HS2: A rocking-chair with three legs

The HS2 has two problems according to Sir Terry Morgan, who resigned as the Chairman of HS2 last month. The first problem according to Sir Terry Morgan is that the name is misleading. The emphasis should not have been on high speed but on adding capacity to the existing network. The second problem is the cost. He suggested that in order to keep the cost down, the line should stop at Old Oak Common in Northwest London. The question remains what is the point of adding capacity if the line does not reach Central London.

It also lays bare the limitations of the cost-benefit paradigm. The cost-benefit paradigm presumes that costs and benefits can be explicitly estimated and compared to pin down the net benefit to the society. If estimated benefits exceed estimated costs, then the projects is weakly a Pareto-improvement, i.e., it can potentially make people better off after the people who are worse off are suitably compensated.

From a practical perspective, costs can all be converted to pecuniary units and easily added up. Conversely, benefits are multi-dimensional and largely non-pecuniary. It is very difficult to estimate each dimension, let alone find some mechanism to add these various non-pecuniary dimensions. A bit like adding apples and oranges. The math just does not add up. Costs are more precisely estimated and benefits are effectively assumed. That is, there are usually a number of hidden assumptions in the methodology that allow benefits to be added up and given a pecuniary value that can then be compared to the benefits. If you are sceptical ask yourself how would you compare the benefits to HS2 line being built to Euston or Old Oak Common.

Sir Terry Morgan’s frank testimony at the Economic Affairs Committee on 22 January 2019 reveals how cost-benefit analysis works in practice. For any large troubled project, the focus often moves to minimising the cost, without mapping the resultant loss in benefits. This is because benefits are vague and cannot be easily estimated. For people who claim that cost-benefit analysis is flawed yet best available methodology, the very least you can say is that putting numbers on unknown unknowns is not a methodology. It is called stabbing in the dark.

HS2 may have been an unwise project to start without fully understanding the pattern of benefits to society. Yet, having sunk the cost into HS2, it needs to be brought to Central London. No one buys a chair with three legs however cheap its. So, why should we as a society pay for a high capacity line from Manchester to Old Oak Common.


Hart, O., Shleifer, A., & Vishny, R. W. (1997). The proper scope of government: theory and an application to prisons. The Quarterly Journal of Economics, 112(4), 1127-1161. Link

Kanbur, R. (2005). Pareto’s revenge. Cornell University. Link



It is rare that a movie captures contemporaneous events so well. The reason why Contagion grips the viewer from the first frame is because it makes allegorical references to the contemporary world we live in and taps deep into our insecurities. It is also an intelligent cautionary tale on the globalisation and urbanisation. As the recent ebola crisis amply illustrates, we are never far from a apocalyptic contagion.

Contagion works at various level. The movie is a docudrama which describes how a contagious disease would spread in todays world and tear apart the fabric of the society. It is a mutated virus that spreads through contact and within days becomes a global pandemic. The disease spreads at an alarming rate because of our interconnectedness. Even though there are no surprises in the movie and the story proceeds at an even pace, the movie turns out to be gripping. I was intrigued by the effect the movie had to me. I was drawn to it as I would be to a movie in the horror or thriller genre, even though it had none of the usual cinematic techniques used in the genre. On reflection, the movie seems to work because it plays on our the insecurities associated with living in a inter-connected modern world. It taps into the insecurities that go much beyond the fear of a global pandemic.

The fact that the movie does not have a well defined human protagonist is refreshing. The story is written around a well defined invisible, yet lethal antagonist. The real protagonist in the movie is the abstract notion of how we organise and govern ourselves as a society. The institutional structures the society uses to organise itself is thus the real protagonist. The protagonist is frail and has serious setbacks but prevails over adversity ultimately. In the well travelled cinematic tradition, this abstract protagonist is fighting a losing battle through the duration of the movie and succeeds in the face of adversity towards the end. The movie proceeds at a even monotonous pace and ends gently without a clear sense of a climax. Yet, the movie grips the audience like a thriller would. Steven Soderbergh has tapped into the insecurities that we carry with us in the modern world. What frustrates the viewer interminably is both the invisible nature of the threat and the incompetent institutional reaction to the threat.

