Price Controls Lead to Shortages and Harm the Poor

This is the 25th installment of The Rationalist, my column for the Times of India.

Indulge me with a thought experiment. One morning the ruler of our country, Dear Leader, decides that India’s poverty is unbearable to him. The people must be made rich. What is a metric of wealth? The automobile! Everyone should have a car! More people will then buy petrol and the economy will recover!

Dear Leader goes on his evening podcast and announces to the nation that henceforth, there will be a price cap on cars. All cars will have to be sold at the very affordable price of Rs 1 lakh only. What will happen?

You don’t need to know economics to answer this. Common sense will do. All manufacturers will stop making cars that cost more than Rs 1 lakh, for why would they sell at a loss? Existing inventory will be disposed of on a first-come-first-serve basis – or in the black market to those privileged with wealth and access. Eventually, there will be no new cars at all.

This seems like a dystopian scenario, but thought experiments can shed light on everyday principles by dressing them up in outrageous garb. The everyday principle here is this: price controls always lead to shortages. And yet, our politicians do not understand this.

The government recently announced that they are planning to put a cap on the prices of some hygiene products. This is a terrible idea. In any competitive market, producers are already driven by competition to sell at the lowest price point they can afford. If you set a price cap that is below this mark, they will have to stop manufacturing. The price cap will not offer any additional benefit to consumers – and will reduce the choices available to them.

How do prices work? Why do price caps hurt? I like to illustrate this with the example of Uber’s surge pricing. This mimics markets, with prices responding in real time to supply and demand. It has also caused much outrage, with users often complaining about Uber’s exploitative pricing during peak hours. Perfect example.

Imagine a miniature Uber world in which, at a specific moment, there are 50 available cars for 100 customers. There’s a mismatch between supply and demand, and Econ 101 tells you that the price should go up. But Dear Leader puts a price cap. What will happen?

Two things. One, the 50 available cars go to customers on a first-come-first serve basis, and 50 customers are left stranded. Some of those who are left stranded may have urgent needs, like catching a flight or going to hospital in an emergency. They would value the ride more. They would be willing to pay more. Some of those who do get cars may have a trivial need, and would gladly not take the trip if the price was too high. (They could use public transport or Netflix-and-chill at home.) First-come-first-serve doesn’t distinguish between the two. A surge price would reflect the scarcity of the ride, and signal its true value.

There is a second effect that is deeper than this allocation effect. A high price sends a signal to the marketplace. It incentivises Uber drivers taking a break to make themselves available. More cars get on the road. More needs get served. Over the long term, the money in driving Ubers might even incentivise people to move from less profitable professions to driving taxis. In a free market, prices carry the information that push people towards deriving the best value from their skills. Price caps stop this information. They perpetuate imbalances between supply and demand, which the market would otherwise sort out.

Whenever a ban on Uber’s surge pricing has been tried out in India, it has led to shortages.  A friend of mine actually missed a flight in Delhi when the government there experimented with it. What if she had a medical emergency at that time?

Another example: A few months ago, the government imposed price caps on stents. As you’d expect, it resulted in shortages, as all advanced stents that cost more than the cap became unavailable. This reduced the choices available to patients. How can this be good?

Economists agree on how prices work the same way physicists agree on the law of gravity. There is no ideological disagreement. Why, then, do politicians keep imposing price caps?

The cynical view is that politicians don’t care about whether price caps work economically, as long as they work politically. Price caps signal compassion. “I care about you,” the politician signals, “and how expensive you find everything.” Voters often do not have the economic literacy to figure out that good intentions often lead to bad outcomes, and policies meant to help the poor can hurt them instead.

It is also possible that our economically illiterate politicians have genuine faith in their powers. They suffer from a ‘God Delusion’. They believe that legislation can change reality. This is delusional. It leads me to wonder, given the scarcity of sensible netas, what would be the value of a good politician?

Farmers, Technology and Freedom of Choice: A Tale of Two Satyagrahas

This is the 23rd installment of The Rationalist, my column for the Times of India.

I had a strange dream last night. I dreamt that the government had passed a law that made using laptops illegal. I would have to write this column by hand. I would also have to leave my home in Mumbai to deliver it in person to my editor in Delhi. I woke up trembling and angry – and realised how Indian farmers feel every single day of their lives.

My column today is a tale of two satyagrahas. Both involve farmers, technology and the freedom of choice. One of them began this month – but first, let us go back to the turn of the millennium.

As the 1990s came to an end, cotton farmers across India were in distress. Pests known as bollworms were ravaging crops across the country. Farmers had to use increasing amounts of pesticide to keep them at bay. The costs of the pesticide and the amount of labour involved made it unviable – and often, the crops would fail anyway.

Then, technology came to the rescue. The farmers heard of Bt Cotton, a genetically modified type of cotton that kept these pests away, and was being used around the world. But they were illegal in India, even though no bad effects had ever been recorded. Well, who cares about ‘illegal’ when it is a matter of life and death?

Farmers in Gujarat got hold of Bt Cotton seeds from the black market and planted them. You’ll never guess what happened next. As 2002 began, all cotton crops in Gujarat failed – except the 10,000 hectares that had Bt Cotton. The government did not care about the failed crops. They cared about the ‘illegal’ ones. They ordered all the Bt Cotton crops to be destroyed.

