If I were Nehru, I would not have created IITs.

IITs are considered one of the showpieces of Indian quest for excellence. Graduates from IITs have excelled in a variety of fields and have brought laurels to the country. It has become the dream for lakhs of teenagers across the country - the definition of achievement. Wasn’t it a stroke of genius on the part of those who came up with the idea of creating IITs ? Let’s analyze the IIT model a  bit in detail.

IITs are one of the most misdirected subsidies.

Lakhs of teenagers across the country, toil for months, to get into these IITs. What exactly are these teenagers toiling for ? These teenagers are fighting among themselves for the right over government subsidies at the cost of all other citizens in the country.

What kind of teenagers generally make it to these IITs ? Duly considering the seats officially split among various communities, these primarily fall into two kinds, among their communities.  Either they are those who are relatively better skilled at physical sciences than others. Or they are those whose parents are capable of spending huge sums of money ( by Indian middle class standards) to get them coached into IITs.

Did the first group need subsidies for education ? No . These were teenagers who were already better skilled than others in their community and in most cases would anyways earn way more than the rest, in future. Rather they would be among the topmost earners in the country. But the system  by design chooses such people over others for these subsidies. These are the people who can most easily secure loans from banks to pay the full cost of their education . But the system precisely forces the others to pay higher rates to other private educational institutions and to depend on loans to pay that . Is this a good subsidy ? Answer for yourself !

The second group is those whose parents were among the richer in the middle class and could afford expensive coaching courses . Did these students needs subsidies at the cost of all other taxpayers ? This is an ultimate no-brainer.

IIT model is just snatching from poor and giving to the rich. IITs increase economic inequality.

We just saw the microeconomic effect on individuals of the IIT subsidy. What are the macroeconomic effects of the IIT model ? ( or more generally –highly subsidized government education with entry determined by competitive exams) . Tax money which could have been used for helping the poor in the country (through time bound income independent cash transfers)  is being handed on a platter to the relatively better off. If you are worried that young poor kids in the country don’t have access to basic schooling, blame these misdirected subsidies . Even if the government had let the market distribute education and waived off the taxes they are spending in the name of IITs, these poor people would have been in a better state with more tax-waived private money getting invested in the education sector.

The Indian middle class is up in arms whenever the government proposes any kind of subsidies on food grains , healthcare  and similar stuff. All of them are wrong, no doubt, but even worse is this subsidy given predominantly to the middle class against which nobody seems to be complaining. The Indian middle class though believing they don’t support communism, more or less are unable to identify communist ideas when they are properly marketed to them.

This socialism in the form of IIT subsidies, does nothing more than exaggerating the economic inequalities in the country. The better off become even better off and the poor stay where they are.

But isn’t it good to promote education ? Will you also speak against scholarships for meritorious students ?

Yes its good, if it isn’t the government. Yes I will, if it’s the government.

Its wrong for the government to promote education , or anything for that matter . Why ? Because government does not produce any goods or services, private individuals do. The only way for the government to give something to somebody is to snatch from somebody else. Whenever any government says that it will promote education, it must pull money through the tax mechanism from private individuals, money(capital) which would have otherwise been distributed by the market in sectors with the highest demand. And if you think education is very important, even the market , by reacting to the price signal, will move money to those sectors which are important, and much  more efficiently than the government.

So does that mean we should not promote educations ? No. Private individuals should be free to spend their money the way they want. And if they want to promote education then they may freely do so. The only thing I am saying is if you want to promote educations, do it with your own money. I cannot support you in snatching money from other people to spend the way you want.

For the same reasons, government providing scholarships to meritorious students is a bad idea. Being meritorious is an incentive in itself. If you are actually useful for the society, you will earn more. Government artificially increasing the incentive for merit over and above the market is a bad idea coz this must be done by the government by taxing someone else higher than otherwise – money which would have been invested much more efficiently by the market. Private charities planning merit scholarships are perfectly fine coz its their personal money and they should be free to spend the way they want.

But the private sector only cares about profits! We need the government to invest in sectors beneficial to the society as a whole.

Who is the right person to determine what is and what is not beneficial for the society as a whole ?  It is the individual who is finally benefited. If an individual thinks something benefits him, he will generally be ready to spend more money on it compared to other things he can spend it on. Taking the aggregate for the whole society the total money offered for a service in the market will depend on how beneficial the society considers that service for the society. The price signal will propel the ‘evil’ capitalist to invest his money in producing this service . This is the market mechanism.

What is the government mechanism? This starts with first rejecting the knowledge and experience of  millions of individuals in the society who are deemed incapable by the socialist of knowing what is good for them. It is then assumed that a set of bureaucrats and elected ministers will be able to make better calculations on how much to invest in each sector , than the sum total of all individuals in the society exercising their will through the market. The next step is granting monopoly powers to these bureaucrats and ministers and exclusive rights to collect(tax) and spend other people’s money. Ironically this is the same socialist gang which came to power citing research on how bad monopoly is and how monopolies lead to inefficient outcomes!

The above just talks about the theoretical reasons on why the government mechanism is worse . I don’t think I need to cite empirical evidence to support this. The Indian experience with socialism is not something which needs to be cited again and again.

