Sunday, July 31, 2011

Microeconomic complexity and development

At TEDx Chennai 2010 I had the good fortune to meet Dr. Tara Thiagarajan, who heads Madura Microfinance. Tara blogs occasionally on issues peripheral to the business of microfinance. At Physics of Poverty, with her analytical background in neuroscience and complexity theory, she dissects questions about the meaning of socioeconomic development, and strives to bring those questions to the core rather than the periphery of the microfinance industry.

Her latest post, titled Productivity Line, attempts to reconceptualize the poverty line. She suggests that instead of dividing the world into segments based on their incomes, and then agreeing upon a reasonable income as the threshold, i.e. the poverty line, why not segment the world based on economic productivity?

Her post provoked a few questions about the relationship between production and consumption both at the social and the individual level. I note these below.

Firstly, I understand and acknowledge that taking a developmental design approach is more useful and socially sustainable than an approach that hand-holds the poorest of the poor just up to the threshold of the cycle of consumption.

1. What is an ideal ratio of producers to consumers in a society so that the society is economically sustainable (let's define economic sustainability as the capacity to diversify, grow and self-renew).

2. What is an ideal ratio of consumption to production in an individual's life? One could think of this ratio as an index of Marxist alienation and therefore a proxy to measure work-satisfaction or happiness.

3. In general, how do these ratios vary as a function of population size and other demographics as well as economic complexity (let's define economic complexity as the complexity of division of labor and the diversity of goods and services produced and consumed)? For instance, in a subsistence farming society where the economic complexity is relatively low, one could imagine that the ratio of producers to consumers is one, but that is scarcely an indicator of progress. Similarly in an extremely large and diversified society the ratio of consumption to production at an individual level is extremely high, but that is not an indicator of well being necessarily.

4. If one could measure these ratios from the demographic data of target communities receiving MFI, then one could go about defining bounds on these ratios and subsequently designing developmental interventions to optimize them.

Further Reading:
David Roodman's Open Book Microfinance Blog
The Institute for New Economic Thinking
A recent article comparing metrics of economic complexity using input-output measures
The building blocks of economic complexity: A white paper that applies complex network metrics to quantify macroeconomic complexity.