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Archive for March 2014

Michael Jordaan: Freeconomics is the future

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elysium

Do you contribute to South Africa’s GDP by reading this post? Traditionally, had I written a letter, I would have required 220 envelopes and 220 stamps to send this note to those subscribed to this blog. It would have clearly registered as a tiny contribution to the country’s GDP? And I would have probably charged you to receive this letter, say R20 per individual, which would also have been recorded in the C or the X of GDP. But when you read this for free on your PC or iPad or phone, is it registered as part of our GDP? No. Similarly, if we search for the telephone number of the local restaurant on Google, or the weather prediction for tomorrow on yr.no, has anything been added to GDP? No. How do we measure the ‘free’ goods and services all of us consume everyday? We don’t. But because our utility (or happiness or satisfaction) has increased significantly through these services (I assume it has if you’ve read this far), it could only mean that we are underestimating GDP or, put differently, that GDP is incapable of measuring the vast gains from technological progress we’ve made over the last three decades.

And this process is unlikely to stop. Moore’s law – where computing power doubles every two years – is likely to be true in a much broader sense: the cost of information – books, music and all the other things that we spend an increasingly larger amount of our time on – will continue to fall, halving every two years. Many of these things are already free: road maps, weather predictions, news about cricket scores and elections and Oscar’s murder trial, connecting with that long-lost friend from school, searching for the origin of the word ‘geometric’, listening to music, translating English to French. You get the point. Only a decade ago we were still forced to pay for all these things. Now its free. And that requires new economic models and measurements, because consumers behave differently when, instead of having to pay for a service, they receive it for free.

Call it ‘freeconomics’ says Michael Jordaan, former CEO of FNB and now head of Montegray Capital in Stellenbosch. Jordaan presented his first lecture as new honorary professor in Stellenbosch University’s Department of Economics last night, and captivated the audience with a crash course of the most revolutionary technological changes today (his slides are available here). Much like Malthus had compared the arithmetic increase in food production with the geometric increase in population, Jordaan claimed that the exponential growth in information and, conversely, the exponential decline in the cost of information, necessitates economists to adjust – or perhaps toss and completely rethink – their classic microeconomic models. This new model, he conjectured, is driven by technologies of the digital age, where the marginal costs of services are close to zero, where demand is unconstrained by price and where scarcity has been replaced by the abundance of products and services that are available for free online.

Clearly, the standard supply-and-demand graph needs revision. Quantity does not necessarily increase linearly as price approach zero (or actually reach zero). Free stuff with no marginal cost and nearly frictionless transaction costs can be consumed by billions of people across the globe; one more person watching a YouTube video adds zero cost. According to Jordaan, in the freeconomy, scarcity is replaced by abundance (echoing the sentiments of Diamandis and Kotler in their book by the same name). Yet there are limits, of course, to what we can consume. Jordaan recognises this by acknowledging that the scarcity of time will become our biggest constraint, although that is changing too as improvements in DNA reconstruction and artificial intelligence may result in rapidly increasing life durations. For the immediate future, how we filter the abundance of free information will likely be our greatest challenge – and the ability of consumer goods to ‘save time’ will be extremely lucrative. Hello Google’s self-driving car.

There are many insights to highlight from Jordaan’s lecture, but some of the most interesting discussions came in the question section. Responding to a question about the social inequalities that this rapid technological change will create, Jordaan predicted that we may need to think differently about unemployment in the future. As robotics and AI will replace much of the unskilled and semi-skilled jobs, perhaps, he suggested, a large cohort of people will depend on state subsidies and the free economy for their daily needs, with no need to earn an additional income. The rich will be happy with this social consensus of large redistribution through the fiscal system as long as they can continue to invest in improving technologies for the betterment of all. With more social grant recipients than tax payers, Jordaan suggested that South Africa is already a template of such a society.

Is the future a benevolent Elysium? Perhaps it is, but if the past is anything to go by, radical change will not be as simple as one, two, free.

Written by Johan Fourie

March 28, 2014 at 16:18

Books I want to read (before the end of the year)

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BooksNo time for long posts this week, so I’ve decided to just list the many books that are currently on my have-to-read list. I’ve started with some of them already, but its too early to pass judgement. Some have not even been published yet. So don’t take this as approval – it is little more than a wishlist.

