Economics, Literature and Scepticism

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I am a PhD student in Economics. I am originally from South Africa and plan to return there after my PhD. I completed my M. Comm in Economics and my MA In Creative Writing (Poetry) at the University of Cape Town, where I worked as a lecturer before starting my PhD.

Saturday, August 23, 2008

Links and comments

Posted by Simon Halliday | Saturday, August 23, 2008 | Category: | 0 comments

I really want to recommend Mark Thoma's commentary on the economic policy of Obama with some of his own ideas and caveats.
Here's a link to the Leonhardt article in the NYT on Obama's policy (to which Thoma refers), from the NYT Magazine.
Please also take a look at the article that he recommends in another recent post referring to an article by Olivier Blanchard on 'The State of Macro'.
I'd also recommend this recent article from Jeffrey Sachs on the impact of the internet and mobile phones on growht and innovation in the developing world. I think that he is somewhat optimistic as usual, but it is still a good article.
Esther Duflo comments on 'too many boys' in China and the effects that the phenomenon of gender imbalance seems to be having on violence and crime in China. Interesting insights as always.
Glewwe, Kremer & Moulin provide another interesting VOX-EU article on textbooks and Kenya and how the textbooks seem to have had almost no effect on educational outcomes. Textbooks assist the best students, but do not assist those students with lower initial achievement.

Tuesday, August 19, 2008


Posted by Simon Halliday | Tuesday, August 19, 2008 | Category: | 0 comments

Ok, so staying with Mary & Greg, my wife's Aunt and Uncle, has allowed me access to a number of fine books. One theme that runs through all of these books is that they contain nothing, formally, that has anything to do with economics (though I cannot help but think economically in the face of some of the ideas, but more on that another time).
A Little History of the World
E.H. Gombrich's A Little History of The World is meant to be an advanced child's or early teen's book of the history of the world. It has short chapters and covers everything from the rise and fall of Egypt, Greece, Babylon and Rome, to the development of the Arabian empires, to basic Chinese and Eastern History, to the modern age. It is written in such a way as to make it attractive to kids and offers you all kinds of interesting insights - I have kept on coming across several little things about parts of history I had not known. Gombrich is better known as one of the most famous art historians of the C20th (mainly for the publication of his Story of Art), this however was the first book her wrote and published in 1935 immediately after finishing his PhD. It was published in German and was only recently translated by him into English and translated almost entirely by him, however as he died during the translation process he never saw the publication into English. His research assistant completed the job. The only thing for me that was occasionally annoying when reading this was that he was obviously biased positively toward a Judeo-Christian ideology in terms of a 'religious position'. Oxford Book of Essays
edited by John Gross is a superb collection of essays from David Hume to John Stuart Mill to Gore Vidal to John Updike. Although I have only managed to read a few of the essays while I have been here I have thoroughly enjoyed them and can recommend the book as a whole. I would like to purchase the more recent version (they own the 1998 edition). Particularly, I enjoyed John Stuart Mill's essay 'Bentham and Coleridge' from his book Coleridge, as well as David Hume's essay 'On The Dignity or Meanness of Human Nature', Bertrand Russell's 'On Being Modern-Minded' was also fantastic. I hope I get to dip in and out of this book whenever I return to visit our relatives here in Stratford -on-Avon.
Also while here, I made the great find of Strunk & White's The Elements of Style (3rd edition) in the 2nd hand bookstore. I was planning to purchase the most recent edition off of Amazon while here, but luckily found it at the Shakespeare Hospice Bookstore, along with a similarly useful old edition of Usage and Abusage. Strunk & White's is a classic text to assist in understanding the basic 'elements of style'. I read through it quickly just to see what all the fuss was about. As commentators have said, it is wittily written and incredibly informative. I plan to pay a bit more attention to it again upon my return to Siena and see if I can put it into practice on my blog and in papers. Oh... the perils and joys of editing.

The Art of the NovelAnother interesting 2nd hand purchase was Milan Kundera's The Art of The Novel. Though I have read nowhere near all of the novels to which he refers in the book (in fact I feel quite ashamed of my lack when seeing the lists of titles that he references) I still feel I have gained something having read the book (actually I have a little bit still to go). I enjoyed Kundera's discussions of Kafka and other novelists, while finding that occasionally he just doddles on a bit with his own theorizing. It also gets a bit po-mo for me once in a while, which is probably to be expected. He draws a distinct line between literature and philosophy, which I think is also appropriate. He challenges people to find 'coherent philosophies' in the writings of some of the modern age's 'great novelists' (Kafka, Joyce, Balzac, Flaubert, &c) and argues that it cannot be done without clutching at straws. Repeatedly he asserts that authoritarian or totalitarian governments and novels are irreconcilable - they are based on mutually exclusive philosophies. The novel requires 'truths' whereas totalitarianism requires one 'truth' (the government's or ruler's 'truth'). This is, again, a relevant comment and one with which I can sympathise. Nevertheless, I hesitate to use the word truth in such a willy-nilly manner, similarly the word 'truths'. All that said and done, I think that the book is definitely a worthwhile read, especially for those of you interested in modern literature and in interpretations of what the novel is or could be.

Anyway, more books another time. Terry Pratchett's Hogfather comprises my current fiction reading, along with some random Sci-Fi (Heinlein and soon Niven I think).

