The top 5 myths about the Food Security Bill

Myth #1: The Food Subsidy Bill is an epochal event - a 'game changer'

• Truth #1: The food subsidy bill is a reformed Public Distribution System (PDS), and some more (lactating and pregnant women, hunger allowance etc). In that sense, it can be called PDS+. The core of the program is the same as the existing PDS - a part of the population is entitled to highly subsidised foodgrains (earlier only wheat and rice; now including millets) which are provided by Fair Price Shops (FPS) across the country.

• Truth #2: The PDS has been in existence, in one form or the other, for the majority of our country's life since independence. We have tried several different versions of the PDS - targeted, universal and then back to targeted. Life's come a full circle, since the food subsidy bill is taking us back to a near-universal coverage.

• Truth #3: The significant departures of the FSB from the PDS are four-fold: (1) inclusion of millets - in my opinion, a long-due and impactful step (2) recognition of PDS food as a right - always existed but good to put it on paper (3) women to be holders of ration cards - was probably true in-practice even earlier, but women's agency within the household is further strengthened (4) equality of prices for rich and poor - this is seen to lead to higher efficiency because of reduced potential of cross-selling.

Myth #2: The Food Subsidy will destroy our fiscal stability

• Truth #1: The food subsidy bill is not astronomically more expensive than the existing PDS. The existing food subsidy bill crossed 1 lakh crore rupees sometime in the early 2010s. The food subsidy bill (which will subsume the existing PDS) is expected to cost somewhere around 1.25 lakh crores. It is a ~25% increase; surely a significant increase, but not one that is going to break India's back.

• Truth #2: The food subsidy burden (PDS + others) has been stable around 0.6-0.8% since when my generation was both. Even a 25% increase in the burden is going to take us to ~1% of GDP. I'm not saying these are small numbers; all I'm saying is that we've been living with these large numbers for a long time and we've both grown, and stagnated, with these numbers. Let's not portray the food subsidy as a cataclysmic event.

• Truth #3: Today I read news reports that India's debt to GDP ratio has gone below 70%. So, we've been reducing our debt/GDP ratio significantly in recent times. Also, debt/GDP ratio in India is lower than in several other major economics; in fact, it is close to the 60% that is required to be a part of the EU. India's fiscal situation is not alarmingly bad.

Myth #3: The bill is throwing money down a dysfunctional drain

• Truth #1: The PDS efficiency is estimated to be around 40% by various agencies. This is extremely poor, but does not compare too badly with existing cash transfers in India. Most Government programs show a similar efficiency level. The argument can then be made that the Government should withdraw from provision. Instead, I make an argument similar to the infant industry argument - live with an inefficient system, improve governance and then reap the benefits later.

• Truth #2: The PDS has worked very well in states such as Tamil Nadu, Himachal Pradesh and Chattisgarh. The efficiency of the PDS in Tamil Nadu (where everyone - poor or rich, is entitled to 20kg) is above 90%. Hence, the PDS is a leaky drain that can be, and has been, fixed.

Myth #4: There is no point giving rice and wheat, instead of more nutritious food

• Truth #1: In any country, cereals are the cheapest sources of calories and proteins. Giving subsidised rice and wheat ensures that a minimum part of a person's daily needs are met.

• Truth #2: Cereals are the least perishable of foods, and hence best suited for long-distance transportation. The food security bill, in fact, is a positive step in that it goes beyond wheat and rice, and includes millets, which are lower than wheat and rice.

• Truth #3: By giving subsidised cereals to people, the Government is saving them a lot of money. This money can then be used by the households to diversify their food basket. Instead, if the Government were to transfer fruits and vegetables, then wastage would be much higher. Hence, the design and intent is to transfer the most efficient food and then let people save up and buy their own stuff.

Myth #5: The Government should restrict itself to creating jobs

• Truth #1: In an ideal situation, this argument works. But India is unable to create jobs for different reasons - primary among them being labour laws. Instead of arguing against food subsidy at this stage, argue for labour and land reforms and then talk about phasing out food subsidy.

