Category Archives: Ethics

An economic depression is not a bad thing

Most people I speak to think that an economic depression is a problem that needs to be solved. Take a look at this article, for instance. This notion is far from correct. An economic depression is a period of necessary correction. An economic depression is necessarily and always preceded by an inflationary boom.

The real problem is the inflationary boom for which the bust is the cure

During the boom, policies targeted at interest rate depression allow the banking system to expand credit way beyond the available pool of real savings. This results in massive investments into projects that never would have been invested in on the free market. At the very least, new investments would need to be accompanied by
1. additional net saving by consumers
2. movement of capital from lines of production of other less preferred goods
These prevent the possibility of an inflationary boom. These conditions are a logical necessity for the new investment to happen.

However, an inflationary boom creates malinvestments. The process of creating the inflationary boom necessarily also includes the pins required to prick the bubble at some unexpected point in time. When this happens, the market reassesses all the investments made and sorts them into good and bad investments. This is done through the profit/loss mechanism and made explicit through the phenomenon of business bankruptcy. While this process involves pain, without it, the market cannot realign investments to be in line with consumer preferences, especially across time periods.

Economists would say that the boom causes intertemporal discoordination while the bust corrects those errors and brings about the highly necessary intertemporal coordination once again.

The free market is capable of keeping the inflationary boom in check

Even if the banking industry or a segment of it were to engage in fractional reserve banking by emitting far more paper, plastic and electronic forms of money than the real money commodity that they have on hand, the free market has a built-in mechanism to keep this under check. This is called bank failures.

Let us take, for instance, a region that uses dollars defined as a 1 ounce coin made of sterling silver as the unit of money. If a bank with $1 million in real dollars issues $10 million in paper dollars, the over-supply of paper dollars can easily be identified by the market. Further, the fact that on this market, every bank’s notes would be clearly identified with the bank (they would be printed as XYZ bank notes) and the market would easily be able to establish different rates of discounts for notes issued by different banks.

A more inflationary bank’s notes would be more deeply discounted than the notes of a less inflationary bank. Prices of goods might be quoted in dollars but one would have to fork out more $1 notes of an inflationary bank than the quoted dollar price. For instance, if an inflationary bank’s notes faced a discount of 50% on the market, a customer wishing to buy a good priced at $50 by paying in notes of the inflationary bank will need to fork out notes of $100 face value. If the discount were 75% because the bank is perceived as highly inflationary, he will need to fork out notes of $200 face value. Thus, the greater the inflationary condition that the market sees in a bank, the less valuable would be the money substitutes emitted by the bank.

Further, the more inflationary a bank is assessed to be, the more likely it is to be brought down by note and deposit holders walking into the bank’s branches and asking for real money in exchange. While this could be due to a loss of trust in the bank, it could also be because a trusting customer has issued a cheque to the customer of another bank that is asking the inflationary bank to pay in real dollars (which it does not have).

Such failures of fractional reserve banks would lead to a more cautious public wary of inflationary fractional reserve banks. Fractional reserve banks would then have to incentivise people to place money in their accounts, which in turn would raise the cost of their funds available for loans. In addition, being rated as a non-inflationary bank would make a bank more attractive to a public seeking greater safety of their money. In this process, the very service of getting rated on inflationary practices would become a valuable service that could be offered by rating agencies. Thus, we see that on the free-market, there exist many possibilities of mechanisms to keep fractional reserve banking in check.

If fractional reserve banking is in check, so is the inflationary boom. Thus, we see that an inflationary boom of the kind that we see today is impossible on the free market and that it is only fractional reserve banking with no market controls that causes the inflationary boom.

When we will encounter massive inflationary booms

Massive inflationary booms necessarily require massive interventions that prevent the functioning of market mechanisms. These typically take the form of government action aimed at protecting the inflationary segments of the banking industry. Today, these take the following forms
1. Central Banking with a monopoly on money issue and bank licensing
2. Central Banking as a source of lending of last resort to failing banks
3. Deposit insurance that is politically motivated and priced
4. Legal tender laws that force acceptance of inflated money substitutes at par
5. Capital gains taxes on alternate forms of money
In the absence of these forms of protection, it is impossible for a fractional reserve banking system to become as prevalent as it has become today.

The conclusion

We need to stop fearing or hating the economic depression. What we really need to be wary of is the inflationary boom that forces the pain of the bust on people at large. We also need to fear all the interventions that make the inflationary boom possible and the periodic pain of the depression a “necessary” feature of our lives.

