September 8th, 2017 | Categories: economy | Tags:

I argue that the system of meritocratic inheritance of technology coupled with economies of scale is a possible reason for income inequality, and I provide a philosophical justification for a universal basic income in the current system.

Introduction

The political discourse about income inequality and universal basic income (UBI) has revolved around the idea of fairness in a free market system. On the left, a high income inequality is seen as a symptom of an unjust system that rewards a few, and a UBI is seen as a restoring act that ensures that no one is left behind. On the right, a high income inequality is seen as incentivizing hard work, and a UBI, at best, is seen as an anti-coercion agent that can prevent exploitation. Today’s high income inequality has been partly blamed on educational disparity. The economic productivity of educated individuals is extremely high, and thus, they command proportionally high incomes. I will argue that the high productivity is not entirely due to the chosen individuals’ hard work and intellect. A substantial portion of the productivity is inherited from scientific advances made by people before us. I believe that such an inheritance ought to be distributed “fairly” and that the exiting system has failed to account for it. Therefore, I argue that a UBI may have a philosophical justification.

Statistics About Income Distribution

Meritocracy has driven the evolution of ideas about distributive justice for a long time. It is apparent that our social, political, and economic systems have heeded this call. The richest people in the world are mostly those who lead state-of-the-art industries, and those who have inherited their wealth are small in number (link). Even in the general population, studies have shown (link; see figure 3.5) that the expected income increases with higher qualifications. It might be tempting to welcome such a trend as it incentivizes people to be highly educated and, consequently, more productive. This point of view, however, assumes that productivity of an individual is proportional their industriousness and intellect. A closer inspection reveals that they are only weakly related, and the lack of a strong relation is a result of selective technological inheritance.

Studies in Economics

Nobel Laureate Robert Solow (link) and Trevor Swan (link) developed an economic model (link) to study the long term growth of economies. Using their mathematical model, they concluded that about 80-90% of productivity growth is a direct result of cumulative technological progress, not industriousness or intellect. Even a “rival” model (link) attributes our economic growth to technological progress.

In their book, Unjust Desserts (link), the authors have studied this phenomenon and have provided a detailed analysis of technological progress and its implication on income and wealth distribution. One of the authors’ blog post (link) provides identical arguments as this post, and a talk (link) by the other author makes the same case. They provide numerous examples to embolden their case, and I will add more below.

Anecdotal Examples

At the industry level, the CEO pay has increased ten fold in the last thirty-forty years (link). Is this because the CEOs of today are ten times more productive? Or is it because the companies today are ten times more productive? It is likely the latter, and the reason for the high productivity of industries today is the technological growth in the last few decades. The CEOs are only partly responsible for the growth, but they are paid as if they are solely responsible for the growth. Even among companies today, those who are at the top of the technology “food chain” seem more profitable on a per man-hour basis. Although the data is not very conclusive (link , link), the trend is noticeable. Qualcomm consumes ATT’s products, and Qualcomm is more profitable than ATT.  In turn, Samsung consumes Qualcomm’s product, Android (Alphabet) consumes Samsung’s products, and Angry Birds consumes Android’s product. The per-man-hour revenue for these companies are strongly linked to their place in the technological food chain (or network) and how much they inherit.

At an individual level, for instance, the inventors of fast Fourier transform made less money than someone who simply uses it today. A broadway actor makes more than a movie actor. A software engineer earns more than someone in the service industry. These facts about individual incomes are not accidental. They are directly correlated to how strongly individuals leverage technology to be highly productive, i.e., to reach more customers, viewers, or clients. For instance, a movie actor, unlike a broadway actor, can simultaneously perform in front of millions of people. I should emphasize that knowing how to leverage technology is a skill that needs to be proportionally rewarded. Our system, however, rewards groups of individuals disproportionately by being oblivious to what was inherited or leveraged. A natural question arises: how should people be rewarded?

Political Philosophy, Fairness and Free Market

Political philosophy has handled this question about a fair compensation for more than two millennia. Many would agree that a “fair” system should satisfy a couple of objectives: a) it should pay more for a harder (intellectually or physically) task, and  b) it should pay more if you are more “productive”. One can argue in favour of a free market system because the compensation is a function of the supply and demand, which satisfies both the objectives.

In theory, the supply of labour for the task is indicative of how hard the task is; greater the supply, easier the task. If a technology may be easily inherited, there will be a greater supply of workers, engineer, or doctors, so their compensation will be correspondingly lower. In theory, a demand for the product is indicative of the how productive one is after the task is completed; greater the demand, more productive one can claim to be. In tandem, one can argue that a free market system leads to a fair outcome. In fact, one can further argue that it incentives higher efficiency because it is oblivious to the means of production.