• Truth #2: Wages as a percentage of productivity in every sector has declined in the past few years - i.e. lesser and lesser of our growth is being distributed in the population as wages. The growth we've been seeing is increasingly less inclusive. We can't wait till food reaches the poorest guy by trickling down. More active intervention is needed.

• Truth #3: Food is different from other goods and services because it is a fundamental human need. I believe that principally, something as basic as food cannot be left to economic systems, which are falling. Economic systems have shifted from feudalism to capitalism and might shift further. We cannot let the vagaries of our economics affect human lives. Practically, the Government is also the owner of all water in the country - hence, extend the same principle to food and the Government's intervention in food markets is not only justified, but also necessary.

Bhagwati V/s Sen : The Real Deal

Jagdish Bhagwati's attacks on Amartya Sen, Sen's own involvement in political discourse, and their supposed political affinities, have become topics of discussion recently. On one hand, of course, I feel glad that a discussion in this country is happening lead by two of the best intellectuals this country is supposed to have produced. At the same time, the sweeping brushstrokes painting this debate as Sen's Socialism versus Bhagwati's Capitalism, or Sen's Kerala versus Bhagwati's Gujarat, have been rather unfortunate. I have read a bit of what Bhagwati has to say about development themes, and am beginning to understand Sen's views. With that caveat, I would like to try to show that this debate is nowhere as sharp as it is being made to be.

Firstly, does either of the economists disagree that growth must benefit the marginal sections of society? No. Sen's views on this aspect are fairly well known. On the other 'side', Bhagwati repeatedly mentions that growth is a means to achieving human development. Moreover, his passionate defense of India's performance on development indicators betrays the centrality of human development in his world view. That Sen would have a lot of intervention in human development is fairly well known. But Bhagwati has discussed at length various methodologies that can be used to improve the standard of living of the people. Bhagwati at no point defends laissez faire or even the now-ridiculed trickle down theory. Hence, there is a commonality of human development as the 'end' in both their arguments.

So what is different? Given my limited reading of both, I have been able to identify two sources of 'discord'. The first is regarding the prioritisation, and the second regarding the implementation. Let me talk about the former first. Laymen have often rejoiced at the growth versus equity debate - and Sen and Bhagwati are seen to be at opposite sides of the spectrum here. But on closer look, the differences do not seem to be all that significant. Sen has merely said that growth (of the kind that India has experienced since 1991) is a great thing, but the lack of an improvement in human development at the same time is shameful. He seems to argue that growth for the sake of growth is immaterial, which I do not believe any sensible person would debate. At no point have I seen Sen argue that India should have grown at a lower pace, and instead redistributed its national income. On the Bhagwati side, he clearly demarcates 'Track I' and 'Track II' reforms. All of his Track II reforms are directly targeted at human development, and even his 'Track I' reforms around economic liberalisation, are supposed to eventually lead to human development. The minor divergence here is the prioritization. Sen would say that equity and human development will eventually lead to growth, whereas Bhagwati would say that growth will generate the necessary resources for equity and development. Neither of them would disagree, I assume, with the fact that growth and development essentially go hand-in-hand. I do not believe there would be any country which focused on any one while ignoring the other.

The second, and apparently more substantial difference, is their view on Government provision of basic services. Here, Bhagwati is distinctively right-wing. He praises the virtues of the private sector in provisioning (with the Government acting as a facilitator), and also suggests replacing the NREGA with cash transfers. I have not read Sen's views on different Government services yet, but on the food subsidy, for example, he openly confesses his lack of knowledge. His support for the food security bill, if at all, is a grudging realisation of no better alternatives. Sen says we need to intervene more effectively in the poor's lives, and if state intervention is the best way to do it, then so be it. For example, Sen extols the virtues of the Bolsa Familia in Brazil, a cash transfer that would be something even Bhagwati would praise. 

