My first novel, My Friend Sancho, is now on the stands across India. It is a contemporary love story set in Mumbai, and was longlisted for the Man Asian Literary Prize 2008. To learn more about the book, click here.
Before this IPL started, a friend of mine, who shall go unnamed, called me up.
Friend: Amit, you have such understanding of cricket, do you have any gyaan about this IPL? I want to place a few bets.
Me: Um, don’t do cricket betting, bro, you’re bound to lose in the long run. But if you absolutely have to, because the dopamine craving is unbearable, and you really hate your money, then do one thing: make a bet, at the toss of every game, on the side batting second. Ignore everything else.
F: What are you saying? Team composition, past records, pitch, weather, my gut feel—ignore all that?
M: Yes. Ignore it all. And don’t even watch the game, your blood pressure is a problem, isn’t it? Just place that one bet and forget about it.
Four days later, I Whatsapp him.
M: Bro, how’s it going? Have you noticed that the team batting second won three out of the four games so far? :)
F: Amit, it’s all fucked up, man. The matches are fixed. Just see yesterday, bro, X was at 40 paisa when I bet, and suddenly the game turned around and I lost so much. Such an unlikely turnaround! It has to be a fix!
M: Um, unlikely things are actually inevitable. Why didn’t you just bet on the side batting second like I told you to?
F: Arre, yaar, that is so simplistic. I have been betting on cricket for 20 years. Main apni analysis karta hoon, bhai!
F: But these bloody games are fixed!
M: Well, just keep in mind what I told you.
I call him after eight games.
M: Champ, this IPL is crazy, isn’t it? Seven out of eight matches so far won by the side batting second. When are you throwing a party?
F: Arre, forget party, I will have to sell one of my flats soon. I bet heavily on X yesterday, and Y won! It was fixed!
M: Er, not likely bro, very hard to fix entire games. Only spot-fixing is realistic, and even that…
F: No no no, it was fixed! See, X had a sure win! And the bookies gave odds of 84 paise. Why would they give such great odds? To lure the money in! And then Y wins! Fixed!
M: Are you saying the bookies fixed it?
F: No bro, the game has evolved beyond that. Bookies and punters don’t fix matches anymore. The BCCI fixed it!
M: Bro, that’s a wild conspiracy theory. Firstly, it’s almost impossible to fix actual results. Secondly, the BCCI makes a lot of money anyway, and their incentives are aligned towards keeping the game clean. I think you’re just rationalising…
F: Arre, stop this rational talk. Nothing good can come out of it.
M: Well, I did tell you about the team batting second…
And now, two weeks later, I speak to him again.
M: Dude, it’s 13 out of 14 wins now for the side batting second. What did I tell you at the start of the tournament?
F: Arre, forget all that, you won’t believe how hard I’m getting banged. My ass should be renamed National Highway 420. I’m telling you, it’s all fixed. I should never have bet a single paisa!
M: Er, well, look, I did tell you…
F: I hate cricket. I’m going to Bangkok for some decleansing. I need to get some detoxing done.
So there it is. My friend will never wake up and see the light, but the weird thing is that many pundits and cricket managements aren’t doing that either. It is a fact that 13 out of 14 games have been won by the side batting second. Not just that, they have been won easily, in an average of 17.2 overs and with an average 6.6 wickets an hand. Why is this happening?
I have speculated on this in an earlier post, but forget all speculation, there is one obvious conclusion to be drawn: teams batting first are consistently underestimating the par score.
In my column before the IPL, ‘What Cricket Can Learn From Economics’, I had pointed out that many sides do not understand the economic concept of opportunity cost. Basically, they need to be more aggressive in order to utilise the 20 overs optimally, and attack the bowling from the get go. (Read the piece for the full argument.) Now, some teams get this, and do actually frontload, but many don’t. And they often adjust sub-optimally when wickets fall.
For example, consider this: A team begins their innings aggressively, but then drops wickets. They drift to 44 for 3 after eight overs, with the bowlers bowling exceptionally well. Here’s what happens: if they’re batting first, they’ll reset the par score in their heads, and aim for something conservative like 165 at 10 an over. If they’re batting second, they’ll aim for whatever the target is, even if it’s 190. They don’t have a choice.
Now, it is my belief that many teams underestimate the ‘expected value’ of aggression. The risk-to-reward ratio for aggressive batting is vastly different in T20s as compared to ODIs because the relationship between the two kinds of resources available to a team (players and time) has changed. And because they underestimate the payoffs, teams are not aggressive enough while batting first. While batting second, though, they often don’t have a choice but to be appropriately aggressive.
This is not the only factor in play, of course—the strength of a side’s bowling attack matters, as do local conditions on any given day. But all of those are largely toss-agnostic. This mindset is not.
Despite my explanation, this streak is an outlier, and I don’t see it continuing: I will be very surprised if 13 of the next 14 games are won by the side batting second. However, I do see this trend continuing. Sides batting second should win more than sides batting first. And when sides batting first do win, it will be because they frontloaded, as RCB did in game 4, and Gujarat Lions try in every game.
Please don’t put your money on it, though. Anyone who bets on cricket is a long-term loser. I’m serious.
As readers of this blog would know, I’ve long argued in favour of Uber’s surge pricing as an excellent mechanism for matching supply and demand. In a column from last year, I warned against the perils of banning surge pricing:
The most efficient way of allocating resources is to let things find their own equilibrium, their own prices. Price controls are foolish and never work. And the demand for them is based on a sort of a fantasy. Fixing the price of a product at a base price below what the market would pay does not mean that everyone gets it at this price—it just means that a lucky few get it and the others don’t. The fundamental truth about the universe is this: everything is scarce. You can’t wish this scarcity away by agitating or legislating against it.
Now, these fundamental laws of economics apply to everything, not just to Uber. And so Mukul Kesavan, in a column for NDTV, makes the pertinent point:
[S]etting aside Kejriwal’s motives and rationality, the larger question is this: should Uber or Ola be allowed to vary their per kilometre rate at will when yellow cabs and auto-rickshaws are stuck with fixed rates? If, as Uber’s defenders never tire of saying, the app’s algorithms represent the invisible hand of the market, frictionlessly matching supply and demand, why should the individual auto-driver be punished and maligned for asking for more than the metered price?
Shoaib Daniyal makes the same point on Twitter:
Good to gripe about Uber restriction—but why did no one notice the massive cab and auto fare regulation in place for a century?
Both Mukul and Shoaib are right, though it seems to me that they might both be indulging in whataboutery and creating a straw man at the same time. No one who defends Uber’s surge pricing could possibly support the way the government regulates taxis and autorickshaws. And some of us have written about it in the past—I found this 11-year-old post by me ranting about the licensing of cycle rickshaws in Delhi, citing Parth Shah and Naveen Mandava’s excellent book, ‘Law, Liberty and Livelihood.’ Rather than search for more old posts, though, let me sum up my position here.
In a nutshell, here is how the market for taxis and autos works in Indian cities. The government gives out a limited number of licenses for taxis and autos. This quota does not increase in response to demand. Thus, as demand goes up in relation to supply, you would expect either prices to rise or the supply to rise. The supply is artificially constrained. And the government imposes price controls, so the prices can’t rise either. In other words, if the auto and taxi drivers stick to government-mandated prices, you should expect scarcities. Or you should expect an informal system to develop, where drivers don’t charge the meter rate and instead negotiate with their clients. Both of these are true, to varying degrees, and each of our own cities has developed our informal cultures in terms of dealing with this.
So when an auto guy demands Rs. 400 for a journey that the government mandates should cost Rs. 80, what is the appropriate response? I know some people who will argue that the auto driver, in exchange for his license to drive an auto, has signed a contract with the government that includes those price controls, so he should abide by them. This is a short-sighted argument. I would argue that both the licensing and those price controls are wrong. And I sympathise with the auto driver’s lament that ‘Hey, I’m not allowed to charge a surge price, why should Uber have that privilege?’ How can that not be a valid complaint?
The best way to create a level playing field, though, is to remove those restrictions from all parties, not to impose them on everyone.
Part of the reason Uber and Ola have thrived in India is that they benefited from a need that was created partly by the controls imposed by the government on taxi and auto drivers. The solution is to remove those controls. But removing government controls on the taxi-and-auto industry is higher hanging fruit because of the interest groups involved, and it’s easier to target Uber and Ola, which is what the governments of Delhi and Karnataka are doing. Who suffers in all this? The consumers do. We’re the fish at the table.
The bottomline: Kesavan is right that if we support surge pricing by Uber, we cannot in the same breath curse the local auto-driver for charging ‘extra’. That doesn’t compute.
Is there anything that cricket can learn from economics? Over the decade-and-a-half that I have written on both these subjects, I’ve come to believe that understanding and applying the principles of economics can enrich the way we live our lives. It follows, then, that all economic concepts can also be applied to cricket.
This is especially relevant at the time of writing these words, when the Twenty20 World Cup has just come to an end. I was delighted that West Indies deservedly won the cup; and saddened that a number of teams, including India, made basic errors because they did not understand one fundamental economic concept: Opportunity Cost.
The term ‘opportunity cost’ was coined by the 19th century economist Friedrich von Wieser, and its simplest definition is: ‘the loss of other alternatives when one alternative is chosen.’ The online site Investopedia defines it as “the cost of an alternative that must be forgone in order to pursue a certain action.” Let me illustrate that with an example.
Say you step out of your office one muggy evening, and have Rs. 300 in your pocket. You feel like drinking a refreshing frappe at a nearby café; and you also feel like taking an AC cab home instead of your normal bus-train routine. The thing is, you only have enough money for one of them. So you go for immediate gratification and get that frappe. The opportunity cost of the frappe is the cab ride home.
Every banal decision in our lives involves opportunity cost. Do I watch TV or read a book? Do I go out with friends or spend time with family? When I choose to spend an evening watching Batman vs Superman, the cost of that decision is not just the price of the ticket and the popcorn, but all the things I could have done with that time.
Understanding opportunity cost is important because it helps us navigate the one fundamental truth about this world: scarcity. Everything is scarce: there is never enough money; or enough time; or enough energy. We have to negotiate scarce resources, which is why all our decisions carry costs. And as the economist James Buchanan said, the concept of opportunity costs “expresses the basic relationship between scarcity and choice.”
Cricket is no exception to these laws of nature. Within a cricket match, there are two kinds of scarcity that a captain or coach must contend with. One is a scarcity of time. The match can only last either five days or 50 overs per side or 20 overs per side. The second is a scarcity of resources. A team can only have eleven players.
Strategy in cricket boils down to negotiating between these two constraints of time and resources. For example, if a team needs 250 runs to win a Test match with two full days in hand, and are 18 for 2 against fired-up new-ball bowlers, they should be more worried about running out of batting resources than about running out of time. That would be a good time for careful consolidation. In contrast, in an ODI, if a team needs 15 to win in one over with eight wickets in hand, they are running out of time but not batting resources. This is a time to hit out and run for everything, and not to preserve wickets.
Every decision carries an opportunity cost. When a batsman shoulders arms to a ball outside off stump, that decision carries the opportunity cost of the runs that might have been scored off it. When he tries to drive it and instead edges it to slip, his action bears the opportunity cost of the runs he might have scored later had he not played that shot. These are opposite actions, and to evaluate which is appropriate in any situation, you need to consider the relative scarcities of time and resources.
Now, here’s where it applies to T20 cricket. Each side gets 20 overs to bat instead of the 50 they would in an ODI; but they still have 11 players! The balance between resources and time has shifted – but many teams haven’t adjusted to this. They apply the ODI innings-building template to T20s: hit out in the powerplay, taking care to consolidate if early wickets fall, then build the innings till the slog overs, then have a slog. This is wrong. It is a waste of resources – and it also allows the bowling side to allocate bowling resources optimally, with specialist death bowlers bowling at the end. What would they do if every over was a slog over?
The teams should adjust to this new dynamic by ‘frontloading’ – a concept I first wrote about in this context a couple of years ago. They should go for their strokes right from the start. If catastrophe comes and four wickets fall in the space of 10 balls, they can dial it back and look to bat all 20 overs so as not to waste the resource of time – but otherwise, they are wasting the batting resources available to them.