In practice, however, does the supply of more and more industries and workers correct the advantages of selective technological inheritance? No, It does not seem so (going by the data above). The likely reason for this is that the economies of scale (link) is at odds with greater competition. There is also a high barrier to enter an industry due to the technical know-how involved. Those who get to lead established and newer industries will be rewarded for all the productivity, and the reward will be oblivious to inheritance. The tree analogy below provides a simple (though not a complete) explanation.

The Tree Analogy

Our technological progress is like a tree that been grown for generations together. Those who know how to climb the tree deserve more fruits than those who do not. But do they deserve all the fruits? No! Yet, our system rewards the few people at the top as if they are responsible for the growth of the tree because they have the access to the fruits. Training more climbers (more competing industries) might mitigate or eliminate the income disparity issue, but the system’s fundamental issues of economies of scale, high entry barrier, and obliviousness to inheritance remain.

Universal Basic Income

I have argued that our wealth is mostly an inheritance from the people who came before us. Although the current system is meritocratic, it fails to account for the fact that our productivity is mostly an inheritance. While it is important that we have to ensure that people have to be incentivized to work hard and carry on the progress, it is also important to fairly distribute the inheritance. A UBI is an excellent way to satisfy both the objectives.

June 11th, 2016 | Categories: Uncategorized | Tags:

I argue that we progressively use more tangible and intangible resources from the government to acquire your income, and therefore, one ought to pay taxes at a higher and higher rate if they make more and more money.

If you google “justification for progressive taxation”, you will see plenty of arguments in favour of and against progressive taxation. I have listed some of them below. While I am mixed opinion about them, I found none of them to be compelling enough to pick any side. In this blog post, I will provide a new ethical justification for progressive taxation with which I hope even libertarians will agree (ha!).  I will first explain how much taxes you should pay for tangible services from the government, and I will then elaborate on intangible services from the government. I will then argue that the exact money you owe to the government is incalculable due to the intangible services, but this lead to a conclusion that a progressive taxation system is closest to being a fair system.

The most common (utilitarian) arguments in favour of progressive taxation are as follows:

  1. The rich can afford to pay more, so they should pay more. (completely disagree)
  2. It spurs economic growth because the rich do not spend all the cash they make, but the poor do. (partially agree)
  3. It enables social mobility. (partially agree)

The most common (libertarian) arguments against progressive taxation are as follows:

  1. It unfair because everyone should bare the responsibility for providing the revenue equally. (disagree)
  2. It punishes success. (partially agree and partially disagree)
  3. It is income redistribution, and therefore, theft. (partially agree and partially disagree)

Why taxes? A flat tax, to be specific …

Everyone know that you pay taxes in order to provide for the services that the government. Simple! Everyone uses roads, bridges, communication networks etc. in order to earn their income. Since everyone uses them, you ought to equally pay for those service.

Why a flat tax rate?

Your income does not get deposited into your bank account out of the blue. Every dollar you earn comes from someone (you or someone else) has used the resources provided by the government. For example, the same road takes you to Walmart and Circuit City. Part of the reason for Walmart making more money than Circuit City is that more people used the road to go to Walmart rather than Circuit City. Therefore, Walmart has to pay more taxes; it used more resources from the government to make that money. Thanks to Walmart making more money, the government had to spend proportionally (assumption) more money to build and maintain the infrastructure.

Sublinear, linear, or superlinear spending: An argument for taxing consumption:

In the paragraph above, I assumed that government spending on the infrastructure to enable your income is proportional to your income. One can critically examine the claim. Because of economies of scale, one an argue that the cost to build and maintain an infrastructural setup is a sublinear function of the number of people using it, i.e., it takes less than twice as much money to build and maintained a road if it is being used by twice as many people. On the other hand, one can also argue that with a greater number of people using the roads, there are additional needs for maintaining law and order, traffic signals, etc., which do not follow necessary conditions for economies of scale to apply.  For instance, a Wall St. trader benefits immensely from the stock exchange, but a cook woking in a restaurant next door doesn’t.  Therefore, it makes more sense to tax consumption rather than income. Perhaps, we could have a system that taxes consumption alone, or we could have a system with minimal flat (or regressive, due to economies of scale) tax rate for basic resources and additional tax for consuming certain specific resources, or we can have a progressive taxation system. I believe these options do not make any major difference if the number are chosen properly. If statistics can prove me wrong, I would be glad to look at them.

Intangible services

In addition to the infrastructure and law and order maintenance for which an exact dollar amount may be calculated, government provides other services such as the protection of intellectual property rights, copyright laws, bankruptcy protection etc. Without these services, the industry in which you work would not have succeeded in making more money than others. Intellectual property rights are, perhaps, the most important factor in enabling companies to make money. If you happen in work in such industries (pharmaceutical, oil, information technology, finance, medical, mining, etc.), you make money than the rest of the population because you use such services provided by the government. The construction worker who makes less money does not need those services, and therefore, should not be held accountable to pay for them. In today’s system, if one makes a lot of money, it is almost certain that they benefitting from those intangible services way more than the rest of the population. Unfortunately, an exact  dollar amount may not be calculated for those services. This is exactly where progressive taxation system makes sense. One can argue about the exact rate of tax and how they should grow, but a progressive system is more fair than the rest.

