Epilogue [to my thoughts] and prologue [to this note]
Reality is for losers.
Normative
Convergence theory, or the catch-up hypothesis (Abramovitz 1986), can be summarised as follows:
Setting the variable x as time and the variable y as any proxy for divergence as you see fit, the convergence function is:
y=a/x+b+E, where the constant a>0, the constant b is any real number, E is the error term, and x>0
Most economists like to accept this highly idealised model, attributing any deviation to the error term E. This is perhaps broadly similar to how economists use the A technology or productivity parameter in growth models. But here, I show below, the overly idealised model is neither accurate nor is it unavoidable to use.
A more realistic model of convergence, henceforward called konvergence to distinguish between Abramovitz's (1986) model and my own, is shown below:
1) y=a/x+b+E for 0<x<π where the constant a>0, the constant b is any real number, and E is the error term;
2) y=cx+F for π<x<µ where the constant c>0 and F is the error term;
3) and convergence in the conventional shape for x>µ.
Positive
For later.
Wednesday 30 April 2008
Tuesday 15 April 2008
Perfect capitalism and perfect communism
Theory
There's a theory that says the following: extreme left on the political scale eventually meets up with extreme right. That is, communism in its most perfect and pure form is identical with capitalism in its most perfect and pure form. This comes close to being the truth, except for one quite major detail, as I show below.
The most queer thing about pure unadulterated capitalism, for me, is that it does not assume the need or existence of nation-states. The nation-state system is merely a byproduct of politics. "Imagine no countries", if you will.
Another concept that is an integral part of our world, but not of classical and neoclassical economic theory, is distance. In the twenty-first century, in an age of intense globalisation, we are moving towards reduced transport and communication costs. But the "death of distance" is not merely far away; it is impossible.
The practical existence of these two concepts, the nation-state system and distance, is not presupposed by economic theory. This goes a long way in explaining the following three things.
Firstly, and most obviously, that factor prices are not equal all around the world. Barriers to free trade exist due to the existence of different countries, and in any case distance makes it impossible to outsource things like manual labour.
Secondly, that we are not all a light-brown colour. Again, the existence of nations and distance makes it impossible for the gene pool to be all mixed up.
Thirdly, and finally, that some areas of the world are poorer than others. Convergence theory, despite its utter lack empirical evidence to support it in the real world, would work in a classical or neoclassical world (if there were any divergence in the first place).
In a perfectly capitalist world, therefore, all prices would be equal all over the world, factor prices would converge, and all people would be equal by their colour of skin.
Notice that in this perfectly capitalist world, if every single person faced exactly the same prices for goods and services, the same factor prices, and if everybody had the same colour of skin, he would be equal to everybody else. (I have not yet figured if this equivalence is merely by definition, but I suspect not.) If the total amount of utility in such a society were denoted by E, and there were n people in this society, each person would have E/n.
Perfect communism, by definition, has everybody equal. If the total amount of utility in a perfectly communist society were denoted by e, and there were n people in this society (same as the perfectly capitalist society above), each person would have e/n.
How do we compare these? It is clear that a comparison would involve analysing E and e to see which is bigger. Now how do we calculate relative values of E and e?
Imagine the state of the world as it is today, and imagine converting it into a perfectly capitalist system. By removing all barriers to trade, one can conservatively estimate that world GDP would double. By removing all barriers to international migration, world GDP would double again. Kill distance: its death would (I'm guessing here) increase world GDP tenfold. Remove away politics and nation-states: GDP would increase another tenfold (I'm again guessing). If € denoted present-day utility, it is abundantly clear from the above that E >>> €.
Now imagine the process of converting today's world into a perfectly communist system. Everybody's utility will decrease until the level hits the utility level of the person with lowest utility. In other words, everybody receives the lowest common denominator of utility. Given that the world today is unequal, at least one person's utility level decreases when making the transition to a perfectly communist world. The proof is sufficient to show that e <<< €.
Now, e <<< € <<< E. Assuming transitivity, e <<< E.
Thus both perfect capitalism and perfect communism have everybody equal, but the average utility of people living under perfect capitalism is much higher than the average utility living under perfect communism. This better expressed by the following statement: capitalism makes the economic pie bigger for everyone, eventually having everybody receive an equal slice; communism merely cuts up the pie into equal slices, not caring about each slice's value.