The threat is not idiosyncratic in nature. Put another way, it is not a threat that affects an individual with a given probability. We are quite used to that in the modern world and there are numerous well-developed mechanisms for insuring against idiosyncratic threats. The threat in the movie is a covariate threat, as in, it affects a significant proportion of the population at the same time. The parallel with the recent financial crisis is uncanny and maybe intentional. The institutional reaction to the covariate threat posed by the financial crisis is inadequate both at level of individual countries as well as the global level. The institutions were slow to grasp the nature of the threat from the financial crisis and their reaction was inadequate at best. In the movie, as the global pandemic spreads, the inadequate institutional response leads to break down of law and order. Widespread looting ensues leading to anarchy and lawlessness.  Again, the parallel with the London riots and protests in Greece is uncanny.

The institutions we live with and that govern us were designed for a very different world. Institutions by its very nature get ossified over time.  It is thus not surprising that these ossified institutions are neither able to comprehend the nature or the scale of the evolving threat to our prosperity. Our ossified institutions have not kept pace with the threats that have emerged from globalisation. 

In essence the evolving nature of covariate threat in the modern inter-connected world and ability of our ossified institutions to react to it taps into the insecurity that envelopes all of us in the modern world. There are great pecuniary and non-pecuniary benefits to be had from globalisation. The benefits of globalisation are meaningless if we don’t acquire a new set of institutions that are capable of reacting effectively to the covariate threat the globalised world poses.

Agglomeration and Urbanisation: The technological advances of the last couple of decades along with the natural tendency to agglomerate has meant that we are living a world where we trade off prosperity for a covariate risk. We are moving towards a increasingly inter-connected world with intense specialisation where we are constantly in sync with each other. Thus, we live in a world of impossibly long value chains that implies that a simple product we buy at our local store could have been made in a number of countries. These long value chains allows individuals to specialise and become part of this large interconnected global production process that makes us more prosperous over time. But this interconnected prosperity is like a house of cards. One significant covariate shock and it all collapses in a blink of an eye.

The institutions that govern us are past their sell by date. Occupy Wall Street, the Tea Party movement, the Arab Spring or the Anna Hazare led anti-corruption movement in India is all part of the same overall challenge to our institutional structures. The fact that is easier to communicate and travel has meant that it is easier for the civil society to organise itself and challenge the current institutional structure. There institutional governance structures are still used designed to respond to threats that are staccato in nature. These institutions are like the superstructures in Marx’s world and generate a similar friction in the society due to their inherent inertia.

The institutional governance structures we currently have are synonymous with the modern nation states. Even though the nation state is the organising principle for institutions that govern us, people across the world are able to assort themselves in smaller homogenous groups according to their interests and want to governed accordingly to their newly acquired group identity. Hence, we see emergence of trans-national movements like the environmental movement and political islamism.

Technology is allowing people to group in ways that defy traditional geographical and physical constraints, yet the nation states and its institutions remain embedded in well defined geographical space. It is not at all clear that the demands we collectively place on our institutions as groups can be resolved easily. Something will have to give. It would either be a radical institutional change or a apocalyptic contagion.

Thresholds in Education

Malcolm Gladwell suggests in his celebrated book “Outlier” that the key to success lies in investing 10,000 hours in practising and perfecting a pertinent task. Does that mean that 10,000 hours guarantees success in your profession? Skill is a perquisite for success in most profession, yet that is not all it takes.

Malcolm Gladwell focusses only on the “outliers” in the society. It is obvious that practising a relevant skill for 10,000 hours is just one part of the success matrix. The outliers are likely to be individuals with exceptional innate abilities. The sample that Malcolm Gladwell studies consists of individuals that already have certain innate abilities and have gone on to invest 10,000 hours to hone a particular skill to perfection. Malcolm does, however, make an useful point of about the effect of thresholds in skill formation that we explore here in the wider context of education.

