Chocolate and Gold Coins

Friday, October 28, 2005

Printing Your Blog

Coyoteblog has a very interesting post about how he was able to print his blog into a book so that he could give it to his parents to read. Many bloggers write excellent blogs that, over many months, add up to a sizeable body of work. Many parents would be thrilled to read their child’s writing, but aren’t about to sit at a computer screen and read it all day long. This gives bloggers a way to give their blog to their relatives so they can read it. Also, it really is easier to read a paper book than staring for hours at a screen.

The cost is not all that expensive, about $30. For people in India, this would be a bit of an expense, but well worth it to preserve your writing for all time. Keep in mind that a lot of stuff that we see on the Internet may become as obsolete as the cassette tape and the floppy disk. In ten years’ time, you might not be able to access your blog archives anymore because the technology will change.

I should point out that Coyoteblog is an excellent blog. It clearly articulates the libertarian viewpoint. I might not agree with all that he writes, but it is very clear and logical and largely persuasive. For example, his article against the minimum wage is the best I have read anywhere. And his post about refuting socialism is a classic.

So will you see Chocolate and Gold Coins in print? We’ll see.

Thursday, October 27, 2005

Secondary Wage Effect

Years ago, I used to teach an undergraduate economics course at the University of Minnesota on labor economics. I should say that I was not a professor at that time, just a teaching assistant, but at the U of Mn, T.A.'s were almost the only teachers for undergraduate econ classes.

One subject that interested me was the discussion of the difference in female and male wages. An oft quoted statistic was that for every dollar a man earned, a woman would earn X cents. The “X” would keep rising over time. At that time it might have been 69 cents. Today I think it is up to 76 cents. This increase is reflective of a great revolution going on in the marketplace.

But the question is, “Why is it lower in the first place.” The answer, I knew, was that women have always tended to do different kinds of jobs than men did in the marketplace. Look around and you will see “male jobs” and “female jobs” all around. Sure, some jobs are mixed but many aren’t. But why is that?

One idea I had at that time was that most women who work have a husband who is the primary wage earner. It occurred to me that a secondary wage earner’s priorities in the labor market might be different than a primary wage earner’s. The primary wage earner cares almost exclusively about making as much money as possible since the family really depends on this income. But the secondary wage earner might trade a bit of salary for other benefits associated with work. These benefits might be pleasant work environment, nice job satisfaction, prestige, flexible work hours, no travel or relocation, and/or light work.

For example, my father was an engineer. The work often was unpleasant: he spent many years traveling to Nevada to work in caves that were built to test atomic bombs. Obviously the money was everything. My mother worked as a librarian. She could have made much more money as a bricklayer. Needless to say, she never considered such an option. She wanted to work, but the salary wasn’t the primary function of the work. She liked the work environment of the library and it gave her a lot of non-monetary benefits.

A regular reader of mine, Ravi of Ravisez pointed me to this interesting article on the male-female wage difference. Here is the money quote:

After years of research, I discovered 25 differences in the work-life choices of men and women. All 25 lead to men earning more money, but to women having better lives.


For my wife and me, the roles are completely reversed: she now makes more money than I do. If she is transferred, I’ll have to follow and take whatever job is available. We have to do things that improve her career.

This blog is an example of a type of labor that provides no family income but immense job satisfaction. One might view “secondary wage effect” as a form of shirking. I suppose one might view blogging that way. But being the primary wage earner is always immensely satisfying in its own way.

Wednesday, October 26, 2005

What Is Your Blog Worth?

There is a bit of blog silliness going around about valuing blogs based on Technorati Rank. I read about this first on Om Malik’s blog. You can see an example on the side ofPatrix’s Blog (the George Washington picture) and Technorati blog, (I might be the first to link to this sad blog). Apparently a big group of blogs was bought out for an outrageous price and Tristan Louis determined that at this price each link is worth somewhere around $564.

Now think about that. Did my five seconds of labor above create $564 in wealth to Patrix? Well, I had linked to him before, but what about Om Malik? This post on Desipundit would be worth easily $100,000 to the collective blogosphere. Obviously links cannot, in the margin, be worth anything because they are essentially costless to produce. You could hire people at not much cost to create blogs and link to other blogs and, in effect, “print up” links like counterfeit money all day long.

But it is something that lots of people thought enough about your blog to create a link to it, without any remuneration involved. That is the curious paradox here. The links are valuable because there is no market for them and they are scarce. If you could buy them, then they would be nearly worthless.

But maybe another way to think about it is that a link is valuable if it is in the context of a genuine article. If someone was inspired to write a genuine essay based on your piece, that is gold. But again, it is valuable only because that person had no incentive to do so besides his own admiration of your work.

While the Technorati metric works okay for now as a way of ranking blogs, it could easily be corrupted once people try to price a blog using this metric. Really, the only metric that matter is ad revenue.

