Mister Keynes and the Visible Hand : Part I

Imagine if you were asked to introduce a bright 12 year old child to the subject matter of Macroeconomics. I can visualize the following conversation between me and her :-

Me : You know, there are quite a few people in this world who don't have enough to eat, its really sad...

She: Yeah....i know. Is there nothing we can do to solve the problem ?

Me : You see, they need money to buy things and...

She : I wish I were the Prime Minister. I would think of a clever way to give them 'lots and lots of money' to buy things!

Me : Sweet of you . Hey, do you know where they print these notes ? ( showing her a 10-rupee note )

She : I know ! It is called a mint. There is one at Nasik I think - my teacher mentioned that in class.

Me : Oh I see. You mean, we can actually go to this mint tomorrow and ask them to print 'lots and lots of money' ? Hey, we can then bring it back and distribute it to the poor !

She : Wow !! Brilliant ! Lets.....umm....but wait....why hasn't the Government thought about this till now ? Maybe more money means.....hmm...what is the worth of money?....can we really...

Me : Welcome to Macroeconomics !!

So, I study 'Macroeco' this term - and am all excited . Before my MBA - I used to be extremely confused with concepts such as 'GDP', 'interest rates' - what decreases when what increases and so on. It was very ambiguous and I thought these economists con us by arguing one way or the other in a way that you can't distinguish which is what !

But now - after 10 classroom sessions [ and an exam :) ] I plan to bore my readers with 'lots and lots' of blog entries on Macroeconomics !!!

So, here goes....

At the very heart of economics , are observations which describe how individuals ( with wants and needs ) behave in society. That's it . All the complicated mathematics that follow are largely unsuccessful ( !) attempts at quantifying this behaviour.

Now, there are 4 Fundamental ( 'Most Important' ) Ideas of Macroeconomics :

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1) The idea that interest rate is the price of money.

Like any other good - money is subjected to demand-supply dynamics. The demand for a good increases when its price decreases and vice versa. Similarly, excessive supply of a good brings down its price. This is a fundamental concept in economics as a whole.

2) The idea that our tendency to consume increases with increase in Income.

Call it greed if you want :) , but this concept of wanting more when you already have more - is discussed in the Vedas and the Bhagavad Gita!

3) The idea that our demand for money :

a) increases if our income levels are higher and
b) decreases if money becomes too costly to hold in idle form. ( why keep it with you when you can park it in a bank and make it grow ) .

4) The idea that corporates need to borrow money to make Investments in machines and factories ( which produce goods ) . So, they are worried if the price of money ( interest rate ) is too high.

==========================================

Now, if we can't do much if we hang around merely with these behavioural insights. We need more than that - we need hard numbers , to tell us by how much do things 'increase' and 'decrease' in the statements above.

The first step towards quantifying is developing a framework for writing equations.

Basis for the Framework of Equations :

1) The idea that we need a measure of the output of an economy and we can look at output as
the sum-total of :
a) All that is consumed ( by the individual and the government )
b) All that is "invested" : that is , spent by companies for buying machines , building
factories ( to produce the goods we consume in a) ! )
c) All that is exported on a 'net' basis( i.e. remove the imported goods since we didn't produce
them )

2) The idea that , at an aggregate level, 'Income' and 'Output' are two different ways of looking at the same thing.

3) The idea that income at your disposal is the sum total of consumption and savings. This may include income received ( a gift , say ) but not earned and income earned ( tax part of your salary ) but not received. So, we make a distinction between 'income' and 'disposable income'.

Now , we are kind of set - In my next blog entry, I'll write about how to understand those 'confusing' things we read in the papers - about RBI , US Fed decreasing interest rates , Bush planning to give a fiscal stimulus to the sub-prime crisis etc.

Formalisms, Frameworks and Frustration

At the risk of "slandering" ( lol ) my own tribe, I make the claim that there are way too many engineers/scientists in the MBA field. This is not at all a good thing and let me explain why.

Remember way back in school, we learnt about this really cool thing called the "Scientific Method". Basically it is about how you observe something in nature , create an idealistic model and start testing your model out. One fine day, it might just happen that some chap comes up with a scenario where your model bombs , and hey- everyone is all excited to try out a new model now. And on goes this cycle..


