On 2ab, Communal Harmony and Economic Growth

I’ve used the concept of “2ab” once before, a day after the Prime Minister used the term in a much lampooned remark, to explain why we need Net Neutrality. I turn to the same concept again to explain why communal harmony is necessary for economic growth.

Some 4-5 days back, a mob entered the house of one Muslim guy who was allegedly cooking beef, and lynched him to death. In response, rather than booking the mob, the police sent meat sample from the victim’s house to “test if he was actually cooking beef” – as if its confirmation as beef would justify the murder.

I’ve mostly been off social media (and hence not fully following the story) since then, but RSS leader Tarun Vijay hasmade some remarks about “lynching on suspicion being wrong“, and star Indian Express columnist Pratap Bhanu Mehta has laid the blame at the Prime Minister’s feet. Mehta writes (HT: V Anantha Nageswaran):

The blame for this has to fall entirely on Modi. Those who spread this poison enjoy his patronage. This government has set a tone that is threatening, mean-spirited and inimical to freedom. Modi should have no doubt that he bears responsibility for the poison that is being spread by the likes of Culture Minister Mahesh Sharma and Vijay — whether through powerlessness or design is irrelevant. But we can be grateful to Vijay for reminding us that the threat to India’s soul emanates from the centre of power, almost nowhere else. It is for that centre, and Modi in particular, to persuade us otherwise.

Now there were two kinds of people Modi appealed to when he came to power in a resounding victory last year – bigots and aspirers. The former hoped that Modi would “teach a lesson to the Muslims”. The latter hoped that Modi would help accelerate economic growth, after a mostly useless and scam-ridden UPA2 government. And Modi might have thought that these two goals are compatible (else it would make no sense to court these two constituencies). Even in theory they are not.

The Gross Domestic Product (GDP), whose growth rate is seen as a bellwether of the economy’s performance, is a measure of the amount of trade. Trade can be external (let’s set that aside for now) and internal. There are many factors that determine the extent of internal trade (trade between the people of the country), but at the margin, it is proportional to the number of possible pairs of people who can trade with each other.

In other words, trade is another of those quantities that follows Metcalfe’s Law, and depends on strong network effects. If the number of people in a place (region or country or state or city) is N, and if everyone can trade with one another, the number of possible trading relationships is N^2.

Despite the development of the rule of law and Contract Acts and court-brokered dispute settlements, people typically trade with other people they can trust. In the past, this meant that certain families or communities had a monopoly over trade. Over time, with the development of laws and contracts and courts, this has expanded. Yet, people still hesitate to trade with people they don’t trust.

So what happens when there is communal or caste disharmony? Then you will not trust someone who belongs to another caste or community or religion because of the person’s community (and notwithstanding the person’s personal characteristics). And if you don’t trust them, you don’t trade with them. And what does this mean for the total volume of trade?

It’s time to bring out our (a+b)^2 expansion. If you have two communities of sizes a and b, in the absence of trust between the communities, the total trade in the community is ceteris paribus proportional to a^2 + b^2. If the two communities live harmoniously and have enough mutual trust that communal differences have no bearing on trade, the total trade in the community is ceteris paribus proportional to (a+b)^2. The difference between the two? 2ab of course!

Communal distrust and the lack of communal harmony ends up restricting the number of possible trading partners for each person, and thus we lose out in terms of the correlation term. In other words, bigotry costs us in terms of GDP growth.

Lastly, even if the government of the day is concerned more about the welfare of one particular community over another, communal harmony makes sense. For by creating distrust, people belonging to the government’s favourite community are denied trade with people of the less favoured community. And this adversely impacts the more favoured community!


Why Europe should back Bashar al-Assad

This might seem like a nonsensical idea, but there are good reasons as to why European countries should back Syrian President Bashar al-Assad. This is because the most important thing now from their perspective is to bring some sort of stability into Syria.

The thing with the long-ongoing civil war in Syria is that there are no good guys. Initially, Western powers considered backing the rebels, who are mostly Sunni and hence enjoy the support of other Gulf countries. However, a part of the rebel faction turned into Islamic State and started unleashing atrocities not only in Syria but also in neighbouring Iraq.

al-Assad is no paragon of virtue, and his forces have not held back in unleashing atrocities. Yet the fact remains that he has successfully ruled over Syria (albeit as a hereditary dictator) successfully for a few years until the trouble started brewing. The other thing going for him is that he is a strong leader, and can possibly be convinced to talk, given that the only leadership on the other side is Abu Bakr al-Baghdadi, the self-styled “caliph” of the Islamic State.

The unrest in Syria has caused much trouble in Europe, thanks to heavy migration – much more than what Europe can normally handle. What this has achieved is in turning Syria’s problem partly into Europe’s problem, and it is in Europe’s interest to solve the problem in Syria if they are to address the problem at their own borders.