IITians have brought laurels to the country. Even US presidents have named IITs in their speeches! IITians send foreign currency back to the country !

Yes, US presidents have named IITs in their speeches! What do you make if it ? If Coca Cola praises some policy of Pepsi, what do you make of it ?

Of course US Presidents will praise IITs. IITs provide USA with cheap labor at the Indian taxpayer’s expense . To elaborate, IIT model  takes money which should have gone to the poorest Indians , gives them as subsidies to better off Indians to improve their skills which increases the supply of technological labor for American companies. A win-win for USA.

Yes they do send foreign currency back to India . They benefit from government subsidies at the cost to other Indians and send back money to ‘their own’  bank accounts. Now will the real socialist , please stand up ! If this is a good outcome, it is a justification for a policy where the government goes a step further and subsidizes meritorious Indian students to be sent to private American universities . This will  give you more of the above outcome . What do u think now ?   

IITs have led to much technological progress in the country

There is a very apt depiction of existing governments. Government is what breaks your legs, uses tax money to provide you a subsidized wheelchair, uses tax money to build accessible infrastructure and then points out to you that you are moving around so well due to the government.

Similar is the case with this uni-dimensional simplistic argument. Yes there is no doubt IITs have contributed to technological progress. At what cost ? What would have happened if there were no IITs. Would there have been technological progress ? What would have been the extent of technological progress ? Would the Internet have existed if the US government had not done something about it?

Where did the government get the money from, which it used as funds for IITs?  As taxes from the private individuals.

What would these private individuals have done if the government would not have had taken this money from them? Most of them would have done anything to make more money out of it.

What is the mechanism to make money in a free market ? Provide something in the market which society values .

What is the final purpose of technological progress ? To provide something which society values .

What would the private individuals have done to produce something of value for the society ? Invested in technology  where  it is required to fulfil society’s needs.

What is the right amount of investment in technology ( mind it any money spent on technology must reduce money spent on something else) ? To that extent which maximizes value for the society considering everything this investment gives society and what it snatches.

Which model would tend to move towards this optimal level of investment ? Take thousands of examples from the history of human civilization (or just from India) and answer for yourself.

Which model would have been more efficient in terms of Return on Investment ? Take thousands of examples from the history of human civilization (or just from India) and answer for yourself.

This idea is not specific to IITs. This is a feature common to any governmental investment . Just ask these questions . What is the right amount of investment in Sector X? Which model tends to go closer to this ‘right amount’ and is efficient?

The primary reason why governments go wrong in estimating the ‘right amount’ is because they are not looking at profits which means they are not looking at value provided to society. They say they are looking for value provided to society, to get your votes, but they are not and they can’t. If they were they would have sold off Air India.   

If a group of ministers and bureaucrats could fathom all the decisions the millions of humans in the market are making every moment, depending on their subjective emotions, objective calculations and things you cannot even imagine, they could as well have been supermen.  And we know there are no supermen around !

Your stand is hypocritical, you have yourself benefited from this subsidy!

What should you do when you know some policy is wrong? ( I am not implying that I understood that the policy is wrong when I took the decision more than a decade ago, I am just considering the case if I did)

If you are in a position to change the policy, change it.

If you are not in such a position, consider two cases , one in which you take the undue benefit of the policy and a case you don’t.

If you do, there is someone else who suffers.  It is easier for you to convince this one person that the policy is wrong! (convincing other people is as easy or as difficult as otherwise) . Yes, you do run the risk of being labelled a hypocrite.

If you don’t take the undue benefit, somebody else does . It becomes more difficult for you to convince this person that the policy is wrong. Along with that, people question your motive and call it  jealousy against those who actually benefited.

The first case of being labelled a hypocrite is better.  At least they don’t reject the idea as being motivated by personal greed and jealousy, though they may reject for other reasons ( but that can as well happen in the other case) 

IIT model is socialism of the worst kind

Socialist goals are commendable. But real world socialism generally produces results contrary to the goals.

The right model to move in the direction of the socialist goal of reducing inequality from the current state in India is the free market. The right way to reduce inequality even further than what the free market provides is the ‘right kind’ of socialism: redistribution of wealth through time bound income independent cash transfers.   

Coming back to real world socialism , even they can be classified under various categories. All are bad but some are less worse than others. Some actually do help some poor at the cost of other poor, while increase inefficiency and corruption.  These are the governmental actions in the field of food, health and stuff.

IIT model is socialism of the worst kind. It benefits the better off at the cost of the worse off. It is very important to clearly differentiate socialism from free markets cause most politicians try to sell socialism to the poor or uneducated  as socialism and socialism to the rich and educated as capitalism cause they know its finally socialism which gives them the opportunity to make money out of government . It is no wonder that people who say/think they support free markets also get into this trap that governmental intervention over and above its job of creating a free market, is somehow necessary to make markets work.

The Government's job is to protect private property, enforce private contracts and manage stuff where you cannot define ownership and do the ‘right’ socialism if required.  Limited powers for the government is what will move us in the direction of an equitable and efficient society.

Why we Indians don't like queues ?

It’s a very common scene in India . People trying to skip queues and get in front of you until nudged. Seen all over the country. Its become a second nature for us.