Excise evasion charges and Cadbury India Limited – Part 2 – The gloves come off

This is perfect follow-up to yesterday’s post where I had spoken of a certain perspective on right and wrong with specific application to The Excise Act. Note this point I made in yesterday’s post.

The income of the producer is his rightful property.

And in the article I have linked today, note the quote in para 3 which is attributed to the official who did not wish to be named. He says (and I quote)

“Let them criticize. How can you collect money from people and not deposit it with the government? It is the government’s money,”

There he goes begging the very question that I asked in the previous post. The simple question is, how does a portion of the property of the producer become the property of government (for how else could he call it the government’s money)?

This is precisely the point. Is he saying that passing The Excise Act into law magically transforms the producer’s property into government’s property? So government can pass titles to ownership to itself by just passing an act into law, can it? What is the source of this magical power? What is the limit of this magical power? What is it that government cannot transfer title to itself to by passing more suitable acts into law or by amending existing law? I am scared. I would be surprised if you aren’t.

Excise evasion charges and Cadbury India Limited

This is an interesting bit of news. The reason I find it interesting is that it raises fundamental and searching questions about our sense of right and wrong and our attempts as a society to transform these into a code of law.

Let us assume for a moment that Cadbury India did indeed evade excise duty. What is the underlying premise in this incident? It is that as per The Law (Please note that I am NOT saying as per law. There is a difference between law and The Law. I am leaving that for another day.), it is a criminal offence to use any technique to avoid paying what the makers of The Law decide is due to government (which is nothing but the makers of The Law themselves). If Cadbury India has done this, it should be deemed to have committed a criminal act and criminal proceedings should be initiated against it and those in Cadbury India who are responsible for this act.

Before we jump in judgement at Cadbury India, let us pause for a moment to think of a fundamental question – Did they do anything wrong? I know that a majority out there would say “Of course, YES! Why do you even have a doubt?” So let me ask another question – Why is what they did wrong? The answer I am most likely to get is “They broke The Law, didn’t they? That’s why they are wrong.”

But then I have another question – Why is breaking The Law wrong? Is it possible that The Law is wrong? In that case, a person could be doing the right thing but faces the strong arm of The Law because he fell on the wrong side of it? What should we do when a provision in Law is clearly wrong? Should we just shrug our shoulders and tell the victim “Tough luck, mate”?

I have a serious problem when The Law departs from basic notions of right and wrong. I do understand that quite a few people think that right and wrong are matters of individual opinion but I beg to differ. I think right and wrong are objectively definable, especially in the interpersonal space. For instance, none of us would say that whether murder and robbery are right or wrong is a matter of individual opinion. Killing another person may not be wrong if it is in self-defence, but that is not a matter of opinion but of the facts of the case.

As I understand right and wrong, a simple theoretical and conceptual yardstick can be used to determine whether an action is right. See if the action involved
1. the initiation of force (aggression) against person or property
2. the commission of fraud
Any one of these two qualifies an action as wrong. This is why murder and robbery are so obviously wrong.

When I apply this yardstick to the Central Excise Act under which Cadbury India is accused of the crime of evasion, I am unable to escape the conclusion that the Law is wrong. The Law basically empowers government to compel producers to part with a portion of the income they receive from sale of their manufactured goods in favour of government. The income of the producer is his rightful property. Compelling a person to part with his property involves aggression or the threat thereof. Imagine a local Mafioso threatening producers in his zone of influence to part with a certain percentage of the income they receive from production to obtain his protection. Clearly, we would call it extortion and understand it as wrongful.

What I fail to understand is how the Central Excise Act is any different from the Mafioso’s threat of “pay or else”. Excise duty collection, like every other form of taxation, is an act of coercive expropriation, i.e., forcible taking away of the property of another individual. By the simple yardsticks I have given above, coercive expropriation is wrong because it involves aggression against property, which if successfully resisted invites aggression against person. So why do we accept it as right when government puts it in the statute book? Does the statute book have the magical power to turn wrong into right and vice versa?

This is a deep and important question for all of us to answer. The answers that we give will determine the shape of the society we create for ourselves. If we accept the legitimisation of aggression through statute, we will eventually end up in a society where aggression is a way of life, i.e., the society of the warrior. If, on the other hand, we reject the legitimisation of aggression, we can pave the way to a society based on peaceful coexistence, cooperation, specialisation, division of labour, and voluntary exchange, i.e., the society of the trader. Which one we choose is up to us.

