The Ownership Society

“It is all about power, isn’t it?” said CJ.

I was on the phone with CJ, discussing a series of columns that the Indian Express newspaper has been running called “India Empowered” which as the newspaper puts it, “if there’s one engine that’s today driving a changing India, it’s empowerment. Empowerment of the individual, the family, the neighborhood, the community – and, hence, the nation.”

The series has seen the usual suspects such as President “Dr” APJ Kalam, Dr. Manmohan Singh, Mr LK Advani, etc. and a few unusual ones as well.

“Empowerment seems to be the most critical ingredient that has been missing from the development recipe. Empower everybody and we will be the greatest developed nation in the world,” I said having read all those wise and wonderful people.

I am especially inspired by Bollywood super star Shah Rukh Khan’s way to making Indian empowered which is “Making people wear a smile, giving them what they want.”

As long as I get what I want, I am sure that you will not have to make me wear a smile, though. I will smile all by myself.

I told CJ, “You should read what the great Khan has to say. I am sure he is not as ugly has he looks, considering that he is a super mega star. But his pronouncements are stupider than they sound. Malls appear to be at the crux of his evaluation of India. Let me read you a few lines from his column. Quote:

The other day I was talking to my friend Juhi Chawla and she told me that the malls are just as good or bad as in any other country. That’s great.

Things are wonderful in India. The economic structure is rising, technological advancements are making headlines and the social consciousness is also pretty encouraging. We’ve made progress in all spheres. Be it malls in Gurgaon, irrigation in Punjab or computer advancement in Hyderabad: greatness is happening every day.

If there is one column you must read from that series, make it Shah Rukh Khan’s. The least the newspaper could have done is to pay a two-bit journalist to ghostwrite that column. Perhaps the editor thinks that Mr Khan’s pronouncements are utterly profound. Would not surprise me in the least. Mr Khan (or should that be “Dr.” Khan because by now I am sure that some university or the other has granted him an honorary doctorate?) again:

Personally, I’ve a problem with the power of information. I’m not an authority on it but I think somewhere down the line, information has been a huge downside. We can access information anytime but we don’t know what to do with it. So, information creates bottlenecks. We create a flyover to Nehru Place but forget to connect it to Surya Hotel. Likewise, information as a tool is good but its utility is still unclear. Give a person what he wants but don’t bore him.

CJ interrupted me just as I was getting into it.

“Actually what he says is not any different from what the others have said but in more sophisticated language. He says, give people what they want. The newspaper is giving its readers what they want. They want to hear nice empty content-free feel good stories about how wonderful it all is and how even more wonderful it is all going to be. No real inquiry or reason needed. It has no operational content. Let’s just empower everybody, whatever that means, and we are done,” CJ said.

“Well, what do you recommend?”

“I say what India needs is an ownership society. The rest of this talk about empowering this that or the other is meaningless without the fundamental notion of ownership. Empowering villagers with knowledge, as the good “Dr” prescribes, will not have any effect until there is ownership. Remarkable results follow once you identify the problem as not one that is centered on power but on ownership.”

Then CJ proceeded to explain what he meant by the ownership society, how to bring it about, and what will be the effects of that transformation if we are ever able to achieve it.

Power without accountability is at the core of many of India’s problems. In a feudal society, the feudal lord has power but is not accountable to the serfs. He can arbitrarily make laws and do what he pleases. At a higher level of organization, in a kingdom, the king has all the power and again no accountability. At its peak, it is imperialism when the entire country is ruled by colonial decree but the rulers are not accountable. After centuries of feudal rule, followed by centuries of foreign invasions, and culminating in the British colonial rule of about 90 years, the habit of power without accountability has been firmly ingrained in the Indian governing psyche.

History matters. It is all karma, neh?

It is not power that is a problem by itself. You have to have power to accomplish anything. It is power divorced from and bereft of accountability that is a problem. Accountability arises from the idea of responsibility. And in turn, responsibility is a correlate of ownership.

What does it mean to “own” something? Here is a concrete example. I “owned” a product line when I worked in a corporation. I was responsible for its performance and I was accountable when things went wrong. I had the power to influence what happened to the product line and knew that if it performed well, I stood to benefit, and if not, I stood to lose.

That is what economists call incentives. I had the incentive to do the right thing because I owned the product and had all the rights and responsibilities that flow from that notion of ownership.

When the notion of ownership is missing, neglect is the outcome. Public enterprises generally fare worse than private firms because they don’t own what they manage.

