Sunday, February 18, 2018


n recently announced budget the finance minister of India Mr. Arun Jaitley launched an ambitious government healthcare program. He dubbed it as Modicare like Obamacare in America, which the present President of USA Mr. Donald Trump is trying to dismantle. This new program, which is touted as the biggest healthcare program in the world, will raise the insurance coverage per family from present annual 30,000 rupees to 5 lakh rupees and will cover 50 crore people, which represents almost 41% of total Indian population.

Notwithstanding the myriad of benefits cited by the ruling government and news outlets, we need to be aware of wide economic, social and cultural impact of such government schemes.

Firstly, the economics of this program will require vast amount of resources, which the government doesn’t have right now. This will necessitate the government to impose new taxes on already burdened tax payers of India. Due to the high tax regime thousands of ultra-rich people are already leaving India annually. Any additional burden of taxes will only speed-up this emigration process. These ultra-rich people are some of those people in India who are providing valuable saving and investment resources which helps build the capital and production structure of the Indian economy. Their saving and investment activities are what make India richer as the time goes by. Once these people are gone, what is left behind are mostly poor people who do not earn enough, save and invest. Lack of capital will further impoverish Indians.  When government will not be able to fund Modicare using taxes, they will resort to market borrowing which will one day bankrupt the country. And when these two sources will fail, government will resort to their time tested method of inflation i.e., printing currency. They will ask the RBI to monetize the deficit by printing currency notes, increasing the money supply in the economy, and buying government bonds. This inflationary policy will ultimately ruin the Indian economy and people.

This program will create a giant healthcare bureaucracy which will be almost impossible to finance without going bankrupt. As Thomas Sowell said, It is amazing that people who think we cannot afford to pay for doctors, hospitals, and medication somehow think that we can afford to pay for doctors, hospitals, medication and a government bureaucracy to administer it. Once in place it will be very difficult to dismantle this giant bureaucracy. The Indian government is already huge and making it even bigger makes no economic sense at all.

Second, the social and cultural impact of this policy will make even more people dependent on government largess. Modicare will alter peoples’ habits and make them lazy and careless about their health. When people will come to know that no matter what the government will pay their health bills, they will stop living a healthy lifestyle. This scheme will basically subsidize unhealthy lifestyle and punish healthy ones. This perverse incentive of Modicare will turn India into a sick society.

Not only this, this policy will result into shortage of medical personnel like doctors and medical facilities like clinics and hospitals in India.  In the present relatively private healthcare system doctors get their fees in cash directly from patients. This keeps their clinics going. We have to understand one fact that no doctor can run his clinic/hospital free of cost without making any profit. Once government starts paying their fees, they will start regulating how much fees doctors can charge and when they will get their payment. Price caps and delays in getting fee money from the bureaucrats will make it increasingly difficult to make profit and covering day to day cost of running clinics and this will make people reluctant to enter medical profession. We are seeing these things already happening in places like America, Canada or Britain where they have similar national health care system in place. Scarcity of doctors and medical facilities will further erode health standards of Indians.

Modi government has initiated this healthcare program in desperation to woo rural poor voters of India, and it might happen that if a new government comes to power in 2019 then this program might get scrapped. But one can never be sure. Government programs run mostly in one direction. Once they are started it is very difficult to roll them back. Successive governments will want to utilize this healthcare scheme for vote purposes, and that will make it very difficult to dismantle it.

All in all, Modicare will be a disaster like what Obamacare has turned out to be for the Americans. In USA the insurance premiums sky rocketed after the implementation of affordable healthcare act (Obamacare). Similar things will happen in India. Economic laws work same everywhere. Instead of making Indians healthy and covering their illness finances, this program will make them even sicker and financially bankrupt.

Wednesday, January 31, 2018

Indian Culture and Economic Development

Which factors determine country’s economic development? Development scholars have looked into this question for more than a century and they came up with different explanations like the theory of colonial victimization, dependency theory, geography and climate, institutions, culture etc. Out of these explanations the cultural explanation is fundamental. I strongly think that culture is the most important factor influencing the process of economic development of any country. I also strongly think that the twin process of biological and cultural evolution together, the gene-culture evolution, ultimately determines whether a country is going to develop or not.  This is because human beings are a product of both biological and cultural evolution.