One thing is certain. The society of the trader will be more prosperous and happy. How do I know that? That’s what economic theory is all about.

The Right to Education (RtE) Act – Flawed at the root

As I watch the circus happening over the RtE act, I just can’t help thinking what a sad moment it was when the bill was actually passed. It represents the moral degradation of many decades and shows that if you repeat a lie enough times, you can get a good number of people to believe it.

At the core of the RtE Act is a fundamental flaw – the notion that Education is or can ever be a “right”. If we ever pause to think of the very concept “right” and understand the nature of education, it will be obvious that it is utterly ridiculous bordering on (intellectually) criminal to treat education as a “right”. That’s exactly what I shall do out here.

What’s wrong with the RtE Act

The error at the core of the RtE Act is to treat rights as an entitlement (let’s not pretend that it is not so). The very notion that everyone is entitled to education and that the State has an obligation to ensure, by whatever means, that everyone gets an education is totally ridiculous. No one is entitled to anything. Not food. Not water. And surely not education. We all have to EARN what we want to consume.

The problem with treating rights as an entitlement is this – someone, somewhere has to PRODUCE the thing that you are “entitled” to. Government (or the State) does not produce anything, least of all education. To give something to A, it has to first take that something or the means to obtain that something from B. It has to do that forcibly because B will not give that up voluntarily.

It does not matter whether it is running government schools or coercing private schools into accepting 25% of their students from economically weaker sections (at a lower fee, of course). In every case, government is forcibly taking away what belongs to B in order to provide education for A. To run government schools, the government robs everyone in the unholy name of tax and steals from everyone under the garb of inflation. To coerce private schools to admit students at lower fees, it just flexes its muscle and threatens to shut down schools (they call it withdrawing recognition/affiliation).

Let’s face it – whichever route government chooses to implement RtE, it has to behave like a common thug on the streets. Right to Education, therefore, translates very simply into Right to unleash violence on others. I am amazed to see that a lot of people really think that this is indeed a legitimate right.

What rights are

Rights are a moral concept defining and sanctioning man’s freedom of action in a social context. Saying “you have a right to X” means that you are FREE to act to get/maintain X. In a social context, that in turn means that no one may prevent you from acting thus. It does not mean that you are entitled to X or that anyone else is obligated to provide you X.

For instance, if I say “You have a Right to Life”, it only means that you are free to act to sustain your life as you deem fit. If that means eating fatty foods or consuming narcotic drugs or smoking cigarettes or drinking yourself into oblivion, then so be it. No one should be free to force you to act otherwise. It does not mean that anyone at all has an obligation to keep you alive.

The concept “Right to property” does not mean that you are entitled to some property and that others should provide you some property. It means that you are free to act to acquire property and hold property that you have acquired. To claim that others should provide you some property is tantamount to claiming that others are your slaves.

The same holds true for education. You are free to get the education you seek and can get. That does not mean that anyone else is obligated to provide you with that education. Unless you are claiming that some people have the right to treat others as slaves who ought to provide them with an education, RtE makes no sense.

Conclusion

From an ethical perspective, RtE is shockingly immoral. The only right thing to do is to call for its repeal.

The sad state of thought in Economics in India

A small point before you read this article: The Nobel Prize in Economics is a prize instituted by the Sveriges Riksbank in memory of Alfred Nobel.

http://nobelprize.org/nobel_prizes/economics/laureates/2009/

The Sveriges Riksbank is the Central Bank of Sweden. That’s equivalent to the Federal Reserve Bank of the USA, the Peoples Bank of China or the Reserve Bank of India.

http://en.wikipedia.org/wiki/Sveriges_Riksbank

Given that Central Banks are responsible for half the economic troubles we face, what credibility should we attach to the prizes they offer or to the quality of thinking that these prizes represent? Can we expect them to do anything other than reward those who support the thesis that Governments and Central Banks are here to save the world?

Here’s an example of what I mean. I am a regular reader of The Hindu, not because I like what they publish but because I find more pieces of economic irrationality coming up in that publication than in any other. Usually, they are hilarious. This time, it was saddening, all the more so because it came from an Indian who has won a Nobel Prize in Economics. In his article “Growth and other concerns“, Dr. Amartya Sen had a lot to say, but this line made my eyes pop out of their sockets in absolute shock.