It was time for a satyagraha – and not just in Gujarat. The late Sharad Joshi, leader of the Shetkari Sanghatana in Maharashtra, took around 10,000 farmers to Gujarat to stand with their fellows there. They sat in the fields of Bt Cotton and basically said, ‘Over our dead bodies.’ ¬Joshi’s point was simple: all other citizens of India have access to the latest technology from all over. They are all empowered with choice. Why should farmers be held back?

The satyagraha was successful. The ban on Bt Cotton was lifted.

There are three things I would like to point out here. One, the lifting of the ban transformed cotton farming in India. Over 90% of Indian farmers now use Bt Cotton. India has become the world’s largest producer of cotton, moving ahead of China. According to agriculture expert Ashok Gulati, India has gained US$ 67 billion in the years since from higher exports and import savings because of Bt Cotton. Most importantly, cotton farmers’ incomes have doubled.

Two, GMO crops have become standard across the world. Around 190 million hectares of GMO crops have been planted worldwide, and GMO foods are accepted in 67 countries. The humanitarian benefits have been massive: Golden Rice, a variety of rice packed with minerals and vitamins, has prevented blindness in countless new-born kids since it was introduced in the Philippines.

Three, despite the fear-mongering of some NGOs, whose existence depends on alarmism, the science behind GMO is settled. No harmful side effects have been noted in all these years, and millions of lives impacted positively. A couple of years ago, over 100 Nobel Laureates signed a petition asserting that GMO foods were safe, and blasting anti-science NGOs that stood in the way of progress. There is scientific consensus on this.

The science may be settled, but the politics is not. The government still bans some types of GMO seeds, such as Bt Brinjal, which was developed by an Indian company called Mahyco, and used successfully in Bangladesh. More crucially, a variety called HT Bt Cotton, which fights weeds, is also banned. Weeding takes up to 15% of a farmer’s time, and often makes farming unviable. Farmers across the world use this variant – 60% of global cotton crops are HT Bt. Indian farmers are so desperate for it that they choose to break the law and buy expensive seeds from the black market – but the government is cracking down. A farmer in Haryana had his crop destroyed by the government in May.

On June 10 this year, a farmer named Lalit Bahale in the Akola District of Maharashtra kicked off a satyagraha by planting banned seeds of HT Bt Cotton and Bt Brinjal. He was soon joined by thousands of farmers. Far from our urban eyes, a heroic fight has begun. Our farmers, already victimised and oppressed by a predatory government in countless ways, are fighting for their right to take charge of their lives.

As this brave struggle unfolds, I am left with a troubling question: All those satyagrahas of the past by our great freedom fighters, what were they for, if all they got us was independence and not freedom?

Trump and Modi are playing a Lose-Lose game

This is the 22nd installment of The Rationalist, my column for the Times of India.

Trade wars are on the rise, and it’s enough to get any nationalist all het up and excited. Earlier this week, Narendra Modi’s government announced that it would start imposing tariffs on 28 US products starting today. This is a response to similar treatment towards us from the US.

There is one thing I would invite you to consider: Trump and Modi are not engaged in a war with each other. Instead, they are waging war on their own people.

Let’s unpack that a bit. Part of the reason Trump came to power is that he provided simple and wrong answers for people’s problems. He responded to the growing jobs crisis in middle America with two explanations: one, foreigners are coming and taking your jobs; two, your jobs are being shipped overseas.

Both explanations are wrong but intuitive, and they worked for Trump. (He is stupid enough that he probably did not create these narratives for votes but actually believes them.) The first of those leads to the demonising of immigrants. The second leads to a demonising of trade. Trump has acted on his rhetoric after becoming president, and a modern US version of our old ‘Indira is India’ slogan might well be, “Trump is Tariff. Tariff is Trump.”

Contrary to the fulminations of the economically illiterate, all tariffs are bad, without exception. Let me illustrate this with an example. Say there is a fictional product called Brump. A local Brump costs Rs 100. Foreign manufacturers appear and offer better Brumps at a cheaper price, say Rs 90. Consumers shift to foreign Brumps.

Manufacturers of local Brumps get angry, and form an interest group. They lobby the government – or bribe it with campaign contributions – to impose a tariff on import of Brumps. The government puts a 20-rupee tariff. The foreign Brumps now cost Rs 110, and people start buying local Brumps again. This is a good thing, right? Local businesses have been helped, and local jobs have been saved.

But this is only the seen effect. The unseen effect of this tariff is that millions of Brump buyers would have saved Rs 10-per-Brump if there were no tariffs. This money would have gone out into the economy, been part of new demand, generated more jobs. Everyone would have been better off, and the overall standard of living would have been higher.

That brings to me to an essential truth about tariffs. Every tariff is a tax on your own people. And every intervention in markets amounts to a distribution of wealth from the people at large to specific interest groups. (In other words, from the poor to the rich.) The costs of this are dispersed and invisible – what is Rs 10 to any of us? – and the benefits are large and worth fighting for: Local manufacturers of Brumps can make crores extra. Much modern politics amounts to manufacturers of Brumps buying politicians to redistribute money from us to them.

There are second-order effects of protectionism as well. When the US imposes tariffs on other countries, those countries may respond by imposing tariffs back. Raw materials for many goods made locally are imported, and as these become expensive, so do those goods. That quintessential American product, the iPhone, uses parts from 43 countries. As local products rise in price because of expensive foreign parts, prices rise, demand goes down, jobs are lost, and everyone is worse off.