The fight in Syria is between two horrible regimes (or one horrible regime and one horrible non-regime), and the victory of neither will do good for the people of Syria. Yet, the steady state of the unsteady peace that will follow after the battle is significantly superior to the people of Syria than the current status of civil war. For this reason, there is merit in ending the war as an immediate goal, and then looking to stabilise the country in the long run.

And the best way for an interventionist power to end a war is to support the stronger side. al-Assad’s side has been officially made stronger with the recent intervention of Russia on that side. So now it is clear who the side more likely to win is. And so Europe should intervene to make sure that happens quickly.

There are other collateral benefits also – coming down on al-Assad’s side will earn European countries brownie points with Putin, which are important because they face off against him in other theatres, such as Ukraine. While it remains that Putin is a madman and the value of such brownie points is unknown, the option value of these points is surely strictly positive?

So Europe should act, and act now. The trouble is at their doorstep now. They need not commit actual troops. Some drones will do for a start. The actual fighting will be done by al-Assad’s forces with more direct help from Putin. And the civil war will hopefully be stamped out soon.

The problem of al-Assad won’t go away, and will need to be dealt with another day, but at least there can be some semblance of peace there. Which might stem the horrific flight of so many Syrians across the seas into Europe’s borders (where they are receiving a mostly cold welcome).

The Gulf countries will not be pleased, of course, but with oil prices dropping their bargaining power in the overall geopolitical sphere is dropping, that much collateral damage is okay for the benefit of putting an end to the horrific conflict in Syria.

On multitasking, queues and call centres

Queues and call centres, with linear processing, are inefficient as they result in low utilisation. 

I recently read this excellent article by Tim Harford about multitasking.  In this, he talks about research which says that multitasking makes you ineffective because of high cost of context switching, something that I’ve come to learn over the last three years. He also has this nice piece on ADHD here:

“You’re letting more information into your cognitive workspace, and that information can be consciously or unconsciously combined,” says Carson. Two other psychologists, Holly White and Priti Shah, found a similar pattern for people suffering from attention deficit hyperactivity disorder (ADHD).

It would be wrong to romanticise potentially disabling conditions such as ADHD. All these studies were conducted on university students, people who had already demonstrated an ability to function well. But their conditions weren’t necessarily trivial — to participate in the White/Shah experiment, students had to have a clinical diagnosis of ADHD, meaning that their condition was troubling enough to prompt them to seek professional help.

This piece, however, is not about multitasking at the personal level. It is not about ADHD, either. It is about Adigas, and Citibank, and call centres.

As I had mentioned in a blog post yesterday, I visited Vasudev Adigas in Jayanagar 8th block on Sunday, after a really long gap. They have completely revamped and redesigned the restaurant, changing the place of the cash counter, food counters, kitchens and what not. Most of the design is good, and speeds up processes. Except for the cash counter.

A “feature” of cash counters at South Indian fast food restaurants is that there is no queueing. Counters are placed in a way that people can crowd around it from all directions. While this leads to some confusion and encourages bad behaviour, it also ensures that the person at the cash counter is always productive. If one customer is dillydallying about her order, the cashier can simply process another order before the first customer has made up her mind.

The new cash counter here, however, have very restricted access which makes it hard for the guy at the counter to multitask. As a consequence, his utilisation is low (customer take time to make up their minds), and the average wait is longer. And there is no queueing either, so there is no reduction in bad behaviour also.

For a similar reason, call centres are ineffective – they result in low utilisation on the part of both the customer and the call centre “executive”. It is unlikely that you spend all your time talking, and there is significant amount of time wasted in being put on hold or listening to boilerplate messages.

For example, I need to talk to Citibank because they’ve issued me a new debit card but haven’t sent me a PIN. When I call them, I’ll have to enter my account number multiple times, waste time listening to their options read out in a linear fashion and simply wait listening to random music when they inevitably put me on hold. On the “executive”‘s side, there will be time taken to verify stuff – when they are stuck with me while they might be serving another customer instead.

Call centres are a vestige of the 1990s (or earlier outside India), when phones were plentiful and internet not so. A significantly superior mechanism is to replace the call centre with chat – either through a web interface or through an app. Chat allows both the customer and the executive to multitask, and not waste time in meaningless tasks. Authentication can be superior to that on the phone, no time is lost navigating (since nothing needs to be read out linearly), and utilisation of both the customer and the executive is really high.

Yet, Citibank doesn’t offer this option. Neither do a lot of other supposedly progressive organisations. And that is disrespect to the time of both their customers and their “executives”. Hopefully, they’ll offer a chat option soon.