Across the world, there is a considerable debate on whether the quality of education matters, i.e., to what extent does a good teacher have an positive impact on the student’s future life? The fadeout effect has always puzzled the economist, i.e., the impact of good quality education in kindergarten fades out as the student’s grade drop to average level. The Project STAR, a well known education experiment in Tennessee randomly assigned students to kindergarten classes. This allowed Chetty et. al. (2010) to identify the impact that being in a “good class” had on a student. Students from some kindergarten classes did better than others but this effect on student’s educational performance faded out by high school. What is surprising is that the initial positive effect revisits the student in later years. Students that did better in kindergarten were more likely to go to college, less likely to become single parents, more likely to save for retirement and earn more.

What is striking is the impact initial education in kindergarten had on seemingly unrelated aspects of the student’s later life. Of course, the exact channel through which early education impacts later life is not clear from the study.

Heckman and Cunha (2007) summarise decades of empirical work on education. Their story suggests that thresholds are relevant in a very specific way. Formal education consists of acquiring a series of skills that can be mapped on an inverted pyramid. There is certain hierarchy of skills, i.e., acquiring a particular skills allows one to acquire a range of further skills. More specifically, certain primary skills facilitate the acquisition of intermediate skills. Learning how to write or do basic math could be one of those primary skills. Similarly, these intermediate skills allow the students to acquire more advanced skills. Heckman and Cunha (2007) also make the point that the level of a primary skill increases the marginal returns on effort in acquiring a related advanced skill. Put another way, the cost of acquiring a certain expertise on a new skills gets lower if you have mastered the previous skill. That is, the more skilled a child is at reading and writing, the easier it is for her to learn history, geography and physics. In Tennessee, students that were put in better kindergarten classes presumably acquired primary skills that allowed them to attain better outcomes in later life. Some of these could have been direct effect in terms of lifetime income where as others could have been indirect effect like lower likelihood of being a single parent.

This paints a rather depressing picture. Children who get a good quality early education get far ahead of children who miss out on early education. Further, it is almost impossible to catch up once there is gap in a child’s education. Further, at a day to day level, the education systems need to be designed to plug the skill gaps so that children are able to acquire more advanced skills. One critical gap could have a disproportionate effect on a child’s ability to acquire skill in future, which a flexible education system would immediately plug. This is where good schooling and home environment becomes critical. A high human capital parent may be more effective in both recognising a critical skill gap in their child and ensuring that it gets plugged by hook or crook. Thus, low human capital parents and under-performing schools are a combination that fatally damages a child’s future from which there is no escape. If a society aspires to provide social mobility to its citizens, then it needs to address this problem head on. Of course, the problem even the richest societies face is that under-peroforming schools are often found in neighbourhood where the average human capital level tends to be low. Hence, these neighbourhoods find themselves caught in a vicious trap, where human capital acquisition remains low from one generation to another.

Malcolm Gladwell suggests that the critical threshold is 10,000 hours of learning a particular skill. Of course, Malcolm Gladwell has a very specific issue in mind. The point he makes about thresholds applies generally to any skills an individual acquires. Heckman-Cunha‘s story of smaller inter-connected skill thresholds is more likely representation of reality. Ensuring that each child gets the best possible chance in life is very resource intensive, which is expensive even for the richest nations in the world. Given the enormity of the problem, it is not surprising that education policy and its role in inter-generational mobility is still being hotly debated in even the most developed of nations of world.


Let her go

Music is something that is extremely personal. I have felt bereft of real music for some time now. It is impossible to relate to anything the music industry has been “manufacturing” lately. Almost everything felt like it was put together by corporates after listening to a focus group. It was all unreal and plastic.

That was till I heard Passenger. He is a Brighton lad who has made it big. His story and the life he has experienced along the way seems real. He has honed his trade by busking in the New York. His music is steeped in his life experiences. His voice can fills an empty space unto its brim. Hearing his single “Let her go” really stirred something inside me that I had not felt for a long time. Twerk off Miley & Co., there is a new kid on the block and he has travelled a long way to get here.

