Author Archives: Kevin L

When Leon Walras set out to made economics a science, he sought to describe the workings of the market using mathematics and even captured the mechanics of its dynamism – the notion that the system is just trying to head towards equilibrium. But the problem with real markets is that the prices never clears the market. Equilibrium is never reached.

If the Walrasian equilibria were reached, there’d be no goods on the shelves of any shops. All the goods would already immediate be in the hands of those who are willing and able to pay for it. And no one would really have the opportunity to master any jobs or pick up any skills reliably because they’ll always be switching jobs and jumping back and forth different production curves in order to optimise the market. Time was a missing ingredient in those equations of economics.

So the equilibria-seeking economics was useful as a way to describe and think about markets to some extent. But for the problems we are dealing with today, we need a new set of economics and approaches that enables us to move the world forward. This is already available as part of development economics and the new institutional economics – we’ve had decades of experiences thinking about laws, competition, market organisations and design in order to guide ourselves all towards the outcomes that can improve the world. It’s probably time for the basic foundations of economics to be about incentives and behaviours rather than demand and supply.

Did you know that bureaucracy is a solution to disorganisation and disorder? Hierarchy introduced some degree of check and balance that enable things to move in an orderly fashion where discretion at various levels would have created sheer chaos. Industrialism is built on finding good-enough practices to be put into a standard operating procedure and with simple enough indicator for the average person to check if instructions were being followed and things were moving normally.

Bureaucracies were not built to retain or use talents – they were built to ensure continued, smooth operations and to maintain status quo. They worked in a world which changed slowly. And they created broad based benefits as it enabled the average person to get a good job, progress through the ranks and be considered to have done well in life.

So not all bureaucracies are bad or made to cause trouble. The difficulty comes when there’s a need to change. As the system is built to hang on to status quo, it becomes hard to change or shift with new needs. And then it becomes strained. Not only so, in order to meet changing needs, additional work-around and often more bureaucracies were created.

The future we want to step into is not one that’s void of bureaucracies but one where breathing spaces are built into bureaucracy to enable changes and where the rationale of rules must hold within the new context or those rules can be ignored. After all, it is often more important to understand contexts than to understand rules.

Daniel Kahneman proposed the prospect theory which essentially relates to our views towards risk-taking. What was originally showing up in terms of financial decisions begins to be recognised in other situations as well. In general, when dealing with change, we face some difficulty recognising something new is better when we haven’t yet experience the full benefit and may resist it even if it’s better than status quo because the lost of status quo feels much more painful for us.

For some reason, I think improvements in living standards have made us less capable of grappling with loss. Smaller things in life seem to become such a big deal that earlier generations would not have understood why they afflict us so badly. In some sense, modernity and the physical comforts of life are starting to make us even more fragile mentally. And we have come to be more and more reliant on not just certainty but somehow having almost all of our expectations fulfilled.

And that is to say even if things do not move along with expectations, there is a sense of loss which is felt. What is operating today is growing to be a pandemic of mental issues and I believe it is not just about re-tuning our expectations but coming back to embrace human-ness, struggles, failure and tragedy as integral parts of life. We are better because of these challenges and not worst off. We better start recognising that.

I wrote about smoking as an example of great cultural and behavioural change even when capitalist incentives were against the trend. There was a time of course when businesses were happy to produce cigarettes and tobacco and many things helped to conspire to remove it from most of our daily lives. That included government action (taxes, regulations for labeling, import restrictions, etc.), companies (benefiting non-smokers, rewarding them more), society (stigmatisation of smoking, some degree of marginalising smokers) and the market (some enlightened investors are choosing not to put their capital in such companies that damages lives)

It takes everyone to work on it, and they only do a small part. But it works, and can bring about broad, sweeping changes which seemed tiny in retrospect.

The truth is, industries are smoking, our power plants are smoking, agriculture industry is smoking. Why are we not taxing them, stigmatising them and rewarding the non-smokers more? Yes I’m talking about carbon dioxide emissions. We need to be able to track, monitor and release details about behaviours and get companies to act. It’s time for “No Smoking 2.0”.

Cultural and behavioural change can happen. Think about smoking, how it was stigmatised, especially when the non-smokers are affected by the smokers. People used to be able to endure others, and thought it normal to smoke indoors. But then gradually, rules changed and then smokers became marginalised. It switched from the default where smokers think they have every right to be puffing around to the extent they feel apologetic about smoking.

Research and studies demonstrating the harm to bodies helps. Not just the impact on the single individual taking the action, but also on those around him. It seemed very significant even though it can be just one individual himself. But it took decades to try and work on this problem. It took excise taxes and more of it. In Singapore there were ‘yellow box’ areas where you can smoke in various places.

It took somewhat coordinated efforts within a country, alongside corporate decisions, to take on smoking. Companies started realising that smokers were taking smoke breaks that on aggregate meant they spent less time working. Whether they were more productive in the hours they did work, I’m not sure. But there are even companies giving non-smoker extra days off to appreciate them for not smoking. Healthier employees also make for better work.

We can create culture and behavioural change even when there are big capitalist incentives not to. Tobacco companies do very well financially; and they have a ‘sticky’ product; in fact, it is so price inelastic that taxes on it can be very high and governments generate revenues without technically causing too much deadweight loss due to this lack of elasticity (in other words, quantity consumed is not distorted much by the tax).

Smoking has given us a great example of this change.

We optimise and invest into the status quo over and over again as we reinforce our behaviours, go to our favourite places, consume our favourite products. And this status quo is that of a carbon intensive, high carbon economy that spews out lots of carbon dioxide around me and across the world. Investing into this status quo makes sense because of the past investments. It is easier to make a car that already runs run faster than to make a new technology that will help get a stationary box to start moving.

But when you invest into the status quo, it makes it harder and harder to change and move away. When you’ve mastered Microsoft Excel, it is hard for you to adopt a new spreadsheet tool. And because more people have mastered it, the tool becomes more and more entrenched because someone else can share the file with you and you’d understand too. So you continue mastering it, and getting better at it.

A lot of the economy, the whole industrial complex works this way. But then at some point you might detect a crack in the status quo. Maybe it is cracking under its own weight or perhaps it is increasingly being used beyond its original design intent. Many have tried to build complex and clunky models inside Excel when it is more efficiently served by other programming language. So then status quo might break down by itself.

Or in other cases, the status quo does not break down but create problems for those who are perpetuating it. In the case of climate change, our status quo of a carbon-intensive economy is creating huge challenges for us right now and for the future generations. To get out of the cycle, we need to make changes; we need to invest in new areas that may not be as attractive as the status quo. We will need to spend effort thinking through old problems and solve them with new ways. We will need to tie up some of our options, and cast old solutions aside.

Are you ready to do that?