Baumol Disease Index

In his excellent take on why Rohit Sharma’s 264 is bad for cricket, Niranjan Rajadhyaksha writes about the Baumol’s Cost Disease. This phenomenon, which was first described by William Baumol and William Bowen in the 1960s, describes the increase in cost of labour in industries that have seen little productivity. This has to do with an increase in productivity in other sectors which pushes up the clearing price of labour, which increases the costs of industries that have seen no improvements in productivity.

Based on this, we can construct an index on how industrialised an economy is, which I’m going to christen “Baumol Disease Index”. The basic idea is to pick a sector that is likely to be unaffected by productivity changes over the long term, and look at the median salary of workers in that sector in different countries and across different points in time. This can help us compare the relative levels of industrialisation and productivity in different countries, and in the same country over time.

In order to construct this index, we will take into account one sector which has a lot of “human input” and is unlikely to see much improvement in productivity thanks to mechanisation. My first choice for this was for employees of a company like McDonalds (taking off on The Economist’s Big Mac Index) but then that sector is not that insulated from greater productivity.

We could use the original example that Baumol and Bowen used, which is performing arts, but then performing arts is a winner takes all market – Iron Maiden will be able to command much higher ticket prices compared to the local orchestra thanks to their history and brand and perception of quality. So performing arts is not a great example, either.

Another good choice would be government bureaucrats, since their work is unlikely to be much affected by productivity. But then we’ve had some computerisation and that must have increased some productivity, and ability to be productive and willingness to be productive don’t always go hand in hand!

What about drivers? Despite the efforts towards development of driverless cars, these are unlikely to really take off in the next couple of decades or so, and so we can assume that productivity will remain broadly constant. The other advantage of drivers is that while salaries are tricky to measure (and we need to depend on surveys for those, with mostly unreliable results), taxi fares in different cities are public information, and it is not hard to separate such fares out into cost of fuel, cost of car and cost of driver’s time. This way, measurement of an average taxi driver’s income in different cities and countries, and at different points in time, should not be really difficult.

So, I hereby propose the Baumol Disease Index. It is the per month pre-tax expected income for a driver in a particular city after taking into account costs of fuel and car. This number is going to be imputed from taxi prices. And is going to be a measure of general levels of productivity and industrialisation in an economy. Sounds good?

And while we are on the topic of indices, you should read this excellent leader in last week’s The Economist on the profusion of indices. And since we have a profusion anyway, adding this one additional index shouldn’t hurt! And this one (Baumol Disease Index) measures something that is not measured by too many other indices, and is simple to calculate!

Howzzat?

Wheat and rice production revisited

Towards the end of last month we had looked at states in India with the maximum land under wheat and rice cultivation (both on an absolute and a relative basis). We revisit that topic of rice and wheat cultivation here, except that now we look at production (in KG) and productivity (KG per hectare). The data at data.gov.in spans from 1998 to 2010, but data for all states is not available for 2009 and 2010, so assuming that production patterns don’t change drastically, I’ve used data from 2008 to look at the biggest producers of these commodities.

Four figures offered without further comment.

1. Top wheat growing states in India (as of 2008)

wheat1

2. Productivity growth in major wheat growing states of India

wheat2

3. Top rice growing states of India (as of 2008)

rice3

4. Productivity growth in major rice growing states of India

rice2

Offshored

Two of the four full-time jobs that I’ve done have been “offshored”. They’ve both involved working for the Bangalore office of American firms, with both jobs having been described as being “front end” and “high quality”, while in both cases it became clear in the course of time that it was anything but front end, and the quality of work depended on what the masters in the First World chose to throw at us.

In between these two jobs, I had done a “local” job, at an India-focused hedge fund based in India, which for the most part I quite liked until certain differences cropped up and grew. While doing that job, and while searching for a job while looking to exit it, one thing I was clear about was that I would never want to do an offhshored job again. Unfortunately, there came along an offer that I couldn’t resist, and so I ended up having not one but two experiences in offshored jobs.