Friday, August 15, 2008

Erratic Blogging

Posted by Simon Halliday | Friday, August 15, 2008 | Category: | 0 comments

Ladies and Gents,
I am currently away from home seeing family in the UK, aunts, uncles, cousins and cousins' children will be taking up much of my time. However, I will be attempting to blog when I can on papers that I manage to read (somehow), or newspaper articles that surprise me, or the extent conversations with my wife's cousin (a doctor of nuclear physics at Warwick, his wife is similarly employed at Oxford - we always have fantastic conversations on Darwin, skepticism and atheism). I also promise to update you on the new project initiated by Michael Meadon of Ionian Enchantment to start a South African Skeptic Bloggers Carnival - currently the first round is planned for the end of this month (28 August) and I hope to have completed a sufficiently interesting post for the carnival while running around with family. Watch this space, but not too avidly over the next two weeks.

Tuesday, August 12, 2008

South African Science Bloggers

Posted by Simon Halliday | Tuesday, August 12, 2008 | Category: | 0 comments

My friend, graduate student in cognitive science and fellow blogger, Michael Meadon over at Ionian Enchantment is calling out to all South African Science Bloggers. So, if you are a South African Science Blogger (where science does include social sciences, I am being 'listed' as an 'economist') then please click on this link and see his post, send him an email and let him know. I am all in favour of a blog carnival by South Africans for South Africans (and anyone else out there interested), as well as a blog listing of SA scientists and skeptics who are out there doing their thing. More interaction, means more sharing of work, means better work. Good times.


Posted by Simon Halliday | | Category: | 3 comments

Here's a quick summary of books that I have been reading recently, both fiction and non-fiction.

Non-Fiction Hayek's The Road to Serfdom is Hayek's major work criticising the basis of socialist 'planning' as capable of maintaining individual liberty. Specifically, as planning becomes more and more prevalent in a society, the respect of individual liberties is likely to decrease and society will probably tend towards Totalitarianism. The book has assisted me in clarifying several of my thoughts on liberty and freedom, it's also helped me to understand the nuances of socialism which I had not adequately confronted previously. I plan to read more of Hayek's work, along with trying to do some more reading into its basis in thinkers on individualism, liberty and so forth. Noting which, I am particularly interested in reading James Galbraith's new book, The Predator State in which he purportedly argues that government planning will be required to combat the predatory planning that is currently pervasive amongst corporations.

After Hayek, I began Douglas North's Understanding The Process of Economic Change I thought this was a fantastic book, which makes one of the first attempts to discuss the necessary grounding of economics in more proximal mechanisms of human beliefs, neuroscience and cognitive science. Though the cognitive science on which he draws could be contested ground (he preferred the connectionist style models of Clarke and co. to more nativist models), the theoretical idea of grounding economics in cognitive science and neuroscience is, I believe, the way forward. He also allies his cause with history, anthropology, psychology and sociology arguing that multidisciplinary work will be the future for better behavioural models. He argues that we live in a non-ergodic, path dependent (i.e. historically contingent) world in which institutions, culture and all sorts of other things are manifested in our beliefs and actions in the world. He argues further for grounding economics in evolutionary theory and biology, discussing the biological models of kin altruism and genetic selection and how for most of human history we have engaged in personal exchange, whereas the past few hundred years and contemporary society requires us to engage primarily in impersonal exchange which grates against our biological heritage (as far as I know this is also taken up in a recent book of Vernon Smith's). He contrasts experiences of institutions in the US versus South America, he makes a case study of the USSR and establishes several guidelines that future research should take consideration of including non-ergodicity, institutions, culture, transaction cost economics and others. I found this to be a profoundly enjoyable and easy to read economics book. Thanks gain to Kait who gave this to me as a birthday gift.

Even though I spend most of my time reading academically inclined articles and books, I attempt still to maintain some connection with fiction. Apart from (what I call) "crappy fantasy" to take my mind of things sometimes I also attempt to read other 'wahks of fickshin' (this phrase must be said with a poncy accent).

The Crossing (Border Trilogy) (paperback)
The first of recent books was Cormac McCarthy's The Crossing. This book is stark, beautiful and mournful. I know that mournful isn't what many people look for when they are searching for a novel, but McCarthy's writing is so consistently beautiful that I cannot help but recommend this book. Yes, it is tragic, something to which McCarthy tends, but the tale at the centre of the story is something which has great allure - the idea of making a 'crossing' definitively establishing your independence and returning to a changed world then repeating the same cycles in attempts to understand yourself. The urge to move into and out of a world in which your language is spoken and another in which it is not: your tongue loses itself and gains a sense of the foreignness and you are changed. A process in which you find yourself crossing back and forth between that which is familiar and close and that which is foreign and full of allure. None of what I have written does any justice to the poetry of the book, and, upon reflection, I could read the book again and probably will in the future. It is the fourth book of McCarthy's that I have read and all of them are awfully good. Soon I will be reading Cities of the Plain to round up the Border Trilogy. I would like to try to find Blood Meridian while I am in London.

