Free markets and democracy

Imagine you want to buy a cola. But you’re not allowed to just buy the cola you want. Instead, all cola drinkers in the country get to vote for a cola brand of their choice. Whichever brand the majority chooses, that’s the one you’re forced to drink. So if you like Coke and the majority votes for Pepsi, too bad. Coke will have to wait four years.

That’s the difference between democracy and free markets.

Now, obviously I’m not suggesting that we all have the MP we want and have separate governments for each of us. That would be absurd, if enjoyable to watch. The point I’m making is this: people who praise democracy for empowering individuals with the power of choice should like free markets even more, for offering that empowerment to a much larger degree. But too often in our country, votaries of democracy rant against free markets. Isn’t that strange?

A beast called government

This is the fifth installment of my weekly column for Mint, Thinking it Through.

There is nothing in the world as dangerous as blind faith. No, no, this is not yet another rant against organised religion: there is enough damnation already scheduled upon me. There is another beast that benefits from blind faith quite as much as religion, and that causes as much harm from our lack of questioning: a beast called government.

Don’t get me wrong, we need government. We need it to take care of law and order, of defense, and for a handful of other things. (I don’t have a very large hand.) But the governments we have, not just in India but virtually everywhere, are vast, monstrous behemoths that are many multiples of the size they need to be. The cost of this, of course, is borne by us: we pay far more tax than we should need to in order to keep government going, and to justify its size the government clamps down on private enterprise and individual freedoms.

Part of our blind faith in government comes from the way we view it. Governments are not supercomputers programmed to work tirelessly for the public interest, nor are they benevolent, supernatural beings constantly striving to give us what we require. On the contrary, governments are collections of people, individuals like you and me, motivated by self-interest. The actions of government are the actions of these men and women, and the best way to understand how they are likely to behave—and therefore, how governments are likely to behave—is to consider their incentives.

Outside of government, we get ahead, whether in our jobs or doing business, by giving other people goods or services that they require. There is a direct correlation between what we give and what we get, and clear accountability: if I overstep my deadline for this column one more time, for example, Mint will surely find another columnist to fill this space!

But the incentives in government are different, and they do not drive a bureaucrat to work in the public interest. This is superbly illustrated in C Northcote Parkinson’s delightful classic, Parkinson’s Law: The Pursuit of Progress. Parkinson, examining the British civil service, found that it tended to expand by a predictable percentage every year, “irrespective of any variation in the amount of work (if any) to be done.” He explained this with “two almost axiomatic sentences”: “(1) “An official wants to multiply subordinates, not rivals” and (2) “Officials make work for each other.”

In other words, it is in bureaucrats’ interest to expand their departments and get greater budgets allocated to them so as to increase their sphere of power. Indeed, mandarins who solve problems and increase efficiency actually risk making themselves, or their departments, redundant. Do we really expect them to be like the proverbial fool on the tree, who cuts the branch he sits on?

If bureaucrats want to increase the power they have, politicians want to build vote banks. That is how they rise in the political system, and it is silly to expect them to stop when they get to power. This means giving sops to interest groups that have supported them when they come to power, and reaching out to others. One illustration that speaks for itself is the Haj subsidy. Indeed, it would be irrational for a politician to focus on anything else but what will get him elected.

But we’re a democracy, so why don’t we just vote such politicians out? Well, to begin with, our system of government has what public choice theorists would call “concentrated benefits and diffused costs.” In other words, what is hundreds of crores of subsidy for a troubled industry or a free TV to a Tamil Nadu voter is just a few paise a year for you. Who do you think is more likely to lobby a politician or bother to go out and vote?

Of course, a few paise a year for thousands of pointless causes each add up to the majority of your tax money, but now we come to another reason for why people don’t vote against government wastage: what economists call ‘rational ignorance’. Besides earning a living, there are many good uses of your time, and finding out a break-up of where your tax money goes would simply take too much of your time. This is exacerbated by the fact that many taxes are indirect and hidden away – indeed, inflation often functions as a form of taxation – and that the politicians you have to choose from, all driven by the same impulses and catering to different interest groups, really aren’t too different from each other.

I had promised last week to elaborate on how a lot of well-intentioned and seemingly sensible government spending actually harms us all, and I shall do so in the weeks to come. I wanted to first highlight how wastage in government is not an aberration, but is written in the DNA of our system, and is integral to its nature. Thomas Jefferson once wrote: “The natural progress of things is for liberty to yield and government to gain ground.” Understanding that process is the first step to turning it around.

Journalists in Russia

“Fear makes such a good soil for self-censorship,” says Garry Kasparov, as quoted by Business Week in their story on how the Russian government oppresses journalists, “Who is killing Russian journalists?” The question, of course, is merely rhetorical.

If you are an Indian journalist, do read and feel relieved. Immense boredom may sometimes come, but at least there is no greater threat to life.

(Link via email from Gautam John.)

Let us trade with Pakistan

My belief in how we should deal with Pakistan was outlined in an earlier post, where I wrote:

I embrace what appears to many to be two contradictory approaches: an uncompromisingly hard line when it comes to terrorism, and a deepening of trade and people-to-people contact. Both work towards the same end.

