The Two Overton Windows

If you want to appear intelligent when discussing something about public policy, you could do worse than uttering the phrase “Overton Window”. The Overton Window, “invented” by one Joseph Overton, suggests that there is a “range of policies acceptable to political mainstream”.

And so you frequently have political commentators talking about the Overton Window “shifting” whenever a new political idea (or person) comes to the fore. This was bandied about much when Modi became Prime Minister of India, or when Trump became President of the US, or when Jeremy Corbyn became the Labour Party leader.

While “shifting Overton window” is something you come across rather often in policy discourse, my argument is that with the rise of subscription media, the Overton window is not shifting as much as it is “splitting”. In other words, we now have not one but two Overton Windows.

Without loss of generality, let us call them the “Jamie Overton Window” and the “Craig Overton Window”. Since both the twins are right arm fast bowlers, it doesn’t matter which brother is associated with which Overton Window.

So how did we get here, and what does it mean for us?

We started with the classic Overton Window. Let’s assume that all politics can be reduced to one axis (if we do a Principal Component Analysis of political views, the principal axis is certain to account for a large share of the variance, so this is not a bad assumption). So the Overton Window can be referred to by a line which the shifts.

As long as the world was “ruled by mainstream media”, this Overton Window kept moving back and forth, expanding and contracting, but it remained united. And then with the start of subscription ad-free media (maybe a decade or decade and half ago), the Overton Window started expanding.

The “left media” (that’s a convenient term isn’t it?) started admitting stuff that was left to the then Overton Window. The “right media” started admitting stuff that was to the right of the then Overton Window. And so over time, the Overton Window started expanding. And things can’t get into the media Overton Window unless they’re part of the mainstream political Overton Window.

The thing is that as the media became subscription-heavy and hence biased, political ideas that were once on the fringe now got a voice. And so the Overton Window got larger and larger.

Until a point when it got so unwieldy that it split, giving rise to Jamie and Craig. The image on the right is an approximate illustration of what happened.

And once the Overton Window split, there was no looking back. They started moving away from each other well-at-a-faster-rate. The Jamies could not come to terms with the policies of the Craigs, and vice versa. Political analysts and commentators started getting associated with the Jamie and Craig camps.

For a while, a few commentators continued to write for both sides, but the extreme fringes, which were getting more and more extreme, started overreacting. “How can we have someone who has written 10 articles for Craigs write for us”, the Jamies asked. “Most of our commentators are Craigs, so we might as well become a Craig newspaper”, the other side reasoned.

And that’s where mainstream media is going. The Overton Window has split down the middle. Crossing this gap is considered a crime worse than crossing the floor in Parliament.

Sadly, it is not just media that is getting Jamie and Craig. Mainstream politics reflects this as well, and so across countries we get political opponents who just cannot talk to each other, since everything one says is outside the Overton Window of the other.

Maybe the only way this can end is by going across axes, or inventing a new axis even. With the current spectrum politics, there is no hope of the two Overton Windows coming to meet.

 

News, Subscription, Advertising, and Bias

Dibyendu Mishra and Joyojeet Pal of the University of Michigan have some very interesting research out on the political bias of Indian news publications. Rather than do complicated gymnastics such as NLP, they’ve simply looked at the share of articles from each news publication that is retweeted by BJP and non-BJP publications, to draw out a measure of their bias (see link above for methodology).

They have made a nice scatter plot (the other axis is how “popular” these news outlets are in terms of the number of articles retweeted), and looking left to right, you can see the understood (by politicians) bias of various Indian news publications. As Helmet pointed out on Twitter, the most “centrist” news outlets seem to be the Times of India and the Economic Times, both from the Bennett, Coleman and Company group, who people crib about for “being too commercial” and “having too many advertisements”.

This reminds me of another piece of analysis that was in the news a few months ago, about how subscription-driven online news has led to news outlets being politically polarising. For example, Zach Goldberg did some analysis of frequency of words/phrases in the New York Times that are associated with the extreme left.

Note the inflexion point sometime in 2012 or so, around the same time when the NY Times put up its paywall.