Jonathan Safran Foer
's Extremely Loud and Incredibly Close is a brilliant work of fiction, it is, moreover, of a completely different style to McCarthy which is why I think reading it when I did made it even more fantastic (I think I have an internal theory that reading certain books at certain times makes it easier to enjoy them and/or appreciate them). The narrative revolves around the sojourn of an incredibly talented 9-year-old boy as he makes a track around New York City where he lives. I don't want to attempt to classify this novel as it is quite experimental, containing photographs, changes in perspective of the different characters and various other devices. One thing I would recommend to anyone reading it is: don't read the blurb - it is poorly written and gives away much of the story, as do several reviews. Bastards I tell you! Just read the book and tell me what you think. I am looking forward to reading Safran Foer's other books including Everything is Illuminated.

Up Next? Several books... I am planning to tackle Glenn Loury's The Anatomy of Racial Inequality which I have begun, but I got caught up in my essay on Equality of Opportunity so I ditched it for a while. It is sitting on my table calling to me, along with some papers I intend to read. Oh well... I'll update you all soon enough.


Posted by Simon Halliday | | Category: | 0 comments

Friedman - Flush With Energy
Dubner (Freakonomics) - Today's China
Levitt (Freakonomics) - Coase in Action
Leib (Freakonomics) - Friendship and the Law
QPQ - Gevisser & Feinstein
JB Rosser - Who are the Ossetians?
NYT - Energy Fictions

And one of the videos from Milton Friedman's 'Free To Choose' series in 1990 - I just watched the debate in the last 15 minutes - a little tangle between Milton Friedman, David Brooks and James Galbraith.
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Friday, August 08, 2008

'Government must do something'

Posted by Simon Halliday | Friday, August 08, 2008 | Category: | 2 comments

COSATU marches struck Cape Town, Johannesburg and Durban this week, the motivation for these protests was the 'rising high food prices and electricity rates'. See articles from the Sowetan, The Times and The Guardian.

Demands by the unions include:
  1. Government investment in infrastructure
  2. Government subsidies for essential commodities
  3. Higher wages for workers
  4. The resignation of ministers if workers lose their jobs
I think that the first is a valid appeal and one that would be supported by most South Africans. I don't believe however that most of the people who were striking were actually using that as a motivation for the strike. Maybe I'm just a bit cynical about strikers' self-interest. So, point 1 clear and we understand that everyone in SA, if not globally, thinks that's probably a good idea.

Cash Transfer ProjectsNow consider 2, 3 and 4. Let's look at 2 first: 'government needs to subsidise commodities for workers'. I would like to see a detailed plan as to how COSATU wants this to work. Subsidies, or let's call them transfers, either in the form of cash or vouchers to workers is probably not a bad idea. However, there is strong evidence that cash transfers have better results when they a) are conditional, and b) go to females in the household rather than males (there seems to be a pattern of increased spending on alcohol and tobacco for transfers to male household heads). Hence, if workers want government to be paternalistic, how paternalistic do they want government to be? Moreover, many conditional cash grants go to the poorest of the poor, not those people with jobs. Are COSATU members going to be happy if they see their unemployed, yet poorer, neighbour get a cash/voucher transfer from government, or do they, the employed individual (you need to be employed to be a member of COSATU), want money for themselves and not the unemployed poor? Notwithstanding these nuances, we also have the problem of where the money comes from... Do we tax businesses? If so, do we expect these businesses to maintain their current levels of employment while being taxed higher than previously? If workers lose their jobs from this application of a 'demand' should ministers lose their jobs? Do we expect businesses, facing a higher corporate tax, to want to come and invest in South Africa when there are demands for higher worker wages (3) and therefore higher labour costs too?

Which brings us duly on to 3. Similar to my point for 2 above on costs, who is meant to pay for the higher wages? Let's assume that you want to have increased wages for most of the 2 million members of COSATU, but the problem is that higher wages won't only be for them, but for members of other unions too. Ok, so many millions of workers want higher wages. If we use classic supply-demand, then a higher wage would imply a lower total number of workers employed. Yes, this is somewhat simplistic.

But the simplicity is still useful. Let's take a look at 3 scenarios, which could be implemented independently or together:Hillbrow tower, Johannesburg
  1. businesses have higher wage bill and fire workers
  2. businesses have higher wage bill; take a hit to profit and keep on some workers
  3. businesses have higher wage bill: increase prices and keep on some workers, transferring the costs of higher wages to the consumer
Moreover, the firm could do 2 in the short run, but implement 3 in the longer run. What does this mean? Let's say prices of firms occur on average, this acts as a driver for inflation and inflationary expectations, i.e. there will be higher prices on average. What's that you say, "higher prices"? Let's strike!

Alrighty then... So people could lose jobs from the application of either of, or both 2 and 3. What happens then is that (some) confused unionists (could) say, "Ahah! People lost jobs! The ministers must GO! Phantsi ministers! Phantsi!" This would be confusing the issue a bit. Just a bit... those ministers who implemented the policies that the unions wanted having their jobs demanded by those same unions for the consequences that could be directly seen as consequences of the application of policies demanded by the unions. Sadly, this is something that I believe could occur in South Africa in the current climate of mass action and disregard for how economies work.

Anyway, I couldn't find any documents on the COSATU website relating to what they are demanding, nor could I find a copy of Vavi's speech. The most recent speech on the website is from June - not particularly helpful.

