The death of Paper cups and Trees

Recession: It is the most discussed term for in the last 12 months. The second position of-course goes to ‘cost-cutting’. Recession led to cost cutting initiatives by all individual and corporates (ie, those who succeeded to survive the ordeal).I cut down on my dine-outs and cigarettes, whereas most companies responded by firing people and re-organizing staff.

However, there is a subtler form of fighting recession which most companies resorted to: economizing operating expenses. This took many forms (some of them are quite hilarious). It saw cutting down electricity by shutting down coolers, elevators, lights and monitors when not in use: cutting use of paper by setting printing limits and abolishing paper cups: cutting fuel by reducing business trips, streamlining pick-ups and drops and encouraging more car-pooling. Some even resorted to the extent of doing away with coffee and cola vending machines, office stationeries, and tissue papers and toilet rolls (oh shit!).

I have no issues with this cost cutting innovations, as they increase efficiency by cutting the extra flab accumulated by the corporates during the booming economic phrase. However, they way they are projecting these measures is often that from a ‘environment conservation’ perspective which is more noble than mere cost cutting perspective. Overnight, it seems the corporates have become environment conscious in the name of Corporate Social Responsibility (corporates’ favorite time pass).
Still, the corporates by these measures are becoming more efficient, and competitive, which is good, whatever be the way of p

Bur the problem is elsewhere. Let us take the example of paper-cups which are stacked at the corner near the coffee vending machines. Of-course they are made of paper which is obtained by cutting trees (Some genius even managed to quantify the number of trees felled to make way for the annual supply of paper cups, kudos to him). The banning of paper cups will led to obvious inconvenience for the employees (which economists can measure in dollar terms, or even in terms of trees). However, let us leave that for the sake of our motto of saving the earth. But the real question is, Are we actually helping the environment by these benevolent measures? Well, ironically, the answer is ..NO.

Let us see the economics behind this. No, this is no off-stream theory by some lazy economist, but the basic theory of economics (suggested by Adam Smith, the father of classical economics) called the ‘Invisible Hand’. Simply stated, it says that whenever there is a competitive market (market with sufficiently large number of buyers and sellers) and market prices, it guarantees efficient outcomes (in terms of allocation of resources).

For example, if there are many sellers of wheat (wheat farmers) and many buyers of wheat (wheat eaters) then market price of wheat automatically determines the optimal allocation of wheat such that economy-wide wheat crop is produced as cheaply as possible. There lies the ‘invisible hand’ which ensures that although each buyer and seller is maximizing individual profits, the resultant outcome is most efficient.

The theory no longer holds if there is absence of a market for any particular commodity. And, of-course, there are absence of markets in many places. African elephants are hunted for their ivory at far a great rate, threatening their extinction. This is because of a simple reason. There is no market for elephants, ie, nobody owns the elephants. An owner, any owner, would want to be sure that elephants survive to keep them in business. The demand for beef is far greater than the demand for ivory, but cattle are not threatened with extinction. Simply because there is a market for cattle: cattle are owned.

The case is exactly similar for the trees. Paper companies have every incentive to replenish the forests they own, and these forests are in no dander of disappearing. The new-born concerned corporate environmentalists advocate recycling paper and cutting down on the use of paper so that fewer trees are harvested. Ironically, the paper companies respond to the reduced demand for trees by maintaining smaller forests. This increases the felling of trees without replenishment. Evidence indicated that cutting down the use of paper causes the world to have fewer trees.

I am considering replacing porcelain cups at my home with paper cups as my contribution to the environment and compensation for the environmental degrading policy in offices.


*Thanks to economist Steven E. Landsburg for enlightening me on this issue.

Let’s keep things simple

Let’s first acknowledge this. A substantial part of the economic literature is worthless.

No, I am not talking about those long pieces of articles which explore the best solution of whether to keep the family toilet seat “up” or “down” after using it in order to economize one’s effort, from the Game Theory perspective. Though there are thousands of better ways to kill your time, but still it applies some economics to an event which is very much related to our everyday life (Those who are dying to know the answer to this puzzle from this economist, you should keep the seat “as it is” after use.)

My definition of worthlessness encompasses those articles which are simply ineligible. Because either they are simply not related to our life or are full of jargons and mathematical derivations without explaining the real issue. While browsing through the American Economic Review (a standard journal of economic literature) I often encounter titles like “Iteratively Stable Cheap Talk Equilibria”. I wonder how many economists will read the whole of it, leave alone the common man.

But is economics that difficult a subject? Of course not. After all, it is all about the people and their life. It is no Astronomy which is though fascinating, but far from life. So, can’t economics be a little simpler so that we can read and understand it? Of course it can.

An interesting way of identifying good economics from junk is suggested by the US economist Tyler Cowen in his book “Discover your Inner Economist”. He suggests 3 tests:
1) The Postcard Test - It should be possible to take a good economics argument and write it out on the back of a moderate-sized postcard.

2) The Grandma Test - Most economic arguments ought to be intelligible to your grandmother.

3) The Aha Principle - If the basic concepts are presented well, economics should make sense and arouse that “Aha” feeling within you.

These 3 tests are petty strong test indeed, and most of the economic articles I know will fail this test. But then the question arises “Why is economics so difficult to understand though it is about our everyday life?” Well, I am afraid; the answer ironically can be explained by application of standard economic theory, which I try to keep within a postcard size limit.

It is called the snob effect. We know that the supply and demand for a good determines its price. However, sometimes, price of a good one is willing to pay depends not only on the demand and supply for that good (along with income, taste and preference, price of substitutes etc), but also on the demand of that particular good by other people. Thus, when we see an economist is presenting his paper on “Aggregation of granularity model”, as a half economist I nod my head in agreement. Seeing this, the guy sitting next to me perceives the presentation as valuable as I am finding it interesting. Thus the price he is willing to pay (in terms of this level of attention) for the product (here the junk presentation) is higher than what he would be willing to pay while listening to it alone. This phenomenon spreads like wild-fire, and every (stupid) guy suddenly finds the presentation interesting.

You want evidence? There are enough true stories of layman disguised in economist’s clothes presenting to the audiences full of (so-called) renowned economists, and are being heavily praised for their work (rather than being kicked out). In one such incident, a person who knew nothing of economics (absolutely) presented in such a seminar for one whole session, and on fear of been getting caught, ran away in the middle of the second session. However, it was perceived by the audience that the “economist” walked out of stage feeling insulted!