I remmbering discussing this with Nitin Pai over a series of emails, trying to bring him round to my point of view, and Nitin has now come out with an excellent Op-Ed in Mint that elaborates on my point about using trade to subvert the military’s hold on Pakistan, and explains how the peace process should be re-engineered. Do read.

Singur: Media bias or media ignorance?

ATimes of India report begins:

Protests against Bengal’s industrial revitalisation could receive a new fillip after the suicide of a 62-year-old cultivator, an organiser of the Krishi Jami Raksha Committee (KJRC) in Singur, who lost nearly an acre of land to the Tata Motors project.

This is either dishonest reporting or shoddy journalism, and I shall give the benefit of the doubt to the reporter and assume that it is the latter. The protests at Singur are not against “Bengal’s industrial revitalisation” but against the forceful appropriation of land by the government. As I wrote in an earlier post on eminent domain and Singur, it really does not matter if the farmers got compensation: if they did not want to sell, it is theft.

Now, eminent domain might be justifiable as a last resort for matters of public use, such as building roads, but it is outrageous when it is applied to take land from poor farmers and give it to a rich industrial house. The irony here is that Tata would probably have been willing to negotiate with the farmers for the land directly, but by law, farmers aren’t allowed to sell their agricultural land for non-agricultural purposes. Yes, that’s right: even if Tata was willing to talk to the farmers and negotiate with them, and farmers were willing to sell, it would have been an illegal transaction. So Tata had no choice but to go to the government, which, of course, is not into negotiating, and simply took the land by force.

I entirely agree with Shruti Rajagopalan when she writes here that the fundamental right to property, revoked in 1978, should be reinstated in our constitution. An “industrial revitalisation” is only sustainable when property rights are sacrosanct. Otherwise it’s a mockery.

Pervez Musharraf’s incentives

Headlines like “India-Pak terror pact sinking fast” exasperate me. Whaddya expect? As I have written before, the India-Pakistan peace process is a charade. While it is in General Pervez Musharraf’s interest to talk peace with India, as it makes him appear responsible in the eyes of the international community, it is equally in his interest to continue the conflict, which Pakistan’s military needs for its sustenance. All talk, no walk, in other words.

Similar incentives drive Musharraf’s actions as far as the War on Terror is concerned. As I wrote here, appearing to be America’s ally gets the foreign aid flooding in (1, 2), which Pakistan’s economy desperately needs. However, if al-Qaeda and the Taliban are actually defeated, then that aid will begin to dry up, as Musharraf and Pakistan will no longer be needed so badly.

In each case, Musharraf is doing what any rational person in his place would do. The only way to solve either problem is to change his incentives. And, much as the mandarins in New Delhi may shudder at the thought, the Americans can do that far better than we can.

The next few months will be interesting.

(Some earlier posts on Musharraf.)

China, Taiwan and the Cricket World Cup

What does the cricket World Cup have to do with China and Taiwan, you may ask? Plenty. Sam Sheringham reports on Bloomberg:

More than 8,000 miles from Beijing, Chinese workers are putting the finishing touches on stadiums for a sport they’ve never played.

Living in temporary plastic huts and taking a single day off each month, about 1,000 employees of state-owned Chinese companies have sweated away the past year on the Caribbean islands of Jamaica, Antigua and Grenada as the West Indies prepare to host the Cricket World Cup, the game’s premier international event.

Their presence has more to do with China’s drive to isolate Taiwan, the democracy it considers a breakaway province, than with what the Chinese call shen shi yun dong, or “the noble game.’’ China is using its economic might to break alliances Taiwan forged in the Caribbean to counter its status as a diplomatic outcast.

Later in the piece Winston Baldwin Spencer, the prime minister of Antigua & Barbuda, is quoted as confessing, “They knew we didn’t have the money. If we didn’t have the Chinese workers we wouldn’t have been able to complete the stadium.”

I knew geopolitics and sport often collided, but I never imagined that China could use cricket to isolate Taiwan. I just hope the sport doesn’t get into any more crosshairs now. How disastrous it would be if Islamic terrorists were to chose a cricketing stage to make a political statement.

(Link via email from Nitin Pai.)

How to create terrorists

You can’t find a better manual on how to make people hate you than Tony Lagouranis’s description of how he tortured people in Iraq when he was in the US Army. An excerpt from John Conroy’s article on Lagouranis:

The warrant officer secured a shipping container that became the unit’s interrogation booth. Stress positions became standard operating procedure. They included standing for long periods; kneeling on concrete, gravel, or plywood; and crawling across gravel. “Another one we’d use was where they would have their back against the wall and their knees bent at right angles. We used to do that as an exercise in basic training and it gets real painful after a few minutes, but we’d make the prisoners do that for a long time.

On the CBI

Mulayam Singh Yadav does not want the CBI to carry out the probe in the case of his alleged disproportionate assets. His fear of the CBI is, by itself, a sharp comment on the efficiency of the agency.

And what is that comment? I suppose that depends on which party you support.