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Certain industries, like the space program, always evoke the image of government hard work in our minds. For Indians, ISRO is the first name that comes to mind when we think of space missions. We miss the contribution of private companies in advancing the space frontier, and even Steel for example. The early advances made by Ratan Tata was instrumental in bolstering the steel production capability in India.
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But it is to be noticed, that when it comes to true innovation, it is actually the private orgs that are leading the frontier. In the hands of Blue Origin or Space X, the reuse of rockets yield an 80 per cent cost saving, opening up even more frontiers.
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Government initiatives lack stronger co-ordination ties. For a small trivia, a global club of governments were vehemently pushing for a networking standard called as X.25, but it’s actually TCP/IP that won global dominance. And this was even an inchoate collection of academics and hobbyists who lead this.
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While the state can give an illusion of being benevolent, it’s to be remembered that states have the tendency to create violence. States also create conditions where nobody is permitted to create violence except the state themselves.
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Collecting taxes, at the onset might seem like a very non-harmful task. But if you don’t pay taxes, you are given a soft penalty in the form of additional charges. And if you fail to pay the penalty, you are given further warnings, until the police comes and knocks your door. If you still don’t open the door, then they will barge in and arrest you. And that’s violence. Eventually when things escalate, states can cause violence. And that’s the ultimate muscle-power that states have to provide order and even maintain peace in the society.
While the state is often seen as benign or benevolent, almost like an uncle or a parent, we have to remember that at the heart of the state, there is violence. The state acquires a monopoly upon violence. States establish conditions where nobody is permitted to engage in violence, but the state is able to inflict violence. States use the threat of violence in order to obtain obedience on taxation and behaviour.
The state can demand tax payments from the populace, backed by threats of violence against people who do not comply. The tax rates can vary based on the situation. Private persons overproduce things that impose negative externalities (such as pollution) and underproduce things that impose positive externalities; modifications to tax rates can help improve the outcome.
- While drafting policy, think about first-order effects, then second-order effects as much as possible. There would be third-order effects and fourth-order effects too, as everything is highly systemic and we cannot predict what’s going on.
During the Cultural Revolution in China, there was a cult of personality surrounding Chairman Mao. In public, everyone claimed that Chairman Mao was their great leader, who had their best interests at heart, and had the right answers to all policy questions. Chairman Mao extolled practical knowledge and denigrated intellectualism. One day, Chairman Mao organized millions of people to kill all the sparrows in China, on the grounds that sparrows eat grain. Suppose we are willing to ignore the ethical problems associated with killing sparrows, and suppose we are willing to agree that this is a good objective as it would increase the amount of grain available to humans. Even then, the intervention failed. With the sparrows removed from the scene, the insect population surged, and the insects ate the grain. Chairman Mao may have had good intentions, and he may have had practical experience of sparrows eating grain, but the intellectual foundation of the intervention was faulty.
Talking about side effects, look at the effect of house widths due to a stupid tax that was levied based on this:
In the sixteenth century, Dutch authorities levied taxes on individuals based on the width of their houses. This has led to narrow houses. The narrowest houses in Amsterdam are 80 centimetres wide.
or the case when Chinese universities who mandated fitness tests through steps tracked on mobile phones, were later rigged through various startups offering “mobile shakes” to fake the steps..
Some Chinese universities mandated a fitness requirement measured through steps as counted on the mobile phone. A business sprang up, of firms that would shake a phone and artificially drive up the number of steps recorded on it.
or even the curious case of the bounty set on a rat’s tail to reduce the population of rats under French rule of Hanoi. But then it ended up increasing the population of rats..
In 1902 in Hanoi, under French rule, there was a rat problem. A bounty was set—one cent per rat—which could be claimed by submitting a rat’s tail to the municipal office. But for each individual who caught a rat, it was optimal to amputate the tail of a rat, and set the rat free, so as to bolster the rat population and make it easier to catch rats in the future. In addition, on the outskirts of Hanoi, farms came up, dedicated to breeding rats. In 1906, there was an outbreak of bubonic plague that killed over 250 people.
Kelkar makes a strong case that the role of the government should be to solve for “market failures”. This is broadly categorised as the following: (a) externalities (industrial pollution that harms residents, but the cost of the environment is not reflected in the price of the product), (b) information asymmetry (informational advantage that creates market advantages), (c) public goods (would you start paying for breathing air? if we end up in that situation, that’s a market failure too), (d) market power (when you become a monopoly and way too powerful that there is no healthy competition possible)..
The role of the government then becomes to solve such critical bottlenecks described in any of these scenarios. And Kelkar suggests to steer away from “social engineering” (such as China’s one child policy etc) as much as possible.
The role for the state is born of a class of problems where freedom does not work so well, where the free market yields poor outcomes. This is the zone of ‘market failures’, where free men and women, all by themselves, obtain results that disappoint. Where the free market fails to deliver efficient economic outcomes, this is termed ‘market failure’. Market failures come in four kinds: Externalities, Asymmetric information, Market power and Public goods. Externalities are the situations where persons impact upon each other in ways that are not intermediated through voluntary agreements between these persons, where people impact upon each other in ways that were not negotiated. Consider a factory that emits pollution upon residents without their consent. This pollution is an example of a ‘negative externality’. We can think of an alternative arrangement, where the factory and the residents of the neighbourhood negotiate an agreement, and the residents are paid a fee in return for the privilege of polluting the air. If this were done, the pollution would be intermediated through a market transaction that is voluntarily entered into by all parties, and there is no externality.