Trump keeps talking about how he wants to ‘win’ at trade, but trade is not a zero-sum game. The most misunderstood term in our times is probably ‘trade-deficit’. A country has a trade deficit when it imports more than what it exports, and Trump thinks of that as a bad thing. It is not. I run a trade deficit with my domestic help and my local grocery store. I buy more from them than they do from me. That is fine, because we all benefit. It is a win-win game.

Similarly, trade between countries is really trade between the people of both countries – and people trade with each other because they are both better off. To interfere in that process is to reduce the value created in their lives. It is immoral. To modify a slogan often identified with libertarians like me, ‘Tariffs are Theft.’

These trade wars, thus, carry a touch of the absurd. Any leader who imposes tariffs is imposing a tax on his own people. Just see the chain of events: Trump taxes the American people. In retaliation, Modi taxes the Indian people. Trump raises taxes. Modi raises taxes. Nationalists in both countries cheer. Interests groups in both countries laugh their way to the bank.

What kind of idiocy is this? How long will this lose-lose game continue?

India’s Problem is Poverty, Not Inequality

This is the 16th installment of The Rationalist, my column for the Times of India.

Steven Pinker, in his book Enlightenment Now, relates an old Russian joke about two peasants named Boris and Igor. They are both poor. Boris has a goat. Igor does not. One day, Igor is granted a wish by a visiting fairy. What will he wish for?

“I wish,” he says, “that Boris’s goat should die.”

The joke ends there, revealing as much about human nature as about economics. Consider the three things that happen if the fairy grants the wish. One, Boris becomes poorer. Two, Igor stays poor. Three, inequality reduces. Is any of them a good outcome?

I feel exasperated when I hear intellectuals and columnists talking about economic inequality. It is my contention that India’s problem is poverty – and that poverty and inequality are two very different things that often do not coincide.

To illustrate this, I sometimes ask this question: In which of the following countries would you rather be poor: USA or Bangladesh? The obvious answer is USA, where the poor are much better off than the poor of Bangladesh. And yet, while Bangladesh has greater poverty, the USA has higher inequality.

Indeed, take a look at the countries of the world measured by the Gini Index, which is that standard metric used to measure inequality, and you will find that USA, Hong Kong, Singapore and the United Kingdom all have greater inequality than Bangladesh, Liberia, Pakistan and Sierra Leone, which are much poorer. And yet, while the poor of Bangladesh would love to migrate to unequal USA, I don’t hear of too many people wishing to go in the opposite direction.

Indeed, people vote with their feet when it comes to choosing between poverty and inequality. All of human history is a story of migration from rural areas to cities – which have greater inequality.

If poverty and inequality are so different, why do people conflate the two? A key reason is that we tend to think of the world in zero-sum ways. For someone to win, someone else must lose. If the rich get richer, the poor must be getting poorer, and the presence of poverty must be proof of inequality.

But that’s not how the world works. The pie is not fixed. Economic growth is a positive-sum game and leads to an expansion of the pie, and everybody benefits. In absolute terms, the rich get richer, and so do the poor, often enough to come out of poverty. And so, in any growing economy, as poverty reduces, inequality tends to increase. (This is counter-intuitive, I know, so used are we to zero-sum thinking.) This is exactly what has happened in India since we liberalised parts of our economy in 1991.

Most people who complain about inequality in India are using the wrong word, and are really worried about poverty. Put a millionaire in a room with a billionaire, and no one will complain about the inequality in that room. But put a starving beggar in there, and the situation is morally objectionable. It is the poverty that makes it a problem, not the inequality.

You might think that this is just semantics, but words matter. Poverty and inequality are different phenomena with opposite solutions. You can solve for inequality by making everyone equally poor. Or you could solve for it by redistributing from the rich to the poor, as if the pie was fixed. The problem with this, as any economist will tell you, is that there is a trade-off between redistribution and growth. All redistribution comes at the cost of growing the pie – and only growth can solve the problem of poverty in a country like ours.

It has been estimated that in India, for every one percent rise in GDP, two million people come out of poverty. That is a stunning statistic. When millions of Indians don’t have enough money to eat properly or sleep with a roof over their heads, it is our moral imperative to help them rise out of poverty. The policies that will make this possible – allowing free markets, incentivising investment and job creation, removing state oppression – are likely to lead to greater inequality. So what? It is more urgent to make sure that every Indian has enough to fulfil his basic needs – what the philosopher Harry Frankfurt, in his fine book On Inequality, called the Doctrine of Sufficiency.

The elite in their airconditioned drawing rooms, and those who live in rich countries, can follow the fashions of the West and talk compassionately about inequality. India does not have that luxury.

Here Is Why the Indian Voter Is Saddled With Bad Economics

This is the 15th installment of The Rationalist, my column for the Times of India.

It’s election season, and promises are raining down on voters like rose petals on naïve newlyweds. Earlier this week, the Congress party announced a minimum income guarantee for the poor. This Friday, the Modi government released a budget full of sops. As the days go by, the promises will get bolder, and you might feel important that so much attention is being given to you. Well, the joke is on you.

Every election, HL Mencken once said, is “an advance auction sale of stolen goods.” A bunch of competing mafias fight to rule over you for the next five years. You decide who wins, on the basis of who can bribe you better with your own money. This is an absurd situation, which I tried to express in a limerick I wrote for this page a couple of years ago:

POLITICS: A neta who loves currency notes/ Told me what his line of work denotes./ ‘It is kind of funny./ We steal people’s money/And use some of it to buy their votes.’