The optimal approach in a T20 game is to treat your first three overs as if they’re the last three. On average you will make as many as you would in the last three. Sometimes you will click and the momentum continues. Sometimes wickets will fall, and you can adjust accordingly, and still not make less than you would have with the traditional strategy.
Teams are wisening up to this, and both the finalists of this T20 World Cup frontloaded through the tournament – but India did not, to my dismay. In their semi-final, India made 192 for 2 and the wicket column alone tells you what was wrong with their approach. By losing only two wickets, consider the strokeplaying resources India left unused: Raina, Pandey, Pandya, Jadeja, even Ashwin at 9. Our middle overs were consumed by Ajinkya Rahane making 40 off 35, which was a criminal waste. Consider the opportunity cost: had Rahane been out while on 20 off 18, do you really think that this army of hitters would not have made way more than the 20 off 17 he eventually added?
This is not Rahane’s fault per se: he is a fantastic Test player, but he doesn’t have a fourth gear and this is the best he can do. It’s the fault of the selectors and the decision makers within the team who ignored this key lesson of T20 cricket. (To be fair to MS Dhoni, though, CSK usually frontloaded in the IPL under him.) It is also the fault of those pundits who will praise an innings of 50 off 40 without considering the opportunity cost, and the unused resources in the pavilion.
Teams will learn, though, and T20 cricket will continue to flourish. This is the future of the sport. Indeed, Test cricket might die out altogether, for reasons that can also be explained by economics. As the number of options to spend our time keep increasing, so does the opportunity cost of watching Test cricket. What is five days worth to you?
What is the one thing that all governments in the world, without exception, are great at doing? I have you scratching your head there, don’t I? ‘Amit thinks there’s something governments are actually good at doing? Is this April Fools Day?’
Here’s my answer: they’re all good at redistributing wealth from the poor to the rich.
I have written before about how all interventions in the free market amount to a transfer of wealth from “the relatively poor masses to a specific relatively rich interest group.” The BJP government just provided us a great illustration of that with some new regulations on e-commerce businesses in India. On the face of it, there’s good news, because they’ve finally ‘allowed’ 100% FDI in online retail. But then there’s this:
It also notified new rules which could potentially end the discount wars, much to the disappointment of consumers. This is because the rules now prohibit marketplaces from offering discounts and capping total sales originating from a group company or one vendor at 25%.
We do. Whatever costs these companies face are passed on to consumers. A decrease in competition also affects the value for money that we get. This is axiomatic. Because of these regulations, we will get less bang for our buck. We are, effectively, losing wealth. Where is this wealth going? For this, think about who benefits.
The BJP has long considered small-and-medium-sized traders to be an integral part of its votebank. They were getting adversely affected by online retail, as consumers obviously gravitated towards whoever gave them more value. Traders are an important interest group for the BJP not only because they represent a votebank, but also because they contribute to the campaign coffers of the BJP. And money buys power for what? To make more money.
These regulations benefit these brick-and-mortar retailers and traders, as they will lose less business than they otherwise would because online retailers will be able to offer less value than they otherwise would.
In other words, this is a redistribution of wealth from poor consumers at large to a specific relatively-rich interest group. (Indeed, given the quid-pro-quos involved, you could argue that the party in power is itself the final beneficiary of this transfer of wealth.)
Another data point on how this government is helping this particular interest group: Gujarat has just passed a bill imposing new taxes on all “goods purchased through e-commerce portals.” You know who this hurts, right? You know who this helps?
Governments always carry out such interventions using noble rhetoric of ‘leveling the playing field’ and helping those poor [insert rich interest group here]s. But the beneficiaries here are not owed a living by anyone, and are not entitled to any money apart from what consumers willingly give them in a free market. The money that the consumers would save because of unhindered online retail, after all, would have gone back into the economy in some form. (For more on this, I refer you to the great Frédéric Bastiat’s famous essay, ‘What is Seen and What is Not Seen.’)
* * *
Here’s my three-fold path to evaluating government policy:
1. Ignore the rhetoric.
2. See who it helps.
3. See who it hurts.
It’s the same story, always, every time. It’s the poor who suffer.
* * *
Also read: ‘The Great Redistribution’, my earlier column on this subject, where I use an example where the protagonist and antagonist interest-groups in question are the reverse of the ones in this post, but it’s still the poor who suffer.
IBN reports that the Karnataka government “is mulling a limit or maximum cap of Rs 120 to be charged on movie tickets in multiplexes.” This is intended to make movies more affordable for regular moviegoers, thus increasing viewership and helping the film industry as well. These are laudable objectives. Who could argue with making movies more affordable for the poor?
In fact, I would argue that the Karnataka government has not gone far enough. Why restrict this benevolence to movies?
I hereby propose that the prices of cars be capped at Rs 80,000. This will help the poor.
Also, the prices of meals at restaurants should be capped at Rs 30. This will help the poor.
While we’re at it, airline tickets should be capped at Rs 300. Why should only the privileged rich be allowed to fly?
Please don’t tell me you object to any of these wonderful ideas. There is no argument against these that don’t also apply to multiplex tickets. Don’t you agree?
Pradeep Magazine is unhappy that Pawan Negi got more than a million dollars at the recent IPL auction. He writes:
Ever since a new cricket format and a new business model – the IPL – in the name of sport has been created in India, this accepted rationale of how sport functions is being challenged each passing year. Among the many questions being debated is the relationship of talent with the wages earned and the impact it will have on the very foundations of cricket in the country.
That is where Pawan Negi and most of his tribe become relevant to this debate. Here is a young talent, not sure of his place in the India team, a surprise selection for the T20 World Cup, who has all of a sudden been catapulted ahead of his much superior seniors and showered with riches — and even he can’t understand why.
Magazine implies that Negi has gotten more money than he is worth—and I don’t have an opinion on that. However, consider the larger philosophical question of who should determine Negi’s value as a player? Should it be the mandarins at the BCCI, or the selectors? Should it be knowledgable journalists who have covered the game for years like Magazine himself? Should it be the owners of IPL franchises, an assorted mix of businessmen and filmstars who may not know much about cricket?
The clue to the answer is to ask yourself who has the best incentives to put in the work to determine Negi’s value. Who is actually putting his money where his mouth is? If Magazine makes a judgment about a player that is wrong, it doesn’t matter, journalists get things wrong all the time. There is not much of a reputational downside. If the Indian selectors get it wrong, ditto, they move on and pick someone else the next time, and only a whole bunch of ludicrous selections can affect their position. If the IPL bosses get it wrong, on the other hand, they lose money. Hard, cold cash. For this reason, the incentives are highest for IPL bosses to put in much work in scouting and analytics, and by all accounts they do exactly that. So insofar as there can be said to be a ‘correct’ price for Negi, the IPL auctions are the closest mechanism available right now of arriving at that. (And of course, econ 101, prices are determined by supply and demand, and you need a market for that.)
Of course, the IPL auctions are not a free market. All players would probably get paid much more if spending caps did not exist. Also, Negi would probably have gotten much less if he was first up in an auction where no team had retained or picked a player yet, and he did get lucky that he came up for auction when there was a scarcity of available players like him, teams had holes to fill, and the demand for what he could supply went up. That’s just luck, and it’s fine. If he doesn’t perform, he won’t get paid this much next time.
An aside: Magazine also says in his piece:
In this bizarre game, where players are bought and sold in an auction, is there any cricketing logic that governs these decisions?
This is a common, and badly phrased, complaint: of cricketers being bought and sold like cattle. But that is not what is happening. Their services, as represented by contracts they have willingly signed, are being bought and sold. It is principally the same thing that happens when you check out different employers to see where you want to work, except that the mechanism is different. Cricketers are not being degraded here, but honoured and valued in a much better way than men in board rooms with nothing at stake could manage.
At first glance, you might think that is good news for North India. It is not. In my view, it shows how socially backward the North still is.
A few years ago, I’d written a column called We Should Celebrate Rising Divorce Rates In it, I’d expressed the opinion that divorce rates were “the single best statistical indicator we have of the empowerment of women.” If I may quote myself:
Rising divorce rates tell us one thing for sure: that more and more women are finding the means, and the independence, to walk out of bad marriages and live life on their own terms. If we judge ourselves as a society on the state of our women – and surely that must be a parameter – then this is good news.
So the ToI report seems to indicate that women are more empowered in the North-East than and North India. I’d love to see if data backs this up. What statistical indicators can stand as a proxy for women’s welfare? Do they show a geographical correlation with divorce rates? These are good questions to ask, though I don’t think ToI will do a follow-up report on this anytime soon.
I’m a devout carnivore, but a decade-and-a-half ago, I turned vegetarian for a year. My reasons were moral, and best illustrated by a story about the Russian novelist Leo Tolstoy. In his later years Tolstoy was a vegetarian, and one day he invited his aunt home for dinner. She said she’d come but insisted, ‘I must have chicken!’ Tolstoy paused at this condition, but then agreed to provide the bird. The lady duly came home, gup-shup happened, and then when they moved to the dining table, she found a live chicken on her chair, and a carving knife alongside.
‘We knew you wanted chicken,’ Tolstoy said, ‘but none of us would kill it.’
The story, as I know it, ends there—but I can’t imagine Tolstoy’s aunt ate Tolstoy’s chicken. She must have been rather exasperated, and Tolstoy was indeed a bit of a spiritual crackpot towards the end of his life. But the story of the chicken resonates with me. It demonstrates our denial when it comes to food. In our mind, there is a screen between the meat that we eat and the animals that are killed for that meat. We taste the flavour and enjoy the texture, but we behave as if the butchery never happened. We pretend that the chicken on the plate and the chicken on the chair are different creatures. But of course they are not. Tolstoy’s flapping, squawking chicken is Varma’s Chicken a la Kiev—and so, many years ago, I gave up meat.
Even if I later explained my subsequent regression by talking about recurring headaches and how my body was too used to meat to give it up, deep down I know that’s just a rationalisation. I didn’t have the strength of character to carry through on my resolve. I dreamed of luscious, succulent kababs, and ignored the screaming of the lambs.
The guilt and dissonance I still occasionally feel may soon be moot, though. Some fine scientists, much to be praised for their noble endeavours to better humankind, have recently found a way to grow meat in the labaratory, without a sentient creature being involved. Within a couple of decades, I predict, you will be able to eat a medium-rare steak that is, in every way, the same as any you would get today, except for the fact that no animal will be harmed in its making. The organ it will come from would have been manufactured a la carte, and would never have been part of a living creature. Tolstoy’s aunt’s grilled chicken leg would have nothing to do with Tolstoy’s actual chicken.
On that note, at the turn of this new year, let me tell you about a concept propounded by a gentleman named WEH Lecky way back in the 19th century: The Expanding Circle. Lecky posited that there is a circle of beings who qualify for our moral consideration as equals, and that this circle has tended to expand through human history. In prehistoric times, we might have regarded just our family or our tribe as being part of that circle, and everyone else would have been ‘the other’. Other tribes, then other nations, other races, and so on. But through time, that circle expanded. It began to include other communities and races, and eventually included all of humanity itself. It is this expanding circle that led to the end of slavery, to women being allowed to vote, to the great immigrant nations across the world, like the US of A. And this circle is still expanding.
The philosopher Peter Singer, in fact, argues that one day animals will be within this circle. He believes that one day we will be as aghast at meat-eating as we are today when we look back at slavery or women not being allowed to vote and so on. For a person in the 23rd century, looking back at the 21st, it will seem as astonishing that we once killed animals for food as it does to us that the great apostle of liberty, Thomas Jefferson, once kept slaves.
At this point, it is worth considering why the expanding circle expands. To my mind, and I say this with sadness, the reasons are instrumental. The circle expands because incentives change. The two main factors driving this are Trade and Technology.