Not going into the contentious issue of genetic basis of culture and economic development, here I just want to focus on cultural factors as a determining force behind economic development. I was recently reading an article by Argentine lawyer and sociologist Prof. Mariano Grondona  A Cultural Typology of Economic Development and found it very relevant to the development difficulties that a third world country like India faces since time immemorial.

In his article Prof. Grondona divides the (cultural) value system, values that can be grouped in a consistent pattern, of any society into two parts: 1) value system that favors economic development, and 2) value system that resists economic development. He lists down twenty different cultural factors, which are part of a value system, that are viewed very differently in cultures that are favorable and resistant to economic development. A quick review of these factors will tell us whether the Indian culture is in favor of economic development or resistant.
  • Religion: As Prof. Grondano says, throughout history, religion has been the richest source of values. A religion which treats life’s winners (the rich) unfavorably and losers (the poor) favorably is antithetical to economic development. Such religion breeds cultural values that exalts poverty and condemns riches. Hindu society and Hinduism is just like this. In India people who gave up productive societal lives for an ascetic life are revered everywhere whereas successful businessmen are derided for being greedy and selfish. Hard honest work is scorned and life of lethargy and laziness is celebrated. Such a culture can never develop.
  • Trust in the individual: The principal engine of economic development is the work and creativity of individuals. What induces them to strive and invent is a climate of liberty that leaves them in control of their own destiny. If individuals feel that others are responsible for them, the effort of individuals will ebb. If others tell them what to think and believe, the consequence is either a loss of motivation and creativity or a choice between submission or rebellion. However, neither submission nor rebellion generates development. Submission leaves a society without innovators, and rebellion diverts energies away from constructive efforts toward resistance, throwing up obstacles and destruction. To trust the individual, to have faith in the individual, is one of the elements of a value system that favors development. In contrast, mistrust of the individual, reflected in oversight and control, is typical of societies that resist development. Implicit in the trusting society is the willingness to accept the risk that the individual will make choices contrary to the desires of government. If this risk is not accepted and the individual is subjected to a network of controls, the society loses the essential engine of economic development, namely, the aspiration of each of us to live and think as we wish, to be who we are, to transform ourselves into unique beings. Where there are no individuals, only “peoples” and “masses,” development does not occur. What takes place instead is either obedience or uprising. And India is precisely this type of society where the individual simply doesn’t exist. An individual’s only identity is to which caste or clan or religion or community or family he belongs. The societal and community control over an individual are so many that it numbs one’s mind. Going against societal norms for most is suicidal. A society where such tight controls on an individual exist can never develop.
  • The moral imperative: The culture that is favorable to economic development is moral in nature. In development favorable cultures moral law and social reality coincides. In development-resistant cultures, on the other hand, there are two worlds that are out of touch with each other. One is the exalted world of the highest standards and the other is the real world of furtive immorality and generalized hypocrisy. The law is a remote, utopian ideal that does little more than express what people might in theory prefer, whereas the real world, effectively out of touch with all law, operates under the law of the jungle, the law of the cleverest or the strongest, a world of foxes and lions disguised as lambs. India is such a society of generalized hypocrisy. People say something in the public and do exactly opposite in private. The hypocrisy starts right from the top level authorities and leaders, both political and religious, and goes right down to the last man.
  • Two concepts of wealth: In societies resistant to development, wealth above all consists of what exists; in favorable societies, wealth above al l consists of what does not yet exist. This means societies favorable to development will innovate to change their future wealth whereas resistant ones will be happy in accumulating whatever wealth they can, and India is such a society where people are simply busy amassing wealth instead of busy thinking about how to increase their wealth in future. This is the reason why hardly any innovation takes place in India.