Firstly (this was a bigger problem in the second job), I’m a morning person. I like to be in at work early in the morning, say at eight. And I like to be back home by the time the sun in down. In fact, for some reason I can’t fathom, I can’t work efficiently after the sun is down – irrespective of when I start, my productivity starts dipping quickly from 5 pm onwards. Huge problem. People say you can take calls from home and all that but that blurs the line between work and life, and ruins the latter. You are forced to stay in office even if you don’t have anything to do. Waste of time.

Then, there is the patronizing attitude of the “onshore” office. In both my offshored jobs, it turned out that an overwhelmingly large portion of the Bangalore offices actually consisted of employees who were there because even the stated reason for their existence in the firms was labour cost arbitrage. It was simple offshoring of not-particularly-skilled work to a cheaper location. I don’t know if this was a reason, but a lot of people in the “main” offices of both firms considered Bangalore to be a “back office”. And irrespective of the work people here had done, or their credentials, or record, there was always the possibility that the person in the foreign office assumed that the person in the Bangalore office existed solely because of labour cost arbitrage.

And then you would have visits by people from the onshore office. Every visitor who was marginally senior would be honoured by being asked to give a speech (without any particular topic) to the Bangalore office. In the first offshored company I worked for, people would actually be herded by the security guard to attend such speeches. The latter company was big enough to not force people to attend these talks, but these talks would be telecast big-brother style from television sets strategically placed all over the floors.

And these onshore office people would talk, quite patronisingly, about how Bangalore was great, and the people here were great, and they were doing great work. Very few of them would add actual value  by means of their lectures (some did, I must mention, talk concrete stuff). Organizing this lecture was a way for the senior “leaders” in the Bangalore office (most of whom had been transplanted from the firms’ onshore offices) to etch their names in the good books of the visitors, we reasoned.

Then there was the actual work. Turn-around time for any questions that you would ask the head office was really high, unless of course you adapted and did night shifts (which I’m incapable of). In the earlier offshored firm, there would be times when I would do nothing for two or three days altogether because the guy in the onshore office hadn’t replied! Colossal waste of billable time! Also, if your boss sat abroad, there would be that much less direction in whatever you did. In my second offshored job, there were maybe two occasions when I was on two-hour phone calls with my boss (in the onshore office), where he patiently explained to me how certain things worked and how they should be done. Those were excellent sessions, and made me feel really good. But only two of them over a two year-plus period? Apart from which, most one-to-one interaction with the boss was with respect to “global” stuff. Yeah a local boss can get on your nerves by creeping behind your back every half hour, but at least you get work done there, and can learn from the boss!

Then there is training. Because of the cost-arbitrage concept on which most offshored employees are hired, the quality of training programs in the offshore offices are abysmal. During my second offshored stint, I happened to attend one training program in Hong Kong, in common with people from onshore offices in the rest of Asia. None of the numerous training programs that I attended in the Bangalore office attained even a tenth of the quality of that program in Hong Kong. The nature of employees in Bangalore meant all programs had to start at an extremely basic level, so there was little value added.

I can go on, there is a lot more. But I’ll stop here, and let you tell me about your stories of working in an offshored environment. And I certainly won’t make the same mistake third time round – of working for an offshored entity.

Comparative advantage and competitive advantage

So there are two reasons why you could be employed. Comparative advantage and competitive advantage. Let me explain.

In international trade, there is a concept called “law of comparative advantage“. Let me explain with the classical (and simple) example. Robinson Crusoe is marooned on an island with Friday. Now, let us assume there are two productive activities on the island – catching fish and cutting wood. Now, Crusoe can catch 10 fish an hour, while Friday can catch 5. On the other hand, Crusoe can cut 3 trees an hour, while Friday can cut 2. Clearly Crusoe “dominates” Friday, and the latter is much more inefficient. So does that mean that Crusoe can just have Friday for dinner one day?