The same Indians change their behavior when out of India . They will not only stay in queues but even maintain enough distance from those in front of them .

What is it that has, in a sense evolved us Indians into this kind of behavior ? Lets step back a moment to understand what is  going on here.

Free markets

Free markets are based on the principle of voluntary exchange. The price of any commodity is decided by mutual agreement between seller and buyer without external coercion. Both buyer and seller are free not to have the deal if any one of them does not want to .

This system has a very special property. What is it ? Only those people get to consume a commodity who were willing to pay an equal or higher price than the price at which the transactions are finally made . The people who don’t get the commodity are those who were not ready to pay or cannot pay the price at which the transactions were finally made. Economists say that this results in supply equaling demand at the given price.

What does this mean for the buyer? This means that in cases where the seller determines the price according to the market , if I am ready to pay the price advertised by the seller, in most cases (not in all cases)  I can be reasonably sure that I will get the stuff whenever  I reach the seller.

Price controls

A favorite device of most politicians to win elections is to promise price controls to the electorate. In literal terms they promise to , by exercising their eventual executive or legislative powers, force the market to provide a commodity at a lower price than the market price. In almost all cases these promises yield rich political dividends . The kind of commodities on which such policies are generally applied are those which are considered ‘necessities’ for everybody.

Let us see how price controls affect the psychology of the buyers.

Most sellers  generally choose the investments they make by evaluating options and preferring those which give them the maximum profits. For example if producing rice and wheat require similar inputs and rice sells at a higher price that wheat , more farmers will move towards producing rice than wheat . Economists say : Other things remaining same, the quantity of a specific product produced increases with the price at which it sells in the market.

What do price controls on a product , result in ? As we saw above , when we put price controls on any product, less people will be willing to invest in producing it . The supply decreases compared to what it would have been in the free market .

The number of people who want a product becomes more than the amount available at the given price . As shown above, the rule as to who gets the product in the free market was simple . If you can pay what the seller sets the price to, you will get it. What is the rule by which these price controlled products are distributed ? No other mechanism remains other than to make it random because there is no other differentiating criteria : all these people are ready to pay the advertised price. Well, not exactly random!

I know all this crap, you didn’t talk abt queues!

What does this mean for the buyer?  Given the price advertised by the seller (forced by the government) , a buyer is less sure  that the product will be available for him to buy, by the time he/she reaches the seller.

In many cases even if the product is available at the time  the buyer reaches the sellers premises , it might go out of stock by the time he is actually ready to make the transaction .

What happens when queues are formed for products with shortages?  Among the people standing in the queue , a group at the beginning of the queue will get the product and another group at the back will not despite they being ready to pay the same price at which the others got it .

When prices are decided by the free market, the people chosen to receive the product are chosen by the amount of money they have . When we have price control induced scarcities, the people chosen to receive the product are determined by their position in the queue.

How does this change the set of incentives for different societies ?

Societies where prices are determined by markets provide an incentive for people to become more productive and earn more money when they are not in a queue and not skip queues when they are in queues.  

Societies where governments choose to control prices,  reduce the incentive for people to become more productive when they are not in the queue (because earning more does not improve their chances of getting the product) and increases their incentive for skipping queues, for obvious reasons.

Humans, like every species, evolve . Darwin talked about survival of the fittest. Specimens of a species which adapts better to the prevailing conditions are chosen by the process of evolution. Specimens which are not as apt, given the circumstances, either change or vanish.

Indians as you see this day, are the result of this process of evolution.

Black Friday deals

The best test bed for this theory is not in India but thousands of kilometers away in the USA,  a few weeks before Christmas.  Its amusing to see how easy it is, to reproduce the same Indian behavior in Americans (otherwise known for their queuing etiquette) , just by doing exactly what the Indian socialists have been imposing on the Indian ‘junta’ for decades. Few announcements by few shops to sell products at prices below the market price, result in this . Its high time we stop blaming Indian queuing habits on ‘we - the junta’ and put the blame at the doorsteps of those who deserve it, the Socialists who got hold of our country after independence.

What is corruption ?

Corruption is one of the most talked about but the least understood issue in modern India. Understanding the root cause of corruption is necessary before embarking on any venture to reduce it. It will serve us well if we delve into some generic patterns of corruption and understand how it is so deeply related to economic policy whereas generally it is attributed to mere greed motives. This is one of the prime reasons why efforts based only on intentions have always failed to reduce corruption in any long term sustainable manner.

Economic policies

If you look at the economic history of the world, it is just a sequence of experiments on varying interpolations between the two opposing views on economic policy. These are the left and the right, named as such due to some French history which is inconsequential to the current discussion. In essence, the two economic ideologies are basically just ideas on how the goods and services produced in the economy be distributed among the people. 

Before getting into exact description of the two ideas lets revise a few facts . Who are  producing these goods and services ? These are the people . Who are consuming the goods and services ? It’s the same set of people. 

Now let’s understand what do these two extreme ideologies state . The extreme right says , the goods and services produced in the economy be distributed among the individuals for consumption in a similar proportion as to what the individuals produce, with voluntary forgoing. The extreme left says that the goods and services produced in the economy be distributed among the people equally, in some sense. The most well-known proponent of the latter view was one Karl Marx . For the former, one of the earliest proponents was one Adam Smith.