David Rozado has a more comprehensive picture (check out his nifty tool here).

The idea is this – when newspapers depended on advertising for most of their funding, they needed to be centrist. Taking political sides meant that large mass-market advertisers wouldn’t want to advertise in this newspaper, and the paper would thus lose revenues. Hence, for the longest time, whatever the quality of the reporting and writing was, news outlets strove to be reasonably politically unbiased – taking sides would mean a loss of money.

Once digital took off, and it became clear that digital advertising wouldn’t really sustain the papers, they started putting their content behind paywalls. And subscription revenues meant two things – news outlets weren’t as beholden to advertisers as they used to be, and it was easier to get paying subscribers if you had a strong ideology. Moreover, online you can provide targeted advertising (rather than mass-market), so you can get away with being biased. And so with the coming of paywalls, newspapers started becoming far more political as the New York Times graph above indicates.

In India, there haven’t been too many publications behind paywalls, but media is evidently getting more and more polarised over time. Papers and channels are branding themselves (implicitly) as being pro or against a particular political party, and that is driving their viewership.

While these media outlets are good for fanbois (and fangirls) of particular ideologies, the ideological bent has meant that it has become harder to get objective news.

And that’s where money, and advertising, comes in.

The positioning of ToI and ET in the middle of the Indian media ideological graph is interesting because they belong to a group that is brazen about commercialisation and revenues (from advertising). And in terms of news objectivity, that’s a good thing. Since ToI and ET are highly money minded, they want to get as much advertising as possible, and in order to attract mass marketers, they need to not be biased.

Taking a political stand means pissing off people belonging to the opposite political persuasion, and that means less readership, which means less advertising revenues. And so if you read the editorials of these newspapers (I read ET everyday), you see that they maintain a careful balance of not appearing too biased in favour or against any party. And you see them raking in the advertisers while more biased (and “ideological”) competitors are forced to request for donations, or put up paywalls restricting their readership.

Putting it another way, there is no surprise that ToI and ET are not biased in their news, and are retweeted by politicians of all persuasions. It is the classic money-driven media model, and that is the one that is capable of providing the most objective news.

Schools and Officers’ Wives

I’m reading this fascinating interview in the Financial Times (possibly paywalled) with my former super^n-boss Lloyd Blankfein. It’s full of interesting nuggets, as well as fodder for people who want to criticise him.

I must admit right up front – I’m a big fan of Lloyd’s. This has nothing to do with the fact that I briefly worked for Goldman when he was CEO (I had even asked him a “planted question” when he had given a talk to the office sometime during my tenure there). In general, I think he says things as they are, and his twitter account is rather entertaining as well.

Anyway, the first statement in the interview that caught my attention was this statement about why the quality of schooling has gone down over the years. “He explains that the schools were only good because the women who staffed them were blocked from jobs in business and industry.” This is complementary to a view that I’ve strongly endorsed for a while.

Let me explain this using examples from India. Long long ago, maybe until the 1940s and 1950s, most school teachers in India were men. Way too few women had the kind of education that would qualify them to teach in schools. Moreover, back then, teaching paid sufficiently to run a (at least lower middle class) family on a single income.

In the 1950s and 1960s, women in India started going to college, and started entering the workforce. Mind that it was still a massively patriarchal society here back then, and women were expected to do their “household duties” in addition to bringing home a secondary income. And this meant that many of them were in the market for jobs that offered good work-life balance.

Teaching in schools offered that sweet spot – it required credentials, and the woman’s degrees would help in that. The hours weren’t too long. There would be ample vacations through the year. Schools were found everywhere, so the job was location-independent to a large extent. This last bit was important since the women’s husbands would frequently be employed in government jobs that were transferable, and the women’s “secondary careers” meant that they would be forced to move along.

And so we saw the rise of a class of teachers that I’ve come to call (not very politically correctly) as “officers’ wives”. These were well educated women, married to well educated men who held good jobs. They were passionate about their jobs, and went about it with a sense of purpose that went well beyond making money. This meant that the standard of teaching overall was raised.

