Wednesday, January 9, 2008

marginal utility

I had a bad habit. I would get up, check e-mails; next thing I knew, several hours of surfing would have gone by. As 2007 wound down, I worked out 1) that the marginal utility of spending an extra two hours online was infinitesimal compared to the utility of going to the gym (2 hours including travel and changing) and 2) that the marginal utility of spending an extra 4 hours online was negligible compared to the advantage conferred by going to a language course 5 days a week and tackling German. If I had replaced 6 hours of time online with those 2 activities daily for the whole of 2007 I would now be 1) thin, fit and cheerful and 2) in a position to get a job. I say 'year' but 3 months would have done the trick. So I have been getting in touch with my inner Utilitarian.

Meanwhile, Tyler Cowen has a post on Marginal Revolution referring to his article with Karl Bordeaux about microcredit, the full text of which is available at Wilson Quarterly. He says:

Sometimes microcredit leads to more savings rather than more debt. That sounds paradoxical, but borrowing in one asset can be a path toward (more efficient) saving in other ­assets.

...Westerners typically save in the form of money or ­money-­denominated assets such as stocks and bonds. But in poor communities, money is often an ineffective medium for savings; if you want to know how much net saving is going on, don’t look at money. Banks may be a ­day­long bus ride away or may be plagued, as in Ghana, by fraud. A cash hoard kept at home can be lost, stolen, taken by the taxman, damaged by floods, or even eaten by rats. It creates other kinds of problems as well. Needy friends and relatives knock on the door and ask for aid. In small communities it is often very hard, even impossible, to say no, especially if you have the cash on ­hand.

...Under these kinds of conditions, a cow (or a goat or pig) is a much better medium for saving. It is sturdier than paper money. Friends and relatives can’t ask for small pieces of it. If you own a cow, it yields milk, it can plow the fields, it produces dung that can be used as fuel or fertilizer, and in a pinch it can be slaughtered and turned into saleable ­meat or simply eaten. With a small loan, people in rural areas can buy that cow and use cash that might otherwise be diverted to less useful purposes to pay back the microcredit institution. So even when microcredit looks like indebtedness, savings are going up rather than down.

In other words, read Keynes's chapter 17, go long on animals (liquidity premium exceeds carrying costs), go short on money (carrying costs exceed liquidity premium, at least in poor countries), and increase your future expected net wealth.


and now I must go to the gym before returning to verbs and their prepositions.


hassan said...

Hooookay. What on earth is this idiot talking about? "Banks may be a daylong bus ride away or may be plagued, as in Ghana, by fraud."

Where on earth does he get this ridiculous information from?!! There are more than a few international banks that operate in Ghana, things like Barclays and Standard Chartered, and I really don't see how fraud comes into it. Any person with enough money in Ghana to bother working with a bank is most likely going to go for one of those, of which if nothing else, the total volume of money traded would make it just a poor use of time to rob you of your worthless Ghanaian currency, to say nothing of how the embarassment of a lawsuit would play out internationally, which, yes, you can do in Ghana. Banks aren't like the Shell oil company, reputation matters. How does this idiot think banks work in Ghana? You put a sign saying "Bank" above your house, and have your youngest children doing shifts at the manpowered 24-hour ATM Cashpoint in your garage?!! I've never come across any banks that small, and even if there were, if you turned up the option to go to something more solid and walked into a dodgy bank with your hard-earned money, you deserved a lesson.

And goats and sheep?!! OK, maybe I can't speak on the behalf of every 3rd world country, but am sick and tired of the idea that all 3rd world countries are nothing but subsistance farmers and corrupt politicians. There is such a thing as a middle class, who are probably the only ones that would bother to bother a bank with whatever money they bring in. Everyone else is simply putting every spare penny they've got back doing business, which in general happens to be commodity money anyway. I really wonder what he thinks we're thinking. Hey! I've got $1000 lying about. I won't put it into Standard Chartered, because of 'fraud'. Don't ask me why, American economists scrolling and clicking through the internet a million miles away tell me that I'll be taken advantage of. So you know what, I'll buy a sheep. No, make that 60. I don't have any where to put them now, but details details. Harvard educated economists tell me I can fleece them to sell and make more money that way. I don't know the first thing about sheep, maybe they'll get sick and die, but whatever, this microfinance thing is all the rage these days, I've got to get with the times.

I really want to go over to Mr. Cowan's office and ask him where the hell (stronger expletive removed) is he getting this stuff from. I haven't been in Ghana for maybe a year, perhaps things are different, maybe my family and friends don't want me worried so aren't telling me developments of this magnitude, I don't know. But there is a plethora of secondary and tertiary companies having done good business in Ghana on our banking system for decades, and so if you say a blanket statement like that, you have to back it up by fact. Otherwise, you're being irresponsible, and leaving such as statement lying around for someone careless to take as fact from a PhD-educated economist. I assume he tossed off what he said without much thought. Which is at the core of my ire. This western attitude of comical pity and fuzzy thinking towards the 3rd world is really annoying. A second ago they used to do the same thing to India and China. Now, after years of disrepectful condescension and racial slurs Asians have earned the right to be touchy when someone mistakenly calls them an 'Oriental' after finally becoming a financial power in the world market. One day, the same thing will happen for Africa.