“One of the great things about economic growth is that it generates resources for the government to spend according to its priorities.”

While I was prepared for “government worshipping” and “statolatry” among the intellectual elite, this one was taking it just too far.

Economic growth does generate resources. What I fail to understand is how the resources that economic growth generates get to belong to government. Such statements hide the thinking that taxation is to be considered a legitimate transfer of private property into the hands of government. It is this thinking that is shocking.

Let’s face it. Taxation is an act of forcible taking away of the property of an individual by government. Morally, it is no different from an act of dacoity. Anyone who considers Phoolan Devi a criminal because she robbed a number of people should also consider taxation as an equally criminal enterprise. That it has legal sanctity in the form of an Act of Parliament that gives it a place in The Constitution does not make it any less of a criminal enterprise.

This line by Amartya Sen, sadly, reveals in its entirety the mentality of Welfare Statists. They are people who have no qualms about committing criminal acts as long as it is done in the name of government and they have the fig leaf cover of using the funds (thus taken away from their rightful owners) for public “welfare”. The schools, hospitals, public health centres, noon-meal centres, etc., justify the prior act of dacoity…. oops…. taxation. It is a different matter that such an approach does not make economic sense either, but I thought it better to stick to the ethical angle today.

Gandhi once mobilised an entire nation of (then) over 30 crore people to fight British Raj. One of the pillars of his fight against the British was their taxation policies. It was to protest the Salt Tax that he set off on the now famous Dandi March. It was a symbolic defiance of the British Raj and its attempts to tax the life out of India’s people. What beats me is how a nation that rose as one to revolt against British taxation policies (among other forms of atrocities) succumbed so quickly and meekly to the same tyrannical taxation policies of the Government of a (supposedly) independent India. Dr. Sen’s statement only shows how Indian academia too seems to have surrendered just as meekly and become a  propaganda machine for the State.

Food Security Bill – An ethical blunder

In my previous article, I had highlighted why the Food Security Bill is an economic blunder. This time, I thought it good to focus on the ethical blunder that we will be committing by passing the Food Security Bill and how that very ethical blunder shall be our undoing and the cause of untold human misery.

My ethical framework

The ethical framework I use here is simple. Ethics is the science of right and wrong. An action is deemed wrong if it involves aggression against the person or property of another. Aggression against person involves the use of force to coerce an individual to act against his will or to cause bodily harm. Aggression against property involves the use of a man’s property without his permission. This includes actions in violation of the code of behavior that the owner lays out for his property. That’s as simple as saying “If you behave in a way I deem inappropriate in my house, I would be doing no wrong in throwing you out of it”.

What conclusions does this lead us to?

There are very few actions that one may deem wrong. These are actions that involve bodily harm (including murder) and taking away an individual’s property without his consent. Anything that an individual does beyond this does not come under the realm of ethics.

For instance, acts like prostitution, smuggling (of whatever including humans who consent to be smuggled), selling narcotic drugs, selling weapons, breaking the Law, etc. are not violations of the ethical code. There is nothing unethical or immoral about them. They are absolutely ethically sound actions. If you are shocked by my inclusion of breaking the Law, remember that Gandhi’s act of picking up a handful of salt at Dandi was an act of breaking the Law. Charging a rent for use of property or charging an interest on money being lent out are perfectly ethical. Laying out and enforcing rules of behavior for others on one’s own property is absolutely ethical.

On the other hand, forcibly taking away an individual’s property is wrong. This means that all forms of taxation are wrong, i.e., ethically unsound. Similarly, taking away a person’s property without his knowledge is wrong because it is a use of his property without his express permission. This means that stealing is wrong. If an act may be demonstrated to be stealing, it will have to be treated as ethically unsound. Fraud is wrong because it violates the terms on which transfer of property was agreed upon. That which is gained by fraud is not considered a man’s legitimate property.

How the Food Security Bill is to be funded

There are only two ways that government may fund the Food Security Bill. The first is taxation. It will either have to raise more taxes now or issue government bonds which are backed by future tax collections. In either case, taxation is the basis. Taxation is a forcible taking away of an individual’s property. Hence, it is wrong.

The second is by printing money. This act would constitute stealing because it transfers to the new paper printed up by government, a portion of the exchange value that similar paper in the hands of other people has. In effect, government steals from people who have money in the form of paper and bank deposits and spends it. Therefore, this method of financing the Food Security Bill is also wrong.

