Monday, October 13, 2008

Human Economics in Bhutan

Listening to NPR yesterday, I heard a very interesting short segment on happiness derived from wealth; something I take personal opinion to as being relatively unrelated. (Read: As most commodities, wealth seems to have diminishing marginal returns. That is, as wealth increases, the satisfaction derived from each additional unit tends to decrease. It becomes harder to become marginally happier as we get richer. Make sense? Of course it does. Unfortunately, most standard measurements of implicit happiness in countries is GDP-- a country's income. It is assumed that as standards of living increase, and people become marginally more well-off financially, their happiness will increase continually as well. This is not true, logically as well as scientifically.

Perhaps if someone has very little wealth, an increase in income will decrease the burden of taking care of a family, paying bills, paying rent or a mortgage, whatever. This will be very noticeable when this person's income is increasing from very little to begin with. After a certain point, though, it will have little or no effect on happiness. Human beings are social creatures, and need human interaction to lead content and satisfied lives. Money has a little to do with happiness, but is vastly overestimated. The country Bhutan started a Gross International Happiness Program, based on Buddhist principles, in which GDP is not a fair measure of well-being of a country's citizens. Bhutan has attempted to isolate itself from the effects of globalization and international trade. Over recent years, this has proved to be somewhat impossible and perhaps as a result, the Gross Happiness Index has fallen.

Interesting concept, don't you think?

"Increases in income are matched by increases in aspirations for income. And the net effect is no change in happiness."-Prof. Richard Easterlin; happiness economist.

Why Bono is doing more harm than good for Africa

For somewhat ridiculous reasons, I got to thinking a lot about international aid-- in particular the celebrity endorsement of completely ineffective policies in an effort to "help" Africa. For the purposes of my own argument (and because his music is awful) I single out Bono. This is fair, in my opinion, to counter the absurd amounts of praise this man receives for promoting the mass consumption of consumer goods like iPods, increasing the sale of his records by painting himself as a hero, and most importantly, diverting very scarce amounts of money, knowledge, and willing hands away from significant problems in order to focus on what is most popular.

The very notion that the West is the only way Africa may be saved is underhandedly racist and insulting. Though we may like to believe we have come a long way from believing colonization was simply "saving" uncivilized Africans, we have truly only shifted our haughtiness to a new line of rhetoric- Africa is in ruin and we must sweep in and save the continent as only we can. There is no stastical link between throwing money at nations and economic growth or disease control. In fact, the policies that have been used have worked so horribly, they have arguably contributed to a negative growth rate, perpetuation of corrupt institutions, and growth of disease. Funny, then, that the IMF, the World Bank, and the alphabet soup of aid organizations continues in this direction. You may say we don't know-- and you would be correct. There are little efforts to ask those affected by these policies if the problem to be addressed is getting better. There is zero accountability.

The far-reaching, utopian ideas spout out by Jeffrey Sachs and Bono are quite attractive. Unfortunately, without accountability and feedback (paraphrasing from Easterly's book) we have no way to see what needs to be done and what is most effective. It is interesting that people have tended to gravitate towards speaking out against worldwide calamities only when they become severe and difficult to address. The outbreak of AIDS, for instance, was well predicted by the international community as early as the 1980s. Where were prevention programs, why wasn't Bono inspiring others to support sex education in Africa? Instead, it was ignored, implying that, although the problem was known and preventable, we decided to let it happen anyways. Perhaps there is more implied racism in the Western aid's actions than its self-proclaimed purpose. Revealed preference theory in economics aligns perfectly with this idea. Here is a concise definition of this very simplistic idea from"This is the notion that what you want is revealed by what you do, not by what you say. Actions speak louder than words."

Anyways, the most important non-contribution to relief efforts has been diverting resources away from what is most important. If you truly care about who you are trying to help, despite their nationality, cries from celebrities, and your own past failures-- you will place what you have in what will help the most amount of people in the quickest amount of time. When we prolong the life of an AIDS victim one more year, we divert at least $1500 away from other problems. Vaccines to prevent much wider-spread diseases (malaria, diarrhea, etc.) sometimes cost pennies and can save thousands of lives at the cost of prolonging someone's life an additional year. These diseases kill 2.5 times more people than AIDS, but cost much less to prevent and to treat. It seems cruel to say that we are effectually killing people by giving money instead to people already infected with AIDS, but from a simple tradeoff approach, it is true.

Africa's poor does not need our pity, does not need our aid dollars spent on what "we" think is best for them. My dislike for Bono is simply due to his extremely loud presence and the focus of his message to be increasing the amount of aid poured into countries, rather than its effectiveness. It is easy to say that you are concerned with the world's poor and suffering. Most people stop at that, and are not concerned with whether or not our interference is helping those we are supposedly intending to help. As long as we are doing something, right? Anything? The West is, again, effectually hurting Africa much more than it is helping; while it can sleep at night thinking it is the hero, the savior, of those it is convinced cannot help themselves. History repeats itself in interesting ways, and it is even more fascinating why it is never realized.