This idea of ownership is not fully appreciated and so I will belabor the point a bit. I am sure you have said to yourself, “This gizmo is not mine. I better take very good care of it,” when you borrowed a gizmo from your friend. And you have also perhaps said at other occasions, “This gizmo isn’t mine. I don’t have to be too careful about it” when you were using a gizmo available for public use.

Contradictory? Not at all. It fits in clearly with the notion of ownership. When you borrowed, you got temporary ownership of the gizmo and therefore acquired the right to use and control it but also inherited the responsibility to be held accountable if something went wrong with it. The temporary ownership was as powerful as if you actually owned it. Note that someone has to own it in the first place before another can acquire temporary ownership. If no one owns it, then no one can acquire temporary ownership and thus not acquire the responsibility of accountability with it.

How the process of ownership is acquired in the first place is a matter that we will go into later. It has to do with the other (other than the market, that is) great institution called the Law. What I am attempting to do is to determine where exactly the holes are and how we can go about fixing them. My contention is that ownership is what is missing from the Indian economy. We need to focus on ownership, and go a little easy on the empowerment idea—whatever “empowerment” means.

There are two very important institutions which are quite critical to the functioning of a society. One is the market and the other the law. These are abstract concepts, of course, but the quality of their instantiation in a particular society determines to a very large extent how well the society functions.

Markets essentially provide the discipline that holds economic agents accountable for their actions. What you bring to the market is a bundle of ownership rights and the basic function of a market is to trade those rights with other market participants. The law actually establishes those ownership rights in the first place and protects them. To the degree the legal institution in a society is unable to do that, markets cannot function and thus trades cannot take place. Consequently, gains from trade do not occur and thus the economy does not function sufficiently well.

What exactly is an economy? Just a bunch of people producing stuff and consuming stuff. Since different people are better at doing different things, it is better for us if we exchange stuff that we are good at producing for stuff we are not so good at producing. That is voluntary trade. Voluntary trade makes both parties better off; it is a win-win situation. When due to some reason, a particular trade does not occur, the gains from trade are foregone and we have less stuff produced than otherwise.

For instance, if I know that I will be protected from my apartment being usurped by the renter, only then will I rent it out. If I find that renting my apartment could mean that the renter would refuse to move out after a certain period, and the courts would take about 200 years to hear my case, and even after getting a favorable decision, my descendents will not be able to evict the usurper, I will just not rent the apartment.

Note that you could be the most honest of renters but I have no way of figuring out that before I rent it out. So otherwise honest trades of renting will not occur and the economy suffers. This leads to the sorry state of thousands of vacant apartments and houses lying locked up in otherwise extremely crowded cities around India.

Trade cannot happen unless contracts are enforceable. That is what the laws and courts do. Furthermore, contracts cannot be signed unless it is clear as to who the owner is so that rights can be transferred, as that is what trade is—the transfer of rights. If the property is under dispute, i.e., if it is unclear as to who owns the property, trade cannot take place.

The law makes trade possible. The invisible hand of the market requires the powerful arm of the law to give it the power it has to transform and coordinate the self-interested actions of the many into overall social welfare.

The quality of the law in an economy fundamentally and essentially determines the nature of the economy. That is the bottom line that we have to focus our attention on. It is the law that assigns ownership and it is an ownership society that is a good society. That is what is missing in India. The rest of this essay is an exploration of the basic notion of an ownership society. Remarkable results follow from it and the operational details of how to implement an ownership society—both in the private and public spheres—will naturally evolve.

If we follow the simple logic of what an ownership society is, we will avoid all sorts of dead-end rhetoric of how malls are wonderful and how great India is because shiny malls dot the landscape, or how “empowering” villagers with “knowledge” will solve our problems, or how internet kiosks will transform India, or how yet another employment guarantee scheme will perform the magic of lifting millions out of poverty that many similar schemes that have merely shifted rubble so far failed to perform.

So what exactly does an “ownership” society mean? It means that for every bit of the economy, there is someone who is identified as the owner. I stress the word someone. It has to be a person, not an abstract entity such as a corporation or a government department. There has to be an identifiable person at whose desk is the sign “The buck stops here.” He or she owns that bit, albeit temporarily, and that means two things. First, the person has total control of that bit and, second, that person is accountable for the consequences of exercising his or her control over that bit.

For this to happen, rules have to be agreed upon regarding who will be the owner of a particular bit and what rights that are attached to the ownership, and what will be the consequences of exercise of those rights by the owner. The set of rules form the Law.

