Atanu Dey On India's Development

Who’s the boss? — Part 2

When a pickpocket meets a saint, all he sees are pockets. Thus goes a well-worn Zen Buddhist saying. Our perceptions of the external world are filtered through our internal desires and motivations. This process is not linear; a powerful feedback mechanism is involved. How we apprehend the world out there depends on what our internal model of the external world is; and our internal model gets modified with fresh inputs from our filtered apprehension of the world. Regardless of which came first – whether we start off with an internal model and then examine the world, or whether we examine the external world first without prejudice and only later build an internal model – the cycle once initiated continues for the rest of an individual’s life. Who we are dictates how we perceive the world to be; how we perceive the world to be dictates who we are in the continual process of becoming.

So to explain the inconsistency between how I evaluate, for example, a certain law and how some others evaluate it, I can point to the differences in the assumptions, or mental models, we variously filter the world through. Here I will attempt to explicitly state my assumptions in the case of the law relating to taxi-drivers and passengers I discussed in the previous post titled “Who’s the boss?

My first axiom derives from the Golden Rule. Do unto others what you would have others do unto you. Treat others as you would like others to treat you. The negative formulation of the same rule goes “Do not treat others the way you would not like to be treated yourself.” Abraham Lincoln used that rule to conclude “that as I would not be a slave, so I would not be a master” and opposed slavery. I do not want to be coerced into an involuntary trade, and therefore I refuse be the coercive party in any involuntary trade. If the taxi driver does not wish to ferry me for whatever reasons, regardless of what the law permits me to do, I will not force him against his will.

My second axiom is that adversarial laws are harmful and decrease social welfare. When a law pits one individual (or group) against another, it blocks many voluntary trades. All agents in society have interests that are congruent in some respects of other agents and divergent in others. If one’s interests were fully and comprehensively divergent from that of another, then any interaction between the two would be a zero-sum game: one can gain only at the expense of the other. But in reality, most people in society have some overlapping interests and any voluntary trade in those areas yields gains to both parties and thus is a positive-sum game.

My third axiom is that one has to be careful in evaluating the benefits of an action. One should not only look at action A’s benefits. Action A’s benefits have to be weighed against the “opportunity cost” of A: the benefits of action B which are foregone because A precludes taking action B. A corollary to this axiom is: be careful in noting both the long term and short term costs and benefits.

My fourth axiom is that one should arrange society on a minimal set of rules that are consistent and comprehensive. That a small set of simple rules can give rise to systems that are complex, sustainable, elegant, and beautiful is well known empirically and I believe that social systems which are free from very large and complex rule sets are more efficient and effective. Specifically in terms of the economy, a society that does not needlessly restrict free trade is one that prospers. Economic freedom leads to social good and effects a productive, efficient and sustainable society.

Starting with the last – as this blog is ostensibly about India’s economic growth and development – I believe that the lack of economic freedom is one of the major causes of India’s poor economy. Like in all things that matter, India’s lack of economic freedom traces its roots to its history of foreign rule. Colonialism is grounded on denying economic freedom to the colonized society so as to more efficiently exploit and extract resources from it. Economic growth and development are not the colonialists’ ultimate goal but enters into the calculus only to the extent that they promote the ultimate aim of maximizing the extraction of wealth.

Political freedom does not automatically translate into economic freedom. Indeed, political freedom and economic freedom are essentially distinct beasts and you can have one without the other. India has been politically free externally but it is economically in shackles and is kept so by its new political masters. Of course political freedom is a good in its own right, just as economic freedom is. How much people value political freedom over economic freedom is an empirical question. I believe that most people value economic freedom more than political freedom. The evidence? Check how many people migrate from nations where they have political freedom but lack economic freedom, to nations which are economically free (and therefore economically prosperous) but where they don’t have political freedom. Case in point: Indians that are capable do migrate to the US at the drop of a hat. Furthermore, the reverse migration of Indians from the US is powered by a corresponding rise of economic opportunities in India (thanks to a limited degree of economic liberalization) – often times those returning lack political freedom (such as their inability to vote in India, having relinquished their Indian citizenship during their sojourn abroad.)

