What book to read next?

I just recently finished reading Michelle Obama's "Becoming" after being immersed in the hype of the book release and after seeing virtually every woman around me reading it. I am usually not a fan of autobiographies (except Bernie Sanders' one which was amazing, and Tara Westover's "Educated" which is one of the best books I've ever read) and the first chapter confirmed my apprehension. I have no idea how authors can authentically write about their childhoods and "remember" the tiniest details when I can't even remember what I had for breakfast. The book definitely picks up after she starts her career, changes her career, meets her now-husband (don't worry, I won't spoiler who it is) and authentically discusses various topics from politics to race and gender. It's a great book and everyone should read it, but this is not what the blog post is about. Instead, I am casually trying to illustrate a few economic concepts using my hunt for the next book as an example.

Let's begin with scarcity - one of our favorite concepts. Economics is all about scarcity. In this example, I am scarce on time. In between studying, adulting (doing laundry, cooking, buying groceries - it's exhausting) and studying (yes, again) you don't get a lot of time to read. If I had all the time in the world only for reading I wouldn't make such a fuss of finding the next book. After all, if the book I choose is not that good, it's no big deal because I'll be on the next book soon enough. I'm not only constrained on reading time but going out to buy the book will also chop some time out of my day. I won't order off amazon (at least I try not to), but lucky for me there is a book shop on campus so we can ignore that constraint. Lastly, I am also constrained by my budget, books are not cheap and if it's a hardcover you can expect to pay around £20 for a new companion. Again, we will ignore this constraint, because I have a gift card (isn't life wonderful?). So, my main constraint is reading-time. Because I am scarce on time, this makes the time that I do have to read very valuable. This is an important result in economics: scare resources are more expensive (or at least they should be, in theory)! This means I want to spend my time well, so I need to find a book that is worth my time.

Now, how do I make this decision? I have some general preferences over books. I prefer to read books that are not too thick (too much commitment) and I weakly prefer books written by women over those by men. Not saying I don't read any books written by men, but if there are two books that are equally likely to be good I'll choose the one written by a woman. I don't want to read anything too heavy, but I am generally indifferent between fiction and non-fiction. Lastly, I think you could say I'm slightly risk-averse in my book choices (risk-taking is for the summer break). This means I am more willing to read a book by an author I have already read or someone I have heard of. This still leaves me with an incredibly huge pool of potential candidates. So what to do? My main strategy is to look for recommendations. This brings me to my next economic concept - information.

Information is most we talked about in my Advanced Microeconomics course so this should be a great recap for the midterm. Information in economics is the reduction in uncertainty. Uncertainty in this context means that I don't know whether a book will be good or bad. Information might help me identify whether a book is likely to be good or bad and make a better decision. I already have some information, my information set will consist of the knowledge I already have of authors that I know are great writes and those who are not. Furthermore, I can make a judgment on how likely I think it is that a book will be either good or bad.  New information can come from various sources, but the value of the information might be different. An example: Getting recommendations from the internet could be one source of information. I could look for the best reads of the year and pick a book from there. But compare this to me asking a friend.* The information my friend has to give is likely to have higher value because she knows me and has read similar books. One more component to incorporate here could be the reliability of sources in the past. Someone who has recommended a good book in the past might have more valuable recommendations**.

This was just one example, but the same thing could easily be applied to music, TV shows, movies, restaurants and so on. Economics offer structures to understand how we make our decisions and why a decision about which book to read next might be important enough to write a blog post about it (scarce time!!!). Either way, I hope you enjoyed this, but even more so, I hope that you have a good book recommendation!!!

* The combination of these two approaches is to look at recommendations by people I admire, thank you Bill Gates, thank you Barack Obama
**I wonder how you'd incorporate this in a theoretical framework.

Microcredit: exploitation or opportunity?

As a student of both politics and economics, I am often keenly aware of the difference in values and frameworks of right and wrong that exist between the two. Last year I had the opportunity to examine this in a bit more depth in the area of development. I took ‘politics of development’ as well as ‘development economics A and B’ in the hopes this would a) enrich the depths of my understanding and b) give me a more balanced account than taking either one or the other. This is not to say there is not a diversity of opinion within both politics and economics, however education of the two in my experience tends towards certain medians, with politics classes being more left leaning and economics classes more conservatively aligned. Below is a case study that illustrates the value in considering a topic from a cross disciplinary perspective.