Genes seem to be making a comeback as explanation for our persistent inequalities. The Son Also Rises by Gregory Clark will certainly be controversial. I happened to be in Clark’s office last year on the day he submitted the final manuscript, and he was excited about the book’s prospects. His thesis: class differences are the result of genetic inheritance. Conclusions: 1) The Swedes are far less socially mobile than they like to think. 2) We can do very little to accelerate social mobility; all government attempts to redress the income distribution are useless. 3) If you believe this thesis, then it has serious implications for whom you decide to marry. Perhaps less controversial but still in uncomfortable territory will be Nicholas Wade’s A Troublesome Inheritance. Wade will draw on scientific research to discuss evolutionary differences in human traits. These books, if read insensitively, will give ammunition to racists everywhere. That is not their purpose. Caution is advised.

I often like reading about the history of objects, and there are four new books about everyday things that look quite interesting: On Paper by Nicholas A. Basbanes documents paper’s two-thousand-year history. (Get the hard cover, it is done beautifully.) Milk by Deborah Valenze is a local and global history of how humans have used and abused milk. The People’s Car by Bernhard Rieger tells the story of the Volkswagen Beetle, probably the most loved car in history. And Tom Standage has written a new book on the history of social media, Writing on the Wall.

For the more hard core economics gurus out there, Thomas Piketty has written a seminal book – Capital – which is scheduled for publication today and should be on every economists wish list. Here’s the blurb:

What are the grand dynamics that drive the accumulation and distribution of capital? Questions about the long-term evolution of inequality, the concentration of wealth, and the prospects for economic growth lie at the heart of political economy. But satisfactory answers have been hard to find for lack of adequate data and clear guiding theories. In Capital in the Twenty-First Century, “Thomas Piketty analyzes a unique collection of data from twenty countries, ranging as far back as the eighteenth century, to uncover key economic and social patterns. His findings will transform debate and set the agenda for the next generation of thought about wealth and inequality.

If you want more on wealth and inequality (and economic history), certainly read Angus Deaton’s The Great Escape: Health, Wealth and the Origins of Inequality. It is an excellent overview of what we know about the process of economic development. For a more local flavour, I’ve ordered Jade Davenport’s Digging Deep: A History of Mining in South Africa. This is the first South African economic history text in nine years, and should make for fascinating reading. (Although, if I have to be critical without reading the book, the blurb suggests that Davenport has not read much of what has been published recently in South African economic history. She writes: “Before the advent of its great mineral revolution in the latter half of the 19th century, South Africa was a sleepy colonial backwater whose unpromising landscape was seemingly devoid of any economic potential.” Uhm, no, no and no. For a summary, read this.) On South African history, I’m also reading Bill Nasson’s The War for South Africa, an excellent account of the Anglo-Boer War, I’ve just finished Tim Couzen’s South African Battles and I’ve just received Lindie Koorts’ biography of DF Malan (available in Afrikaans and English) in the mail. Hopefully I’ll write a post or two about these books in the future.

For now, though, it’s back to marking essays, setting tests and preparing for class. And maybe sneak a few minutes to watch the cricket.

Written by Johan Fourie

March 26, 2014 at 07:46

The vanquished people

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WE ARE THE EVIDENCE: Names of groups that have disappeared in the US (National Museum of the American Indian; photo by Johan Fourie)

WE ARE THE EVIDENCE: Names of groups that have disappeared in the US (National Museum of the American Indian; photo by Johan Fourie)

It is often said that history is written by the victors. (The quote is attributed to Churchill but its origin is unknown.) But perhaps it is better to think of it another way: History is written by the survivors. Or, more accurately, the descendants of survivors.

This is because even our recent past includes frightening numbers of vanished peoples; groups of indigenous people that have disappeared and are now retired to the footnotes of history. In September last year, Helanya, Dieter, Wimpie and I visited the National Museum of the American Indian in Washington DC, a museum dedicated to the indigenous peoples that lived across the North American continent when Europeans arrived in the fifteenth century. Over the following four centuries, European guns and especially European diseases killed millions of these peoples; I found the image of the names of the vanished tribes, shown above, bone-chilling.

Of course, the American experience is not dissimilar to our own. The Khoesan, consisting of the nomadic, pastoral Khoe and hunter-gatherer San, inhabited most of the Western Cape, Northern Cape and parts of the Eastern Cape when Europeans arrived in the mid-seventeenth century. (Read this for more on the origin of the Khoesan.) Two centuries later, the descendants of the Khoesan and imported slaves were an underclass, living mostly on farms as labourers and subjected to harsh work and living conditions. Several smallpox episodes, notably in 1713 and 1755, had killed a large proportion of the population and those that would not work on settler farms were forced to move deeper into the drier interior, settling in areas with little economic potential. Their economic and social way of life soon disappeared; names such as the Attaqua, Chainouqua, Cochoqua, Damaqua, Gonaqua, Gorachouqua, Namaqua, Hessequa, Hoengeiqua, Outenique and Sonqua all but vanished.

