Books that should be read before starting a Ph.D. in economics

Suppose a young person is going to start a Ph.D. in economics. What essential readings would you recommend prior to this?



In my opinion, the Ph.D. in economics involves a heavy emphasis on tools. But the story isn't told, about why we are building these tools. The intuition isn't built, about the world out there that we seek to model. I always joke that economics students who are clueless about reality are like a child studying projectile motion without having ever thrown something into the air.



So I thought it's useful to pick a set of books that touch on the great themes of the world, often going into troublesome terrain that the models aren't very good at, so as to lay a foundation of background knowledge and historical knowledge which can pave the way to usefully assimilating what's taught in the economics Ph.D. Of course, they should be books that are fun to read and un-putdownable.



Here's my suggested compact checklist of books worth reading. Please do suggest books, and disagree with this list, in the comments to this post.

1. The evolution of cooperation, by Robert M. Axelrod


2. Good capitalism, bad capitalism, and the economics of growth and prosperity by William J. Baumol, Robert E. Litan and Carl J. Schramm
   
   


3. A splendid exchange: How trade shaped the world by William J. Bernstein
   
   


4. The elusive quest for growth by William Russell Easterly
   
   


5. Invisible engines: How software platforms drive innovation and transform industries by David S. Evans, Andrei Hagiu and Richard Schmalensee
   
   


6. The ascent of money by Niall Ferguson


7. Economic gangsters: Corruption, violence and the poverty of nations by Raymond Fisman and Edward Miguel


8. Capitalism and freedom by Milton Friedman
   
   


9. The great crash of 1929 by John Kenneth Galbraith
   
   


10. The age of uncertainty by John Kenneth Galbraith
    
    


11. Exit, voice, loyalty by Albert O. Hirschman
    
    


12. Development, geography and economic theory by Paul Krugman


13. More money than God: Hedge funds and the making of a new elite by Sebastian Mallaby
    
    


14. Reinventing the bazaar: A natural history of markets by John McMillan
    
    


15. Readings in applied microeconomics: The power of the market edited by Craig Newmark
    
    


16. From the corn laws to free trade: Interests, ideas and institutions in historical perspective by Cheryl Schonhardt-Bailey
    
    


17. Seeing like a State by James C. Scott
    
    


18. The company of strangers by Paul Seabright
    
    


19. Information rules: A strategic guide to the network economy by Carl Shapiro and Hal R. Varian

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A new low for Indian economic policy

Strange things in the appointments process:

• 16 May: Deepshikha Sikarwar has a story in the Economic Times today titled I-T dept seeks former SEBI chairman CB Bhave's tax returns details.
  
  
• 25 April: Shaji Vikraman had a front page story in the Economic Times about how Bhave's team at SEBI was being dispersed. And, Mobis Philipose on these issues in Mint, and Sahad PV on VCCircle.
  
  
• 23 April: P. Vaidyanathan Iyer had a front page story in the Indian Express on how C. B. Bhave was removed.
  
  
• 18 April: Paranjoy Guha Thakurta on the problems of recruiting a successor for U. K. Sinha at UTI.
  
  
• 9 April: Subhomoy Bhattacharjee and Sunil Jain in the Indian Express on problems in the recruitment of a successor to U. K. Sinha at UTI.
  
  
• 5 April: An interview with C. B. Bhave in the Business Standard by Shyamal Majumdar and Rajesh Bhayani.

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Solving the problem of black money in real estate

by href="http://ajayshahblog.blogspot.com/2011/02/author-shubho-roy.html">Shubho
Roy and Pratik Datta.

Manmohan Singh as finance minister killed off smuggling, by
eliminating customs duties. Black money in the real estate sector href="http://www.deccanherald.com/content/146794/lower-stamp-duties-can-check.html">recently
attracted his attention. He suggested lowering of stamp duties
to check the flow of black money in this sector. But will this solve
the problem of black money? And how will the State compensate for
the loss of revenue collected from stamp duty?

Stamp duty is a transaction tax; it is charged as a percentage of
the transaction value of the property. Public economics teaches us
that all transaction taxes are bad taxes, that the right level for the
stamp duty is zero (as it is for all taxation of transactions).

The stamp duty distorts the behaviour of parties to the
transaction. Stamp duty on property is usually paid by the
buyer. Hence, the buyer tries to coax the seller to agree to
undervalue the property on paper (the transaction value declared to
the government) and accept the rest in black money. On the other hand,
sellers have an incentive in accepting black money from the buyer in
order to evade the taxation of capital gains. As long as real estate
capital gains are taxed, eliminating the stamp duty will influence the
behaviour of the buyer but not that of the seller.