Now let me be clear about my position on unions. I support their existence. I think that there are many situations in which workers require protection from firms, specifically when it comes to working conditions, wage increases in line with inflation, firing disputes and such. Workers require some form of representation. I am probably of a similar opinion as Mark Thoma on this one - unions are flawed, so are firms, but workers need something to balance the power of firms.

However, I do not believe that the current action in South Africa is in any way cognizant of the dynamics in the current world economy. Higher fuel and food prices are being driven by factors outside the locus of control of the South African government. The ANC government cannot do anything about fuel and food prices that will not, in all likelihood, have unexpected consequences.

food-crisis-2.jpgWhere, therefore, can they legitimately intervene? They can improve their investment in energy in order to have decreases in energy costs in the long run. This is not going to happen overnight. They could investigate improved social welfare and conditional cash grant/voucher systems. They could look at policies to increase employment generally. This does not mean that a family in a township is going to be able to better afford its meals over the next year. That requires other interventions that are more nuanced and require greater consideration than what COSATU proposes. I really wish that they and their members understood this. COSATU desperately needs to educate its members on the basics of economics. I rarely see evidence of this all that I see instead is evidence of communist rhetoric and arguments for government planning (see Vavi's speeches on this for his opinions on the 'barbarity of capitalism'). Our union movement could be better.

My last point is that I did not consider transfers of government spending within the budget from some projects to others. This is obviously a possible source of funding for projects such as conditional cash grants. Moreover, having more efficient revenue services can allow for increased tax revenues from businesses and from individuals which provides for more funds to implement these kinds of projects. These are considerations that could be looked at, but are not, I believe in the current ambit of what was being demanded by COSATU.

Thursday, August 07, 2008


Posted by Simon Halliday | Thursday, August 07, 2008 | Category: | 0 comments

Dani Rodrik - Don't Cry for Doha
Brad De Long (Project Syndicate Op-Ed) - On The Knife Edge
Robert Reich - Democratic Capitalism vs. Authoritarian Capitalism
Joseph Stiglitz - Turn Left for Growth
Justin Wolfers - Happiness Inequality I, II and III
Ian Ayres - Obama and Me
Fritz Foley (Vox EU) - Welfare Payments and Crime (Really interesting and intuitive)
The Age - Musical Key To Unlocking Teenage Wasteland

And this fantastic campaign ad for Paris Hilton's presidential campaign - her speech, contra-McCain on Energy Policy.

See more funny videos at Funny or Die

Wednesday, August 06, 2008

Giving and Taking

Posted by Simon Halliday | Wednesday, August 06, 2008 | Category: , , | 1 comments Are economic experiments representative of underlying sentiments, or social preferences? This was the topic of a recent series of posts I did on articles by John List two of which were in collaboration with Steven Levitt (you can find them here, here and here). One of the main papers to which List referred was a paper by Nicholas Bardsley, then a working paper, and recently published in Experimental Economics. So that's what I'm reviewing today: Nicholas Bardsley's 'Dictator Game Giving: altruism or artefact'.

Bardsley's main thesis is that altruistic giving, and by extension much of social preference theory, are artefacts of the way in which the dictator game is traditionally constructed: the 'proposer' gets some sum of money, they choose to give some of it to their partner, the 'responder'. The giving act can either be one to one in money terms, or it can be multiplied by some factor (generally two). Hence 'giving' $1 means that the 'responder' receives $2. But, if social preference theory predicts that people should give why doesn't this occur more regularly in everyday life. As Bardsley points out:

A common concern is that people could always make anonymous donations to random strangers in everyday life, for example by mailing cash to persons sampled from the telephone directory, but few if any choose to do so. Transfers are made instead to family members, specific organisations or face-to-face to people requesting money. (123)
His analysis therefore is based on the fact that our lives involve interactions with many different individuals, some of whom we interact regularly and some we shall never meet again. What would happen, therefore, if we introduce an option that allows us to 'take' resources from others into the dictator game?

By standard theory of social preferences (inequity aversion, altruism, reciprocity), it would be argued that individuals would 'give' some positive amount to the other individual, because the benefits to the other enter into our own utility functions. Grossly simplified, we care about other people's material interests. If social preference theory is accurate, Bardsley reflects, then introducing taking should not affect giving behaviour. He argues that allowing taking can assist us in identifying our theory more accurately. Hence, in these experimental variations, as the proposer not only do I have the option to give money to the responder, but I can take money away from them at some rate - Bardsley proposes the inverse of the giving rate (i.e. 1 to 1 or 1/2 to 1).

The results of the experiments are fairly stark: when 'taking' is introduced into the action set, the number of individuals who choose to give drops dramatically. This is the case for all the constructions of the game in which the taking treatment is applied. I'll leave it to you to read the paper for specific nuances of this.

What does this mean? Is dictator game giving simply a result of say, a "Hawthorne Effect" (response to experimental demand characteristics): individuals give when giving is an option and take when taking is an option to be "good experimental subjects". Alternatively, is giving subject to a "range effect" where taking $1 could be seen as kind when you have the option to take $2 (this is still consistent with Rabin's reciprocity models). A third option includes stochastic choice models, which he duly dismisses. Bardsley believes that either Hawthorne effects, or range effects are predominantly 'to blame' and proposes more research in these areas.

