Econ 101
This post comes under the sub-section Econ 101. Under Econ 101 I try to cover some basic economics concepts that will come handy in public policy discussions. We won't cover economic theory exhaustively, there are many textbooks that can do this better. We will be focussed on developing an economic way of looking at the world.
E-Cigarettes
A friend of mine who once interned at a think tank told me a story about a white paper that he was part of writing. This paper was on e-cigarettes. As you may know, e-cigarettes are banned in India. The paper was supposed to disparage the ban by discussing the negative consequences it could bring about. Now, here comes the interesting part: the think-tank was funded to write this paper by an e-cigarette company that wanted to get into the Indian market. Quite contrived and sketchy, you might think. But hold your guns before you pass your judgements.
Why were e-cigarettes banned in India in the first place? Moral reasons, one could say! After all, Indians are not strangers to our government acting like our 8th grade moral studies teacher. We have plenty of laws that legislate morality, and we keep adding to that list. But even with moral reasons, the e-cigarette ban is quite preposterous.Cigarettes only make up 8% of the Indian tobacco market. Oral or chewed tobacco dominates this space. Smoking sure is injurious to health, but chewing tobacco has significantly increased likelihood of developing cancer. But interestingly, chewed tobacco and normal cigarettes are legal, but e-cigarettes are not. Why, do you figure?
One possible explanation could be this. 85% of the cigarette market is dominated by one firm - ITC ltd. Government owned companies hold a stake of over 28.6% in ITC Ltd. If e-cigarettes were made legal, they might eventually replace the use of cigarettes in India. This will affect the revenue of ITC ltd and in turn the government. If health risks were the real reason to ban e-cigarettes, a ban on cigarettes in general and chewed tobacco must follow. But it never did, and probably never will.
Who looks more sketchy now? The think-tank or the government?
Politics Without Romance
For public choice economists, this is not surprising. Every law, every government order, has these threads that, if followed, would take us through some murky roads.
We often like to think that a good government is one that is constituted by good people. We are all probably in search of a Gandhi-like figure to be our leader. "If we had a brilliant, morally upright, uncorruptible leader," we say, "our country could have achieved so much more". But we rarely find such people. In fact, what is not so rare is so-called good people acting in corrupt ways while handling the pressures of public office. (We all have heard the old adage, "Power tends to corrupt, and absolute power corrupts absolutely”.)
Public choice is the field of economics that deals with political behaviour. As James Buchanan, one of the founding fathers of public choice theory, defined it, public choice is 'politics without romance'. Public choice theory views politicians as self-interested humans who respond to incentives.
Think about this: all decisions involve tradeoffs. Banning chewable tobacco and cigarettes can reduce (let's assume) their consumption and bring about health benefits. But that's also a lot of income foregone by the government. This money could have been used by the government to build hospitals and give rations. So should we ban tobacco or sell it and use the profits to deliver goods and services? These are not easy choices to make. There are interest groups involved: tobacco chewers, tobacco-making companies, and anti-tobacco activists, to name a few. They all influence government decisions through elections, campaign funding, protests, etc. There are many more considerations that come into play when the government makes these decisions than are apparent to the naked eye.
Poltician, Electorate, Bureaucrats
For a politician in a democratic system, winning elections is the utmost priority. The democratic system is wired in such a way as to incentivise politicians to lure voters. The system assumes that the better a politician performs in delivering his duties, higher his/her chances of winning more votes and getting reelcted. But it's not that simple.
One, In any country, there are interest groups. They may be organised around a common cause, like environmentalists; a common profession, like farmers or corporations; a common agenda, like secularism or nationalism; a common language; a common region, etc. These groups are usually well organised and homogenous, unlike the general electorate, whose interests are more diffuse. To win a majority, the politician only has to cater to the needs of such special interest groups just enough to cross the majority mark. Hence, special interest groups have disproportionate power over governments.
Two, the electorate doesn't really have an incentive to vote or to give an informed vote. Usually, in a democratic system, one person is given one vote. The power of one vote to change the outcome of an election is very small. Hence, the voters either tend not to vote or vote without analysing all the choices they have. This is why voters are often swayed by agenda-setting or noisy media voices. Politicians are usually good at leveraging this.
If a politician can appease an interest group that has strength in numbers, and set some agendas and create enough noise during election campaigns - they can get elected and re-elected.
There is no point in blaming particular politicians or questioning their morality. They are just responding to incentives, like all of us. In the public choice economist's perspective of politics, ideology and party affiliation are less significant than the incentives that politicians face. As James Buchanan said:
Politicians and bureaucrats are no different from the rest of us. They will maximise their incentives just like everybody else.
Once we identify that the issue is with the incentive mechanisms and not with particular politicians, we can start working on structural issues.
Three, public choice theory also talks about bureaucrats. Bureaucrats work with the aim of advancing their careers. They do this by making decisions that satisfy the politicians who control their career growth, by taking fewer risks, etc. Since they rarely bear the cost of their own decisions (like politicians), their incentives are almost always aligned more towards maximising their own well-being than the well-being of the citizenry.
Institutions
Public choice economics therefore concludes that everyone, including voters, politicians, and bureaucrats, is driven more by their own interests than by the interests of the public. So, changing just the people who hold public offices will not change much in terms of policy outcomes.
What do we do then? The answer is institutional reform. Institutional reform can ensure efficient outcomes no matter who gets elected. Good institutions align self-interest with social interests. Thus, even when politicians or bureaucrats act in their own self-interest, which they inevitably will, we can be sure that their actions lead to some kind of improved social outcomes as well. Hence, we need to design governance systems that deliver outcomes no matter which party is in power. We at least need institutional mechanisms that cannot be gamed by tyrants.
This will happen when we separate politics from romance and create incentives by taking into account this simple thumb rule: people are self-interested; politicians are people; hence, politicians are self-interested.
Homework:
Check out this article that uses a public choice framework called Bootleggers & Baptists.
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