Thus have I heard, that once when the The Blessed One, the Tathagata, was resting in Rajagriha during the season of rains, he carefully pondered the economic truths. Among those assembled were Shariputra, the son of a noble family, and Avalokiteshwara, the Bodhisattva Mahasattva, the Buddha of Infinite Compassion, and lots of monks too numerous to name here.
Shariputra asked The Blessed One, “What is the chief lesson that one can learn from a careful study of economics?”
Avalokiteshwara, the Bodhisattva Mahasattva, the Buddha of Infinite Compassion, etc, responded (because the Tathagata often lets others have a go at mundane questions) by saying, “O Shariputra, a careful study of economics reveals to a son or a daughter of a noble family the First Minor Noble Truth.”
Shariputra, the son of a noble family, then asked, “And the First Minor Noble Truth is exactly what?” Then Avalokiteshwara, the Bodhisattva Mahasattva etc etc said, “The First MNT is that Incentives Matter.”
Beholding incomprehension written large on the face of the noble Shariputra, the Compassionate One continued. “Aggregate human behavior in the realm of Samsara is very predictable. At its very core, that is what the study of economics is–the study of aggregate human behavior. Given the right incentives, people who are bound to the Wheel of Becoming, who have not yet gone across, behave accordingly.
“If you want them to be good, then reward them for good behavior and they will behave well. If you want them to stop bad behavior, then give them negative reinforcement and they will reduce their bad behavior. The former is called the carrot approach and the latter is called the stick approach. That’s about the sum of it: carrots and sticks.
“Noble Shariputra, if you consider this for a moment, it is quite simple really. People are motivated by selfish desires in the realm of Samsara. Of course, in the realm of Nirvana, motivation and incentives don’t matter because one has gone beyond, gone completely beyond the Wheel of Becoming.”
Shariputra began to see the light. He then asked, “Avalokiteshwara, I sort of understand that now. But, what is the principle mechanism which coordinates the behavior of the masses so that their aggregate behavior is socially beneficial even through their individual behavior is selfishly motivated?”
Avalokiteshwara, the BMBIC, replied thusly: “Shariputra, SoaNF, the mechanism is called the market and that is the Second Minor Noble Truth: Markets Work. Seemingly enlightened behavior emerges from apparent individual selfish actions–actions that bind one to Samsara and the escape from which was outlined by the Blessed One, the Tathagata, the One Who Has Gone Beyond, in his major work The Four Noble Truths which you may recall if you were paying attention the last time. But we will not digress into them right now because we are discussing the Minor Noble Truths of Samsara.”
Shariputra, clearly the bright-eyed curious student forever questioning the Avalokiteshwara, the BMBIC, said, “But do the markets always work? Are there any conditions under which markets fail and therefore don’t deliver the goods that one would expect? Under which set of conditions do the Fundamental Theorems of Welfare Economics hold? Indeed, what are the Fundamental Theorems of Welfare Economics?”
Avalokiteshwara, with a very weary look but patiently still answered, “O Shariputra, check the World Wide Web and google for those answers in about 2500 years. In about 2500 years, a bunch of bright guys would have mathematically proved the FTs of WE. If you are really interested, get yourself a few credits of economics courses. For now, let me give you a glimpse of what you will learn.
“You will learn that market failures are common because the conditions under which the fundamental welfare theorems hold are rather strict. Information imperfections, for instance, is one of them. But when information technology advances sufficiently, then markets will become more efficient. Of course, the markets will become bigger also. So the information requirements will also increase. All this increase in market size will be due to globalization and globalization will create its own discontents.”
Shariputra was silent for a moment. Then he asked, “Yabbut, in the real world, markets fail. Is there some remedy, however imperfect?”
Avalokiteshwara spoke thus: “O Shariputra, SoaNF, it is the role of an enlightened government–the state– to gently correct for some of the failures. I think that the best governments must use light-handed regulations to fix market failures. Of course, in the real world, government failure is often more harmful than market failures. But that is an imperfect solution in an imperfect world. Why so? Because goverments are not a collection of Buddhas, enlightened beings who have transcended their desires. Governments are not comprised of Bodhisattvas, those enlightened beings who vow to delay their own departure until all sentient beings have attained Nirvana. Quite to the contrary, actually. Governments are collections of equally deluded people generally.
“Talking of people, don’t forget that today we have only 300 million people in the whole planet. In about 2500 years, you will have 6000 million all of whom will be interconnected in a complex web of commerce (some of it on the Internet.) An important side-effect of increase in the number people and increase in market size is that governments will have to increase. In a primitive economy, say the Robinson Crusoe economy, government size can be zero. But in a modern economy, the more complex the market and the economy, the more government is needed.”
Shariputra said, “What you are saying, if I understand you correctly, is that an ideal government would be able to intervene in cases of market failures but that in the real world, ideal governments are as rare as unicorns. And further, that the market usually delivers the carrots and sticks that drive people to behave well but in case the market fails to do so, then the government has to get into the carrots and sticks business. But, according to you, the problem is that governments themselves need carrots and sticks so that they can continue to govern well. Isn’t that a bit of a problem?”
“Quite so, O Shariputra. Use the same principles and apply them to governments. Just like market participants are rewarded for bringing good stuff to the market, so also government employees should be rewarded for delivering good governance and if they fail to do so, they should be given the stick without delay.
“See we are sitting in Bihar, the state that will in about 2000 years become one of the most misgoverned pieces of real estate on the planet. If you take the leaders of the government of the state of Bihar and force them to live for a year under the conditions that the bottom 10 percent of the people of Bihar live, they will quickly come to their senses. It is simply because they who misrule don’t get subjected to the pain of those whom they cause pain to, that they continue to misrule. String up the corrupt bastards and you will soon fix the problem.”
Shariputra was shocked. Avalokiteshwara, the Buddha of Infinite Compassion was advocating summary execution? He could not believe his ears. “O Avalokiteshwara, how can stringing up corrupt officials be a compassionate thing to do?”
Avalokiteshwara, the BMBIC: “O Shariputra, son of a noble family, do you send your children to school and does it not cause them pain at times? But you still do that because of your compassion. You cause them pain now but they will grow up to be worthy citizens and thank you for educating them later. So also, by stringing up the corrupt officials, you are hastening their journey to buddhahood. Not just that, by shortening their present stay in Samsara, you are helping them by not allowing them to accumulate more negative karma. And finally, if they cannot continue their corrupt ways, millions of ordinary citizens will lead more human existences once the corrupt ones have departed this mortal coil. So you will string up say half a dozen of the biggest offenders. Big deal. But that will put the fear of God (imaginary being that many deluded people think exists and who they believe takes a personal interest in their silly matters) into them, to use an expression and deter many from getting started down the road to perdition at all. In short, governments will again be staffed with people who are into doing good stuff, not by people who are in there just to make a fast billion and stash it away in some Swiss bank account.”
At that point, the Blessed One, the Tathagata raised a flower in his hand and said, “Very well said, O Avalokiteswara. You have expressed some of the Minor Noble Truths for now. We should continue to examine this very fascinating subject later. But now it is time to pick up our begging bowls and head off for something to eat. The people of Rajagriha turn in early these rainy days and once they shut the doors, we cannot seek alms and we will have to go to bed hungry. You don’t really want that, do you?”
Hearing the Buddha bring this session to close was a great relief and everyone–the gods, the asuras, the monks–rejoiced.
Thus have I heard.