Personal reaction
I am currently a conservative because I believe that we can make the economic pie bigger. Much bigger. But equality is an anathema to me. So if we start liberalising the world economy to such an extent that perfect capitalism looks on the horizon (unlikely, but still), I will certainly turn to the left.
There's a theory that says the following: extreme left on the political scale eventually meets up with extreme right. That is, communism in its most perfect and pure form is identical with capitalism in its most perfect and pure form. This comes close to being the truth, except for one quite major detail, as I show below.
The most queer thing about pure unadulterated capitalism, for me, is that it does not assume the need or existence of nation-states. The nation-state system is merely a byproduct of politics. "Imagine no countries", if you will.
Another concept that is an integral part of our world, but not of classical and neoclassical economic theory, is distance. In the twenty-first century, in an age of intense globalisation, we are moving towards reduced transport and communication costs. But the "death of distance" is not merely far away; it is impossible.
The practical existence of these two concepts, the nation-state system and distance, is not presupposed by economic theory. This goes a long way in explaining the following three things.
Firstly, and most obviously, that factor prices are not equal all around the world. Barriers to free trade exist due to the existence of different countries, and in any case distance makes it impossible to outsource things like manual labour.
Secondly, that we are not all a light-brown colour. Again, the existence of nations and distance makes it impossible for the gene pool to be all mixed up.
Thirdly, and finally, that some areas of the world are poorer than others. Convergence theory, despite its utter lack empirical evidence to support it in the real world, would work in a classical or neoclassical world (if there were any divergence in the first place).
In a perfectly capitalist world, therefore, all prices would be equal all over the world, factor prices would converge, and all people would be equal by their colour of skin.
Notice that in this perfectly capitalist world, if every single person faced exactly the same prices for goods and services, the same factor prices, and if everybody had the same colour of skin, he would be equal to everybody else. (I have not yet figured if this equivalence is merely by definition, but I suspect not.) If the total amount of utility in such a society were denoted by E, and there were n people in this society, each person would have E/n.
Perfect communism, by definition, has everybody equal. If the total amount of utility in a perfectly communist society were denoted by e, and there were n people in this society (same as the perfectly capitalist society above), each person would have e/n.
How do we compare these? It is clear that a comparison would involve analysing E and e to see which is bigger. Now how do we calculate relative values of E and e?
Imagine the state of the world as it is today, and imagine converting it into a perfectly capitalist system. By removing all barriers to trade, one can conservatively estimate that world GDP would double. By removing all barriers to international migration, world GDP would double again. Kill distance: its death would (I'm guessing here) increase world GDP tenfold. Remove away politics and nation-states: GDP would increase another tenfold (I'm again guessing). If € denoted present-day utility, it is abundantly clear from the above that E >>> €.
Now imagine the process of converting today's world into a perfectly communist system. Everybody's utility will decrease until the level hits the utility level of the person with lowest utility. In other words, everybody receives the lowest common denominator of utility. Given that the world today is unequal, at least one person's utility level decreases when making the transition to a perfectly communist world. The proof is sufficient to show that e <<< €.
Now, e <<< € <<< E. Assuming transitivity, e <<< E.
Thus both perfect capitalism and perfect communism have everybody equal, but the average utility of people living under perfect capitalism is much higher than the average utility living under perfect communism. This better expressed by the following statement: capitalism makes the economic pie bigger for everyone, eventually having everybody receive an equal slice; communism merely cuts up the pie into equal slices, not caring about each slice's value.
Personal reaction
I am currently a conservative because I believe that we can make the economic pie bigger. Much bigger. But equality is an anathema to me. So if we start liberalising the world economy to such an extent that perfect capitalism looks on the horizon (unlikely, but still), I will certainly turn to the left.
Thursday 10 April 2008
Hurdle model of price discrimination as applicable to voter registration
In economic theory, the hurdle model of price discrimination is used by monopolists who want to charge different prices to different consumers in order to extract as much consumer surplus out of consumers as possible. The model works in the following way:
Some consumers are willing to pay a high price for a given product, whereas other consumers will not purchase the product unless the price is lower. This is due to the fact that different consumers' income elasticities are different. If a firm has to sell at one constant price, it will undoubtedly lose much of the consumer surplus to be extracted. Instead, smart monopolies impose a hurdle on consumers.