Economics teaches us that every human being can provide value to this world (comparative advantage) and that voluntary trade always leaves both parties better off, leading to a positive-sum game. If ‘The Other’ is working hard to improve our lives, and it is in our interest to improve theirs, for that is how we profit, then the circle is bound to expand to include them. Immigration is great not just because of moral reasons, but because it helps societies and economies flourish. The larger our circles are, in whatever sense, the better we do.
Technology also plays its part. Until recently, half of humanity – the female half – was deeply constrained because that’s just how the comparative advantage game played itself out. Housework and raising large families took so much time that it made economic sense for family units to specialise, and for women to stay at home and for men to go out and be bread-earners. This got codified in social norms, and thus women got forced into subsidiary roles. That changed in the 20th century. Firstly, household technology freed up huge chunks of women’s time. Secondly, birth control gave them, well, more control over their bodies. There is much to be said for good intentions, but women’s empowerment really happened because of technology, and so hurray for technology.
And hurray for technology one more time, because if our circle expands to include animals, it will do so not because of the benevolence of meat eaters around the world, but because growing meat may no longer require the killing of animals. And here, consider the consequences of all animal products being manufactured without animals being involved. The incentives around rearing farm animals will change entirely. And so one day, cows and pigs and chickens and goats may go extinct not because we ate them, but because we stopped. The irony is delicious.
One of the things that most exasperates me about Indian political discourse these days is that we often speak in terms of ‘left-wing’ and ‘right-wing’. This is wrong for two reasons. Firstly, this is not how politicians themselves actually speak (unless they’re humouring the English-speaking media). Voters in India vote for a myriad of reasons, mostly local, and they don’t frame issues in terms of left or right. Therefore, neither do politicians when they speak to their constituencies, or when they strategise among each other. There is, thus, a disconnect between politics and political discourse. Many political commentators, unable or unwilling to engage with the complexities of the political economy, insist on imposing simplistic narratives.
But this would not matter if a left-right prism was useful in evaluating the desirability of policies, or provided a compass to gauge the moral or instrumental value of the actions of politicians. But it does not, which brings me to my second reason, which is not a local one. Across the world, framing issues in terms of left or right misses the central principle at stake in any modern society: that of individual rights, and of freedom. I view the world through a classical liberal (or libertarian, if you will) prism, and my liberalism boils down to a respect for individual freedom. On moral grounds alone, if we come from first principles, we should respect individual freedom above all else. From a consequentialist perspective, also, we should defend freedom, for economic freedom leads to material prosperity, and personal freedoms, such as freedom of speech, enrich our culture.
As a true liberal, I see no difference between economic and social freedoms. As I am fond of saying, once we accept that two consenting adults may do whatever they want with each other provided they infringe the rights of no one else, it should not matter whether they are fucking in a bedroom or trading in a marketplace. Interfering with either is wrong. And here’s the thing: parties on both the left and right sides of the political spectrum support infringements on individual freedom all the time.
Parties on the right tend to want to impose their cultural values on others, and are suspicious of those they view as ‘outsiders’. They don’t care much for free speech or other personal freedoms. Parties on the left tend to oppose economic freedom. They do so stating noble reasons, but all infringements of economic freedom amount to a redistribution of wealth from poor consumers to a rich interest group, so they’re either hypocrites or delusional. They also tend to favour big government, which means more taxation, and therefore more coercion.
If you believe, as I do, that coercion is wrong, then it won’t make a difference whether you look left or right, you’ll see coercion everywhere. A classical liberal opposes both Donald Trump and Bernie Sanders, both Prakash Karat and Mohan Bhagwat. (I would give credit to those guys for at least stating their positions clearly, though. Politicians down the ostensible middle, slaves to special interests as they mostly are, tend to be equally coercive and far more hypocritical.) Looking at the political marketplace, you will find that the options available to you aren’t all that different from each other. And why should they be? Even when they cater to different segments of the population, they’re still reacting to the same inevitably corrupting incentives at work in the political economy.
Here’s the funny thing about India in particular. We have conveniently classified the BJP as a right-wing party and the Congress as a left-wing party—but they’re both practically the same party. In terms of economics, both are left-wing, and oppose economic freedom. It might surprise you to hear me say this about the BJP, but forget their campaign rhetoric and consider their actual policies: Modi I is basically UPA III. Modi has the same top-down way of looking at the economy as any Congress leader before him, and he’s trigger-happy when it comes to imposing new taxes and cesses.
Equally, on social issues, the Congress was as right-wing as the BJP allegedly is. They have a stellar record when it comes to banning books, and it was a Congress government that effectively banned The Satanic Verses. Censorship flourished under their watch, as did attempts at social engineering, which weren’t restricted to the Emergency: odious policies on sterilisation still exist, decades after the emergency was called off. Even in terms of attacking other communities, the Congress set the standards: more people died in the 1984 riots than in the 2002 riots. My friend, the political commentator Nitin Pai, once coined a term that describes this jostling between the parties perfectly: ‘Competitive Intolerance’. This is quite the kind of competition that makes the poor ol’ free-marketer in me cringe!
To sum it up, India’s political parties tend to be left-wing on economics and right-wing on social issues. In other words, they oppose freedom in every sphere. I would be no more disheartened by this than India’s freedom fighters were in the first half on the last century, when they gazed up at the monolithic British empire. They gritted their teeth, and hurled themselves into the battle for our political freedom. Likewise, we must keep fighting till we win these other freedoms, and emerge as a free country at last. Not a left country, or a right country, but a free country.
I love Uber, as much for what it is as what it represents. But here’s the thing: Uber functions because its marketplace is competitive. When it comes to most of the services the government provides, though, the government has a monopoly. The greatest incentive for any organisation to function well comes from competition, and the need to excel in order to survive. In areas that the government has a monopoly, I predict, it will fail—as indeed ours has for 68 years. You cannot change the level of service until you change the incentives.
Abhinav Singh has a good post up about how the Government of Maharashtra is proposing to regulate Uber. As you’d expect, there are vested interests behind this: the existing taxi industry, which feels threatened by the new operators, as indeed they should, because the new operators are proving more value to consumers. So they go to the government.
As I’d written here, all interventions in the free market amount to a redistribution of wealth from the poor to the rich. Any regulations here will end up as exactly that. The value that consumers would have gained from the unhindered operation of Uber and Ola will be redistributed away to the older taxi operators. You really don’t need to ask what’s in this for the government, do you?
If this makes you angry, do go sign Uber’s petition. I’m usually skeptical of online petitions and candlelight vigils and so on, but this is a petition directly from one of the affected parties, and there is a non-zero probability that it will make a difference.
‘I’m not conceited. Conceit is a fault and I have no faults.’ Imagine this quote on an internet meme, alongside a picture of Narendra Modi, looking dapper in that famous pinstripe suit, or maybe a trademark Modi kurta. It would surely get thousands of shares on social media, many from bhakts impressed by the prime minister’s modesty. Don’t rush to share it, though: as one tends to do on the internet, I just misattributed. Those words were not uttered by Modi, or even Oscar Wilde or GB Shaw. The man who said them is former Van Halen singer Dave Lee Roth, with his back against a record machine. But Modi could have said them, could he not?
Please don’t think I am picking on Narendrabhai alone. All politicians are vain. Indeed, one could argue that in politics, vanity is a feature and not a bug. Politicians come to power by selling specific narratives about their excellence; and they can sell it most effectively if they believe it themselves. Success in many fields often begins, comically and ironically, with self-delusion. But politicians have consequences, and there’s nothing comic about that.
One reason that India is still a poor country is the ‘fatal conceit’ of our founding fathers. Jawaharlal Nehru, and his minions and successors, believed that economies were best planned from the top down. An economy is a complex thing, the poor and ignorant masses of India surely could not be trusted to perform this task by themselves, and needed to be directed by wise and benevolent planners. Those who have studied economics or paid attention to history know that this was foolish and wrong.
Economies, like languages, are products of “human action but not human design,” in the words of Adam Ferguson. They function brilliantly on their own, with millions of individuals pursuing their self-interest, and thus increasing the value in the lives of others, for that is the only path to profit. Planning is not only not required, it is an impediment. A central planner can never get a grasp on the huge amount of dispersed knowledge in an economy, and any intervention is bound to lead to a loss in efficiency. This hurts the poor the most: as I illustrated in a previous column, every intervention in a free market amounts to a distribution of wealth from the poor to the rich.
Nehru suffered from a disease that Friedrich Hayek called the Fatal Conceit. His coining of that term was inspired by the following passage in Adam Smith’s The Theory of Moral Sentiments: “The man of system […] is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board.”
People are not chess pieces, of course, and Nehru and his successors ravaged the economy with their well-intentioned interventions. I won’t recite the litany, but here’s the thing: 68 years after we became independent, 24 after the Soviet Union collapsed, we are still enslaved by a failed philosophy. And we’re still suffering because of the fatal conceit of flawed individuals.
It amuses me sometimes that Modi is considered a right-wing politician. He actually embodies the worst of both left and right. Like his party, and the ecosystem of religious nutjobs that sustains it, he is right-wing on social issues; and left on economic ones. Basically, he is against individual freedom in every domain possible, and thus the exact opposite of me. If you put Modi and me in a test tube, the resultant explosion could blow the earth off its orbit, or at least result in a good rap album. But that is a digression, and it is possible that you have your mouth open because I called him an economic leftist. Well, if a man is to be known by his actions and not his public image, what else can we call him?
I know many economic liberals, bald because of six decades of tearing their hair out, who thought Modi would be a free-market messiah. My ass. Tell me this: exactly what reforms has he carried out that increase our economic freedom? When Modi took over, India was ranked 140 out of 189 countries in the World Bank’s Ease of Doing Business Index: it has since slipped to 142. He has not reformed the labour laws that, for decades, have prevented us from being a manufacturing superpower. The license and inspector raj remains what it was under his predecessors. A litany of what he has not changed would be the same as a litany of what was wrong with our country before he took over.
I have friends in high places who tell me that the system doesn’t allow him to act. But the truth is that Modi suffers from the same fatal conceit that Nehru displayed. He believes the economy needs a top-down manager. He would rather reform a public sector unit than sell it off. When he talks of ‘minimum government and maximum governance,’ as that catchy slogan went, he is speaking of making government more efficient and not at eliminating it entirely from areas where it has no business existing.
His conceit isn’t limited to his economic thinking, though. Look at how the man struts! He may not walk the walk in the sense of governance, but he certainly does in a catwalk sense. Once he was denied a US Visa; now he travels the world meeting the high and mighty. I wonder if he realises, though, that these global leaders give him importance because of the position he occupies, and not the man he is. I suspect he has actually drunk his Kool Aid, and believes the Modi Wave narrative of the last elections. He may be headed for a fall if so.
Look at the numbers from the 2014 general elections again. Our first-past-the-post system made it seem like a wipeout, as the BJP got 6.4 times the seats that Congress did. But they got just 1.6 the vote share of the Congress. It was 31% to 19%, and a 4% swing away from them next time could easily result in a hung parliament. They delivered outlier performances in states like UP, MP and Gujarat, which seem statistically impossible to repeat. And the following things are certain: Since the election, they have not won more supporters than they have lost; the turnout of their supporters is bound to be less the next time around; other parties, clear about what they are up against, will make smarter coalitions to consolidate the non-BJP vote; anti-incumbency will be a factor now that some of the Modi sheen is gone.
Modi behaves like the prime ministership was his destiny and he will win again easily in 2019. But if he doesn’t get his act together, reforming the economy and constraining the lunatic fringe in his party, he could be in for a surprise. India could choose another delusional politician over him, and 2014-2019 could be remembered as The Selfie Years.
Never talk to me about profit,’ Jawaharlal Nehru once said to an industrialist friend of his. ‘It is a dirty word.’
Nehru’s sentiments were understandable in those times, and his sentiments were noble. India had just rid itself of the British, who had come to India ostensibly to do business and had left it impoverished. Nehru, who had played a notable role in the freedom struggle, had spent his formative years in England learning from the Fabian Socialists, as well as from Howard Laski, the Marxist professor at LSE who had a greater influence on modern India than Mahatma Gandhi, through students such as Nehru and VK Krishna Menon. The Soviet Union seemed to be a model to admire, America itself vastly expanded the role of the state after the Great Depression, and the top-down command-and-control economy must have seemed incredibly attractive to Nehru. The center had to hold. The profit motive was evil. Those exploitative capitalists had to be kept in check.
