scrap Over Poverty Statistics

What should we make of the latest scrap over the Tendulkar committee report? Here are some thoughts.

 Poverty isn’t a binary variable. There is no switch that, when turned on, defines a household as poor vs.  non-poor.  There are various degrees of deprivation, and we have differing intuitions about at what level of deprivation we should classify a family as poor. Part of the root of the outrage over the seemingly low household income (Rs. 26 per day per person in villages to Rs. 32 per person per day in cities)  comes from the fact that our intuition about what constitutes poverty has changed.

 My uncle started his career after completing his graduation in the mid-70s in Bombay’s weather office. He was single and lived alone then, but he’d send part of his salary home to his family. Towards the end of the month, his money would run out, and the last few days of the month, he’d be able to cook and eat only one meal a day.

 Then, as now, if you were a graduate and you were earning an entry level salary in a government firm, you would be categorized into the middle-class – lower middle-class to be sure, but middle-class nonetheless. When did you last hear of a middle-class person lacking for food in India? But that’s how things were till the 70s, and my uncle’s situation wouldn’t excite comment then.  One can only imagine the situation of the others who were poorer than my uncle.

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The Moral of the Corruption Tale

Gaurav argues that the only discernible  moral from my tale of corruption is that Indians are corrupt.  Well, that is a good enough summary, but I need to fill out an entire blog post, so here I spell out the lessons I drew from that incident.
The most striking aspect of the tale, to me, was this: B, who was undoubtedly a well-meaning man, saw nothing wrong in misusing the CBI to achieve what he considered were morally justifiable ends. But if misusing public resources to achieve private aims is what is considered corruption, how were B’s actions any less corrupt than A’s?

There is a tendency in India to think of incorruptibility as a personal quality roughly equivalent to “lack of avarice”.  We believe that corruption is caused by a hankering after material wealth, and consequently, the tendency is to hold the saintly man, preferably with no family to lead him astray, as the model from which good governance will flow.   Sometime back, I read a story on how Nitish Kumar was transforming Bihar. I do not remember the source now, nor the exact words, but there was a line on how honest a man Nitish was. Apparently, industrialists who went to him with bags of money (presumably as donations to the party fund) found that Nitish did not even look at or touch the money when they tried to hand it over, but asked them to keep it in one corner.  Now, without detracting from Nitish’s achievement in making Bihar governable, which is indeed a considerable one, Nitish’s own personal “cleanness” makes no difference to the fact that the wads of notes that industrialists contribute to his party funds distort policy-making, just as B’s own personal honesty made no difference to the fact that his actions ensured that a person who ought to be arrested and in jail was out of it because it served the cause of a private dispute.

This tendency to think of corruption in terms of personal characteristics is a consequence of the saintly idiom in Indian politics. Gandhiji contributed significantly in establishing this, but he was by no means responsible for originating it. This mode of thinking has had many deleterious consequences on our polity.  One of them, which has thankfully reduced in severity, is an Indian inability to distinguish between a dishonest man and a person who, having made his money honestly, enjoys the good things in life.  This inability was fueled by, and in turn contributed to, the antipathy towards free-market policies.  Whether it is liberalization that changed this attitude or generational change, this particular attitude’s trend is downwards. Other consequences, however, remain. We tend to search for the incorruptible person to run our systems, and our fantasies of a perfect society display a disturbing willingness to hand over dictatorial powers to such a person.

The second aspect of the story to note was the reaction of the association’s members. The membership was split in its support between A and B, but there was no dispute over facts. None of A’s supporters thought him to be an honest man. Indeed, it never occurred to them that there was anything wrong with looting from the public purse.  What tipped the views of his supporters in A’s favour was the fact that A did a good job at the association – and yes, they knew that he took a cut there too.
For that matter, A’s opponents weren’t particularly concerned about the public money either. It was his avarice and his behaviour at the association that they were concerned with (Of course, as we have noted, B, the supposedly honest man, wasn’t that concerned about A’s corruption)
This is an important point, and unless we address it, we are not going to get rid of corruption. For us, the government’s money is “out there”, something external to us. It exists to be looted. The job of our representatives is not to be incorruptible and govern impartially.  It is to be corrupt in our favour.  We are strongly opposed to corruption when indulged in by our opponents, because they are denying our side the opportunity to do the same thing.