While the intuitive answer might be a “yes”, the law of comparative advantage shows otherwise. While Friday might be inferior to Crusoe in both activities, he is “less worse off” at chopping trees than he is at catching fish. For example, let us say that if left to himself, Crusoe would spend 3 hours fishing and 2 hours chopping wood every day. That would produce 30 fish and 6 trees of wood.

Now, if Crusoe were to spend all his 5 work hours exclusively catching fish, he will have 50 fish and no wood. He can trade the extra 20 fish for 8 logs of wood from Friday (Friday demands 5 fish for every 2 logs of wood, since that’s his opportunity cost). So net-net Crusoe is better off by 2 logs of wood. The trade similarly leaves Friday also better off (compared to the situation if he were alone on the island). Now you see why Friday keeps his job.

So in a “comparative advantage” job, you keep the job only because you make it easier for one or more colleagues to do more. You are clearly inferior to these colleagues in all the “components” of your job, but you don’t get fired only because you increase their productivity. You become the Friday to their Crusoe.

On the other hand, you can keep a job for “competitive advantage“. You are paid because there are one or more skills that the job demands in which you are better than your colleagues. You have a “competitive advantage” in those skills, and that is what you are paid for. Here you can expect to be treated better than your comparative advantage colleague would. You can even expect for some of your “comparative advantage” colleagues to be assigned to you to take your load off on those tasks you don’t enjoy a competitive advantage in. And again I’m not saying you need to “dominate” your colleagues.  All you need is one “axis” along which you are clearly superior. And you’ll get the “competitive” treatment.

Pause for a moment and ask yourself why your job exists. Check if you work because you have a competitive advantage, or if it is merely because of the “comparative advantage” – that your presence frees up time for the more efficient people. If your job belongs to the latter category, I think you have reason to be more worried.

Theory of comparative advantage and chutiya kaam

Suppose you and me together have to do two tasks A and B. We need to decide who does what (let’s assume that we need to pick one task each). Now I’m a stud and you are a chutiya so I’m better than you at both A and B. So how do we split? It all comes down to the degree to which I’m better than you in each of these tasks. Suppose I’m marginally better than you at A, but significantly better than you at B. Theory of comparative advantage (commonly used to describe international trade) says that I should do B and you should do A – this way, total productivity is maximized. I suppose this makes intuitive sense.

You have a number of people cribbing about what is popularly knonw as “chutiya kaam” – approximately translates to bullshit work. Work that is uninspiring for them, but which they need to do because it needs to be done. Sometimes you have otherwise fairly intelligent and efficient people assigned to chutiya kaam – with the explanation that there is no one else who is well-enough equipped to do it. And these people find that less intelligent nad less efficient people are being given better work.

The reason the more intelligent and efficient person might get the chutiya kaam is that he is better at that than his colleagues, even if he is better than his colleagues in the more intelligent stuff. So I suppose if you want to avoid chutiya kaam altogether, one of the ways of doing it is to prove yourself to be a chutiya at that. To be inefficient and incapable of doing that, and in the hope that it will then get palmed off to someone else who is perceived to be better.

But then this is a double edged sword. There are people who believe that all kinds of “chutiya kaam” are inferior to all non-chutiya kaam. And that if you are not good at chutiya kaam you cannot be good at everything else. I’m reminded of this guy in my class who was captaining the class team for a day and who refused to let me open the bowling because I’d dropped a catch. “You can’t even catch properly, and how can you expect to bowl?” he had asked.

The unfortunate thing is that a large number of people are like this. They refuse to accept that chutiya and non-chutiya kaam are not comparable, and require different skill sets, and that they will neeed to apply trade theory to figure out who does what. They look at your skills in one and use that to judge you in another. And allocate resources suboptimally. And when faced with this kind of people, the strategy of trying to be chutiya at chutiya kaam may not work.