It is not fair to judge Nehru in hindsight, and he was right about other things that mattered. But he was wrong about this. Profit is the secret behind all prosperity. And it is a distrust of the profit motive that has kept this country poor.
The fundamental fallacy that Nehru committed was of looking at the economy as a zero-sum game. By that thinking, if someone is winning, someone else must be losing. If the industrialist makes a profit, someone else is getting exploited. But this is not the way the world works. All trade is a positive-sum game; and indeed, it is not possible for one person alone to make a profit in a transaction.
I am fond of illustrating this by citing what the writer John Stossel calls the Double Thank-You Moment. When you buy a cup of coffee at a Cafe Coffee Day, you say ‘thank you’ when you are handed your cup of coffee. And the cashier says ‘thank you’ when you hand over your money. This double ‘thank-you’ illustrates that both of you benefited from the transaction. Both of you profited.
This is, simply put, the root cause of prosperity. Every single voluntary transaction that takes place makes both parties better off, and increases the sum total of value in the world. Equally, every impediment that anyone places on the ability of consenting adults to trade freely with each other reduces the notional value in the world, and is an impediment to growth. It stands to reason, then, that trade should lead to prosperity, and that economic freedom should be correlated with a nation’s wealth. Does the data bear this out? You bet it does.
First up, I urge you to consider this chart. (Here’s the source.) It shows the wealth of the world as a flat line for centuries, until 1800. And then, boom, the world economy takes off in a spurt that economists call the Hockey Stick of Human Prosperity. It correlates perfectly with the explosion of markets across the world, of double-thank-you moments.
But it doesn’t take off uniformly across countries. Free markets are a necessary condition for prosperity, so let me now draw your attention to another chart. This one, from the Index of Economic Freedom 2015 brought out by the Heritage Foundations, shows a clear correlation between economic freedom and the wealth of nations. The freer you are, the wealthier you tend to be. (Also, the freer you are, the faster you grow.)
Forget the data, you say. Capitalists are exploitative. What about the low wages paid by Walmart? What about sweat shops run by large multinationals in third world countries like Bangladesh, where workers toil jn inhumane conditions? Isn’t that the profit motive at work?
Yes, it is. And I deeply admire Walmart and every company that runs a sweatshop in a poor country. That is because the people who work in Walmart and in those sweatshops do so because it is the best option open to them. They are not fools. They are choosing to work where they do because they deem all other alternatives to be worse, and those evil capitalist behemoths should actually be thanked for actually providing them an option that is better than the best option otherwise available to them. We condescend to those workers when we say they are being exploited. (Indeed, it is possible that we are exploiting them by using them to feed our sanctimony.)
This doesn’t apply to slavery and trafficking, of course, for by free markets I mean markets where consenting adults trade freely under the rule of law. Also, let us not conflate rent-seeking and profit-seeking. Many large companies get together with government to put restrictions on markets so that their market share is protected from competition. Such protectionism hurts the common consumer, and amounts to a redistribution of wealth from the poor at large to rich special-interest groups. Big companies are often the biggest enemies of free markets, and capitalism often unfairly gets a bad name because it is confused with crony capitalism – or ‘crapitalism’ as some call it.
To sum up, the profit motive is not something nefarious, but is actually noble. You can only profit in a free market by improving someone else’s life. And the more you profit, the greater the good you do in the world, the more the value you create. Profit, indeed, is the purest form of philanthropy.
I must admit here the very slight, teeny-weeny possibility that I am being unjust to Nehru. Maybe he had a mischievous glint in his eye when he said that profit was a ‘dirty word’. I can imagine him sidling up to Edwina Mountbatten at a party, gently putting his hand on her waist, and whispering to her, ‘Edwina, my dear, would you like to, ahem, profit with me?’ That certainly could have led to a double thank-you moment.
India is a poor country. We were poor when we became Independent in 1947, and while other countries have lifted themselves to wealth in that much time, we’re still poor. And government policies are the reason for our continuing poverty. For the last 68 years, since a group of white-skinned rulers handed over power to a bunch of brown-skinned rulers, all the governments that have run India have done one thing incredibly effectively: they have redistributed wealth from the poor to the rich.
Yes, you read that right: I’m not talking about redistribution from the rich to the poor, which itself would be an ineffective way of fighting poverty, but from the poor to the rich. They have taken money from the poor in our country and given it to the rich, and, as if to troll us, they have done this in the name of fighting poverty. For that reason, while there are some very rich people in our country, on average, as our GDP-per-capita indicates, we’re still a third-world country.
Let me take a recent event to illustrate what I mean. A few weeks ago, the central government announced that it would not allow foreign direct investment in retail e-commerce. Business Standardreported: ‘Minister of State for Commerce and Industry Nirmala Sitharaman last month met executives of Flipkart and Snapdeal and representatives from the Confederation of Indian Industry (CII) and the Federation of Indian Chambers of Commerce and Industry (Ficci) to assess the impact of FDI on Indian e-commerce companies.’ The government then decided that it needed to protect the local players, and therefore did not allow FDI.
Do you see what happened here? Who benefits from competition? The consumers do. The greater the competition, the more value for money the common consumer gets. This is axiomatic. Our local retailers—all the people consulted by the ministers—were scared that their bottomline would be affected by this competition, so they successfully petitioned the government to block it. The result: the consumers will get less value than they otherwise would; the local retailers will make more money than if competition was allowed. In effect, it is a transfer of wealth from a large, dispersed group of consumers to a small, relatively wealthy interest group.
All tariffs have exactly this effect. Let’s say I like to buy widgets. Local manufacturers sell me widgets for Rs 100 each. Foreign manufacturers, for a variety of reasons from technology to labour, can sell me widgets for Rs 80. But the local manufacturers petition the government to put a tariff on imports, and the government puts a Rs. 30-per-widget tariff on the foreigners, so they don’t bother coming over. The net result: each of us loses a notional Rs 20. Who gets that money? The local manufacturers. What just happened? The government redistributed wealth from the relatively poor masses to a specific relatively rich interest group.
Governments that impose or continue tariffs will do so in the name of protecting the domestic industry. But at whose cost? The French economist Frédéric Bastiat once wrote a great essay called ‘What is Seen and What is Not Seen’, which speaks of the hidden effects of such actions. What is seen here is the good done to one specific group of people (with money usurped from a poorer group, which by itself is surely morally wrong). What is not seen is what the consumers would have done with that money. They would have spent it or invested it, and it would have gone back into the economy, creating growth and employment. But the potential beneficiaries of that are not even aware of what didn’t happen.
Subsidies are also redistribution of the reverse-Robin Hood kind, if in a more obvious way. The wealth taken from the poor is not in terms of marketplace prices or value for money, but is taken directly from your taxes. And while the poor may not file income tax returns, they pay taxes too. Every time your maidservant buys a bag of salt or the beggar at the nearby traffic signal buys soap, they are contributing to the Rich Interest Group Benefit Fund. This is not just poor economics – it is morally wrong.
Here’s the upshot: All interventions in free markets amount to a redistribution of wealth from the poor to the rich. Anything that reduces competition or artificially raises costs for the consumers amounts to just this. Restrictions on FDI, tariffs, licensing processes or regulations that make it harder to open a business or to run it, subsidies; and so on. The interest groups to benefit may differ in each case, and will often include rent-seeking forces within the government, but always, without exception, the wealth will flow, in relative terms, from the poor to the rich.
So why don’t we protest, you ask, given that we are a democracy? Well, think about the winners and the losers here. The costs of such redistribution are dispersed among more than a billion of us, and the benefits are concentrated to a few. If Rs 2 from the taxes you paid last year went as a subsidy to the widget industry, you won’t even know or care. The widget industry, making millions from the accumulated Rs 2s, will care, and will lobby aggressively, contribute to party coffers, buy off politicians and bureaucrats – whatever it takes. That is why government policy is not dictated by the people at large, but by the aggressive lobbying of hundreds of interest groups, out to make a killing at the expense of the poor. That is why government grows and grows, and so many constraints are placed on the only force that can make us wealthy: economic freedom.
A few days ago, I got ready for a meeting, switched on my Uber app, saw that there were no taxis available in my area, and remembered an earthquake.
More than two decades ago, when I was in college in Pune, an earthquake ravaged the region of Latur. I got together with some friends to collect money for relief efforts. We decided that we would go to the affected areas ourselves to figure out the most efficient way of using the money. We hitched a ride on an ambulance of paramedics headed there with medical supplies. While in the affected district, we stopped at a village where around half the houses had been destroyed, and only one grocery store was still standing. “They are the only place one can buy groceries from,” a resident complained to us bitterly, “and they have tripled their prices.” That made me very angry. “Exploitative bastards,” I thought to myself, “feeding off the misery of others.”
Today, I know that my reaction was misplaced – just like the complaints of everyone who’s taken issue with Uber’s dynamic pricing. In case you missed the controversy, cabs and autos in Mumbai recently went on strike to protest against the competition they got from the likes of Uber and Ola. Since people had to get to work, the ironic short-term beneficiaries of this were the very parties they were protesting against. So when demand for a particular product or service goes up and supply can’t keep pace, what happens? That’s right, the prices go up, and Uber uses a mechanism called dynamic pricing which is an incredibly efficient way of arriving at an appropriate price for their service based on demand and supply. So commuters who switched on their Uber apps in the morning were informed that the base price had gone up by as much as 5x. Naturally there was much outrage and shouts of ‘exploitation’ and ‘predatory pricing’, and Uber, rattled by the bad press, announced that they would suspend dynamic pricing for the duration of the strike, and operate at their usual base fare. They put this into effect, and I woke up the next day, switched on my app, and found that no Uber cab was available.
Do you see what happened here? When demand goes up relative to supply, two things can happen. The price can go up to reflect the growth in demand; or, if the price is fixed, there is inevitably a shortage of the product or service in question. In Uber’s case, with their dynamic pricing disabled, all their cars quickly got booked, and whichever customers switched on their apps after that found that there were no cars available. Their need could have been urgent: they may have needed to rush to the airport to catch a flight they couldn’t afford to miss; or take an aging relative to hospital; or head to town for a make-or-break meeting. But even if they were willing to pay more, too bad.
The most efficient way of allocating resources is to let things find their own equilibrium, their own prices. Price controls are foolish and never work. And the demand for them is based on a sort of a fantasy. Fixing the price of a product at a base price below what the market would pay does not mean that everyone gets it at this price—it just means that a lucky few get it and the others don’t. The fundamental truth about the universe is this: everything is scarce. You can’t wish this scarcity away by agitating or legislating against it.
* * *
Speaking of prices, another company that disrupted an industry, Amazon, has announced that it will pay authors on its Kindle direct publishing program according to pages read, not units moved. This is an opt-in program, applying only to self-published authors on their DP platform, but authors on my Facebook timeline have already reacted with horror. Their instinctive aversion to the idea is understandable: commoditization of art and all that. As in the movies, they can imagine a publishing executive in a suit telling them to clip their novel by 30% and have only one 8-letter-word-per-100,000 because more than that diminishes page-turning rate. The horror! But those fears are overblown. I think this development, like almost everything Amazon has done with regard to books, is visionary and good for authors.
Look, there isn’t, and shouldn’t be, a central politburo that decides how much authors get paid according to some high-falutin notions of literary merit. Authors get paid, quite simply, based on copies sold, and how many people want to read them. Literary authors accept that they will not make remotely as much as those who write airport potboilers. That’s just fine, because if they’re good at what they do, they’ll find an audience that appreciates their work anyway.
Amazon’s new system achieves the same end—paying writers according to the demand for their writing—with greater granularity. Good literary writers will still make money – I devour every word Alice Munro or Anne Tyler write—because their work is compelling. But if I get bored with a writer after reading ten pages of his work, I don’t see why he deserves any more of my money than those ten pages represent.