What we know about these groups we must learn from the records of the victors; the journals of European travellers, letters by settler farmers, reports by Company officials. Even here, there are large gaps. We don’t know, for example, how many Khoesan worked on settler farms, and exactly what they did. Because the Khoesan could not be enslaved, mention of them is also missing from tax censuses or probate inventories, records that kept meticulous account of the number of slaves (imported from south-east Asia) working on farms. So when calculating things like Cape per capita production, or levels of inequality, or slave productivity, what historians (myself included) simply did was to ignore the Khoesan: somewhere in a footnote we would note the existence of a group of people we cannot count because we have no quantitative information about their size and whereabouts. All our earlier estimates of the Cape economy had the caveat of the missing people.

So Erik Green of Lund University and I decided to do something about this. We use the qualitative information available from traveller accounts, settler journals and letter, and Company reports to reconstruct the size of the Khoesan population. Making several assumptions based on anecdotal evidence (anecdata?) and using the eighteenth century tax censuses, we calculate an annual estimate of the Khoesan population. We then use these new estimates to adjust earlier estimates of slave productivity, societal inequality, and GDP growth. It turns out that earlier estimates for slave productivity was much too large, between-group inequality much too low, and GDP per capita too high. The paper is now available as an ERSA working paper.

South Africans have mostly surrendered the history of these peoples to the dominant narrative of colonisation and liberation history (first, white, now black). There are attempts under way to address this: the Department of Traditional Affairs has, for example, decided to include the descendants of Khoesan in the National Traditional Affairs Bill. Yet, given that the Coloured population in the Western Cape are now genetically between 32 and 43% Khoesan (see a recent study by De Wit et al. in Human Genetics), it is not obvious who would qualify as ‘descendants’, and what their interests are. With land claims before 1913 now a possibility, expect more enthusiasm for any evidence that ties current descendants to ancestral lands.

To be able to claim land, I suspect, the location of the ‘original’ Khoesan inhabitants must first be established and, secondly, the modern-day descendants (and claimants) must be linked to those original inhabitants. This is, in truth, an almost impossible exercise in the absence of detailed records for the early Cape Khoesan. And, to be sure, given the high levels of mortality, it is highly likely that most of the Khoesan in the south-west Cape would have left few, if any, descendants.

Again, it seems, history will be written, if not by the victors, then certainly by the survivors.

Written by Johan Fourie

March 19, 2014 at 09:34

Smart people should build things

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Because CNN says so: Kobus Ehlers and his team at FireID are building something:.

Because CNN says so: Kobus Ehlers and his team at FireID are building something.

Smart People Should Build Things is the title of a new book by Andrew Yang, a serial entrepreneur and founder of Venture for America. Yang shows that most graduates from top US universities become bankers, lawyers, consultants, or doctors in one of the five main metropolitan areas of America: New York, Boston, San Francisco, Los Angeles or Washington D.C. Why is this? Because smart people want to achieve, ‘and that’s what achievement looks like’ in America today.

In short, Yang’s story goes like this: The smartest kids go to the top universities, are recruited by the largest corporates and funnelled into fancy offices with high paying salaries where they perform routine, uninventive tasks. The reason they choose this path is because it is the road of least resistance: while it is arduous and challenging to study to be a doctor, or lawyer, or economist, the risk is low if you have a certain academic ability. Jump through the necessary academic hoops, and a high-paying job is assured.

To Andrew, this is a bad thing for America. Imagine if Mark Zuckerberg, known to be one of the top students of his generation, had decided to accept a job at a prominent New York consulting firm. Instead he founded Facebook, to the benefit of the American economy (including the consulting firm, who now advises clients to invest in Facebook) and billions of people around the world. And it’s not only the economy that benefits, Yang argues, but also the entrepreneurs themselves; Zuckerberg is not only fabulously wealthy, but he actually enjoys what he’s doing.

So is this also true for South Africa? What do South Africa’s top talent choose to study, and what do they end up doing with their lives? Are they building future Facebooks, or accepting cosy jobs in Sandton or Canary Warf? To answer this question, I tracked down the top 20 matric students on the Merit Lists for 2001 to 2010, published by the Western Cape Department of Education. A friend and I could find degrees and current job descriptions on 77% of these students (174 of the 226 students on the list; for several years, the List included the names of more than 20 students).

(Incidentally, 115 of these 174 matrics (66%) decided to study at Stellenbosch. The second most popular university is UCT, which attracted 20%. Only one student studied at the other Western Cape university, UWC. 61% of these students are female.)