So I suppose the key is to figure out what kind of person your boss is. Whether he appreciates that different jobs can take different skills, and no one job “dominates” another. And whether he applies trade theory when it comes to work allocation. If the former, you can’t really do anything. If the latter, you can try being chutiya at chutiya kaam.

Postscripts

“chutiiya kaam” is not a homogeneous term. Some jobs are chutiya for some people but non-chutiya for others. It varies from person to person.

I have grouped all “chutiya kaam” together just for the sake of convenience. There are differnet kidns of chutiya kaams and all of them require different skill sets.

Each non-chutiya kaam also requires its own skill set. I’ve again grouped them together for the sake of convenience of argument

I firmly believe that principles of economics that can be useful in real life (such as demand and supply, trade theory, game theory, etc.) should be part of the 10th standard economics syllabus, rather than teaching kids to mug up GDP growth rates for different states for different decades

I have resisted the temptation to bring in the studs and fighters theory into this analysis

Don’t use stud processes for fighter jobs and fighter processes for stud jobs

When people crib to other people that their job is not too exciting and that it’s too process-oriented and that there’s not muc scope for independend thinking, the usual response is that no job is inherently process-oriented or thinking-oriented, and that what matters is the way in which one perceives his job. People usually say that it doesn’t matter if a job is stud or fighter, and you can choose to do it the way you want to. This is wrong.

So there are two kinds of jobs – stud (i.e. insight-oriented) and fighter (i.e. process oriented). And you can do the job in either a stud manner (trying to “solve a problem” and looking for insights) or in a fighter manner (logically breaking down the problem, structuring it according to known formula and then applying known processes to each sub-problem). So this gives scope for a 2 by 2. I don’t want this to look like a BCG paper so I’m not actually drawing a 2 by 2.

Two of the four quadrants are “normal” and productive – doing stud jobs in a stud manner, and fighter jobs in a fighter manner. There is usually an expectancy match here in terms of the person doing the job and the “client” (client is defined loosely here as the person for whom this job is being done. in most cases it’s the boss). Both parties have a good idea about the time it will tak e  for the job to be done, the quality of the solution, and so on. If you are in either of these two quadrants you are good.

You can’t do a stud job (something that inherently requires insight) using a fighter process. A fighter process, by definition, looks out for known kind of solutions. When the nature of the solution is completely unknown, or if the problem is completely unstructured, the fighter behaves like a headless chicken. It is only in very rare and lucky conditions that the fighter will be able to do the stud job. As for “fighterization”, about which I’ve been talking so much on this blog, the problem definition is usually tweaked slightly in order to convert the stud problem to a fighter problem. So in effect, you should not try to solve a “stud problem” using a fighter process. Also, as an employer, it is unfair to expect a mostly fighter employee to come up with a good solution for a stud problem.

The fourth quadrant is what I started off this blog post with – studs doing fighter jobs. The point here is that there is no real harm in doing a fighter job in a stud manner, and the stud should be able to come up wiht a pretty good solution. The problem is wiht expectations, and with efficiency. Doing a fighter job in a stud manner creates inefficiency, since a large part of the “solution” involves reinventing the wheel. Yes, the stud might be able to come up with enhanced solutions – maybe solve the problem for a general case, or make the solution more scalable or sustainable, but unless the “client” understands that the problem was a stud problem, he is unlikely to care for these enhancements (unless he asked for them of course), and is likely to get pained because of lack of efficiency.

Before doing something it is important to figure out if the client expects a stud solution or a fighter solution. And tailor your working style according to that. Else there could be serious expectation mismatch which can lead to some level of dissatisfaction.

And when you are distributing work to subordinates, it might also help to classify them using stud nad fighter scales and give them jobs that take advantage of their stronger suits. I know you can’t do this completely – since transaction costs of having more than one person working on a small piece of work can be high – but if you do this to the extent possible it is likely that you will get superior results out of everyone.