Thus, for Bardsley,
[T]he results confirm that dictator game giving provides no evidence of context-free pro-social behaviour or, therefore, orthodox social preferences. (130)
Bardsley's attack is thus routed in the claim that social preferences, if existent, must be everywhere applied, i.e. if we have deep-seated inequity aversion then that should be our main influence when making choices. My interpretation is that he has misunderstood the nuances of social preferences - do 'context-free' preferences of any sort exist? In my reading, the idea is that social preferences can be looked at as 'general rules' of behaviour that can, in fact, be undermined by all kinds of things. For example, when offered enough money for themselves, people don't care as much about inequality. Incentives can alter the 'general rule'. The argument for this, as proposed in say, Bowles's recent paper (on which I blogged here) is that several factors can activate different underlying motivations. When we allow individuals to 'take' we 'frame' the problem differently. I believe strongly that introducing new actions changes the ways in which we understand problems. Actions alter the state in which we make choices.

However, my defence is also problematic. Basically, I have said that theories of social preferences are nigh on unfalsifiable: certain frames will highlight certain actions and social preferences can be activated or deactivated depending on the frame. The inclusion of certain actions in the action set acts as a frame and therefore we cannot tell whether social preferences exist (in general) or whether individuals are rational altruists (in general). I can't really think of a way to get around this in terms of the current research. Nevertheless, I think that this idea of framing is distinct from the idea of the Hawthorne effect that Bardsley identifies and needs to be kept in mind regardless - research must be dedicated to differentiating the two and trying to get our experimental results to be robust to these effects. Moreover, experimental economists and social psychologists should definitely dedicate a greater amount of research to range effects and to the ways in which nuanced ranges can affect experimental outcomes.

[On this last point, Dan Ariely has an entertaining Authors@Google talk where he briefly discusses range effect experiments on 'incidence of flossing'.]

Bardsley, N. (2008). Dictator game giving: altruism or artefact?. Experimental Economics, 11(2), 122-133. DOI: 10.1007/s10683-007-9172-2


Posted by Simon Halliday | | Category: | 0 comments

Saturday, August 02, 2008

Middle Class Angst

Posted by Simon Halliday | Saturday, August 02, 2008 | Category: , , , | 0 comments Abhijit Banerjee and Esther Duflo in their essay 'What is middle class about the middle classes around the world?' continue a strand of thought that originated in their previous essay, 'The Economic Lives of the Poor'. Specifically they contrast the lives of 'the middle class' in a sample of countries worldwide, with the 'lives of the poor' that they discussed in their previous essay. In particular, they attempt to address the question: "Is there anything special about the way the middle class spend their money, earn their incomes, or bring up their children" (4).

The sample of countries on which they draw is: Guatemala, India, Indonesia, Ivory Coast, Mexico, Nicaragua, Panama, Pakistan, Papau New Guinea, Peru, South Africa, Tanzania and East Timor. This is the same sample that they used for the 'economic lives' paper, which makes comparison easier. They partition the middle class into two groups: households in which individuals earn $2-4 per person per day, or $6-10 per person per day (I don't know what happened to $5 - probably a survey construction issue). As a consequence of using the same survey, some of the criticisms that I lodged previously still apply, such as representing the 'middle class' as it was 15 years ago as representative of how it is now. I believe strongly that this is not the case for South Africa, and this comes through in some of the data that they present.

Unlike previously, Banerjee and Duflo attribute some of the differences that they observe to social norms, and therefore to culture. I think that this is an improvement. I understand that they need to be circumspect about introducing this kind of idea into economic analysis, but I believe strongly that doing so strengthens their analysis. Note that I am not going to discuss their definition of the middle class, I think many might attack this, but I don't think it warrants concern right now. It is sufficient to note that the $2-4 group is quite large in most of the countries, and the $6-$10 is somewhat smaller. This seems to identify factors typifying a middle class.