At Harvard in 2011, 29% of graduates went into finance and consulting, 19% into Law School and 18% to medical school. Table 1 shows the choice of the Western Cape’s top talent: similar to Harvard, 18% of students studied to become medical doctors. Far fewer of our top students study Law (5%), while a significantly higher number went into finance and consulting – 36% when we add the two categories of Accounting, and Maths, stats and finance (which is dominated by Actuarial Science).

Field Freq. Percentage Upstarts Abroad
Accounting

28

16%

6%

29%

Arts

14

8%

100%

30%

Engineering

34

20%

57%

14%

Law

8

5%

33%

20%

Maths, stats and finance

37

22%

12%

27%

Medicine

30

18%

0%

15%

Natural and Earth Sciences

20

12%

71%

47%

Total

171

100%

31%

26%

 

We should ask the same question of South Africa that Yang asks for America: how many of our best students choose the paths of least resistance? To test this, I also include another variable in Table 1: ‘Upstarts’ show the percentage of students from the various fields that now work in small to medium-sized firms (I only included students that finished school up until 2007). The story is quite clear: those in Math, stats and finance, and in Accounting end up working for big, established corporates: for example, nine former students now work for PwC. It is the engineers (57%) and especially the scientists (71%) that end up working for small, South African start-ups. (Students from the Arts also end up in small firms, although the sample size here is tiny; we could only find information on four individuals.)

Students in Engineering and the Natural and Earth Sciences are more likely to start their own thing, or join another small start-up. Unfortunately, many of them do so in foreign countries. ‘Abroad’ denotes the share of students that are situated outside South Africa. Close to half of all the students with a Natural and Earth Sciences degree end up abroad. While some are continuing their studies at top US and British universities and will hopefully return to South Africa, many seem to have relocated permanently. How many of them might be a future Elon Musk?

South Africa needs more start-ups if it is to grow the economy. Most innovation (especially transformative innovation, like Facebook or, to use a South African example, Mark Shuttleworth’s Thawte) occurs in small firms, and this is also where most employment is created. And to lead such innovation and job creation we need the sharpest tools in the shed to start or join these young companies.

Because it is better for South Africa if our smartest students build their own companies or join young ones, perhaps we should offer them incentives to do so. Stellenbosch University already has excellent facilities for start-ups – the MIH Media Lab, for example, and InnovUS. Many Stellenbosch start-ups are already making their mark on the national and international stage, like digital payments app SnapScan, developed by FireID (a company founded by a top 20 Merit List alumni). But maybe we should do more, and Yang offers a number of suggestions like tax incentives, risk sharing or greater emphasis on graduate recruitment, like his own Venture for America.

Of course, we can’t all be innovators, scientists, and entrepreneurs. And not all start-ups will be successful. But what we should do is to create incentives that will reduce the risks for aspiring young innovators to try something new, incentives that will encourage smart kids to join an upstart rather than a corporate conglomerate. South Africa’s GDP – and their happiness – would be much better for it.

*A shortened version of this essay appeared in Die Matie, the student newspaper of Stellenbosch University (12 March 2014)

Written by Johan Fourie

March 12, 2014 at 09:49

Why my job is safe (and, if you read this, yours probably too)

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Another labour-saving technology: goodbye chauffeurs and taxi-drivers, hello millions of hours of additional work time for commuters. Picture taken by my wife Helanya as we drove through Silicon Valley, November 2013. My biggest fear was crashing into it.

Another labour-saving technology by Google: goodbye chauffeurs and taxi-drivers, hello millions of hours of additional work time for commuters. Picture taken by my wife, Helanya, as we drove through Silicon Valley, November 2013. My biggest fear was crashing into it.

I teach economics at Stellenbosch. I don’t consider myself the best teacher there’s ever been (this is backed by empirical evidence on rating scores and faculty rewards), but also probably not the worst either (purely anecdotal and experiential evidence). Some of my teaching is at the postgraduate level – Economic History – but most of it is undergraduate, from a textbook, and mostly replicable by any university that offer second-year Macroeconomics.

And, increasingly, also by online universities that now offer MOOCs: ‘massive open online courses’. Instead of listening to me explain the IS-LM model, students now have the opportunity to sign up for online lectures from the best macroeconomists out there, and listen to these when they want, where they want. MOOCs have been billed as the ‘end of universities as we know it’. See here, here and here. Instead of every university offering mediocre, entry-level courses, why not have one superprofessor at the best university in the world broadcast his lectures to a global audience? Broader access, high quality and for a much lower price.