But, for a week anyway, I will enjoy the thought that my humble blog is worth $61,500. Now that I have crossed the 100 link threshold, I want say "thank you" to everyone who has linked to my blog at some time:

(It feels nice to print up counterfeit money).

Tuesday, October 25, 2005

GNP and Contra-Bads

Dilip D’Souza has written an interesting piece about electric stabilizers: a device to prevent electric gadgets from India’s unstable electric grid. This is an example of a particular category of good which I will call a “contra-bad” to coin a term. A contra-bad is a good that simply exists to counter a public "bad". He argues that such goods should not be counted in GNP because they would have no value if other parts of the economy were not so inefficient.

Many of the goods and services we buy and much of the government sector is devoted to producing contra-bads. Security systems, guns, police, most lawyer services, and national defense all fall into the category of contra-bads. These are things that we would simply not need in a perfect world. It is reasonable to worry if too much of the economy is devoted to contra-bads instead of producing genuine goods like automobiles and homes and MP-3 players.

However, I would not agree that the existence of contra-bads means that the metric of GNP is flawed. GNP is not a measure of happiness. This essay by Atanu Dey might be relevant here. Or read this follow-up essay here. GNP measures what an economy is capable of producing. GNP is national income, (more or less). It measures what an economy is capable of buying. It is pretty clear that if you have a small GNP you probably would want to have some more of it. But a large per-capita GNP does not mean that you are actually buying things that make you happy, it just means that you have the income necessary to buy nice things. But you might end up wasting it on other junk. The Egyptian pyramids come to mind or this bridge.

It is a good question to ask whether too much of the economy is devoted to producing contra-bads instead of genuine goods. In the long run, your economy won’t grow if it is producing contra-bads or other intrinsically useless goods, (I am guessing that this was Ravikiran’s point).

However, it is wrong to say that contra-bads are bogus GNP. What a nation is capable of producing is largely independent of the types of goods that it produces. The Indian economy could easily switch from producing stablizers to MP-3 players or many other goods. If it isn’t producing a lot of goods, it isn’t the mixture of goods that it produces that is the problem; it is the regulatory environment and it is the types of skills that the workers lack that is the problem.

Contra-bads would seem to be wasted national income. Ironically, the U.S. probably spends more on contra-bads than anyone. But if Dilip is arguing that India really cannot afford to spend its limited income on contra-bads, I couldn't agree more.

Monday, October 24, 2005

Optical Illusion

This is odd. (via Steven Jens).

Thursday, October 20, 2005

Google Journalism

The recent IIPM brouhaha has revealed an interesting possibility: that people with little more than Internet access and maybe inexpensive calling cards can do some serious investigative reporting. Here are some examples:

  1. Arzan investigates IIPM’s bogus Toronto office.

  2. Arzan calls up some people at IMI, IIPM’s European partner.

  3. Curious Gawker further investigates IMI.

  4. Transmogrifier follows up on the IMI trail.

  5. Thalassa_Mikra investigates the educational claims of the IIPM founder Malay Chaudhuri.

  6. 42510 (Zip Code U of KY) follows up on the background on IIPM founder Malay Chaudhuri.

  7. In an excellent example of blog journalism Thalassa_Mikra emails several people named on the IIPM website as people with high credentials who are connected to IIPM and finds out that the IIPM claims are grossly inflated. This is a great piece (must read).

There could be several takeaways from these examples of “blog journalism.” The obvious conclusion that many bloggers are making, including Instapundit, is that many little bloggers working independently can take down the mighty.

But I don’t think this is the most important implication. I believe paid reporters working for newspapers will always be the primary source of serious journalism. The point is that people can do much of the work necessary to do a story in their own homes using simply the Internet, Google, email, and calling cards. There is enough serious information on-line for some journalists to specialize in “Google journalism,” to coin a phrase.

The “Google journalist” can work from anywhere there is Internet access. Well-educated people in India can do serious investigative “Google journalism” in the United States and in Europe. This was the idea I suggested several months ago in my post “Earning in Dollars, Spending in Rupees.”

At that time, Amit Varma wrote to me that he doubted that this kind of partnership between journalists in India and America could work. He is a journalist and he felt that there needed to be the close cooperation that can only occur if the co-workers physically work in the same office and meet face-to-face.

I agree that there are logistical problems associated with working with people remotely, but the difference in salaries between workers in the U.S. and workers in India makes it just too tempting not to try to outsource the “Google journalism” to India. People can call, email, and even talk face-to-face remotely using technology. Everyone is in the next office on the Internet.

So what do you think? Do you think "Google journalism" will be the next wave of "outsourcing" (or "insourcing" depending on your point of view)?

When It Pays to Advertise

Some comments to my previous post got me thinking about advertising and whether the old saying, “It pays to advertise,” is really true in all cases. I would say that in general it only pays to advertise if you are selling a quality good or service. Advertisement costs money and this cost has to be made up in volume. This is easier to do if you can continue to sell the product in volume for years to come, even after you stop advertising. You want loyal customers who buy your product because they like it. This will only occur if you produce a product that has a very favorable cost and quality combination.

