George Orwell claimed, “In a time of universal deceit – telling the truth is a revolutionary act.” By that measure, a commitment to telling the truth as one sees it must make one a bit of a revolutionary. Here I continue with my argument that the Indian constitution is the fountainhead of all of India’s troubles. Unless and until it is replaced, India will continue to languish at the bottom of the heap. That claim predictably makes people uncomfortable. In this series I aim to support argue for its truth. (Here is the first part.) In this part, I examine the importance of rules.
An economy essentially is a collection of interacting human beings. For any group of two or more people, this collective interaction requires rules. These rules could have evolved naturally, in which case they are part of the culture. or they could have been formally codified through some formal procedure (which itself could have been arrived at organically or by borrowing from others.) In all cases, however, there always are rules.
Rules are powerful
They fundamentally determine the nature and outcome of the interactions that go to determine the game. An economy is a very large, multi-generational complicated game played by a very large number of people. It is easy to see that rules determine the game.
A board game like chess differs from checkers or draughts because the rules are different. It is not the shape of the pieces that make them different games. The same pieces under different rules define a different game. Similarly, the same set of players following different rules could play a game of soccer or a game of cricket. Rules define all games, including the great games of politics and economics.
All political entities are defined (and distinguished) by the rules. Two entities following different set of rules have different outcomes. Natural historical experiments across the world point to the truth of this proposition. Following WW II, East and West Germany’s fortunes diverged. The people in the two nations had similar endowments — history, culture, material & social. They followed different sets of rules. The outcomes were markedly different.
The same story can be told for North and South Korea, and many other parts of the world. Another example relates to the US and Argentina.
A short century ago the US and Argentina were rivals. Both were riding the first wave of globalisation at the turn of the 20th century. Both were young, dynamic nations with fertile farmlands and confident exporters. Both brought the beef of the New World to the tables of their European colonial forebears. Before the Great Depression of the 1930s, Argentina was among the 10 richest economies in the world.
A hundred years later there was no choice at all. One had gone on to be among the most successful economies ever. The other was a broken husk.
There was no individual event at which Argentina’s path was set on a permanent divergence from that of the United States of America. But there was a series of mistakes and missteps that fit a general pattern. The countries were dealt quite similar hands but played them very differently. The similarities between the two in the second half of the 19th century, and in fact up to 1939, were neither fictional nor superficial.
[Source: “Argentina: The superpower that never was.” Alan Beattie in the Financial Times of May 23rd, 2009]
The different outcomes of the two countries depended on a variety of factors, no doubt, but the one salient factor that necessarily differed was in the different rule sets the two countries followed.
Rules Determine Trajectories
The trajectory that an economy takes is dictated by the rules. If the trajectory has to change, the rules have to change. If the rules don’t change, the trajectory does not change. This fact simply explains the persistence of prosperity or poverty of nations. Generally, the rules persist and therefore the trajectory persists.
People make the rules. But in a bit of circular causation, rules make the people. Of course, it is only the “leaders” of the group make the rules. But the rules themselves determine who the leaders are. Rules provide the constraints within which the rules are made and by whom. Rules choose leaders and leaders choose rules (although this is not simultaneous.)
[Next up: Part 3 — The Persistence of Policies.]