Let’s investigate the two ideas in some detail.

Right

The right says the goods and services in the economy be distributed among the people in the proportion to what they produce . How do we achieve such a system?

Free market is one of the mechanisms to achieve this . People make voluntary exchanges of their goods and services as they deem fit . The relative values of different goods/services are determined by the individuals themselves involved in the transactions . The transaction does not guarantee that individuals are happy (which in itself is a very subjective idea) . A transaction only guarantees that it happens only when both individuals think that they are better off with the transactions rather than without it.

Is there a role for government in such a system ?

Yes, a government is necessary in such a system and a few of its major responsibilities are: 

1) Codifying and Enforcing property right ,i.e. listing out rules as to what production and consumption of goods and services will be attributed to which individual and enforcing such rules.

2) A collective  mechanism to handle cases where either production and consumption cannot be defined . Even here the government functions by trying to define some approximate rules. Example would be its difficult to identify which individual uses(consumes)  the defense services in what proportion. Who uses(consumes)  the oxygen in the air in what proportion . These are cases where the government cannot assign property rights and hence must find an approximate rule .

What are the major benefits and drawbacks of the system .

One major benefit which is pertinent to our discussion on corruption  is the minimal requirement for centralization of economic power. The other benefit is that for an individual to consume more goods and services , it is necessary for him/her to produce more goods and services and specifically those goods and services which are valued relatively more by the rest. This results in the total goods and services in the economy increasing with time. Another effect is the increased production of those goods and services which are valued more and deemed more necessary by the society as a whole . The relative value of goods and service are quantified by what is called price.

What are the major drawbacks of this system?

People who produce less get to consume less. The reduced production from these individuals could be because of many factors , e.g. absence of skills due to less/no education , inability to produce due to health issues or handicaps. It could even be due to less desire to consume more .

Left

Let’s look at the other system of economic organization , the most extreme form of which is the left. It tries to provide each individual with equality of consumption irrespective of the amount they produce . How do you achieve such a system? Communism, or to a milder extent – socialism where the government takes more and more ownership of the economic assets. 

It necessarily requires a centralized authority which needs to be entrusted with the task of distributing consumption relatively equally among the people. Differing from the previous system there is no way this can be achieved in a decentralized manner . Because in any exchange of goods and services , the two people involved need information about the whole economy to find what exchange leads to the results desired by the left. The centralized authority in this system has to take up the task of collecting information on the production in the system and then devises rules on how to distribute them equally. In almost all cases, this extra responsibility is assigned to the government and it is just assumed that the government will do a good job.

What are the benefits of this system? There is less inequality in the consumption available to the people.

What are the drawbacks ?

In an absolute communist state there is no incentive to produce more . In more real world manifestations i.e. socialist states, the incentive to produce more is not totally removed but still reduced as compared to the free market . Many people will say, if I am going to be allowed consumption similar to what others get, why should I put in more effort to produce more than others . This results in the total output of the economy not increasing with time as fast as in a free market or stagnating.

The other drawback here, and this is most pertinent to our discussion, is the centralized economic power. Who are the individuals who wield this centralized economic power? These have to be people among us . Societies generally use the process of democracy to assign groups of individuals to wield this elevated economic status.  Multiple individuals compete against each other in the process of elections to wield this power. Let’s analyze this system in a bit more detail. 

Back to corruption

In a rightist model , the government is more or less only a contract enforcer. When we move towards the left we endow it with powers to also be a redistributive center. How does this system play out in real life ? For an individual, the tendency to crave for more and more consumption with less and less production is very natural. In the free market system, the only means to consume more is by producing more and this human tendency is kept in check. Of course, no one will give u his production without  in turn expecting to receive some of ur production,  and the government does not have the right to force him/her into doing otherwise . In the socialist/communist system , this tendency is left unchecked ! How ?  The individuals who had the most craving for consuming more than they produced were limited by the free market earlier. But in the left model, apart from all the options available, they have another new option . They can try to seize control of the redistributive center. Directly by themselves getting elected in democratic elections to positions of governmental economic power. Indirectly by bribing those who are in positions of governmental economic power.

Corrupt are entering politics

Nobody is corrupt till he is corrupt. But yes the desire to consume more and produce less is innate in human nature . I would be lying if I say I don’t want that . Will I refuse an employer who pays me higher than my current employer , with everything else remaining the same . How many of you will ? The problems arise when there are opportunities to fulfil this desire  by means other than the market mechanism.

Consider democratic election system. Consider a government position with relatively less economic powers . Consider a population with 1000 people with 500 well intentioned and 500 mal-intentioned . Also assume that given the economic powers of the position 10 well intentioned and 10 mal-intentioned people are interested in running for election.  How does this equilibrium changes as you increase the economic powers of that position ? The incentives for the mal-intentioned increase much more than the well –intentioned in seizing this position of economic powers . So now 10 well-intentioned and 15 mal-intentioned people would be interested in running for office . Keep increasing the economic powers and u will see that the system acts as a sieve which increases the ratio of mal-intentioned to well-intentioned people entering the electoral battle. But wont the voters reject the corrupt people  ? To some extent yes , but is that enough. Nobody is corrupt till they are corrupt . After someone has come to power you might reject them in the next election but the sieve is still there . Faces change but the ratio of aspirants to democratic elections remains the same.

