Why consultants?

Robin Hanson, via MR, has this explanation for paying exorbitant amounts to hire reputed management consultation firms with inexperienced but smart consultants,

Firms often have big obvious misallocations of resources, where lots of folks in the firm know about the problems and workable solutions. The main issue is that many highest status folks in the firm resist such changes, as they correctly see that their status will be lowered if they embrace such solutions.

The CEO often understands what needs to be done, but does not have the resources to fight this blocking coalition. But if a prestigious outside consulting firm weighs in, that can turn the status tide. Coalitions can often successfully block a CEO initiative, and yet not resist the further support of a prestigious outside consultant...

Yes the information contained in consulting advice can be obtained elsewhere at a lower cost. Firms could hire most any smart independent folks, or set up a prediction market. But alas those sources don’t have the raw strength of status to cow opponents into submission, opponents who in practice can block changes no matter what a CEO declares.

I will add four more reasons

1. Most often, the leadership (or atleast critical parts of the leadership) knows what is wrong. However, any major transformation cannot be done based on hunches or anecdotal evidence. The consultant provides the convenient cover for the executives to push through the transformational changes. The consultant's report provides the gravitas and credible justification for the reforms proposed.

2. A reputed external consultant, specifically hired to develop and/or manage a transformation program, has significant symbolic value. This can provide the required change momentum and discipline to push through the proposed reforms. The transformation blue-print prepared by a reputed external consultant after a "stakeholder consultation" (and this jargon is important) process, provides a platform to galvanize the entire organization into embracing change.

3. The organization generally contains the knowledge for its failings, its prospects, and an idea of its road map. However, the transformation blue-print is never available in one place and in an implementable format. The consultant talks to all stakeholders and puts together everything in an implementable shape.

If the organization does not have an idea of its broad failings and its future direction, then it is an indictment of the management itself. Such organizations require a change in their management, instead of consultant quick-fixes. If the management is not revamped, such organization cannot turn-around or achieve its objectives even with the consultants' advise.

4. Apart from the broad transformation components, the consultant's transformation blue-print contains certain details (like the sequence of changes, its pace, etc) which are not always evident and does require some basic information collection and problem solving. Ultimately, this may be the biggest substantive value addition by the consultant.

Burgernomics says yuan needs to rise 48%?

The latest version of the Economist's Big Mac Index is out. The index, which is based on the premise that in the long run exchange rates should move to equalize the price of an identical basket of goods (n this case one Big Mac) between two countries, seeks to arrive at a light-hearted measure of how far currencies are from their fair value (in relation to dollar).



The index would suggest that a fair value dollar-yuan exchange rate should be 3.54 yuan to the dollar, compared with the current rate of 6.78, or the yuan is undervalued by 48%. In fact, its broader message would have it that emerging economy currencies are under-valued.

India is not covered under the index. But interestingly, even though the Big Mac is the cheapest in India (at around $1.22), it is amongst those where it is slowest earned (it takes almost 61 minutes of work to earn enough to buy a Big Mac Mumbai).

Defunct consultant!

John Maynard Keynes said this about economic policy making between the wars

"The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist."

It could easily be re-phrased as...

"The ideas of consultants and experts, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Politicians and bureaucrats, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct consultant or self-proclaimed development expert."

... to describe the state of administration in many important sectors.

Age of the "attention economy"

Fascinating article (via Marginal Revolution) by Michael Erard about how in the information age, cultural producers (designers, filmmakers, theater types, musicians, artists, advertisers etc) face both a shortage of attention (among their audience) and the challenge of "allocating that attention efficiently among the overabundance of information sources that might consume it".

He gives the exmaple of giving "free" and making things brief as allocation strategies to capture immediate attention. However, on the flip-side, pricing things free does not come free, and is unsustainable. And, being brief is underpriced. He writes

"I imagine attention festivals: week-long multimedia, cross-industry carnivals of readings, installations, and performances, where you go from a tent with 30-second films, guitar solos, 10-minute video games, and haiku to the tent with only Andy Warhol movies, to a myriad of venues with other media forms and activities requiring other attention lengths. In the Nano Tent, you can hear ringtones and read tweets. A festival organized not by the forms of the commodities themselves but of the experience of interacting with them. Not organized by time elapsed, but by cognitive investment: a pop song, which goes by quickly, can resonate for days; a poem, which can go by more quickly, sticks through a season. A festival in which you can see images of your brain on knitting and on Twitter.

I imagine a retail sector for cultural products that's organized around the attention span: not around "books" or "music" but around short stories and pop songs in one aisle, poems and arias in the other. In the long store: 5,000 piece jigsaw puzzles, big novels, beer brewing equipment, DVDs of The Wire. Clerks could suggest and build attentional menus. We would develop attentional connoisseurship: the right pairings of the short and long. We would understand, and promote, attentional health.