And most importantly, this increased standard of teaching came without a corresponding increase in cost. The marginal utility to the family of this secondary source of income wasn’t particularly high, so this class of teachers didn’t demand very highly in terms of wages. In any case, they were doing their job out of passion rather than for the money, and would be willing to accept below-market wages to go about their jobs.

Then, two things happened. Firstly, the presence of employees who weren’t in it solely for the money pushed down average wages, and teachers for whom teaching was the sole source of family income started getting crowded out of the market. Secondly, with liberalisation in the 1990s, the nature of the job market itself suddenly changed.

One reason why the “officers’ wives” took to teaching was that it was hard to find other employment that was commensurate to their education that gave them the flexibility they desired (if you’re a secondary income earner you need that flexibility). With the market opening up, there was suddenly a number of options available to these people that matched their skill and flexibility needs. For example, my 11th standard physics teacher quit the school midway through the year to take up a job as a software tester at Wipro (this was in 1998-99).

So, rather suddenly, the opportunity cost of teaching shot up since the teachers suddenly many more options. It wasn’t possible for schools to jack up fees at the same time to be able to continue to afford the same teachers. And so, supply of quality teachers dropped. And consequently, the average quality of teachers (holding the schools constant) dropped as well.

Putting it in another way, schools nowadays need to compete with a much larger and much more diverse set of employers for their teachers. Many of them, for the sort of fees they charge, are simply unable to do so. The “passionate bunch” has found other avenues to exhibit their passion.

And the problem continues. And from what Lloyd says, it isn’t only India that is seeing this drop in quality of teaching – the US sees that as well. It was a sort of repressed larger market that had artificially pushed up the quality of school teachers, and the drop in repression has meant that the quality of teaching has dropped.

I will leave you with the concept of Baumol’s Cost Disease.

Afcon in winter

As well as Liverpool is doing this season, there are already clouds on how good next season could be. The reason is the moving of the African Cup of Nations (AFCON) to January-February, which means Liverpool will be without three key players (Mo Salah, Sadio Mane and Naby Keita) for over six weeks of the season.

When asked about it at a press conference last week, manager Jurgen Klopp went off on a massive rant (paywalled) about scheduling, and FIFA and UEFA and everything.

The other thing is it doesn’t help African players. We will not sell Sadio, Mo or Naby now because they have a tournament in January and February — of course not — but if you have to make a decision about bringing in a player it is a massive one because before the season you know for four weeks you don’t have them. That’s a normal process and as a club you have to think about these things. It doesn’t help the players, for sure.

This is a very valid second-order impact of having the African Cup of Nations in the middle of the European season. As the timing of the AFCON gets regularised in winter, European clubs will be loathe to hire Africans into their leagues. And that is bad news for African footballers.

While elite players such as Salah or Mane might never be in the need for a job, the problem with the unavailability mid-season is that clubs will start accounting for that while making decisions on recruitment.

The marginal African player playing in the second or third division in a major European footballing country will find it marginally more difficult to get a next good contract. The marginal African player at the top of his country’s league will find it marginally more difficult to get recruited to a (nowadays coveted) European club.

And as African players play less for European clubs (this will happen in due course), there will be fewer African role models. Because of which fewer African kids will want to take up football. Because of which the overall level of football in African countries will go down.

This is the problem with dependence on external factors, like African football does with European football. That the best African footballers want to play in Europe means that the wishes of Europe will automatically have an impact on football in Africa. This means that Africa cannot schedule its continental tournament at the time of the year that is most convenient to it without impacting its own players.

This is a rather common problem. A quick analogy I can think of is the impossible trinity of macroeconomics – an independent monetary policy, free capital flows and a fixed exchange rate. The moment you peg your currency to another, what happens in the other currency automatically starts affecting you.

So what should African Football do? Clearly, climatic conditions mean that for most of Africa it’s optimal to host the tournament in (the northern hemisphere) winter. Clearly, there is no point of hosting such a tournament if the best African footballers don’t take part. But doing so will marginally jeopardise the marginal African footballer. And that is not good for African football.

There are no easy answers to this puzzle.