Fighterization of food

One of the topics that I’d introduced on my blog not so long ago was “fighterization“. The funda was basically about how professions that are inherently stud are “fighterzied” so that a larger number of people can participate in it, and a larger number of people can be served. In the original post, I had written about how strategy consulting has completely changed based on fighterization.

After that, I pointed out about how processes are set – my hypothesis being that the “process” is something that some stud would have followed, and which some people liked because of which it became a process. And more recently, I wrote about the fighterization of Carnatic music, which is an exception to the general rule. Classical music has not been fighterized so as to enable more people to participate, or to serve a larger market. It has naturally evolved this way.

And even more recently, I had talked about how “stud instructions” (which are looser, and more ‘principles based’) are inherently different from “fighter instructions” (which are basically a set of rules). Ravi, in a comment on Mohit‘s google reader shared items, said it’s like rule-based versus principles-based regulation.

Today I was reading this Vir Sanghvi piece on Lucknowi cuisine, which among other things talks about the fact that it is pulao that is made in Lucknow, and now biryani; and about the general declining standards at the Taj Lucknow. However, the part that caught my eye, which has resulted in this post with an ultra-long introduction was this statement:

The secret of good Lucknowi cooking, he said, is not the recipe. It is the hand. A chef has to know when to add what and depending on the water, the quality of the meat etc, it’s never exactly the same process. A great chef will have the confidence to improvise and to extract the maximum flavour from the ingredients.

This basically states that high-end cooking is basically a stud process. That the top chefs are studs, and can adapt their cooking and methods and styles to the ingredients and the atmosphere in order to churn out the best possible product.You might notice that most good cooks are this way. There is some bit of randomness or flexibility in the process that allows them to give out a superior product. And a possible reason why they may not be willing to give out their recipes even if they are not worried about their copyright is that the process of cooking is a stud process, and is hence not easily explained.

Publishing recipes is the attempt at fighterization of cooking. Each step is laid down in stone. Each ingredient needs to be exactly measured (apart from salt which is usually “to taste”). Each part of the process needs to be followed properly in the correct order. And if you do everything perfectly,  you will get the perfect standardized product.

Confession time. I’ve been in Gurgaon for 8 months and have yet to go to Old Delhi to eat (maybe I should make amends this saturday. if you want to join me, or in fact lead me, leave a comment). The only choley-bhature that I’ve had has been at Haldiram’s. And however well they attempt to make it, all they can churn out is the standardized “perfect” product. The “magic” that is supposed to be there in the food of Old Delhi is nowhere to be seen.

Taking an example close to home, my mother’s cooking can be broadly classified into two. One is the stuff that she has learnt from watching her mother and sisters cook. And she is great at making all of these – Bisibelebhath and masala dosa being her trademark dishes (most guests usually ask her to make one of these whenever we invite them home for a meal). She has learnt to make these things by watching. By trying and erring. And putting her personal touch to it. And she makes them really well.

On the other hand, there are these things that she makes by looking at recipes published in Women’s Era. Usually she messes them up. When she doesn’t, it’s standardized fare. She has learnt to cook them by a fighter process. Though I must mention that the closer the “special dish” is to traditional Kannadiga cooking (which she specializes in), the better it turns out.

Another example close to home. My own cooking. Certain things I’ve learnt to make by watching my mother cook. Certain other things I’ve learnt from this cookbook that my parents wrote for me before I went to England four years ago. And the quality of the stuff that I make, the taste in either case, etc. is markedly different.

So much about food. Coming to work, my day job involves fighterization too. Stock trading is supposed to be a stud process. And by trying to implement algorithmic trading, my company is trying to fighterize it. The company is not willing to take any half-measures in fighterization, so it is recruiting the ultimate fighter of ’em all – the computer – and teaching it to trade.

Preliminary reading on studs and fighters theory:

Studs and Fighters

Extending the studs and fighters theory