April 27th, 2014 | Categories: world affairs | Tags:

Should there be a provision to reject all candidates during an election? I will explain why I support such a provision in the ballot using a logical puzzle and introducing the concept of common knowledge.

In India, a new option, None of the Above (NOTA) [link], has been introduced in the ballot in ongoing general elections. This gives the voter a choice of not voting for any of the candidates. Although NOTA is equivalent to an invalid vote, I believe that it can significantly affect the process. The voter exercising this option may not explicitly reject all candidates. Instead, he/she may simply be informing that they are not engaged in the political process. Thus, I believe that another additional option of rejecting all candidates should be present in the ballot. I will explain my reasons in this post even if they are treated being equivalent to invalid votes. First, I will talk about a logical puzzle whose solution is rather tricky. Second, I will present a follow-up question. The answer to this follow up question is explained by the concept of common knowledge. Third, I will relate this concept to dictatorships and revolutions. I will also explain why I believe Facebook, Twitter, etc. are really powerful media. It is not because protests can be organised through these tools, but because of something more fundamental that is also explained by common knowledge. Finally, I will provide my beliefs about how the right-to-reject initiative can help improve a process even in successful democracies.

The Blue-Eyed Islanders Puzzle:

Source [link, link]: There is a tribe residing in an island in which the religion dictates that a person should not know the colour of their eyes. If an individual learns the colour, he/she commits ritualistic suicide just before the next town gathering. People learn of the suicides only after they have taken place; it is announced at the town gathering. The town gathering happens every day at noon. Everyone in the island attends all the town gatherings. It has a small population; every one knows the colors of other people’s eyes, but they do not discuss it for obvious reasons. They do have reflective surfaces in the island so that people do not discover their own eye colour. An outsider enters the island, and he is ignorant about this practice. When he leaves the island, he tells the people at his last town gathering (after the suicide ritual is suppose to have been finished) that he was happy to see other people with blue eyes on the island.  He is telling the truth and everyone trusts him. What happens to the blue eyed people in the island in the following days? Assume that everyone in the town is logical and follow their religious duties sincerely.

This puzzle is tricky to solve. Do take some time to think about it if you are mathematically inclined. I will provide the solution in the next paragraph. If you have clarification about the assumptions in the puzzle, do google for the puzzle for more details or leave me a comment.

The Solution:

Source [link, link]: The trick is to use mathematical induction. If there is only one person with blue eyes in the island, since he know the colour of all others’ eyes in the island, he knows right away that his eyes are blue. He commits suicide just before the next town meeting on the next day. If there are two people with blue eyes, each of them assumes that the other person is only person with blue eyes and waits for the other person to commit suicide next day. When neither of them commit suicide, they both know that they both have blues eyes. Therefore, on the second day, they both commit suicide. This can be extended to n people with blues eyes, i.e, they all commit suicide on the nth day.

The Follow-Up Question:

Source [linklink]: If there are more than one individual with blue eyes, everyone in the island already know that there is at least one person with blue eyes. The outsider only said that there is at least one person with blues eyes in the island, and the islanders already knew that. What additional information did the outsider add that lead to the consequence? If the outsider did not add any new information, isn’t the solution above contradictory to the reasoning presented here?

Common Knowledge:

The answer to the apparent contradiction lies in the concept of common knowledge [link]. If a fact p is known to everyone, it is called mutual knowledge [link]. In this context, p is the fact that there is at least one person with blue eyes. If everyone knows that everyone knows p, and everyone knows that everyone knows that everyone knows p, and so on ad infinitum, then p is common knowledge.

In the context of the islanders puzzle, consider the time when the outsider had not yet visited the island. If there are two people, A and B, with blue eyes, both of them know that there is at least one person with blue eyes. A knows that B has blue eyes, and B knows that A has blue eyes. A, however, does not know that B also knows that there is at least one person with blue eyes. Similarly, if there are 100 people with blues eyes, every one knows that there are at least 99 people with blue eyes. Everyone knows that everyone knows that there are at least 98 people with blue eyes. Every knows that everyone knows that everyone knows that there are at least 97 people with blue eyes. Clearly, this does not continue up to infinity. What the outsider does is to make it a common knowledge that there is at least one person with blue eyes. That triggers the chain of events.