If you're as interested as I in this topic, I highly recommend William Easterly's The Elusive Quest for Growth and The White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good; as well as Paul Collier's Bottom Billion.

Paul Krugman wins Nobel Prize!

In case you're interested (as I certainly am), Paul Krugman-- professor at Princeton University, op-ed writer for the New York Times, and a well-respected member of the economics community, won the Nobel Prize in economics. Quite deservably, if you ask me!
From the NY Times, today:

Honoring Paul Krugman
Edward L. Glaeser
Edward L. Glaeser is an economist at Harvard.

Rarely, if ever, has an economics Nobel laureate been as widely known before receiving the prize than Paul Krugman. His New York Times columns have been read by millions; he has argued economic policy eloquently in a large number of popular books. Yet these pursuits had little to do with the decision of the Nobel committee. They gave this prize to honor a truly seminal figure in economic trade and geography. Mr. Krugman’s fame as a public intellectual should not lead anyone to think that they understand his contributions to economic research just because they regularly read his columns.
The Nobel Prize citation highlights two distinct but connected contributions: Mr. Krugman’s development of the “new trade theory” and his work on the “new economic geography.” International trade has a long history in economics, and for the bulk of the field’s history, patterns of trade have been explained by factor endowments and comparative advantage. Why does England export wool and Portugal export wine? The cold winters of Yorkshire produce really fluffy sheep and the banks of the Douro produce splendid grapes. Yet comparative advantage does little to explain much of modern international trade, especially not trade within industries.
Mr. Krugman published two seminal papers in 1979 and 1980 that made sense of the fact that Toyota sells cars in Germany and Mercedes-Benz sells cars in Japan. Mr. Krugman started with a variant of Edward Chamberlain’s model of monopolistic competition. In this model, every firm sells a slightly different good — an Infiniti is not exactly the same thing as a BMW. There are fixed costs of production, which means that producers get more efficient as they sell more. Finally, consumers like variety, so that even if they live in the Land of the Rising Sun, with its abundant well-made cars, they still occasionally want something a little more Teutonic.
These ingredients came together and provided a framework than can match the world’s trade patterns better than the 19th-century framework of David Ricardo, or the mid-20th-century models of Eli Heckscher, Bertil Ohlin and Paul Samuelson. The fact that two out of three of those 20th-century giants are themselves Swedes should remind us of how seriously the Swedes take their trade theory, and what a big deal it is for them to admit Mr. Krugman to the pantheon.
Mr. Krugman’s trade models became the standard in the economics profession both because they fit the world a bit better and because they were masterpieces of mathematical modeling. His models’ combination of realism, elegance and tractability meant that they could provide the underpinnings for thousands of subsequent papers on trade, economic growth, political economy and especially economic geography.
Mr. Krugman’s 1991 Journal of Political Economy paper, “Increasing Returns and Economic Geography,” is the first article that provides a clear, internally consistent mathematically rigorous framework for thinking simultaneously about trade and the location of people and firms across space. It is one of only two models that I insist that Harvard’s Ph.D. students in urban economics be able to regurgitate, equation by equation.
The model begins with the same basic elements as the new trade theory: monopolistic competition, scale economics, love of variety. To these elements Mr. Krugman adds free migration of workers across space and industries. Because workers are able to move, real wages equalize across space. People in New York City may be paid more, but they give some of that back in the form of higher housing prices. The paper provides economists with a clear framework that can make sense of where we all live. Firms and workers are pulled toward the same location to reduce transportation costs of shipping goods. For example, the garment industry located in New York City, in part because of the vast trade in textiles that was already moving through the city and because of the large number of customers already living in America’s largest city.
Of course, we don’t all live in the same city. A good model of geography needs both a centripetal and a centrifugal force. In Mr. Krugman’s model, populations are pulled apart by the desire to be close to natural inputs, like land or coal mines. Cyrus McCormick moved his reaper business from Virginia to Chicago to be closer to his rural customers in the Midwest. Later models incorporated traffic congestion and other forces that limit the growth of a single large urban area. Mr. Krugman’s model proved to quite adaptable; it has received thousands of citations.
In his public role, Paul Krugman is often a polarizing figure, loved by millions but also intensely disliked by his political opponents. I still chuckle over an old New Yorker cartoon with one plutocrat saying to another that he gets some satisfaction from the fact that his vote will cancel out the vote of Paul Krugman. Within the less divided world of the academy, Mr. Krugman’s economic research has generated plenty of light, but far less heat. His papers are universally acknowledged to be immense contributions that helped to create two distinct fields. His Nobel Prize is extremely well deserved and not unexpected. I, for one, had bet on him in Harvard’s Nobel Prize winner pool.