That brings me to the Jan Lok Pal idea, which is essentially a fantasy that we can get rid of corruption without addressing the systemic problems that cause it. I will write about it in a subsequent post.

(Update: Aadisht pointed out that I mixed up A and B in the last few paragraphs. Fixed that.)

What Just Happened?

I have tried in the past, with some success, to explain how economies work with the help of The Model Village, so let me try again.  This time I will try to explain how the American Economy got into the situation it is in. These, by the way, are the fundamental reasons that I will be explaining. There are many, equally valid and mutually consistent ways of looking at the situation. I will be explaining just one aspect of it, which I hope, cuts to the heart of the matter.
So, in The Model Village, there was a huge Zamindari. By huge, I mean really huge. It was a mini-economy by itself. Many crops grew on its lands, it had cattle, goats and chicken. It also had small factories that processed the produce of its land into finished goods that could be sold outside.

Of course, this Zamindari, while enormously productive, did not produce everything it needed. What it did not, it would buy from the traders of The Model Village. And while the Zamindari was extremely rich, it still needed credit to smooth out its consumption cycle – it needed to borrow early during the planting cycle and repay when the harvest came in. Also, the Zamindar was focused on making improvements in his lands and factories, and he needed credit for that.

The way the Zamindari got credit was to issue IOUs in return for whatever they needed, and those IOUs could later be redeemed for fixed quantities of wheat, rice, etc. (And oh – by the way – this was a primitive model village, so no one had bothered to issue currency yet. They were still using barter.) But the IOUs suited the traders just fine. They knew that they’d get something of value later in return for those IOUs, so they applied the time value of money to calculate how much they could offer in return now. The Zamindari was extremely well-run, so its IOU was seen as extremely stable. It would soon perform the function of money. People in The Model Village traded Zamindari IOUs among themselves, their savings consisted of these IOUs, and so on.
After a time, the Zamindar announced a change. He said that these IOUs would no longer be redeemable against fixed quantities of wheat or rice. Instead, the Zamindari would buy whatever it wanted against the IOUs, and when it came to redeeming the IOUs, he’d auction the produce of his estate, and the price, in IOUs, would be determined by the results of the auction. When asked why he was introducing this change, the Zamindar gave an honest answer – he needed the flexibility to print IOUs to finance his estate’s expansion, and he found the constant need to worry about making sure that the IOUs were good constraining. But surely, the traders did not need to worry about? In any case, the IOUs were backed by the good credit of the Zamindari, and as long as the Zamindari’s lands were fertile and its people hardworking,  there was no need to worry – after all, if the Zamindari was too reckless in issuing IOUs,  it would not be in a position to buy what it needed next time round.

The traders saw the logic of this – and in any case, they had no choice. The Zamindari was the biggest deal in The Model Village, and not trading with it was not an option.

Things went fine for a while. The Zamindari continued to be well-managed, and the Zamindar was prudent in issuing IOUs. The IOUs continued to strengthen their position as the de facto currency of The Model Village. Its value began to be determined less by what the Zamindari could pay for it and more by what other traders would. Traders in turn began to measure their success by the number of IOUs they could accumulate.  The rest of The Model Village got prosperous and began to produce a lot of stuff, much of which was sold to the Zamindari in return for IOUs.

The prosperity of The Model Village grew so much that very few took notice of the fact that the output of the Zamindari was in fact slowing down. The old Zamindar had died and his son had taken over. The new Zamindar was, compared to his father, a reckless man, and he had not failed to notice that the traders’ willingness to accept his IOUs was rather out of proportion to his ability to repay. His lands were turning infertile and his workers older, and he needed to keep issuing IOUs to keep up the expenses of his Zamindari, and so he did.

From the point of view of the traders, they were behaving prudently.   While they intellectually understood the views of those who pointed out that this was a classic bubble, the fact was that they were working hard, making sales, making money (they no longer thought of it as IOUs) and saving. Everything they were doing was exactly what their wise men had told them to do. How could that be wrong?

But of course, things were bound to go wrong. Very, very wrong. It was just a question of how.

By now, most of you would have understood the elements of the allegory. The Zamindari is the United States of America.  The IOUs are dollars. The Zamindar’s decision to cease setting the value of his IOUs is analogous to Nixon’s decision to take the dollar off the gold standard. The traders are those countries who, over the past few decades, have run an export surplus with the US – Japan, China, India, to name a few.