Why the Food Security Bill is ethically unsound

It is ethically unsound because it can only be funded by robbing or stealing. It is no more than a systematically organized scheme to rob Peter to pay Paul. Paul is very happy and probably better off in the short run. So are all the bleeding hearts who have no qualms about robbing others rather than giving their own money to feed the starving millions. But that does not negate the point that the act of robbing or stealing from Peter is ethically unjustifiable.

Down the slippery slope

Accepting the principle that it is alright to rob Peter to pay Paul creates an apparent ethical justification for many more such boondoggles. Today it is food. Tomorrow it will be housing. The day after that it will be healthcare. A further day later it will be clothing. Take it a little further and you will find education, televisions and, who knows, even Apple iPods being included in this act of systematic plunder. Incidentally, education has already been included in this scheme through that laughable piece of legislation called the “Right to Education Act”. So have televisions in Tamil Nadu. It won’t be long before the same scheme is repeated in other states as well.

Where does that leave us and why should we oppose this horrible legislation

The Food Security Bill strikes at the very root of the concept freedom. If government has the power to take away what you earn and give it to those it chooses, you are essentially going to slave away to keep others better off. The notion that government may dispose of what you earn is nothing short of abolishing the very concept private property and ushering in Socialism. Socialism is an unsustainable system and a sure-shot route to economic disintegration. That means that our own future well being and that of many generations to come is at stake. That is why we should oppose it tooth and nail.

A Republic Day wish-list

As one more Republic Day passes me by, I just can’t help thinking of what the day stands for and taking stock of where we stand as individuals and a society. It must have been good to be in the teens and mid-twenties on the first Republic Day. Crores of people had given up the prime of their lives and in many cases their life itself to fight for one of those few things for which it is worth giving you own life for – freedom. After 200 years under the yoke, people were free. They could now live in a system that recognized their rights as human beings and let them live as they wish to. Forming an Indian government that would formulate the laws of the land, execute them and mete out justice was seen as the way forward. The Constitution was seen as the indispensable tool to make this possible. As we all know, it is to celebrate the ratification of the Constitution of India in 1950 that we observe Republic Day.

Why am I speaking of the Constitution? Not just because it is Republic Day time and it is fashionable to speak of it and praise it to the high heavens. Far from it. I am writing to criticize it. I am writing because I am convinced that the blame for most of the problems we face as a society today have their roots in the Constitution and certain irreconcilable conflicts that existed in that original document. These conflicts were so deep that in the ensuing tug of war, something had to give. And that turned out to be the very principles of freedom that the Constitution was drafted to protect.

What was the irreconcilable conflict in the Constitution?

First, let me place a caveat. I am no “Constitutional Expert”. I just know a little about it that I have read in bits and pieces. However, for what it is worth, I thought it better to share what I feel about it. So here goes.

The Constitution as it was drafted in 1950 carried a deep conflict between the section on Fundamental Rights of the Indian citizen and the powers of the State as enumerated in the constitution. In particular, the conflict was between the Fundamental Right to Property on the one side and three provisions as enumerated below

  1. The Income Tax Act of 1931 and other similar acts related to taxation
  2. The Land Acquisition Act of 1894
  3. The 9th Schedule

Any attempt to protect an individual’s fundamental Right to Property against violation of the same, especially by government actions backed by the first two provisions identified above, had to end in a judgement one way or the other. There is no scope for a middle path. You cannot simultaneously say that the Fundamental Right to Property is inviolable and that the Government may acquire private property, especially without the voluntary consent of the owner of the property, something that is in the very nature of Income Tax and Compulsory Land Acquisition by government.

Among the 3 provisions listed above, the 9th Schedule is especially interesting because the Acts which are under it are not open to judicial scrutiny. In other words, if State governments can get the laws they pass into the 9th Schedule, they cannot be questioned under the Law. A cursory look at the 9th Schedule will reveal that over 90% of the acts protected under its ambit relate to land and its acquisition and redistribution by various state governments.

However, when it was realized that the 9th Schedule was not sufficient protection for laws, especially if they violated the Fundamental Right to Property, it was clear that the only way out to protect these laws was to remove the Right to Property from the list of Fundamental Rights.

