The economics of everyday life

B Baskar | Updated on March 28, 2021

Title: The Economics of Small Things Author: Sudipta Sarangi Publisher: Penguin Random House India Price: ₹299

An economics book shorn of jargon, equations and graphs

Most of our everyday actions, even the seemingly irrational ones, are rooted in economic logic. This is the basic thrust of Sudipta Sarangi’s delightful and pithy book — Economics of Small Things. Economic theory can explain even the most mundane of our everyday actions, says Sarangi, professor of economics at Virginia Tech, US, where he also teaches a popular course titled, ‘Economic Puzzles in History, Literature and Movies’.

Why do we always invite our guests to eat first? Why do the best quality mangoes in India get exported? Why do we not care to wear a helmet or a seat belt when we drive our two-wheelers and cars? Why should we pay our house help more? These and many more issues that confront us every day can be explained by basic economic theory.

Sarangi starts out by how Nobel Prize winner Mohammed Yunus solved the problem of asymmetric information — where “both parties are not fully informed about each other” — in bank lending. In the Grameen Bank model — where the lenders have to form groups of five to borrow money — Yunus in one stroke solved the problem of both asymmetric information and adverse selection. It is in the interest of the borrower to find four other solvent borrowers, which also solves the problem of moral hazard. The borrower will make sure that the other borrowers in his group will also pay their instalments in time.

Why the best quality mangoes are not available to Indian consumers is explained by Sarangi through a simple example which shows why Alphonso mangoes are cheaper for the American consumer, and hence she demands more of it, leading to more exports of this variety of mango from India.

Sarangi invokes Game theory to explain some of the more irrational of our actions — not wearing a seat belt or a helmet (and rather trust God by saying a quick prayer before starting their vehicles), and why in a game of ‘chicken’, the contestants would even risk death rather than ‘lose face’ among their community.

House helps are among the most exploited workers in India with low wages and no job security or safety net. Sarangi makes use of the ‘efficiency wage theory’ to explain why it would make ‘economic’ sense to pay our house helps salaries that are higher than the minimum wage as that would help in retaining them.

The cognitive impact of poverty is explained in another essay, the important takeaway being while designing anti-poverty schemes governments must make things simple for the poor and cut red tape. Talking about the concept of ‘price discrimination’ where producers charge different prices for more or less the same product, Sarangi refers to an old essay by Gandhiji, where the Father of the Nation laments about how the Railways did not provide even a modicum of comfort to passengers travelling in the Third Class. But due to price discrimination, economic logic works differently from Gandhiji’s moral outlook and Sarangi explains how producers often use subtle methods to make some people pay more for the same product.

Racial discrimination

Economics has also grappled with the issue of racial discrimination, where economists talk about ‘statistical discrimination’ and ‘taste or preference-based discrimination’. The former is based on some data or criteria (however flawed) while the latter is based on plain prejudice, though both forms are abhorrent. Crucially a caveat, that Sarangi too admits, here is that while explaining discrimination, economics does not go into its historical or cultural roots.

How economics explains jealousy and envy is dealt with in the essay: ‘Capturing Indian ’crab’ behaviour’, where explanations range from in-group and out-group solidarity to simple utilitarian ‘self-interest’.

Economics also explains why and how natural disasters affect the poor more as their homes are likely to be situated in areas that suffer a disproportionate impact of the disasters.

According to Sarangi, making our guests feel special, by offering them food first, helps us bond with them better and we may have purely selfish reasons for doing that! These practices are also religious or culturally sanctioned and may have their origins from a time when food was scarce. Similar reasons explain why we refrain from grabbing that last piece of cake or pizza when we dine with friends.

Sarangi has pulled off the impossible by demystifying the arcane concepts of economic theory without using a single graph or equation. This book is an intellectual journey into the quotidian.

Published on March 28, 2021

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