In conclusion, the differences between these two great economists is not as great as it seems to be. Bhagwati is by no means a capitalist, and Sen is even farther from being a socialist. A welfare state within the structure of capitalism is neither unique nor surprising.  We, as readers, can rationalise the debate between two great minds to hone our own understanding of the country we live in.

India's Turn : When?

I remember a chapter in the second year titled 'India's Turn' that presented a rather startling fact - that India's  economic growth had started in the 1980s, well before the reforms initiated in 1990s. The narrative was as follows: Indira Gandhi, chastened by her defeat in 1977, now returned with a more pro-business attitude. This 'attitudinal shift' alone was sufficient to accelerate growth, and was followed by piecemeal reforms in the mid-1980s, following by full-blown reforms in the early 1990s. In this story, the reforms in the 1990s, at best, helped in sustaining the momentum that had already been built.

I have started reading the book 'India's Tryst with Destiny' by Jagdish Bhagwati and Arvind Panagariya. In the book, they state that growth during 1980-1987 was only 4.6% p.a, closer to the 'Hindu rate of growth' of 4% than to the growth rates we are now accustomed to. The 'high' growth rate of the 1980s was seen during the period 1988-1991, well after piecemeal reforms had been initiated and the fiscal deficit had started ballooning.

My problem is that, to make our education more holistic, we should be presented with an academic debate, rather than an academic piece of work. A debate would have enabled us to understand the issue in more depth and then form a perspective on it. At the very least, counter-views should have been suggested for further reading (and not testing). 

Was Gandhi a Marxist?

This article was published in Satya 2013, annual journal of Gandhi Study Circle, St. Stephen's College.

Was Gandhi a Marxist? This question arises from the fact that both Gandhi and Marx had similar views. Gandhi fought against caste, race and various other social sufferings. He fought against economic exploitation and oppression of the poor by the rich. Marx fought against political subjugation and oppressed humanity in his own way. According to him, capitalism, where the workers are exploited is an unstable system and leads to crises.

Their views were similar but not identical. Gandhi’s approach was quite different from that of Marx. Both of them believed that social conflicts existed because of disparities between the rich and the poor. But, they differed on their views on how the conflicts would be resolved. Marx believed in revolutionary means while Gandhi believed in reformist means.

To elaborate further, Marx’s Dialectical Materialism explains his views regarding class struggles. According to Marx, it is the internal contradictions within the system that brings about a change. The people who are being exploited will organize themselves together and revolt. This revolution would abolish the existing class structure. The English Revolution and The French Revolution are the examples of how revolutions took place because of internal contradictions and finally led to the emergence of a capitalist class.

“The history of all hitherto existing society is the history of class struggles.” – Karl Marx

Gandhi, on the other hand, found class struggles to be quite superficial. His approach to resolving conflicts was through non-violence and Satyagraha. However, there is certain inconsistency in what he believed. On one hand he believed in harmonious co-operation between the poor and the rich, labour and capital and landlords and tenants. On the other hand, he also believed in struggling against exploitation.

According to Gandhi, the struggle against exploitation, unlike what Marx believed, will not take place through bloody revolutions, but through non-cooperation. If the workers can come together in the form of trade unions and refuse to co-operate with the capitalists, then they will be able to control the supply of labour. The capitalists will be forced to increase their wages. In Marxian terminology, Reserve Army of Labour is the biggest hindrance to the increase in wages and Gandhi believed that the only way to overcome this was non-cooperation.

"The idea of class war does not appeal to me. In India a class war is not inevitable, but it is avoidable if we have understood the message of nonviolence.” – Gandhi

What makes me believe that Gandhism is irrelevant today is the fact that people have become excessively self-centred and they are involved in an unending pursuit of acquiring more and more at the cost of the others. Gandhi believed in the mutual love between the labour and the capital. He wanted to convert the capitalists – the exploiters, which he thought could be done only through non-violence and Satyagraha. His theory of trusteeship was based on moral transformation of the capitalists, but we know that in today’s world, people do not give away their wealth (acquired through exploitation of labour and the poor) listening to moral preaching.