Kurosawa’s world

For Kurosawa, perspectives matter. Truth is ephemeral in his world, almost Heisenberg like. Who you are matters. But, who you want to be matters even more.

The ability to deceive others is almost synonymous with life. Yet, humans are unique in their ability to deceive themselves. This is what allows human to transform themselves from villains to heroes and vice versa, at will. Kurosawa realised very early that cinema is more vulnerable to this than any other narrative device.

Kurosawa explores the limits of narration in this complex compass-less world where the narrator is always unreliable. Without the narration, truth is like the ever shifting sands. Thus, Kurosawa’s movies are also his encomium to the vagaries of life itself.

In Rashmon (1950) something terrible happens. Each character in the movie narrates the story in a different way. The viewer’s first instinct is to reconcile the differences. Yet, there are some differences that cannot be reconciled. You start shuffling through the stories in your head, while you try to reconcile the differences. And then you realise that the movie is about who the characters want to be and not about what actually happened. By the end of the movie you are no wiser about what happened but you do learn a lot about the people involved. What is surprising is what you learn about characters in the movie and yourself. Of course, vanity and human frailty drives these characters. Yet, the characters are frail and vain in ways that are really surprising.

While watching the movie, something dawned on me. I have lived through episodes in my life that are as intense and as distressing as Rashmon itself. And yet, through that experience, I learnt very little about actual events of my life and learnt much more about people who lived around me. Truth is ephemeral at best. Yet, life is as substantial as the people you choose to surround yourself with.

Seven Samurai (1954) is more of a jingoistic film made in the shadows of a Japan coming to terms with its own frailty. Yet, there is more. People and their perspectives collide in what is a thinly veiled war movie. A hapless medieval Japanese village seeks the help of seven freelance samurais to help defend their village against the periodic onslaught by marauding bandits. There is camaraderie amongst the samurai. The villagers are a loose coalition. Everyone wants something for his or her self from the war, yet a common purpose unites them. It is the common purpose that papers over the human frailty. People’s perspectives constantly grinding against each other makes this an extremely complex as well as entertaining film.

In the Hidden Fortress (1958), the story is told from the perspective of two dishevelled peasants. The inspiration for telling the story from the perspective of C-3PO and R2-D2 in Star War Episode IV (1977) comes from the Hidden Fortress. In the telling the story from the perspective of two hapless peasants, Kurosawa was creating a cinematic devices that would used over and over again. The beauty of this particular cinematic device lies in the fact that hapless narrators, with very little to live for or lose, turn out to be the most reliable narrators. We get closer to the truth only when we have very little left to lose.

In Synecdoche New York (2008), another Kurosawa influenced movie, the narration becomes more and surreal and unreliable as the movie progresses. The protagonist finds solace in giving up his freedom to act as an individual and subject himself to the dictates of an in-camera director. Ironically, when I watched Synecdoche New York, I was blissfully unaware how accurately the movie reflected my life at that time. And how I unwittingly gave up my freedoms for a short but significant period of time before realising how surreal my life had become.

As I trawl through Kurosawa’s oeuvre, the impact he has had on popular culture is slowly sinking in. Both conceptually as well as technically, he is masterful in the way in which he moulds the medium of cinema to tell the story. The narration is somewhere between the Stanislavsky and the rasa mode of story telling. The characters seem fully immersed in their roles yet they seem to be puppet in the hands of Kurosawa, the real invisible narrator, who tells the stories which are ethereal yet substantial at the same time.

Its been the most glorious summer of my life. Discovering Kurosawa at the end of it has made it perfect. Kurosawa’s movies have a toolkit for life within them. They force us to confront our narcissistic self image. They explore human morality, or a lack thereof, without being pivoted around a societal conventional axis. I just wish I had started watching Kurosawa earlier. It would have saved me a lot of unnecessary misery.

