I recently spoke with Prof Sudipta Sarangi, who teaches economics at Virginia Tech, for the 'Everyday Economics' podcast. He takes a course there called 'Economic Puzzles in History, Literature and Movies'. He has just published a book, 'The Economics of Small Things', in which he identifies serious economic behaviour in everyday life and explains the concepts at work and in doing so, he tries to show economics can be fun. This book is basically a compilation of illustrations of microeconomics concepts. The illustrations he has written about are daily occurrences for most people and show that all of us in fact practise microeconomics in our daily lives, although without realising that we do this.
Take, for example, our consumption of streaming services Netflix and Amazon Prime. These illustrate the simple concept of fixed costs versus marginal costs. Once we pay for the subscription, a fixed cost, we can consume unlimited number of films and shows. The only additional cost is power and internet usage, which is also often consumed at fixed-cost rates. There's of course the other, not so easily obvious cost: opportunity cost. What all we could do with our time if were to not spend it on consuming entertainment.
Another interesting illustration in the book relates to shoe pinchers. If you have seen the film 'Slumdog Millionaire', you may recall the young fake tour guides, Jamal and Salim, lifting shoes from outside Taj Mahal in the story. Do you know what economic concept that sequence in the Oscar-winning film tells us about? This particular economic concept can be put to good use when trying to give shoe pinchers the slip when going to temples or other places of worship where shoes have to be left outside. It's to do with complementarities, which are very important in the production process.
Complementarities have serious implications for economic development. The 2019 winner for the Nobel Prize in economics, Harvard Professor Michael Kremer, gave the 'O-ring Theory of Economic Development' that says skills of workers complement each other. The output in a factory depends on all skills being present and working together. Even one weak link in the chain can have disastrous consequences. The name 'O-ring' comes from the 1986 Challenger space shuttle disaster - all of the rocket science that had gone into it was brought to its knees by the faulty design of a humble O-ring.
So, to return to shoe theft, not leaving the pair in one place, leaving the two shoes in two separate clubbyholes will do the trick. Because most people will find a pair of shoes worthless unless the two complements, the left shoe and the right shoe, are available.
Next, what do pens we flaunt tell us about economics? We have seen Prime Minister Narendra Modi uses very stylish pens. In fact, many politicians use designer pens. I am not sure what sort of pens Prime Minister Atal Behari Vajpayee, Prime Minister Lal Bahadur Shastri and the many prime ministers from the Gandhi-Nehru family used, especially Pandit Jawaharlal Nehru since he authored such masterly and high-sales books? I read recently that Barack Obama is very particular about writing only with a certain type of Uniball pens. He disclosed that in a chat similar to about his just-released presidential memoirs. I was somewhat intrigued because somehow, I'd always had the impression that such a well-read and deep-thinking leader, with such extraordinary flair for writing and speaking would most certainly be a user of fountain pens. But, I guess, there's reverse snob value to owning simpler pens. Pens people carry in their pockets tell us about signalling economics, writes Prof Sarangi. To carry a Montblanc pen signals wealth. To use pens used by common people is to signal a position against rising inequalities.
Signals are very important in microeconomics. Take the example of price signals. The national capital is seeing farmers these days protesting the central government's farm-law changes. One of the farmers' concerns is the minimum support price, or the price at which the government promises to procure farm produce. Why? To ensure the market price does not crash below the announced minimum support price. Because theoretically farmers can simply sell their crops harvest to the government rather than in the free market at lower prices. Of course, for a variety of imperfections in the system, the market price does often fall below the minimum support price. But in the absence of the announcement of this price, the market price could be even lower, especially in years of bumper produce. So, howsoever imperfectly, the support price does work as a signal to the market. As it does for farmers. Seeing the hike in the minimum support prices of different crops in a season, they decide what and how much to sow for the subsequent season. Used well, minimum support prices can be good signalling devices for both, buyers of farm produce and farmers.
One of the most interesting parts in the book is the discussion of the cobra effect. It shows how governments often make policies that often end up doing exactly opposite of the original intention. The lore goes that in British India, the city of Delhi was infested with cobras, so the administration announced a cash reward for submission of dead cobras. What did this policy do? People of Delhi started rearing cobras, killing them, and then taking them to the authorities to collect their cash rewards. Instead of reducing Delhi's cobra population, the policy turned the city's homes into cobra farms. The administration was spending more and more money, and the cobra population was increasing. No one knows if this story is true. But it has come to be known as the cobra effect to demonstrate how governments often create wrong incentives for people and make policies that result in worsening problems rather than solving them.
Puja Mehra is a Delhi-based journalist and author of 'The Lost Decade (2008-18): How India's Growth Story Devolved Into Growth Without A Story'