A hurdle is something that imposes only a negligible cost (time and monetary) on the consumers who jump it, yet forces the most elastic consumers to show themselves, and gives a discount to the jumpers. I give a few examples below:
Firstly, in the airlines industry, the hurdle is flying on weekends. Most people do not want to spend the weekend on an airplane, so they buy weekday tickets at the normal going rate. The travelers with the most sensitive income elasticities, however, will choose to travel in the weekends at a lower price. In the clothing industry, the hurdle is items with some artificial cosmetic imperfection. In the publishing industry, the hurdle is the more expensive hardcover edition appears in bookstands much earlier than the cheaper softcover edition.
A good hurdle is somewhat difficult to jump over (otherwise everybody would get the discount price) but the consumers who most want to jump over it are able to do so at negligible cost.
The economics of human behaviour tells us that most people are too lazy to bother jumping over hurdles. For example, the difficulty of filling out forms puts many people off from getting a tax rebate. For another example, many people do not ask for discounts even if the store they are shopping in has a sign saying "Ask for our special low price" because of the embarrassment of asking.
It is clear, therefore, that hurdles have at least some amount of success in keeping away all but the most elastic consumers from the discount prices.
I think that the hurdle model can be used profitably in voter registration applications.
My reason for using the model in this context is because I feel less people should be allowed to vote. I feel that over-politicisation of a nation is a bad thing; excessive involvement in the political process, in my opinion, is not optimal. I say the above because of two reasons. Dan Boudreaux writes that “involvement” in the political sphere is a huge opportunity cost – one could be doing something worthwhile in one’s private life. Involvement in politics, to Boudreaux, is a false hope. Bryan Caplan writes that voters are irrational, and do not vote with even their own – never mind the whole nation’s – interests at heart. Voters, Caplan, argues, “are worse than ignorant; they are, in a word, irrational – and vote accordingly”.
What is the solution? Boudreaux suggests simply staying out of politics. Caplan has more radical solutions: he wants tests for voter competency, and wants to give highly educated people more votes.
But these solutions are impractical. Merely telling people to stay out of politics will not work. Caplan’s suggestions won’t go down very well in a democratic society.
I suggest targeting voter turnout, making it as low as one can manage. To make voter turnout low, I suggest imposing a significant hurdle on voter registration. I propose that voter registration be made a tedious and difficult process, so that only those who have an extraordinary keen inclination to vote are allowed to do so. A further hurdle of making the voting process as difficult as possible (for example, having elections on weekdays, in inconvenient places, etc.) should reduce voter turnout by a huge amount.
I believe that imposing these hurdles will benefit the nation quite substantially. With these hurdles in place, we shall see elections where only people who really care about the political process (that is, the people who are not ignorant and irrational) vote, with all the noise eliminated.
Some consumers are willing to pay a high price for a given product, whereas other consumers will not purchase the product unless the price is lower. This is due to the fact that different consumers' income elasticities are different. If a firm has to sell at one constant price, it will undoubtedly lose much of the consumer surplus to be extracted. Instead, smart monopolies impose a hurdle on consumers.
A hurdle is something that imposes only a negligible cost (time and monetary) on the consumers who jump it, yet forces the most elastic consumers to show themselves, and gives a discount to the jumpers. I give a few examples below:
Firstly, in the airlines industry, the hurdle is flying on weekends. Most people do not want to spend the weekend on an airplane, so they buy weekday tickets at the normal going rate. The travelers with the most sensitive income elasticities, however, will choose to travel in the weekends at a lower price. In the clothing industry, the hurdle is items with some artificial cosmetic imperfection. In the publishing industry, the hurdle is the more expensive hardcover edition appears in bookstands much earlier than the cheaper softcover edition.
A good hurdle is somewhat difficult to jump over (otherwise everybody would get the discount price) but the consumers who most want to jump over it are able to do so at negligible cost.
The economics of human behaviour tells us that most people are too lazy to bother jumping over hurdles. For example, the difficulty of filling out forms puts many people off from getting a tax rebate. For another example, many people do not ask for discounts even if the store they are shopping in has a sign saying "Ask for our special low price" because of the embarrassment of asking.