  • Two views of competition: The necessity of competing to achieve wealth and excellence characterizes the societies favorable to development, not only in the economy but elsewhere in the society. Competition is central to the success of the enterprise, the politician, the intellectual, the professional. In resistant societies, competition is condemned as a form of aggression. India is a society where most people, whether a businessman or politician or an intellectual or professional, hate any kind of competition. Most people are busy creating monopoly organizations for themselves using the state machinery. Indians love protectionism. 
  • Two notions of justice: In resistant societies, distributive justice is concerned with those who are alive now-an emphasis on the present that is also reflected in a propensity to consume rather than to save. The favorable society is likely to define distributive justice as that which also involves the interests of future generations. In such societies, the propensity to consume is often smaller and the propensity to save is often greater. A small percentage of people in India think of a future generation in India. The people in power, who are in charge of societal institutions, can hardly think beyond their tenures. They are ruining the coming generations to give little (false) benefit to the present.
  • The value of work: Work is not highly valued in progress-resistant societies … The entrepreneur is suspect but the manual laborer somewhat less so, since he must work to survive. At the top of the prestige ladder are the intellectual, the artist, the politician, the religious leader, the military leader. Again, India is exactly this type of society. Entrepreneurs, especially the smaller honest ones, are derided but unproductive people like politicians, religious leaders etc., are worshiped like Gods.
  • The role of heresy: A development resistant society always censors people who are dissidents. Heresy is always punished. Any kind of questioning of the established norms and authorities is strictly prohibited. But such questioning is the very process that creates innovation and new ideas that promote development. In India most people are simple followers of the past traditions and customs. Questioning is forbidden. Inquiring minds will get frustrated in India and so most of them fly to Western countries. In new India (sic) rational people are not tolerated and are now murdered regularly.
  • To educate is not to brainwash: Value systems favorable to development nurture the formation of individuals who are innovators, heretics. Education is the principal instrument of this nurturing. However, this must be a form of education that helps the individual discover his or her own truths, not one that dictates what the truth is. In value systems resistant to development, education is a process that transmits dogma, producing conformists and followers. In India the education system is a pure propaganda machinery of the government for brainwashing the future generation so that everyone become docile citizens. There is only rot memorizing going on inside the classrooms. Schools only create herds of graduates who can’t think on their own. No wonder India is a third world country.
  • The importance of utility: The developed world eschews unverifiable theory and prefers to pursue that which is practically verifiable and useful. To know what is verifiable and useful requires scientific attitude which hardly few Indians have. Indians are fatalist who will blindly follow what their lives dictate to them instead of controlling their lives through their intelligent actions. Such people can hardly develop themselves.
  • The lesser virtues: Advanced societies esteem a series of lesser virtues that are virtually irrelevant in traditional cultures: a job well done, tidiness, courtesy, punctuality. These contribute to both efficiency and harmoniousness in human relations. They are unimportant in a resistant culture. A job well done, tidiness, courtesy and punctuality are unknown concepts for most Indians. The Indian society hardly values time, and that is the reason why the chances of its development are minuscule in present.
  • Time focus: There are four categories of time: the past, the present, the immediate future, and a distant future that merges into the afterlife. The time focus of the advanced societies is the future that is within reach; it is the only time frame that can be controlled or planned for. The characteristic of traditional cultures is the exaltation of the past. To the extent that the traditional culture does focus on the future, it is on the distant, eschatological future. Indians always look to their glorious past forgetting their present dismal condition. If at all they think about the future then it is either their afterlives in heaven or hell or the next life. All want to get moksha in the afterlife but will happily live a wretched present life!