What Gandhi wanted to achieve was to educate and awaken the masses, make them conscious of their exploitation, bring them together into a powerful organization, so that they can struggle against the exploiters and fight for their rights. Even though Satyagraha and the non-violent ways might be thought of as moral preaching in the 21^st century, but we shouldn’t forget that it was this weapon which in part led to our Independence. Critics argue that Gandhi’s approach was applicable only to a specific historical context. True, but the need is not to side-line his ideas but to study them and revise them according to the changing situations.

Marx and Gandhi had very similar philosophies about what an ideal society should be. Both of them focused on a society free from exploitation. But again, their approaches to the achievement of this ideal state were different. Marx believed in a classless, stateless communist society which is described in the Communist Manifesto. On the other hand Gandhi believed in a non-violent, egalitarian and a democratic society where everyone is treated equally, irrespective of caste, race, and sex and where there is no discrimination based on income because the entire wealth belongs to the society as a whole.

According to Marx, we would reach communism because of the process of Dialectical Materialism. The germs of a future society lie within the present society and these opposites within the system contradict it and lead to revolution. Feudalism gave way to capitalism, because the germs of capitalism (the exploitation of the peasants and serfs by the lords) lay within the system itself. Similarly, capitalism will give rise to socialism and finally communism would emerge. It would be a society of dignity and freedom, a society with human conditions rather than ‘animal’ conditions of existence.

Gandhi asserted that one day moral transformation would take place which would lead to, what he called, Ramrajya. He explained the evolution through non-violence.  Violence and self-centredness are the qualities of a beast. Earlier we were beasts, wandering and hunting animals. Realizing the need to curtail violence, we took to agriculture. Hence Gandhi had faith that this streak of progressing through non-violence would continue till the ideal state is achieved. A man understands co-operation and is morally sound. This is what Gandhi believed we are heading to – from beasts to a man.

In today’s world, Marx seems to be winning the race because we foresee that communism might follow capitalism and socialism. China already claims to be a communist country. But, nowhere is Gandhi’s Ramrajya to be seen. The reason, I believe, Gandhi’s approach is difficult is because it is too ideal, it’s like bringing heaven on earth and converting the devils to angels. Marx’s communism might emerge as a future society because it’s not all that ideal and solves only those problems which can be tackled, given the current stage of human development.

Though both Gandhism and Marxism are similar in spirit, they are very different in practice and it becomes essential to re-read them and make changes to them as the society progresses.

Objectivism and Altruism

I just read this article that attacks Ayn Rand's objectivist theory at several levels. As someone who has barely read a quarter of The Fountainhead, I base my understanding of Rand on this (rather biased) article. Click here for reading the article.

Let me not even attempt a critique of Wikipedia claims was Rand's espousal of full, pure, uncontrolled, unregulated, laissez-faire capitalism. For even those with the most cursory knowledge of economics, it is not difficult to disprove such an assertion. There are so many market failures that unregulated capitalism cannot be optimal even in theory. Marx, of course, takes it further - he says that capitalism is a doomed regime that will one day fall under the weight of its own contradictions. In practice, the numerous crises have taught us that capitalism by itself cannot stand. However, trying to critique Rand at this point would end up becoming a lesson in basic economics, which I do not wish to detail here.

It is the second assertion, which I have accidentally dealt with earlier, that I will elucidate a bit here. As I have discussed in my previous article on norms and compliance (click here to read), many kinds of socially optimal behaviour can be made individually optimal using a set of incentives. In fact, according to the Folk Theorem, if an individual is patient enough, then any outcome in which the payoff to the individual is at least as much as his worst-case scenario, can be sustained. Given that a young person would not discount the future heavily, we can abstract away from the details and state that almost any social outcome can be sustained as a Nash equilibrium.