I would think that products would sort themselves out into two categories: ones that advertise regularly and cost a bit more and are premium quality and ones that cost less and don’t advertise and are of lesser quality. If I go to buy toothpaste, there may be 50 choices available. Maybe two-thirds of those are made by famous brands that advertise heavily. Then the remainder will be generic brands that never advertise and sell for less. If I think, “toothpaste is toothpaste,” then I would buy a generic brand and save a dollar. But most people would not risk getting an inferior product for the mere savings of one dollar so they choose a name brand.

Advertising has a lot to do with building a brand reputation. If you invest in the reputation of your product, you can reap a healthy stream of profits for years to come. But there’s a catch: if your product really isn’t so good, people will figure this out eventually and bad word-of-mouth will destroy your reputation. This is why I think it only pays to advertise a quality product.

But here is the interesting part: if only quality products advertise, people will assume that advertised products are quality products. A producer of an inferior product might seize this opportunity to free ride off of this perception and pass his inferior product as a quality product by merely advertising it heavily. If consumers are not savvy, this strategy might work for a small number of producers – especially ones with a lot of marketing skill. The market will be “polluted” by these inferior products passing themselves off as superior products. Over time, bad word-of-mouth may hurt these products but not before their producers pocket their millions.

There may be lots of strategies that take advantage of lazy consumers occasionally. For example, most gasoline stations charge almost the same price for gasoline because the market is very competitive. But some consumers become lazy and assume that the price of gasoline is the same everywhere. Therefore, a small number of stations in desirable locations will be able to charge several cents more than the average price knowing that many consumers never check the price and don’t realize that they are overspending. Obviously not many stations could successfully use this strategy but a few do.

The point is that the consumer has to take the job of being a consumer seriously. Just because markets tend to produce competitive prices everywhere, one cannot be lazy and just assume that these prices are the same everywhere, you need to shop around. Likewise we cannot assume that advertised products are quality products. We need to do are own research to see if the product is worth the money that the producer is charging.

When we buy a product or a service that is no good, we are likely to keep quiet about it because it is embarrassing to admit to a mistake. But this information is essential to an efficient economy. This information is the essential negative advertising that would counterbalance the producer’s misleading advertising. We each have a minor role in the general economy and we can help the economy along a little bit by taking that role seriously.

Wednesday, October 19, 2005

Signaling and the Scam School

The whole IIPM brouhaha raises an interesting question: does the existence of a scam school mean that a free market isn’t working? Does the government have to regulate schools to make sure they are not bogus?

I believe markets a self-regulating to a large extent. Parents and students will have a strong incentive to do good research on any educational institution before attending. We would expect that a scam school would lose students over time and eventually fail. I will add that making demonstrably false claims in newspaper advertisements could and should be considered fraud, and the government has a role to enforce these laws.

However I had another completely different thought; one that might bother some people if they took it too seriously. The idea is that maybe scam schools provide a service by sorting students into different quality categories.

The idea is related to Michael Spence and his Nobel-prize winning idea that education is partly a labor market signal. Imagine that unlike engineering, an MBA really doesn’t impart any useful skills (which is possible). Maybe running a business is mostly common sense. But who has common sense? It isn’t at all common. The idea of “signaling” is that an MBA reveals inner qualities of the students such as common sense and organization that are useful in running a portion of a business. Therefore, those who do well in a reputable business school “signal” their abilities and can command a higher salary than other people of equal - but hidden - ability. They earn more because everyone knows that they are special.

Now maybe there is a role for an institution to signal the other end of the ability spectrum. Suppose there are many people who are bright and engaging and somehow lack all common sense. These people might like to run an office but lack the ability to do so. This is the problem: how do managers know before putting someone in a position of responsibility that someone will do more harm than good? Wouldn’t it be nice if foolish people somehow acquired negative signals that could tip off the manager that this person is exactly the wrong type of person to run a business?

So the scam school enters the picture. It advertises heavily with obviously inflated claims. On its website you see lots of things that make you suspicious: no faculty list, unclear course description, inflated claims, etc. Anyone with common sense would avoid such a school. But some people will go there. Those people will list the school on their resumes and managers will know whom not to hire. Perhaps, over time, some of these people will guess that their “business school” experience is more of a handicap than an asset, but the lack of common sense that lead them to this school will prevent them from really understand this.

These signals are useful in the labor market because they allow for better sorting between people and tasks. People without good business sense will not run businesses, and this will save companies from costly mistakes.

Here is an excerpt from Chandrachoodran’s blog about his experience with the infamous IIPM. He applied there and felt that he had done poorly in the interview and in the examination, but he was offered a spot and told to make an immediate decision to accept or refuse.

I refused. Next day, somebody calls me up and gives me a lecture on how IIPM education is valid world-wide and why I should quit my current job (I was a trainee writer in an agency) and improve myself. Of course, they would also be willing to let me pay my fees in two installments.