As for Adigas, the redesign has been after their new PE money came in. I’m less bullish about their changing their billing counter design.

Characterising network effects

Met a bunch of people for drinks this evening. Most of the conversation was just okay. But there was this little bit about network effects. Where I figured out how to calculate whether network effects are present in an industry. It all came out of Kingsley claiming that the age of network effects is over, and there are no more network effects left.

The discussion presently moved to how you discover whether there exist network effects in different industries. Does the fact that  Amazon’s marketshare is nowhere close to that of a monopoly mean that there are no network effects in e-commerce marketplaces? Doesn’t Google have network effects in that given the larger number of people searching on the platform, there are more clicks and more opportunity for learning (for Google) and hence better results?

At a point of time in the conversation, I made the statement that Google (in particular and search engines in general) has “partial network effects”, in that more users means more learning and hence more results. And that for this reason Bing or any other competitor can’t match up.

So how can we characterise whether an industry has network effects, and if so, to what degree? Thinking about it, it’s rather simple. In a “normal” non-networked industry, the value of the user base is directly proportional to the number of users. Going by Metcalfe’s Law, in a fully networked industry, the value of the user base is directly proportional to the square of the number of users. An industry with “partial network effects” should surely have its value a power between 1 and 2 of the number of users?

Here’s how we figure out how networked an industry is. Take all the players in the industry and tabulate the size of the user base and the value of each of the players (excluding very small players). Plot them on a log-log plot, and measure the slope. If the slope of this log-log plot is close to 1, it means that the industry is not networked at all. If the slope is close to 2, it means it has “full network effects”. And the numbers in between represent the spectrum of possible values.

Rather simple, isn’t it? This is why I love drinking sessions, for they allow you to unleash such thoughts. Oh, and I “recorded” this thought by sending a WhatsApp voice message with the gist of the above content to Hariba. He replied with “keep them coming” or some such thing, but this was all it was for this evening.

On Sub-nationalism

Pramit Bhattacharya has a nice piece in MintOnSunday about the positives of sub-nationalism, which fosters provision of public and common goods. He cites academic research to contrast Kerala and Uttar Pradesh, which were similar in the mid-19th century, but now have significantly differing levels of public goods.

The research Bhattacharya cites argues that the linguistic sub-nationalism that was formed in Kerala in the mid 19th century was responsible for the state’s high levels of public goods and development. The absence of such sub-nationalism has resulted in weak institutions and weak development in UP, he says.

He ends the piece saying that sub-nationalism is not always a good thing and can lead to secessionist tendencies. He cites the example of Assam, where sub-nationalism has actually hampered development rather than fostering it.

This discussion reminds me about last year’s “unofficial” referendum in Catalunya about whether to secede from Spain. The vote was unofficial since the Spanish Parliament didn’t authorise it, but there were strong signs of Catalan nationalism when I visited Barcelona last October. The Yellow, Red and Blue flag of Catalan nationalism hung from several windows. There was a clock in one of the main squares counting down to the referendum (which finally didn’t matter).

And while there were several emotional reasons for the demand for secessions, including repression at the hands of the “Castilians”, one of the main reasons was economic – the share of national spending on Catalunya was far less than the proportion of Catalunya’s contribution to the Spanish National Budget. The feeling of “why should we subsidise the rest of the country?” was rampant.

This little story illustrates both the positive and negative aspects of sub-nationalism. The negative is easy to see from the above – strong sub-nationalism leads to a strong “us and them” sentiment towards the rest of the country, and the region begins to resent the rest of the country, especially if the latter gets a larger share of the national pie. And this can lead to secessionist tendencies as is evident in Catalunya.

The positive thing about sub-nationalism, on the other hand, is that it subsumes groupism at smaller levels. A strong sub-nationalist feeling means that people think of themselves as members of that sub-nationalist group, and solidarity to any “lower level” groups weakens.

The problem with high solidarity among small groups is that it may lead to provision of private goods at the expense of public goods. When a place is strongly divided by caste, for example, each caste group wants to maximise the interest of the particular caste, and thus invests in a way that the caste gets a bigger share of the seemingly fixed pie.

When the solidarity is at the level of a state or region, on the other hand, the best way to develop the region or state is to provide for public goods or welfare schemes that span the entire state or region, and this leads to an expansion of the pie and the overall development of the region. In other words, when the “us” is a largish geographical area, it is more likely that investments happen in terms of public goods for the area rather than private goods.

Coming back to the example of Kerala, the strong Malayali subnationalism of the mid 19th century had the effect of pushing down casteism. Consequently, the groupism happened at a level (“Malayalis”) that was larger and more diverse than the caste-level groupism that happened elsewhere (like in UP) where there was no strong sub-nationlist movement. The lack of sub-nationalism in a place like UP has meant that casteist divisions in the region have remained strong, and solidarity at that level doesn’t lead to public goods or development.