As I did for the 'economic lives' paper, I list some descriptions from the statistics they present:
  • relative to the poor the middle class have a declining amount of expenditure on food, and they select tastier & more expensive food.
  • no pattern for alcohol and tobacco - goes up in some countries, down in others.
  • as share of income dedicated to food decreases, the amount freed for entertainment expenditure increases, more middle class individuals have TVs
  • no clear pattern for education spending
  • there is a definite rise in spending on health care
  • the middle classes have better access to household infrastructure and basic amenities (electricity, water, latrine).
  • rankings of expenditures between the countries for spending seems to be the same as for the poor.
  • there are possibly common norms for expenditure, e.g. in SA extravagant expenditure on funerals by middle class seems to pressure the poor to attempt to emulate the middle classes
  • middle class less directly connected to agriculture than the poor
  • oddly, rural middle classes less likely to own land than rural poor
  • rural middle class are local entrepreneurs
  • share of entrepreneurs and share of employees seems roughly the same for poor and for middle class
  • trying to get something "without a large resource commitment seems to infuse the middle class" (16)
  • there seem to be differential returns to entrepreneurship for men and women: the return for men is greater - this could be due to women often trying to run businesses while engaged with child care, or other factors
  • middle class businesses are undercapitalized, similar to the poor they do not have good access to capital
  • however middle classes have better access to sources of credit
  • middle class business seem to remain small even though health care spending rises dramatically - why do they not save more and invest in capital to increase returns?
  • cannot really view the middle classes as particularly entrepreneurial, in fact here they are about as entrepreneurial as the poor
  • distinct difference between poor and middle class is that the poor have erratic casual employment, whereas middle classes seem to have more regular salaried employment
  • there seems to be a large element of luck in terms of admission to the middle class, for example a business deciding to locate a factory close to an individual household's home can produce a long term virtuous cycle of employment of one generation, education of the next, employment of the next and more education for the generation following.
  • the middle classes tend to migrate for longer and to migrate for long term job prospects, reflecting either better searching for jobs, or better qualification, the problem is that we cannot disentangle the causality of admission to the middle class - could be better migrants get into middle class, or that middle classes promote permanent migration for jobs
  • middle classes have lower fertility and substantially lower rates of mortality among the elderly, most likely as a consequence of dramatically increased health care spending relative to poor
  • urban middle classes have higher education spending than other groups, includes spending on private tutors
  • higher share of children enrolled in school for middle classes, although SA is anomalous here, which, I would argue, is a consequence of them using a survey from the end of Apartheid (1993).
Summing up:
  • Most middle class characteristic: having a steady well-paying job
  • The idea of a 'good job' is typically middle class
  • The middle class work longer hours and more regularly than the poor
  • Middle class seem to want to get 'good jobs' so that their children can be educated, or have talent revealed, and move up in the world
  • Middle classes are not the 'source of entrepreneurship' we might be led to believe they are by news media and some politicians
As much as I think that the paper achieves a sense of what the 'middle class' is about, it does so in a manner which I think is problematic. I experienced the feeling that the paper should have, instead, been two papers. The first paper would have been a comparison of different middle class characteristics with the sample of countries that they used and the second an in depth analysis of the middle class in the Udaipur region of India where Banerjee and Duflo have incredibly detailed information from the surveys that they conducted. The problem is that it is difficult, in my opinion, to argue that the experiences in Udaipur, India in 2006 are necessarily representative of the experiences of rural South Africans in 1993, or, more importantly, in South Africa in 2008. A similar criticism applies to the 'economic lives' paper which had a similar dynamic of discussing the international patterns and then going into a deeper analysis combined with anecdotes in Udaipur.

That being said, the study is comprehensive and tries to cover a substantial amount of ground. I am surprised that something like this hasn't been done before. I would compare it to the recent work by Hertz et al (2008) on education inequality, which also takes a broad approach in order to come up with some common insights. Hopefully these insights can give us better tools with which to assess international policy differences and for international institutions such as the World Bank, while maintaining more nuanced approaches at the national level of policy.

Banerjee, A.V., Duflo, E. (2008). What is Middle Class about the Middle Classes around the World?. Journal of Economic Perspectives, 22(2), 3-28. DOI: 10.1257/jep.22.2.3

Hertz Tom, Tamara Jayasundera, Patrizio Piraino, Sibel Selcuk, Nicole Smith, and Alina Verashchagina (2007). 'The Inheritance of Educational Inequality: International Comparisons and Fifty-Year Trends,' The B.E. Journal of Economic Analysis & Policy: Vol. 7: Iss. 2 (Advances), Article 10.

Friday, August 01, 2008

Most coherent thought on Zuma

Posted by Simon Halliday | Friday, August 01, 2008 | Category: | 0 comments

I have just read this article from the M&G on the lead-up to the Jacob Zuma trial. In it Kgalema Motlanthe, deputy president of the ANC, said:
If, as a society, we are serious about what we have enshrined in our Bill of Rights, we are bound to accept that the presumption of innocence is not partial or discretionary... Until such time as a court tells us otherwise, Jacob Zuma is an innocent person. That is why the ANC has supported him until now, and will continue to support him.
This is a good and coherent statement. He continues:
It is about the principles and practices upon which we intend to build a new society, one that is democratic, just and equitable... It is also about the assertion of the right of any group of people to freely choose whom they wish to lead them. The members of the ANC have unequivocally said that they want Jacob Zuma to be their president. They have further said that they will be putting him forward as the ANC's candidate for president of South Africa in the 2009 elections. The ANC will therefore vigorously resist any attempts to undermine the collective will of its membership or the freely expressed will of the South African people. As the ANC has repeatedly said, we seek no special treatment for our president. We simply ask that he be treated fairly and justly.
Now this is where things get more contentious. He is probably correct in saying that most of the people in the ANC simply want him to be treated fairly and justly, but the problem is that interference with the judiciary by ANC members (Hlophe), comments about killing in the name of Zuma (COSATU - Vavi and ANCYL - Malema), arguments that he is being attacked politically by being accused of corruption (CYL, SACP, ANCYL, COSATU) and assertions that 'we will never see him in orange (prison) overalls' (MK Veterans). These are not the kinds of comments that legitimize a person's position. Yes, he may be innocent. Maintain, therefore, that the courts should have access to all the available evidence and, consequently, establish whether the individual is guilty or not. If he is, he cannot be president. If, on the contrary, he is innocent then the elections will see that he is South Africa's next president. But don't obscure justice on the behalf of populist justifications that 'the people have made their choice'. That is simply 'big man politics', something that South Africa, and Africa in general, could do without.

Nevertheless, these are the most coherent thoughts from a party politico on the Jacob Zuma trial that I have heard in some time.