Micro credit is a term you may or may not be familiar with. Micro credit is a development strategy formulated by a man named Muhammed Yunus; it is a concept perceived to be so impactful and empowering that Yunus and the Grameen Bank  won the Nobel peace prize in 2006 for their efforts at implementing the approach in 2006. To explain this fully, I invite you to consider a developing country context, specifically a small rural community where each individual has minimal disposable incomes, let alone assets to their name. If one such individual wants to take out a loan, whether for starting a business or for consumption purposes, they have two options (so far).

  1. Approach a formal lender. (These will be institutions such as banks)
  2. Approach an informal lender. (This could be someone in the village, an individual with money etc)

Formal institutions will always be preferable for the borrower- whilst interest rates are high they are a lot lower than informal alternatives.
So what is the problem?
Some of you may have gone through the process of getting a bank loan such as a mortgage. Often some form of collateral is needed so that if you fail to make the loan repayments, the bank can collect this collateral in lieu of the payment. In the above context of a developing country and a poor rural community, it is very unlikely that the borrower will have any acceptable collateral to promise to the bank in case they miss the repayments. Because they don’t have this, the borrower has nothing to lose - if they can’t make the repayment nothing can be taken from them. There is an incentive to choose riskier projects or try and cheat. The lender will be aware of this and, without any collateral, will refuse the loan.
So option 1 is not an option for the poor borrower. That leaves option 2. This is an undesirable option as interest rates are so high on any loan given. This is to account for all the risk (because the borrower has no collateral) that the informal lender is accepting.
So both options are unattractive or unavailable to the poor borrower. This is where microcredit comes in. The premise of microcredit is to provide some middle ground option using social collateral and peer monitoring.
Microcredit grants small loans to groups of people rather than individuals. The loans are staggered at first, to demonstrate the reliability of the group. Once this is established more loans will become available. So how can the lender afford to give lower interest rates when these are still risky borrowers? Two concepts are important to understand here.
Social Collateral-when monetary punishments are not an option, as is the case with a poor borrower, it can be more effective to take advantage of close knit communities and social sanctions that they can impose on people who do not pay back their loans. Social sanctions would include the awareness that an individual and their family are not to be trusted, making it unlikely that other members of the community will lend to this person again or work with them. This reintroduces the incentive to pay back the loan- you don’t want to be seen as untrustworthy and blocked out of business in your community. This is used in the Grameen Banks use of microcredit by making borrowers repay their loans publicly in the centre of the community so that their payment or lack thereof is witnessed and appropriate action may be taken.
Peer monitoring- this can be seen in the allocation of microcredit loans to groups rather than individual. If one group member fails to make a payment, the whole group is no longer eligible for loans. This means that other group members success and reputation is based upon each members reliability. There will be pressure placed upon each other to make the payments and if the group cares about each other, they will not want to let the group down. Furthermore, this helps microcredit institutions cut down on screening costs. You don’t have to check each person is reliable because each member of the group wants to make sure the group they are with when asking for the loan is reliable and hard working- they will only select good people for the borrowing group.
This means that microcredit can afford to offer lower interest rates and provide loans to poor people otherwise blocked from getting credit because the risks are severely reduced. Indeed in 2000 only 2% of loans were defaulted at the Grameen Bank, the first big implementor of microcredit, compared to default rates of 60-70% in informal rural credit markets. (Default= not able to pay back the loan)
From an economics perspective, this is a tremendous success, allowing people in developing countries increased opportunity to start businesses and improve their economic status (especially for women who are the principal recipients of microcredit loans) and actually providing the incentives needed for these borrowers to make the repayments without high costs of enforcement (chasing borrowers for their payment etc)