Economic freedom is determined by the set of laws that constrain economic behavior. It is the entire set, not just any particular law. If the set contains a large number of what I call ‘adversarial laws,’ then inevitably they collectively introduce friction into the economic machinery and it grinds very slowly and inefficiently. The society produces little and the end result is poverty.

Adversarial laws pit one set of people against another. The one forcing tax-drivers to take any and all passengers is one such. Each such law introduces only a small inefficiency but a truckload of similar laws introduce inefficiencies which aggregated over time and space add up and create havoc. The reason that these adversarial laws are made is due to myopia and ignorance. Myopic because they trade small short-term gains for long-term costs; ignorant because finally they end up hurting those who are the supposed beneficiaries.

Examples of adversarial laws abound. Rent control, for instance. It is supposed to penalize the landlord and to favor the tenant. Perhaps good in intent but results in lack of affordable housing. Another example: labor laws that favor the employee in that the employer has to expend enormous effort to fire an employee. The result is that employers are reluctant to hire and the substitution of capital for labor leading to higher unemployment. Yet another example: disallowing large firms from producing certain goods and only permitting small producers. Result: costlier products that hurt the consumers.

I find it fascinating that there are phenomena in the world that are defy naïve intuition. For instance, how can the general welfare be advanced through the uncoordinated self-interested actions of a large number of people? Yet that is what happens, as suspected by Adam Smith in the 18th century. Economists have figured out why and how, and have enshrined the phenomenon in what is called the Fundamental Laws of Welfare Economics.

Naïve intuition says that limiting one’s own freedom voluntarily is a silly idea. But in reality it is often a strategically good idea. It allows a party to make commitments that are credible to the other party and hence allows trades that would have not occurred in the absence of that commitment.

The operative word is trade. Humans are distinguished from all other forms of life on earth by their capacity to trade. In general, we produce some stuff and consume some stuff, and exchange some of what we have with others in a place (sometimes a virtual place) we call a market. Sometimes what we exchange is our own labor, sometimes stuff that we have produced. The centrality of exchange in human affairs leads to the centrality of the market. That we produce stuff which is in excess of our own consumption needs is due to the remarkable but commonplace fact that we all differ in our preferences and our abilities. If we all had the exact same preferences and the exact same abilities, we would have no need to exchange. It is our human diversity that allows us to exchange stuff and thus have more stuff than what we would have had otherwise. It is that wonderful invention called the market that makes this exchange possible.

For the market to work as advertised (maximize social welfare) there is one very important caveat: that all trades must be voluntary.

So what about that taxi law? I think it is not a good idea. Sure it privileges me occasionally and I get a small gain but in the long run, it hurts me directly and indirectly. The damage that it mostly does is that it supports and reinforces the notion that it is alright to coerce people to do things that they perceive to be against their self-interest and that it is ok to force people to do things against their self-interest as long as it is for the “greater good.” I am vehemently against any coercion against my own self for the “greater good” and I have not yet met anyone who will acquiesce to being forced to do something for the “greater good.” Laws that are not consistent with economic freedom are bad laws and I am not willing to abide by them.

Why, I ask myself, do people agree to laws that are clearly bad for them? Perhaps because they mistakenly believe that the law does not apply to them. Take, for instance, the principle of free expression. It leads to social welfare gains in the long run but it could have the occasional short-term cost of nasty and hateful speech. I want the freedom to speak freely and therefore will accord the same right to everyone else, even those who I disagree with. I would like to live free of coercion and therefore will not coerce anyone else.

Responses to comments from the previous post.

Amit asks how should one deal with case of Muslim cab drivers who refuse to take passengers carrying alcohol.

I absolutely support the freedom of the Muslim drivers to refuse passengers without having to justify their action. Reciprocally, the passengers are also free to not ride in cabs driven by Muslim drivers. The market will decide if there is much need for Muslim cab drivers. If passengers refuse to hire Muslim cab drivers regardless of whether they have alcohol on them or not, the number of cabs driven by Muslims will be optimally determined. If there are too few non-Muslim cabbies at that airport, over a very short period that imbalance will be rectified by the greater demand for them.

Bongopondit comments that there is a shortage of cabs and hence the cabbies can dictate terms. Which brings me to an important general principle: that one should address the root cause of a problem rather than the symptom. It is pointless to force cabbies to take on fares when the real problem is that there is a shortage of cabs. Why are there too few cabs? Is it because of not sufficient people wishing to be cabbies because of too little profit in the business, or is it because government regulation limits the number? Needs investigation.