We’re the dupes here, and we pay far more to keep this circus going than this circus costs. It would be okay if the parties, once they came to power, provided good governance. But voters have given up on that, and now only want patronage and handouts. That leads to one of the biggest problems in Indian politics: We are stuck in an equilibrium where all good politics is bad economics, and vice versa.

For example, the minimum guarantee for the poor is good politics, because the optics are great. It’s basically Garibi Hatao: that slogan made Indira Gandhi a political juggernaut in the 1970s, at the same time that she unleashed a series of economic policies that kept millions of people in garibi for decades longer than they should have been.

This time, the Congress has released no details, and keeping it vague makes sense because I find it hard to see how it can make economic sense. Depending on how they define ‘poor’, how much income they offer and what the cost is, the plan will either be ineffective or unworkable.

The Modi government’s interim budget announced a handout for poor farmers that seemed rather pointless. Given our agricultural distress, offering a poor farmer 500 bucks a month seems almost like mockery.

Such condescending handouts solve nothing. The poor want jobs and opportunities. Those come with growth, which requires structural reforms. Structural reforms don’t sound sexy as election promises. Handouts do.

A classic example is farm loan waivers. We have reached a stage in our politics where every party has to promise them to assuage farmers, who are a strong vote bank everywhere. You can’t blame farmers for wanting them – they are a necessary anaesthetic. But no government has yet made a serious attempt at tackling the root causes of our agricultural crisis.

Why is it that Good Politics in India is always Bad Economics? Let me put forth some possible reasons. One, voters tend to think in zero-sum ways, as if the pie is fixed, and the only way to bring people out of poverty is to redistribute. The truth is that trade is a positive-sum game, and nations can only be lifted out of poverty when the whole pie grows. But this is unintuitive.

Two, Indian politics revolves around identity and patronage. The spoils of power are limited – that is indeed a zero-sum game – so you’re likely to vote for whoever can look after the interests of your in-group rather than care about the economy as a whole.

Three, voters tend to stay uninformed for good reasons, because of what Public Choice economists call Rational Ignorance. A single vote is unlikely to make a difference in an election, so why put in the effort to understand the nuances of economics and governance? Just ask, what is in it for me, and go with whatever seems to be the best answer.

Four, Politicians have a short-term horizon, geared towards winning the next election. A good policy that may take years to play out is unattractive. A policy that will win them votes in the short term is preferable.

Sadly, no Indian party has shown a willingness to aim for the long term. The Congress has produced new Gandhis, but not new ideas. And while the BJP did make some solid promises in 2014, they did not walk that talk, and have proved to be, as Arun Shourie once called them, UPA + Cow. Even the Congress is adopting the cow, in fact, so maybe the BJP will add Temple to that mix?

Benjamin Franklin once said, “Democracy is two wolves and a lamb voting on what to have for lunch.” This election season, my friends, the people of India are on the menu. You have been deveined and deboned, marinated with rhetoric, seasoned with narrative – now enter the oven and vote.

The Indian State Is the Greatest Enemy of the Indian Farmer

This is the 13th installment of The Rationalist, my column for the Times of India.

The late farmer leader Sharad Joshi used to enjoy reciting a poem that described the Indian farmer’s plight perfectly. It addresses the non-farmer from the farmer’s point of view, and it goes:

Marte hum bhi hain. Marte tum bhi ho.
Marte hum bhi hain, marte tum bhi ho.
Hum sasta bech ke marte hain,
Tum mahanga khareedke marte ho.

I would translate it thus:

I die, my friend, and so do you.
I die, my friend, and so do you.
I sell my produce cheap, and die.
You pay so much that you die too.

This beautiful shair expresses an old truth that many investigative journalists wrote about anew this week, as protesting farmers congregated on Delhi: the gap between what farmers get for their produce, and what the consumer pays. One report revealed that a farmer sold tomatoes at Rs 2 per kg, and consumers bought them for Rs 20. Too little; and too much. Both the farmers and consumers were getting killed by this, just like in the poem.

Joshi’s insight in the late 1970s was that this was caused not by the greed of middlemen, but the interference of the Indian state. The state had set forth rules that the farmer could not sell his produce in an open market, responding to supply and demand, but only to a government-appointed body called the Agricultural Produce Market Committee (APMC). Because the farmers are not allowed to sell to anyone else, they are forced to take the price offered to them. And because all produce comes through the APMC, buyers also have no bargaining power.

Now imagine what would happen if the free market was allowed to operate. Middlemen would compete to buy goods from farmers, and that competition would ensure that farmers would get a better price. They would also compete for customers, this ensuring that customers would pay less. Instead of farmers selling for Rs 2 and the consumer buying for Rs 20, you could have the farmer selling for Rs 10 and the consumer buying for Rs 12. Both farmer and consumer would benefit by Rs 8 per KG. But the government does not allow this, and both farmers and consumers get hurt.

Joshi referred to this notional cost paid by the farmer as a ‘negative subsidy’. He viewed it, correctly, as theft. The issue here is not that farmers are hard up and the government is not helping them. The issue is that the government is responsible for the poverty of the farmer, and is stealing from him. And this is not the only way that the government is crippling our farmers.