Am I saying that all democratically elected people in the left system are corrupt ? No . What I am saying is that the ratio of corrupt people elected in the leftist system is more than in the rightist system.

Money spent on winning elections

With the above understanding , the fact that more and more money is spent on winning elections, is a corollary . I will invest in a venture in the proportion of the profits I expect to gain from that venture . You increase the economic powers of the government and the individuals who have more money power will invest more and more in the business of politics . Politics has become a business . Yes that’s something we all understand . Why ? Because we want it to. We are giving the government economic powers and it’s a corollary that it will become a business, where the major beneficiaries are the ones who are ready to use the economic redistributive power as a means of self-fulfillment.  If u want to reduce the amount of money spent on election reduce the economic powers of the government.

The corrupt industrialist

The  ‘evil’ capitalist whose greed was being checked by the free market now has a free reign. Earlier he had to satisfy his millions of customers to sustain his business. He had to provide them the best product available in the market at that price to retain his wealthy position. Now he has a simpler way. He can bribe the politicians who have power to take economic decisions. Or he can start by just funding the expenses of the candidates, in expectation of some ‘regulations on himself ’ in return. These regulations generally are advertised as helping the consumer  but take the form of rules which helps to prevent competition.

These could be stricter rules on the types of products allowed in the market which prevent other companies from competing.

These could be minimum wage laws which help to prevent new competition with less capital from entering the sector.

These could be ‘anti-monopoly’ laws which prevent a competitor  from selling a similar product at a lower price .

The types of regulations which help the big business man are only limited by the imagination of the politician  and the businessman. Yet there is one common strand in all these regulations . All are sold to the ‘junta’ in the name of benefiting the consumer. By giving government power over the market, we have created more opportunities for monopoly. Yet when a country reaches this situation, the ‘junta’ is somehow convinced that even more government control is the solution. As the great economist Milton Friedman once said , the biggest monopoly in the country is the government. What makes it even worse than any other monopoly in the free market is the fact that you can choose not to transact with other monopolies and reduce its power over you but the government has the powers to coerce you into transacting with it.

A combination of left and right

The most common argument given is that a combination of left and right will be best because then we can pick and choose the good points of both. This argument is not wrong but in most cases it is based on an incorrect assumption. It does not consider the  fact that you will unintentionally also be pulling in the bad effects of either system in the same ratio in which you include them in your cocktail. It’s not possible to pick up only the good results and leave out the bad results. So any benefits of left will simultaneously pull in reduced prosperity and increased corruption. The important point is analyzing any given interpolation considering both the good and bad effects of the left and right components of an economic policy and comparing these overall effects of the policy with another interpolation. Analyzing a policy by only considering how it works on a ‘specific’ case, is the reason for many logical fallacies.

Am I saying that a combination of left and right is not the best model? No. It is . But we need to very careful in choosing what we pick from where. More on this later.  

But we can choose good leaders and the left model will work

We can choose good leaders to be put in positions of economic power . Wont that be the best for society as a whole ?

This is another logical fallacy resulting from analyzing a policy by only looking at its effect on a specific case or person .

Who is a good leader ? Is that leader better who legislates high prices for rice or the one who legislates lower prices for rice ?  Farmers say the one who legislated a higher price is better . Consumers say  the one who legislated lower prices is better.

There are so many verticals on which a policy helps someone and harms someone else that it’s very difficult to have a consensus on who is a good leader . As discussed earlier , states resort to the system of democracy to resolve this problem. The rule which a majority of people support is supposed to be ‘somehow’ correct. The argument given is that the majority conscience will overwhelm the malafide intent of a few . But the individuals in the majority are only analyzing the policy   as to how it will affect them and hence we see the results we have seen in every democracy around. Is this an argument against democracy?  No. Democracy is the least worst system to resolve such conflicts . But can it be taken to be a principle ? No. Democracy is just an expedient . Is it moral for the 51% in a state to legislate murder for the rest of the 49% ? If not, how can democracy be a principle, its nothing more than an expedient.

And as we discussed earlier, democratic control of economic power comes with its own pitfalls of increased incentive for the corrupt to invest in seizing control of it.

The argument that a left system with good leaders can work is on shaky grounds . The very fact that we want a democratically elected individual to exercise economic powers is full of pitfalls , leave aside the intentions . Ironically a leader with good intentions (and this is my view) will actually refrain from exercising economic control because that is best for society as a whole.

Any proponent of such a view ‘choose good leaders and corruption will reduce’ will have to answer the question – why have we not been able to do this in the last 60 yrs ? The answer you will get is that good people are not entering politics – ‘Sarre neta chor hain’ . Why ? We discussed the sieve in an earlier sections  , that’s the primary reason . How do we remove , or at least reduce the effect of this sieve . As discussed earlier, by reducing economic powers of the government.

