The Economics of Small
Things by Sudipta
Sarangi (Penguin Books)
At one place in this wonderfully ‘infotaining’ book, we are given an insight into game theory, “any rule-governed situation, where the final outcome depends on the actions of more than one person”. We get a breezy explanation of “today’s utility (our immediate consumption) versus future utility (the consumption of our future generations)”. We are told about repeated games, those which recur, and are also told that “... many of the seemingly irrational things that we do/observe can actually be explained using notions from repeated games”. This assertion is illustrated by a beautiful example showing why “many drivers in India will say a quick prayer while passing a temple... to protect themselves from mishaps on the road. The same drivers, however, will typically not wear a seat belt (a device guaranteed to provide greater protection in the event of an accident)...” Humour is present in this example, which is set up as a repeated game featuring the driver, God, and the seat belt itself, as players. I am tempted to offer spoilers as to the game, but will desist.
Behind stories of people going about their daily behaviour – from the trivial, such as eating (or not eating) the last slice of pizza, proudly displaying a pen in their shirt pocket (or not), to the important, such as selecting a health insurance policy, or, indeed, deciding to wear or not to wear a seat belt – are choices. Behind those choices is “serious economic behaviour”, the author says.
The book follows the winning ways of most nonfiction that seeks to explain a specialist topic to a general audience – it features plenty of autobiographical anecdotes, engaging examples, and deft analogies. For instance, the example of the bottled-water industry is used to explain the concept of ‘price discrimination’, or “charging different prices to different segments of the market for the very same product”. Surprised? Companies routinely practise price discrimination “by selling different quantities (bulk discounts) or qualities (different classes of airline travel) at different prices, besides offering stuff such as discount coupons”. Also, the author says, by charging late fees – credit card companies do this, combining these high late fees with low interest rates. Through price discrimination, the company can enhance its profits through selling, essentially, the same product to people who willingly pay more for it.
This book deals with the ‘invisible hand’ of economics in our everyday life. So, I suppose, the book will inevitably be clumped with Freakonomics by Steven Levitt and Stephen J. Dubner. But Freakonomics deals with major, life changing questions, while, as the title of this book suggests, its theatre is the commonplace life, for the most part. Also, this book is more theory-heavy while being as interesting as Freakonomics – no small feat, that.
Another example, rich and earthy, and oh-so-Indian: The author explores the vexatious and rousing problem of whether the best quality mangoes produced in India are exported to the US and other places, leaving lesser quality (though still good) mangoes for us Indians. His explanation for why this might happen is wonderfully simple (though the underlying concept is counterintuitive at first glance).
The author has the gift of grabbing your attention by joining together seemingly unrelated ideas to drive home his explanations. For instance, he uses the example of a gang of thieves in Sweden who stole “designer shoes from store windows”, even though the stores only displayed “shoes meant for the left foot”. It emerged the thievery was a trans-national operation, also involving stealing from stores in neighbouring Denmark, which exhibited shoes meant for the right foot. The thieves were stealing from both countries, then assembling pairs and selling them in the grey market. This example highlights the concept of “complementary goods”, and also complementarity existing between “different sectors of the economy” such as “the rail, steel and coal industries”. These sectors, we are told, “feed off each other”. If investment in either of these sectors lags behind (mis-coordination), “it will pull the other sectors down and the economy may experience losses”. Investing in just one or two of these sectors can “lead to wasteful expenditure, like spending money on jam but not buying the necessary amount of bread to roll it on”. This is one of the most lucid, as well as entertaining, explanations of an economic concept that I’ve ever read.
Despite the name of the book, the author does take on a few important topics. For instance, he mentions research published in Science magazine, which says that being poor “imposes a heavy tax on one’s cognitive abilities” because “immediate financial worries” leave the poor with “much less mental bandwidth”, which impacts their “cognitive capacity and makes them prone to errors”. This reduction in cognitive capacity can be as much as 13 IQ points – the equivalent of “being a chronic alcoholic, or losing an entire night’s sleep”.
The author also tackles racial, caste-based and religion-based discrimination through the lens of economics. He says there are two “simple and adequate” notions of discrimination – “statistical discrimination and taste-based discrimination”. In this connection, we are introduced to the work of Nobel awardees Kenneth Arrow and Gary Becker.
Many of the research conclusions mentioned are counterintuitive to the point of being mindblowing. For instance, we are told that while earthquakes obviously cause havoc in the short term, it is also true that “in the long run earthquakes affect income positively”. Wait, what? Also, is there a correlation between more Facebook use and less corruption? Yes, says the author, and explains how. And could a book meant for Indians avoid the topic of cricket? The author discusses research that explores whether “[t]he Twenty Twenty (T20) format required a different style of play from that of the One Day International (ODI) matches”. The answer makes for intriguing reading. And is more choice good? Cheerleaders of capitalism may well say “Yes!” But the author introduces us to the concept of “choice overload” – the phenomenon in which, “... faced with more choices/options, people often do not choose at all”.
This book is easy to recommend to the general reader. It features superbly entertaining anecdotes and examples, as well as delicious and accessible explanations, and apparently the desire to spark an interest in economics among those who pick it up. The book demonstrates how our behaviour is impacted by considerations which are avidly studied by economists – that much of our behaviour can be explained and demystified by explanations found in the science of economics. ‘Dismal science?’ Hardly.