  • Rationality: The modern world is characterized by its emphasis on rationality. The rational person derives satisfaction at the end of the day from achievement, and progress is the consequence of a vast sum of small achievements. Most Indians are irrational and tribal to their core so true progress is impossible.
  • Authority: In rational societies, power resides in the (natural) law. In resistant societies, the authority of the prince or the state is similar to that of an irascible, unpredictable God. People are not expected to adapt themselves to the known, logical, and permanent dictates of the law; rather, they must attempt to divine the arbitrary will of those with power. This perfectly characterizes the Indian society. The present God of most Indians is Narendra Modi.
  • Worldview: In a culture favorable to development, the world is seen as a setting for action. The world awaits the person who wants to do something to change it. In a culture resistant to development, the world is perceived as a vast entity in which irresistible forces manifest themselves. These forces bear various names: God, luck, the devil, a powerful international conspiracy, capitalism, imperialism, Marxism etc. As I said above, upon any kind of failure or success most Indians will immediately blame of give credit to factors like God or luck etc. They will never say that my actions are responsible for my failure or success. Most Indians think their dismal condition is permanent and they can’t do anything to change it. This is a typical sign of a backward development resistant society.
  • Life view: In the progressive culture, life is something that I will make happen-I am the protagonist. In the resistant culture, life is something that happens to me – I must be resigned to it. Again, as I said above, most Indians are fatalist and they have resigned their lives to external forces. Whenever I discuss the issue of changing the Indian society in my classes most of my students will always say, what can we do sir? We are so small and powerless!
  • Salvation from or in the world: In the resistant conception, the goal is to save oneself from the world. But for the favorable culture salvation in the other world depends on the success of the individual’s efforts to transform this world. This again typifies the Indian society at large.
  • Two utopias: Both progress-prone and progress-resistant cultures embrace a certain kind of utopianism. In the progressive culture, the world progresses slowly toward a distant utopia through the creativity and effort of individuals. In the resistant culture, the individual seeks an early utopia that is beyond reach. The example of the latter in India is Narendra Modi’s grandiose utopian unrealizable vision of new India in 2022!
  • The nature of optimism: In the resistant culture, the optimist is the person who expects that luck, the gods, or the powerful will favor him or her. In the culture favorable to development, the optimist is the person who is resolved to do whatever is necessary to assure a satisfactory destiny, convinced that what he or she does will make the difference. This again is quintessential India.
  • Two visions of democracy: The resistant culture is the heir of the tradition of absolutism, even when it takes the form of Rousseauistic popular democracy, which admits no legal limits or institutional controls. The liberal, constitutional democracy of John Locke, Baron de Montesquieu, James Madison etc., characterizes the vision of democracy in the progressive culture. Political power is dispersed among different sectors and the law is supreme. India is a namesake democracy only. Politicians behave worst than past nabobs and kings, and the law is absent.  
After reviewing the list of these twenty cultural factors that are favorable or resistant to economic development one can easily see that all twenty factors in India are resistant to economic development. This is not surprising as underneath the veneer of modern democracy India remains a collectivist tribal society. This resistant culture is the reason why India is still a third world country, and will remain as long as this resistant culture is not changing in favorable direction. Such cultural changes come only after centuries of persistent hard work.  And it is also possible that such changes might never come and India remains a third world country forever. In the end everything depends on Indians. If they wish they can change their culture, but if they are comfortable with the kind of miserable lives they are living in present then there is very little hope for the future.