Gap in giveaways and disposal

There is a gap in the market between second hand sales and garbage disposal, and I’m not sure what’s a good way to address it.

These are things that you own that might be useful for someone, but you don’t know who it might be useful for. If one such person is located, you are willing to give the stuff away for free, but you don’t want to make any effort or spend anything to dispose it.

The part of London I used to live in had evolved a simple way of achieving this – people would simply leave stuff out in their front yards very close to the footpath (the compounds didn’t have gates). People walking past were free to pick up whatever they wanted, and after things had been left out for a sufficient period of time, the council would be called and they would pick it up as “garbage”.

Unfortunately when I moved out of London earlier this year, the house we were living in was on the main road (right next to Ealing Broadway station), and this method of disposal of unwanted things wasn’t available to us. And we had to incur significant cost to dispose of some of our stuff.

The wife put up some of them on the UK equivalent of OLX, and managed to sell off a lot of our stuff for not very high amounts (though I think we got more for our mixie than what we’d paid for it 10 years ago). We made money, yes, but it possibly wasn’t significant enough to cover the cost of my wife’s time.

And then there were the books – there were no second hand bookshops available that would pay anything reasonable for the books. So I had to actually cart all the books to the local Oxfam centre to be given away to charity (apart from stuff friends picked up).

Clothes, similarly, had to be dropped off at a charity centre (there was a Cancer Research UK shop right across the road from our house, so that helped). Again, I don’t know if everything we left there was used, but that was the lowest cost way for us to dispose of them.

Coming back, this gap in the market exists in India as well. The market is a bit better here because you have house cleaners and cooks and drivers you interact with on a regular basis, who are happy to take your unwanted stuff off you and dispose it. The problem is that they are picky on what they take and dispose – they have transaction costs, just like us, and don’t want to take on stuff that they will find it hard to move on.

And what makes matters worse is that even putting it in the trash is not a proper solution here – the municipal trash collectors ask for a bribe to take these things off you!

In some sense, this is a classic market design problem – where the transaction cost of the sale overwhelms the value of items being bought and sold. The things we want to dispose of have value to someone, for which they might be willing to pay, but the costs of finding these people are so high that you end up paying to dispose them.

Basically what we need is a service where someone comes and picks up all your “semi-trash”, sorts through it to find stuff that might be useful for someone else and then transfer it to markets where it can reach people who want it. And things that aren’t useful to anyone will go into garbage.

The problem with this service is that there is a natural upper bound on what people will be willing to pay for this service – zero. And when you factor in the market for lemons here (people might use this to dispose of absolute garbage rather than semi-trash that might be useful for someone), you know why “solution doesn’t exist”.

Bad signalling

About a month or two back, a new set of traffic lights came up on the way from home to my daughter’s school. It’s among the least effective set of lights I’ve seen.

For starters, the signal cycles are too long to justify the traffic, so if everyone decides to follow the lights, the traffic will only get worse.

Then, on two sides of the signal (the east and west approach roads) the lights aren’t displayed properly. There are lights on the left side of the road just before the signal, but no corresponding lights at a height across the intersection. So if someone is too close to the intersection they can’t see the lights.

Most importantly there has been no attempt at all so far to enforce the lights. There wasn’t even a cop standing there in the days leading up to the installation of the lights. The intersection was never really that crowded to necessitate a signal (ok I have limited data on this). And one day suddenly the lights went up and it was expected that people will follow.

People, for the most part, haven’t, and that’s a good thing considering the signal cycle. The east and west sides (who don’t have lights on the opposite side of the intersection to reinforce the signal) started the jumping first. The north and south sides joined.

I usually approach it from the south side, and the only times I stop at the signal is if someone in front of me has decided to obey the signal and doesn’t let me past. And I suppose that as people hit the signal multiple times they too make an independent judgment that everyone is jumping the signal, and that’s the optimal strategy.

I see this as a case of failed mechanism design. A set of traffic lights is good if and only if everyone has an incentive to follow it, or is made to follow it. For example, once a set of lights go up, having a cop stationed at the intersection for a few weeks means that most regular commuters across the intersection will get used to the lights, and start following it. And once you have a critical mass of commuters following the signal, the rest simply obey.