For our purpose of our argument, it is sufficient to say that Rand's argument that only selfish acts can be sustained, is false and myopic. Human society is a society of repeated social interactions. If interaction between any two individuals occurred only once, then Rand would be correct. However, since we need to interact at several times, we need to also consider how our action today would affect the state that will materialise tomorrow. While a more complete discussion can be found in my article I referenced earlier, let me give a simple example. When someone wants to photocopy my notes, then it would be in my selfish interests to not give those notes because the notes provide me with a comparative advantage that will help me score more. Sharing would reduce my comparative advantage. However, I might need notes in the future, and refusal to share notes today might jeopardize my chances of getting them in the future. Hence, the 'altruistic' task of sharing notes today becomes the Nash equilibrium.

Why I put 'altruistic' in quotes is because even this behaviour is selfish in that I still take the cost-and-benefit (to me) approach while deciding whether to share notes or not. However, the key thing to note here is that this selfishness differs from that of Rand in that it has a social context of incentives. In case the societal norms are removed and exchange of notes is made depersonalized (every person uploads his notes voluntarily on a network and others can download it, such that the uploader does not know who is downloading), then cooperation would break down and nobody would share notes. Instead, if anyone who refused to share notes was flogged, then everyone would share notes. The basic point is that seemingly selfish behaviour can also be modified and contained.

Going by my reading of Ms.Bekiempis' article, I can strongly assert that Rand was wrong - selfish behaviour isn't the only sustainable ones. Better outcomes can be sustained, and very often without the need for the Government.

IITs, IIMs and the Signalling Race

The first time I read an interview with this year's JEE topper, I felt a certain degree of deja vu. At the end of the day, any 'success story', be it the boards, JEE, Civil Services or CAT, bears a strong resemblance to each and every other 'success story'. Of course, much of it is due to the media trying to highlight the same set of attributes, and hence it would be unfair to blame the toppers for being conformists. However, when I talked to my friends about it, something struck me as especially alarming. While we all know that much of the intake of our top business schools comes from the top engineering colleges, what was striking was that this year's IIT topper said he wanted to go to an IIM even before he entered an IIT.

The tragedy, unfortunately, is that it is unfair to single him out for criticism. Perhaps lots of students have the same aim of going through the IIT-IIM route. There is certainly a tremendous 'brand value' associated with this route. Going to the best institutions in the country in their respective fields is certainly a very difficult task. It is perhaps the most effective signal that a person can offer to potential employers in the labour market. I can also think of how this is the best way to humour one's ego. In an education system that is geared towards mass production (and here I am not being critical of India in specific), the fraction of students who can qualify for both these institutions is indeed very, very small. Truth be told, I would have considered it an honour to be in such elite company.

That said, what I am unable to grasp is why somebody who wants to do an MBA eventually would want to spend four years studying engineering. My experience at the IIM interviews this year has convinced me that it is easier for a non-engineer with the same aptitude (read CAT score) to clear the interviews than it is for an engineer. What sense would it then make for someone who eventually wants to go to an IIM to spend four years at an IIT?

There are two reasons that I can possible think of. Firstly, the person might intrinsically enjoy engineering as a discipline and even though he does not want to pursue a career in it, he might enjoy studying it. I am not sure how far this is the case for engineers, and hence cannot make a statement on it. Secondly, being in an IIT might expose a student to a plethora of activities that are unheard of in other institutions. For starters, the scale of cultural events at IITs is far beyond what one can even imagine at Delhi University. Being able to access such opportunities can help an individual hone one's skills and hence not only improve his career prospects, but also help him grow as an individual. Hence, even though I doubt how many students actually rationalise it in this way, it does make sense individually to follow the IIT-IIM path.

Does it make for a social optimal? Most signalling devices are pareto inefficient - they are a drain on resources that are now used to create signals, but could have instead been used for productive purposes. An IIT is an effective, but expensive signal. The kind of money spent on a single IIT student is exceptional for a country at India's level of development. Certainly, this is a case of individually sensible decisions to become socially sub-optimal. There is thus a pressing need to devise better signals that drain fewer productive resources on those whose eventual aim is to get management education.