Am I saying don’t choose good leaders ? No. What I am saying is just delve a bit deeper into who is a good leader ? I think on the average considering the current state of most economies around the world, a leader who reduces economic powers of the government is a good leader .  On the average, a leader who increases economic powers of the government is a bad leader.  A leader who with good intentions , arbitrarily increases the economic powers of the government is generally a bad leader because he is missing two points . Even with increased government economic powers, he cannot give better results than the free market at least when productivity is concerned, and he cannot make any commitment about the intentions of leaders coming after him , who will inherit the elevated economic power. A good leader is one who limits the economic powers of the government in a specific way. More on this later.

We can add more checks and balances.  Lokpal can help. Wont that solve the problem?

One idea which comes up is that the system is corrupt because there are not enough checks and balances . This is true to some extent. After all the only reason a rightist system works is because your greed is checked by my greed and my greed is checked by your greed. How do we apply a similar structure on the government to make it less corrupt? The founding fathers of India had put in a lot of thought and tried to make the legislature, executive and judiciary independent of each other to as great an extent as possible. This in some sense provides a structure of checks and balances. The idea is that if one branch goes the wrong way ( read corrupt) , the other branch can check it. A logical extension( or is it?) of this idea is that if I can create another independent entity which has power over the other branches  to investigate and prosecute corrupt people in these branches, this will reduce corruption. Let us examine this proposition in some detail.

System of checks and balances works where greed of two different people generates a conflict of interest. Is such a thing happening in the ombudsman model? Does the ombudsman have a personal greed which will cause him to reject a bribe and prefer prosecuting corrupt and doing with the inherent personal economic loss of rejecting the bribe. Am I saying that all ombudsmen will be corrupt? No. But the probability of the ombudsman becoming corrupt is more than the probability of him/her not being corrupt. The argument given against this is that the ombudsman will be an eminent person selected after much discussion. The question is : selected by whom ? Selected by the combination of the same legislature, executive  and judiciary . The judiciary is selected by the judiciary and executive . The executive is chosen by the legislature . The legislature is selected by the people. So in effect all four are selected by the same people . How would it happen that the same people who are not able to choose a good legislature and executive will be able to select a good ombudsman? Why would it not happen that the same reasons which result in choosing of a ‘bad corrupt’  legislature , will result in a ‘bad corrupt’ ombudsman being selected ? Is there any inherent difference ?

Am I arguing that  an ombudsman will not reduce corruption in the short term ? No. This model will reduce corruption in the short term . But as time progresses it is inevitable that the ombudsman will become corrupt for the same reason the legislature became corrupt . What are those reason? Economic power over other people . This is a major factor which will determine the level of corruption in the long term.

Yes lets definitely go for an ombudsman. But let us not delude ourselves that this is the best way to reduce corruption or it is the ultimate way to reduce corruption. The only sustainable way to reduce corruption is reducing economic powers of the government.  

But there can be corruption in the right too

As we have seen,  as the proportion of left policies in the government increases the tendency to become corrupt increases. Am I saying there will be no corruption in a right leaning government ? No, but the tendency to become corrupt and attract corrupt people will reduce .

But can corruption happen in businesses which are left free from government interference in the rightist model, which under left government would have been a part of the government?  Sure it can happen. Examples : Satyam scandal . Let us understand what the scam was . A publicly traded company fudged its accounts to show higher profits than they actually had in order to increase its share prices than it otherwise would have had. Why did the  individuals involved do this ? So that they can earn more money by selling their shares , or the company can attract more investment than it otherwise would have got.  So we see that lies and deceit can happen even with publicly traded privately owned companies .

What are the major differences between this kind of corruption and corruption in government ? 

The first is that though there is corruption in the private sector also , the  pilfered money as a fraction of total money involved is still higher in the government than the private sector . So the objective question to be asked is : Given the current state of affairs,  how do you compare the probabilities of corruption happening in the government and corruption happening in the private sector ? If corruption is the deciding factor , in whose hands would you want to put more resources of the country ?

The other difference is how do the distributions of losses compare in the two cases of private and public corruption? When private companies indulge in corruption, the biggest losers are the shareholders , and the the employees . The shareholders in some sense deserve the loss because they made an imprudent decision to invest in the specific company when every other option was available to them .The employees are also affected . Not that they deserved the loss but these are still individuals who will have other options for them and were anyways better off than the poorest in the country . Only those who were somehow related with the company lose. What  is the distribution of losses when the government agency indulges in corruption ? The loss is shared equally among all citizens of the country . The poorest are as hit as the richest when the government indulges in corruption. Which distribution do you prefer ?

The solution proposed by most people here is more government oversight over private companies . As discussed earlier this has two drawbacks and minimal benefits . What are the drawbacks : More government oversight requires more government spending which requires more taxes on all . What for ? For whose benefit ? The biggest beneficiaries are the private investors , and that too only if the government agency works as expected ( which in itself is very improbable) . The second drawback is that more government economic power is a sureshot way of increasing corruption. Private interests will try to bribe the government oversight wing to change reports in the direction which benefits them . So we see that if the wing becomes corrupt , it benefits the bureaucrat and the rich selfish economic interests and if it does work well, the beneficiaries will be rich private investors at the expense of all the taxpayers . So are we better off with more government involvement or less government involvement. Mind it, the contract enforcing powers of the government is not being questioned, only supervisory powers of the government are being questioned.