Saturday, January 20, 2018

Government’s Right to Coerce and Our Duty to Obey

Do the state (aka the government) has any right to coerce us and we have any duty to obey it? This is the question that philosopher Dr. Michael Huemer addresses in his important work, The Problem of Political Authority: An Examination of the Right to Coerce and the Duty to Obey. The answer at which Dr. Huemer arrives after logical and empirical analysis is: I shall ultimately conclude that political authority is an illusion: no one has the right to rule, and no one is obliged to obey a command merely because it comes from their government.

Dr. Huemer divides his book in two parts. Part one is devoted to logically and empirically analyze various theories of political authority and part two to the discussion of how a society without the state will function.

The method that Dr. Huemer uses to logically analyze various theories of political authority is to first juxtapose an action of the government in the private sphere and then see if a private individual is allowed by common moral instincts, that most people intuitively understand and share, to perform that action. If that action is unjust and immoral for a private individual then it is also unjust and immoral for the governmental political authority to perform e.g., will we allow an individual to rob Paul and pay that money to Peter and call it social welfare? Not at all. So if a private individual is not allowed to rob Peter to pay Paul then the government should also not be allowed to do so.

The Traditional Social Contract Theory
The first theory of political authority that Dr. Huemer examines is the famous theory of social contract. The theory of social contract says that there is an explicit contract between the state (political authority) and the society members re giving monopoly of use of violence and force to the state via an explicit so-called “social contract”. The theory holds that, at least in some countries, there is a contractual relationship between the government and its citizens. The contract requires the government to provide certain services for the population, notably protection from private criminals and hostile foreign governments.

According to this theory then the state has the right to coerce its citizens and the citizens have the duty to obey the coercion of the state according to the explicit social contract that they have signed with the state.

The first problem with this social contract theory is that it totally ignores the reality i.e., no citizen in the history has ever explicitly signed a document called “social contract” with its government. Did you, my dear reader, sign such a social contract ever in your life with your government? No citizen has ever been presented with such an explicit contract document that citizens read and after agreeing to its terms and conditions signed it. Dr. Huemer presents more such glaring problems with the theory of social contract: But even If there was an original social contract, how could this contract bind people born much later, who never participated in the original agreement and were never asked for their consent?

Because of this and other such glaring logical defects this theory only remains as an historical artifact in the political science. No one takes it to be the logical justification of political authority.

The Implicit Social Contract Theory
As the explicit social contract theory crumbled under the weight of logical scrutiny the statist theorists designed another social contract theory. This time the social contract is implicit instead of explicit. Implicit consent is consent that one indicates through one’s conduct, without actually stating one’s agreement. If citizens have not embraced social contract explicitly, perhaps they have embraced it implicitly.

There are various ways in which one can indicate agreement to government’s coercion without stating agreement explicitly:
  • One expresses an implicit consent by not explicitly opposing the contract (passive consent)
  • One commits oneself to accepting certain demands by soliciting or voluntarily accepting benefits to which those demands are known to be attached (consent through acceptance of benefits)
  • Consent through presence i.e., one indicates agreement to a proposal merely by remaining in some location; and finally
  • Sometimes one implicitly consents to the rules governing a practice voluntarily participating in the practice (consent through participation).
Any of these four kinds of implicit consent might be used as a model for citizens’ implicit acceptance of the social contract. Dr. Huemer analyzes these implicit forms of consent using conditions for valid agreements. A valid agreement is an agreement that is morally efficacious – that is, it succeeds in rendering permissible some action to which one consents or in generating an obligation to act in a way that one has agreed to act. Where these conditions are not present contract is invalid. An example of an invalid agreement is, for instance, suppose a criminal holds a gun to your head and demands that you sign over the movie rights to your latest book. If you sign, the contract would be invalid, because the threat of violence made it involuntary. A valid agreement requires that these conditions are met in an implicit contract. These conditions are:
  • Valid consent requires a reasonable way of opting out
  • Explicit dissent trumps alleged implicit consent
  • An action can be taken as indicating agreement to some scheme, only if one can be assumed to believe that, if one did not take that action, the scheme would not be imposed upon one; and
  • Contractual obligation is mutual and conditional
The implicit social contract fails to pass all these four conditions and so is not a valid agreement between citizens and their governments. Dr. Huemer concludes the analysis of the social contract theory saying that the social contract theory cannot account for political authority.

The Hypothetical Social Contract Theory
The hypothetical social contract theory proponents say that individuals would consent to the state under certain hypothetical conditions. These conditions may involve stipulations regarding he knowledge, degree of rationality, and motivations of the parties to the social contract, in addition to the stipulation that all members of a society be given a choice as to what sort of society they shall live in. Dr. Heumer defines the conditions under which a hypothetical social contract can be judged valid. These conditions are, first, the defenders of this theory must show that people would accept the social contract in their hypothetical scenario; second, they must show that this hypothetical consent is morally efficacious, in the sense that it generates obligations and ethical entitlements similar to those generated by a valid actual consent. After a lengthy analysis Dr. Huemer concludes that, the move to a merely hypothetical contract cannot save the social contract theory. There is no reason to believe that agreement could be reached even in the hypothetical scenarios envisioned by most theorists nor that such hypothetical consent would be morally relevant if it could be reached.