You will notice that it is rather difficult to fix the blame here. Was going off the Gold standard the mistake? Perhaps, but it also presents advantages – and which other country is on the Gold Standard? Was the Zamindar too reckless? Well yes, he was, but not too much. He issued the IOUs because there were always greater fools to buy them. Were the traders at fault? Yes, but it isn’t easy to notice at first glance, because, after all, they are doing what they should be doing – selling stuff, making “money” and saving it – the problem of course is that they shouldn’t have treated those IOUs as money.

You will also notice that this edition of The Model Village was not particularly difficult to understand. It is  not even very controversial. In many bubbles, you will find many sensible people disagreeing over whether  we are in fact in a bubble – if there weren’t such people, we wouldn’t have bubbles. But you won’t find that to be the case here. If you stop two mainstream economists who are vehemently arguing over the Debt ceiling debate and ask them if they, in essence, agree that the parable of the Zamindari is a valid model of the US economy, they will agree before moving on to argue over the specifics of how long  the bubble will last, whether the bubble will burst or slowly lose steam and how to deflate it. And yet, we ended up here.

The Chinese Stock Market

In late 2007, the Shanghai stock market was going through a boom. A Professor of Economics was visiting China and there he learnt that everyone, everyone was expecting the stock market to crash after the Olympics in September 2008. In other words, they assumed the market to keep rising like a Diwali rocket till then, and then fall dramatically.

The professor was amused that no one had reasoned backwards from there. Everyone expected the market to fall in September. So, what would happen in August? Wouldn’t they think, “Hey, I don’t want to get too greedy. I know that the index will rise another month, but what if it suddenly starts falling  and I am caught short? I had better sell right now and book my profits.”

Now, if many people think so, prices will fall, not in September, but in August. But if everyone knows that everyone else is thinking that way, why would they wait till August? Won’t they start selling in July? And so on, by induction, if people expect the market to tank in September, prices should fall right now.

This is what traditional economics suggests. Behavioural economics argues that the professor’s analysis is incomplete. Obviously, not everyone will decide to sell in August, but some people will. What will happen in the market is the classic battle between greed and fear. Some people, overcome by greed, will hold on in the hope of making even more gains, while some people, overcome with fear, will sell. At some point, fear will overcome greed and the market will crash.

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Responses

Venu says

I find it worrisome that you are making quite strong claims (global warming can be handled by markets alone) and then casually stating that you don’t have any evidence for them.

No! I didn’t say that.  All I say is that we will not act on Global Warming at the optimal time. To use an overworked analogy – Hitler. Perhaps there was a time at which he could have been tackled without the enormous carnage of WWII. My view is that given what human nature is, this was unavoidable. We aren’t good at foreseeing and agreeing to act on uncertain threats in the distant future. We are, however, good at getting our act together in the face of a crisis. When we do try to fix problems too distant in the future, we make a lot of mistakes and there is a good chance that we make things worse. So, I propose that we go with the flow and not do anything about Global Warming, and leave things for our children to fix. When we do fix it, we will probably not rely on the market entirely, but we will still be relying on market-like mechanisms.

Ritwik says

Isn’t the market nothing but an aggregation of human behaviour? If you’re agreed in theory and premise with the behaviourists (about hyperbolic discounting, etc.), how are your recommendations so different from the ones they make – why do you (and others like you) consider subject matter expertise to be so important in say, science, but not in policy?

Because behaviourists have not yet come up with practical and actionable recommendations. I know that you have written out the theory of how behavioural economics will prove the EMH wrong. But behavioural economics, while it explains very well why bubbles form, is still unable to tell us the exact, or even approximate moment at which the bubble will burst. Without that, we do not know how to profit from the irrationality of the stock markets.

Likewise, all their “policy recommendations” amount to:

  1. Here is a behavioural quirk that causes ordinary human beings to behave in a way not predicted by standard economic theory
  2. Here is a policy recommendation that fixes the above, which we will assume, for the purposes of simplicity, will be put in place by detached technocrats not subject to the quirks above.