As things stand now, I’m happy that nobody really follows these lights – for if people did, it would only slow things down!

These lights, by the way, are at the intersection of 26th main and 39th cross roads in Jayanagar 9th Block.

Active aggression and passive aggression

For the record I’m most often actively aggressive. I believe passive aggression is a waste of energy since not only do you end up fighting but you also end up trying to second guess the other party, which leads to suboptimal outcomes. This post is a justification of that.

Let’s say you and I are trying to decide the price of something I want to sell you. There are two ways we can go about it. One way is for us to have a negotiation. I can name my asking price. You call your bid. And if the two meet, well and good. Most often they won’t meet. So one of us will have to budge. We start budging slowly, in steps, until a time when the bid and ask are close together. And then we have a deal.

In most situations (except exceptional cases where there are very few buyers and sellers – read the first chapter of my book. This is within the Kindle sample), this will lead to an efficient outcome. Even if the final price were a little too close to the bid or to the ask, both parties know that under the circumstances they couldn’t get better. And the transaction takes place and the parties move on.

The other situation is where one party publicly states that they are unwilling to negotiate and will do the deal if and only if the counterparty comes up with a good enough offer. If the offer is not good enough, there is no deal. This is similar to the ultimatum game popular in behavioural economics. In this case you are also required to guess (and you have exactly one guess) what the counterparty’s hurdle rate is.

When there is a liquid market, there is no issue with this kind of a game – you simply have your own hurdle rate and you bid that. And irrespective of whether it gets accepted or not, you get the optimal outcome – since the market is liquid, it is likely that your quote will get accepted somewhere.

In a highly illiquid market, with only one buyer and one seller, the ultimatum setup can lead to highly suboptimal outcomes. I mean if you’re desperate to do the sale, you might bring your price “all the way to zero” to ensure you do the deal, but the thing is that irrespective of whether you get a deal or not, you are bound to feel disappointed.

If your ask got accepted, you start wondering if you could’ve charged more. If you didn’t get your deal, you start wondering if reducing a price “just a little” would have gotten the deal done. It is endless headache, something that’s not there when there is an active negotiation process.

Now to build the analogy – instead of a sale, think of the situation when you have a disagreement with someone and need to resolve it. You can either confront them about it and solve it “using negotiation” or you can be passive aggressive, letting them know you’re “not happy”. Notice that in this case the disagreement is with one specific party, the market is as illiquid as it can get – no negotiations with any third party will have any impact (ignore snitching here).

When you express your disagreement and you talk/fight it out, you know that irrespective of the outcome (whether it was resolved or not), you have done what you could. Either it has been resolved, which has happened with you telling what exactly your position is, or you have given it all to explain yourself and things remain bad (in this case, whatever happened there would have been “no deal” or an “unhappy deal”).

And that is why active aggression is always better than passive aggression. By expressing your disagreement, even if that means you’re being aggressive, you are stating the exact extent of the problem and the solution will be to your satisfaction. When you’re passive aggressive, nobody is the winner.

PS: I realise that by writing this post I’m violating this own advice, since this post itself can be seen as a form of passive aggression! Mea culpa.

Magnus Carlsen’s Endowment

Game 12 of the ongoing Chess World Championship match between Magnus Carlsen and Fabiano Caruana ended in an unexpected draw after only 31 moves, when Carlsen, in a clearly better position and clearly ahead on time, made an unexpected draw offer.

The match will now go into a series of tie-breaks, played with ever-shortening time controls, as the world looks for a winner. Given the players’ historical record, Carlsen is the favourite for the rapid playoffs. And he knows it, since starting in game 11, he seemed to play towards taking it into the playoffs.

Yesterday’s Game 12 was a strange one. It started off with a sharp Sicilian Pelikan like games 8 and 10, and then between moves 15 and 20, players repeated the position twice. Now, the rules of chess state that if the same position appears three times on the board, the game is declared a draw. And there was this move where Caruana had the chance to repeat a position for the third time, thus drawing the game.