Reason prevailed and I continued being a trainee writer, going on to become a respected member of that organisation.

Now, I say this for two reasons. One. IIPM is as much interested in transparency as the Playboy reader is in the stories.

Second is that that incident told me that IIPM is not worried about their student’s academic merit and talent. They just want him/her in. I say this for I know I was never MBA material. One, my CAT score that year wasn’t encouraging. (My Quant score was to blame - I ain’t an expert in math). SO I am not sure how well I would have performed in the IIPM test.

Two, my contribution to that GD was zilch. I remember this well. For I am not a follower of cricket and wouldn’t know what globe changing effects a match between India and Pakistan would have.

I say this without hesitation. I would have sucked big time in an MBA course. I don’t have the ruthlessness that I see in friends who are at IIMA and ISB. I do know I am clever and creative. But that doesn’t translate to being a good MBA student. And I am sure, IIPM would have known it. Yet, they wanted me to join their course.

Why? Simply put. Rs. 7 lakhs or whatever their course fee is.

I have been viewing everything IIPM does since that day with a suspicious eye. And my doubts have been proved.

Chandrachoodran had the sense to know that he really wasn’t MBA material but some people don’t know that. They end up going to the scam school and acquiring a worthless degree.

But if there are foolish students who attend scam school, aren’t there foolish managers who might hire them? Indeed there might be. But these managers are probably foolish in many dimensions and will almost surely run their businesses into the ground over time. If they are allowed the opportunity to make a foolish choice in hiring a person to run a particular operation, he will hasten the demise of his business. This means that resources that were trapped in an inefficient operation would be freed to go to more efficient operations.

But if there are foolish graduates who go to work for foolish managers, might there not be foolish consumers who buy their products? Indeed. An economy of fools would not work so well.

Thursday, October 13, 2005

The Non-credible Threat

The non-credible threat is a strategy that youngsters learn very early in life and many hone the skill into true art. They learn that they can get their way on occasion if they make a threat to do something that would be essentially self-destructive. An example might be a child who threatens to hold his breath until he passes out unless the parent gives him what he wants. He probably wouldn’t go through with it, but one never knows. That’s why it is effective.

Parents use it on children as well. The parent might threaten, “If you don’t behave right now, we’ll just go right straight home.” If you are visiting Disneyland, this might not be completely believable, but maybe the child doesn’t really want to push his luck.

Indian parents are masters in the art. If they don’t like your new girlfriend and perhaps soon-to-be wife, they might threaten to disown you and never allow you to step foot in the house again. See Saket’s post to get a taste of this.

In game theory, the non-credible threat can be modeled as a simple two-stage game. First player two threatens. Then player 1 plays either “capitulate” or “non-capitulate”. If player 1 plays “non-capitulate”, then player 2 plays either “accept” or “reject”. Here are the possible payoffs for each player (player 1, player 2):

  1. (c): ( 1 , 2 )

  2. (n, a): ( 2, 1 )

  3. (n, r): ( -10, -10)

If they play the “non-credible threat” game only once, it is clearly irrational for player 2 to actually carry out the threat and reject the offer player 1 makes. But here is where it gets interesting: suppose everyone knows that player 2 is a hothead and not at all likely to use reason. Then they may believe that he/she will actually play “reject” and therefore decide it is best to capitulate. The point is that “irrationality” is rational if one plays the game often enough.

In the current controversy over IIPM vs. bloggers, Gaurav Sabnis resigned from IBM because he believed that IIPM students might actually carry out an non-credible threat to burn laptops in front of IBM. Was this a credible or a non-credible treat? Gaurav thought it was credible. But one wonders if IIPM students would really burn their nice new laptops.

Indians might be more inclined to issue and to capitulate to non-credible threats. Strikes (bundhs) are more common and more violent in India than in most western nations. Parents do issue the threat of disowning their children if they don’t marry a suitable boy or girl and some really do carry out this threat.

The point I want to make is that the person making the non-credible threat is really just a bully. He or she is trying to influence your life in a way that is unacceptable. And it is easy enough for people to kill off this nasty practice: throw the non-credible threat right back at the person making the threat. You can say: “okay, fine, I want to see the burnt laptops.” Or you can say, “Mom, if you don’t like my wife, I will not step foot in your house and you will never know your grandchildren.” We can stop the non-credible threats by simply insisting on resisting them. This is the point about non-credible threats, they often hurt the person doing the threatening. If he or she knew that no one would ever capitulate, they would never make the threats in the first place.

It isn’t surprising that Gaurav refused to delete his blog entries because he is a great lover of freedom and liberty (a libertarian) and he would not want to capitulate to the non-credible threat. But he did resign which meant the bullies didn’t have to actually burn any laptops. Too bad. If I were in that situation, I would have dearly wanted to see some burnt laptops. I would have wanted to see the bullies look stupid…just to teach them a lesson.

