[Previously in this series: Part 1, Part 2.] Human behavior is complex and appropriately so since humans are complex entities. It is hard to analyze, understand and predict how people will behave in general. Compare that to inanimate matter. Basic laws of thermodynamics, a few laws of motion, a few conservation laws — and you pretty much know what to expect. Still there is one useful generalization about humans which goes a long way in explaining how we behave: we respond to incentives. Most simply (and perhaps simplistically) stated, carrots and sticks matter.
One way to look at organizations is to consider them to be “incentive structures.” All organizations great and small, wild and wonderful — large firms, tiny startups, colleges, religions, states, terrorist organizations, the list goes on — they all have a set of incentives that define what the rewards and punishments of belonging to it are and people respond appropriately. Get the incentive structure right, and the organization is “successful.”
Success is defined in terms of the objectives of the organization. A Buddhist monastery’s objective differs from that of a terrorist organization, and so does the incentive structure. Different kinds of people get attracted to them. In one, success may be defined as the mastery over one’s own mind, and in the other, how large the massacre is; in one, the incentive may be enlightenment and release from the cycle of births and deaths, while in the other attainment of supernatural potency and a huge harem of virgins in the after-life. In response to incentives, in one people sit around meditating on the impermanence of life, and in another, it makes people strap on explosive vests and commit mass murder.
So if you want to achieve a specific objective, you have to have an appropriate organization, and that means you have to figure out the incentive structure. Get that incentive structure right, and you will get people to behave in ways that achieve the objective. Simply stated, the story is that if the incentive structure is built correctly, then the objectives are achieved.
Governments are organizations too. At some point, the objectives of the government and the related incentive structure are determined. From then on, the system evolves as people respond to the incentive structure. A colonial government, for instance, has the objective of resource extraction and exploitation of the colonized economy. The British colonial government is an example of this. A development oriented government could have general welfare of citizens as its objective. Many advanced industrialized Western European governments fit this description. If the objective is the private gain of the leaders of government at the expense of the people, then it is best achieved by concentrating power at the center to control the economy.
The India story is really interesting. While the objective enshrined in the newly minted Constitution of India may have changed from that of the British, the incentive structure remained the same as before. The citizens were given the power to choose whom they wanted to be ruled by but not whether they wanted to be ruled and to what extent. India’s post-independence government inherited the British government’s severe control of the economy.
As Lord Acton stated it succinctly: power corrupts. By corruption is meant a weakening of moral and ethical standards. Add to that a bit of positive feedback and you have a rather predictable story. The people in government have power; it corrupts them to some extent; they acquire more power; they get a bit more corrupt; people who are corrupt to begin with see the advantage of becoming leaders of the government; the more corrupt from the population get to positions of power; they expand the government’s power; that leads to even more corruption; which in turn attracts the more criminally corrupt to seek power by being in the government, and so on.
In physics, there’s the idea that the entropy of any closed system (the universe is the largest closed system), inexorably increases with time, and a prolonged heat death is the ultimate fate of the universe. That’s one of the laws of thermodynamics. An analogous idea would be that government power increases with time. At some future time, one can imagine that the government finally attains near absolute power. Near absolute power tends to corrupt near absolutely.
The government of the newly independent India had quite a bit of control, and therefore the leaders who took over had quite a bit of power. That power corrupted those in power. Indira Gandhi is a particularly interesting case. She increased government control by nationalizing important bits of the economy. More control, more power, more corruption.
Now we are at a stage that the incentive structure of the government has evolved to be such that the government is the biggest magnet for criminals. Criminals either get elected themselves, or else have pawns that they control in the government. To become fabulously rich in India, you don’t have to invent or create. You have to have control over the government. It can be direct — as when you become a minister — or it could be indirect — as when you pay off a minister for bending the rules in your favor.
This story is immensely depressing. It suggests an inexorable slide into deepening poverty, untold misery and ultimately death of civil society. But there’s hope and it lies in taking away power from the government.
Imagine if the government was limited to being a referee and prohibited from becoming a player in the economic game. That is, it did not have the power to influence the outcome but only to judge if players were following the rules, and to punish those who broke the rules. In that case, being in the government would not be financially rewarding. Lacking that incentive, criminals would find it pointless to be in the government.
In the two previous posts in this series (part 1, and part 2), I presented a bit of vocabulary to help with an argument that I propose to make in later parts. Here I looked at the big stage within which every sordid tale of corruption is played out. A telecom minister is merely an actor playing out his role on this stage. His resignation does not change anything substantially. Another actor will take his place and play the same role. The script has not changed, only the actor.
In the next bit, I will get back to the telecom story. The matters we have yet to explore are really interesting. How should spectrum be priced? As a commenter, RM asked, what about a revenue neutrality policy for the sale of spectrum. What we will find is this. It all starts with the objective of the government. Depending on that, it is easy to figure out whether to sell spectrum to the highest bidder or to give away spectrum for free. That matter is informed by economic analysis. Specifically, it has to do with fixed costs, competition, multiple equilibriums, distributional equity, linkages of the telecom sector with other sectors of the economy, the state of the art of telecommunications, the rate of technological change, income and wealth distribution of the population, and a whole host of other matters.
[Go to Part 4.]