It’s somewhat silly for an author to have a sense of entitlement, and believe that other people should pay him money even if he can’t produce work they want to read. As silly, indeed, as for an Uber user to feel entitled to the service at a lower price than others are willing to pay, at the expense, therefore, of the service provider. Such arrogance is priceless.
This is the 36th installment of my fortnightly poker column in the Economic Times, Range Rover.
A few days ago, I was shooting the breeze with a friend of mine when he told me about a couple of business ventures he was planning, and the investors he’d lined up for them. ‘You won’t believe how gullible they are,’ he said. ‘If there’s one thing I’ve learned from poker, it’s how to find fish and exploit them. And there are so many fish in the business world.’
It’s a good thing I was sipping lemonade at the time and not my usual hot Americano, or I’d have singed myself. Having recovered from the shock of his statement, I shook my head sadly. Poker is a beautiful game, and it can teach you a lot about life. But the lesson my friend had learned was entirely the wrong one.
Poker is a zero-sum game. (A negative-sum game, in fact, if you’re playing a raked game.) The only way you can win money is if someone else loses it. So it’s natural that the key skill in poker lies in exploiting the mistakes of others, sometimes after inducing those mistakes in the first place. It is a mathematical exercise that plays on the frailties of human nature. The game is played by consenting adults, and as your opponents are also trying to exploit you and take your money, they’re fair game. But the real world works differently.
Life is a positive-sum game. This is most eloquently illustrated by what the libertarian writer John Stossel once described, in an old column, as the Double Thank You Moment. When you buy a cup of coffee at a café, you say ‘thank you’ when you are handed the coffee, and the person behind the counter says ‘thank you’ on receiving your money. Both of you are better off. Indeed, the vast majority of human transaction, including all business transactions, are like this. Both people benefit – or they wouldn’t be transacting in the first place.
This amazing phenomenon, which we take for granted, is responsible for the remarkable economic and technological progress of the last three centuries. The economies of nations across the world have grown in consonance with the rise of free markets within them. Think about it: if every transaction leads to both parties benefiting, and a consequent increase of value in the world, then the more people are free to transact, in whatever form, the more we progress as an economy and a society. This is why libertarians such as myself consider it a crime to clamp down on any kind of freedom, be it economic or social.
The positive-sumness of things is unintuitive, and many people reflexively speak of the world in zero-sum terms. For example, socialists, with all their talk of ‘exploitation’, the rich getting richer at the expense of the poor and the need for redistribution. But that is not how the world works; it is not a game of poker. Just as in poker there is no possibility of a Double Thank You Moment, in life, we can all be sharks.
So much for learning the wrong lesson from poker. What does poker teach us about life that is useful to us? Well, the most important lesson I have learnt from poker is not to be results-oriented. Luck plays a huge role in the short term, you only get what you deserve in the long run, so just focus on doing the right thing and don’t worry about the fruits of your actions. The Bhagawad Gita teaches the exact same lesson. Lord Krishna would have crushed the games.
The editors of Okonomos, the economics journal of the Hansraj College in Delhi, asked me to write a guest article for the current issue of their magazine. Here it is.
Imagine one day God comes down to Earth. He’s an old man with a beard, hanging out in the clouds, and he latches onto the wing of a plane and sits there, cross-legged, until the flight lands. A communist man who took a reclining-emergency-row window seat for the legroom has to be taken off the plane on a stretcher, for he faints after seeing 1), a gentleman who is obviously God on the wing of the plane, and 2), the T-shirt God is wearing, which says, in fluorescent pink letters, ‘Free Markets Rule.’
God is instantly met by waiting paparazzi, and an impromptu press conference is convened. ‘Oh God,’ says an overwhelmed young lady, who appears to be on the brink of orgasm, or something equally divine, ‘Oh God, please tell us: why that T-shirt?’
‘I was hoping someone would ask me that,’ says God. ‘Or rather, I made you ask me that. This is why I have come down here. You should know that I’m a bit of an efficiency buff. I made the universe, and then the earth, and then amoeba and fish and monkeys and all you folk, but the thing is, I was not much into micro-management. The universe is full of tons of shit, and fine-tuning every small aspect of each creation would take eternity. And while I do have that much time, why sweat the small stuff, so I decided to just put systems in place and take a nap.
‘When I went to sleep, there was primordial ooze. I put natural selection in place, and as I slept, evolution happened. I knew that something like you humans would eventually evolve, though I must confess I couldn’t have anticipated Honey Singh or Kim Kardashian. Wtf , really? Anyway, I put systems in place for you folk too, so you could reach reach your optimum levels as a species, in the pursuit of happiness. But when I wake up I find, hey, what’s going on here, the most beautiful, elegant aspect of my creation, which was meant to help you reach fulfilment, is being maligned. I’m talkin’ about free markets. So here I am, to put the record straight, and to set you on the right track as a species. So listen up carefully, because I won’t be back to repeat this: I have to rush after this to North-West Andromeda, and I could take quite a while there, a black hole has been acting up, keeps spitting galaxies out, wtf?’
‘Oh God,’ says the young lady we have already met, on the verge of rapture. ‘Tell us everything. Oh God!’
‘Right,’ says God. ‘Listen up, here come some basic truths about economics that are really just common sense, but you may consider them divine revelation if you wish.
‘One: Life is a Positive Sum game. Every time two people make a trade, they do so because both of them benefit. One of my blessed children, John Stossel, illustrated this by coining a phrase, ‘Double Thank You Moment.’ You buy a cup of coffee, and as you pay for it and take the cup, you say to the guy behind the counter, ‘Thank you,’ and he says the same thing to you. Two Thank Yous! And indeed, in every single transaction that takes place across the world, both people benefit, or they wouldn’t have entered into that transaction. This is how productivity goes up, how the amount of value in the world rises, how societies grow prosperous. For my sake, think about how drastic progress has been since the 18th century, when free markets started becoming common. Look at the two Koreas, identical once upon a time, and now so different because of the different paths they chose. And listen up, listen up, to what I say next:
‘Since every trade leads to both parties benefiting and value being created in the world, anyone who comes in the way of free trade anywhere is sinning. Yes, you heard me, it is a sin to get in the way of free enterprise. Tariffs and duties are evil, and regulations and license rajs are man’s way of trying to play God. Don’t you dare!
‘Two: Business is better than charity. Given what I told you above, how does a human being make money? Only by increasing the value in the lives of other people. Put another way, you can only enrich yourself by enriching others. That is exactly what business is. You make money by giving people what they want. The more value you create for others, the more value you create for yourself. Thus, it’s nonsensical to speak of a system where the rich get richer and the poor get poorer. In a free market, that’s not possible. The rich can only get richer if the poor also get richer.
‘And this is why I consider businesses better than charities. Both aim to help others, but the survival of businesses depends on their ability to do so, and I like those incentives better.
‘Three: Money Trickles Up, Not Down. No respectable economist has ever spoken of trickle-down economics. There is no such thing. It is a straw man. (You are all like straw to me, but never mind that.) In a free market, money trickles up, not down. In a business, it is the suppliers and the workers who get paid first, and the consumers who get served, and only then, right at the end, do the owners make any money. They are at the end of the chain. Ask anyone you know who runs a business how it works.
‘Four: Capitalists are among the biggest enemies of capitalism. Raghuram Rajan, a man I created in my own image (aren’t I handsome?), once co-wrote a book titled ‘Saving Capitalism from the Capitalists.’ Note that sentiment. People often think that defenders of free markets are defending the actions of evil capitalists and big businesses gaming the system. Wrong. Established capitalists are the ones who have the most to fear from competition, and they are the ones who lobby governments to manipulate markets in their favour. To take an example, look at India. When India gained Independence, a group of its top businessmen came up with something called the Bombay Plan, which was their vision of what the economy should be like. They wanted an interventionist state, with plenty of regulation and many curbs placed on free enterprise. Historians have presented this in support of the argument that hey, even capitalists wanted unfree markets, so free markets can’t be all that great, right? But think about it: of course the entrenched businesses would want government to keep out competition. Like, duh!
‘So beware of crony capitalists and the governments they partner with. And every time a new regulation or tax or tariff is introduced, consider who it is likely to benefit.
‘Five: Government is a false God. If offends me when people have blind faith in entities other than me. Like government. Governments came into being to serve the people and protect their rights, but instead, have ended up ruling the people and infringing their rights. Think about it, if any individual or group of people forced you to pay a third of your income every year to them, which effectively meant you were enslaved to them till April every year, you’d be pissed, and would correctly call them thieves. If they regulated all your activities, curtailed your freedom even when you were causing no harm to others, and took a cut of all your purchases, you’d feel that a mafia was running your life. But when an entity called government does all this, and sanctimoniously tells you that this is for your own good, and it’s your duty to obey it, you somehow accept it. And furthermore, you expect it to be the solution to all your problems, even when the biggest problems around you are caused by government itself. What a con job!
‘The biggest force in human progress over the last few centuries has been free enterprise. And the biggest enemy of free enterprise – indeed, a sinner in my books – is government. And yet, you worship this false God, while forgetting all about me and the beautiful, natural system I put in place for you, tailored perfectly to human nature. So here’s a commandment for you: Embrace freedom – and question everything that your governments do.’
God stops here, and the young lady we mentioned earlier takes advantage of the lull to shoot a quick selfie with Him. As soon as she clicks the button on her cellphone, God, having delivered His message, disappears. The communist man of the reclining-emergency-row disappears with him. And far away, in North-West Andromeda, an alumnus of JNU is hurled into a black hole and is promptly hurled back out, for it is a universal truth that all transactions should be voluntary.
All right, here are some quick thoughts on the election results:
One, I’m overjoyed that the Congress got hammered. We are close to seeing the end of the Nehru-Gandhi dynasty in politics, which is fantastic. This vile family has caused incalculable damage to our country with its destructive economic policies, which has kept our country poor for the seven decades since independence. It’s impossible to quantify the effect of this, but I believe that this family has orders-of-magnitude more blood on its hands than, say, a Narendra Modi would even if all the allegations against him were true. I’m glad to see them finished as a political force, though it is likely that they will continue to be a political spectacle for a while yet, which I welcome. Pappu provides much amusement.
Two, I’m ambivalent about Narendra Modi but I’m glad he has a decisive mandate. Here’s why I’m ambivalent: I’m classical liberal (or minarchist libertarian, if you will), and freedom matters a lot to me. I want a free society with free speech and free markets. In conventional terms, I’d be right-of-centre on economics and left-of-centre on social issues. The BJP is right-of-centre on both. So I worry about issues like freedom of speech—but remember that the Congress had a deplorable record on this front, and was, in fact, the party that banned the Satanic Verses. We have so far been a reasonably pluralistic society; that, and our (meagre and somewhat inadequate) constitutional safeguards should protect us if the RSS nutjobs get out of hand. One can only hope.
On economics, Modi can’t do worse than the UPA did. Yes, I worry about crony capitalism, but Modi has done a lot to create a conducive environment for small businesses in Gujarat, and his main campaign slogan, ‘minimum government and maximum governance,’ is music to my ears. But it will take a lot of doing, and this is why I’m glad his mandate is so overwhelming, and he is free of the constraints of coalition politics. He now has the power to get the job done, and no scope for excuses. He can carry out the measures that are essential if we are to be the manufacturing superpower that he has said he aspires to make India. (I’d start with labour reforms.) He can reduce the number of ministries at the centre, cut down on red-tapism throughout the country, and reform agriculture and education, moving from a culture of patronage to one of empowerment. He has the power to do all this; we will now see if he can walk the talk.
Three, this is a seminal moment in Indian politics, and the political landscape has changed forever. It is estimated that around 100 million people voted for the first time in these elections, part of a demographic shift that is going to continue. If these new voters alone were a country, that country would be the 12th largest in the world, bigger than Germany, France or the UK. This country is where the Modi wave happened.