Wednesday, October 12, 2005

Letter to Instapundit

Someone who works at IBM wrote a wonderful letter to Instapundit about Gaurav Sabnis and his decision to resign from IBM:

As an IBM employee I was very interested to read about IBM vs The Indian Blogosphere, however if you read Gaurav Sabnis's post you'll see that isn't actually the case, or at least it shouldn't be. Rather it's a case of IIPM - The Indian Institute of Planning and Management - and their reprehensible tactics in attempting to silence a critic. As far as I can tell much of the brouhaha on this issue re:IBM has arisen from the article you linked to on Global Voices posted by Neha Viswanathan. That article excerpts Gaurav Sabnis's blog post where he announces that he's resigning from IBM, however it does so without mentioning why he left, loyalty.

It seems that the Dean of IIPM contacted Lenovo (IBM) and threatened them with a student protest where IBM Thinkpads would be burnt in front of the IBM offices in Delhi. In the face of what could only have been a public relations disaster Lenovo demanded that Gaurav do...nothing. No pressure was brought to bear, no demands were made, there was no "counseling session" where it was darkly hinted that any failure to mollify the demands of IIPM would go on his permanent record, nothing.

In fact Gaurav decided to resign because out of appreciation and a sense of loyalty to IBM. He wrote, "The second thing dear to me is IBM's well-being. IBM has been a good employer to me. I have no complaints about them. Even in light of these events, they did not pressurise me to go against my principles and hush the matter up. Yet, IBM was being dragged into this unnecessarily. It was being made a target of bizarre pressure tactics. If even one Thinkpad laptop was actually burnt, it would cause a lot of bad press and nuisance for IBM. So I did not want IBM's well-being to be compromised in any way."

To me that is the big story, that any corporation can still inspire such loyalty in it's employees that they'd rather leave the company than see it get hurt is, these days, nothing short of wondrous. That there are still people like Gaurav Sabnis who stick to their principles, even when it means making the tough decisions, is marvelous. I'm sorry I never got a chance to meet the man, or work with him, as he's exactly the kind of person we need to keep.

Glenn at Instapundit thought that IBM should have stood up for Gaurav and not accepted his resignation. No one really disagrees. The letter-writer seemed (to me) to be hinting that IBM should stood up for Gaurav in the last sentence.

(technorati tag)

Tuesday, October 11, 2005

Reputation and Indian Newspapers

Yesterday, I wrote about how businesses invest in their reputations and how it was especially important in fields where the product is difficult to immediately evaluate. Newspapers have a particular problem with credibility. If they post sensational stories, they may immediately gain readers, but in the long run their credibility will be destroyed when these sensational stories are attacked. Likewise, if they fail to write about serious stories that are genuinely newsworthy because of a conflict of interest, their credibility will decline.

The IIPM vs. bloggers conflict that has erupted in the Indian blogosphere has put the print media in a curious conflict of interest situation. They want to print newsworthy stories but it turns out that IIPM is one of Indian newspapers’ biggest advertisers. So far, the so-called MSM has ignored this story. It could be that no one has researched the story far enough to see the newsworthy aspects of the story. It could be that investigative reporters are digging around at inside story of the IIPM and will publish their stories in the coming weeks (and I really suspect that there is a big story here to be uncovered). However, it might be that each newspaper is reluctant to upset its biggest advertiser.

This raises an interesting economic question: how much does it cost a newspaper to lose its biggest advertiser? To answer this question, they should ask Mr. Chaudhuri, dean of IIPM, to place his head into a basin of water, (any bowl will do, even a toilet bowl), and then quickly remove it from the water. If the image of his face remains in the bowl of water, the newspaper will sorely miss this ad revenue. If the water quickly rushes in to fill the void, then one would assume that likewise many other advertisers would rush in to fill the void caused by the absence of IIPM’s advertising.

This is an important point: there really is no conflict of interest here. No newspaper needs IIPM’s advertising. In the long run, there is no better way to guarantee advertising revenue than to produce a consistently credible newspaper that covers all of the news. Any credible newspaper knows this and purposefully keeps the advertising portion of their newspaper physically separate from the reporters so that there is no interaction between them and so there is no potential for a conflict of interest. In the long run, reputation sells papers, and selling papers brings in advertisers. And the only time the reporters should consider their advertisers is when they read them and wonder: “Who are these people and why are they spending so much on advertising – what is the story here?”

The links above for IIPM are to a new IIPM wikipedia entry. Read Ravikiran’s post about how you can help build this important wiki cite.

(technorati tag)

Monday, October 10, 2005

Reputation as a Business Asset

Many businesses need not worry too much about their reputations. The product they make is easy to evaluate. If the price is reasonable, the product will sell even if you never heard of the company.

Other products are inherently different. The may have aspect of them that make it difficult to determine their quality. An automobile is like this. It may be easy to see if it looks nice and if it runs smoothly in a test-drive, but only time will tell if the car will be a “lemon” or a “peach”. If the automobile has a reputation for needing frequent service, the reputation of the automaker will suffer.