This is of course part of what I think will be the key question for future generations: the extent which human labour can and should be replaced by robots. In Europe and the US, convenience store staff are being replaced by automated payment points. Instead of call centre operators, I now get calls from recorded human voices selling products (which, incidentally, is much easier to switch off). But let’s remember that technology can be both labour-substituting and complementary: while a harvesting machine will probably substitute a farmer’s need for many workers, a tractor makes a farmer more productive and its acquisition might even require the farmer to employ more people to expand production. To take an example closer to home: technological advancement (like more advanced computers and better statistical packages) augments my ability to do research; speak to any economist older than 50 and they will tell you how they used to use punch cards for regression analysis. Quaint, but extremely time-consuming.

So technological change creates winners and losers. Capital investment (accumulation as Adam Smith called it) make labour more productive, increasing productivity, wages, and therefore living standards. But technological improvement also changes the labour requirement: it often substitutes lower-skilled jobs for higher-skilled jobs. Here is the best example: Tesla’s new manufacturing plant really only requires people for the first 18 months of its operation (to programme the circuit). Thereafter, as soon as production begins, everything (apart from oversight) will be done by computers and robotic arms. Is this the future of car manufacturing? Will the workers in our vehicle manufacturing plants become obsolete? Probably.

This is of course of great concern if you live in a country with an unemployment rate of 40%, a country where every political party fighting in this year’s election hopes to win votes by ‘creating jobs’. What is the solution, then? To ban technological innovation and change? Of course not. To do so would lead to stagnation in productivity growth, meaning a decline in our ability to remain internationally competitive, meaning lower profits for firms, lower incomes and wages, and lower living standards. (Incidentally to the labour economists out there, won’t labour subsidies have the same effect?) But to stick our collective heads in the sand is also not a solution: workers that lose their jobs is not only a political dilemma, but a moral one too. And a difficult one. And then there’s still the additional (and bigger) problem of the 5 million South Africans that are actively looking for work, and another 4 million that would like to work but has stopped looking.

So who is likely to lose to technology? Is my job threatened by the arrival of these MOOCs? Probably not. I would argue that any service job that requires some socialising to be effective – and learning, especially in the social sciences, is a social activity – will be complementary to technology rather than being substituted by it. A course in pure mathematics or machine learning can perhaps be usefully taught online. But any course where context becomes important – where the past experience of the student interacts with the teaching material to create a unique product for all the other students – is unlikely to be substitutable by an online, one-way interaction. A new NBER Working Paper by Acemoglu, Laibson and List supports this view. They investigate the concern that internet-based educational resources (MOOCs) will be ‘disequalising’, creating superstar teachers and a winner-take-all education system that, for example, will put me out of a job. Instead, they find quite the opposite:

We contend that a major impact of web-based educational technologies will be the democratisation of education: educational resources will be more equally distributed, and lower-skilled teachers will benefit. At the root of our results is the observation that skilled lecturers can only exploit their comparative advantage if other teachers complement those lectures with face-to-face instruction. This complementarity will increase the quantity and quality of face-to-face teaching services, potentially increasing the marginal product and wages of lower-skill teachers.

And, I would argue, this is not only true for university professors, but for any service industry. Simple, replicable tasks will be outsourced to robots, but any task that requires context and interaction, and especially ones that require an emotive response, will require humans, and lots of them. The Economist listed a number of jobs that are likely to be replaced by robots. (I wrote about it here.) The top four jobs most unlikely to be replaced are recreational therapists, dentists, athletic trainers and clergy. Context, interaction, emotion. The four jobs most likely to be replaced are telemarketers, accountants and auditors, retail salespeople and technical writers. Simple, replicable tasks.

Technological advancement creates far more winners than losers. Users benefit (hello, smart phones). The inventors benefit (hello, Apple and Samsung). It creates thousands of new job opportunities (hello, app builders) and fantastic incomes (like the 55 people that just sold WhatsApp to Facebook for $19 billion. Even if each employee only had a 0.01% share in the business, that equates to R160 million each). We all become more productive because of it (you might be reading this post on your smart phone on your way to work). Yet the proprietors and employees of the previous technology suffer (Nokia, the South African Postal Service, or the messenger pigeon).

Not only is my job safe, but I will probably benefit from the MOOCs. This dynamic is also true in all other industries: Certainly, some jobs will be replaced by technology, but many others (even jobs that don’t yet exist, or that require only basic skills) will benefit from it. If our high level of unemployment is to fall, then we need to 1) focus our training on those skills that are complementary to the new technology, and 2) ensure that government policies do not obstruct the impact of technological change.

Written by Johan Fourie

March 5, 2014 at 10:18