Imperfections in Education

Here is a thought-provoking article by Manan Vyas about how complete education is a luxury:

http://www.mananvyas.com/thoughts/why-complete-education-is-a-luxury/

There is certainly no disagreement about the fact that for most of our population, complete education is indeed a luxury. The purpose of this article is to further expand on what Manan says, and also introduce certain disagreements with the referenced article.

While I have no disagreement with the advocacy of a dual education system, it must be noted that there are two more fundamental market imperfections at play here, one of which supports the broad-based education system that we currently have.

Before I deal with those those issues, a subtle clarification must be sought: I am a firm believer in the fact that education has an intrinsic value - not only does it get me a good job, but it makes me feel good about life. Of course, the article does not seem to disagree with that at any stage. It accepts this by calling complete education a luxury, in the sense that this intrinsic value of education is important but out of reach for a majority of our population. However, it must be noted that a good (in this case, education) is not a luxury forever. At some point, with rising incomes, it becomes a necessity. Hence, are we arguing that the dual education system will be progressively dismantled over time as complete education ceases to be a luxury? Why is it that Germany, a fairly rich country, would still find complete education a luxury? It is the most basic of economic phenomena - the Engel's law - which will ensure that education cannot be a luxury forever. Why then do we see this paradox?

Now returning to the two market imperfections that I referenced to earlier.

Firstly, there is the issue of imperfect capital markets. Why can't Sushil borrow to finance his children's educational expenses and then use the higher income potential to pay off this loan either himself or through his children? Of course, such loans in themselves are a luxury for most Indians. However, it is an aspect of education that I saw was not discussed in the article. Rather than provide the agent with an X (broad-based education) or Y (vocational education) choice, financial inclusion will provide him with a whole gamut of choices. This change is, of course, not going to happen any time soon, maybe not even in the next quarter of a century. Moreover, given the long gestation period of such loans, it might even be difficult or impossible to enforce such contracts. However, my point is that it is theoretically possible for Sushil to want to send his kids to school, given his low current income.

Secondly, there will be imperfections even if financial market imperfections are removed. There are benefits from a well-educated workforce that an individual agent is unable to internalise. Of the top of my head, a person who is able to explain much of how the world around him works will be happier and more motivated - hence more productive. Even as a financial analyst, it would make someone happier when he knows himself how electricity works. However, since these positive externalities are not internalised by the agent, there will always be under-investment in education. Hence, leaving the agents to make choices on their own will produce a level of education that isn't socially optimal.

Another problem that I realised while writing this response, is one of agency. If you propose that a dual education system be introduced, do note that in the presence of imperfect information regarding the aptitude of the child and uncertainty regarding the job prospects after a particular stream (since all industries go through phases of growth and stagnation), some subjective choices need to be made. Who makes these choices? In a society such as India's, these decisions will often be made by the parent. It is not certain, and not even likely, that the agent's (parents') interests coincide with those of the principal (the child). Once introduced to a particular stream at a young age, the child faces high costs of making a switch. In such a case, having a monolithic educational system till the age of 16 might not be a bad idea. I am not, in any way, saying that this WILL happen. What I am saying is that this is another aspect to be considered. 

Norms and Compliance

Very often, we find ourselves in a conflict situation - a conflict between our personal (and often, primeval) desires and social norms. By the very fact that 'norms' need to be enforced through a variety of legal rules, religious beliefs and psychological conditioning, it is obvious that breaking these norms would be the more obvious thing to do in the absence of such norms. I sometimes feel amazed at the superstructure of social norms that we have built for ourselves. To me, it is quite surely man's greatest creation. Everything else - including finance and technology (arguably two of the greatest inventions of the last century) - could not have been possible unless we got together as a society and built these norms that could sustain cooperation.