So what is the political perspective on this strategy?
First let’s consider the structural critique
“Encouraging the poor to participate in their own survival strategies by accumulating personal debt and creating small businesses displaces any sense that poverty may be structural or that the state has any responsibility for collective welfare”
This understanding considers the broader problem of the inequalities and poverty that has put these rural workers in this position of poverty in the first place. If you accept that this is the result of political structures, with poor social safety nets and a system that rewards the pursuit of profit at the expense of other people it may seem laughable to put the responsibility back onto the very people who are the victims of such a system and celebrating the fact that they need to work hard just to survive also may seem uncomfortable. This is especially pertinent because whilst yes, the interest rates are lower than other options, they are still high (30%!) and people are still putting themselves into debt.
Next let’s consider the disconnect between theory and reality
Despite theoretically appearing sound and assertions abound of the opportunities for business start ups and entrepreneurship, this may grossly underestimate the poverty that exists in targeted communities, and ignore the results. 94% of microcredit loans in South Africa are used for consumption- that is just to get by; to get food, water and basic necessities. This means that actually, these people are not making a return on their loans, placing themselves into debt for pure survival and not on a business idea to make a return. Even more misleading, when groups do use the loans for business start ups, there is a real deficit in consumer demand. Remember, these communities are poor, many can barely afford food let alone extra bits their neighbour is now trying to sell.
Jason Hickel describes this as a "socially acceptable mechanism for extracting wealth and resources from poor people".
A final point I would add here is related to the values microcredit depends upon; needing social collateral that potentially will lead to a generation of exclusion seems like a punishment for being poor rather than a punishment for not making a payment. This is particularly emphasised when microloans are being taken out for consumption.

Maybe theory doesn't always work the way it should

Basic economic concepts

Why do we write this blog? As Jocelyn mentioned in her latest post one reason is to break down the barriers between academic economics and everyone who might be interested in economics but scared away because of the jargon and the maths. But at the same time, we are rational, self-interested economist students (little economics joke) so we couldn't possibly do something just for the public's benefit. This post (and probably some of my future posts, too) will demonstrate how we can do both at the same time.

Let me explain. Just like everyone else, I am thinking (panicking) about what to do after third year and one route I am looking at is a research economist role at the Institute for Fiscal studies. They are an applied microeconomics (yes, please no more macroeconomics) institute that does economic research with a policy focus. The place sounds like an absolute dream to me so I want to do well in the applications. In the process, they will test our understanding of basic economic principles. So, today I will revisit some of these "basic" principles (this is the self-interest part). At the same time, I think it could be useful to explain some of the jargon and work through some of the basic theory economists use to explain the world. So, let's start.

Courtesy of Freeeconhelp.com I will discuss some of what they identify as the fundamental principles of economics.

The economist's best friend is the rational agent. But who is she*? The idea of rationality is based on preferences. Preferences must be complete and transitive (hello jargon!) to be rational. Completeness means that if I look at all the fruit at Lidl I have a preference over which fruit I prefer to the other, e.g. apples are better than oranges, and oranges are better than bananas, and so on. Completeness just means that I have an opinion on all of this. This could also mean that I am indifferent between apples and pears, for example, it just means that given the choice between an apple and a pear I'm happy to have either. Transitivity means that my choices are logical. For example, if I like apples better than oranges, and oranges are better than bananas, then that implies that I also like apples better than bananas. If both of these things hold then my preferences are considered rational. This concept can then be applied to larger scales, from what type of food I buy, to how I behave in day to day life. One thing that is absolutely crucial to understand is that the rational agent is just a theory. There are many, many cases where people don't behave perfectly rational and yes economists do know this. However, there are different degrees to which economists are willing to digress from this theory. Assuming people are rational agents enables economists to scale up this behavior and then make predictions about how people will behave. But what are these predictions worth if people don't even behave this way? But if we can't make any predicitons it makes it harder to say which programs governments should spend their money on or how high taxes on certain goods should be. The rational agent is definitely a balancing act. The main takeaway should be that economists have an "ideal" model of how people behave (the rational agent) which simplifies their analysis but that this model is flawed and these flaws should be taken into account when making predictions.

