Easynomics

Economic growth is just 200 years old

deflation
We live in a day and age where economic growth is taken for granted. China was growing at greater than 10% per year for a long time. In the recent past, the growth has slowed down to around 7% per year. If Chinese growth keeps slowing down, the world growth will also slow down.

The United States has grown at around 3% per year, over the long term. The world’s largest economy is now growing at a much slower pace. Economic growth in India has also slowed down over the last few years. And all this has got economists and people who follow such things worried.

Nevertheless, in the context of history, economic growth is a very recent phenomenon, and is just around 200 years old. As John Plender writes in Capitalism—Money, Morals and Markets: “The economist Angus Maddison calculated that in the period from 1500 to 1800, world domestic product per capita[income] grew at an annual average compound rate of just 0.04 percent—one-thirtieth of what has been achieved since 1820.”

While some economists have issues with the methodology Maddison used to arrive at the economic growth number, most agree with the broader point he makes. In fact, economic growth even before 1500 was nothing home to write about.

Why was this the case? There was a great fear of creative destruction that new inventions would unleash. As Daron Acemoglu and James A. Robinson write in Why Nations Fail—The Origins of Power, Prosperity and Poverty: “The fear of creative destruction is the main reason why there was no sustained increase in living standards between the Neolithic and Industrial revolutions. Technological innovation makes human societies prosperous, but also involves the replacement of the old with the new, and the destruction of the economic privileges and political power of certain people.”

Acemoglu and Robison take the example of the Roman Emperor Vespasian, who ruled between AD 69 and 79. The Emperor was approached by a man who had invented a device to cheaply transport heavy columns to the Capitol, the citadel of Rome. This cost the government a lot of money. By adopting the new invention, the government could have saved a lot of money.

The Emperor rejected the invention and declared: “How will it be possible for me to feed the populace?” The invention was rejected because it would have disturbed the way things stood at that point of time. The new device would have put many people out of work. As Acemoglu and Robinson explain: “The innovation was turned down because of the threat of creative destruction, not so much because of its economic impact…Vespian was concerned that unless he kept people happy and under control it would be politically destabilizing.”

A similar logic was used to put many inventions in the cold storage, including few in the textile industry, in the pre-industrial revolution era. The industrial revolution started in Great Britain in the second half of the eighteenth century and gradually spread to other parts of the Europe and the United States.
A major reason why the Industrial Revolution flourished was because governments no longer tried to stop creative destruction. They took it in their stride.  Further, as people and governments saw the benefits of economic growth that new inventions and creative destruction brought in, their approach towards economic activity changed as well. As Plender writes: “Economic activity was no longer perceived as a zero-sum game in which one man’s profit was another’s loss and thus morally questionable. It became easier to make great fortunes from industry and commerce than from land.”

To conclude, there is a lesson in this for Indian government. The only way sustained economic growth can be unleashed is by encouraging new ideas and inventions. This will only happen if the ease of doing business in this country improves. And on that front, there is a lot that still needs to be done.
The column originally appeared in the Bangalore Mirror on August 26, 2015

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

I want to do frandship with you…

facebook-logoThis column should have ideally been written by a woman, given that it concerns what women experience on the social media as well as on the internet. Many women receive random friend requests on Facebook from men stating: “I want to do frandship with you,” or something like “I want to be frands with you”.

Of course it is safe to say that men who send out such requests do not really understand the basic etiquette that one needs to follow on Facebook and other social media. Their English language skills are nothing to write home about. And honestly, I am being a tad euphemistic here.

Nevertheless, there is enough anecdotal evidence to suggest that men who send out such friend requests do not really give up that easily. Even though, their friend requests keep getting rejected, they keep sending out newer ones. Some of them even end up as proper stalkers.

Why is that? Nobel Prize winning economist Alvin E. Roth has a possible explanation in his new book Who Gets What and Why—The Hidden World of Match Making and Market Design. As he writes: “Think of an Internet dating site on which women with appealing photos receive far more messages than they can answer and men find that very few of their messages draw responses. This causes men to send more, and hence more superficial, messages and women to respond to fewer and fewer of them.”

While Facebook is clearly not a dating site, Roth’s logic applies perfectly to the random friend requests that are sent out on Facebook. And this explains to a large extent why some women do not have their pictures as profile pictures on Facebook. It just attracts the wrong kind of attention.

The interesting bit is that the same phenomenon plays out in a different way on matrimonial websites as well. During the course of last week, I met two friends, who, rather late in life have started using matrimonial websites in their quest to get married quickly. The female friend complained that she was getting way too many proposals, and it had become difficult for her to separate the wheat from the chaff.

The male friend on the other hand was disappointed with his search and felt that trying to get married through matrimonial websites was a waste of time. He had been getting proposals at a very slow rate. And this was happening despite him showing interest and sending out many proposals.

So, what is happening here? As Roth writes: “At many interest dating sites…attractive women get more emails than they can answer. The men, who find that many of their emails go unanswered, react by sending more emails.”