Some of the basic ideas of this short article are from a chapter in our course in Development Economics (which most of us decided to skip for the exams, though).  The idea is simple - if we as humans did not coordinate (and by coordinate I encompass things such as trust and cooperation), then even basic activities would be impossible. Take even a simple barter economy. You make handicrafts and sell it for food. What forces you to ensure that you are exchanging good quality handicrafts? Once you get the food, even if the handicrafts turn out to be of poor quality, you have already made whatever gains you needed to. However, we observe adherence to a certain quality in our society. This is caused due to the repeated nature of the interaction. If I do not supply good quality handicrafts, then very few farmers would be willing to exchange their food in the future.

Take something more private. Why should we be kind to others? Here I am not considering the 'feel good' associated with being kind. Often, the 'feel good' is a part of our psychological conditioning, and is in no way 'good' by itself. However, we would, generally speaking, still find it in our interest to be kind, because of the hope of reciprocity. If I am kind to people today, they would be kind to me tomorrow, and that would be beneficial to me. Similarly, faithfulness. If there was no stigma attached to not being faithful in relationships, then our primeval urges would take over. In this case, I do not quite see why human society would find faithfulness as a useful virtue. Probably a bit more thinking would make it obvious.

Now when you come to think of it, every type of human society, and every activity in human society, is based on such social norms. It is exactly like a repeated form game. The Nash equilibrium in any one game might be for all players to do the socially imperfect action. However, because human society is based on repeated interactions, we are able to sustain socially optimal outcomes even when there is an incentive for individual players to renege.

Take a simple example - driving. Consider that a driver has to actions - follow traffic rules and don't follow traffic rules.  If all other players are following traffic rules, then your not following traffic rules doesn't make a difference and hence it is in your interest to not follow traffic rules. In case all other players are not following traffic rules, you would be stupid to be following traffic rules. Abstracting away from the intermediate outcomes where some people follow rules and some don't, we find that it is in every player's interest to not follow traffic rules (in the language of game theory, a dominant strategy). However, the outcome where nobody follows traffic rules is socially imperfect. Hence, we have a system of rules and fines that make it optimal for every individual player to follow traffic rules. This is the only way that the social optimal can be sustained.

Think about it - where would we be if socially optimal outcomes could not be sustained? The need to make coordination optimal has made humans create such an elaborate system of norms. In one word, it is simply mind-boggling.

A natural corollary of what I have argued, and one that I do not always agree with, is religion. Religion is probably the greatest of these social norms that has survived centuries. What is religion but a means to ensure that all of us behave a certain way? Is it not religion that is the last-ditch effort to ensure that we place an intrinsic value on traits such as truthfulness, honesty etc that are otherwise only functionally important? At this stage, I would leave this argument as such and leave it to the readers to think about it.

Choices Matter

You must have heard of Scrooge in Charles Dickens’ ‘A Christmas Carol’. Scrooge was a greedy businessman who had no joy and love in his heart. So, he worked in his office even on the Christmas Eve. Had Scrooge went to celebrate Christmas, he would have had to buy gifts. Being ‘rational’ Scrooge chose not to. Why? Suppose Scrooge gave a gift worth Rs. 100 to a person, say A. But, A values the gift to Rs. 80. Scrooge in return might receive a gift that he values less than the price of the gift. Therefore, it leads to a loss in total utility. Scrooge could have given Rs. 100 in cash as a gift but he chose not to, because he won’t be as satisfied, though better off than the previous case. Scrooge’s rational thinking led to him having no place in his life for love and compassion!

We make choices every day. These little choices that we make are very crucial. You must have heard someone saying, ‘I have no choice.’ What does ‘choice’ mean? Actually, when we say ‘I have no choice’, it means we had choices but they were not liked by us. In short, they were ‘bad’. Choice is something that relates what we prefer and what we demand. While studying microeconomics we often assume that all consumers are rational and that their decisions maximize their utility. But is it so?