The Japanese automakers invested heavily in quality, the Yugoslavian ones didn’t. Over time the Yugoslavs left the auto market and the Japanese dominate. It seems obvious that you want to invest in your reputation but it isn’t quite as easy as it sounds.

Firms that invest in their reputations can almost mint money over time, because the barriers to entry are huge. The only way to compete is to invest in your reputation for many years, but in the short run, you don’t have a reputation and you need to cover your costs. Also, if your management is lax, your employees will let you down and destroy what little reputation you have. It takes many years to build a reputation, and only an instant to destroy it (a message many parents have shared with their children). Therefore, a firm with a good reputation in an industry where reputation is key can be fairly confident that most of their potential competitors will mess up over time and ruin their reputations.

Nowhere is reputation so vital as in the area of education. The product requires many years of work to produce, and only after you leave the institution do you get to see if the student made a wise decision in choosing that institution. Institutions like Harvard and Yale have spent literally centuries building their reputations. Other institutions compete, but it won’t be easy to gain on their reputations. Harvard and Yale get the best students and the best teachers because they have such stellar reputations. Chances are excellent that these institutions will be at the top of the list even one-hundred years from now.

At the extreme other end of the reputation scale is the infamous IIPM. Instead of investing in producing a quality product, they have invested heavily in advertising. Most quality education institutions let their reputations do their advertising. I have never seen an ad for Harvard and Yale and don’t expect to. But the IIPM apparently works on the P.T. Barnum theory of reputation: “There’s a sucker born every minute.”

But even a bottom-dweller in reputation hates to see more bad press in print or on the web. This might explain why this institute has been extremely aggressive in suppressing bad news coming from popular Indian blogs. In particular, the IIPM has reacted strongly to pieces written by Gaurav Sabnis and Rashmi Bansal. This blog post by Rashmi Bansal has some outrageous comments by some pseudo-blogs that are sympathetic to IIPM.

Who would make such outrageous and potentially libelous statements? It is possible that these comments are from misguided supporters of IIPM but it is very doubtful that there are any such supporters who would be so motivated to make such uncivil comments. Another possibility is that these comments all come from a single disgruntled student who really wants to trash the reputation of the IIPM (and is succeeding). But in that case, the IIPM should be quick to denounce these comments. The IIPM cannot claim to be ignorant of them because their other actions suggest that the IIPM is very much aware and concerned about blogger’s comments about the IIPM. A third possibility is that these comments were created by people directly under the employ of the IIPM under the specific guidance of senior IIPM management. There may be a fourth possibility, but I cannot think of it.

Now, today comes the incredible news that the famous Indian blogger Gaurav Sabnis has resigned to prevent an absolutely outrageous (and thoroughly non-credible) threat from the IIPM against his employer, IBM. The behavior of the IIPM is unbelievable. You must read his post. Why would an institution that needs to protect its reputation act so brazenly?

Let us assume that an institution, not the IIPM but an imaginary institution, decides to create bogus blogs and libel its detractors in the blogosphere. They also make wild threats like threatening to burn laptops to get a blogger to retract a story that is negative about that institution. What would motivate the management of an institution where reputation is key to act so immaturely and so recklessly? There can be only a few reasons that I can see. One is that these are idiots (we can never rule that out), but even most idiots need motivation to do idiotic things. The other possibility is that such an institution is fairly desperate. Perhaps the institution faces emanate bankruptcy and sees little to lose from desperate measures. Maybe the senior management did things that would be very embarrassing (or even criminal) in an effort to keep their business going while they worked desperately to avoid the inevitable collapse. Before the collapse, they might see little reason not to lash out irrationally at everyone they see as their enemies. If you have nothing, you have nothing to lose.

I have no idea if any of this would apply to the IIPM. I cannot know anything just by speculating on motive. However, I would say that there is a very high probability that the IIPM story that we know so far is just the tip of a giant iceberg. The way the supporters and the management of the IIPM are behaving is inconsistent with the way I would think the supporters and the management of a reputable institution would behave, and reasonable people would wonder what the IIPM is really up to.

Many bloggers have taken great pains to explain that their issues with the management of IIPM should not reflect on the students IIPM. There is an important point here: is the management of IIPM think at all of the reputation of their alumni? The management of the IIPM are free to trash the reputation of their school but don't they have an obligation to protect whatever little respectability that an IIPM degree might confer on a graduate? In a few years (if not already) a graduate of the IIPM might as well go into a job interview with a dunce cap on his head rather than admit to attending this infamous institution. Is the IIPM mananagement even considering this? Did P.T. Barnum spare a thought for one of his suckers?

