The Problem of Economic Growth – Part 2

I ended the previous part of this essay with:

The one factor that motivates the vast majority of people is self-interest. Self-interest is not a pathology because it’s a normal and unalterable aspect of human nature. It’s not a bug in human nature but is actually a feature. Indeed, self-interest broadly construed — enlightened self-interest — is what accounts for the advancement of civilization itself. People work hard to better the circumstances of themselves and those they care about, and in doing so advance the greater good even without intending to. This had been recognized two and a half centuries ago by Adam Smith and others.

Moving on —

But taken to an extreme, self-interest can indeed be worse than a pathology affecting only the person; it can wreak havoc on countless others. We have to seriously consider the possibility that it’s the narrow self-interest of policy makers (who may not necessarily be malevolent) that is responsible for the distress of untold millions. It’s not mere ignorance of which policies would promote the public good (however that is defined), nor malice but the self-interested behavior of those who exert power over others that lies at the root of bad policy choices and the resultant economic malaise that poor countries suffer.

It would be proper to define what is meant by “policy makers” here. In a democratic republic they constitute two groups of people: the politicians who are the elected representatives of the people, and the (unelected) bureaucrats who provide the administrative functions necessary for implementing policies. The bureaucrats answer to their political masters, not to the people.

In theory, this is how a well-governed society is supposed to work. The voters are supposed to somehow elect wise and benevolent politicians to office, and the politicians and bureaucrats are presumed to work selflessly, first, in discovering the “public good” and second, using the most expedient means of promoting the public good through public policies.

But in practice, reality diverges dramatically from that theory. The primary reason for that is that we all — voters, politicians, bureaucrats — are humans. And as previously noted, we all are self-interested and therefore we work to promote our own well-being before the interests of others. Therefore we can be assumed to also be guided by our self-interest as voters, politicians and bureaucrats. This assumption is known as “behavioral symmetry”–we behave the same in the public sphere as we do in the private sphere.

As private citizens we choose what to consume, produce and trade. Our self-interest directs us to get the most “bang for our bucks.” We minimize the cost and maximize the benefits. Our actions are self-interested.

As voters, politicians or government bureaucrats we continue to make choices that are primarily (though not exclusively) self-interested. We don’t somehow change our basic nature when we vote, get elected to office, or get a job as a bureaucrat.

Our preferences don’t change and neither do our abilities when we enter into the public sphere. People don’t suddenly become capable of discovering what is true, good and beautiful the moment they are elected to political office. They are people just like the rest of us. We all have limited knowledge, understanding, foresight and wisdom. Getting elected does not alter that reality.

With political office comes power, the power to control others. This should not be surprising because the primary motivation for seeking political office is to control others. Lord Acton’s dictum that “power tends to corrupt, and absolute power corrupts absolutely” is unfortunately true. It’s not just that only the corrupt are drawn to power but that even those who are initially non-corrupt tend to get corrupted once they get power.

Going hand in hand with power is wealth. It’s a two-way street: wealth confers power, and power confers wealth. Some people seek power to enrich themselves, and thus power is used instrumentally, not for its own sake. It is not easy to disentangle the two. However it is the general rule that politicians and bureaucrats in most poor countries become inordinately wealthy. That fact suggests that there is a relationship between political power, wealthy politicians and poor countries.

Here’s the maintained assumption that will guide the rest of this essay. People who have above-average desire for power and wealth seek political office, and those who are successful in winning elections become politicians. Once in office, their focus is on continuing to be in office so that they can continue to enjoy power and its attendant wealth. Given that, we ask what policies would they choose.

Let’s distinguish between two kinds of policies:

• • policies that are good for the country, and
  • policies that are good for the politicians and bureaucrats.

“Good for the country” policies are those that increase the long-run economic growth rate of the country, and “bad for the country” is the converse. It is generally true that good policies often cause short- and medium-run hardships but in the long run confer significant benefits. (Why is this so? We need to address this later.)

“Good for the politicians” are policies that increase their power and control over the economy, and hence increase their power to extract wealth for themselves. These policies are often designed to provide benefits to those constituencies that are important for the politicians’ re-election. “Bad for the politicians” policies are those that hurt their re-election chances, and do not enrich them or increase their power.

So we can sort all policies into four distinct categories:

• • Group A: Good for the country, bad for the politicians.
  • Group B: Good for the country, good for the politicians.
  • Group C: Bad for the country, bad for the politicians.
  • Group D: Bad for the country, good for the politicians.

Group A and C policies are off the table. They don’t win elections and therefore they would never be chosen by rational politicians.

There are a few policies in Group B but they are too far between. The reason for this group being sparse is that good policies rarely increase government intervention in the economy, which by definition are not good for politicians seeking power.

That leaves only Group D policies. These are the preferred policies of politicians, and therefore only those policies are implemented. Consequently, the politicians benefit at the expense of the country.

The preceding provides the general background for the analysis of the situation in India. The consistent bad policy choices of the various Indian governments — regardless of which political party has control — can be explained with one additional feature of the system. It’s the institutional arrangement we recognize as a “political party.”

[Continued in Part 3.]