Yeah, its fun . But, folks - I think we are suffering from a hangover. We want to make EVERY DISCIPLINE under the sun comply with these sacred steps. Du-uh? Why this one-size-fits-all approach ? The 'scientific way' is the only LEGITIMATE way to study any subject. For the writers who write textbooks , it is the only way they can make their discipline 'attractive' ! This is a really dangerous trend affecting not-entirely-scientific disciplines , MBA being no exception.

Here's an example :-

In my MBA course, I study Organization Behavior ( more specifically, "Managing People and Performance in Organizations" ) which tries to understand people's personalities , their mutual interaction in an organizational setting and how their environment can be made conducive to the organization's benefit . My biggest complaint against this course is its extremely 'formal' treatment. By formal treatment , I mean that the course proceeds so much like a textbook on science - where you make observations , try and standardize whatever you see and draw generic conclusions. As a consequence of 'forcing' the scientifc method, you create this huge machinery of


a) Definitions
b) Frameworks : I am referring to complicated Graphs, Diagrams, Tables, Matrices and what not.
( Its like Newton who ended up inventing Calculus while describing astronomical phenomena )

Just what ARE we trying to do ?? Don't we realize that so much of it is meaningless formalism. Where is the so called 'human element' ? It seems to have hopelessly got lost in all the quibbling.
To illustrate a point, one section in my textbook talks about different styles of leadership and goes on to PLOT them on an X - Y axes with ORDERED PAIRS such as ( 1,1 ) , ( 9,9 ) etc ! And that is not all , it goes further to describe a new ' style ' and tries to project it on 3 dimensions - finally the reader is staring at a sexy figure straight out of a 'Math Challenges' magazine !

Give me a break folks. If the eternal debate of whether Management is a Science or an Art has hit a new level, it is due to such illustrations. I am afraid if my coursework requires me to 'remember' such 'creations' for my examination. I have a good mind to rebel and fill my entire answer paper with equations I learnt in co-ordinate geometry.

So, that's one. Now, the other 'casualty' in my MBA course seems to be 'Marketing Management'. At the outset, let me agree that marketing ( especially market research ) DOES require a lot of quantitative analysis and hence the subject needs to be analytical and 'scientific'.
But , why have elaborate analytical frameworks for something like consumer behaviour or advertising psychology ? In our coursework, we are simply bombarded with words , theories , definitions and more theories.

To me , most frameworks that populate textbooks are of dubious worth - they are hardly applicable in a situation which is not the same as the one which led to the creation of the framework itself ! ( Sort of these perpetual machines we used to imagine! )


Then came something to spruce up our grim life :-)
Today , we had this talk on Marketing by this awesome guy called Santosh Desai. You can probably google him up , but here's one link for those of you who follow the marketing industry.

Man, he was SIMPLY AMAZING. His whole talk , titled 'Life Backwards' was about two simple ideas :
a) Advertising should speak to people when they are busy being people. ( In other words, don't sit in your Ivory tower making marketing plans to these unknown creatures you call as "consumers" )
b) The central quest of human beings is the quest for meaning , and the concept of brand should address that.

He stressed the importance of getting out of straight-jacketed thinking and look for simple insights in everyday life. For example , how do you say that the Indian Society is getting more "modernized " ? No, don't point to the urban westernized youth who visit pubs and discos. Show me the heartland of middle-class India. Women in 'Nighties' ! lol . It was quite an interesting / amusing point he made - what a nightie offers them is really 'Freedom from Shape!' ( Women' Lib? ) and then think about how names such as potty, pinky, sweety in middle class India came about -( an indication of a 'greasy' modernism?) . Or look at little girls from poor families who go to Government Schools - They sport bob cuts! -( a paradigm shift from the traditional plaited hair , a shape of things to come? )

On the whole, a very engaging talk - I should probably reserve a separate blog entry for this some other time.

That brings me to the end of this blog entry and back to my basic point -

If the MBA world wants to encourage innovation in its truest sense , they better start by ruthlessly cutting down excessive formalization and steering away from obsessing on the 'Venerated' Scientific Method. The sooner this is done, the better it is for us all.

Random Ramblings

I decided to try my hand at some random ( "arbit" as we call it ) writing , so here goes ......

Interestingly , all institutes such as the one I study at , have a highly developed nomenclature for the various kinds of species that haunt their accomodations . ( The inventors of these names can be traced to the early inhabitants of the IIT's ) . I have taken the liberty to 'glamourise' the names by altering them :D. Let me present the reader with the first of these species - "Fighterus Maximus"( English : The Fighter ) . Fighters are organisms who push themselves to run that 'extra' mile. More importantly, they are the ones who want to be the best at everything they do and rarely compromise. Simply put, they work, and they work hard.