The Authority of Democracy
As the theory of social contract between all citizens and the state fell apart, the theorists of the state needed something else to justify its political authority to legitimize its coercion. They came up with a compromised idea of majority consent. Can the agreement of only a majority of citizens give the state a right to coerce all of us? A simple scenario can expose the fallacy of democratic majority rule argument. Suppose you have gone out for drinks with few of your friends. You are all busy talking about philosophy, when someone raises the question of who is going to pay the bill. A number of options are discussed.  A friend suggests dividing the bill evenly among everyone at the table. You suggest that everyone pay for his own drinks. Another friend then suggests that you pay for everybody’s drinks. Reluctant to spend so much money, you decline. But your friend persists: “let’s take a vote”. To your consternation, they proceed to take the vote, which reveals that everyone at the table except you wants you to pay for everybody’s drinks. ‘Well, that settles it’, declares your friend. ‘Pay up’. In this scenario are you ethically obligated to pay for everyone’s drinks? Can your friends collect the bill money from you by force? I am sure your answer is no. This is the normal generally accepted ethical instincts of most people when it comes to such private scenario, but same situation exists in the case of democratic majoritarian government. Majority alone doesn’t generate any right to coerce the minority. It also doesn’t generate any duty for the minority to obey the majority.

Dr. Huemer then analyzes theories of deliberative democracy, argument from equality justifying political authority etc., and concludes, democracy does not solve the problem of political authority. The fact that a majority of persons favor some rule does not justify imposing that rule by force on those who do not agree to It nor coercively punishing those who disobey the rule.

After logically analyzing and refuting various theories of political authority Dr. Huemer discusses very important topic of the psychology of authority. Why people abide by the coercion of authority and why some people like to coercively rule over others. The motive of Dr. Huemer to review the psychological evidence re authority is to throw light on two issues. First, how much trust we should place in our institutions about authority, and second, how desirable or harmful it may be to encourage skepticism about authority. Dr. Huemer goes on to analyze famous psychological experiments like the Milgram experiment, the Boston Prison experiment, the Stockholm syndrome phenomenon, the problem of cognitive dissonance, the social proof and the status quo bias etc., to throw light on these issues. Dr. Huemer concludes that, human beings come equipped with strong and pervasive pro-authority biases that operate even when an authority is illegitimate or issues illegitimate and indefensible commands. And this is the reason why the standard intuitions about authority are not to be trusted because they are products of systematic biases of the human mind.

What if there is no Authority?      
Dr. Huemer dedicates part two of his book to the discussion of a world without any kind of political authority. This world is not a typical world of chaos portrayed by the opponents of this idea of a world without political authority. This world simply replaces state coercion with voluntary agreements and contracts. In this world most of today’s laws will be unjust because they are coercive. 

Dr. Huemer goes on to discuss how this stateless society will provide goods like protection and security, justice etc. He concludes that a market based voluntary system is much better than coercive state system of today.

In the last chapter from democracy to anarchy Dr. Heumer discusses strategies of transition from a statist society to a stateless society. He concludes,
 It is reasonable to believe that anarchy may come to the world in due time. The most plausible transitional model is one in which democratic societies move gradually toward anarcho-capitalism through progressive outsourcing of governmental functions to competing businesses. No obstacle but public opinion and inertia prevents government from turning over policing, dispute resolution, or even the conduct of criminal trials to private agents. Governmental armed forces can be drawn down and ultimately eliminated through an extended ratcheting-down process in which each country repeatedly cuts back its military forces to only those needed for defenses. … 
The most important determinant of whether this process will occur is intellectual: if anarcho-capitalism is a good idea, then it will probably ultimately be recognized as such. Once it is generally recognized as desirable, it will probably eventually be implemented. Abolishing the state is more realistic than reforming it, because abolition requires people to accept only single philosophical idea – skepticism about authority – whereas reform requires people to familiarize themselves on an ongoing basis with the myriad of flaws of specific policies. (Emphasize mine)
Dr. Huemer’s book is a must read for anyone who is interested in issues of political authority. Most people in their day to day lives are ethical and moral, but when it comes to the government (political authority) they become vulnerable. As Dr. Huemer shows, we need to apply the same ethical standards to the government that we apply in our private sphere. Application of those standards tells us that the government has no right to coerce us and we have no duty to obey the government. Once we start questioning the political authority and legitimacy of the statist governmental system, its days will be numbered. Only then we will be able to build a peaceful, just, civilized and prosperous society for all of us on this planet.   