He spent nearly half an hour on the move, and at the end of it, he decided to deviate. In other words, no quick draw. My suspicion is that this unnerved Carlsen, who decided to then take a draw at the earliest available opportunity available to him (the rules of the match state that a draw cannot be agreed before move 30. Carlsen made his offer on move 31).

In behavioural economics, Endowment Effect refers to the bias where you place a higher value on something you own than on something you don’t own. This has several implications, all of which can lead to potentially irrational behaviour. The best example is “throwing good money after bad” – if you have made an investment that has lost money, rather than cutting your losses, you double down on the investment in the hope that you’ll recoup your losses.

Another implication is that even when it is rational to sell something you own, you hold on because of the irrationally high value you place on it. The endowment effect also has an impact in pricing and negotiations – you don’t mind that “convenience charge” that the travel aggregator adds on just before you enter your credit card details, for you have already mentally “bought” the ticket, and this convenience charge is only a minor inconvenience. Once you are convinced that you need to do a business deal, you don’t mind if the price moves away from you in small marginal steps – once you’ve made the decision that you have to do the deal, these moves away are only minor, and well within the higher value you’ve placed on the deal.

So where does this fit in to Carlsen’s draw offer yesterday? It was clear from the outset that Carlsen was playing for a draw. When the position was repeated twice, it raised Carlsen’s hope that the game would be a draw, and he assumed that he was getting the draw he wanted. When Caruana refused to repeat position, and did so after a really long think, Carlsen suddenly realised that he wasn’t getting the draw he thought he was getting.

It was as if the draw was Carlsen’s and it had now been taken away from him, so now he needed to somehow get it. Carlsen played well after that, and Caruana played badly, and the engines clearly showed that Carlsen had an advantage when the game crossed move 30.

However, having “accepted” a draw earlier in the game (by repeating moves twice), Carlsen wanted to lock in the draw, rather than play on in an inferior mental state and risk a loss (which would also result in the loss of the Championship). And hence, despite the significantly superior position, he made the draw offer, which Caruana was only happy to accept (given his worse situation).

 

 

Advertising Agencies: From Brokers to Dealers

The Ken, where I bought a year long subscription today, has a brilliant piece on the ad agency business (paywalled) in India. More specifically, the piece is on pricing in the industry and how it is moving from a commissions only basis to a more mixed model.

Advertising agencies perform a dual role for their clients. Apart from advising them on advertising strategy and helping them create the campaigns, they are also in charge of execution and buying the advertising slots – either in print or television or hoardings (we’ll leave online out since the structure there is more complicated).

As far as the latter business (acquisition of slots to place the ad – commonly known as “buying”) is concerned, typically agencies have operated on a commission basis. The fees charged has been to the extent of about 2.5% of the value of the inventory bought.

In financial markets parlance, advertising agencies have traditionally operated as brokers, buying inventory on behalf of their clients and then charging a fee for it. The thrust of Ashish Mishra’s piece in ate Ken is that agencies are moving away from this model – and instead becoming what is known in financial markets as “dealers”.

Dealers, also known as market makers, make their money by taking the other side of the trade from the client. So if a client wants to buy IBM stock, the dealer is always available to sell it to her.

The dealer makes money by buying low and selling high – buying from people who want to sell and selling to people who want to buy. Their income is in the spread, and it is risky business, since they bear the risk of not being able to offload inventory they have had to buy. They hedge this risk by pricing – the harder they think it is to offload inventory, the wider they set the spreads.

Similarly, going by the Ken story, what ad agencies are nowadays doing is to buy inventory from media companies, and then selling it on to the clients, and making money on the spread. And clients aren’t taking too well to this new situation, subjecting the dealers ad agencies to audits.

From a market design perspective, there is nothing wrong in what the ad agencies are doing. The problem is due to their transition from brokers to dealers, and their clients not coming to terms with the fact that dealers don’t normally have a fiduciary responsibility towards their clients (unlike brokers who represent their clients). There are also local monopoly issues.

The main service that a dealer performs is to take the other side of the trade. The usual mechanism is that the dealer quotes the prices (both buy and sell) and then the client has the option to trade. If the client feels the dealer is ripping her off, she has a chance to not do the deal.