I imagine attention-based pricing, in which prices of information commodities are inversely adjusted to the cognitive investment of consuming them. All the candy for the human brain — haiku, ringtones, bumper stickers — would be priced like the luxuries that they are. Things requiring longer attention spans would be cheaper — they might even be free, and the higher fixed costs of producing them would be covered by the higher sales of the short attention span products. Single TV episodes would be more expensive to purchase than whole seasons, in the same way that a six-pack of Oreos at the gas station is more expensive, per cookie, than a whole tray at the grocery store.

I imagine an attention tax that aspiring cultural producers must pay. A barrier to entry. If you want people to read your book, then you have to read books; if you want people to buy your book, then you buy books. Give your attention to the industry of your choice. Like indie musicians have done for decades, conceive of the scene as an attention economy, in which those who pay in (e.g., I go to your shows) get to take out (e.g., come to my show). It would also mitigate one oft-claimed peril of the rise of the amateur, which is that they don't know from quality: consuming many other examples from a variety of sources, even amateur producers would generate a sense of what's good and what's bad: in other words, in their community they'd evolve a set of standards. This might frustrate the elitists, who want to impose their standards. But standards would, given enough time, emerge...

And yet I can't shake fantasizing about attention that has no price, that can't be bought or sold, but is given freely: a gift. I buy and read books because I want to give the gift of my attention to the attention economy I'm (as a writer) a part of. I'm inspired by Lewis Hyde in The Gift, who says that what distinguishes commodities is that they're used up, but what distinguishes gifts is that they circulate — the gift is never trapped, consumed, used up, contained or confined. That seems like the best basis for cultural production to thrive."

All this sounds very appropriate in the context of the intense debate surrounding the future (and even the utility) of test and one-day cricket matches in light of the spectacular manner in which Twenty-twenty cricket has caught hold of the imagination of cricket fans (and even those who never watched the game) across the world.

The Jewish diaspora

I can only exclaim in admiration, wow!

"They (Jews) make up 0.2 percent of the world population, but 54 percent of the world chess champions, 27 percent of the Nobel physics laureates and 31 percent of the medicine laureates.

Jews make up 2 percent of the U.S. population, but 21 percent of the Ivy League student bodies, 26 percent of the Kennedy Center honorees, 37 percent of the Academy Award-winning directors, 38 percent of those on a recent Business Week list of leading philanthropists, 51 percent of the Pulitzer Prize winners for nonfiction."

David Brooks

But among economists, the list is even more sweeping. We could just about replace the list of all prominent economists with that of Jewish economists and not miss much!

Going vertical in good times!

The spectacularly awesome 828 m high Burj Khalifa, which cost $1.5 bn and five years to build may be following in the footsteps of its predecessors as the tallest building in the world, in so far as its construction was initiated at the peak of property boom and is now inaugurated when the real estate bubble is deflated.



The Economist has a chart that compares economic growth of the relevant country when a tower was opened, with the respective annual growth rate enjoyed half a decade earlier.

Time cover curse?

This was then, and the rest is history!



And recently, Ben Bernanke, only history will tell the fate of this

Happy New Year!

My 2009 can be summed up thus,

The world economy witnessed many tumultuous events over the past year, and I learnt most of my macro while following the debates surrounding them!!

Wish you all a very happy and rewarding year ahead!

Rock climbers in demand!

In Kerala there is an acute shortage of people who can climb coconut trees amd pluck coconuts, so much so that the Kerala government even announced an international design competition to develop commercial coconut picking machines.



In California, they are searching for people who can climb up the massive blades of wind turbines for inspecting turbines, cleaning them and repairing them.



And both jobs are highly remunerative. A coconut plucker in present day Kerala can make Rs 300-500 a day for a couple of hours work. Similarly, the cost of a basic one-day job by two blade climbers in California starts at $2,000!

In California, the free-wheeling spirit of capitalist America has tapped into the supply of recreational climbers to incentivize them into cleaning and repairing blades. Is there a similar market in Kerala, as part of tourist packages to Kuttanad? How does "coconut tree climbing adventure tourism" sound???

Nobel prediction

The Economics Nobel Prize will be announced on Monday. Surprisingly, at its least credible moment and battered by the events of the past few months, Efficient Market Hypothesis appears to find redemption in the odds offered by Ladrokes (via Greg Mankiw), which places Eugene Fama at the top of the ladder. See also this, this, this, and this.

My pick is that one of them, Robert Shiller or William Nordhaus, will be a very worthy winner on Monday! Both choices are for reasons of topicality - financial market crisis and climate change respectively.

But given the Peace shocker, don't be surpised with something like this!