Let’s take a simple example. B likes swimming and hence joined swimming classes. He has two choices-either pay Rs. 50 per visit or Rs. 900 per month. If B goes for swimming frequently, the second choice must be preferred. But B is a busy man. He still prefers second choice thinking it cost Rs. 30 per visit. At the end of the month B finds that he went for swimming only 15 days and ended up paying Rs. 60 per visit. This, as some economists call is ‘irrational confidence.’ B overestimates his number of visits and hence lands on a lower indifference curve (See diagram).  Take another example, C goes to watch a movie. He wants to buy popcorn. (Is C actually hungry?) Small size cup costs Rs. 50 and large size costs Rs. 60. C’s decision to buy the large cup was not determined by his hunger level but by the thought of getting those extra popcorns for just Rs. 10. Had he bought a small cup, he would have saved Rs. 10 and also taken care of his ‘health’.

Thus, we see that there are many factors which influence decisions because of which consumers are irrational. If the ‘overconfident’ consumers think a little rationally, coupled by looking at the macro-economic indicators, then they can save a lot in times when prices are soaring high. Hence choices do matter!

Corruption - Economic Bad or Good

Some days back, my Microeconomics Professor suggested a very strange thing – ‘Maybe corruption is a good thing after all.’ I was taken aback for a moment and then the incredulous feeling was replaced with a strong contemplation as he proceeded about how the thought of earning that extra bit of money might actually serve as an incentive for people to perform better and work harder. “Maybe it is not such a bad thing after all”, he said.

 I started dwelling on it. Then again, when you think about it, maybe corruption and the facility and liberty of making that extra bit of money can distort many other things as well. If things were left to the policy of – “how much you can get by how much you do”, people would tire everything out to make money. What I believe is the problem in India is the work policy and the facts that people aren’t driven by the right motives and incentives to work. Every one works only to make them better and richer and healthier. There is the spirit of philanthropy, of the concept of making things better for everyone... these things missing. Therefore with the advent of such a policy, there comes this whole widening gap of the social and economic status of people in this country. Corruption is essentially a bad thing, defined as ‘Dishonest or fraudulent conduct by those in power, typically involving bribery’. It is found in a survey that corruption as incredible as it might sound can actually elevate the efficiency of an economic system.

There is an example where it is shown the case of bribery in attaining the driver’s license. Now a person would pay the extra marginal money only if he believes that his utility from that product would be much greater than others and would definitely offset the extra cost, therefore he values it more than the others, which further implies that his usage of the product would fetch an increased marginal productivity, which is kind of efficient. Now this argument of mine might look absurd when it is made to stand on certain moral and welfare grounds, because on a whole, corruption is never good on a long term. The efficiencies on the short term are always short scale and have the capacity to erode social equality and even mar law and order. The cost of corruption is always so huge that it causes disparities on another level. The money which is siphoned off from the main stream is definitely a flawed angle in the whole system of the way the economics works in a nation.

But the main negative point, according to me about this social evil is the huge disparity that it causes amongst the poor. It creates distributional consequences. It hampers the progressivity of the taxing system, creates social and economic inequality and also leads to slowing of the growth of a country and reduces the effectiveness of the social programs, and by perpetuating an unequal distribution of asset ownership and unequal access to education. In a cross-section of 37 countries, a significant impact of corruption on inequality was found, while taking into account various other exogenous variables. When controlling for GDP per head, this impact remains significant at a 10 % level. It was concluded that deterioration in a country's corruption index of 2.5 points on a scale of 0 to 10 is associated with the same increase in the Gini coefficient as a reduction in average secondary schooling of 2.3 years.

Therefore though we can continue contemplating about the good effects of corruption and it’s potent of becoming an economic developer, yet the ill effects need to be diluted first. I would continue writing of this, if some new idea strikes me on how to go about this dilution!!! Till then, have a great weekend! 

Reference for the statistics:  Anti Corruption Resource centre U4