Farmers are not allowed access to markets in anything they do. The state doesn’t allow free markets in inputs, because of which many of the inputs a farmer needs, from seeds to fertilisers to energy to even credit, are either hard to come by or of a low quality. And when they do manage to produce crops, they are not allowed to get the best price for it, as an open market would enable. By denying them freedom, the state effectively imprisons our farmers in what a friend of mine calls PPP: Perpetually Planned Poverty.

This extends not just to their produce, but to their property. Farmers are not allowed to sell their land for non-agricultural purposes. This restricts their market to other farmers, and ensures that the price they can get for their land is so low that it becomes pointless to sell. It has been estimated that some farmland would be forty times as valuable if this law did not exist.

Indeed, a common scam is for a crony of the state to acquire land from farmers, through the state, at low prices, and then get the land-use certificate changed so that they can sell at many multiples of that price. All perfectly legal – and deeply unethical. This is how Robert Vadra was alleged to have made his money, in fact.

Every political party in our history has let our farmers down, but there is a reason things are coming to a head now. India is already facing a jobs crisis, made worse by the deepening of the agricultural crisis. With every generation, land holdings get smaller – one farmer’s land is split among multiple children – and more and more unsustainable. It is no coincidence that many recent popular uprisings have been around demand for jobs from land-owning castes like like Jats, Patidars and Marathas.

Indian agriculture has been in crisis for decades. More than 50% of our country is in the agricultural sector, producing 14% of our GDP. In developing countries, less than 10% of the population works in agriculture. Here, we have trapped our farmers in poverty, and also not allowed the industrial revolution that would have provided an escape route. We pay lip service to farmers, but instead of making the necessary structural reforms, we give handouts like farm loan waivers that provide only temporary relief.

It is like handing aspirin to a burning man. “Here,” we say, “take this for the pain.” And everybody claps.

*  *  *

Also check out:
The State of Our Farmers—Epsiode 86 of The Seen and the Unseen, featuring farmer leader Gunvant Patil.
We Must Save Our Farmers — Amit Varma
Free the Farmers — Barun Mitra
The Crisis in Indian Agriculture — Brainstorm discussion on Pragati
Entry and Exit in Agriculture — Episode 1 of The Seen and the Unseen
The Farmer Rolls the Dice — Episode 12 of The Seen and the Unseen
The Unseen Effects of Farm Loan Waivers — Episode 25 of The Seen and the Unseen
Down to Earth — The collected writings of Sharad Joshi

Where Have All the Leaders Gone?

This is the first installment of Politics Without Romance, my monthly column with Bloomberg Quint. As the name indicates, this column will look at Indian politics through the lens of Public Choice Theory.

One more Independence Day comes up, and it’s time to ask that annual question again: Where have all the leaders gone?

It’s a common lament that the politicians of today are the opposite of the freedom fighters who got us this Independence. We had giants then. We have pygmies now. Our leaders then were driven by principle. Our leaders now are driven by the lust for power. Why?

If you look at politics through the lens of economics, which I will do in this column over the new few months, the answer lies in incentives. Why do people get into politics? What do they want from it? What can they realistically expect? What do they need to do to get to the top? What trade-offs do they need to make? What do they need to do to stay on top?

Right from the 19th century, our freedom fighters had little personal upside to their battles. We were ruled by the British Empire, and these men had no chance of coming to power and enjoying its rewards. The downside was significant, though. If you were in a position of influence, you could lose it. If you were not, and fought too vigorously, you could land up in jail or worse.

The generations of men and women who rose up to fight against the British empire did so because they were animated by a higher cause. There was no personal upside to it. There was a principle at stake. For example: Freedom is my birthright, and I shall have it. And they cared about that principle so much that some of them were willing to die for it.

Once Independence was achieved, the incentives changed. Firstly, getting the British to leave was so miraculous, coming after a decades-long struggle, that our leaders did not notice what we did not achieve. Yes, we got political independence, but we still weren’t guaranteed the personal and economic freedoms that we had fought for.

One of the seminal moments of our Independence struggle was Mahatma Gandhi’s protest against the tyranny of the salt tax. Well, consider that the tax on salt is far higher today, not to mention other taxes or other tyrannies.

Here’s what we did on August 15, 1947. We replaced one set of rulers with another. Only the colour of their skin changed. And those who had fought against those in power were now in power themselves. Their incentives changed. Would they change?

In the early years of our independence, our politics was ruled by those who had come into the freedom struggle for the sake of principles, not power. I’m willing to give them the benefit of doubt. Their mistakes were honest mistakes – such as the embrace of the Fabian socialism that kept India poor for decades longer than it should have. That flawed thinking was the fashion of the times, and was not driven by bad incentives. The drive towards Big Government did, however, change incentives further.

Henceforth, it was natural that those who would be drawn to politics would be driven by the lust for power. Now that it was possible for Indians to join the ruling class, people were bound to want to do so. Now that we had achieved Independence, there no longer seemed a burning need to fight for higher principles. Principles would become a rationalisation, a way to position a political brand to differentiate it from others. 

Those who did enter politics for reasons of principle would soon find themselves having to compromise on those principles for pragmatic reasons. So much so that by the time they actually achieved power, there could be no trace of those original principles. There is an old truism that power corrupts. It is equally true that the quest for power corrodes character. There may be politicians who start off idealistic—but they cannot remain that way, no matter what their public positioning.