Does this mean there should be no oversight over private companies ? No that is not being said.  The only point being made that taxpayer money should not be used here because this is unjust to the poorer people. The right thing would be that only those people who use these services ( of oversight over private companies)  pay for it . We can have public or private models but that’s a different discussion.

The biggest and most under-discussed effect of government oversight over private corporations is the promotion of risky behavior among investors and corporations . When there are no government guarantees given over the performance of the private sector , the investors apply the maximum mind in choosing the right companies to invest in. Risky behavior is discouraged among investors . Reduced risky behavior by investors automatically reduces risky behavior by corporations . The great crashes in the US economy , one in 1930s and the other much more recently in 2008 were both results of increased govt interference in the private market . The establishment of the US federal reserve in 1913 by President Woodrow Wilson gave guarantees to private banks in case of bank runs and resulted in more risky behavior from them effectively reducing their reserve ratios below what the free market would allow. This was one of the biggest contributing factor to the biggest economic crash in Human history. The affordable housing schemes from president Bill Clinton in 1998 was implemented by forcing banks to provide housing loans at lower interest rates and banks were compensated by more guarantees from the government on loan defaults. This increased risky behavior among banks which provided loans at a lower interest rate to less worthy creditors than what the market would have allowed  resulting in the sub-prime crisis of 2008. The interesting thing about these effects of government actions is that the results show up decades later . The immediate effects of such policies are stimulated economic growth due to monetary expansion in the short term(which is cheered by ‘junta’) and crashes in the long term. When the crashes happen, the immediate incumbents are blamed . There is demand for more government actions as happened in the aftermath of both 1930 and 2008, and the cycle continues.

Isnt this an oversimplification

Sure this is a simplified model of a very complicated problem which has many more factors affecting it than discussed here . Is this an oversimplification ? What is an oversimplification ? An oversimplification is a model which is missing such important facets of the problem so that the conclusions are erroneous. Are the conclusions here erroneous ? The only way to say that is if somebody can come up with another model which considers more factors and gives qualitatively different results.

Till then , I will say this is a simplification and not an oversimplification .

Also we must understand why simplification is necessary. In almost all problems is real life there are so many factors affecting the issues that it is not possible to account for each and every factor . So we choose those factors which have the most relevant effect on the issues under discussions . The only way to determine if all ‘necessary’ factors have been considered or not ,is experimental verification. I believe that for the qualitative analysis of corruption at the macro-level ,the factors considered above are sufficient and serve to explain almost all observed facts about corruption.

Scandinavian countries are working well with Socialism.

But Scandinavian countries are working well with a very large government, and low levels of corruption.  They rank among  the topmost countries as far as the quality of life is concerned. Does this not go against all what we discussed above ?

Lets look at the propositions in a bit more detail.

                     

Is economic powers of the government the only factor which determines corruption ? No. Multiple factors will effect it. Ceteris paribus(Given everything else stays the same) , will the economic powers of the govt change the level of corruption? Yes .

If we understand the above , the only questions which remains is when we say Scandinavian countries have less corruption, whom are we comparing with  ? The only objective comparison can be with the same country at a different level of government’s economic powers . Is there any reason to suggest that the level of corruption will not increase with the size of govt increasing? Or it will not decrease with the size of govt decreasing?

The prosperity of Scandinavian countries cannot be attributed to socialism. These countries have been prosperous even before they became socialist, for various reasons like natural resources and low population densities , along with the climate conditions which force a higher average standard of living. The initial prosperity allowed them to move towards socialism. A rich man spends a lot of money but this does not mean that spending a lot of money makes him rich. If we compare apples to apples , socialism has done more harm than good to the economies of these countries . They are still better than most other countries but would have been still better had they had not moved in the direction of socialism.

All this is theoretical, the actual problem is selfish people

Yes that’s a problem. Most people prioritizes their personal interests over interests of other people. Some people are selfish and will work only for self interest. Some people consider other people’s interests above their own and will work irrespective of whether they personally gain or not.  So we have two groups of people lets called them A and B respectively. Now lets see how they behave under the two systems . In a communist system A will not work and B will work . In a  free market system both A and B will work . So which system handles the problem of selfish people better? The answer is quite obvious.

The idea of blaming problems  in the country on selfish people is quite self-defeating. Prioritizing your self-interest over others is not totally unnatural. Systems which fail to take into account this basic fact, increase corruption and decrease productivity. Systems which consider this fact as a basic assumption in their design generally tend to perform much better.

The idea that lack of education is what makes people selfish has been absolutely discredited by events in the last decade in India . The individuals who indulged in the biggest scams did not ‘need’ it . They were not ‘less educated’ . They were selfish like most others. The only unique factor contributing was opportunities available.

The assumption that people are always rational is false

The assumption that this is an assumption in the above discussion is wrong.

One criticism of the free market system says that free market system is not optimal in real life because it fails to account for the fact that people are not always rational. That is right , people not being rational decreases the optimality of the market. But, this argument is used to justify government intervention in the economy! This begs a very basic question. Is government action somehow more optimal than the market ?

