[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.]
Atanu Dey : Life is a Random Draw 
Nu da…
Awesome analysis. Keep it coming…waiting to see the next part (and also the remaining part of the Singapore vs India comparison in relation to development).
LikeLike
I stumbled upon your blog a couple of weeks ago and have been following it since through my RSS feeds.
I’m enjoying your analysis of the very depressing telecom scam. I read an opinion piece on the corruption that you’ve touched upon here and that seems to be so endemic to our society now: http://online.wsj.com/article/SB10001424052748704312504575617840639040962.html . There’s a statement at the end that is even more depressing: “Corruption is no longer the grease that allows a socialist economy to function, and has become instead a systemic problem that threatens to derail development. “
LikeLike
Keep it coming sir. Too good.
LikeLike
Mr.Shourie’s video talking about the topic : http://www.ndtv.com/video/player/walk-the-talk/walk-the-talk-with-arun-shourie/176376
LikeLike
The statement above is a bit self-contradictory because if you are judging anything, you are influencing the outcome. Referee’s are as susceptible to corruption as players themselves. In case of India, restricting government to a miniscule role will not solve the problem. Regardless of what the rules are, as long as the people elected to government are thieves, we will always end up with our houses robbed. The Indian problem is not one of lack of rules, its a problem of application of existing rules. If we cant find a way to apply rules effectively, no amount of rules will ever solve our problem. As you have correctly mentioned, the rot has seeped so deep into the public psyche, that it is now close to impossible to reverse without a cataclysmic event to usher it in. I have begun to believe that our non violent struggle for freedom has ended up causing us immense damage in this regard. Humans tend to place much more value on commodities they paid for dearly or things they have to fight for. We got our freedom by attending Gandhi’s rallies and then using non-violence (i.e doing nothing), and due to fortunate or unfortunate turn of events in the 2nd world war we ended up being free from the British. Our mentality of ‘do nothing’ or ‘do as we are told’ for the next 60 years has brought us to this state of affairs. The government is not afraid of the citizens in India when in fact every government should be very very afraid of its citizens. And the people who live in fear of the government strive to get to pole position in government where they no longer have to fear it but instead become its instrument.
LikeLiked by 1 person
Oh man! Do I have to wait for part 4 now? 🙂 What is a good way to allocate public resources when you are not trying to raise money from the sale? Tell me, tell me, tell me! 🙂 🙂
LikeLike
LikeLike
http://www.outlookindia.com/article.aspx?268068
LikeLike
The general attitude in India is that its all the politicians that are corrupt and the people are all created in the image of “Shree Ram”.
The fact is that the society as whole is corrupt as hell and leaders are just a sample of the society.
And the corruption in society is the result of the decades of controlled economy and resulting poverty.
An interesting observation of this can be seen in Finland and Estonia. Finland and Estonia are very close to each other just separated by the gulf of Finland. They can understand each others languages for most part. Estonia being part of Russian economy remained poor and corrupt while Finland is one of the least corrupt and highest GDP per capita nations in the world. Estonia, after getting free from Russia in 1991, is doing much better now, that it follows a regular liberalized economic principles. (Yet the cab drivers will overcharge you 🙂 )
Remove the command and control of the economy and set the people free. Thats how poverty is alleviated and thats what results in lessening of corruption.
LikeLiked by 1 person
World’s largest democracy in action (with reference to the tapes)
LikeLike
The physics principle of entropy which you use to make an analogy I think has been wrongly applied. The laws of thermodynamics are valid only for finite sized systems. There is no agreement among physicists as to whether the size of the universe can be considered as finite. Although I get the point you are trying to make, the principle has been incorrectly applied.
The rest of analysis has parallels to Plato’s thinking in Republic that a democratic government has a very high possibility of degenerating into a tyranny. Tyranny in this case being due to unethical and corrupt politicians.
LikeLike
I think this scam is a blessing in disguise for the consumers of telecom services. For 50 years, we paid an irrational price to the bogus state controlled BSNL that charged a fortune for a phone call. I remember the days in college when a 1 minute call from New Delhi to Hyderabad in 1994 in prime time was 38 rupees and 50 paisa + a wait in queue time of 30 minutes + a queue in wait time of 10 minutes. Adjusting for parity vis-à-vis today’s incomes that have typically grown 5-10 folds in this period and the fact that same call now costs Re1 per minute; the Government actually charged us 400 times the present call rates or to put the other way round private player brought down the prices nearly 400 times. Very depressing to swallow this fact and that explains why I will NEVER buy any service from BSNL or MTNL or any state owned telecom company even if they offer the services free of charge (for similar reasons I fuel my car in Shell and not state owned retailers and fly anything but Indian airlines and Air India). The Government’s audacity of hope that they could have fleeced more money from the bidders is criminal and mal-intended. This as Atanu puts is no different from objectives of our colonial master viz. exploitation. More generally wherever and whenever the Government had little or no understanding about the nature of the business, the business eventually prospered and benefitted the consumers. As regards who is the main offender, Dr. Singh is malnourished and impoverished ( having to live off Kitchen Scraps – quoting Atanu again – of Sonia Ghandy) he is completely clueless on what he does and what he is supposed to do. So let’s excuse him. Raja who is fed on congress and TRAI rule books written by secretaries who least understand the business, isn’t a criminal either. He has learnt art of corruption from his masters and siphoned some money south.
LikeLike
The incompetence of the government machinery can be frustrating – but this seems to be true across all countries. For a very insightful and amusing look as to why governments behave the way they do , please read the book titled: The institutional imperative: How to understand the United States Government and other bulky objects by Robert N Kharasch
Dr Malpani
LikeLike