Why is this? Incentives. Achieving power requires two things: Money and Votes. (As you can only get Votes by spending Money, this is arguably one thing, but I’ll speak of them as two to illustrate the different directions that politicians are pulled in.)

First, money. Over the decades, it has gotten more and more prohibitive to fight an election. One needs crores to contest even a local election. Where does this money come from? Who can afford such large sums?

The money always comes from interest groups who expect a Return on Investment. There’s always a quid pro quo involved. I give you money, but when you come to power, you do XYZ for me. First, money leads to power. Then, power must lead to money. This is the chakravyuh of politics.

For example, if a big industrialist gives a political party money, what could he want out of it? One, he may want regulation that protects his industry or company from competition. Place tariffs on foreign goods, deny a license to a competitor, and so on. (All these can be done citing seemingly noble principles.)

Two, he may want special privileges that the government, using its monopoly on violence, can get him. For example, if he wants land for a factory, the government can use eminent domain to get it cheaply from villagers and hand it to him. Three, he may want soft loans from a Public Sector Bank, which he otherwise may not get from a private sector bank that has different incentives and does due diligence.

Contemporary examples of this abound. Consider the interest groups that benefit from any government policy, and you can follow the trail. You may oppose FDI in retail, for example, because small traders form a large chunk of your donor base, as is the case with AAP (and the BJP, until recently). You may allocate natural resources to favoured cronies, as the UPA was alleged to have done with coal and spectrum.

All of these, you will note, amount to a transfer of wealth from the poor to the rich, from us citizens to moneybag interest groups. This is how Power provides RoI to Money.

Needless to say, you don’t make money only for those who fund you, but also for yourself. (This might even be the prime personal incentive for wannabe politicians.) Our system of big government is especially lucrative. Wherever there is power, there is discretion, and there will be corruption. And our government is designed to give enormous amounts of power to those in charge, which makes immense corruption inevitable. This is not a function of the party in power, but of the incentives in play.

And now, to votes. In our democracy, elections are the process by which we decide which of the competing mafias will get to rule us for five years. There is just one way for these mafias to win our votes: by bribing us. The party in power may hand out immediate sops. The parties in opposition will promise them.

In the political marketplace, just as in any other marketplace, every brand does not try to woo every customer. (Unlike in a regular marketplace, of course, there is usually only one winner.) Parties will have vote banks that they will nurture over time, and reward when they are in power. The immense power of the state makes patronage politics lucrative.

For example, you can promise reservations in government jobs to a group of your choice. Or, even without explicit promises, you can make sure the state favours the groups you are wooing, either by giving them jobs or contracts or looking after them in other ways. (This is analogous to how a mafia rewards and protects those who give them hafta, except here it is legal.)

Or you can just bribe them directly, with free biryani or pressure cookers. This can become a vicious circle. For example, everyone wants farmers’ votes, and once one party promises farm loan waivers, every other party has to follow suit. Loan waivers are a temporary anaesthetic that perpetuate the problem, but politicians do not have the incentives to make the deep structural changes that are required in agriculture. Those will take years to play out, much beyond an election cycle – and parties need votes now.

The great tragedy of Indian politics is that all our politics is identity politics that centres around state patronage. All parties are guilty of this. Smaller regional parties nurture their own caste vote banks. The Congress pandered to minorities for decades. The BJP caters to the worst bigots among us – and there are enough of them now to make the party a force. They also manipulated the caste politics of UP masterfully in 2014 and 2017. As for AAP, they have pandered to Khalistanis and Kanwariyas alike, and a prominent supporter of theirs was made to apologize to a Jain Muni for the reason that Jains were a powerful vote bank for AAP.

All this is inevitable. What can a party do without votes? What can a party do without money? The imperatives of our democracy make politics morally corrosive. To get to power, you must privilege the means over the ends. And even if your ends were noble to begin with, by the time you are done, your only goal is power. You become the monster you might have tried to fight.

What could change this? Well, if the state had less power, it would offer less RoI to investors. There would be less money and less patronage for parties to bribe voters with. Imagine a limited government that existed just to protect our rights and nothing else. The incentives would change. It would have so little power that those who lust for power would be forced to look elsewhere for career options. (Maybe they’d join the mafia.) Interest groups would stop funding politicians because politicians would not have power to do something in return for them. Voters could not be induced with short-term sops or goodies.

Can that change in the design of our government ever take place? Who will have the incentives to make that change? Not the moneybags and the interest groups, that’s for sure. But what about the voters? If enough citizens demanded reform, the government would have to listen. Supply has to obey Demand.

Andrew Brietbart once said, ‘Politics is downstream of culture.’ This is exactly right. Before we change our politics, we must change our culture. This is as noble a battle to fight as the one our great freedom fighters fought against the British empire decades ago. Will new leaders emerge to fight it?

Test Cricket Is Dying, but Cricket Is Not

This is the first installment on a cricket column I have started for Cricket Next, in which I will write about cricket from the lens of other disciplines, such as economics, psychology, game theory etc.

During his second innings in the Lord’s Test, Virat Kohli could be seen grimacing, and a nation grimaced with him. Kohli has a chronic back problem. The rest of the country has a chronic cricket problem. Why can’t our batsmen play the swinging ball in Test matches in England? Why did this particular lot look so incapable? Why are they worse at this than previous generations? Can an asteroid please give us deliverance by hitting Earth, wiping humanity out and ending this pain?