While this nebulous wave might have been embodied in the figure of one man, consider what it stands for, and why so many first-time voters exercised their mandate: These people are shrugging aside considerations of identity and patronage politics: caste or the Gandhi family do not matter to them. They want progress, development and also, implicitly, the eradication of poverty, which goes hand-in-hand with the first two. For seven decades, parties have only paid lip service to that last aim, and followed policies that perpetuated poverty and nurtured vote banks. Modi embodies the hope that we can break away from this. Even if he doesn’t deliver, and these new voters, and other new voters to come next time, abandon him, we can see the parameters based on which they are making their choices. Those won’t change. The parties that don’t adapt themselves to this new political marketplace will be ejected with, as Pappu would say, ‘the escape velocity of Jupiter.’
Four, It will nevertheless not be easy for the BJP to replicate this performance the next time around. Consider that a big part of this wave was the party winning 71 out of 80 seats in UP, masterminded by their brilliant strategist, Amit Shah. Now, one can expect the BJP to also win the next UP assembly elections. So at the next Lok Sabha elections in 2019, they’ll face double incumbency in UP. They’ll be fighting on the basis of performance, not promises, and perceptions of the former will depend not just on Modi’s governance, but also extraneous factors like the last monsoons and the state of the world economy. A few percentage points could lead to a huge swing in terms of seats.
Five, Consider the percentages. In terms of seats, the BJP did 6.4 times better than the Congress. In terms of vote share, they did 1.6 times better. (31% to 19% of vote share respectively, nationally.) The Congress is moribund, relying on feudalism, led by morons, and I expect their vote-share to drop. But note that relatively small swings in terms of votes can lead to much bigger swings when it comes to seats in parliament. Don’t take anything for granted in 2019. A 4% swing away from the BJP, for whatever reason, would almost certainly result in a coalition government.
Six, AAP has shown itself to be the political economy’s equivalent of candlelight vigils and online petitions, both futile gestures made by self-righteous people who want to feel good about themselves and lack an understanding of how the world works. Leave aside its constituency, the party itself was a meld of contradictions, defined only in opposition to others. It articulated a faith in government and leftist economic policies that would take our country backwards, not forwards. It claimed to speak for the common man—but the common man chose the chaiwallah over the income-tax officer.
What really got my goat was the coverage given to AAP by our Delhi-centric media. This was a party expected to get at best 10 seats in a parliament of 543. (I expected them to get one [Rakhi Birla], they surprised me and got four [Punjab].) And yet, from the media coverage given to them, you’d think they were a major contender to form the government. William Dalrymple, in fact, referred to Arvind Kejriwal as one of ‘the three front-runners’ in these elections. Immense WTFness.
Seven, What about 2002? Was Modi personally responsible for engineering the riots? If he was, nothing else matters, and that would be enough to condemn him. But was he? I’ve spent a fair bit of time going through the evidence to implicate him (quite convincing) and the defences in his favour (also, weirdly, convincing). I know that almost all my friends will jump on me for saying this, but I no longer believe that it is possible for anyone on the outside to know, for sure, whether he engineered those riots. The facts are such that what you choose to believe will be what you want to believe, and will reveal more about you than about him. This is an epistemological position, not an ideological one; and I therefore have no choice but to consider him innocent until proven guilty, though he can be proven neither innocent nor guilty, but I know where the burden of proof lies.
In any case, as I’ve written before, I believe that Modi acts purely out of self-interest and not ideology. At the centre, he will do whatever he believes will increase his political capital. I don’t think communal violence will be part of that equation. I think development will. That gives me hope.
We human beings always seek happiness. Now there are two ways. You make yourself happy by making other people unhappy—I call that the logic of robbery. The other way, you make yourself happy by making other people happy—that’s the logic of the market. Which way do you prefer?
Or what John Stossel once called ‘The Double “Thank You” Moment’. It’s a ridiculously simple insight, which makes it all the more amazing that so many people just don’t get it.
Posted by Amit Varma on 14 October, 2012 in
So here’s the story: 15 dead rats land up in the drains of St George’s Hospital in Mumbai. A massive stink ensues (literally), and the hospital staff can’t figure out where the smell is coming from. So:
The hospital’s staff tried different methods - burning incense sticks, spraying room refreshers - to ‘clear the air’, but to little avail.
And this is exactly the way in which the Indian government deals with our country’s poverty. Every single government measure to tackle poverty is equivalent to incense sticks and room fresheners—it smells good for a while, and then the stink is back. The rats remain.
And yeah, if you read this blog regularly, you know what I think the root cause is: the lack of economic freedom. If only Rajaji, Patel and Prasad had their way 60 years ago instead of Nehru...
We don’t really have a problem that there aren’t enough television sets in our society. We really don’t. I mean we did once. I mean it used to be that some people had television sets and some people don’t. We don’t have that problem anymore in America.
When somebody writes the human history of Americans, the fact that 25 years from now we will have done most of the following: cure Alzheimer’s, apply stem cells to prevent diabetes, develop approaches that enable most of us to be the weight we want to be, rather than the weight we are, and find a solution for dementia, the fact that 25 years from now we will have done not all of those things, but we will have done most of those things, I think that looms enormously large.
If you look at the price earnings ratio for technology companies relative to the price earnings ratios for all industrial companies, you take that ratio, PE technology divided by PE industrial, you can plot that ratio over the last 40 years, and it is at the lowest point that it’s ever been.
So if you look at the large tech sector, it’s very, very hard to see a bubble. [...] What is true is that the Internet, the last time there was an Internet bubble, was 120 million people dialing up.
The Internet today is two billion people and two billion mobile devices, with wireless connectivity at a far more rapid pace. Today, the businesses have cash flow, which they didn’t ten years ago. So I think it’s a little facile to assume that just because the numbers are big, that it’s obviously a bubble.
There’s a section in which Summers talks about the different styles of the two presidents he’s worked for, Bill Clinton and Barack Obama. Most interesting.
* * *
And yeah, I’m encouraged by his prediction that 25 years from now, I’ll be the weight I want to be. An exercise regime, in these circumstances, seems short-sighted.
It was both ironic and poignant when, a few days ago, Anna Hazare remarked that his crusade for the Lokpal Bill was akin to a second freedom struggle for India. Hazare is fighting against the right things in the wrong way: as I wrote a few weeks ago, corruption arises from an excess of government power; creating an alternate center of power, as the Lokpal Bill attempts to do, which is neither accountable nor democratically elected, solves nothing. That said, Hazare’s rhetoric, borrowed from the likes of C Rajagopalachari from decades past, was correct: India does need a second freedom struggle.
Every nation is a work in progress, but India is more so because our independence was a job half finished. In 1947, we gained freedom from the British—but not from oppression. As the country heaved a long sigh of relief at gaining political independence, a new set of brown sahibs took over from the white ones. The great hope of this new democracy was that it would lead to a government that would serve us—but we found ourselves with one that continued to rule us, with laws either directly retained from the British, or even more oppressive than those that existed before. We were colonized by our own people, and eventually enslaved by ways of thinking that saw a mai-baap government as the solution to all our problems—even when it was often the source of them.
There is no Mahatma Gandhi to lead this second freedom struggle, and most Indians, complacent with how things are, would not even think it is required. But if it was to take place, what would its aims be? What would it fight to change? The goal of that first freedom struggle was to free ourselves of a colonial power; the aim of this notional second freedom struggle should be to drastically reform the system that denies us freedom in so many areas of our lives. From the classical liberal/libertarian perspective, here are a few things I’d love a second freedom struggle to strive to achieve.
One: Limit the power of government
As things stand, we are ruled by a government as oppressive as the British were. Ideally, the function of governments should be to protect our rights and provide basic services. But our government is a bloated behemoth whose tentacles, like a modern-day Cthulhu, extend into every area of our lives. This is hardly surprising: those in power are always looking for ways to extend their power, and government, if adequate safeguards are not in place, just grows and grows and grows. This is exactly what has happened in India—our government functions like an officially sanctioned mafia, controlling our lives and curtailing our freedom. It’s all a bit of a scam.
Two: Unleash Private Enterprise. Remove the License and Permit Raj
The liberalisation India carried out in 1991 was a half-hearted one, forced upon us by a balance of payments crisis and not out a genuine desire for change. The reforms halted once the crisis eased, and the License and Permit Raj largely remains in place. It has stopped us, in the past, from being the manufacturing superpower we should naturally have been, given the abundance of cheap labour in this country. It continues to act as a huge shackle on private industry: I’ve pointed out earlier the abominable fact that you need 165 licenses to open a hotel in India, including ““a special licence for the vegetable weighing scale in the kitchen and one for each of the bathroom scales put in guest rooms.” Every businessman in India has to go through surreal hurdles to go about his work, and given that businesses exists to fulfil the needs of the people, for how else can they make profits, it is doubly criminal of an inept government to stand in the way of private enterprise. In the areas where it has been allowed to operate, look at the impact private enterprise has had: consider how many years it took to get a telephone from the state-owned MTNL in the 1980s, and how quickly you can get one today. We are a resourceful people, and every problem of India can be solved by private citizens—if they’re allowed that freedom.
Three: Reform the Indian Penal Code
The IPC is an abomination created by the British in the 19th century to make it easier for them to rule us, and to impose their Victorian morality on us. That it still exists is a disgrace. It contains ridiculous laws like Section 295 (a), which makes it a crime to “outrage religious feelings or any class” and Section 153 (a), which criminalizes any act “which disturbs or is likely to disturb the public tranquility”: both of these have been used to clamp down on free speech in the country. So has Section 124 (a), which aims to punish anyone who “brings or attempts to bring or provoke a feeling of hatred, contempt or disaffection towards government established by law,” and could be applied to this column, as these laws are open to interpretation and discretion. Section 377, which effectively criminalised homosexuality, has thankfully been overthrown in a court of law, but other archaic laws remain on the books, including some that punish victimless crimes. Many of these threaten our freedom directly.
Four: Ensure Free Speech in India
The IPC alone cannot be blamed for the absence of free speech in India. Our constitution itself does not protect it, and while Article 19 (1) (a) pays lip service to it, Article 19 (2) introduces caveats to it under the guise of “public order” and “decency and morality”. Practically anything one says could be a threat to public order, depending on how it is interpreted, which makes it easy for those in power to clamp down on those without. If we don’t even have freedom of expression, how can we call ourselves a truly free country?
It’s ironic that Mahatma Gandhi’s famous Dandi March was held in protest against an unfair tax; most taxes today are far more draconian. Sit down sometime and calculate what percentage of your income goes into taxes: if you pay 33%—chances are you end up paying more, if you include indirect taxation—it means that until the end of April every year, you are effectively earning for the government. This is freedom?
Six: Treat the Right to Property as Sacred
In 1978, the 44th amendment removed the right to property from our list of fundamental rights. Even had this not happened, the poor of India are habituated to having their property snatched from them: eminent domain has long been used by corrupt governments in a crony capitalism system to line their own pockets. One of our biggest problems is that even after so many decades of independence, clear land titles do not exist in many parts of the country. (My fellow columnist, Mohit Satyanand, wrote about this a few weeks ago, as did Devangshu Datta in an old piece.) This makes it ridiculously easy for a ruling government to infringe on the rights of its poor people—and it stands as a huge impediment to economic growth.
Seven: Reform Schooling
The state of education in this country makes for black comedy: the government pours more and more money into education, and after decades of this, the results remain dismal. There are various complex reasons for this government dysfunction, but a huge one is that the private sector is hugely constrained from entering this area. As I wrote in this old piece, even desperately poor people have shown a preference for those low-cost private schools that do manage to exist, despite governmental hurdles, than inefficient government ones. It is ironic and tragic that while private enterprise is allowed to flourish in trivial areas of our lives, like the production of shampoos and potato chips, it is constrained from competing with the government in this most crucial field. I am not recommending that the government stop spending money on education: just allow private enterprise to flourish as well. Consider the cost and quality of air travel in India when we only had Indian Airlines at our service—and look at what it has become today. Isn’t education far more crucial to our progress as a nation?
