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The Economics of Small Things – Sudipta Sarangi

by Venky
Economics of Small Things by Sudipta Sarangi

Scottish essayist and historian Thomas Carlyle coined the term ‘dismal science’ to describe the discipline of economics. It is popularly understood that the inspiration behind such a coinage was Thomas Malthus’ (an economist) dystopian prediction about a surging population always outpacing the production of food grains, and thereby resigning humanity to a perpetual cycle of poverty and adversity. However, Sudipta Sarangi, Department Head and Professor of Economics at Virginia Tech (Virginia Polytechnic Institute and State University), in his engaging book, “The Economics of Small Things” demonstrates that the field of economics need not be dismal in either its literal, symbolic, or figurative sense. By illustrating the application of economics to everyday life, Sarangi juxtaposes wicked wit and wonderful wisdom to instill in his reader a curiosity and inclination towards the subject.

Choosing the most quotidian and mundane of repetitive activities that we all engage in on a routine basis, Sarangi explains popular principles of economics which informs our behaviour without our own knowledge. For example, have you ever wondered as to why your driver obstinately refuses to heed your advice to strap on his seat belt, but bows his head and mouths a silent prayer as your car passes by every roadside temple? Sarangi employs the technique of Game Theory (conceptualized and popularized by giants in the field such as John Nash, Eric Maskin, Roger Myerson, and Reinhard Selten)  to explain this paradoxical behaviour when it comes to road safety. There are three players who are involved in the game: the devout driver, the God whose blessings the driver unfailingly invokes, and the seat belt itself. Now the driver has four options at his behest: i) wear the seat belt and not pray; ii)pray, but do not strap the seat belt on; iii) do both; and iv) do neither. The second player, who is God can choose to either keep the driver safe or imperil him. Finally the creation of Swedish mechanical engineer, Nil Ivar Bohlin’s, the unassuming but vitally important seat belt. Every day the driver completes his chores on time, his faith in Providence keeps exponentially increasing, and the poor seat belt is relegated to the confines of neglect. But if only the seat belt would have been included in the Pantheon of Divinity, things would be mightily different!

Similarly why is it that all the best things manufactured in a country are designated for exports and thus consumption in another country. Why is the Alphonso variety of mangoes – considered to be the “king of mangoes” in India the only variety of mangoes from India to be stocked by outlets abroad? Enter the third law of demand initially propounded by Armen Alchian and William R. Allen. This law elucidates that sellers of mangoes would want to high quality mangoes to the US, since a kilogram of high quality mangoes works out to be the equivalent of just a few additional kilograms of low-quality equivalent mangoes.

In explaining the principle of “complementarity”, Sarangi cites the example of a trans-Scandinavian robbery. An intrepid gang of thieves in Sweden stole “designer shoes from store windows”, even though the stores only displayed “shoes meant for the left foot”. It actually turned out that the method indeed had a madness when another team belonging to the same gang was in parallel pilfering shoes meant for the right foot  from stores in neighbouring Denmark, which exhibited only shoes meant for the right foot. The robbers who were pillaging from both Sweden and Denmark before assembling pairs and selling them in the grey market were informed by the classic notion of “complementary goods”. This same concept informs the complementarity existing between “different sectors of the economy” such as “the rail, steel and coal industries”. These sectors “feed off each other”. Hence If investment in either of these sectors lags behind, “it will pull the other sectors down and the economy may experience losses”. Investing in just one or two of these sectors can “lead to wasteful expenditure, like spending money on jam but not buying the necessary amount of bread to roll it on”.

A very important and common concept in the domain of economics borders on the perils of asymmetric information. Asymmetric information refers to a state where, “both parties are not fully informed about each other.”  Nobel laureate Mohammed Yunus used an ingenious but perfectly practicable technique to resolve this issue. In his micro credit financing model that involved the establishment of Bangladesh’s biggest micro financing facility, the Grameen Bank, Yunus insisted that lenders form groups of five to borrow money. It was purely in the interest of the borrower to identify and evaluate four other solvent borrowers. This exercise put a virtual end to the insidious problem of moral hazard as well. The borrower had an uncompromising incentive to ensure that his or her (most of the borrowers were enterprising but underprivileged women) compatriots keep remitting their instalments on time.

Even Mahatma Gandhi makes a fascinating appearance in Sarangi’s absorbing book. Sarangi brings the attention of his reader to an old essay by Gandhi, where he bemoans on the sheer inadequacy of the Railways in providing even a semblance of comfort to passengers being conveyed by the Third Class. But Sarangi, seeking corroboration from French civil engineer, Jules Dupuit, argues that Bapu got it wrong – for once! Driven by the logic and policies of price discrimination, cold and rational economic logic works in a tangentially different mode that is the prerogative of moral outlook. This is exactly the weapon assiduously and at times, brazenly used by manufacturers to make some people pay more for the same product.

A personal favourite of mine from the book is the imaginatively titled concept of the “Cobra Effect”. Coined by German economist Horst Siebert, the Cobra Effect postulates that a perverse incentive constitutes one that embeds an unintended result that is contrary to the intentions of its designers. For example, “apparently, worried about the number of cobras in Delhi, the British colonial government had started offering a bounty to anyone who turned in a dead cobra. The story goes that in response to this, some smart people started farming cobras. As a result, the government finally had to kill the programme.”

“The Economics of Small Things” is a riveting read that makes even the most arcane of topics seem absolutely fun filled yet instructive.

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