Sunday, December 24, 2017

Will imposing import duties on foreign electronic products boost ‘make in India’ campaign?

Recently the government of India raised import duty on electronic items including cellphones and TVs to allegedly boost its Swadeshi campaign of Make in India as well as government revenues (sic).

Let us analyze this protectionist policy of government using sound economic laws and see if it is capable of achieving its stated goals.

Economics and Psychology of Protectionism
In the immediate aftermath of this hike in import duties the price of the imported electronic goods will go up choking some of the demand. This price rise will though not choke all of the demand. Those people whose price elasticity of demand is inelastic, e.g., a diehard iPhone fan, will continue to purchase these now costly imported goods. The price rise will reduce the purchasing power of their money e.g., if the iPhone was selling at 100 rupees before the 10% duty hike then it will now sell at 110 rupees. This means consumer will have to now spend more on iPhone leaving that much less income in his pocket to be spend on other items e.g., suppose his nominal income was 200 rupees before import duty hike and he was spending 100 rupees on an iPhone so his remaining income, which he can spend on, let’s say, other Indian manufactured items, was 100 rupees; but after the hike that income has come down to 90 rupees, which means he has 10 rupees less left to spend on other make in India items! This means the demand for make in India items, in the non-electronic market, will actually go down because of this import duty hike; and lower demand means higher unemployment. This policy will help only few sellers of electronics market while hurting consumers and sellers from all other sectors! This is zero sum outcome of this policy which is antithetical to the make in India goal.

Another problem is with the make in India products itself.  The reason why Indian consumers buy imported products is because they are not satisfied with the price and quality of the make in India products! Forcing them to buy make in India product via protectionist measure of import duty hike is not going to solve this original problem of low quality and higher price of make in India products! Here there is no incentive for the Indian manufacturers to compete in the market for customers by implementing innovations and improving quality of their products and reducing their prices to the lowest possible level. In fact, the protectionist measure erects exactly opposite incentive structure for the make in India manufacturers. Import duty hike eliminates the competition coming from the foreign manufacturers. In the absence of this pressure of competition, the Indian manufacturers will relax and not improve either quality of their product or its price. They will continue to fleece the Indian consumers by providing them low quality high price products as has always happened in past!

Not only this, this policy will indirectly result into higher smuggling and creation of another vast underground economy in the electronic market. As I explained above, the import duty hike is not addressing the problem of why Indian consumers don’t want to voluntarily buy make in India products. Import duty hike might deter some demand of imported electronic goods in the short run, but in the long run it will remain ineffective because the underlying cause of imported item’s demand will be still present. In the absence of high quality low price local electronic goods, consumers will still want to buy imported items. This continuous demand will give rise to new entrepreneurs, in vulgar language they are known as smugglers, who will now take risk of providing these contraband items to the needy customers. In this way huge underground market of smuggled imported electronic items will come into existence as it used to exist during the Nehruvian era of import substitution policies. This underground economy will also create more corrupt customs officials increasing corruption in India! And this underground economy and corruption are the two things that Modi government is supposedly trying to eliminate.  As usual, governments never learn from their past mistakes. Modi is creating the same monster that he is trying to eliminate!

The import duty hike will not boost make in India campaign. It will, in fact, reduce the demand of make in India products! Also, protectionism will give rise to an underground economy in the electronic goods market in India resulting into loss of revenue (sic) for the government.