Hayek on Zimbabwe

Posted by Simon Halliday | | Category: , , | 1 comments

I have been reading Friedrich Hayek's The Road to Serfdom, which I found in a bookshop in Florence the other day. I have been intending to read it for some time and was going to buy it in London in a few weeks until happening upon it at The Paperback Exchange.

Hayek says the following,
The whole system will tend towards that plebiscitarian dictatorship in which the head of government is from time to time confirmed in his position by popular vote, but where he has all the powers at his command to make certain that the vote will go in the direction of his desires.
Hayek, 2007: 109 of course that The Road to Serfdom was first published in 1944 and its main case study was Germany.

I know that Zim isn't meant to be a dictatorship, it is meant to be a democracy. However, that it is not a de facto democracy could be indicative of the fact that greater and greater centralization of power around one individual, around a presidency, or around one big man is not good for a country, nor for its democratic roots. It is by this centralization that, little by little, the democratic and liberal powers of the individual are taken away. This I would say, is typical Zimbabwe, straight up Bob Mugabe. This, I hope, is not what will happen in South Africa, even though Mbeki has focused more power in the presidency and the presidency itself is soon to be up for grabs...

NYT misses work on Vengeance

Posted by Simon Halliday | | Category: , | 0 comments article in the New York Times entitled, 'Calculating Economics of an Eye for an Eye', discusses the work of Naci H. Mocan, arguing that his work on vengeance "opens up a new area for exploration." Um... No. Vengeance has become the centre of a research program in experimental economics to understand the dynamics of of cultural salienc of actions and antisocial punishment.

In terms of culture, this has had more substantial investigation since the work by Henrich et al reported on experiments in small-scale societies in 2005, highlighting cultural differences in playing economic experiments.

Antisocial punishment is the phenomenon in experimental games (say public goods games) when individuals punish others who they see infringing on some social norm, but which ends up with the entire group benefiting less. Moreover, the dynamics of revenge in experiments, with respect to individuals who are punished specifically for contributing what is perceived as "too much" to the pot in a public goods game, often assign 'punishment points' to the people who punished them for contributing "too much".

Work of this sort has been going on at the experimental labs of the University of Zurich, under the guidance of Ernst Fehr, as well as at the University of Nottingham, under Simon Gaechter. Hence when they quote Daniel Houser of GMU as saying, "I'm not aware of any work in economics that tries to capture individual differences in vengeful feelings" I say, "What the...?"

Nevertheless, kudos to Mocan for doing this research, but take a look at the work that has been done on these topics outside of the US. Herrmann, Thoni and Gaechter's (2008) Science piece published earlier this year, has similar results to those found by Mocan: weak rule of law, poor institutions, etc are more likely to sustain antisocial punishment and vengeful actions than others. I have referred to the Herrmann et al paper a number of times and highlighted the contribution it has made. If I can, surely people in the US can too?

Herrmann, B., Thoni, C., Gachter, S. (2008). Antisocial Punishment Across Societies. Science, 319(5868), 1362-1367. DOI: 10.1126/science.1153808

Henrich, J., et al. (2005) ‘Economic man’ in cross-cultural perspective: Ethnography and experiments from 15 small-scale societies. Behavioral and Brain Sciences, 28, 795-855.

Lives of the Poor - why no culture?

Posted by Simon Halliday | | Category: , , , | 0 comments I'm going to spend the next couple of review posts on two papers by Abhijit Banerjee and Esther Duflo, two development economists at the Massachusetts Institute of Technology in the Abdul Latif Jameel Poverty Action Lab (J-PAL). The paper I review today is their 'The Economic Lives of the Poor' (2007), JEP article. The second post will be on their JEP article 'What is middle class about the middle classes around the world?' (both links are to ungated working paper versions of the published papers).

Banerjee and Duflo (2007) 'The Economic Lives of the Poor'
This paper constitutes a review of a few different datasets to give researchers an insight into the everyday lives of the poor through specific statistical commonalities and differences between groups of the poor in different nations. The researchers use the LSMS as well as a detailed dataset that they themselves have compiled in work on Udaipur, India. My main interest is in the African sample.

Banerjee and Duflo first comment on their use of the $1/day extreme poor and $2/day poor poverty lines and the fact that these can be considered arbitrary depending on the way in which we conceive of poverty, but they use them to be consistent with the majority of the literature. All well and good.

They go on to quote statistic after statistic of the types of consumption, access to savings, urban-rural contrasts and differences between countries in terms of the behaviour of the poor and extreme poor. One thing that struck me was the way in which, yet again, 'the poor' and 'the extreme poor' are lumped into categories that seem to be devoid of cultural impact. When there are differences in consumption of, say, radio vs. television the first thing to which they refer is the possibility of lack of access to broadcasting. Whereas one of the first things I would think of would be: what do we associate with owning televisions? Specifically, Veblen's idea of conspicuous consumption. Yes, even when you are poor or extremely poor you too could be interested in conspicuously consuming (maybe even more so?) in order to gain reputation, or maybe to make people think things aren't as hard as they seem. This motivation seems entirely absent from Banerjee and Duflo's analysis, even when they admit that their sample shows the fairly typical pattern of patterns of food consumption that are not as high as we would expect ex ante. Many of the people in the sample eat less than they might do, while consuming other non-necessity goods.