It is clear, therefore, that hurdles have at least some amount of success in keeping away all but the most elastic consumers from the discount prices.
I think that the hurdle model can be used profitably in voter registration applications.
My reason for using the model in this context is because I feel less people should be allowed to vote. I feel that over-politicisation of a nation is a bad thing; excessive involvement in the political process, in my opinion, is not optimal. I say the above because of two reasons. Dan Boudreaux writes that “involvement” in the political sphere is a huge opportunity cost – one could be doing something worthwhile in one’s private life. Involvement in politics, to Boudreaux, is a false hope. Bryan Caplan writes that voters are irrational, and do not vote with even their own – never mind the whole nation’s – interests at heart. Voters, Caplan, argues, “are worse than ignorant; they are, in a word, irrational – and vote accordingly”.
What is the solution? Boudreaux suggests simply staying out of politics. Caplan has more radical solutions: he wants tests for voter competency, and wants to give highly educated people more votes.
But these solutions are impractical. Merely telling people to stay out of politics will not work. Caplan’s suggestions won’t go down very well in a democratic society.
I suggest targeting voter turnout, making it as low as one can manage. To make voter turnout low, I suggest imposing a significant hurdle on voter registration. I propose that voter registration be made a tedious and difficult process, so that only those who have an extraordinary keen inclination to vote are allowed to do so. A further hurdle of making the voting process as difficult as possible (for example, having elections on weekdays, in inconvenient places, etc.) should reduce voter turnout by a huge amount.
I believe that imposing these hurdles will benefit the nation quite substantially. With these hurdles in place, we shall see elections where only people who really care about the political process (that is, the people who are not ignorant and irrational) vote, with all the noise eliminated.
Wednesday 2 April 2008
Economics of the Rugby Sevens
After a week of hard economics revision, I had a three-day break at the Hong Kong Rugby Sevens. The four countries I am presently associated with [India, Hong Kong, Australia, and England] either did not play or did not play very well. But I thoroughly enjoyed myself nevertheless. Below are some of my thoughts about the economics of the Sevens.
Ticket prices
A three-day ticket cost HKD 1080. But I think that the price could have been raised considerably without any loss in total revenues earned. In my opinion, the price elasticity of demand at the current price is very inelastic, which means that prices can rise along with rising total revenue. This is due to huge demand for Sevens tickets: Hong Kong Stadium was absolutely packed on Saturday and Sunday, and many many people simply could not get hold of tickets. This implies excess demand of a product that is available only in limited amounts; the solution is to raise prices. I approximate that prices can rise to HKD 1600 or thereabouts to make price elasticity of demand unitary; that is, up to the above price, total revenue will rise. Furthermore, there is no close substitute for going to the Sevens, so the cross-price elasticity will also be very low.
Absence of price discrimination
The organisers of the Sevens clearly have a monopoly due to the control of inputs (only they can get so much rugby and beer at the Hong Kong Stadium at the same time) and the network effect (being seen at the Sevens is cool). But they sell every ticket at the same price. As I have said above, the overall price needs to rise, but practising some price discrimination would help raise total revenues even more. The South Stand is the only stand where alcohol is allowed to be consumed, so it is obviously very popular. Being the stand where the party is, there are very long queues to get in. At one point the queue was over 4 hours long, and later it was closed off because the South Stand was full. Selling South Stand tickets at, say, HKD 200 above the normal ticket price would eliminate queues and allow for higher revenues. On Sunday, I woke up at 4.30 in the morning to help get two rows of seats for the man who gave me a free ticket. There were so many people trying to get the same two rows; clearly, price discrimination is needed here too. I realise that this price discrimination would result in higher costs for the organisers -- more guards will be needed to check the different tickets, for example -- but these could be factored into the price hikes.
I obviously feel rather guilty for missing three days' worth of revision, and that's why I wrote this economic analysis of the Sevens. But only now do I realise that the opportunity cost of writing this has been the loss of 20 minutes of sleep. Bah!