Dictators, Revolutions, and Common Knowledge:

Although the primary reason for the revolutions in the Arab world is believed to be rising food prices [link, link], Wikileaks is considered a major inspiration for the Arab spring [link]. Wikileaks exposed the extent of corruption in the Tunisian and Egyptian dictatorship. It is very unlikely that people of the two countries were unaware that their dictators were corrupt. They may have not known the extent of the corruption, but they all must have known that their dictators were corrupt. Due to the absence of  strong media and public discourse, they probably did not know that everyone knew that the dictators were corrupt. Wikileaks made the mutual knowledge of the corrupt rulers a common knowledge. As the diplomatic cables were published, everyone knew that everyone knew that (and so on) their dictators were corrupt. That kick-started the revolution. I believe that the real power of Facebook and Twitter lies in this phenomenon where mutual knowledge becomes common knowledge more than facilitating the organisation of protests. Dictators hate public gatherings at town squares [link]. A part of the reason for that is the evolution of mutual knowledge to common knowledge happens quickly during public meetings. Of course, common knowledge is not sufficient for revolutions to occur.  The underlying factors such as public dissatisfaction, leadership, unity among the people, etc. have to be given their due credit. A condition stronger than mutual knowledge, however, is necessary for a revolution to take place.

Common Knowledge in Successful Democracies:

The concept of common knowledge is applicable in a democratic setup too. People strategically vote for the party they least hate and has a good chance of winning the elections [link]. It is possible that they may not really want to vote for the party. Some may chose to abstain from voting in such elections. It is very hard to determine how many people have abstained from voting due their lack of faith in the system and how many have abstained due to their ignorance or apathy towards the political process. As a result, the established political parties cyclically exchange power in the electoral cycle. Although people may prefer a fresh face in the elections, no one really knows how many people want a fresh face. Many may not be happy with the choices presented to them, but it is not a common knowledge. The provision of choosing none of the candidates (the NOTA option) or rejecting all candidates makes the displeasure a common knowledge.  That will allow a fresh face, who would have otherwise been reluctant, to enter politics.

Many are apathetic towards the electoral process. They are not going to vote. There are many who are ignorant about the political process, but not apathetic to it. If the NOTA option is provided, such people would cast the NOTA vote. This informs the political parties and candidates that these votes are up for grabs. An incumbent candidate would have the incentive to carry out and advertise their work, and other candidates would have incentive to politicise them for their benefit. The NOTA option can also prevent impersonation-related voter fraud in developing countries.

A vote to reject all candidates informs aspiring politicians of their chances in the subsequent elections. That may enable a dynamic system in which the established political entities cannot be complacent with their support and new people show up when the establishment fails to deliver.

Does it Happen in Practice?

My interest in these options are philosophical/theoretical in nature. They many not actually translate to a significant change in the electoral process, but it does have the potential, and the cost is insignificant. We will have additional information by implementing the system, and it is up to the people to use this information well. It would be interesting to see if there were improvements in people’s satisfaction with their elected representative before and after NOTA was implemented. I am not aware of such studies.

In the Delhi election late last year, a new party, Aam Aadmi Party (AAP), was voted the second largest party. It was agreed upon in the social media that if another elections happens soon (because of the hung parliament), they could become the single largest party. This is an example where “AAP can win” became a common knowledge, and thus, had the potential to change the outcome of the subsequent election. Thus, another party could become a mainstream party. More choice is good, isn’t it [link]?

UPDATE: The NOTA option did affect Russian elections [link].

February 26th, 2012 | Categories: Uncategorized | Tags:

In which I describe how my idea of fairness is different from free market principles.

In this post, I talk about the definition of fairness in the context of economic transaction. Many of you may have simple framework based on free market principles to judge a transaction as fair or unfair. I have a different framework that is based on equality. This post should be read from a philosophical standpoint and not from a practical or enforcement standpoint.

Two Transactions

I will present two transactions to you. Both of them follow free market principles. I would like you to judge if these transaction are fair. First, a rich businessman approaches several equally rich engineers and arrives at $200 as a price for a job, which is given to least expensive engineer. Second, knowing that the price of the job was $200, the businessman goes to a poorer, desperate (for tangential reasons) engineers. The businessman uses the poorer engineers’ lack of bargaining power to establish $50 as the price for the same job. All the engineers are equally skilled and efficient at the job. My question is: do you think the second transaction was fair? If the businessman goes to the poorer engineers first and then to the richer ones, are the same transactions fair?

Fairness

If you argue that the all transactions were fair because they were all mutually agreed upon by the parties involved (free market economics), I respect your judgement, but I disagree with it. I think that fairness and free market principle are different entities altogether. I think that free market is just one of the many possible systems to distribute capital and resources.

My framework to judge fairness is based on equality. If the businessman *knowingly* exploits the lack of the bargaining power, which has got nothing to do with the job, I think that he is being unfair. You may ask me how I know that $200 is the “real” price for the job. The key term in my definition is “knowingly.” If the businessman genuinely thought that $200 was too much, and that $50 is reasonable, I wouldn’t call it unfair. In the second case, where the businessman approaches the poorer engineers first, he does not really know the price of the job, and so he negotiates the best he can. I wouldn’t call that unfair either. We assume here that the businessman used his bargaining position, which had no relation to the job, to treat people in different ways. Fairness goes the other way too. If the engineers were to treat different businessmen differently, I would call them unfair too.