Costs and Opportunity Costs
This is actually a fun one. We all know normal costs, the price tag on that Lidl banana or the concert tickets we've been waiting to buy forever. These costs are pretty straight forward and are called "monetary" (because of money) costs. But economists also look at different types of costs - opportunity costs. The opportunity cost is the cost of the options forgone. For example, if I skip work to go to a concert, not only do I have to pay for the concert tickets, there is also the indirect cost of my forgone wages (assuming I am paid by the hour). Or, if I go on a night out with my friends instead of studying, I incur the costs of the drinks but there is also the cost of the lost studying time (although this is harder to measure - this could be measured in lost marks?). That's the basic concept of opportunity cost. A quick side note on costs here: There are many costs that are neither direct monetary costs nor can they straight-up opportunity costs. The most prominent example of this are environmental costs. What is the cost of building a parking lot on a green space? This doesn't have a straight price tag. Environmental valuation tries to approximate these costs by looking at the benefits and happiness people derived from going to the park or the benefit of the air quality provided from the green space. This is a good example where economic theory falls short and it's important to think beyond economic models to have a wholesome assessment of the situation.

Marginal Analysis
This plays a very important role in economics. Economists usually analyze things at the margin. What does that mean? The straight forward answer is that it's the next possible unit. So marginal utility (read: happiness) would mean how much happier I'd be from eating one more brownie. Marginal cost would be how much more it costs a firm to produce one more unit. For costs, the marginal costs could be quite low. For example, if you start a pencil-making business, in the beginning, you have to spend quite a bit of money to buy machines and rent a place (assume you're the only worker there) for example. But once all the equipment is bought it doesn't cost you anything to produce the next pencil. So the marginal cost from producing the fifth pencil after the first four is basically zero. This simplification again can help economists make inferences over people's behavior.

*Footnote: Yes, my rational agent is a she. But whenever I have read about the rational agent it was pretty much always a he. Why? Because the majority (pretty much all) of economists who came up with these theories were men, so all their examples are men. Recently, people have called attention to the fact that most examples in economics textbooks are men and that maybe we should change that. The result? My math econ lecturer priding himself on being politically incorrect because he used a male name in his example. Congrats K. you absolutely do not get the point.

Economics and its love affair with jargon

The above clip is an excerpt from a Michael Moore documentary poking satirical fun out of the lack of clarity so prevalent within economics dialogue. Whilst I might have found this slightly humorous when I watched the documentary during college (ages 16-18), after my entry into the world of academic economics with no prior experience, it hit home a bit harder. Since embarking on this journey, I often feel as though I have spent longer trying to decode and grapple with the definitions of economics terms and phrasing than I have needed to spend on actually understanding the underlying concepts. All of this is from the perspective of a student who has had access to good quality education and academic support throughout her 20 years of living as well as being a student who pretty consistently performs well and indulges in the use of excessively technical phrasing (to my detriment) from time to time. I mean, maybe it's just a Monday evening but I, an economics student, feel tired just reading stuff like this:
Late on Wednesday night, the governing council of the ECB decided that it would no longer accept Greek sovereign debt as collateral for its loans. Greece’s junk-rated bonds had been the subject of a “waiver”, where the central bank accepted sovereign and bank debt as security in return for cheap ECB funding.
According to research from the Post Crash Economics society at Manchester University, 60% of the 1500 students asked were unable to choose the correct answer for defining GDP whilst almost half could not identify what the budget deficit was. These terms are commonly used in media reporting, so if these definitions are ill-defined in the public eye, passages like the excerpt above are unlikely to feel particularly enlightening. Michael Moore makes the critique that the confusion of such terminology is intentional, meant to make you switch off and lose interest so you do not really know what is going on, and certainly when financial and economic terms are explained and illustrated in the format used by films such as the Big Short, it is scary to see how little we know and how angry it should make us sometimes.
If critique is limited to the upper echelons of discussion, doesn't it all feel a bit shady and elitist? If we want more people to engage with subjects like economics, the first step should be to reduce the barriers to accessibility. Maybe this way more people could become interested in economics and not yawn involuntarily when they see the word inflation in an article or zone out and nod along when someone grumbles about fiscal policy. We need to democratise economics! This is part of what we are trying to do in this blog, making economics seem doable, exciting and applicable to so much more than financial trends or Brexit predictions (but also these things). Whilst maybe part of the motivation behind this blog post is me tired of struggling through another economic concept, I think the point remains valid, and there is a lot more to gain than my individual time spent on studying (although I wouldn't be mad about that either).