Ticket prices
A three-day ticket cost HKD 1080. But I think that the price could have been raised considerably without any loss in total revenues earned. In my opinion, the price elasticity of demand at the current price is very inelastic, which means that prices can rise along with rising total revenue. This is due to huge demand for Sevens tickets: Hong Kong Stadium was absolutely packed on Saturday and Sunday, and many many people simply could not get hold of tickets. This implies excess demand of a product that is available only in limited amounts; the solution is to raise prices. I approximate that prices can rise to HKD 1600 or thereabouts to make price elasticity of demand unitary; that is, up to the above price, total revenue will rise. Furthermore, there is no close substitute for going to the Sevens, so the cross-price elasticity will also be very low.
Absence of price discrimination
The organisers of the Sevens clearly have a monopoly due to the control of inputs (only they can get so much rugby and beer at the Hong Kong Stadium at the same time) and the network effect (being seen at the Sevens is cool). But they sell every ticket at the same price. As I have said above, the overall price needs to rise, but practising some price discrimination would help raise total revenues even more. The South Stand is the only stand where alcohol is allowed to be consumed, so it is obviously very popular. Being the stand where the party is, there are very long queues to get in. At one point the queue was over 4 hours long, and later it was closed off because the South Stand was full. Selling South Stand tickets at, say, HKD 200 above the normal ticket price would eliminate queues and allow for higher revenues. On Sunday, I woke up at 4.30 in the morning to help get two rows of seats for the man who gave me a free ticket. There were so many people trying to get the same two rows; clearly, price discrimination is needed here too. I realise that this price discrimination would result in higher costs for the organisers -- more guards will be needed to check the different tickets, for example -- but these could be factored into the price hikes.
I obviously feel rather guilty for missing three days' worth of revision, and that's why I wrote this economic analysis of the Sevens. But only now do I realise that the opportunity cost of writing this has been the loss of 20 minutes of sleep. Bah!
"Kafka", "Alchemist", and "Cholera"
After 20 weeks of LSE-ing, I finally had time to read three novels.
Thirdly, I read Gabriel García Márquez’s “Love in the Time of Cholera”. Having studied “Chronicle of a Death Foretold” in English last year, I expected more of the postmodern narrator and over-the-top magical realism, but “Cholera” was much less pretentiously postmodern and literary than I expected. In fact, it was almost too normal, considering that Márquez is a Nobelist.
I absolutely enjoyed reading “Cholera” because, to me, it is a meditation on love of all types: romantic love, sexual love, irrational infatuated love, and, most importantly, pedophiliac love. (I kid.) Márquez’s style of narration is still as vague as in “Chronicle”, but here the deliberate postmodern tendencies are toned down, which makes “Cholera” much more of a pleasure to read. For example, one overarching theme seems to be that it is noble and good to suffer for love. Florentino Ariza, who has waited for over fifty years for his one love Fermina Daza (51 years, 9 months, and 4 days exactly), is portrayed positively throughout the novel. But Florentino’s numerous affairs with other women – 622 of them with widows, married women, mothers, and fourteen-year olds (not counting the one-night stands of course!) – are simply glossed over. The narrator wilily suggests that these affairs are merely ways to pass the time. The negative aspects of Florentino’s affairs are never given any importance. Now, I don’t want to be misunderstood, so I’ll say this very clearly: Florentino is a real man for sleeping with more than 622 women, but most people would not think the same. And in my opinion, it’s rather lame to wait for a woman’s husband to die so that you can get with her, especially when the aforementioned woman rejected you quite plainly.
The surrealism and magical realism is more toned down here than in “Chronicle”, but on the occasions where it does appear Márquez puts the technique to good use. For example, when Fermina was first attracted to Juvenal Urbino, her husband, after she married him when she heard him urinating strongly and masculinely in the toilet. The concept of love is so incongruous with talk of urination, but Márquez makes it work in a beautifully poignant paragraph. Also, I liked how Fermina found out about her husband’s infidelity by simply sniffing his clothes everyday.
What I liked most about “Cholera” was that it allowed me to think and reflect about the novel’s themes, and did not force-feed me with a dogmatic message. The second book I read, Paul Coelho’s “The Alchemist”, unfortunately did the latter.
I wish I could have liked “Alchemist”, because it has the potential to be one of the most uplifting books I have read, but Coelho chooses to let the plot and characters be merely tools for his grand theme, rather than let the grand theme be shown through the plot and characters. As a result, “Alchemist” reads more like a fable or allegory than a novel.