Jesus Christ, someone get me a drink.

Harrumph harrumph. Aaanyway. How's your day going Helen? Also had a major breakthrough with secondhand yesterday, details when I unveil (gasp!) version 2.0, with profiles and logins...

Ithaca said...

Hassan, I don't know the basis for Cowen's claim about fraud in Ghanaian banks; if you leave a comment on his blog he may explain the evidence for the claim. The evidence for the other claims about micro-credit is, according to the full text, a series of interviews he and his co-author carried out over the course of a year with borrowers, lenders and others.

He is not talking about the financial practices of everyone in the third world; he is talking about the practices of those who qualify for micro-credit, those whose source of credit before the advent of Yunus and others was not the formal banking system but moneylenders. Everyone in Zimbabwe is not a subsistence farmer either, but a typical recipient of MICRO credit would be a girl who has finished school in a rural district and needs a small cash advance to buy some chickens. It would surprise me if anyone could read the full text of the article and take it as either denying the existence of a middle class or offering recommendations for financial practice on the part of members of that class. Since micro-credit is designed, precisely, to assist those who do not qualify for credit from commercial banks, a discussion of micro-credit has no bearing on those who are in a position to deal with commercial banks.

The question Cowen and Bordeaux address is simply whether the very sweeping claims made for micro-credit, as a way of lifting the poor out of poverty, are borne out by use being made of these loans.

Hassan said...

Understood, I guess my claims about microcredit are as tangential as his about Ghana. With context in place, it sounds a whole lot less crazy. And you might see how what I said actually would support his claim, when I said, "everyone else is simply putting every spare penny they've got back doing business, which in general happens to be commodity money anyway."

(I love microcredit, even though his article now I read it has other things I don't wholy agree with that aren't worth getting into)

Nonetheless, it would
seem the banks of my beloved country are being slandered. I'm sure he's not pulling it out of the air, I'm sure he has explanations, but that explanation should either be in the text or omitted entirely. He's using Ghana to make what seems a key point about the viability of a microborrower using the banking system in a given country. I still think it's a bit rich to claim "the banks" in Ghana are rife with fraud, without some asterick placed in there somewhere. I'm sure he can give an explanation, which at the most conservative is probably at least arguable. I myself per se don't need his references (though curiosity beckons, and I will ask him what his basis is) - I know enough of the failings and the strengths of Ghana to come to my own opinion about even his facts, let alone his reasoning. It's those who don't who have a fractionally significant portion added on to what they know about Ghana tainted.

Perhaps I'm making a big thing out of a small comment, but who knows how far possible misinformation could travel? Maybe Ghana's lost an investor over this. But in general I'm no fan of handy-waviness, and as you can probably imagine in this specific case, it becomes that much more of a touchy subject.

I hope you realize my anger is directed at an institution of behavior, rather than anyone in particular and definitely not you, right?

OK, must run and make my audition at Jailyard.

hassan said...

Argh, rife with mistakes, missing finishings to thoughts, mispellings, etc. Wish I had to time to correct them or having written properly. Ah well. Toodles...

Anonymous said...

Please explain.

Elatia Harris said...

So this is where you've been. Not that I'm not interested in microcredit, but resolutions are more interesting just now.

Nadia Boulanger said on her deathbed that she regretted not having learned Russian -- all for some fantasized lack of time. When 10 minutes a day, every day, would have sufficed, given the length of her life. A few years ago, I met an air-traveler who, faced with a 9-hour unanticipated layover in a charmless city, could think of nothing to do but to write a novel -- something he'd always hoped he'd have time for, one way or another.

I've tried going offline the moment I cease to write as a way to eliminate surfing, but the real problem is discerning trolling -- er, research! -- from surfing. Don't know if the gym would do it for me -- I think I need Reform School. Let us know how it goes, okay?

"Post-Google" by TAR ART RAT said...

my friend's dad, a near-deaf and eccentric doctor, did notsave in the bank, but rather just bought gold. I could never decide if he was crazy or crazy-smart in doing that.

Ithaca said...

Hassan - Yes, TC should have given a footnote supporting his claim about fraudulent Ghanaian banks. You've said yourself, though, that major international banks operate in Ghana; one would expect most foreign investors to use these in any case, surely, regardless of the trustworthiness of local institutions. It would surprise me if TC's carelessness lost Ghana an investor.

Anon, sorry, what exactly do you want explained?

EH, well, all I can say is, I'm not convinced I am worse off for the loss of the hours I could have spent, ahem, researching

TAR ART RAT, considering the present rate of exchange of dollars for euros or pounds, I wish I wish I wish I'd bought gold