The majority of our daily behaviours, including those that are irrational, are based on economic rationality and this is the central theme of Sudipta Sarangi’s charming and succinct novel, Economics of Small Things. According to Sarangi, an economics professor at Virginia Tech in the United States, economic theory can explain even the most mundane of our daily actions. He also teaches a popular course called Economic Puzzles in History, Literature, and Films.
Why do we still serve food first to our guests? Why do India’s best mangoes end up being exported? Why do we refuse to wear a helmet or a seat belt while we ride our motorcycles or drive our cars? Why do we increase the amount we pay our housekeeper? A simple economic theory should clarify these and many other problems that we face daily.
Sarangi begins by describing how Nobel Laureate Mohammed Yunus solved the issue of asymmetric information or knowledge in bank lending, in which both parties are unaware of each other’s capabilities. Yunus solved the issue of asymmetric information and adverse selection in one stroke with the Grameen Bank model, which allows lenders to form groups of five to borrow money. The borrower’s best interest is to find four other solvent investors, which also addresses the moral hazard issue. The creditor would ensure that the other members of his party settle their instalments on schedule as well.
The reason Sarangi does not explain why Indian consumers are not getting the best quality of mangoes is explained by a simple instance which shows why mangoes from the Alphonso market are cheaper to the US customer.
Sarangi calls on Game Theory to justify the most insane of our decisions — not wearing a seat belt or a helmet — and trust God by telling you a short prayer before starting your cars, and why in a chicken game, the contestants risk their own communities’ death rather than lose faces.
Housekeepers are some of India’s most exploited jobs, with poor pay and no job security or safety net. Sarangi uses the performance wage principle to justify why it would be “economic” to pay our housekeepers higher wages than the minimum wage to keep them.
Sarangi refers to an old essay by Gandhiji, in which Father of the Nation lament how the Railways didn’t even give a modicum of comfort to passengers travelling in the Third Class when they addressed the idea of ‘price discrimination,’ where manufacturers charge varying prices of more or less similar goods. But economic theory is different from Gandhiji’s moral views because of price disparity, and Sarangi discusses how manufacturers sometimes use sly tactics to make other customers pay more for the same thing.
Economics has also addressed the topic of ethnic inequality, where economists note statistical discrimination on taste or bigotry depending on tastes. The latter is based on such evidence or parameters (but defective), while the former where all types are abhorrent, is based upon a clear bias. It’s a warning, as Sarangi acknowledges, that economics does not go through its historical or cultural origins when describing discrimination.
Economics further discusses when and how natural disasters harm the vulnerable rather than their households in regions that are affected by excessive catastrophes.
According to Sarangi, it helps us to make our guests feel special by first offering them food. We could purely selfishly make a difference! These habits are often sanctioned religiously or culturally and may come from a period of meals scarce. Similar explanations justify why, when dining with friends, we do not take this last slice of cake or pizza.
Sarangi eliminated the impossible without using a single graph or equation by demystifying the arcane principles of economic theory. This book is a journey into everyday life.
The lack of voices in sustainable growth
The inability to represent marginalized communities in political, financial, and cultural corridors of influence is a growing cause of global concern. Knowledge gives strength, so it is important who produces it. “I don’t care who writes the Laws of a Country if I can write its textbooks,” as Nobel Prize laureate economist Paul Samuelson famously said.
Development is aimed at improving the well-being of billions of citizens in countries with poor revenues, but the global South is seriously underrepresented on the ground. Unfortunately, it has been appropriated by a limited number of rich world institutions, with significant repercussions and the situation seems to be worsening.
Consider the Journal of Growth Economics, a major journal in the field that publishes research articles. Neither the editor of the newspaper nor any of its 10 co-publishers, is located in a developing nation.
The prestigious World Bank’s Annual Bank Conference on Development Economics (ABCDE) has been organized for years now. The 2019 event marked the 75th anniversary of the World Bank and IMF conference in Bretton Woods, but none of the 77 attendees is from a developing country organization. And our study of the three-decade period of the ABCDE reveals that just 7 per cent of the conference papers were drawn up by organizations in the developed world.
Increasing use of randomized controlled trials (RCTs) to assess the efficacy of a particular poverty reduction policy in low-income countries amplifies the long-standing issue of underrepresentation. While the RCT campaign deserves enormous praise for demonstrating the need for rigorous evidence in economic growth, its implications have been exclusionary. Due to their well-deserved academic reputations, RCT-based economists now serve in leading economics journals and practice at the most prestigious universities and research institutes in the world. This vital position in maintaining the agenda gives them the power to set the agenda. Two decades ago, for example, almost no RCT-based paper in economic growth existed, with about 40% of the publications in the leading magazines, as we have analyzed in 2020.
The RCT campaign itself characterizes isolation. At the most influential global Center for Development Related Studies in RCT at the Abdul Latif Jameel Poverty Action Lab (J-PAL), some five per cent of the close to 225 affiliate professors are from developing countries, and no institutions are presented in East Asia. RCTs are often costly, which leads to an increasing concentration of poverty reduction studies and financing in the richest universities (J-PAL was established at MIT).
Indeed, the prices of RCTs can go up to millions per paper, making it impossible for scholars from developed countries to study their own countries without relying on the scholarly orthodoxies of wealthy universities. If RCT-based findings are not open to these scholars, they will not be published in leading newspapers and will face the possibility of being ranked second. Although our study shows that the institutions from developing countries represented less than 10% of RCT-based papers in the top six business papers in 2020, even with a generous reading of the writer’s studies.
Prioritization of analysis is a more subtle expense. There is a power disparity between relatively poor developing-country governments, and financially and reputationally strong scholars, as well as friction between what policymakers in lower-income economies consider relevant and what academics find worthy of publishing in top journals. These considerations undoubtedly favour research that generates strong private returns for researchers in wealthy countries but low public returns for decision-makers in developed countries.
True, researchers from developed countries contribute significantly to developing economics at prestigious institutions in developing countries. However, the incentives and expectations of the institutional environments in which they live have a significant impact.
The ultimate cost is related to the information that is disregarded. South Korea, Vietnam, China, Mauritius, Taiwan, and Botswana, for example, did not rely on RCTs to change their fortunes and raise their vast populations out of poverty. However, academics from these countries are underrepresented on the editorial boards of major journals and at development economists’ conferences and seminars — an absence that is particularly telling in the case of China, which is undergoing a historically unprecedented economic transition. It’s as if the development successes of these countries haven’t taught them anything.
First, it requires the acknowledged that the Global South has ceded to supremacy as well as the elite Northern institutions have appropriated to avoid the global North’s hegemony on information production in development economics. Many developed countries have seriously weakened their universities and processes of information creation, both by a lack of resources and political intervention. If they do not fix this imbalance, economic inequality will continue to suffer.
We must also pay attention to novelist Kazuo Ishiguro’s Nobel lecture from 2017, in which he encouraged a broadening of our shared literary landscape to incorporate even more voices from beyond our elite first-world cultures’ comfort zones. That means looking more zealously for treasures from today’s obscure literary cultures, whether the authors are from far-flung countries or from within our societies while being careful not to limit or conservatively define what constitutes good literature.
If you replace “literature” with “growth economics,” Ishiguro’s injunction becomes a positive agenda of disciplinary action for intellectuals in the Global North. It also indicates that greater diversity and inclusion are the strongest protections against intellectual narrowing induced by elite capturing.