The world’s greatest lie is that at some point in our lives, destiny will take over and we will be unable to reach our dreams. Everybody has a Personal Legend that is to be followed. All things are one in the Soul of the World. Every moment spent searching for your Personal Legend is a moment directly in contact with God and with eternity. All things are one. Everybody has a Personal Legend. Follow the omens, especially for what is called the Personal Legend.
And so on. The only quotable line I liked went something like this: It is not what goes into a man’s mouth that is evil; it is what comes out of it that is. I’m using that to justify drinking!
And firstly, I read Haruki Murakami’s “Kafka on the Shore”. I picked it up only because “Kafka” was on the title. The name-dropping proved to be just that; I’m considering suing because I read over 430 pages of drivel with two parallel storylines that did not converge at the end. For all that, however, I’m betting that the pretentiousness and surrealism of this novel should win Murakami the Nobel Prize in the next ten years.
Thirdly, I read Gabriel García Márquez’s “Love in the Time of Cholera”. Having studied “Chronicle of a Death Foretold” in English last year, I expected more of the postmodern narrator and over-the-top magical realism, but “Cholera” was much less pretentiously postmodern and literary than I expected. In fact, it was almost too normal, considering that Márquez is a Nobelist.
I absolutely enjoyed reading “Cholera” because, to me, it is a meditation on love of all types: romantic love, sexual love, irrational infatuated love, and, most importantly, pedophiliac love. (I kid.) Márquez’s style of narration is still as vague as in “Chronicle”, but here the deliberate postmodern tendencies are toned down, which makes “Cholera” much more of a pleasure to read. For example, one overarching theme seems to be that it is noble and good to suffer for love. Florentino Ariza, who has waited for over fifty years for his one love Fermina Daza (51 years, 9 months, and 4 days exactly), is portrayed positively throughout the novel. But Florentino’s numerous affairs with other women – 622 of them with widows, married women, mothers, and fourteen-year olds (not counting the one-night stands of course!) – are simply glossed over. The narrator wilily suggests that these affairs are merely ways to pass the time. The negative aspects of Florentino’s affairs are never given any importance. Now, I don’t want to be misunderstood, so I’ll say this very clearly: Florentino is a real man for sleeping with more than 622 women, but most people would not think the same. And in my opinion, it’s rather lame to wait for a woman’s husband to die so that you can get with her, especially when the aforementioned woman rejected you quite plainly.
The surrealism and magical realism is more toned down here than in “Chronicle”, but on the occasions where it does appear Márquez puts the technique to good use. For example, when Fermina was first attracted to Juvenal Urbino, her husband, after she married him when she heard him urinating strongly and masculinely in the toilet. The concept of love is so incongruous with talk of urination, but Márquez makes it work in a beautifully poignant paragraph. Also, I liked how Fermina found out about her husband’s infidelity by simply sniffing his clothes everyday.
What I liked most about “Cholera” was that it allowed me to think and reflect about the novel’s themes, and did not force-feed me with a dogmatic message. The second book I read, Paul Coelho’s “The Alchemist”, unfortunately did the latter.
I wish I could have liked “Alchemist”, because it has the potential to be one of the most uplifting books I have read, but Coelho chooses to let the plot and characters be merely tools for his grand theme, rather than let the grand theme be shown through the plot and characters. As a result, “Alchemist” reads more like a fable or allegory than a novel.
The world’s greatest lie is that at some point in our lives, destiny will take over and we will be unable to reach our dreams. Everybody has a Personal Legend that is to be followed. All things are one in the Soul of the World. Every moment spent searching for your Personal Legend is a moment directly in contact with God and with eternity. All things are one. Everybody has a Personal Legend. Follow the omens, especially for what is called the Personal Legend.
And so on. The only quotable line I liked went something like this: It is not what goes into a man’s mouth that is evil; it is what comes out of it that is. I’m using that to justify drinking!
And firstly, I read Haruki Murakami’s “Kafka on the Shore”. I picked it up only because “Kafka” was on the title. The name-dropping proved to be just that; I’m considering suing because I read over 430 pages of drivel with two parallel storylines that did not converge at the end. For all that, however, I’m betting that the pretentiousness and surrealism of this novel should win Murakami the Nobel Prize in the next ten years.
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