(technorati tag)

Thursday, October 06, 2005

Fallow Minds

Sometimes while driving around, I might see a field of weeds. Surely this land will soon be used for something because land is too valuable to leave fallow for long. You might think, “If the owner lacks cash, he may have to put off building for a while.” But the owner’s financial situation is irrelevant. He can borrow the money and use what he is building as collateral.

In general, the amount of money that should be invested in any project is independent of how much money you have to invest in it. If you have very little money, or even a lot of debt, you should still be able to borrow as long as the marginal return on further investment is greater than the interest rate. On the other hand, if you have tons of money to invest, you wouldn’t invest more money in your firm than the amount where the marginal return on further investment equals the interest rate because otherwise you could make more money just investing in other things. The key assumption here is that you can borrow money because you have collateral that the bank can seize if you cannot make good on your loan.

Now consider a young farmer in India who is not making it. He decides to give up and move to the big city. He may have a mind that is capable of learning a good skill like plumbing. He is young and strong and healthy. He is reasonably trustworthy. He may lack any money, but he has potential. Why can’t the market help him the same way the market helps invest in firms? Why wouldn’t a free market invest in the ex-farmer’s skills as long as the return on that investment exceeds the interest rate?

In some sense, I would call this Dilip’s complaint. Dilip D’Souza understands the failings of socialism but doesn’t see why the free markets fail to help the farmer above. It is a valid question: “Why doesn’t the market help this farmer achieve his potential?”

There could be several explanations for this market failure. Amit Varma might say that there really is no free market in India. He might say that the License Raj and the myriad of regulations in India have thwarted the farmer’s potential and have stifled the markets, especially the manufacturing sector. There is truth to that, but I doubt that even in a pure free market, the farmer would find it easy to find investors for his training.

The problem the farmer faces is a problem of collateral. Banks want something they can seize if the loan goes sour. You can’t put yourself up for collateral.

This is one area where socialism might have an edge. The socialist government can and does own everyone like slaves. They would gladly invest in the people’s skills as long as the return on those skills is merited. The government knows that there is no escaping their reach (as long as you don’t leave the country) so they will get their money eventually. But do we need government that owns the farmer to get someone to invest in his potential? Can’t the market invest in the farmer without government interference?

In the early days of the colonial America, workers would become indentured servants in order to pay for passage to the New World. These indentured servants would then have to work like slaves for about seven years to pay off the debt associated with the passage over the ocean. But the people sometimes just ran off and blended with the free colonists. This was one of the reasons why the colonies went for African slaves. But any kind of contract that would virtually enslave a person would be invalid today.

In the United States, if this farmer wanted to be a plumber, he could go to the labor union. The labor union might turn him away, but if they didn’t, they would make sure he got the skills necessary to become a fully skilled plumber. The union would not fear that the farmer would run away with his skills without paying back the investment because where would he go? He has to belong to the union to be a plumber so he can never leave.

This is an important point: the union doesn’t need to own you; they just need to own your type of labor. They know that if you want to be a plumber, you cannot do it outside of their union. And they reason that you would not want to throw away such valuable skills.

However, the union is a monopoly and has a vested interest in limiting the supply of new trainees. It would be ideal to have competition between labor corporations to ensure that the market provided plenty of plumbers.

An interesting labor agreement is the contract that a baseball club signs with its minor league players. These players need years of training before they are ready to play in the big leagues. The clubs in effect own the players and can even sell them to other clubs. The players are free to quit baseball, but if they want to play baseball, they have to play for the club that owns their contract. This allows the clubs to invest heavily in the skills of the players and know that they will get that money back. After several years, the player becomes a free agent: he owns himself again and can sell his services to the highest bidder. It is an arraignment that works really well.

My idea is that the farmer could sign a contract with a firm that trains plumbers. This firm would invest in the farmer’s skills with the understanding that the farmer would belong to the labor corporation for a limited time until the debt is paid off. But what would prevent the farmer from running away and becoming a free plumber somewhere else just like the indentured servant?

In order for the labor corporation to work, they need to have some form of collateral. This collateral would be a license to practice as a plumber. The firm issues the license and can hold it as collateral during the indenture period. But in order for this to work, there need to be an enforcement mechanism. There must be a regulation that would prevent firms from hiring the farmer who ran away without his license.

There is actually a country that enforces such regulations: Switzerland. No one can do any job in Switzerland, no matter how trivial, without first doing an apprenticeship. You must be trained on the job and get your license before you can be a free agent. This has a remarkable effect: there is virtually no unemployment and virtually no poverty in Switzerland (Switzerland is doing a lot of things right, not just the labor markets). Firms gladly invest in workers because they cannot run away.

I think the same system could work in India or even in the United States. The government would have to have to enforce the rule that you cannot work in a field without first doing your apprenticeship with some labor corporation. The labor corporations would want to build their reputations since recruiting talent is how they would make their money, so they would have incentive to train these workers well and make sure that after the workers got their apprenticeships, they could command a good salary. The government would have to prevent phony labor companies that print up bogus licenses that could be used by “runaways” to skirt the apprenticeship requirement.