Hence, modest changes in the stamp duty rate will not solve the
problem of black money in real estate. When stamp duty is eliminated,
the buyer will be comfortable with zero evasion, but the seller will
still urge him to take some black money.

Bad taxes should be eliminated because they are bad taxes. There
should be no attempt at finding a direct replacement. As an example,
India largely phased out customs duties, because the economists said
these are bad taxes, without specifically trying to find a
replacement. The elimination of customs duties enabled high GDP
growth, and the main pillars of taxation (income tax and the VAT)
generated bountiful revenues. A similar story will hold for stamp
duty.

The economists teach us that all taxation of transactions is
wrong. The property tax suffers from no such problems. Much work is
needed in India in building a sound property tax system. In some
countries, property tax revenues can be as large as 1% of GDP, which
is a very big number compared with the financing of local government
in India. The key issue is that the average value of property in each
micro neighbourhood (e.g. a 200 metre stretch of road) needs to be
assessed correctly and revised every year. This should then be used as
a preumptive property tax rate, per square foot, for that micro
neighbourhood. Once this is done, property tax collections will be a
powerful source of revenue for local government.

There is a link between these two issues. As long as there is a
stamp duty and high taxation of real estate capital gains, the
reported data will understate property values. This will hamper the
revenues obtained through the property tax. To the extent that we
solve the twin problems of stamp duty and capital gains taxation,
the data in the hands of government about real estate prices will
improve, and this will bring property tax to life as a significant
revenue source.

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Author: Pratik Datta

• Sunshine in the court room, 4 April 2013.


• The genesis of India's 'basic structure' doctrine, 23 April 2012.


• Solving the problem of black money in real estate, 5 May 2011.
  
  


• Reliance ADAG consent order, 18 February 2011.
  
  


• Transactions between banks in bad assets: An interesting legal drama, 7 October 2010.
  
  

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Succession problems in Indian firms

Democracies are more stable

Autocratic countries often appear to have a clean and stable political system. A government is clearly in charge. Businessmen like to deal with such a government, because you can go into a room with a powerful person and walk out holding a deal. You can do business with them.



Democracies, in contrast, are messy. The essence of a democracy is the dispersion of power. When power is dispersed between many individuals and institutions, decision making is slow and messy.



Differences are visible in public. A businessman finds it difficult to deal with such a government: He can't walk into a room and do a deal. Instead, deals (such as an airport contract or a mining concession) go through a contentious procurement process in the public domain. In the third world, the procurement and regulatory procesess are often riven with corruption, which makes a benevolent dictator look good.



While an autocracy may appear to be calm and stable, it actually suffers from two dimensions of instability. The regime suffers from the silent reproach of a million tear-stained eyes: You never know when an upheaval will come about. And autocracies suffer from problems of succession. When the strongman dies or gets killed, you never know what's going to happen next. When power and decision making is centralised, succession becomes difficult.



When the caudillo comes towards the end of his life, this triggers off instability because people around him are solving dynamic programming problems. I suspect this was part of the story of how Mubarak's world fell apart.

A business with a strong CEO is like an autocracy

Many firms have centralisation of thinking, power and decision making in the hands of one person or one family. This often looks nice for a while. There is clarity about who is in charge; the CEO is generally well incentivised; the CEO generally works hard and many such firms are highly successful.



But such firms face difficulties of succession. Precisely because so much power and decision making was concentrated in one person, it is difficult to replace him or her.



As with good countries, good companies evolve from concentrated power to dispersion of power. A good country is one in which power is highly dispersed, where thinking and problem solving is taking place in millions of places by empowered individuals who are not waiting for instructions. In similar fashion, a good company is one in which the CEO does not dominate the landscape: the board of directors (above) and the management team (below) play a much stronger role when compared with conditions of dictatorship. As with a country, if one person is doing all the thinking, the firm is capable of little. In a good firm, the energy and imagination of dozens or hundreds or thousands of people is harnessed.



For small problems, one thinker is often adequate. As an example, to run a coffee shop, one mom and pop suffices. But to run a large, complex, modern knowledge-intensive firm, we need to harness the energy and imagination of hundreds or thousands of people. When such a firm is limited to the capabilities of one person, no matter how good he or she is, that yields stagnation.



In an autocratic company, there are serious problems of succession. A dominant CEO is hard to replace even if one were recruiting from the open market. Matters are often made worse by limiting CEO search to a family. In contrast, when power is dispersed, succession is inherently safer. Even if there is a lot of sound and fury in succession, there is less that can go wrong.