That was precisely what the 44th amendment to the constitution set out to do. By removing the Right to Property from the list of fundamental rights, it eliminated the internal conflict in the Constitution. What it did, however, was to make government power almost limitless. Today, the government is armed to the teeth with the power to violate with impunity the individual rights (as different from Fundamental Rights and the popular notion of Human Rights) of its citizens. After all, if no person may be deprived of his property save by due process of law, all government has to do is to create the due process of law and then start depriving people of their property. It can then take away or trespass upon the property of any citizen without having to pay the price. More than making government powerful, it has made the government functionary extremely powerful within his fiefdom. And then we wonder why there is rampant corruption.

A second conflict

Indira Gandhi, in her infinite wisdom, introduced another conflict into the Constitution by inserting the word “Socialist” into the Preamble of the Constitution. How a Socialist Republic is to ever protect the Fundamental Right to Property is a mystery to me given that the very basis of Socialism is the rejection of the concept “private property”.

Just imagine. If today, I announce the formation “The Capitalist Party if India” on an agenda that completely rejects Socialism, I wonder how my party can get Constitutional recognition. How can I, the founder of The Capitalist Party of India, a party that stands for absolute property rights, swear allegiance to a Constitution one of whose objectives is to violate the property rights of its citizens? Fairly bizarre!!

What should be done – My Constitutional wish list

  1. Reinstate the Right to Property as a Fundamental Right
  2. Abolish the Income Tax Act and all other Tax Acts
  3. Abolish the Land Acquisition Law of 1894
  4. Annul various Acts passed by State Governments that infringe upon the Right to Property
  5. Eliminate protection under the 9th Schedule for any law passed by any government in this country
  6. Remove the word “Socialist” from the Preamble to the Constitution of India

Failing this, I am afraid, it shall not be too long before we forget the very meaning of the words “freedom” and “republic”.

Corruption – A Social Evil – Its Cause and Cure – Part 3

It is now quite some time since the 2G spectrum scam erupted. The figures involved in the scam are so staggering that one tends to forget the number of zeros in them. This scam, however, is not exactly unique but truly representative of a third type of corruption prevalent in India. It is a form of corruption that stems from the power that is in the hands of government to confer economic favours upon particular people. Before we understand the nature of this form of corruption, let us first understand the 2G spectrum scam well.

The 2G spectrum scam

In 2008, the Telecom Ministry of the Government of India issued 122 new licences and second generation (2G) spectrum bundled with it to several domestic companies with little or no experience in the telecom sector, that too at prices set in 2001. The charge is that while the market for telecom services had grown from 4 million subscribers in 2001 to 350 million subscribers in 2008, the prices at which the 2G spectrum was allotted in 2008 did not reflect the growth in subscriber base. No process of price discovery such as an auction was followed and this combined with other irregularities including flouting norms related to prior experience, share-holding, method of issuing licences and arbitrarily advancing the cut-off date by 1 week led to the suspicion that a lot of money must have changed hands. The scanner was completely on the man who was in charge throughout the period in 2008 when the new licences were issued – the then Telecom Minister Mr. A Raja. It is suspected that he must have received a substantial sum in exchange for “saving” the recipients a sum of money estimated at a staggering Rs. 1,67,000 crores.

Is the 2G spectrum scam really shocking?

Not exactly. It was only a matter of time before someone became audacious enough to deal in sleaze money of this magnitude. Given the power in the hands of the man, all it required was the audacity to commit the act and then be prepared to be brazen if and when the act is discovered. Mr. Raja has done precisely that. His brazenness stems from his confidence that his party’s support is absolutely essential for the survival of the government at the centre. It could also stem from the complicity of Congress leaders in this entire scam.

What was the power in the hands of Mr. Raja?

Mr. Raja, as telecom minister, had the power to decide who would get to offer telecom services to customers in India and which circles they would get. Why did he have this power? It was simply because of the acceptance of the principle that the 2G spectrum belongs to the government and that he, as the minister of Telecom, was the person in charge of its licensing. Had that principle not been accepted, he would not have had the power to bestow telecom licences and spectrum and, lo and behold, there would have been no scam!! Of course, government would not have got the revenue of Rs. 1,67,000 crore but then no one would have been able to get “rewarded” for giving the licences out at much cheaper prices.

The “principle” that made the 2G spectrum scam possible – Is it valid?