Fettering the Markets

Vince Cable recently said that corporate behaviour was murky, bankers were greedy, capitalism was a competition-killer. Well, Mr. Cable gets certainly no points for eloquence, yet there was nothing particularly offensive about the substance of his remarks. We have known for a long time that unfettered markets do not deliver the social good. So, why is there such a huge backlash from the city and the media.

Through the history, unfettered markets have delivered the society to disastrous consequences. Slavery being the best known example. We associate prosperity with a government that has a strong fiscal capacity (ability to tax and spend) and an ability to deliver market supporting public goods, i.e., regulate the markets effectively so that they deliver the social goods. (Besley and Ghatak, 2001, 2003)

There seemed to have been a surprising back lash at what Mr. Cable said. What surprised me was how organised and orchestrated it seemed. Mr. Cable’s tone was certainly irreverent and emotional. After all, why bring the words murky, greed and capitalism into it. But to understand the precise reason for the backlash, we have to think of the role regulation plays in maintaining market competition in the services industry.

Regulating the services sector (banking, law industry etc.) is not easy. The services sector produces an output that has significant information problems associated with it, i.e., the consumers are not able to assess the quality of the good before buying it. The information problems are circumvented by the service producers developing reputations for producing reliable services. Cost of acquiring reputation is often steep in these industries. This makes entry into these markets become extremely costly and the industry naturally gravitates towards a monopolistic competition environment.

In a monopolistic competition environment, the firms pays an upfront fixed cost to the enter the market before it can start producing in the market. The fixed cost could be the cost of setting up the factory, the cost of acquiring the correct permits, cost of researching and developing a particular product or the cost of acquiring a reputation for reliability. The size or the volume of the markets and the fixed cost of entering the market together give you the number of firms that the market would be able to support.

In the services sector, given the problem of reliability, the up front fixed cost is often the cost of acquiring the reputation. An entrant that does not have sufficiently deep pockets would not able to enter such a market. See Banerjee and Duflo for an excellent study on the software sector in India and specific cost of developing reputation in this sector. (A. Banerjee and E. Duflo, 2000)

Does monopolistic competition deliver the social good for the society? The answer is a definite yes. There are a lot of sectors that have monopolistic competition and deliver the social good.

But, there is another level of complication here. What is the relationship between regulation and cost of acquiring the reputation. Regulation reduces the cost of acquiring reputation. If the firm meets the regulatory requirements, the consumer does not have to worry about the reliability of the firm.

If the regulation is sufficiently stringent, the significance of regulation decreases driving down the cost of entry. As the fixed cost of entry decreases, there are more players in the market and price of output decreases as a direct result of a lower initial fixed cost that needs to be recovered by the firms. With monopolistic competition per se, the firms are not really able to charge any kinds of rents. The price of the output is sufficiently higher than the variable cost so that it allow the firm to recover the initial fixed cost.

When does monopolistic competition become bad for the society? Essentially, this happens when the firms in the economy are able to collude with each other and influence the regulation that effects that sector. Think of the political economy of regulation. If the market incumbents are able to influence the regulation, what kind of regulation would they like. They would like to drive up the potential cost of entry into the market. This would ensure that only the collusive incumbents remain in the market. If the set of incumbents are stable, their ability to collectively influence the policy becomes greater over time, leading to a vicious circle.

The are many ways to drive up the fixed cost of entry. You could burden the firms that are entering the market with all kinds of regulation that put the new entrants to a disadvantage compared to the incumbents. The most extreme case of this was the “license raj” in India till the mid 80s. The firms had to obtain a license to produce. The regulators (bureaucrats and politicians) would compare the payoffs from the new entrants and incumbents before deciding on the license. Over time as the incumbents grew strong, the new entrants found it difficult to outbid the incumbents and the entry virtually stopped in the market. The oft quoted example of this is the car industry in India, where for decades there were only two players in the market. The market over time grew so lucrative that the government itself entered into the market as the third player in the early 80s.