Eight: Reform Agriculture
We romanticize the farmer, and we want to keep him poor. It is shocking that 60% of our countrymen work in the agricultural sector: the equivalent figure for most developed countries is in single digits. There are various reasons for this, one of many being that farmers are not allowed to sell agricultural land for non-agricultural purposes. This prevents an escape route for many farmers, and also hampers industrial growth in many parts of the country, which would automatically provide alternative avenues of employment. More industrialisation would lead to more urbanisation and greater economic growth, but we hamper this process right at the start. It is a vicious circle that traps poor farmers in poverty. As Manmohan Singh once said, “our salvation lies in getting people to move out of agriculture.” He is right, which is ironic, given that he is our prime minister and is doing exactly nothing in terms of reforming that sector. Words come so easy.
I can think of many other worthy aims, such as making government more local and less centrally directed, so that it is more responsive and accountable, and reforming our legal system. I’m sure you can add to this list. But at one level, India’s second freedom struggle remains a pipe dream. We are a nation colonized by the religion of government, and we display a lazy reverence for it. We look for specific quick fixes to problems, instead of recognising that many of them emanate from structural issues with our system of government—and from how we think about it. What is worse is that we largely do not even think of ourselves as unfree—so who needs a freedom movement then? Do we? What do you think?
I’ve watched it in utter delight about five times now, and each time I notice wonderful new details. Like Say and Mises being in Hayek’s corner during the boxing match, and Malthus in Keynes’s. It’s a brilliant production, and Russ Roberts (of Cafe Hayek) and John Papola deserve much credit.
Trivia: The security guard in that video is Mike Munger, the libertarian economist.
The embedded video above is a sequel to this one, by the way. I prefer part 2, as it happens.
And yes, regular readers of this blog would know whose side I’m on. Much of my worldview is shaped by Hayek, who is one of my intellectual heroes.
I have often said that economics, to the extent it is a science, is like biology rather than physics. Let me try to make that clearer. By biology, I do not mean the study of the human cell, which we have made a great deal of progress understanding though there is more to learn. I am thinking of biology in the sense of an ecosystem where competition and emergent order create a complex interaction of organisms and their environment. That sounds a lot like economics and of course it is. But we would never ask of biologists what the public and media ask of economists. We do not expect a biologist to forecast how many squirrels will be alive in ten years if we increase the number of trees in the United States by 20%. A biologist would laugh at you. But that is what people ask of economists all the time.
Beautifully put—and you can make the same comparison with medicine. I am just reading The Emperor of All Maladies, Siddhartha Mukherjee’s magisterial history of cancer, and the similarities between medicine and economics in the last century are striking. You see hubris, false certainties, ideological fervour, and mistakes on a giant scale that cause the suffering of millions and are diagnosed only in retrospect. Both fields have grown by quantum leaps and achieved much: Just look at the radical increase in life expectancies and living standards in the last 100 years. But complexity still abounds, cancer still kills, economies still fail, and humility is always a good thing.
In 1944 a group of seven businessmen, including JRD Tata, GD Birla and Kasturbhai Lalbhai, came together to produce a document titled A Brief Memorandum Outlining a Plan of Economic Development for India. As the name indicates, it outlined an economic vision for soon-to-be-independent India. It envisioned a mixed economy with strong government intervention in markets, a huge public sector, and much protectionism so that Indian companies would be sheltered from foreign competition. Jawaharlal Nehru’s eventual economic policy would be on the lines of what this document laid out, and one of its authors, John Mathai, was even a finance minister in Nehru’s government. Because ‘A Brief Memorandum Outlining a Plan of Economic Development for India’ is a most unfunky name, the document eventually came to be called The Bombay Plan. (Just as Hindus may be offended at their religion being associated, in name only, with the Hindu Rate of Growth, I am not too happy about that document being named after my beloved city. Ah, well.)
In his fine book, India After Gandhi, Ramachandra Guha cites the Bombay Plan as an example of the support Nehru’s Fabian Socialism got from industrialists of the day, and writes, “One wonders what free-market pundits would make of it now.” At a colloquium of classical liberals I attended a few days ago in Bangalore, one attendee wondered why more industrialists in present-day India don’t speak up for economic freedom. The answer to this is simple: big business is as much the enemy of free markets as big government is.
The cornerstone of free markets, competition, is great for consumers, as it delivers better-quality products and services at lower prices. But it is terrible for established businesses, which are constantly under pressure to keep prices low and salaries high, and may be wiped out by more innovative and efficient competitors. There’s nothing they’d like more than high entry barriers in their industry, so that their place is secure. Thus, to expect the established industrialists of the 1940s to support free markets would be naive: economic freedom is actually against the interests of big business. The journalist Seetha Parthasarathy pointed out at the colloquium I attended last week that the Swatantra Party, which spoke up so ardently for free markets in the 1950s and ‘60s, hardly got any funding from businessmen and industrialists of the day. That makes perfect sense: they would have felt threatened by it.
This is why it irritates me no end when critics of free markets point to the evils of big business as a repudiation of our principles. The truth is that a libertarian or classical liberal is as wary of big business as a socialist is. Indeed, now that communism is dead, one of the greatest threats to freedom everywhere is not socialism, but crony capitalism. To look after the interests of the common man, we must beware of the cronies.
* * * *
Death, taxes and crony capitalism are inevitable. When I am in a pessimistic mood, generally after a bad meal or a spell of television surfing, I lose hope that we will ever have economic freedom. Free markets, indeed, seem slightly utopian. After all, we don’t live in an economy that is a blank slate. We live in times of big government. Big governments only get bigger, not smaller. (This is true even in the West, when the size of government expanded even under fiscal conservatives like Ronald Reagan and Margaret Thatcher.) It is not in the interest of those who run governments to curtail their power or the money available to them. (Like, duh.) It is a beast that keeps on growing, and feeding on us.
Power and money always go together. The more power government has, the more it can subvert markets, the more big business runs to it, with big money, to safeguard its own interests. Crony capitalism is inevitable. Big government is one ass cheek, big business is another, and together they’re shitting on capitalism.
* * * *
What about the recent financial crisis in the US? The notion that it illustrates the inadequacy of free markets is a simplistic one, like most narratives generated by the media. The crisis came about because of a melange of complex factors, and we’ll be debating the respective merits of those for decades. There is no shortage of actors to blame. The low interest rates of the Fed in the early 2000s played a key role. (It amuses me when Alan Greenspan is sometimes described as a libertarian. Whatever his youthful infatuations may have been, the chairman of a central bank can no more be a libertarian than General Dyer was a freedom fighter.) Defenders of free markets will also point to the Community Reinvestment Act, and the role played by Fannie and Freddie, both quasi-government entities. But it is true that there were structural issues with the way markets themselves functioned at the time.
Short-term incentives in the finance industry weren’t aligned with long-term interests. If you worked in Lehman Brothers, and had to choose between chasing massive short-term profits (with the consequent bonuses for yourself) that carried a long-term risk to your company, and a prudence that would put you out of step with your peers, for absolutely no benefit to you and the risk of losing your job, what would you do? C’mon, it’s human nature. As Chuck Prince famously said, “As long as the music is playing, you’ve got to get up and dance.”
How does capitalism deal with this? Simple: when companies screw up, their bottomline gets affected, and sometimes they go bust. The learning percolates through the markets, and the incentives change for future players. The problem here is that when the long-term consequences of their short-term behaviour hit the finance industry, the government stepped in. Lehman Brothers was allowed to go bust, but others were bailed out on the grounds that they were ‘too big to fail’, and that their failure threatened the entire economy. (Was this really so? We’ll never know. We’ll just have to take their word for it.) The result: Moral Hazard. The sort of short-term risk-taking that led to the crisis wasn’t punished, and the incentives haven’t changed. On the contrary, the financial whizkids out there will now be further emboldened to keep taking wild risks, secure in the knowledge that when things go bad, the government will bail them out.
What would you call this? Free markets? I don’t think so.
* * * *
Until 1991, capitalism in India was crony capitalism. The license raj ensured that the markets were a tijori and the government held the key. All big industrialists had liaison offices in Delhi whose job was to deliver adequate chai-paani to government officials in exchange for licenses and other favours. Money chased power; power sought money.
The liberalisation of 1991 didn’t really change much. Firstly, it was a limited liberalisation, and most markets in India remain unfree. Secondly, the government still retains enormous power. As this paper (pdf link) points out, crony capitalism continues to thrive in India. R Jagannathan wrote in DNA last year: “In his current avatar as PM, Manmohan Singh, architect of the initial reforms involving delicensing, deregulation and downsizing, has presided over the largest expansion of government spending in living memory. In the current fiscal year (2009-10), government will borrow more than Rs 400,000 crore (probably Rs 500,000 crore, if you consider off-budget items like oil bonds), a figure that’s larger than the entire central expenditure for 2004-05, the first year of the UPA. Large government is invariably accompanied by crony capitalism. Reason: when government spends more, private companies do more business with it.”
And here’s an excerpt from a speech Manmohan gave in 2007: “Are we encouraging crony capitalism? Is this a necessary but transient phase in the development of modern capitalism in our country? Are we doing enough to protect consumers and small businesses from the consequences of crony capitalism? [...] Do we have a genuine level playing field for all businesses? What should be done to inject a greater degree of competitiveness in the industrial sector?”
One has to wonder, why on earth was he asking those questions? He’s the prime minister, no?
* * * *
So should I be pessimistic? Naysayers of free markets argue that they’re a utopian construct, and that a perfect free market, with a government that limits its role to administering the rule of law and enforcing contracts, does not exist anywhere. Perhaps. But here’s the thing: perfect good health is also a utopian construct, and there is no one in the world who is perfectly healthy. And yet, it is something to aspire to, and as individuals, we’re constantly trying (or should be trying) to get as close to it as possible. (Just don’t ask me what I had for dinner last night.) Similarly, it is my contention that free markets are the surest route to prosperity, and we should keep fighting to make our markets as free as possible. We, the people, the consumers, are the biggest beneficiaries of this. Not the fat-ass businessmen, in bed with the sleazy politicians, who just want to milk us dry. As long as we are aware of this, there is hope—for we do live in a democracy, don’t we?
Postscript: My thanks to Chandrasekaran Balakrishnan, Mana Shah, Raj Cherubal, Sumeet Kulkarni, Deepak Shenoy, Vikramjit Banerjee, Parth Shah, Seetha, Arun Simha, Sunil Laxman and Devangshu Datta for their part in discussions that helped me refine my views on this subject.
Reuters informs us that Air France has denied that it plans to charge overweight passengers extra. There had earlier been speculation that they could “bar obese passengers from flying.” Well, that’s been clarified.
Here’s the interesting thing, though: fat passengers do cost more for the airline to fly then thin passengers, as greater weight leads to more fuel consumption. It would politically incorrect and logistically impractical to charge passengers according to weight, of course, so the airlines don’t make that a factor in their pricing. As a result, thin passengers end up subsidizing fat ones.
I would have complained about this bitterly in my college days, when I was slim like a male Kate Moss. But I couldn’t afford to fly in those days, and had no stake in the matter. Today, I’m probably one of those benefiting from the subsidy, so you won’t find me complaining anytime soon. It’s all worked out well.
The Sensex has just touched “a 23-month high.” This will, I have no doubt, make many investors feel bullish. And yet, that is an absolutely inappropriate response. If I had money in the stock market, I’d be bearish right now.
Hundreds of poor Hindu villagers in eastern India have refused to hand over a rare turtle to authorities, saying it is an incarnation of God, officials said on Tuesday.
Villagers chanting hymns and carrying garlands, bowls of rice and fruits are pouring in from remote villages to a temple in Kendrapara, a coastal district in eastern Orissa state.
“Lord Jagannath has visited our village in the form of a turtle. We will not allow anybody to take the turtle away,” said Ramesh Mishra, a priest of the temple.
Ok, my question to you: What does the Jagannath Turtle have in common with Naxalism?
Answer: They are both indicators of the fucked-up lives of so many of the people of rural India. There is no development, there is little chance of upward mobility, there is often no law and order. Their lives are so screwed that they actually derive hope from a turtle that they think is Lord Jagannath. How sad is that?
And Naxalism is born in that same well of despair and anger.