What if it Happens to You?

I would like to put the same question in the context of your employer. Suppose your boss knows that you and  your colleague are both equally productive and equally valuable to the company. And he also *knows* that you are desperate to keep this job. Perhaps, you and your spouse  just had a baby, and cannot afford to change health insurance plans, while your colleague  can afford to quit the job and look for a new one because he has a richer ancestry. Or, perhaps, your colleague may be as desperate a you are. If your boss decides that only your colleague gets a bonus for no reason (your boss tells you so), would you still call that fair? Remember that reason why he decided to treat you unequally had nothing do your job, but other tangential reason, and everything here follows free market principles; you are free to walk away from your job if you don’t like the salary.

Personal Confession

I knew that the previous owner from whom I bought my car was going out of country in a few days. So I used that information to lower the price I paid for the car. In my opinion, I was being unfair to him because the value of the car had got nothing do with his going abroad. Will I be unfair next time I am a part of such transactions? I think I will be. I am not taking a moral highground. I think that the social cost of my unfair actions is not very high. I hope I will be less selfish if the social costs are high.

Relevance to Foxconn, Walmart and Apple

Clearly, everyone knows that Chinese workers are more desperate for work. The companies use this to exploit them. I have read many posts online that explain that it is fair because it follows free market principles, and that their life is better off as a result. I have to disagree with that reasoning. No one would complain if the employees has a decent standard of living. But we all know that condition of workers in Foxconn (link) and Walmart (link). The companies are not doing the worker a favour by giving them the job. It is business transaction in which the workers are being treated worse thay should be (based on my framework on fairness). The social cost of their actions is very high. That is the reason why their practices are frowned upon.

Practical?

I realise that enforcing my idea of fairness is not practical. Walmart can simply say that they genuinely believe that their worker do deserve health insurance. This is where government mandates come into play. I am not a fan of ideas that imply fairness if all rules are followed (government rules or otherwise). How would you decide if the rules are themselves fair? I think a judgement on what is fair should not have external dependence because it is a personal moral compass.

Other Frameworks

I have not had the time to read any of the following wiki links or books to which they refer. If you happen to know other frameworks (described in the links below or otherwise), do let me know.

a. Justice as Fairness: John Rawls conception of Justice

b. A Theory of Justice: A book by John Rawls.

c. Justice as Fairness: A Restatement: A book by John Rawls

d. The Theory of Moral Sentiments: A book by Adam Smith

e. The Idea of Justice: A book by Amartya Sen

Comment Policy:

If you diagree with me, provide your framework, and let me know what you think about the transaction with your employer.  It’s a simple “is it fair” question. Keep it to the point. Please do not explain free market principles to me in a hundred possible ways (willingness to pay, current value of the job to the engineer or businessman etc.). I have a different framework. Please respect it.

January 15th, 2012 | Categories: Uncategorized | Tags:

Where I relate wars, capital punishment, environmentalism and feminism.

It was rather unpleasant to watch Gov. Rick Perry being applauded for overseeing capital punishments in Texas during the Republican presidential debate last year. Even a supporter of capital punishment usually agrees that it is not carried out with pride but with a disappointment that such punishments are necessitated in our society[*].

I noticed on wiki (link) that US is in really bad company with China, Iran, North Korea and Yemen in awarding death penalties. The rest of the “western” world (i.e., other than the US) does not see as many death penalties. China, Iran, North Korea and Yemen are some countries that are hated for their domestic policy. Countries with large number of capital punishment victims are usually totalitarian or dictatorial. US, on the other hand, is proud of being a “free nation.” Something was amiss. But then, the US is hated for it foreign policy. It has broken its own laws many times when they are deemed a threat to national security (link). There should be a factor that reconciles all these facts. I believe that it is the holier-than-thou attitude that reconciles the facts.

Before I elaborate, I stress that I am not using holier-than-thou with a negative connotation. Holier-than-thou is usually associated with hypocrisy. My use is more generic.  If you expect a better pay at work for reasons such as race, caste or nationality, that is holier-than-thou attitude at play, and it is frowned upon for its hypocrisy. If you work harder then your peers, and then expect a better pay, it is reasonable, but it is also a holier-than-thou attitude at play. There is nothing bad about it in this context.

Now, let me explain how the holier-than-attitude relates harsh punishments and domestic or foreign policies. The US is notorious for waging wars all the time. War is imposing your idea of what is right upon others. Similarly, harsh punishments are awarded to those whom we deem unfit to live in the society and deny them some of the basic rights that the rest of us enjoy. Both of them have elements of the holier-than-thou attitude. I see capital punishment as a tangible manifestation of that attitude, which brings people to believe that those who have done something terribly wrong are not worthy of living anymore.