It takes a long time for a country to learn how to live within the complex checks and balances of democracy. In similar fashion, it is not easy to be a sophisticated modern firm, where the CEO is not a demigod. It is a difficult transition to make, to go from an autocratic environment to a democratic environment.



I believe that political analysts, globally, make the mistake of overstating the stability of a dictatorship and underestimating the stability of a democracy. In similar fashion, I feel that many people underestimate the succession problem of a family business and overstate it in a professionally managed company.

On the other hand, agency problems

This case against family run companies is very strong, for large organisations where it is essential to have many people thinking. However, the key problem that the professionally managed company faces is that of agency conflicts. With a family company, the incentives of the CEO are clear. With a professionally run company, it is not easy to ensure that the management team works for the interests of the shareholders.



On one hand, power needs to be dispersed because otherwise we can't have hundreds of people who are empowered and thinking. But when power is dispersed in such fashion, there is the heightened danger of theft.



The management of a professionally run company is therefore all about the tension between the efficiencies (economies of scale + large number of people who are thinking) on one hand versus theft on the other. Once again, it isn't so different from the agency problems that democracy is riven with.

Infosys

When a dictator is succeeded by his son, it looks like a smooth and easy transition, but it is actually a situation that is fraught with risk.



Succession at Infosys has been contentious and in the public domain. As with an Indian general election, it looks messy. But the problems here are overstated. Infosys is doing something relatively new in India: they are a professionally-managed dispersed shareholding company with disperson of power. While such succession looks messy, there is greater stability under the hood.

Governance problems of Indian firms

India is remarkable in having high quality firms. But at present, very few firms have the checks and balances of dispersed shareholding, a genuinely powerful board of directors, a professional management team, and the absence of dominant founders or family. There are a few such examples -- L&T, Infosys, ITC, Axis Bank, ICICI -- but as of yet, it is rare.



Many of the successful giant firms of the present Indian landscape are a bit like China: They look great today but they run the risk of a USSR event as they face the transitions of the future. The Indian corporate sector has a lot of work in store, in refashioning the giants of today, using the governance DNA of firms like L&T, Infosys, ITC, Axis Bank and ICICI. Those transitions will not be easy. As Lant Pritchett says: I recently did a study examining the growth consequences of sudden large democratisation (a shift in the POLITY index of more than 6 points). Of the 22 cases that experienced rapid democratisation with above average growth: (a) all but one had a growth deceleration, (b) the average deceleration was 3.5 ppa, and (c) the predicted deceleration was increasing with growth—roughly, post-democratisation countries reverted to world average growth. Transitions out of dictatorship are not easy.

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Slavery is freedom

While many people in India think that we have freedom of speech,
things are actually quite bad.

There are two well-respected global rankings in this field:

• Reporters Without Borders has a `Press Freedom Index'. For 2010,
  they
  show India at rank 122 out 178 countries. In their ranking,
  Nepal and Jordan and Qatar are more free than India.
  
  
• The other prominent ranking is by Freedom House. For
  2010, they
  place India at rank 72 out of 196. In their ranking, Hong Kong,
  Benin and Tonga are more free than India.
  
  

Why are things so bad? The Constitution does not establish freedom
of speech as a fundamental right. Laws of colonial vintage punish
free expression, and new laws (e.g. connected with the Internet)
have not shown a greater interest in free speech. Books are
regularly banned, journalists or bloggers are regularly imprisoned
or killed. It is a war zone out there.

See India
puts tight leash on Internet free speech by Vikas Bajaj
in the New York Times on 27 April.

I was hence quite surprised to
see reporting
by Sanjib Kumar Baruah in the Hindustan Times where he
quotes the minister for information and broadcasting, Ambika Soni,
as saying:

"Our media is probably the freest in the world"

It is bad enough to have a fundamentally flawed Constitution and
laws where free speech is not enshrined. The least we can do in this
unhappy situation is to recognise that we have a serious problem and
go solve it. We are better off without such Orwellian claims.

Similarly, Amartya
Sen, writing in the New York Review of Books notes that
there is more free speech in India than China. Yes, there is. But
should we get pleased when we are good when compared with one of
the more thuggish states of the world? India needs to set its
sights higher.

We like to think that while we're poor, we're one of the better
democracies out there. Okay, if so, shouldn't we be atleast in the
top quartile in international rankings of freedom of speech? That
would mean getting to a rank of 45 (instead of 122) in the ranking
by Reporters Without Borders, and a rank of 49 (instead of 72) in
the ranking by Freedom House. To get there, we will need to first
start by acknowledging that we have a problem, instead of engaging
in triumphalism.

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Kicking the wheels of the new CPI

by Ashish Kumar.