Further, unlike approaching a woman in person, it is very easy to send across a proposal over the internet. Hence, many end up sending too many proposals. But as Roth writes in the context of dating websites (and which I feel applies equally to the Indian matrimonial websites): “These emails become less informative, because the men submitting them are less likely to study the information  contained in each woman’s profile and how best to approach her. The women in turn reply to a smaller and smaller percentages of the messages they get, and the men respond by sending even more, and even more superficial, messages.”

This essentially leads to the collapse of the matrimonial market on the internet. Given that messages can be easily sent, more and more messages are sent and ultimately nothing happens. As Roth writes: “Economists call such superficial messages “cheap talk.” When talk is cheap, it doesn’t reliably signal anything.” It leads to congestion setting in, “and that can make it impossible for participants to identify the most promising alternatives the market has to offer.” And that makes the entire situation quite tricky for both men and women looking to get married.

(Vivek Kaul is the writer of the Easy Money trilogy. He tweets @kaul_vivek)

The column appeared in the Bangalore Mirror on August 19, 2015

Why Indians still love real estate

India-Real-Estate-Market
Every time I write a column saying that the good days of investing in real estate are over, I get newer theories on why I am wrong. The latest that I have heard is that the government will not allow real estate prices to fall. Oh and there is another one – the seventh pay commission will lead to an increase in salaries of government employees and the higher salaries will be ploughed into owning real estate.

The theories notwithstanding, the question to ask here is, why do Indians love owning real estate? The simple answer is that some of them have got black money to invest. And it’s not so easy to invest black money in other forms of investment like mutual funds, bank fixed deposits, etc. Further, you can see the real estate you own and get a sense of satisfaction from it. It’s a hard asset. The same is not true about other forms of investing.

Having said that if we left it at these reasons, it would be a very simplistic way of looking at the entire scenario. There are multiple other factors at work.
When it comes to real estate, how do minds of people work? Everyone knows someone who has bought a piece of real estate, some land or a home, at a very low price and sold it at a very high price. There are two behavioural biases at work here: anchoring and availability.

When you know of someone who has bought a flat at Rs 10 lakh and sold it at Rs 50 lakh, the Rs 50 lakh number gets anchored in your mind. As John Allen Paulos writes in A Mathematician Plays the Stock Market: “Most of us suffer from a common psychological failing. We credit and easily become attached to any number we hear. This tendency is called the “anchoring effect”.”

Then there is there the availability effect at work as well. Nobel Prize winning psychologist Daniel Kahneman defines the availability effect as the “ease with which instances come to mind”. If you know of someone who has bought a flat at Rs 10 lakh and sold it at Rs 50 lakh, you will recall this example almost immediately.

The anchoring and the availability biases will lead you to believe that there is a lot of money to be made in real estate. But what you are not taking into account is the actual cost of owning real estate. The interest you pay on the home loan. The stamp duty that needs to be paid initially. The property tax that needs to be paid every year. The maintenance charges that need to be paid to the society every month. The risk of owning an under-construction property (where real money is made). The risk of the builder increasing the price. The risk of the builder disappearing (as seems to be happening regularly these days). And so on.

Why are these factors not taken into account? Simply because there is only so much a human brain can process at a time and there is only a limited amount of time to make a decision. This is human weakness is termed as “bounded rationality”. The term was coined by social scientist Herbert Simon. Due to these reasons Indians are firm in their belief that real estate is the best form of investing. And this might have been even true between 2004 and 2013, when the returns from investing in real estate where pretty good.

But since then the returns from investing in real estate have been lower than what you would have made by letting your money sit idle in a savings bank account. The reason is very simple. The prices are way too high. In Bangalore, the weighted average price of a flat is Rs 88 lakh. Given the high prices, the demand has collapsed. And without demand there can be no price rise.

The story has changed and it’s time to wake up and smell the coffee.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared in the Bangalore Mirror on Aug 12, 2015

Dear parents, the engineering bubble has burst

engineering
In my extended-family when a kid grows up, the parents push him towards getting an engineering degree. If I may generalise a little more this is largely true for the Kashmiri Pandit community my parents belong to.

Once a youngster gets into an engineering course, all is forgiven and it is automatically assumed that the future will now be bright. And this may have been largely true for the nineties and the noughties, when India’s information technology companies were taking off. But now we are in the teens and the story has changed.

Why? The “indifference principle” is at work. As Steven E. Landsburg writes in The Armchair Economist: “Unless you’re unusual in some way, nothing can ever make you happier than the next best alternative.”

Landsburg explains the indifference principle through an example. As he writes: “Would you rather spend a bright summer day at the shopping mall or the…Fair…If the Fair is more fun than the mall, people flock to the Fair, building up the crowd size until it’s not more fun than the mall.”

So, the Fair doesn’t remain fun anymore because way too many people turn up. Something similar has happened to the engineering degree in India. The country is producing way too many engineers. As analyst Akhilesh Tilotia of Kotak Institutional Equities writes in a recent research note titled How many graduates are required to change a light bulb?: “Engineering graduate output of Indian universities stood at 15 lakh a year in FY2015 [the period between April 1, 2014 and March 31, 2015], up from 3 lakh in FY2005 [the period between April 1, 2004 and March 31, 2005].”