Now, there are a few organisms which are quite different from the fighters. These species have a natural aptitude at quantitative subjects and always manage to ace them. Since the fighters take a longer while to master such subjects , they are super-amazed as to how this other group has so much time to spare. Hence, they begin to refer to them as "Studdus Ultimatus" ( English : The Stud , for Spare Time Under Disposal! ).

There is a third kind of species which form the most interesting of studies for the behavioural scientist - they are the "Fuddus Hypocritus" ( English : The Fud , for Fighter Under Distress ) .
These are a curious bunch of organisms who are basically fighters , but , due to some strange reason hate to be known as fighters in other fellow organisms. They are unhappy that they do not have the natural aptitude of the studs , it really seems to hurt their pride.

So, they love to behave as if they have a lot of Spare Time Under Disposal in front of everyone. They make elaborate preparations to pretend they aced a quiz without having studied for it ! ( by secretly putting in as many work hours as the fighters when nobody seems to be noticing!) . Being know as a "stud" seems to give them a lot of legitimacy in their circles - its quite interesting. No one seems to know where their hypocrisy comes from. I wonder if my enlightened readers like to comment...

This probably brings me to the inevitable question : Where do I fit in ?
Well, definitely not Fuddus Hypocritus, so I will put myself under Fighterus Maximus :D

M.B.A : Master of Business Analysis

Let me acknowledge that 3 weeks into the program is too early to size up what an M.B.A is all about . However, I refuse to let go of this opportunity , so here goes ! [ Disclaimer : I plan to revisit this blog entry after the course to validate my lemmas ]

So, I was initiated into thinking this up in my class on Managing Oraganizations ( "OB" as it is popularly known ). A question we posed in the course was this : " Should organizations follow a model where much of their product is developed in-house or should they follow a model where most of the development ( including core competencies ) are outsourced ? "
[ Some examples of the latter are Toyota, Bharthi Telecom . ]

Here's the problem :-
How do we answer the above query ?

Wait , let me make it glamorous :- Say you are the company executive who needs to take this decision tomorrow . Will the learnings from your b-school give you the answer ?

My Answer : Not really.
And that is exactly what I am trying to drive at in this post on the three letters M, B, A.

To me, an MBA is a course on Business Analysis ( not Administration ) . By analysis, I mean that the course teaches you exactly two things :-

1) Tells you how to analyse a given problem.

2) Hammers into you that you need to consider ALL possible options and evaluate them before making a decision . ( In this specific case, our Prof told us interesting things on how you need to account for a zillion costs - Costs of Production , Transaction Costs etc etc let me not get into those details... )

Anyway, my point is , What an MBA *does not* tell you how to do is - the vital 3rd step :

3) Making the decision !

Why ? Simply because this last step is entirely situation dependent. Had it been formulaic, somebody might have come up with a cool idea to replace Managers with slick computers already. Fortunately for the manager-types, of the several variables which go into decision making , many can never be 'quantize'd and crunched into numbers.

So decision making is much much more than that.

Enter the X factor . Call it " Experience " , " Intuition " , " Gut Feeling " or whatever you want. You might have all your grand theories in place about the Auto industry , but if you have never worked in the auto industry - you can rest assured the decisions you make will almost always go for a toss!

Let me quote Henry Mintzberg who drives the point home about MBA programs , " It is plain silly to take people who have never been managers - many of whom have not even worked full-time for more than a few years - and pretend to be turning them into managers in a classroom.......stop dumping management theories and cases on people who have no basis to judge the relevance. "

Can somebody take a comment from B-schools that advertise themselves to be creating the "leaders of tomorrow " in their classrooms ?


In the end, what does this all mean ? Are MBA programs nothing more than a burden on the exchequer ?
Not at all. There is no need to be pessimistic about the whole thing.

All we need to keep in mind is the river-horse analogy :
If we are the horses , an MBA is that which can , at the most, take us to the river.

Nope, it CAN'T make you drink water. Period.

Illegal Economics

I decided to quickly document an interesting discussion that came up in class today.

Suppose you want to badly watch the Wimbeldon Final ,and you are unable to get a ticket for it. Lets say a tout comes to you with a $1500 ticket and, given the great demand, you agree to pay $3000 and have a happy viewing at the final.



As per law, selling tickets in "black" is illegal. Lets examine this a little more carefully. What illegal activity did the tout indulge in ?