Now it is time to get down to brass tacks. Let us distinguish between the private and the public sectors. The private sector first. By its very definition, the ownership issue is clear. You own something, starting with self-ownership. Then you own other bits that are legally yours, whether it be a car or a factory. You have control over it and you are responsible for it totally and unambiguously, and you enjoy the benefits of the control you exercise over it and are liable for any damage you inflict on others as a result of that control. You run over a pedestrian in your car, you pay for the damage. Your factory blows up, you pay for the harm.

Note that the legal system is intimately involved. If the same legal system which grants you the ownership rights and assigns you the benefits of that ownership does not also simultaneously guarantee penalties for the harm arising from that ownership, it is incomplete and will not be effective.

The Law, in short, has to not only grant ownership to you, but also has to provide the appropriate incentives for you to properly exercise those rights. Incentives matter. In most cases involving the private sector, markets impose the discipline that keeps things in check. In the absence of that discipline, we suffer from what in economics is called “moral hazard”—people do not exercise due caution.

Question: should the CEO of a private firm manufacturing hazardous chemicals be a foreigner? No, if the law of the land cannot reach the CEO if the factory could potentially blow up and kill 20,000 people. It happened in Bhopal.

In the normal course of events, the market imposes some degree of discipline on the private sector. For instance, the managers of a private firm, if they are the owners, know that if the firm does not perform, they lose in the marketplace. In the case of firms which have shareholders, the managers of the firm are agents which work on behalf of principals who are the shareholders. The shareholders can reward or punish the managers on their performance. People can get fired for screwing up, and in the extreme case go to jail for misbehavior.

It is the threat of punishment that keeps the agents which manage a private sector firm in check. That punishment must be fully understood by the managers of the firm before they take “ownership” of the firm, and the law should be sufficiently efficient to credibly commit to carrying out the punishment.

Now in the public sector, the same logic applies. Every enterprise must have at every level someone who is held accountable, and the level of accountability should be commensurate with the degree of control the person has over the enterprise.

So here are the rules:

1. The Law should clearly state what rights and responsibilities are associated with the ownership of very bit.
2. Every bit of the economy—private or public—must be owned by someone.

Here is an example I can play with to illustrate what I would do if I were in charge of making the laws. The example comes to mind easily as I sit here in Pune without the benefit of power supply for about four hours every day.

Supplying adequate reliable power is neither an art impossible to master nor is it rocket science. The science and technology of power generation and distribution is fairly generally known and accessible. It is easy enough to figure out using very simple forecasting tools how much power is likely to be required in any particular region sufficiently in advance to account for the long lead times required for installing capacity. Yet, India continues to suffer chronic power shortage and has done so for decades. Before we go into the why of it, let us briefly recall some of the entirely avoidable costs of this failure.

It is economically wasteful. Real resources are diverted to deal with the power shortfall. Every household which can afford it puts in a diesel generator, or at least a “power inverter.” Businesses have to buy expensive generator and UPS systems to keep themselves running and their costs go up. Instead of centrally generating say 100 megawatts of power, it is generated inefficiently by tens of thousands of small generators at many times the cost.

Who is at fault? Clearly it is the fault of the state electricity board which has failed to adequately plan and provide power. Somebody screwed up and they did so at least to a large degree because the rules did not state the consequences of failure. Someone was in control of a huge firm and that someone did not have the right incentives to exercise due diligence and plan for the energy needs.

Imagine for a moment the following rules. The CEO of the state electricity board is given the ownership of that entity. The job description: “provide power now and build capacity so that there is sufficient capacity for the next 5 years” (assuming that it takes 5 years to build capacity.) If the CEO fails to do that, the entire salary paid to the CEO will have to be repaid and the person—who may have left the job by the time the shortfall is detected—will be publicly flogged in the town square.

Now this rule should be made fully clear to the prospective candidates and anyone who takes up the job must know the consequences of failure. It is because people know up front that they are shielded from the consequences of their failures that they fail in the first place.

I really don’t care whether the power I use in Pune is provided by a public firm or a private firm. As long as I know that if I suffer, those who are responsible for my suffering also suffer, I would be quite content. More importantly, I believe that if the penalties are made sufficiently appropriate, these failures will not happen very frequently.

I don’t really care if there is a Ministry for Power in India or not. What I would care about is if there is one, the man or woman who wants to have the power and the glory of being the minister, would also be flogged publicly for any problems that arise as a result of their tenure.

I don’t really care whether the railways are run by the government or not. But if there is a train accident, the rule should be that the railway minister will be flogged publicly and given as many lashes as there are deaths due to that accident.