Just to reiterate the point, let me identify the principle that made the 2G scam possible – government owns the telecom spectrum and may licence it out to private operators for a fee. This is no different from saying that government owns potential oil-fields or mines and hence that it may licence these out for a fee. If one can demonstrate that this principle is not valid, it will be easy to understand what needs to be done to completely eliminate the possibility of all such scams in the future.

The heart of the principle is the idea that telecom spectrum is a national asset or endowment and that the government is the proper owner of electromagnetic spectrum. If, on the other hand, one can argue that the very principle of government ownership of anything at all is self-contradiction, the principle of government ownership of telecom spectrum becomes invalid and thus the cure to this version of the disease of corruption becomes apparent.

The concept “government property” is an oxymoron

For those who are not familiar, the term oxymoron refers to a self-contradictory term that consists of two parts which cannot simultaneously be true. The term “oxymoron” itself comes from a Greek word which literally translates as “sharp-dull”. Basically, if a person is sharp, he can’t be dull and vice versa. Other examples of oxymorons include “living dead”, “dark light”, “virtual reality”, “new classic”, etc. In each case, if the one attribute is true, the other is false but the term implies that both attributes are simultaneously present, which represents an impossible combination. So, labeling the term “government property” as an oxymoron is essentially saying that if it is property, it cannot be owned by government and that if the entity in question is government, it cannot own any property.

Understanding this concept requires one to understand the very concept “property”. The term “property” stands for a relationship between humans and objects in their environment. When we say that a thing A is the property of human being X, we mean that X has the sole right to use or dispose of A. This would include consuming A (if it were a consumable), transforming it into something else (as in the case of iron ore into iron), leasing it out for a rent (as we do with a house), throwing it away (as we do with garbage) or even destroying it by burning or smashing it to smithereens. It also means that any other person would require X’s permission before they use A. X has the complete rights to specify the terms of usage of A by anyone else.

In a negative sense, the term “property” stands for the principle that no man may initiate force to take away that which another has taken from a state of nature or has obtained through a series of voluntary exchanges starting with the initial taking from nature by the first possessor. The concept “property” in this sense stands for the moral principle that no man may use force against another man except in retaliation. The concept “property”, thus, is the basis of civilized society. The very ascent of man from the jungles all the way to the modern civilization rests on the principle “property”. Without this concept, human beings cannot live in peace with each other and human existence would be as Hobbes (erroneously) put it – nasty, brutish and short.

“Property” arises from the fundamental fact of human existence that man needs to take possession of nature given resources in order to ensure his survival. Whether the nature-given resource is a berry or a tract of land, man needs to take possession of it first in order to use it to sustain his life. Unlike other animals, however, man is a rational animal. He gathers materials from nature not just to satisfy his immediate needs but also a variety of long term needs. He plans his utilization of the things he has taken from nature over an entire lifetime. In the absence of the concept “property”, such long-term planning is impossible for man and he is reduced to existing like a savage. It is the concept “property” that thus makes it possible for humans to engage in economic calculation. It enables the establishment of a society based on division of labour, which in turn is the basis of the modern, technologically advanced civilization that provides man a much higher standard of living than at any prior time in human history.

Governments, on the other hand, are not people. They are not even like companies which are themselves owned by many people in proportion to their investments in the company. To apply the principle “property” to government is to give them an unjustified anthropomorphic character. Since only human beings can own “property” and government is not a person or a company owned by many people, “government property” is an oxymoron.

The conclusion

Eliminating scams of the 2G spectrum scam variety is simple. Abolish the very concept “government property” by treating it as the oxymoron that it is. That leaves no room for government to claim to sell or licence resources such as electromagnetic spectrum, land, oil fields, mines, etc. That in turn completely eliminates the possibility for government functionaries to earn income by allotting these resources to those who are ready to enrich them (the government functionaries) in exchange.

Corruption – A Social Evil – Its Cause and Cure – Part 2

One of the most enduring images of corruption is the case of the “dishonest” police officer or bureaucrat who makes a lot of wealth by colluding with gangsters to permit the latter to continue running business activities not permitted by The Law. In many Indian movies, the bad cop is the lackey of the bad politician who himself makes his money brewing liquor though prohibition is supposed to be in force. In other cases, the bad cop is the stooge of the smuggler whose main business is to evade the scanner of the dutiful police or customs officer (usually the hero) and make huge profits selling the goods thus smuggled on the black market. Even worse is the case of cops who are accomplices of “gangsters” engaged in “despicable” trades like gun-running, the production/import, processing and peddling of narcotic drugs, prostitution and pimping, etc. In many cases, the cooperation of the corrupt government official extends to turning a blind eye when actions like murder and rape are committed by the villain. All this tends to accentuate the villainy of all the people concerned.