1) He took the trouble of standing in the Queue and getting the ticket.

2) He did *not* force the ticket on you, it was entirely your decision to buy it from him.

3) He made profit by buying a good at a lower price and selling the same good at a higher price.



Isn't this exactly what "legitimate" businesses do ?

1) Get their hands dirty to provide you a service.

2) Sell that service whenever you require it.

3) Make a profit by charging you a premium for that service.



So, why is the tout a wrong-doer or a criminal ? [ Because he doesn't pay tax ? Assume the money he earns is within the tax-slab where there is complete exemption. ]

You might now argue that the Wimbeldon authorities have already fixed a price for the ticket, and we have no 'right' to change it. But wait, we are talking of a free market. Who are they to fix the price. In fact, no price can be disallowed in a free market . If prices are too high and ridiculous , rational consumers will automatically ensure that the price is brought down by decreasing the demand.



So, the tout's rebuttal to the Wimbeldon Authorities will be , " Look, you guys are free to increase price. Because you are ignorant of the PREVAILING value of that ticket , you fixed a lower price and sold it at that 'wrong' price to me . So, don't blame ME for YOUR incompetence ! "

From an economics standpoint, I don't see what is wrong with the tout's argument. Interesting. What we consider to be "illegal" is probably not so illegal after all !

My Singapore Holiday !

Exotic. Simply , 'Zimbly' ( remember Tamil is official! ) exotic.
That's how I would describe Singapore.

Our tour began upon landing at Changi on June 12th after which we headed straight to Little India - the township where our hotel was located. The drive was superb. Clean roads, beautiful cars , green trees and super sexy bikes ! Seeing Chinese people ride them reminded me of Police Story ( Jackie Chan ) ! There are some really cool models in China/Singapore ( most of them come with a front glass ) .
The city is very well planned and structured. Quite literally so ; for, we came across a truck carrying labourers and even the labourers were seated in an orderly fashion ! There were exactly 3 striaght rows with 8 people each ! :-)

Day 1 was the Night Safari trip. A lot of work has gone into simulating the real jungle experience and it is by no means wasted. You are taken on a long tour on a tram into a forest where you see wild animals on either side and very close to you . As you move along, the announcer gives you very interesting information about the animals you see and she makes it so exciting ! The quiet atmosphere and flawless rendition reminds you National Geographic ( only , this time you are inside the TV ). Great Experience.

On the side of the entrance , there is an Animal show every 1 hour called Creatures of the Night. We sit around in an open Amphitheatre and the host brings animals to the stage and makes them do interesting things. I am amazed by how they make it not only entertaining but also educational. Most importantly, they spell out a hidden message on Environment And Conservation. Like the mongoose in the show which picked up plastic bags and neatly dropped them into the waste bin !



Day 2 was the visit to Jurong Bird Park and Sentosa Island. The bird park is so big , it will probably take you two full days to see all of it. It is as exciting as the Night Safari , there are two interesting shows with birds ( Hawks , eagles and other birds of prey go wizzing above your heads !) . We went around on a mini-train and stopped midway at a place called the Lory Loft where you have a huge netted enclosure of lories. You can move around with a small cup of bird seed and feed these birds .They coolly perch on your hands - but if you try to touch them , they'll fly away !

Sentosa Island is a beautiful place. The underwater world is one of the best attractions there. You walk through a transparent glass tunnel where you see exotic fish and shark swim all around you. Other attractions are the Dolphin show ( which , surprisingly - is not very great. My parents tell me the one in San Diego is much better ) , and the Merlion . The cable car ride where you cross the sea is fantastic . The tour ends with a laser show called 'Songs of the Sea' where they use water , lights , music and fire(!) to construct an amazing visual experience lasting half-an-hour.


Day 3 was a tour of the city. Did you know that Subhash Chandra Bose formed the Indian National Army in front of the City Hall at Singapore ? The Supreme Court of Singapore is located on top of the City Hall. I must admit I was amused when the tour guide called it the 'supreme' Court - I mean, it is serves only a small city of 4 million people ! However, it is by no means taken lightly by the people there . The law is very very strict in Singapore. For example, drug trafficking invokes a mandatory death penalty. And corruption attracts rigorous imprisonment and caning on the seat of your pants ! In fact, the court is in the shape of a flying saucer. Supposed to be symbolic of a gateway to hell for the wrong-doers !
If you drive around in Singapore, you can't miss the skyscrapers. ( You could have a panoramic view if you take the special sky ride at Sentosa ). Some of them have lovely shapes - there is one which looks like a slice of cake, one which is a chocolate and one which...was meant to be a mike ( stage microphone ) but looks like a jackfruit ! ( This building is where plays/operas are held ).