Sunday, December 17, 2017

Supreme Court wants to Regulate the Legal Profession

Last Tuesday the supreme court of India expressing concern over growing commercialization of the legal profession with lawyers demanding “astronomical” fees from litigants, which made it difficult for the poor to access justice, the Supreme Court asked the Centre on Tuesday to bring a law to regulate the field and to prescribe “floor and ceiling of advocates’ fees”.

Let us examine supreme court’s demand of regulating the legal profession in India using sound laws of economics.

First, the concern of supreme court re commercialization of the legal profession where lawyers are demanding ‘astronomical’ fees from the litigants is quite legitimate. But after this correct diagnosis of the symptom the treatment offered by the court isn’t sound at all. In fact it is antithetical to the concerns shown by the court as we will see in a while.

To understand the issue reflected in court’s concern one needs to simply ask the question, why the lawyer’s fees are astronomical (astronomical from whose perspective is also an important question, but I will not delve into that issue here)?  The reason of astronomical fees is simple demand and supply condition prevailing in the legal market right now. The legal market (profession) of India is monopolized by the legal professionals (lawyers, judges etc.) using the method of government licensing. Anyone who wants to become a lawyer will have to acquire a law degree (LLB or LLM) and then get a license to practice law from the monopolist Bar Association. Without this license no outsider is allowed to become a lawyer and practice law. This monopoly condition means the supply of lawyers in India is highly restricted. When this low supply of lawyers meets with the high demand of law services, arising because of myriad of governmental regulations and legislation, it results into higher prices (fees) of lawyer’s services. As with any monopoly, this law monopoly also results into high legal prices (fees) and low quality of services provided by the legal profession.

Now, because the root cause of higher lawyer fees is the monopoly practice of that profession, which is legally backed by the government and supreme court itself, the only sound solution is to dismantle this monopoly by dismantling the bar association and allowing free market competition in legal profession. Market competition will ensure lower prices and higher quality (including speedy resolution of all cases with justice being done to victims) of legal services. The moment legal market will be opened for competition more lawyers will start to enter this profession because of its present higher prices (fees) and profit. This entry of lawyers will increase the supply of legal services lowering its price (fees). Market competition will ensure that only top quality honest and just lawyers remain in the market whereas all inefficient unjust lawyers will be weeded out. Gradual lowering of legal fees will make sure that the poorest of the poor Indians can also avail top quality legal services.

But, alas, instead of offering this economically and ethically sound solution of the problems of the legal profession, the supreme court is offering the exact opposite and economically and ethically unsound solution in the form of ‘price controls’. As I said above, the measure of price control will prove to be antithetical to the goals envisaged by the supreme court. When the government will put ceiling and floor on the prices (fees) of legal services it will result into scarcity of lawyers and other legal professionals in the country. Lawyers are also humans and entrepreneurs who need profit to survive and run their live. Selfishness is what drives every life on this earth. Everyone is selfish and there is nothing wrong in being selfish. If people think people like lawyers or teachers are in a noble profession and they don’t require profit then they are making a big mistake. The matter is not whether lawyers and teachers should earn profit; the matter is how much profit they should earn. The answer is: as much as their services are valued by their customers in the free market. When the government will put limit on the maximum fees that lawyers can charge from their customers, as according to the law of supply, it will result into drastic reduction in the supply of lawyers in India. This will increase the prices of legal services even higher than at what astronomical levels it is today! This will make sure that no poor person will ever be able to access legal services! Not only this, it is quite possible that this increased scarcity will start a whole new underground market for legal services in the form of local mafias who will produce their own mafia justice! When people will not be able to get justice from the official legal system, they will resort to other alternatives. Many will take law in their hands. And all these results are exactly opposite to what the supreme court is eying for.

Murray Rothbard once said, “It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.”  The supreme court of India is in this state of economic ignorance, and in that state of ignorance it is better that it refrains from advising the government or anyone else on economic matters. In the zeal of doing good the busybody judges will harm (poor) people of India.