Hence, over the last decade, the number of engineers being produced has gone up five times. In fact Tilotia in his book The Making of India writes: “India in 2016 will graduate more engineers annually (1.5 million) than China (1.1 million) and the United States (0.1 million) combined.” One impact of so many engineers being produced is that it has “reduced the importance of ‘capitation fees’”.

Nevertheless, the trouble is that the employment opportunities for engineers haven’t gone up at the same speed. Information technology companies which were taking in a bulk of the country’s engineering graduates, aren’t recruiting at the same pace as they were in the past. As Tilotia points out: “net hiring in the IT sector has remained stagnant at 2.5 lakh [per year] over the past five years until FY2015”.

In fact, if we leave out the individuals recruited by the BPO sector from these numbers, the number of employees recruited by the information technology companies in the financial year ending as on March 31, 2015, stood at 2.09 lakh. The number of engineers produced, as mentioned earlier, stood at 15 lakh. Hence, there is a clear disconnect between supply and demand. The engineering dream to prosperity has clearly broken down.

The fascination of Indian parents for pushing their children towards getting an engineering degree has been built on hearing too many “success stories” of Indian engineers working in information technology companies in the United States on dollar salaries and other parts of the world.

Even those Indian engineers who have settled in the country and started working for the information technology companies in the nineties and up to the mid noughties, have done well for themselves. And these success stories have had a lot of impact on the thinking of parents.

The trouble is that the story has changed. As Tilotia writes: “IT companies have publicly stated that they are looking to automate meaningful parts of service offerings…Automation of workflow can significantly impact the prospects of entry-level joinees – their work is more susceptible to being automated.” Nevertheless, stories take a long time to unravel.

To conclude, as Landsburg writes: “In order for one activity to make you happier than another, you must be unusual in some way.” Hence, dear parents, the engineering bubble has burst. And as far as children go— please let them be!

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared in the Bangalore Mirror on August 5, 2015

Of film critics and their love for Bajrangi Bhaijaan

bajrangi bhaijaan
One of my favourite armchair theories is built around film critics and Salman Khan—the more the critics hate a Salman Khan movie, the more money the movie tends to make. It doesn’t work all the time, but it works often enough to at least be categorised as an armchair theory.

The superstar’s movies get regularly panned by film critics, and yet they end up making a lot of money. Now that doesn’t mean that the critics are wrong about what they think of Salman’s movies. They are actually quite trashy. An apt comparison are the movies that Amitabh Bachchan starred in the 1980s. Movies like Nastik, Mahaan, Pukar, Desh Premee, Mard, Coolie, Geraftaar, Jadugar and Toofan.

Most of these movies made a lot of money nevertheless they are completely unwatchable now, unless you are a die-hard fan to whom the quality of the movie doesn’t really matter. Bachchan’s bubble finally burst with Gangaa Jamunaa Saraswati, which I think is the trashiest film ever made.

Khan’s bubble is still going strong and it was rather surprising that critics liked his latest film Bajrangi Bhaijaan. And these are not the trade critics whose reviews depend on what kind of business the movie they are reviewing is likely to do. These are critics who are genuinely in love with cinema. And they seem to have liked Bajrangi Bhaijaan and the movie has received a spate of ratings of 3 out of five stars.

So what were these guys smoking? How come so many film critics had nice things to say about a Salman Khan movie? Why have things changed this time around? The answer might perhaps lie in what economists call the contrast effect. Comparison comes naturally to human beings especially when they are making a decision. In such a situation, a particular option can be made to be look better by comparing it with something which is similar, but at the same time a worse alternative. This is known as the ‘contrast effect’.

As Barry Schwartz writes in The Paradox of Choice—Why More is Less: “If a person comes right out of a sauna and jumps into a swimming pool, the water in the pool feels really cold, because of the contrast between the water temperature and the temperature in the sauna. Jumping into the same pool after having just come indoors on a sub-zero winter day will produce sensations of warmth.”

This is the contrast effect and it best explains why film critics have fallen in love with Salman’s latest movie. How is that? Look at the movies Salman has starred in the recent past: Jai Ho, Kick, Dabanng 2, Bodyguard etc. Each one of these movies was pretty trashy. In comparison, Bajrangi Bhaijaan is a slightly better movie with some sort of a storyline and very good performances by the child artist Harshali Malhotra(who the audience has fallen in love with) and as well as Nawazuddin Siddiqui.

Hence, this contrast effect between the earlier movies of Salman and Bajrangi Bhaijaan has led to good reviews. In fact, a similar contrast effect was at work when Ek Tha Tiger had released in 2012. The movie was better than some of Salman’s earlier releases like Veer, Ready, London Dreams etc. And the critics had similarly given it good ratings.

There is another learning here. Bajrangi Bhaijaan has been breaking box-office records. As I write this, the movie has already made close to Rs 200 crore on the Indian box-office. Over and above Salman’s fans who watch every movie of his, however trashy it might be, the non-fans have also been streaming into the theatres because of the good reviews that the movie has universally received.

And what this tells us is that if Salman stars in even half decent movies they are likely to earn much more money than the trash that he chooses to star in. Hope he is reading this.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared in the Bangalore Mirror on July 29, 2015