Sreddy comments that it is a union problem. Same as above: figure out the root of the problem instead of using a band-aid solution that masks the symptom.

I acknowledge Rishi’s comment and note that the matter of fixing fares deserves an entire post which I will go into later.

Tejas’ comment about discrimination likewise deserves a separate post. I am absolutely in favor of the freedom to discriminate by anybody towards anybody. I will write in praise of discrimination later.

Thanks to all who have bothered to comment and advance the discussion. I am grateful to those who disagreed with me for they afford me a chance to explore the topic.

Thank you, good night, and may your god go with you.

  • rishi

    Atanu,
    What you have raised is a very emotive issue for middle class Indians. People who live here face the situation of no service to certain locations, overcharging and in times of emergency the rates of the rickshaws even double or triple.

    This law is required as long as there are other imbalances in the system. But it is basically a band aid job and a pretty ineffective one at that. The root cause of all the above is that there isn’t an open market in autorickshaw’s. The govt restricts the number of licences granted per city. Licenses must be granted to everyone who wishes to use a rickshaw.

  • dodo

    I am quite in agreement with Rishi. Here is what I have learnt through my daily commuting in cabs and autorickshaws in Mumbai for the last 3 years:

    1. One needs a permit along with a license to run an auto or a cab in Mumbai

    2. The last time BMC released permits for autos and cabs in 1996 ( and the window was open for 1 month).

    3. Now the existing permits are sold like stocks. Three years rent for a permit for an autorickshaw is Rs. 70,000/-.

    So this mechanism ensures that the number of cabs and autos are constant in the city, which is adding more than 3000 persons every day.

  • Vednas

    Examples of adversarial laws abound. Rent control, for instance. It is supposed to penalize the landlord and to favor the tenant. Perhaps good in intent but results in lack of affordable housing.

    Fuck the Indian government. We had to sell our house at half of it’s market price because of our inability to turn out our tenants for 24 years. We knew that we would lose if we sued him. In the end it was decided that the house should be sold. But who will buy it? No one was interested to buy a house with a lovely long-standing tenant. We had to sell it at half of its market price!The local muscleman who bought it was able to kick out the tenant because he had a 9mm thing and he never hesitated to use it.

    Here I see glittering and sparkling shops upon which rest a dilappidated sad-looking but magnificent houses.One can easily guess the earnings mismatch between the landlord and the tenant. The shopowners would earn a fortune but pay a pittance to the landlord. And what’s worse the landlord can not even dare to ask for higher rent to maintain his crumbling house! I knew a friend who had 2 unemployed cousins but they could not kick out tenants who paid a majestic Rs. 50 rent per month.

    Long live the Indian government! Mera Bharat Mahan!

  • Amit

    Re: rent, when my dad bought a house in Delhi (we were living in another city at that time), he decided to rent it to only army people or bank officers (through the bank) as that would guarantee against any hanky-panky that Vednas mentions, and which is quite common in India. Maybe he got less rent money than he could’ve got, but it also ensured that when my dad finally moved to Delhi, the house was available right away.

  • http://sudiptachatterjee.blogspot.com Sudipta Chatterjee

    As always, Atanu, I feel awed by the argument, because you express some intuitions which I hold so well in words. I would love to read your post on fixing Taxi fares.

  • Pavan

    Band-aid solutions and stop-gap measures can be good provided you have a government that is nimble enough to fix the underlying problem quickly while the band-aid is in effect.

    India’s is not such a government, but I wouldn’t categorically snub band-aids.
    For example, I would say it is wise to use a band-aid on the greenhouse gas emissions problem. In the long run we can invest in new technologies and embark on whatever social engineering we need to so that we may reduce our use of greenhouse gases. But for now, putting hard limits on emissions seems to be the only way.

    The other big example is welfare in the United States. It is, essentially, and anti-starvation measure for people until they get themselves a job. Sure it serves to create some market distortions, but the alternative is having a lot of poor people in the streets without housing or food.
    Isn’t there some utility to be gained by all of society by paying out some amount to keep the poorest clothed and fed?