Of course, if the quality of particular output is not obvious from the start, only firms with reputation for reliability would be able to operate in that market. In that case, lowering the regulation may prove of beneficial as it increase the need for reputation and increases the fixed cost of entry into the market. Thus, counter-intuitively, in these markets, the incumbents could argue for lower regulation.

Ironically, by singing praises of free markets, the services sector has limited the number of players in the market and ensured lack of effective ex post competition. This has been a two-pronged strategy. The first strategy has been to influence the regulators directly and convince them that there is no need for regulation. The second strategy is to build a narrative for the society through an extensive media campaign. In both cases, these market fundamentalist are using the using the free market slogan to effectively reduce the competition in the market.

Vince Cable’s observations were not off the mark. He of course underestimated the ability of the service sector incumbents to use the media to discredit anything that deviates from the narrative. It is indeed puzzling that four decades on after Akerlof’s lemon’s paper, we as society still think that free markets work and anybody who interferes with it is evil. (Akerlof, 1970)

As a society, collectively empowering our regulators to deliver the social good is extremely important. We often talk of regulators that are influenced. The bigger problems is that the society can collectively be influenced by vested interests to think that unfettered markets are always good for us. It is thus extremely important for the social scientists to challenge the free market slogan and explain the precise caveats the markets come with.

A. Banerjee and E. Duflo (2000). Reputation effects and the limits of contracting: A study of the indian software industry. Quarterly Journal of Economics, 115(3):989–1017.

T. Besley and M. Ghatak (2003). Public goods and economic development. Prepared for Policies for Poverty Alleviation (ed.) Abhijit Banerjee, Roland Benabou, and Dilip Mookherjee.

T. Besley and M. Ghatak (2001). Government versus private ownership of public goods*. Quarterly Journal of Economics, 116(4):1343–1372.

G. Akerlof (1970). The market for” lemons”: Quality uncertainty and the market mechanism. The quarterly journal of economics, pages 488–500.

The Southern Barbarians

The Southern Barbarians are actually quite hospitable, once you can find them. Walking through the beautifully lit streets of the French Concession, the address for the Southern Barbarians led me to one of the innumerable plazas that dot Shanghai.

It was late by Shanghai standards. The hustle bustle on the streets was slowly dying away. The address took me to the a deserted but glittering Shanghai plaza or shopping arcade. There was no sign of the barbarians. I walked the length and the breath of the plaza but there was a very little sign of life. Right at the back of the plaza, in an alley that was much seedier than the rest of the plaza, there were three rows of chefs standing in attention and being lectured by what looked like their stern and serious leader. Their faces had a sincere expression with a hint of alarm. It looked like they were being given a dressing down, which required privacy and so I turned back. Walking around Shanghai, it is not uncommon to see employees standing in attention listening to their respective leaders. I have no idea what wisdom was being imparted but the whole scenario certainly looked like it was in a martial tradition.

I finally found the caretaker and showed him the address I had. He pointed me back in the direction of the lined up chef and so I had no choice to head back to the courtyard. As I was plucking up courage to interrupt the leader and ask him about the address, an angelic girl emerged from the dark shadows. She was unmistakably as tourist. It took a lot of effort to reach the Southern Barbarians. But it was all worth it.

Southern Barbarians specialise in the cuisine from Yunnan. Yunnan is one of the southern most provinces of China and borders Burma, Vietnam and Laos. The vegetarian component in the menu was remarkable. I orders spicy yunanese roots against the advice of the waiter. The roots very crunchy with a slight hint of woodiness. They were certainly spicy and very refreshing to eat. Next came pomegranate flowers with garlic chives. I had never imagined that pomegranate flowers could be so tasty. The flowers very green and crunchy. They had been very lightly sautéed. The result was pure bliss. The meal was finished off with a generous portion of a wild mushroom hotpot. The mushrooms were plump and varied and the hotpot hot and comforting. It was a bit on the bland side allowing me to fully appreciate the variety of wild mushrooms in the hotpot.

Southern Barbarians
2F Area E
56 Life Art Space 169 Jinxian Lu
near Maoming Nanlu
Tel.: 1362 1797 634