We do not yet have a model of human behaviour that can be used to make predictions about the impact of specific policies when all behavioural traits are considered, and when the fact that even policy-making and implementation is subject to the same quirks is considered. Given this, I did the only scientifically responsible thing possible – I used behavioural psychology to understand (science) but not recommend (policy)

Not everything reduces to incentives, at least in the way that we formally study them. Incentives are great at explaining the average truth, the usual explanation for why something happens. They fail miserably when explaining fringe behaviour or initiatives to tackle fringe issues. By fringe here, I mean not unimportant, but at the edge of our knowledge, efforts and motivations. Of course, one can use a slippery definition of ‘incentives’ and then everything can be considered a function of incentives.

What has this got to do with my post?

And at the end of it all, I am still wondering what your point is. Is it that we won’t be able to ’solve’ global warming, assuming that it is a problem in the first place?

See above – that we will not be able to solve Global Warming at the “optimal” time, and that we shouldn’t try to solve problems too much in advance.  Also, correcting for market failure is not a simple thing.

A Drafting Error

How could Shekhar Gupta write this sentence with a straight face?

That is why it is fascinating that the most commonly stated discomfort with the Sharm el-Sheikh joint declaration is with its drafting. (The big rewrite)

The “drafting” in question says  that India will talk to Pakistan without insisting that Pakistan prosecute those responsible for killing Indian citizens on 26/11 and without insisting that Pakistan takes action to prevent future such attacks.  Is Gupta saying that this is a drafting error? No, because he goes on to claim that this is a game changing move, which is entirely to Manmohan Singh’s credit. He goes on to suggest that we should do exactly what the draft says. Then why say that the “discomfort” with the declaration is only “with its drafting”? 

He keeps saying that we should not concentrate on tactical issues, but on strategic ones. I am not quite sure what he means by tactical issues. If he says that the “drafting” is the tactical issue in question, then he is misrepresenting opponents of the declaration, because they are in fact concerned with the substantive issue of terrorism, not with the “drafting”. If he is saying that terrorism itself is a “tactical” issue, then it is a disgraceful statement.  Terrorism is a tactical issue for Pakistan, a tactic to achieve its larger goals in India. Stopping terrorism against India is a strategic issue for India. In fact, as far as I am concerned, that is the only issue. Prosecuting those responsible for the deaths in Mumbai is a tactical step towards that goal.

He goes on say that India should “engage” Pakistan while keeping up the pressure on it to prosecute those responsible for the massacre on 26/11. But what did the declaration achieve except reduction of that pressure?

The Politics of Reservations

In the  July 2009 Pragati, you can find my article on the politics of reservations.
Whenever supporters of reservations have to make the case for extending reservations for another 10 years, they are faced with a dilemma. If they admit that reservations have achieved their goal, then why do they want them extended? And if they admit that they have not achieved their goal, then why are they persisting with a failed policy for over 60 years? The generally accepted solution to this is to claim that reservations have had some effect, and the policy would be even more effective if it had been properly implemented, and for that they need to extend reservations in time and scope.  This is what I meant when I compared reservations to Yossarian’s liver in Catch-22 – if doctors can confirm that it is a disease, they would have to treat it. If they pronounce him cured, they would have to discharge him. Because the problem was invariably in between, Yossarian could stay indefinitely in hospital.

Here, I would like to respond to some points that were made by Anubhav Agarwal, who made these points as twitter replies. The points here have been edited for readability:
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The Hackneyed Man From the Past

Gaurav non-Sabnis thinks that  the use of the man-from-the-past technique in my Pragati editorial “The Case for Freedom” was hackneyed.  He is free to think so. He also thinks that my introduction was inaccurate. He is free to think so too as long as he doesn’t mind being mistaken.

Gaurav makes two errors – a misinterpretation and a factual error. The misinterpretation is this: He says that “mismatch between supply and demand must be as old as beginning of trade”. Well, duh. Obviously, a famine is a severe mismatch between the demand for food and the supply of food. If I had said that there is now a greater mismatch than before, it would have been an extremely stupid statement.

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Why Vote for Meera Sanyal?

Nilu wants to know why I support Meera Sanyal. He seems to have discerned that I support her from the fact that I have joined the Facebook group that says “Meera Sanyal for South Mumbai”. Can’t blame him for that, but I don’t only join Facebook groups when I support those causes. I join them when I am interested enough to track what is happening.

That said, I do support Sanyal, and if I were a registered voter in South Mumbai, I would vote for her. But Nilu asks some valid questions, and here are the answers.

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