I checked out punishments in some of the kingdoms. Larger kingdoms have obviously waged wars and expanded from smaller-sized kingdoms. Are the punishments for crimes in those kingdom equally harsh? I found that the Chola dynasty, a small dynasty, had very little punishment such as fines even for crimes such as murder (link). The Rashtrakutas (link) were a little bigger dynasty. The punishments were harsh, but some “high” caste people were excluded from such punishments. When we get to really big empires such as the Roman empire or the Mughals, the punishments were “cruel and unusual” (link, link, link). Execution by elephants were common. In the British Empire, I could not find examples of cruel punishments during its “glory” days in England. Some links (link, link) do indicate that punishments were harsh before the fall of the empire. There may be exceptions to the rule that ambitious empires also practise cruel punishment, but I would like to see some more study on the correlation (religion may also offer more information).

Few years ago, I answered a survey questionnaire in which a few questions about our opinion on women’s rights and environmental policies were asked. At the end of the questionnaire, I was informed that those who support equal rights for women are also likely to support strong policies to preserve the environment. This brings us to Ecofeminism (link), which has its roots in the belief that “the social mentality that leads to the domination and oppression of women is directly connected to the social mentality that leads to the abuse of the natural environment.” I think that this is just a fancy way to explain that the holier-than-thou attitude (or lack of) is responsible for many of our views.

[*] In the same way, military might is something that is forced upon us because we have enemies; displaying military might  (as during India’s Republic Day) is not something I am comfortable with.  Most agree that public hanging is unhealthy for a society. I don’t think that display of military might, similarly, is healthy. I think the US did the right thing by not releasing Osama bin Laden’s picture.

September 12th, 2011 | Categories: Uncategorized | Tags:

This is a reponse to Swaminomic’s post, where he talks about economic inequality in Indian states (link). I will briefly present his views first and then present some flaws in his argument by providing some facts.

He suggests that India should not be worrying about economic inequality as much as worrying about the overall growth because actions to promote overall growth will benefit a state more than just targeting inequality. He argues that according to Gini Coefficient (link), which measures economic inequality in a region, Haryana, Kerala, Maharashtra, Tamil Nadu, Punjab and Gujarat are the most unequal states, but the same set of states are are more prosperous than the rest of the country. Thus, he concludes that inequality is not a good measure to assess well-being of Indian states. He implies that the Gini coefficient is meaningless because overall growth brings more people into a prosperous state and skews the wealth distribution. And also, because of presence of rich folks in Gurgaon, a fairly secure landlord in Haryana is counted as poor in the Gini Coefficient. The wiki article on the Gini Coeffieicnt (link) discusses the weaknesses in the measure. Swaminomic’s post says that some of the weaknesses are applicable in India’s case.

Against the harsh reality of farmer suicides, I am led to believe that the weakness do not play a role. This presentation (link) and this wiki article (link) indicate that Haryana, Kerala, Maharashtra and Punjab see some of the highest cases farmer suicides in the country. The claim that the inequality measure falsely indicates a fairly-rich person as a poor because the presence of richer folks is untrue in these cases. Inequality and poverty are very real in this case. Clearly, spending effort on the overall health has not benefited the very poor. Inequality needs as much attention as the overall economic health. A disguised trickle-down-theory (tried, tested and failed) argument will not convince me.

I do realise that the farmer’s suicide is an incomplete indicator. I am willing to look at other indicators, if any of you can provide them. Given an agriculture-based rural economy, farmers forms a major chunk of the population. So I think it would be hard to find indicators that support the contrary. The post says that GDP is an incomplete indicator, but it uses GDP to make arguments against Gini coefficient as an indicator (I assume. If not, then what?). There is a structural flaw in the argument, too.

May 20th, 2011 | Categories: Uncategorized | Tags:

I came across a blog post (link, and also a column: link) that talks about the effects of futures market on the oil and onion market. Many think that futures market is responsible for the oil price fluctuation (link). The author notes that despite the absence of futures market in the onion markets (due to Onion Future Act (link)), the price fluctuations are more severe than that is seen in oil trading. The authors uses this example to argue some academics’ belief that futures markets control extreme price swings. I think the analysis is poor for the reasons I describe below. I am not an economist; but, being trained as an engineer, I can say that their analysis is flawed.

First, the statistical analysis of price fluctuations in the posts is poor. The author of the blog post compares the monthly changes in the price of onion to that of oil. We have seen that oil prices have a two- or three-year cycle. Obviously, the monthly changes in oil prices is not as big as the changes in onion prices. A better statistical analysis is needed. Also, volatility of onion prices before and after the Onion Futures Act was passed is open to debate (link).

Second,  it is not a controlled statistical sampling of commodity value because there are a number of factors that affect each the price of commodity. The oil market has a seasonal supply-and-demand cycle, whereas the onion market experiences abrupt supply issues due to inclimate weather. There are plenty of other factors, including the price of oil, that determines the price of onions. Oil prices are globally uniform while onion price vary geographically. Future trading is not the only factor that differs between the two markets.