Out tour came to end on Day3 and we reached Changi Airport four hours early for our 20:15 flight back to India. The airport is simply mind-blowing !! If you go to Singapore budget some time specifically to go around the airport . For those familiar with Bangalore, imagine a super-mall comprising The Forum + Garuda + Bangalore Central. Multiply the size of this mall by a factor of 20. Now , you might get something close to Changi. You get the idea.
Seriously - its incredible. After security check, you can catch a free movie or work out at the Gym. Or , you could sit around in the Lounge and watch TV. Or, you could go back and forth in the Travellator ( the 'horizontal' escalator ) :-)
Well, you begin to wonder if Changi is primarily an entertainment super-mall which , INCIDENTALLY, manages to land planes !


Ah, that brings me to the end of this travelogue. I must not forget to narrate that funny incident at the Mustafa Center ( Singapore's 24/7 shopping mall ). I was wandering around when three burly policemen came out of nowhere , gave me a handout and walked away. The handout said, " Beware of pickpockets and shop-lifters ". I felt good ( thank-you- that- was-very-kind ). I turned over the page and saw - " Shop Theft is a crime ! If caught ......." . Oops . Now, why the handout ? Was I a potential victim or the thief himself ! LOL.

The Pompous Autowallah of BengaLooru

Bangalore's Auto Rikshaw drivers never cease to annoy and irritate me. Especially the ones who park their vehicles at the auto stand near my place.

If you walk up to them and politely tell them you need to go to place A , they do either of two things : Look away from you and pretend they didn't hear you. Or, give you a nasty look ( as if I asked to be chauffeured to the neighbouring galaxy! ) and shake their heads.

Sheesh! What is wrong with these people ? Am I not paying for the service ??

Hmm, makes me wonder where this arrogance comes from. My first thought is the Demand - Supply Dynamic , there are probably way too many people who want to travel via autos.

Or, say I am an Autowallah. I probably make too much money already ! So, I don't have an ECONOMIC INCENTIVE to strain myself doing that extra trip to place A. The gain from that extra trip is at best marginal. So, why should I care ? ( Call it 'Freakonomic incentive' if you have read that amazing book )

An autowallah is a self-employed person. What can incentivise him to do more ( or better ) ? Well, if you were a Company or an Institution , you would easily answer that question. There are SO MANY things you could do : Expand your business, diversify into different products, produce more , improve quality and so on.

But what should an Auto driver do ? If there were a private agency running these autos , you can rest assured the driver's manager would stretch him, push him harder. ( Ah, we all have personal experience , don't we :D ) At least, you are assured of a commutation facility to place A. But, with a self-employed auto driver who is answerable/accountable to NOBODY, you have a very difficult problem on your hands.

Yes, probably the Government could intervene and make those meters tick slower. In fact, the Government is probably the source of all trouble ( heh! ) , why did they fix the pulse rate so high ?

I will end by making a comparison with Hyderabad where I lived for nearly two years. Most places in Hyderabad are connected by "Shared Autos". Now, shared autos are a very interesting concept. To put in software parlance, they are highly customizable :-) . Which means, if Person A is going from X to Z, and you are person B - you can get into the Auto by stopping it at some place Y ( between X and Z ) , and get down at ANY place W ( again between X and Z ). Amazing ! So, you must have guessed that - it is not 1 or 2 people travelling in these autos - they are literally bursting with people ! Commuters can just drop off where they want , and new ones get in. Yeah, very similar to a bus service. Of course, you pay only for that fraction of distance you have travelled. Oh yeah - those auto wallahs can quickly proportion the money you need to pay. All this basically implies that people get to quickly travel short distances by paying small amounts - 3 to 4 Rs. It really helps them do a lot of things in a day, travel is no longer a constraint, unlike Bangalore.

From the economics perspective, Auto Drivers in Hyderabad end up COMPETING to get customers by stopping at various points. Naturally, competition drives prices downwards. Also, they are cordial and well-behaved , after all they want you to be their guest :-)

To summarize, it is not self-employment that is the fundamental problem - but, the ECONOMIC ENVIRONMENT where self-employment is practised.