Public flogging of public officials is the answer to the problem of public officials not taking their charges seriously. Not just corporations. Take politicians. Any election promises they make about how they will change the economy must be taken seriously. And then if they fail to deliver, hold their feet to the fire. Candidate A claims that he will make something happen, then as elected leader A, he becomes the owner of that something. If he does not deliver—you guessed it—public flogging.

Want to be the prime minister of India? No problem. Take ownership of the country and set goals that you say you will achieve. If the goals are not achieved as promised by you, public flogging over an extended period of time. What this will do is to bring the right sort of people into public life. People who know what they are capable of doing and who will not mess with the fate of millions knowing that their behinds —literally— will be on the line.

Flogging is a simple enough measure to implement. It does not require high tech equipment. What it does require is a judiciary that can impose the punishment and carry it out.

Corruption in an organization? Here is my solution which will fix it pretty fast. Suppose Mr A has been involved in corruption. Don’t just flog Mr A, get his boss (Mr B) and his boss’s boss (Mr C) and flog them as well. Why so? Because Mr C will be extra vigilant and keep on Mr B’s case and tell him to be on the lookout that no one under him is into corruption.

What this multi-level flogging does is this. It makes managers liable for corruption in institutions that they control. That is, it give the managers ownership of the organization they control. Irrespective of how deep the organization is, if a person at a certain level is corrupt, include the two higher levels and flog those two individuals as well.

You may think that I am not really serious. But I am. I am dead serious about this. You want to make India the least corrupt economy on earth, get serious about dealing with the problem for just a few years. After a few dozen high level officials have been publicly flogged, corruption will be a thing of the past which children will read about in their history books.

You may say that instead of flogging, why not just impose a fine on them. That would not hit where it hurts. Merely fining someone who has lots of money is not pain enough. The penalty has to have a sting. Here is what I mean. In Finland, the penalty for a moving traffic violation such as speeding is monetary but it is indexed on the income of the person. A dotcom millionaire was fined $93,000 for speeding.

So flogging should do very well in India. Those in high positions value their pride. They depend on their image. If they penalty is public flogging, they would cease and desist from doing what exacts that penalty.

Public flogging of public officials is a proposal which can transform Indian society more than all this talk about empowering the citizens that we are getting dizzy from reading in the newspapers. Everyone and his brother is advancing all sorts of wooly ideas about how to transform India. Here is an idea that will not see the light of the day of course, but it has the real power to transform.

Where did I get this idea from, you might ask. I think it has to do with what John Muir once said. He said that when he was a wee little kid in Ireland, leather was one of the best aids for memory. The prospect of a good belting sufficiently focused the mind to learn his lessons. If little children could be given the proper incentive via a belting, why not give the right incentives to managers with a good public flogging?

I must stress though that you would not really have to spend all your Sundays visiting public floggings. Merely including a credible threat of a public flogging in the rule book will take care of the problem and you will not have to actually carry out many except the first few.

I am nearing the end of my piece. Some years ago, I had heard a song—A Cowboy Needs a Horse—which parodies the idea of superfluous possessions. It starts off simply enough with what a cowboy needs but then it veers off into never-never land of quadraphonic sound systems and helicopters and Xerox machines. I was reminded of that song when I was half way through reading the series India Empowered written by all those very famous people. I thought to myself, that yes, a cowboy does need a microwave oven and all sorts of gizmos but not essentially. Nice to have but definitely not strictly required. So I asked myself, what are the equivalent in the Indian economy to the horse, hat, and a rope that the cowboy really needs. I realized that it was the market, the law, and the credible thread of public floggings.

The market is slowly coming into being in India. The law has flaws. We need to get the “f” out to get good laws. What that means is we need to get the courts to move. Many trades don’t occur because contracts cannot be enforced by a court system which has a reported backlog of about 300-odd years. Finally, we need to make people owners so that they can properly care for their charge and this they will do only if they have an incentive to perform their duty, which they will do if credible commitments can be made about public flogging.

So why do these famous people talk about empowerment of this that or the other? Because they have power. That is what CJ said right in the beginning. It is all about power. They have power and they are doing pretty well and so they think that all citizens must have power. And hence empowerment.

Power without accountability and responsibility has gotten us where we are. We got here because government officials have power over things that they don’t own. What we need is the precise understanding of who owns what so that we know who to go after for when things don’t turn out as they should.

Will it happen? No, it will not. The last thing they who have power want is accountability and responsibility which comes from ownership. They makes the rules, and they will continue to rule.

It is all karma, neh?