Third, if the cycle is two to three years long, ten-year data of oil prices fluctuation is not enough to statistically conclude anything about futures trading. We either need a different form of analysis for the data from the limited time period or need data from a larger time period. But it is hard to control all the factors when the time period is large. Thus, statistical analysis would likely be meaningless.

The authors may be right about their conclusion, but they have not provided sound evidence to back it up.

May 5th, 2011 | Categories: india, world affairs | Tags:

Is it right to question the integrity of people of a country based on what their democratically-elected government does? My opinion, based on the current global context, is that it is not correct. In this post, I will explain why. This is mainly in response to Great Bong’s post (link), in which he holds the opposite view. I respect his opinion as long as he is consistant. I will also relate this to blaming every bank employee (in Goldman Sachs etc.) for the banks’ role in the global economic crisis.

A view held by many is that the citizens on the country are ultimately responsible for the actions of the government. Thus, any state-sponsored activity, including terrorism, can be blamed upon every individual from the country. In theory, the government is suppose to reflect the views of the majority in the country, and therefore, the actions of the governments are indicative of the mass opinion in the country. I respect this view, but do not agree with it.

I question that basic premise of the argument that the government reflects the views of the majority. I have seen overwhelming evidence off-late that most democratically-elected governments today are plutocracies. First, there was the plutocracy memo (link) by the Citigroup. Second, I read this Al Jazeera article on the power of lobbying in the US (link). These pieces, among others, make me believe that common man has absolutely no voice in the governance of the country because he does not belong to the elite. Is my vote really worth a billionth of the value of all billion Indian voters put together? Regardless of what most of the country thinks, it is the wealth-driven lobbies, which dictate the domestic and foreign policy. That is disturbing.

Also, when we accuse a nation of being immoral, we should be willing to accept similar, well-reasoned aspersions on us. Let’s take Kashmir and the Northeastern India as examples, where our lawmakers have wrecked havok. We have rigged elections in Kashmir (link) and misused Armed Force Special Provision Act (AFSPA) in Kashmir and the Northeastern India (link) (Also look my post on Kashmir (link)).Based on these irresponsible acts, a Kashmiri or a Manipuri can easily label the rest of the nation as traitors. I am personally not responsible for these acts by our government. We all blame it on factors beyond our control such as the politicians and their vote-bank politics. Just like how I am not willing to take criticism for the atrocities my government commits (maybe, I ought to accept those criticisms), I do not want to blame another nation in entirety for actions of a few individuals of their government.

I apply the same moral compass in blaming bankers working for big banks for the sub-prime crisis. The contempt against the big banks for their hand in the crisis is well justified (link). But are we right in holding every individual who work in these firms responsible for the chaos? I assume that it is an “elite few” at the top who made those decisions that led to the downfall. Most worker have had no role in the crisis. Thus, I do not hold every banker accountable for the crisis.

There is one point for which I don’t have an answer. You may argue that the bankers have a choice to quit their job and work elsewhere. I think that’s a fair point. But I also think about the reality of their choice. After a fairly-long career, changing domains is not easy. The real choice is between a great lifestyle and being unemployed for a long time. Should one’s values be strong enough to punish oneself by being unemployed for no fault of their own?

This post appeared as a column in The Viewspaper (link)

April 14th, 2011 | Categories: world affairs | Tags:

My brother and I visited Tunisia two weeks before their revolution. Though poverty and economic inequality were quite evident, public utilities were plenty. My brother remarked that the facilities and infrastructure in Tunisia are surprisingly good despite being ruled a dictator. I responded saying, “It’s about keeping people just happy enough.” Although there were small uprisings a few months earlier, signs of mass uprising were absent. Three weeks later, however, the iron-fist regime collapsed. It was partly due to 25% (link) youth unemployment.

What does it take to successfully run an oppressive regime? Is it necessary to keep the oppressed “just happy enough,” is it sufficient to keep them “just hopeful enough,” or is it safe to keep them “in the dark” about the world outside? For each of the ways, I found historical and contemporary attempts.

To keep the people “just happy enough,” the rulers have to provide the basic needs. Many religions had authorised slavery. Islam, in particular, had strict rules to follow (link) to possess slaves. Though slaves were considered inferior beings, cruelty was forbidden. They were entitled to receive food, clothing, shelter and medical attention. It was oppression, but the slaves were kept “just happy enough.” Slave revolts were uncommon; they happened only when the owners did not follow the Islamic laws.

A contemporary example that keeps people “just happy enough” is Iran. Iran’s 2009 revolution was unsuccessful not only due to a crackdown, but also due to the absence of workers’ support (link). Inequality in Iran is less severe than in other countries. Progress in labour laws and women empowerment have created ways to move up the social ladder. Despite the oppression, the regime has managed to keep the people “just happy enough.”

