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About Amit Varma

Amit Varma is a writer based in Mumbai. He worked in journalism for over a decade, and won the Bastiat Prize for Journalism in 2007. His bestselling novel, My Friend Sancho, was published in 2009. He is best known for his blog, India Uncut. His current project is a non-fiction book about the lack of personal and economic freedoms in post-Independence India.




Bastiat Prize 2007 Winner

Recent entries

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Misogyny is the Oldest Indian Tradition

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Beware of the Useful Idiots

This editorial by me appeared today in Pragati. Many of the intellectuals who supported Narendra Modi in 2014 should have…

Bollywood Explains Economics

A few weeks ago, I started a new section in Pragati, the online magazine I edit, called Housefull Economics. The…

25 June, 2017

Wonder Woman, the God of War and Public Choice Economics

This essay, which I co-wrote with Kumar Anand, was published in Pragati, the online magazine I edit, on June 8.

The most beautiful moment in the film Wonder Woman is a small, human moment. Diana Prince, out in the real world for the first time, makes her ice cream-eating debut while rushing somewhere in a crowded marketplace. Blown away by its taste, she turns to the vendor with a surprised smile on her face and tells him, “You should be very proud!” She learns one important truth about the real world: ice cream is awesome. Later in the film, she learns another.

(Spoiler alert: we give away a crucial part of the plot in the next paragraph, so stop reading if that matters to you. But do come back later after watching the film!)

The reason Diana aka Wonder Woman steps out in the real world is that she hears that a terrible war is raging, and concludes that it is caused by the God of War, Ares. She has been raised by the Amazons to kill exactly that one God when he returns to action, and she now decides to fight him and end this war. She heads forth into battle, decides that German General Ludendorff is Ares, and goes off to fight him. She catches him, kills him, and then finds to her astonishment that the war continues to rage around her. Killing the God of War made no difference.

Moments later, she discovers that the God of War was someone else, not Ludendorff. But killing that dude won’t make a difference either, because of one essential truth: Humans are human. They are flawed; they will fight. You don’t end war by killing the God of War.

The film ends on a syrupy, sentimental note, as she finds notes of redemption in these flawed humans, but that moment of dissonance she faces before that was familiar to us. We, too, have faced that dissonance in our lives, when a God died and we realised that the problems in our world are rooted in human nature. That God was Government.

Public Choice Economics

We grew up in India as believers in the biggest religion in the world: the religion of Government. Like all religions, this one claims to reveal the One Big Truth, and worships the biggest God of all. It holds that Government is the solution to all our problems. Put in rational terms, we are taught that markets are imperfect, market failures are inevitable, and we need Government to set everything right. This was economic orthodoxy until recently.

But in the middle of the last century, a new academic discipline sprung up that aimed to unmask the true nature of this false God: Public Choice Economics. Pioneered by scholars such as Gordon Tullock and James Buchanan, Public Choice Economics had one key insight to offer: that governments aren’t supernatural entities, but consist of humans. And humans respond to incentives. Therefore, to understand government, we must understand the incentives of the people it is made up of.

Incentives, Incentives, Incentives

Now, markets also consist of humans responding to incentives. But these are good incentives. Markets are networks of voluntary exchanges that are basically a positive-sum game: in every voluntary transaction, both parties benefit, else they wouldn’t be transacting. The only way to make a profit is by adding value to someone’s life. The greedier you are, the harder you work to make others better off. These are great incentives.

There is nothing voluntary about government. It has a monopoly on coercion and violence, and its very existence is an act of coercion – no one pays taxes willingly, or asks to be licensed and regulated. Now, we believe in a limited government (with its consequent coercion) to the exact extent that you need to protect individual rights and provide the rule of law that markets (aka society) need to function. But leave aside the broader philosophical point and just consider the incentives of the humans in government. Those are all messed up, because unlike markets, they are zero-sum or negative-sum, and the easiest way to make money is not to improve the lives of others, but to exploit them.

Let’s break up the different types of incentives at play with government.

The Money Incentive

Milton Friedman famously expounded on the Four Ways of Spending Money, which you can see summed up in the table below. (You can read about it in a piece one of us wrote recently.) In a nutshell, government brings together the worst conditions for spending money – you are spending someone else’s money on someone else, and are likely to care about neither the money being spent nor the service being provided. These are the worst possible incentives.

image

To use an example from the piece we linked to above, consider the question of why Mumbai’s roads always have potholes. The municipal officer in charge has a tenured job, zero accountability, and his incentives are aligned to making sure that he picks the most expensive contractor so he gets the biggest kickback, and that the repairs are done so badly that future repair work is necessary, with all the kickbacks they entail. This is inevitable not because that government officer is a bad person, but because the incentives are what they are.

The Bureaucrat’s Incentive

Consider the incentives of bureaucrats. What motivates them? In the words of economist William Niskanen: “Salary, prerequisites of the office, public reputation, power, patronage… and the ease of managing the bureau.” In other words, they want to expand their scope and power, which usually has no connection with the work they are supposed to perform.