Think of the nation as a hierarchy, of sub-nations and sub-sub-nations and so forth. And each person’s loyalty is divided in different extents up and down the person’s “chain”. And among these different layers, it is a zero sum game. Thus, strong loyalties at a particular level are resented both by levels higher and lower, and justifiably so. But the higher the level at which the loyalty remains, the better it is for the provision of public goods and development. Chew on it.

Finite and infinite stories

Recently I started reading a book called “Finite and Infinite Games”. I’m barely through the Kindle sample, so can’t comment much on the book, but I want to talk about a related concept – finite and infinite stories.

An important feature of the story is that it is “finite”, and has a fixed ending. For example, if you take Lord Of The Rings, the story is primarily concerned with whether Frodo can destroy the ring by taking it to wherever it came from before Sauron can get his hands on it. Once either the ring is destroyed or Sauron gets his hands on it, the story is essentially over, and doesn’t concern about any subsequent events.

Thus, as you plough through either the books or the movies, you condition yourself to the story “ending” at one of these two finalities. And in this particular story, considering that both of these are epochal events, all characters have a horizon no longer than the time required for one of these two events to happen. In other words, most books and movies are “finite stories”, and efforts in those stories are optimised for such finiteness.

Real life, however, is different, in that it is “continuous”. Whatever happens, in most cases, life simply goes on, and hence you need to optimise for the long term. Let’s say, for example, that you are going through a tough time at work and want your current assignment to end. And while you are at it, you look upon your life as a story, where the success or failure of your current assignment is an epochal event. Consequently, you will use a strategy that optimises your performance until this epochal event.

And then this event happens. Let’s say the assignment is a success. Then, life has to move on and another assignment gets thrown at you. Except that you’ve thrown all you had at the previous assignment, and now have no energy left to deal with this one.

In that sense, real life is like an “infinite story” (though death adds a degree of finiteness to this). However epochal certain events seem, unless they are life-threatening, one ought to think for the long term and plan for beyond the event. For unlike in the books or the movies, the story never ends.

Grofers, BigBasket and the Lack of Systems Thinking

Last week I wrote this post about why Grofers is not a sustainable and scalable business. The basic point was that goods they sell undergo both high inventory cost (having been stored in a retail store) and high transport cost (delivery).

The most common response to the post was that my claim was wrong because “Grofers doesn’t store any inventory but only delivers”. And it was not unintelligent people who said this – I counted at least three IIM graduates who made this claim on Twitter (ok if that statement gives the impression that I think that all IIM graduates are intelligent, so be it. I don’t disagree).

While their claim is correct, that Grofers doesn’t store any inventory but only delivers, the problem with their line of attack is that they are looking at it from a very localised perspective and not looking at the bigger picture.

A similar problem can be seen in this post on TechCrunch announcing BigBasket’s latest round of funding. Relevant section here (hat tip: Rohin Dharmakumar):

Challenges faced by BigBasket include the grocery industry’s low margins, the cost of adding new delivery staff, and the fact that it carries its own inventory. This allows BigBasket to offer a large selection, but also means it has more overhead than hyperlocal services that partner with existing merchants and needs to more time to prepare before expanding into new cities. (emphasis added)

Catherine Shu, who wrote that piece, might be right in claiming that Bigbasket carries its own inventory. But she is wrong in claiming that it is a problem, for Bigbasket is in a completely different business compared to those hyperlocal services, and in my opinion in a superior business. The carrying of inventory is a feature rather than a bug.

What the twitter comments on my post on Grofers and this piece on BigBasket illustrate is the lack of “systems thinking”. People are great at looking at localised problems, and localised “point solutions” to these local problems. What is not so intuitive is to look at a particular problem as part of a bigger picture and in a more holistic fashion.

Grofers itself may not carry inventory, but the goods it ships would have been part of inventory of some retailer. So while Grofers may not directly incur this high inventory cost, someone along the chain (the retailer in this case) does, and that means there is less money for Grofers to play around with and make a margin.

BigBasket, on the other hand, carries its own inventory and this inventory is aggregated at a much higher than retail level. This implies that the inventory costs for BigBasket are significantly lower than any retailer (since aggregation leads to lower inventory costs). And this inventory cost thus saved can help BigBasket make higher margins. It also allows them to serve the “long tail” to the customer cheaply, something Grofers may not be able to do if no shops in the customer’s vicinity stock such products.

The problem with localised thinking is that it leads to localised solutions, and local optimisation. Optimising locally at different points in a chain makes it harder to optimise at a system level.