Inflation measurement is a critical component of macroeconomic
policy. In a recent paper, href="http://econpapers.repec.org/RePEc:npf:wpaper:11/83">Patnaik
et. al. have argued that while the CPI-IW has many problems, these
difficulties are not first order, and that the CPI-IW can yield a
reasonable measure of inflation today.

On 18 February 2011, CSO released a new CPI with base year 2010
(Jan-Dec =100). This new CPI has five important new features:

1. It is disaggregated at the rural and urban levels. The new
   overall all India CPI is a weighted average of the two. This
   is in contrast with the earlier CPIs which represented subsets of
   the population (industrial workers, agricultural labourers, rural
   labourers, etc.).
   
   
2. The new series has better geographical as well as commodity
   coverage. The basket of consumer goods has risen from 25 to 250.
   
   
3. The weights have been derived from the 61st round of the NSS
   consumer expenditure survey (2004-05).
   
   
4. Data for the urban CPI will be collected from 310 towns (compared
   to 78 in the current CPI-IW, for all India). The rural CPI will use
   data from 1181 villages. Field officers of the NSSO and the Department
   of Post will be the price collection agents for urban and rural
   centers respectively.
   
   
5. Since the two series are not comparable, year-on-year inflation
   numbers based on the new CPI will be available only from February
   2012.
   
   

Sub Group		New CPI
	Rural	Urban	All India	CPI IW
Food, beverages and tobacco	59.31	37.15	49.71	50.20
Fuel and Light	10.42	8.40	9.49	6.25
Clothing, bedding and footwear	5.36	3.91	4.73	13.28
Housing	0.00	22.53	9.77	5.33
Miscellaneous	24.91	28.00	26.31	24.94

The share of food in the new CPI series has seen a small dip in
comparison to the CPI-IW while the share of services has risen. The
share of housing has also seen a sharp rise. In CPI-IW, the price of
housing services was imputed from the house rent allowance given to
civil servants. For the new CPI series, housing prices will be
collected through surveys of a sample of rented dwellings in 310
towns.

The weights in the new CPI are taken from a household survey by
NSSO. This is, however, already quite dated given that it was
conducted in 2004-05. It is hence interesting to compare these
weights with those seen in the href="http://www.consumer-pyramids.com/">CMIE Consumer Pyramids
dataset, which goes upto the quarter ending Dec 2010. This is a
panel dataset where 140,000 households are measured every
quarter.

The household basket as shown by CMIE gives a weight to rent based
on households that report rent. The CPI uses an imputed rent. An
imputed rent calculation for the CMIE data is not feasible based on
the information presently given out by CMIE. In order to render the
two comparable, we purge both consumption baskets of rent.

Sub Group	New CPI, rural	CMIE: Oct-Dec 2010, rural
Date	2004-05	2010-11
Food, beverages and tobacco	59.31	59.57
Fuel and Light	10.42	12.12
Clothing, bedding and footwear	5.36	3.75
Miscellaneous	24.91	24.54

In rural India, the weights of food and miscellaneous in the new
CPI match that seen in the CMIE consumer pyramids even though the CMIE
dataset is much more timely. In comparison to the Consumer Pyramids
weights, fuel and light is under-weighted while the clothing category
is over-weighted in the new CPI. The fact that these differences are
small gives us increased confidence in the NSSO and in the new
CPI.

Sub Group	New CPI, urban	CMIE: Oct-Dec 2010, urban
survey in	2004-05	2010-11
Food, beverages and tobacco	47.96	45.95
Fuel and Light	10.84	16.45
Clothing, bedding and footwear	5.04	3.78
Miscellaneous	36.14	33.82

A similar comparison in urban India shows noticeable differences in
all categories. The weights for the food group is lower in the CMIE
data. Both the clothing and the miscellaneous categories exhibit
similar patterns. The fuel group has a significantly higher weight in
Consumer Pyramids. Over time, the role of fuel has risen.

Sub Group	New CPI, all India	CMIE: Oct-Dec 2010, all India
survey in	2004-05	2010-11
Food, beverages and tobacco	55.09	53.48
Fuel and Light	10.52	14.06
Clothing, bedding and footwear	5.24	3.77
Miscellaneous	29.16	28.69

All India weights reveal similar patterns as urban India
weights. This is not surprising because all India figures are weighted
averages of rural and urban weights.

Assuming NSSO did a good job of measurement in 2004-05, this
suggests that over a short period of time, the expenditure pattern
of Indian households has been changing at a fast pace.

Despite the issue of weights, the new CPI series is a welcome
step. Improvements in inflation measurement will be an important
component of the Indian process of refashioning monetary policy
to deliver low and stable inflation,

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