Parkinson’s Law illustrates the state of the bureaucracy beautifully: “Work expands so as to fill the time available for its completion.” The two implications of this, according to C Northcote Parkinson, after whom the law is named:

One: “An official wants to multiply subordinates, not rivals.”

Two: “Officials make work for each other.”

This is why government departments tend to grow endlessly and not get anything done. Here’s an example of this: Have you heard of the Churchill Cigar Assistant?

The Politician’s Incentive

The politician’s aim is simple: he wants to come to power. For this, he needs lots of money. (A humble corporator’s election expenses can run to many crores.) Where does this money come from? It comes from interest groups who want to use the coercive power of government for their own ends. You could be an industrialist who wants mining contracts, or soft loans from public banks that private banks would never give, or protectionist measures to safeguard your business from competition, or state subsidies of some sort, and so on.

These interest groups use their money to get their favoured politicians to power. (Canny interest groups will keep politicians on all sides happy.) Those politicians, once elected, use their power to generate more money for those interest groups and themselves. All of this comes at the expense of the common citizen.

If Company A wants a subsidy of Rs 1.3 billion, consider that every Indian pays an average of one rupee for this subsidy: too small for them to care, even if they figure out what is happening. Public Choice economists refer to this as a case of ‘Concentrated Benefits and Diffuse Costs.’ Company A will lobby vigorously for its 1.3 billion, but the common citizen will just let the one rupee go.

While the example above is of a direct subsidy, most regulation actually has the effect of indirectly redistributing money from relatively poor citizens to relatively rich interest groups. (Read ‘The Great Redistribution’ for a sense of the process.) And all electoral politics comes down to using money coerced from all of the people to bribe a specific section you consider your vote bank: consider the rash of farm-loan waivers across India right now. (Don’t get us started on the incentives that puts into play. Groan.)

The Legal Mafia

Instead of thinking of the idealised notion of government, we should see it as what it is: a legal mafia. You give one set of people power over another. Power corrupts. This set of people soon realises that the easiest way to make money is by Rent Seeking: exploiting this power they have over others. (This beats profit-seeking through voluntary exchange, which requires you to actually add value to people’s lives, which is harder.) They leech off others, extracting hafta.

In theory, government is a noble defender of our rights. In practice, it is an ever-growing parasite. This is not an unfortunate accident, but the norm. It is embedded in the DNA of government.

Government Failure

Priests of the religion of Government often talk about why government is necessary because of market failure. We have two points to make here. One, the case for market failures is overstated, and those that take place usually do so because of the interference of government. Two, no one talks about Government Failure. Because of the incentives involved, Government Failure is actually not just pervasive, but also inevitable.

Look around you and tell us one thing that the government of India does properly. (From its stated aims, that is. If you look beyond those, we concede that it does an outstanding job of sucking our blood dry.) Its biggest failure is perhaps in its core function of ensuring the rule of law. It is our case that India does not have a rule of law, especially for the poor, and we somehow get by despite the government because of a) frameworks of societal trust, and b) sheer dumb luck.

As an illustration of that, consider the police’s reaction to the recent case of a woman who was abducted by three men in an autorickshaw. These men threw her infant child out, killing him in the process, and then gang-raped her. She went back to her baby’s corpse, carried it in the metro to a doctor, and refused to believe that the child was dead. When she went to the cops to complain, they refused to register her rape case. Why? Because they were too busy organising security for a presidential visit.

This is not an aberration. This is typical of India. Every time that poor woman buys something, for the rest of her life, the government will cut taxes that it will then redistribute to rich industrialists and interest groups. This is India, under the spell of this evil religion of Government.

The Problem is not the People

We often point to government misdeeds with shock and horror, and then demand that action be taken on the individuals responsible. To think this solves the problem is as delusional as Diana killing Ares and expecting that the problems of the world will be resolved. The individuals in the government are just human beings responding to the incentives before them. The real problem is the system. And the key problem with the system lies in power. When you give one group of people power over others, nothing good can come out of it.

The job of government is to safeguard the rights of its citizens, and not to run their lives. The whole idea of a constitutional republic is that the constitution places limits on the power of the state. But the state, after all, is run by people. People crave Power, and even a libertarian utopia will creep towards fascism unless there are strong safeguards in place. As that old saying goes, the price for our liberty is eternal vigilance. But before even that, it is important to recognize what the problem is, and what we need to be vigilant of. Public Choice Economics provides a framework for understanding that.

The God we need

Wonder Woman ends on a needlessly sentimental note (according to only one of us, ie, AV!), but it is a film after all, with superheroes and Gods. We don’t have those in the real world. If we did, though, we would need only one God for the world to function perfectly: the God of Incentives. We would name him Milton.

Posted by Amit Varma in Economics | Essays and Op-Eds

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