I am both a Cricket Tragic and an India Tragic, and I will make three tragic arguments in this piece. One, Indian batsmen of the future will be even worse against the swinging ball in England. Two, it doesn’t matter because Test cricket is dying, and there won’t be any Test matches in England 20 years from now. Three, that also doesn’t matter, because cricket will flourish nevertheless, and other forms of the game have as much drama and nuance as Test cricket does, if in different ways.

This may sound dismal to you, so its apt that I make my argument through the lens of the allegedly ‘dismal science’ of economics. In particular, I want to look at Incentives: what are the incentives of those who view the game, play the game, and run the game? How is their behaviour moulded by these incentives? What are the implications of this?

First up, consider the concept of Opportunity Cost, which, put simply, refers to what alternative uses you could have made of the time or money you spent on something. The opportunity cost of watching a Test match, for example, is what else you could have done with the five days you spent watching it. This boils down to the options available for your time.

For most of cricket’s existence, there haven’t been that many alternatives. There is a cliché about cricket and Bollywood being the two great 20th century passions of India, but think about it, what else did you have for entertainment? Not much television, and no internet, Facebook, Whatsapp, Youtube, Netflix or easily available porn. That has changed today.

We’re inundated with options of what to do with our time. That means that the opportunity cost of watching a Test match has shot up, and our incentive for doing so has declined. Most cricket purists I know don’t actually spend much time watching Test cricket. (Look up another concept from economics, ‘Revealed Preferences’.) The TV ratings of Test cricket have been plummeting, and if not for the subsidy from other forms of the game, there would already be no commercial reason for the game to exist.

What is remarkable about Test cricket is that it exists at all. Most other popular sports can be viewed in easy-to-digest nuggets. Football lasts 90 minutes, not nine hours. Tennis matches, hockey games, badminton encounters can all be done with within an evening. And because there is no longer form of the game to compare these sports to, no one complains about how they lack drama or depth.

I believe that we complain about Twenty20 cricket because Test matches came first, so we put that on a pedestal, and consider that the basis of comparison. (Another economic concept to look up: the ‘Anchoring Effect’.) Had T20s come first, we might have viewed Test cricket through a different prism of values – and found it wanting.

Use the tools of economics on a T20 game. Each team is given as many resources (11 players) as in a Test or a one-day match, but far less overs (only 20) to play an innings in. This relative scarcity of overs changes the value of all the resources. A dot ball becomes more expensive for the batting side, as every ball carries more value. A wicket has less value than in an ODI, as your batting resources need to be spread out over only 20 overs rather than 50. The risk-reward ratio changes, and the value of aggression goes up.

This changes the incentives for batting sides. Aggression is rewarded, the value of ‘building an innings’ goes down, and to finish an innings with batsmen still waiting in the pavilion counts as a waste of resources. (Opportunity cost, again.) Batsmen, thus, have to innovate far more, and find new ways of playing the game.

Consider the much-touted 360-degree game of AB de Villiers. There, invention came out of necessity, the new format making demands on batsmen to expand their repertoire. ABD is just the most spectacular player around. Many other batsmen started practising new strokes, playing them reflexively, expanding not just their repertoire but also the orthodoxy. Who is to say that the reverse-sweep and the ramp shot don’t now belong in batting textbooks?

Contrary to a popular canard, bowlers did not turn into bowling machines. Their response to more aggressive batsmen was more deception, and not just by bowling more slower balls and wide yorkers. Spinners actually began flighting the ball more, inviting batsmen to hit them, like back in the romanticized days of yore. Think back on the bowling of the spinners like Rashid Khan, Kuldeep Yadav and Yuzvendra Chahal in the last IPL: the flight, the loop, the aggressive intent. Bowlers figured out that one way to counter the momentum of a batting side was to take wickets. Attack became the best defence.

This might seem contradictory. On one hand, the value of a wicket goes down for a batsmen because runs are more important. On the other hand, the value of a wicket goes up for a bowler because it can slow a batting side’s momentum. So how much do wickets matter?

Questions like this make it a fascinating time to be a cricket lover. There is an ongoing conversation between batsmen and bowlers, with both innovating new skills as they test this hypothesis or that. This is why watching the IPL is so eye-opening and mind-boggling. A game is evolving in front of our eyes: its grammar and structure, its mores and norms, through a conversation between batsmen and bowlers and captains that we get to see in real time.

If you love cricket, how can you not be enthralled? 

Now consider how the incentives change for everyone concerned. Viewers prefer T20s to Tests because the opportunity cost of watching a T20 game is far less. (Besides, it is an incredibly rich experience, having that added dramatic element of urgency that Tests do not have.) Because of this, there is more money to be made excelling in this shorter form of the game. So players are incentivised to optimise for it. Every minute that a batsman spends expanding his repertoire of aggressive strokes, though, carries the opportunity cost of not practising for Test match skills, such as how to leave a swinging ball.

The inevitable outcome of this is that batsmen will always train to play T20s, and will be unequipped for those specialised skills that Test matches demand.  (Especially Test matches in England.) India tours England once every few years. Why should KL Rahul, who I consider a batting genius, spend much time preparing for conditions he will encounter so infrequently?