Getting this whole system going would take some work. The problem is that there are no companies that have good reputations and can issue reputable licenses. It would probably take some initiative to get this going and some very entrepreneurial firms that are willing to blaze a trail. Most of all, it would take a government that could understand this market well enough to pass a few reasonable regulations to protect the integrity of the licenses without gumming up the works with myriads of useless rules. I’m sure most people in India would be reluctant to give the government another excuse to require another license. But in principle, this idea could be exactly what the poor in India would need to quickly climb out of poverty.

In the comments section, Ravikiran Rao (who used to blog at the Examined Life) objects vehemently with my suggestion that these certificates need to be mandated by government. "What were you thinking?" he asks. Indeed, what was I thinking?

I was thinking that this was a market of full information and the person who had received skills and not paid back the company that had given them would be able to simply run away and get the benefits of being skilled by just working somewhere else. I feared that the market for these certificates would collapse because there was no practical way to enforce the contract on the worker.

However, I think I was probably mistaken. The market for skills is definitely one of private information. Only the certification authority would have certain knowledge that a particular worker was fully trained in a particular field. The certificate (if issued by a reputable firm) would be the proof that the worker would need to show an employer that he or she is fully skilled and not just partially skilled. This proof enables the worker to get a premium wage in the job market.

So if no government agency is necessary to create these labor corporations and these certificates, why haven't they appeared spontaneously in the labor market? The answer might be that it would take many years to develop credibility in this field and it would take a bold entrepeneur to enter. But the interesting thing about this market is that the barriers to entry mean that it would be almost the perfect to be in since you wouldn't need to fear lots of competition.

Tuesday, October 04, 2005

The Importance of Paying Close Attention to Conversation

My wife was telling me how some woman came up to her and said, “You look familiar. Have we met before?”

This has happened before and, no, they had never met. My wife wondered what was it about her that made others seem to think that they had met her before.

“Maybe she had gone to India before and she thought that all India woman looked alike.”

“Maybe,” I said.

“Or maybe I just have a common-looking face.”


“You’re supposed to say, ‘No, dear, you have a extraordinary face.’”

I stepped into this one. Now I needed to find my way out. “You have a very beautiful face dear.”

“Too late, you missed your chance. You can’t sweet-talk your way out of this.”

“Your face is common in the sense that it represents the ideal of beauty that every woman aspires to and every man would hope for.”

“That boat has set sail, dear.”

Monday, October 03, 2005

Half Sigma was Libertarian Girl

Half Sigma (whose real name is Michael) pulled off one of the biggest blog hoaxes. He had a blog called Libertarian Girl and had a picture of a pretty young blonde (it was actually taken from a Russian mail order bride site), and he pretended to be this blonde who was into laissez-faire economics. The blog was a big hit but eventually Catallarchy exposed him because they noticed the picture on the Russian mail order bride site.

Michael at Half Sigma also had a very successful blog at Calico Cat. This blog continues to get a lot of hits because he linked to all of the salacious gossip associated with Jessica Cutler, a Washington area prostitute who kept a blog of her affairs.

He also started another blog called Abigail’s Magic Garden in which he pretended to be a liberal girl.

He also blogged at Half Sigma, which was an honest blog that discussed politics and economics from a right of center perspective. It was very popular until July, and then he slowed down his posting.

When Half Sigma was very popular, I used to comment on virtually every post. I thought that Half Sigma was going to be a very popular blog because he posted often and was reasonably intelligent. I linked to several of his posts and I even wrote a piece about how blogging could be indicative of labor market skills using Half Sigma as an example. At that time, I thought Half Sigma would become more popular that Coyote Blog. That seems ridiculous now. Coyote blog now gets 10 times the traffic that Half Sigma gets.

At the time when I was commenting on everything that Half Sigma posted, it seemed that commenting on others’ blogs was the only way that anyone would read what I had to say. I would often insert links to my own posts (which Michael didn’t mind) and this gave me a little bit of readership.

Eventually, though, I figured that I would get more regular readers by commenting on the other blogs that linked to me and the better blogs that those people linked to. Since even at that time about 75% of the blogs that linked to me were “desi” blogs, I started commenting on desi blogs. I have gone from 9 links to around 90 links, so that strategy really worked. More than that, I have made some really good blog buddies that I love to read every day (and if I haven’t commented on your blog recently, I am still reading it, I am just commenting a little less now).

Michael’s blogging experience is actually an interesting story. If he were writing a book about it, it might be really interesting. But it also seems kind of sad. I don’t think he has many friends. He has turned to online dating to try to find a wife. He spent a lot of time going to law school but didn’t become a lawyer. It seems like he is really intelligent and creative and none that lead to anything all that worthwhile, (yet).

And the last sentence could be said about me (except that I do have a wonderful wife and child and a nice job and a nice house). I need to think about that. There is a fine line between pursuing a fulfilling hobby and wasting a lot of talent.