Alan S. Blinder has gone soft

Alan Blinder is a brilliant economist but judging from this article in the WSJ opinion journal, I'm wondering what he's been drinking. He has missed out a very large part of the outsourcing issue and because of this, he is wrong.

One of the determinants of price is productivity. If Lineland can produce 3 widgets per worker while Flatland can produce 9 widgets per worker then all things being equal, a worker in Flatland will earn 3x as much (if he earns more than 3x then it is more economical to produce in Lineland). Now because of comparitive advantage if a worker in Lineland can produce either 3 widgets or 1 blob and a worker in Flatland can produce 9 widgets and 15 blobs then even though Flatland has a considerable productivity advantage for both widgets and blobs, Flatland will tend to specialize in blobs and Lineland will specialize in widgets as this will yield the biggest advantage to both nations.
China fits into this classic mould - China produces widgets (manufactured goods) with relative efficiency while the US produces blobs (services) with relative efficiency. The end result is that the US is still a net exporter of services. That there is a huge trade deficit stems from other issues that we can discuss later (clue: a huge source of the US trade defecit is not China...).


It gets murkier when both Flatland and Lineland have specialized in the same area.
India is one of these anomalies. Blessed by a decent higher education system, and the fact that the manufacturing section was tied down by red tape, their services sector took off. This is not a sustainable model. India has hundreds of millions of poor people who don't have a hope of ever getting a high school education let alone a university education - many these people are unemployed because the traditional route up through manufacturing is blocked to them. This will be a source of major social instability in the future.

This anomaly in India is manifested in some pretty obvious ways. Witness the airport in Delhi compared to Shanghai. Shanghai is a modern, efficient airport where it is clear where to go and how to get there while Delhi is a total mess. If you're not careful in Delhi, you could easily get into some serious trouble. Other differences are also apparent - bad roads, terrible train transportation, awful telephone system, unbelievable amount of red tape - the list goes on. The services sector is booming but everything else in India seems to be struggling. Already their infrastructure deficiencies are having an impact on their growth.

Are there productivity differences between an information worker in the US vs. an information worker in India (for example)? While I am not questioning the talented young men and women in India, the answer is clear. An IT worker in India has to contend with: poor communications networks, bad roads (to go to and from work), inefficient retail networks (and logistics), less powerful machines (though the cost of a PC has been going down steadily while becoming more powerful, the cost of the most powerful machines at the time has remained high), less efficient financial markets to produce venture capital and less effective management. Were all of these factors equalized, the cost of an IT resource in India would be the same as that in the West.

It is almost surprising that we are able to outsource to India given the fact that the West has the same relative efficiencies as India. But this is not surprising when we start to break down the numbers. Where India has excelled is in the low margin, high volume sort of work. In sheer quality of research and product development, most of the innovation still happens in the West (with some notable exceptions). This does not mean that the West should be complacent. Protected industries are ripe for outsourcing as the price far exceeds the productivity of the resources. Restrictive immigration laws also works as a form of industry protectionsim by reducing the supply of workers. Old controls need to break down - unions and professional bodies need to accept that the market must determine wages not committees. And in the end, it is better to have workers come and work in your country than having the firm move away in search of workers.

Returning to Mr. Blinder, a professional in the West does not have anything to worry about if they keep their productivity advantage and if their industry has a relative productivity advantage to the rest of the economy of their country.

Olympic Security

Interesting how security is chosen for the London Olympics. Considering how London is a potential target for the myriad terrorist outfits out there, this is quite plainly stupid. Forget about quality of service and ability - anyone can arrange for security as long as they sponsor the events. Encouraging wouldn't you say?

Why I stopped worrying and learned to love string theory

I learned about superstrings when I was 12. But it was in university that I first started to really learn about what they were and the mathematics behind them. The phrase that came to mind was EPICYCLES (see above). It could be a natural bias of mine but I wouldn't characterize string theory as elegant. Aside from the fact that dimensions spring out of the theory like grasshoppers out of an open box and that the theory predicts an inordinately high number of possible universes and that just about nothing in string theory is testable, it lacks any sort of unified set of principles. It still treats space-time as a stage where strings are the actors. Fast forward to today.
String theory has become M theory and the lack of testability is beginning to worry some physicists (and the fact that all the best talent is being sucked up by this monster). Two good books address this Lee Smolin's The Trouble with Physics and Peter Woit's Not Even Wrong. And some recent developments such as the accelerating universe seem to cause problems for string theory. Of course anything can be explained by string theory, just as the positions of the planets could be explained by epicycles if you added enough epicycles.
So what are the alternatives to string theory? Well there are a few:

• Abhay Ashtekar's and Lee Smolin's Loop Quantum Gravity which quantizes space-time and worries about unification later (makes sense as one of the biggest problems is that gravity and quantum theory are incompatible).

• Then there is Alain Connes's noncommutative geometry which looks at a geometry linked to the noncommutativity of quantum phase space (position and momentum). Unlike ordinary numbers where 2x3=6=3x2, certain operations are noncommutative (ex. moving on the surface of Earth - if you start on the equator and move 200km north and 200km west, this will put you in a different position on earth then first travelling 200km west and then 200km north).
  
• Twistor String theory, which is based on Roger Penrose's Twistor Theory, which relates real 4 dimensional Minkowsky space to 4 dimensional complex space.

I suspect that all of the theories (including M)are orbiting some common theory that they don't see yet. There are some striking similarities sometimes in the mathematics of the theories that suggest this is the case. Problem is that M Theory is getting all the limelight and funding to the detriment of the other theories and to science.

But I do like string theory and it is mathematically quite splendid.

Tax Pipe Dreams

Excellent article here about how the tax code can be changed.
My personal favourite is the flat tax. Several of the Baltic states have adopted a flat tax and have done really well. A flat tax is the fairest as everyone pays the same portion of their income as taxes and a 0 marginal tax rate does not penalize success or risk taking. Interestingly enough, a flat tax actually increases the tax revenues for the state because firstly there is a strong positive incentive to earn more (the Laffer curve) and there would be fewer people wanting to dodge taxes because they deem it unfair.

Gun Control

Although greatly saddened by the events in Virginia Tech, we need to sit back for a moment before we start to react and start legislating.
The US is one of the few places in the world where citizens are allowed to carry arms with little or no restriction. The problem is that most citizens don't exercise that right. This is why some punk can walk into a school and gun people down - few take their own protection seriously and even if they did, ham-fisted laws barring guns from schools and campuses prevent them from exercising that right.

Mass murderers will always find ways of killing - either by walking into a school in broad daylight and gunning people down, or by burning down the house of a sleeping family, or by hunting people down one-by-one in dark allies. The question is whether we give citizens the ability to defend themselves.

Perhaps this episode should tell us less about the legality of guns than about the structure of our communities. Remember that the warning signs for Mr. Cho's psychotic nature were abundant - but nobody cared to follow up.

Space Pragmatism: NASA Goes Open Source for Missions

Space Pragmatism: NASA Goes Open Source for Missions Cool idea here to leverage the open source community. Might make for some leaner more interesting code. This can only be better for science.

Irrational persistence

Michael Shermer from Skeptic Magazine is always a good read. He also has a monthly article in Scientific American. This month's article is quite interesting - about why we persist knowing that the chances of success are quite limited. Anyone who's worked for a big company knows this. The company spends $200M on a project that is going nowhere fast. Everyone knows it but no one is willing to say "Enough is enough". Anyway Mr. Shermer can explain it better than me here.