State intervention should apply as much applied research as possible. They should start thinking of the state more like a product, or a system with multiple causal feedback loops. They should acknowledge the second/third order effects, there is no single “white pill” that magically solves the problem which the policy is trying to address. If they think in “product” framing, then they should make multiple experiments, test, validate results, apply new hypothesis, increase scale slowly, instead of releasing all at once.. sensitive policies should be staged.
We need the humanities, the economists, the anthropologists, the free thinkers, the rationalists, the theologists even. We need a diverse think tank to conjointly draft such applied research, and use that to influence state policy. This has also been a pipe dream for a while, and it’s also one of those things that’s harder to translate to action.
Education is tough outcome to achieve progress over. The Indian government has been incrementally increasing the State budget for bolstering the learning outcomes, and yet.. enrolment in government schools has fell by 11.1 million from 2010 to 2016 (need to check the latest figures). literacy rates are actually declining, which is a strange situation to be in.
The expenditure per student in government schools rose from Rs 2455 in 2010 to Rs 4385 in 2016. Learning outcomes declined in this period. In 2010, 50.7 per cent of children in class 5 in government schools could read a class 2 level text, but this declined to 42.2 per cent in 2014. Parents voted with their feet, and switched from free government schools to private schools charging a fee. Enrolment in government schools fell by 11.1 million while it rose by 16 million in private schools, from 2010 to 2016.
We need to transition our framing of the government from a benign paternalistic government, to a more skeptical form. Keep watching.
Consider the problem of policemen tapping phones. We cannot assume that policemen or their masters are benign people who mean well. We need tight restrictions upon the state apparatus for surveillance. Suppose a policeman engages in illegal surveillance which successfully identifies a criminal. Should we condone the violation of laws governing surveillance, on the grounds that this illegal activity yielded a good result? Under the ‘fruit of the poisonous tree’ doctrine in the US, all illegally gathered evidence is inadmissible in court, and policemen who violate laws governing surveillance are personally subject to punishment. Whether illegal surveillance found the criminal or not, the fruits of this poisonous tree cannot be used in court.
After independence, just like many other countries, we were on the verge of becoming a mature liberal democracy, and yet, this promise failed in India to some extent, as compared to the other countries such as Sweden, Norway, Denmark etc.. I would also like to know why India lost this half-way through..
India obtained freedom in 1947 with great expectations of rapidly rising to the ranks of a prosperous liberal democracy. This did not work out. A few rare countries that were poor in 1945 have graduated to prosperity and the freedoms of a mature liberal democracy, but most did not, and we in India fall in that group. Our founding fathers had the best of intentions, and initiated numerous policy programmes. However, good intentions do not suffice, and we have poor outcomes in a large number of areas, such as the criminal justice system, the judiciary, the tax system, and financial regulation. Social change has been quite limited; we continue to be hobbled by superstition and prejudice. As an example, women’s participation in the labour force in India is much like it is in Pakistan.
Sometimes, doing nothing is also a good answer. Doing “something” might also make things work. I was recently laying my eyes on a very popular Github repo called the “ponytail” which talks and acts like a senior engineer by making the AI agents write as less code as possible. Wherever possible, it finds existing functions, and classes and libraries which it could re-use instead of re-creating most of these from scratch for each and every problem.
Having one single tax rate is much better than having multiple tax rates for different goods and services. In India, the lobbying of various pressure goods has led to a distorted tax allocation.
When we do not have a simple single-rate tax system, this has adverse consequences for GDP. For example, if there was only one customs duty (say, 5 per cent), this is much better than having different rates. Similarly, 80 per cent of the countries which introduced the Goods and Services Tax (GST) after 1995 have opted for a single rate GST. In India, various pressure groups lobby for higher or lower taxes on one industry or another, and this distorts the resource allocation of the economy. This drives up the MCPF.
Populism is also not a healthy approach, the wisdom of the crowd exists, but only should exist if the crowd is wise enough. Contrary to what populism seeks to offer, pursuing policies that are having wider support can often lead to outcomes that are against the best interests of the people. Therefore, the usual best-fit approach here is to go for a “representative” democracy, where an MLA (Member of legislative assembly), represents as 1 for every 10,000 etc people in a country. You vote with your foot, but the MLA gets to influence the policy.
The strategy that, instead, works better is representative democracy, a republic. We as individuals elect persons to represent our interests. We expect municipal councillors, members of the legislative assembly (MLAs) and members of Parliament (MPs) to invest time in understanding policy questions, on our behalf. Legislators are expected to have shared values with voters, and obtain intricate knowledge of public policy in pursuing the best interests of their constituents. This is not easy: there is a principal–agent problem where the individual (the principal) faces difficulties in ensuring that the elected politician (the agent) works in her best interests. Making this work is difficult, but it is more feasible than asking voters to understand policy choices.
Companies going bankrupt is actually not a bad thing. The bad thing is when government gets paternalistic especially when companies become too huge to fail, and then they start giving them life support. We should start having a more broader perspective here, and marvel at this creative destruction..
Creative destruction and the death of firms Every firm constantly tries to adapt to the changing world of what consumers want and what technology makes possible. Every firm peers into the future, and speculates about the kinds of products and production processes that will prove to be profitable. Some firms will always make mistakes in this speculation and go out of business. Their departure frees up labour and capital that can go to more productive firms. When a firm goes out of business, we feel a certain sorrow about its departure. But a key idea of economics is that birth and death of firms is healthy and desirable. The great economist Joseph Schumpeter termed this process ‘creative destruction’. In India, we have traditionally felt that all firm failure is a bad thing. As Montek Ahluwalia says, the very phrase ‘sick company’ suggests the need for a hospital to nurse it back to health. We need to shift gears, and marvel at the process of creative destruction.