Comparing national pride!

In a poll of the nationals of 33 countries, Australians emerged with the greatest national pride, followed by Canada. Interestingly, Indians emerged amongst those with the largest national pride. Japanese, South Africans and Brazilians came out with the least self-image of their country.



(HT: The Economist)

Circular reasoning puzzle

Try out this circular reasoning puzzle.

Earth by night!

Paul Romer's new blog has this excellent map which illustrates the geographic variations in the level of economic activity across the globe (the lighted areas indicating economically active regions). Going by this yardstick, India is one of the most economically active regions in the world. Contrast this with China, whose economic activity is predominantly concentrated in the eastern coast.



Update 1
See this Vox article that explores alternate indicators to measure economic activity.

Dream and feel good...

... this YouTube video on Susan Boyle, a contestant in the "Britain's Got Talent" music show, has been watched and raved over by more than 30 million and counting...

Also read this, this, and this, and see this video.

Update 1
Chris Dillow on the economics of Susan Boyle - statistical prejudice, contrast effect etc

Epitaph for the present times...

... Dickens sounds very appropriate

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us...

Charles Dickens

Arianna Huffington sets the stage for Oscars!

Best Picture: Slumdog Millionaire
Worst: Bailout Billionaire

Best sound effects: Wall-E's singing.
Worst: Wall Street's begging.

Best editing: Elliot Graham, Milk
Worst: George W. Bush, The Constitution

Best adaptation: Simon Beaufoy, Slumdog Millionaire
Worst Adaptation: George W. Bush, U.S. Constitution

Best sex scene: Kate Winslet and David Kross in The Reader
Worst: Eliot Spitzer and Ashley Dupré in Client #9

Best rip off: the compromising photo stolen in The Bank Job
Worst: the $50 billion Bernie Madoff stole from his hapless clients

Best return on investment: Slumdog Millionaire, which cost $15 million to make and has grossed over $130 million worldwide.
Worst: the $350 billion we gave to Wall Street banks - with nothing to show for

Best sequel: The Dark Knight, Christopher Nolan's brooding follow up to Batman Begins
Worst: TARP II, Tim Geithner's vague follow up to Hank Paulson's Bailout Begins

Best performance in a drama: Mickey Rourke's soulful comeback in The Wrestler
Worst: the banking CEOs trying to act contrite in front of Congress

Best performance by a rodent: Matthew Broderick as the fearless mouse in The Tale of Despereaux
Worst: Rod Blagojevich as the Senate seat-selling rat in A Tale of Desperation

Best mega-buck action fantasy: Iron Man
Worst: Self-Regulation on Wall Street

Best Funny Performance: Jim Carrey says "Yes" to everything in Yes Man
Unfunny: Republicans say "No" to everything in Congress

Best Song: M.I.A.'s "Paper Planes," Slumdog Millionaire
Worst: G.O.P.'s "Barack the Magic Negro," Scumdog Millionaires

Best Achievement in Sound: The Dark Knight
Worst: Rod Blagojevich recorded trying to sell a Senate seat

Best farce: War, Inc.
Worst: (tie) Iraq War, Afghanistan War, War on Terror, War on Drugs

Best rude character: Dane Cook, "Tank" in My Best Friend's Girl
Worst: Dick Cheney "VP" in The Torturista

Best costume design: The Duchess
Worst: Sarah Palin's $150,000 wardrobe

Best overblown performance by a Diva with a dubious sense of right and wrong : Meryl Streep in Doubt
Worst: Sarah Palin in Doubt She Has Any Business on the Ticket

(HT: Huffington Post, here and here)

On learning economics...

On the question of debates on economic issues, Greg Mankiw writes,

"As you come to grips with (these) various points of view, you will be in a better position to judge which you find most cogent. But don't expect to reach unequivocal positions easily. It is best to consider all knowledge as tentative. The best scholars maintain an open-mindedness and humility about even their own core beliefs. Excessive conviction is often a sign of insufficient thought, which in turn may be derived from a certain pig-headedness. Intellectual maturity comes when you can maintain the right balance between informed belief and honest skepticism."

Caricatures of our times!

(HT: Greg Mankiw, Paul Krugman, Salon)

Shopping Guernica!

The incident involving the trampling to death of a Wal Mart employee in a New York store during the Thanksgiving shopping weekend captures the mood of the moment. As the economy weakens and the purses hollow out, American consumers, unable to shake off the long cultivated addiction to shopping, are finding solace in bargain shopping.

NYT has an excellent feature on the Wal Mart incident, comparing it to a "shopping Guernica"!

Ranking of Orchestras

Royal Concertgebouw Orchestra of Amsterdam has been ranked the world's top orchestra in a poll conducted by the Grampaphone magazine.