If you are assuming that the people are not rational, how can you say that they will elect the ‘right’ people in government who will make the best decisions for them? If they are not rational when their self-interest is concerned, how will they all of a sudden become rational when voting for a government and will end up choosing the right guy whose policies reduce corruption?

So comes the next argument that rational people are in a majority and hence the government chosen will be rational. But does that also not mean that the rational people will impose economic policies on the less rational ones which exploit them. Afterall by assumption the rational people are in majority  here . And the effect of any economic intervention by government in the market is good for some and bad for others . Wont in such cases will there be lots of economic interventions which will be good for the rational and not so good for the irrational. How is the irrational better off here than the free market by having a government for the rational ? Rational does not mean selfless.

Then comes the next argument :  its not about being rational, its about being profit maximizers. And because not all people are profit maximizers, free market is less optimal than government economic intervention. If there are some people who are not profit maximizers in a free market then they would be doing good to other people at their own expense , isn’t it ? If they are ok with this, is it ok for others to use the government to force them into maximizing profit   ? Either they are doing this deliberately(benevolence- and there are many examples of this ) or under ignorance(no knowledge of alternatives available). What does it mean that someone is not maximizing their profit due to ignorance ? Examples : a laborer who is very poor but does not know that if he shifts to the contractor across the road he can get Rs10 more per day. But the contractor across the street knows that there is a laborer across the street who is working at a rate Rs10 lower than what he is paying currently to his employed labourers. He out of greed, will layoff one of the guys he was paying Rs50 per day and employ this unaware laborer at Rs45 per day . Yes there are costs involved in shifting jobs . Does that change the affairs in any qualitative way?  Sure there is a case where this contractor is not rational or a profit maximizer ! What governmental actions will you propose to make all the people involved better off ?

In all cases, the biggest question is: what government economic rule will you propose to make it more optimal ? And what rule will you put in that the good people are always elected to power?

The real power of the free market system is that it tends to reduce 3^rd party effects, which in economics jargon is termed ‘externalities’ . Externalities are effects on individual A  of a mutual transaction between other individuals B and C.  The whole free market system is based on the idea that the system which reduces externalities will produce the most efficient results. Free markets try to isolate actions and effects to individuals thereby reducing externalities. Do free market systems totally eliminate externalities? They cant . They can’t in those cases where individual property rights can’t be defined. For example air , water , etc. This is where the government needs to step in to somehow compensate for these left over externalities from the free market. But the left model provides for overarching governmental functions which increases externalities much more than the leftover from the free market. When Air India loses money, its not some individual who loses money. All taxpayers lose money . Do I have an option to sell off my stake in Air India ? No, I am forced by government to invest in Air India  by forcing me to pay taxes. So much externalities for no reason! The externality argument is actually an argument  in favor of limited government and free markets.

The biggest benefit of the market is that it provides an incentive to make myself more productive for the society which any left model cannot match. It provides me an incentive to be more rational and not indulge in actions detrimental to myself . The left reduces it.

But what about the poor in the rightist system

Now lets get back to the problems we stated earlier with the rightist system. To restate , the problem with the rightist system is that there will be some individuals who will have to live with minimal consumption due to absence of skills due to less/no education or inability to produce due to health issues or handicaps. We will leave aside those who voluntarily choose not to produce or consume . Does the rightist system have a solution for this problem ? Absolute right does not, apart from the instances of voluntary donations . It might suffice, it might not ! But it gives no guarantees .

Now this is precisely where a combination of left and right will help. But as we know, left if fraught with dangers detrimental to the society as a whole . So we must be very careful and picky in what we pick from the left. We must pick the model which disturbs the market to the minimal possible extent . Which provides least opportunities for corruption and which reduces the incentives to produce to the least extent. Mind it , the maximum productivity of the society reached by free market necessarily will be reduced whenever picking up anything from the left. Just that we should pick up what is least harmful.

Least corrupt left

The one option which seems to satisfy all these criteria is a system of income independent cash support, the amount of which keeps decreasing over a period of say 50 years and stopping altogether after that . To elaborate, all citizens of the country receive some amount of cash from the govt monthly which they can choose to spend the way they want. The govt does not provide any public hospitals, schools or anything of that sort. The govt only provides foreign defense ,contract enforcement services and environmental protection. The system provides minimal opportunities for corruption because any discrepancy between the cash released by the govt per individual and the cash actually reaching the individual can be very objectively and quickly determined . This should be income independent so that the incentive to bargain a higher wage from employer is not reduced , which is a very major factor for the success of the market. The govt does not get into the business of determining who is poor and who is not and gives this monthly cash to just every adult citizen. This is done because the resources required to make this determination do not justify any benefits which can be obtained from it, and anyways an apparatus certifying poor people will be a promoter of corruption. This model in my view will provide us the maximal possible benefits of the free market with some slight concessions for those among us who for some reason, which is not their fault, are not able contribute as effectively as others . The pursuit of reducing economic inequality beyond the reduction which the free market will itself provide over current crony capitalist models, will necessarily require some sacrifice of productivity . The expectation is that in these 50 years people should find ways to sustain themselves , improve their skills to become productive  and get insurance for any handicaps, diseases or accidents . Post these 50 years there will be minimal requirements for government support . And if the government is small , this will give us a society with the least possible corruption.