To keep people “just hopeful enough,” a promise of a good future is necessary. The British Raj in India followed (link) every major demand from the Indian national movement with political and economic reforms. They managed to diffuse the tensions, but did not make efforts to alleviate the plight of the country.

Today, Egypt and Tunisia are good example where economic reforms kept people hopeful, but not happy (link). Egyptian economic reforms helped many, but not all. In his Time column (link), Fareed Zakaria explains that reforms and revolutions go together. Economic reforms are the most dangerous phase in an autocratic regime. Reforms expose the people to new possibilities and create demands for better governance. Failure to meet the demands result in a revolution.

To keep people “in the dark”, access to education and information have to be denied. For instance, after Nat Turner’s slave rebellion (link), the Virginia General Assembly passed legislation making it unlawful to teach slaves, free blacks or mulattoes to read or write. Other restrictions were imposed to keep them uneducated and uninformed. Thirty five years later, after the civil war, the slaves were still illiterate.

Syria and North Korea are current examples of regimes that keep people “in the dark”. Reforms have never been carried out there. Fareed Zakaria’s column, referred above, says that they are not in danger of collapsing because the people have not been exposed to better options. Leaked Citigroup “Plutonomy” memo (link) also highlights the importance of keeping people uninformed. The memo talks about plutocracy in America, and how rich grew richer in capitalist-friendly countries. It emphasises that if the “rest of us” were in the dark about the existence of the plutonomy, it can strengthen the “plutonomy.”

Only time can tell which regimes are ticking time bombs waiting to explode. I also wonder how the army remains on the dictators side and obliges to kill its own people during a revolution. I guess I will never have a satisfactory answer to that question.

Note: This appeared as a column in The Viewspaper (link).

March 31st, 2011 | Categories: economy | Tags:

Some claim that the expiration of Bush Tax Cuts, only for the rich, is class warfare, and that it punishes the rich for working hard. The argument implicitly assumes that regardless of who you are, being smart and working hard helps you grow richer. I decided to put that claim to test because we have mostly seen children of poor parents grow up to be poor and children of the rich grow up to be rich (for a number of reasons). I wondered what statistical evidence is needed to conclude with the claim. After some time, I was able to conceptualise the survey that can statistically “prove” the claim. I googled and found out that such surveys have been done. They have proved me right, i.e., how rich you will be depends strongly on how rich your parent were (there are exceptions, of course). In this post, I will explain the survey data that is needed to make any such claim and also suggest ways to strengthen the claim.

Wealth Mobility

“Wealth mobility” is an economist’s term for inter-generational movement on the economic ladder, which studies how one’s wealth is related to their parents’. Studies on wealth mobility (link, link, link) begin by categorising the parents on percentile-based income brackets, i.e., determine what percentage of people were richer than the parents in question, adjusted for inflation. Some are in top 10%, few more in top 10%-20%, more in top 20%-30%, and so on. The study also looks at the income brackets of their children. Thus, we get a table of numbers which conveys how many children, whose parents were in, say, top 10%-20% bracket, stay in the top 10-20% bracket, how many have moved to the top 10% bracket, how many to the 20%-30% bracket, and so on. We may call this ‘wealth-mobility table.’

If there is an even distribution of people moving across the income brackets, I will conclude that luck does not play a big role in being rich (for most people). If the results are skewed to show that rich children stay rich and poor children stay poor, I will conclude that luck does plays a big role and taxing the rich more is not all that unfair.

Conclusions

The studies (linked above) have concluded that upward mobility is hard, but possible. Most people stay in the same bracket as their parents did. I don’t think this is surprising because opportunities are plenty for the rich, while lacking for the poor. Thus, I wouldn’t call higher tax rate on the rich as class warfare.

Inequality Fractal

There is a small flaw in the studies linked above. They do not consider the fact that economic inequality is a fractal (link). Wealth is exponentially distributed in many countries. Top 0.1% of people are much more richer than top 1%, who are much more richer than top 10%, and so on (link). Thus, a person from any income range will find people who are 10 to 100 times poorer and people who are 10 to 100 times richer. This inequality fractal makes the studies’ linearly-distributed income brackets (Top 10%, 10-20%, 20-30% and so on) inappropriate. Better-designed income brackets will strengthen any conclusions that are drawn from the data.

Expected Results*

We expect a wealth barrier beyond which good wealth mobility is present among the rich. The rich and the super-rich children, both, have equal access to education and other opportunities. There are plenty of avenues to grow richer and plenty of risk of losing money. A dynamic equilibrium can be expected at the top. Note that there may not be just one barrier; there may be several barriers as we move down the income ladder depending of government policies.

Technology is know to be detrimental factor in economic inequality (link), i.e., it has widen the gap between haves and have-nots. But at the same time, we expect technology to move the wealth barrier towards the poorer side as technology makes in easier for everyone to avail education and other opportunities. In the next generation, technology may alleviate the economic inequality.

*Thanks to Karthik Swaminathan for inputs