Needless to say, the state of these people justifies neither Naxalism (or Maoism, or whatever you want to call it) or such stupid superstition. Anyone who resorts to the kind of violence the Maoists have taken up must be crushed. Equally, a belief that a turtle is a reincarnation of a deity should be given no respect whatsoever. (Leave the turtle aside, anyone who believes in a deity to begin with… never mind.)
But while we crush the Naxalites and go WTF over the turtle worship, it makes sense to remember why people give in to such madness. It is because of how abject their lives are. And if we don’t sort that out, we’ll have more batches of Naxalites after this one is dealt with, and more turtle gods. (A leech deity makes much more symbolic sense, actually.) There’s no point boasting of our ‘soft power’ and our IT revolution while 60% of the population survives on agriculture. (The figure in developed countries is around 5%.) It’s like showing off a gym-toned body with much muscle while there’s a cancer in the liver and a farm of worms in the intestines. That’s fool’s vanity.
I am not a fan of Ayn Rand’s work: Her prose is mediocre and her novels are cheesy. Even though I agree with many of her beliefs, that is neither here nor there, as they weren’t original to her, and the brand of classical liberalism (or minarchist libertarianism) I believe in took off at least a century earlier than her. So I am never quick to defend Rand when she is being criticized. I’ll make an exception, though, for a recent piece on her in The New York Times by Adam Kirsch.
In his piece, a review of a biography by Anne C Heller, Kirsch relates how Bennett Cerf, the head of Random House, wanted to edit out Galt’s speech from Atlas Shrugged. Rand refused. Then:
Cerf offered Rand an alternative: if she gave up 7 cents per copy in royalties, she could have the extra paper needed to print Galt’s oration. That she agreed is a sign of the great contradiction that haunts her writing and especially her life. Politically, Rand was committed to the idea that capitalism is the best form of social organization invented or conceivable. [...]
Yet while Rand took to wearing a dollar-sign pin to advertise her love of capitalism, Heller makes clear that the author had no real affection for dollars themselves. Giving up her royalties to preserve her vision is something that no genuine capitalist, and few popular novelists, would have done. It is the act of an intellectual, of someone who believes that ideas matter more than lucre.
This is a strange comment, and I have two points to make:
One: Rand might well have agreed to the chop on commercial considerations alone. She might have calculated that the book would sell more copies if it included the speech, and that the extra royalties from those extra sales might offset the 7 cents per copy that she gave up.
Two: “Genuine capitalists” would look to serving their self interest as much as possible. But they need not view this in purely monetary terms. Rand might have placed a higher value on spreading her ideas in the world than on merely making money. It would then be entirely rational for her to accept a notional monetary loss for the sake of keeping a speech that many of her supporters today regard very highly. This is entirely consistent with being a capitalist.
The deal between Rand and Cerf was one between two private parties that involved no coercion. Both of them got what they wanted. It might even have ended in a double ‘thank you’ moment. How on earth could it non-capitalistic?
On a personal note, I regard myself as a capitalist as well. And pretty much all the important decisions I’ve made in the last few years have reduced my income vastly. First, I opted to give up a senior job in journalism to become a freelancer; and then, I opted to give up freelancing to focus on writing novels. In the short run, this has decimated my bank balance. And yet, I have no regrets over these decisions—and they are not noble in any way. They arise out of sheer self-interest. I’m a greedy capitalist pig.
But Heller and Kirsch would probably think otherwise.
Ashok Malik writes in The Hindustan Times that the BJP has hurt itself by chasing “straightforward capital gains” in a few states. He is right—but this is true of all parties in all states. People join the pursuit of power because they want the spoils of power. I would wager that not a single prominent politician in the country today gives a damn about public service.
This is not a problem by itself. We are all driven by self-interest, and that’s worked well for us. Human progress is based on individuals serving the needs of others for their own profit. In politics, this would work just fine if we held our politicians accountable for not serving us.
Sadly, in India we have retained the feudal mindset that our governments are there to rule us, not to serve us. With our apathy, we allow them to loot us—for their capital gains are really our capital to begin with. Our political parties are nothing more than competing mafia clans. If the BJP is down right now, it’s not because they are crooked, but because they’re not as smart as the other crooked players in the game. Such it goes.
I won the prize in 2007, and the prize candlestick, which I can see now across the room, is one of my treasured possessions. The prize money enabled me to give up freelance journalism and focus on writing novels, an effect that, for the Bastiat organisers, was surely in the category of “that which is not seen.” I’d count it as a one-off positive externality, so all’s well.
This year, the Bastiat guys also instituted a separate prize for online journalism. I was one of the judges for this, along with Jimmy Wales, Esther Dyson and Scott Banister, and was blown away by the quality of the entries I read. I’m delighted that the prize has been shared by Daniel Hannan and Shikha Dalmia—both of them deserve it, and this is a fitting result.
Oh, and here’s the column I wrote after I won the Bastiat Prize in 2007: “Remembering Frédéric Bastiat.” And here are the three pieces I’d entered that won me the prize:
There’s a Facebook status message meme going around that goes like this:
[Your name here] thinks that no one should die because they cannot afford health care, and no one should go broke because they get sick. If you agree, please post this as your status.
This is about as useful as candlelight vigils and online petitions. I could just as easily come up with a status message meme that goes thus:
[Your name here] thinks that no one should die or be poor, and no one should feel sad or lonely. If you agree, please post this as your status.
You get the drift. No doubt all these things are desirable, but stating that is kind of obvious. The big question is, how are these things to be achieved? In answering that, hazaar thorny issues crop up, and no one solution is a panacea. (Some, in fact, run counter to one another.) All that a Facebook status message of this sort does is help you make a statement about yourself. So why not simply put up a message that says:
[your name here] is a kind and compassionate person, and you should be impressed by that.
There. Cut to the chase!
On a personal note, a friend SMSed today in great concern, asking if all was well with me. Apparently he saw an unusual lack of activity on India Uncut, and got worried. Well, yes, I’ve been immensely lax recently, but I’m back now, and intend to be regular. I promise. Smile now. Say cheese. Who’s a good reader now, bolly wolly golly?
Update (sep 5): Sriram Gopalan writes in to share his FB status message:
I am an evil, evil person who thinks poor people should die without healthcare, so that the rest of us can harvest their organs. If you agree, please make this your status for the rest of the day.
Some characteristics unite Indians. The most visible is our opportunism. One good way to judge a society is to see it in motion. On the road, we observe the opportunism in the behaviour of the Indian driver. Where traffic halts on one side of the road in India, motorists will encroach the oncoming side because there is space available there. If that leads to both sides being blocked, that is fine, as long as we maintain our advantage over people behind us or next to us. This is because the other man cannot be trusted to stay in his place.
But the point is, when these same Indians go abroad, they’re following the traffic rules, not cutting lanes and so on. The behaviour isn’t ingrained into us—it’s contextual. Break rule in India, where sab chalta hai; be a model citizen in Singapore, where you’ll get into trouble otherwise.
Equally, everyone’s opportunistic. It’s a human characteristic, not an Indian one. How much we follow rules depends on the incentives offered. Abroad, as in Singapore, the laws of littering may be strict; or your peers may frown upon loutish behaviour, which is disincentive enough. In India, laws, where they exist, aren’t implemented; and littering and jumping lanes in traffic is normal, not deviant, behaviour.
Aakar speculates that many of the aspects in our culture might have come from our religion. For example, he says that “the Hindu gets his world view—which is zero-sum,” from Hinduism’s recognition that “the world is irredeemable.” In my view, you’d find that kind of zero-sumness in every developing society, where most people are poor, and accessible resources are relatively scarce. It has more to do with economics than religion. (And some might argue, biology, as our genes were shaped in pre-historic times when life must have seemed zero-sum, in addition to nasty, brutish and short.) But as societies progress, they grow more and more aware of the non-zero-sumness of life, and cultural change happens. So give it a couple of decades and then see.
According to Alan Greenspan, sales of men’s underwear should go down during a recession, as “hardly anyone actually sees a guy’s undies, [so] they’re the first thing men stop buying when the economy tightens.” By this reasoning, the recession hasn’t affected me—I bought much new underwear recently.
That said, writers in India are immune from a recession—we earn nothing anyway.
Local government officials in China have been ordered to smoke nearly a quarter of a million packs of cigarettes in a move to boost the local economy during the global financial crisis.
The edict, issued by officials in Hubei province in central China, threatens to fine officials who “fail to meet their targets” or are caught smoking rival brands manufactured in neighbouring provinces.
Even local schools have been issued with a smoking quota for teachers, while one village was ordered to purchase 400 cartons of cigarettes a year for its officials, according to the local government’s website.
Yes, that’s The Telegraph, not The Onion. Reality is reinvented as farce. The thing is, this is no less absurd than any protectionist measure. Think of any subsidy or tariff, and at its heart it amounts to forced cigarette smoking. We don’t laugh about most of that, though.
(Link via email from Aniket Thakur.)
I couldn’t help but remember Frédéric Bastiat when I read that news, so here’s a reminder that the Bastiat Prize, which I won in 2007, is now open for submissions for 2009. They have an additional prize for online journalism from this year, so all ye freedom-loving bloggers, go forth and enter.
... is one of the most important freedoms there is. It is at the heart of human progress, for the only way we can improve the quality of our lives is by trading with others to mutual benefit. This is true at the individual level—and it is true when it comes to trade between nations. This is so apparent that it shouldn’t even need to be said—and yet, it is forever under threat.
Check out the wonderful video below about the perils of protectionism—it looks to the Great Depression, and shows how the Smoot-Hawley tariff, by severely constricting free trade, harmed economies across the world. It is relevant to America today, where protectionism is in danger of making a resurgence—and it’s relevant to India as well.
Aakar Patel has a piece in the latest Lounge where he compares LK Advani with Manmohan Singh. His analysis of Advani is spot on, and I’m with him on his opposition to the man. But he looks at Singh through rose-tinted glasses:
At 30, he understood the problem with Nehru’s economic model. At 59, he got the chance to set it right, and he did.
This is flat-out wrong. In the little I’ve read of his writings and speeches before 1991, Singh doesn’t say a word against against Nehru’s economic policies, and in fact seems to support the Fabian Socialist framework he built. I have the transcript of a seminar on price controls that was held in the early 80s, and Singh, in his speech, speaks just like a Nehruvian apparatchik. His reputation as a reformer came after 1991.
And the reforms of 1991 came about not because of the inner conviction of Singh or Narasimha Rao, but because there was simply no choice. We faced a severe balance-of-payments crisis, and the IMF loan we needed to save the country was conditional on reforms being carried out. And so they were, and worked wonderfully well. However, once that crisis passed, the pace of reforms slowed.
In his years as PM, Singh has carried out very few reforms. This is not entirely his fault: the government depended on the support of the Left for much of this time, and they blocked many of the reforms that we need. But he also supported schemes that Nehru and Indira would have been proud of, such as the NREGA—though one could argue that this was Sonia Gandhi’s baby, and he didn’t have an option. Regardless, nothing he has done in these last five years justifies his reputation as a reformer.
That said, I obviously support Singh over Advani as PM: the divisive politics of the BJP is a deal-breaker for me, though this is a matter of degree, as the nature of Indian politics dictates than any party that wishes to do well must be divisive. Such it is.
I’m a great admirer of Barack Obama, as regular readers of this blog would know. But I have to admit, Kunal Sawardekar has a point.
Allow me to be anal here and point out that when I say I am “a great admirer” of Obama, I mean that I admire him greatly, and not that I admire him and I am great. Just in case, like, you thought otherwise.
If you want a real bonus outrage, consider this: The operation getting the biggest taxpayer subsidy of all - the federal government - pays bonuses to its employees too. This year it plans to hand out about $1.6 billion of bonuses, despite running more than $1 trillion in the red.
Ironically, many of the people who have cried themselves hoarse about how a private company is misusing taxpayers’ money have nothing to say about the astronomical wastage that takes place of the taxpayers’ money that is actually with the government—in any country. It is almost as if the government has a right to that money, for they are our rulers and we, their subjects—and not the other way around.
And here’s a thought—it’s much harder to bail out a government than an insurance company or two.