Nevertheless, here are some of the common factors that they show: (HH = household)
  • extended families live under one roof is common
  • the poor of the world are young, either because as they get older they get wealthier or because the poor die sooner
  • food represents between 56-78% of consumption of poor HHs.
  • of non-food items, alcohol and tobacco are prominent
  • spending on festivals is an important part of the budget for the poor, including weddings, funerals and religious festivals - in SA specifically, 90% of the poor allocated funding to festivals.
  • the poor spend little on entertainment (movies & theatre)
  • Pertinent to my considerations, even the extremely poor do not buy the most calorie-cost efficient grains they often choose to buy more costly grains.
  • Share of rural HHs owning TV is substantially higher for poor than extreme poor.
  • many poor run own businesses but with very few assets
  • self-reported levels of happiness by the poor are not particularly low
  • the poor experience high levels of stress: many poor have higher morbidity and can give up meals (both adults and children) in order to have more consistent meals.
  • education spending is low for most poor, mainly because education is paid for by their governments
  • the poor are engaged in multiple occupations (although not in SA) and do not accumulate specific skills & their businesses often operate at too small a scale
  • the poor often temporarily migrate for work
  • the poor have low access to credit and low access to adequate (formal) savings mechanisms, markets for land and insurance are inadequately structured to suit the poor
  • access to water and electricity is better for the urban poor than the rural poor.
Subsequent to which they consider 6 questions:
  1. Why so little specialization? Risk is a problem - diversity spreads risk and/or the poor cannot raise the capital to occupy themselves fully in one trade.
  2. Why so many entrepreneurs? few skills, no capital & female being an entrepreneur is easier than finding a job, and borrowing is risky and unlikely to find individuals willing to lend.
  3. Why don't the poor eat more? Eating more wouldn't help much, but some improvements are linked to increased productivity. Is it lack of self-control? No, because they seem to save for festivals, or they are somehow credit-worthy when it comes to festivals.
  4. Why don't the poor spend more on education? Parents don't seem to react to low school quality, possibly because many parents are themselves illiterate and unable to assess quality of education.
  5. Why don't the poor save more? They spend on tobacco & alcohol, festivals, tea, coffee and sugar, why don't they cut down and save, or buy machines to improve productivity? But saving at home is hard, & difficult to resist temptation of spending on goods that others have, households report wanting to cut expenditure, but don't. Is it lack of self-control?
  6. Why don't the poor migrate for longer? Social networks and connections to home, informal insurance networks & other such. High social value of remaining connected.
There comments on these seem inconsistent - the poor have self-control when it comes to saving for festivals, but otherwise not. The poor could make more money if they stayed away from home for longer, but they don't because of lack of commitment (165). What I don't understand is that they do not admit culture at all into the ways in which they deal with 'the economic lives', as though 'economics lives' are independent of cultural factors that are extant in a given society. This is, I think, strange. I know that Economics has not traditionally admitted 'culture', but it is becoming more and more a salient feature when discussing economics, especially development economics, as culture impacts directly on the types of institutions that groups have.

Notwithstanding my culture gripe, I have a bit of a problem with claims emanating from the data. Data for 8 of the 14 countries is from the 1990s. For South Africa the data is from 1993 (the same year in which the comprehensive PSLSD, or SALDRU93, dataset was undertaken). In South Africa, for example, it is well understood that the lives of the poor, specifically with respect to access to infrastructure, housing and land reform has improved (Bhorat and Kanbur, 2005). It has not improved as well as we might like to hope, nevertheless it has improved. I cannot legitimately comment on the situations in the other countries. In lieu of this, I don't know if the piece can legitimately be called 'the economic lives of the poor' as that gives the reader the incorrect idea that it is 'the economic lives of the poor as they are living now' which is not what the paper manages to relate (in my opinion this is not assisted by the convention to write in the present tense, for example, "Infant mortality among the extremely poor is 8.7% in South Africa" (160, my emphasis)). It is not legitimate to claim that infant mortality at the end of Apartheid is the same as infant mortality in South Africa now. I understand that it is a linguistic rather than technical issue, but it still carries weight for me.

Nevertheless, I think that the piece fills a relevant gap in the literature. It highlights many issues in the lives of the poor over the last two decades. It does however have many flaws, not the least of which is the lack of discussion of the salience of culture in different societies. Lastly, I want to comment on the lack of references to researchers in the countries that the research, India aside. This is a consistent issue for development researchers in countries outside the US whose work seems not to attract as much attention as development economists in the US and, as such, is often deeply problematic because they fail to recognise the fantastic work (and use of RECENT DATA) that goes on in those countries. I'll leave it at that. Good paper, but could be better.


Banerjee, A.V., Duflo, E. (2007). The Economic Lives of the Poor. Journal of Economic Perspectives, 21(1), 141-167. DOI: 10.1257/jep.21.1.141

Banerjee, A.V., Duflo, E. (2008). What is Middle Class about the Middle Classes around the World?. Journal of Economic Perspectives, 22(2), 3-28. DOI: 10.1257/jep.22.2.3

Bhorat, H., Kanbur, R. (2005), Poverty and Well-Being In Post-Apartheid South Africa: An Overview of Data, Outcomes and Policy, Working Papers 9620, University of Cape Town, Development Policy Research Unit (this is actually the introductory chapter to the book, Poverty and Policy in Post-Apartheid South Africa)