Institutions as Ideas
Institutions defined most generally are essentially ideas. They are big ideas, ideas that are persistent and which have a profound effect on the populations that evolve, and adopt, the ideas. Examples of powerful institutions – therefore powerful ideas – are easy to find: markets, state constitutions, legal systems, systems of governance, and so on. The institution called democracy is also an idea. The instantiation of an idea — its embodiment or implementation or incarnation – varies from place to place, and from time to time. How an institution is implemented depends on, among other things, preferences of the population and on the available technology. As tastes and technologies change, institutions can be implemented differently, and generally they are more efficiently implemented as time goes by.
Just as an example, consider the idea (which is not really an institution but let’s go along for now) of the Carnot cycle, the theoretical basis of a heat engine. Nikolaus Otto developed the first four-stroke internal combustion engine in 1876 and that was an instantiation of the Carnot cycle. As you can imagine, that engine must have been crude compared to what we have today in our automobiles. Technological improvements increased the efficiency with which the idea could be implemented.
The generalization that I am aiming at is that technology allows us to implement ideas more efficiently. But whether that technology is used or not depends on factors that are often not technical. For instance, if the improvement in the efficiency of the implementation of an idea goes against the interests of the existing power structure, that improvement will be blocked.
Democracy as Implemented
My thesis in this post (which is a follow up to the previous post on the subject) is that democracy is an idea which has been implemented in a certain way for many decades now in India. Now that technology has advanced since then, it is perhaps time to redesign it to make it more efficient and effective. It is time to make some needed changes. The most important of these changes is in giving citizens more control over how much the government spends on discretionary items.
Let’s just for the moment define discretionary items as those that are not public goods (such as law and order, national security, etc.) In the previous post I had mentioned three discretionary items: a grant to a foreign university, haj subsidy, and “earthquake relief” to a foreign nation. These are not public goods by any stretch of the definition of the term, and it is perfectly feasible for private citizens to make up their own minds whether they wish to contribute to those ventures. The government, by making those decisions on behalf of the citizens without their express and explicit consent, is violating their private property rights. This is not a trivial matter and this has to stop.
As an idea, democracy has its merits. But whether a particular implementation of the idea is socially beneficial or not is an empirical matter. In my opinion, democracy as implemented in India is seriously flawed. The most basic flaw in the implementation is that it is really imperialism in disguise: there are the rulers who have most of the power and consequently the citizens have little power. Here democracy basically means that one gets to vote occasionally and then too the choices are dismal: what’s generally on offer is a collection of criminals to choose from. That criminals routinely contest elections is a damning indictment of the flawed implementation of democracy I am talking about.
The democratic political system in India has degenerated into a criminal enterprise. We are really caught in a vicious cycle. The system attracts criminals because the opportunity for rent-seeking are tremendous; the more criminals enter the system, the more they increase their power and the rents increase and this attracts even greater criminals. Things have come to such a pass that if you are honest, conscientious, decent, moral, and ethical, you have absolutely no chance of ever holding political office.
Just to expand on that, let’s examine the public sector. The government runs railways, airlines, schools and colleges, broadcasting, telecommunications, banking and insurance related institutions, and other commercial establishments. It is not as if these activities cannot be done by the private sector, and done extremely efficiently. There is absolutely no reason for the government to do all this except – and that is the main point – that it gives those in government an opportunity for rent-seeking.
Let’s remember that the range of activities that the government has control over is wide. It of course has monopoly control over some, such as the railways, and until recently in airlines and telecommunications. Then in some areas where it is not the monopoly provider, it still has a presence and often the playing field is tilted towards the public entities and against the private participants. Finally, whether or not the government participates in the activity, it has near absolute control over all private participants, dictating who can enter and on what terms. That is the licence-control-permit-quota raj. The government is omnipotent and that is where the corruption begins.
Control and Corruption
So let’s examine absolute and discretionary control over something. Monopolists have control over the quantity that they wish to supply and hence control the price. That is how they extract what economists call rent – the economic profits that arise from the price being much above costs. Rent-seeking is the term economists use. It should be part of the lexicon of the average citizen because that is at the core of much government activity.
Let’s say that the government decides that education should be under its control. Regardless of the rhetoric employed, it is not that the government is the only agency which can deliver education effectively and efficiently. Indeed, the government is the last entity that can do so. The reason that it controls education is that it can extracts rents from controlling education. In India, the government decided who has the licence to run an educational institution. This is at the discretion of the political and bureaucratic apparatus. By limiting access, it raises the costs, and these are passed on as high prices. The rents can then be extracted by pricing licenses. The chronic shortage of good educational institutions is the predictable result.
If the government has the power to control the education sector, it implicitly has the power to extract rents. That applies for the scores of sectors that the government controls. If you add up all the sectors that the government indirectly or directly controls, it amounts to a very impressive deal. So therefore the opportunity to make a substantial pile of money attracts the most avaricious and therefore the fierce competition to gain political control.
Corruption in India, as elsewhere, is a direct consequence of the gain from control. So if we were to reduce the power of government, we have an avenue for reducing corruption. The technology exists for transferring that control from those in government to the citizens. We just have to implement that change.
In the next bit, we will explore this topic in some detail. In the meanwhile, be well, do good work, and keep in touch.