And in this kind of a situation, the price at which the dealer obtained the inventory is moot – all that matters to the deal is the price that the dealer is willing to sell to the client at, and the price that competing dealers might be charging.

So when clients of ad agencies demand that they get the inventory at the same price at which the agencies got it from the media, they are effectively asking for “retail goods at wholesale rates” and refusing to respect the risk that the dealers might have taken in acquiring the inventories (remember the ad agencies run the risk of inventories going unsold if they price them too high).

The reason for the little turmoil in the ad agency industry is that it is an industry in transition – where the agencies are moving from being brokers to being dealers, and clients are in the process of coming to terms with it.

And from one quote in the article (paywalled, again), it seems like the industry might as well move completely to a dealer model from the current broker model.

Clients who are aware are now questioning the point of paying a commission to an agency. “The client’s rationale is that is that it is my money that is being spent. And on that you are already making money as rebate, discount, incentive and reselling inventory to me at a margin, so why do I need to pay you any agency commissions? Some clients have lost trust in their agencies owing to lack of transparency,” says Sodhani.

Finally, there is the issue of monopoly. Dealers work best when there is competition – the clients need to have an option to walk away from the dealers’ exorbitant prices. And this is a bit problematic in the advertising world since agencies act as their clients’ brokers elsewhere in the chain – planning, creating ads, etc.

However the financial industry has dealt with this problem where most large banks function as both brokers and dealers. It’s only a matter of time before the advertising world goes down that path as well.

PS: you can read more about brokers and dealers and marketplaces and platforms in my book Between the Buyer and the Seller

Why Real Estate Prices are High

World over, high housing prices seem to be a problem. They’ve always been an issue in India. They are an issue in the US, where millennials are not able to afford houses to live in. In the UK as well, rising housing prices mean that today’s young are unable to buy up houses. The global phenomenon that is driving all this is the drive towards increasingly large cities.

Going by first principles, there are two major components that determine the cost of a house (note that I said cost and not price) – the cost of the land and the cost of construction. It can be safely assumed that the latter hasn’t increased at a rate dramatically higher than inflation over the years.

Yes, there are bubbles and busts in prices of commodities such as steel and cement. Houses nowadays are being built largely to better specifications and quality than earlier homes. In places like the US, modern houses are  bigger. But all this is balanced by technological innovation which makes stuff cheaper. So on an average, the increase in construction costs over the years is not dramatic.

That implies that the massive increase in price of housing the world over is driven by  increasing costs of land. Some scaremongers will try to tell you that this is due to there being too many human beings in the world, and we are soon headed for a Malthusian collapse. However, the land needed for housing is small, compared to say agriculture, so regular transfer of land from agriculture to housing should take care of this. So why are land prices increasing so much?

It has to do with the distribution. During most of the 20th century, manufacturing being the base of the economy meant that a lot of smaller cities and towns flourished. These cities and towns were either located conveniently enough to tap raw materials or markets for industrial goods, or were helped by the fact that land requirements for industries meant that big cities would get expensive very soon for industries, driving development to smaller cities and towns.

As the share of populations in manufacturing falls, and more people move into services, the larger cities gain at the expense of smaller cities and towns. This means the distribution of demand has changed massively over the last 30 years or so. Rather than demand being more or less uniform over cities, nowadays most of the housing demand is spread over a few small cities.

And these cities aren’t able to keep up. Supply in some cities such as San Francisco and Mumbai, are constrained by regulations on how much can be built. Other cities such as Bangalore or Houston have expanded radially, but housing in the far suburbs is much less attractive than closer to town (due to increased transport costs), and there is only so much supply in “convenient areas” of towns.

This changing pattern of urbanisation is leading to rapid increase in the prices of housing in places that people want to live in. And so millennials are being priced out, unable to buy homes. The distribution of jobs across cities means they don’t have the luxury of “settling down” in smaller cities and towns where housing is still affordable. And until the larger cities hit their limits of growth and businesses start moving to smaller cities (thus creating newer hubs), this housing shortage will exist.