Another indication of how these incentives play out: only Cheteshwar Pujara bothered to go to England early and prepare for this tour. He did so only because he has been discarded in the other forms of the game. Incentives. Contrast this with the fact that the Indian batsmen of the generation immediately preceding the IPL era, the Dravid-Tendulkar-Ganguly generation, all played county cricket. But why should KL Rahul or Rishabh Pant bother with that?

It is not fair to make a value judgement about this. All these players have made rational choices, responding to incentives. Who is to say that one specific ‘balance between bat and ball’ is better than some other balance? Who is to say that Test cricket is superior to one-day cricket? Even many who do state that as a personal preference don’t actually put their eyeballs where their mouths are.

People who love Test cricket, as I do, can take succour in the fact that the cricket boards will keep the form alive even when it is no longer commercially viable, by subsidising it from income that comes from shorter formats. But for how long will this posturing be necessary? When the 15-year-old of today is 35 years old, who will care for Test cricket? Especially if that kid is an Indian viewer who watched this Lord’s Test and thought to himself, “Ya whatever. Why even bother?”

It is Daft to Worry About Inequality

This is the 46th installment of Lighthouse, my monthly column for BLink, a supplement of the Hindu Business Line.

Inequality and poverty are different problems, requiring different, even opposite, solutions. India’s problem is poverty.

Let me begin this column with a question, dear reader, which I urge you to read carefully and answer before reading on:

In which of these two countries would you rather be poor: the USA or Bangladesh?

Most people I ask this to go, Duh, of course I’d rather be poor in the US than in Bangladesh. Well, here’s something I’d like you to consider: the USA has far greater inequality than Bangladesh does. A measure called the Gini Index measures inequality across the world, and the USA, Hong Kong, Singapore and the United Kingdom all have greater inequality than Bangladesh, Liberia, Pakistan and Sierra Leone. And yet, that second group of countries is by far poorer than the first group

It has become fashionable these days, especially in elite, privileged circles, to agitate about inequality. But as my question and the data above make clear, inequality and poverty are very different things. Some of the poorest countries in the world are among the most equal. (Some Communist countries of the last century came close to achieving equality in poverty.)

So here’s my contention, in three propositions:

One: India’s big problem is poverty.

Two: The more we reduce poverty, the more we are likely to increase inequality.

Three: It is perverse, therefore, to worry about inequality. We should only keep our eye on poverty, and not worry if inequality goes up.

There is a fundamental fallacy at the root of the obsession with inequality. We think of the world in zero-sum ways. That is, we behave as if there is a fixed pie, and the rich can only become richer if the poor become poorer. In this vision of the world, the more inequality increases, the more abject the suffering of the poor. Redistribution is the only solution.

And yet, this narrative is wrong. The world is not zero-sum but positive-sum. The size of the pie increases with every voluntary transaction. Every time I buy a cup of coffee from a café, both the café and I are better off – otherwise we would not have transacted to begin with. The amount of value in the world has gone up.

The more you allow and enable such voluntary exchange, the more people trade to mutual benefit, and we all become better off. And the larger these economic networks of voluntary exchange, the greater the scope for such mutual enrichment. That is why people migrate to cities from villages, and rarely the other way around.

In fact, within a country, cities are far more unequal than villages are. If inequality was such a bad thing, why would so many poor people vote with their feet by migrating to cities? They embrace this greater inequality because they want to escape poverty.

The reason India remained a poor country for so many decades after Independence is that, with the zero-sum vision of our leaders, we frowned upon free markets. While the rest of Asia shot ahead, we restrained the natural ingenuity and enterprise of our people with our mai-baap vision of politics. We did reform a bit in 1991, but too little and too late. Our poverty levels did go down a bit, though, even as we grew more unequal, illustrating the fact that there is no correlation at all between poverty and inequality.

I don’t want to talk only in terms of abstract ideas, so let me illustrate one way in which reducing poverty would raise inequality. There is consensus among economists today, even left-wing ones, that we have crippled our manufacturing sector for decades with a series of bad laws, such as our labour laws, which don’t allow small businesses to grow, and force much of our nation into the informal sector. These regulations stopped us from becoming a manufacturing superpower like China. What would happen if these restrictions were to magically disappear one day?

You would have growth in the manufacturing industry. There is no question that there would be far more employment generated, which would reduce poverty. You would also have some of these businesses achieving scale and becoming behemoths. Poverty would go down and our per-capita income would go up; but because of the winners at the top, inequality would also go up. Would this be a bad thing? I don’t think so.

The zero-sum instinct is ingrained in us: we evolved in prehistoric times when we lived in small tribes amid scarcity, and the positive-sum view of the world would have been unintuitive. It is also natural to resent the super-rich among us, especially when they behave in ostentatious, obnoxious ways, and game the system with their money, which happens a lot in our crony socialist state. Maybe a country that has eliminated poverty can have the luxury to think about Inequality. But not us.

It is a moral shame that seven decades after Independence, we still have millions of people living in poverty. We need to fight this. We should not be distracted by false metrics.

A Special Cess

This is the 68th installment of Rhyme and Reason, my weekly set of limericks for the Sunday Times of India edit page.

BUDGET

My finances were in such a mess.
I said, “I demand an Amit cess.”
A gentleman named Shah
Said, “Arre bhaiyya, wah.
Super idea, I must confess.”

FIRST PRINCIPLE

Tom Friedman has defended Aadhaar.
He said, “Facebook has your data, yaar.”
Oh, what a clueless gent.
Facebook has our consent,
And consent must be our guiding star.