Now, while movies generally tend to exaggerate and like caricatures, focus excessively on particular aspects, they do tend to be a mirror of society in general. The very reason such movies, which show the protagonist fighting these bad elements and ultimately winning heroically or suffering privations to bring tears to the eyes of the audience, succeed is that the public agrees that the protagonist is the good guy engaged in a just battle against the evil forces of corruption lined up against him.

Understanding the portrayal and the angst over the “corruption”

Clearly, in all the cases cited above, the villains are either engaged in business activities proscribed by The Law or are running businesses otherwise permitted by The Law but using methods that circumvent provisions of The Law to make piles of money by duping the exchequer. The role of “corruption” is for the “cooperating” government official to turn a blind eye to the villain’s nefarious activities and to get rewarded for such cooperation. The idea of the film makers is to pronounce the judgement that the corruption portrayed is a result of the moral depravity of the villains and their accomplices in government and that they deserve to be punished for their misdeeds.

While the above portrayal of corruption is reasonably correct, the objective of the portrayal betrays a complete lack of understanding of the causes of the corruption and hence results in faulty prescriptions as demonstrated in the last few scenes of these movies where the villains get their “punishment” or the hero, tragically, fails in his pursuit and dies a martyr to a good cause.

What is wrong with the portrayal described thus far?

What’s wrong is that they place the blame at the wrong doorstep and portray the real “hero” as the villain while depicting a blundering fool who fails to understand this as the “hero”. This is true in real life as well where we tend to view the smuggler, the black marketer, the illicit arrack brewer, the brothel owner, the gun runner, the drug smuggler or the businessman evading various duties to be paid to government as per The Law as real life villains engaged in “criminal” activities. Barring the acts of murder, rape and robbery that they may engage in, their normal trade actually consists not of criminal activities but of illegal activities. In simpler terms, they are either engaged in businesses that are barred or restricted by The Law or The Law imposes certain compulsory costs on the otherwise honest businessman.

The only way to understand the real cause of corruption in all these cases is to ask the simple question “Is the Law right?”. In particular, is the Law right to proscribe business activities and use the might of the police force to stop people from engaging in those business activities? Is the Law right in imposing compulsory costs and treating the avoidance of these costs as criminal activities worthy of punishment?

Is the Law right?

In my view, it is completely wrong. The Law has no business proscribing any trading activity in the first place. Whether it is moving goods across borders or trading them with other people within this country, as long as there is no initiation of force or fraud, the business activity is legitimate. This point is most obvious in the case of Gold. At one point in time prior to the now famous Liberalisation policy of the Government of India, import of Gold into the country was prohibited. Smuggling Gold into the country was considered criminal. The typical villain in our movies of that period was, among other things, a gold smuggler meeting shady people in shady alcoves along the coast exchanging briefcases full of cash for briefcases full of gold biscuits.

Another class of goods that makes the point clear is that of electronic goods. Today, we are free to buy a television or a home theatre or cell phone of any brand by just walking into a showroom and paying the price asked. A few decades earlier, however, this was almost impossible and buying a Sony colour television, for instance, required one to be or at least know a high ranking customs officer or to approach a dealer on the (unreliable) black market. I still remember the kind of risks I thought I was taking by getting myself a Nokia 5110 (I call it The Brick for its size and weight) mobile handset in 1999 when I had just started off on business. Almost all the electronic goods available on the black market were smuggled into the country by enterprising souls working hard to escape the eagle eye of the Law.

The truth is that the Gold smugglers of the yesteryears were legitimate businessmen meeting a market demand for a commodity and were committing no aggression or fraud by the mere act of transporting Gold into the country and selling it to willing buyers. The same was the case with the smugglers of electronic goods. By declaring legitimate activities like buying and selling Gold and electronic goods illegal or by imposing huge costs on them from the outside, the Law was hindering those legitimate activities. It was therefore clearly wrong.

Further, the police officer or the customs official has nothing of value to offer the Gold smuggler or the smuggler of electronic goods except to turn a blind eye and thus fail to bring the sledgehammer of the Law on their heads. In the absence of the Law prohibiting or imposing costs upon these trades, the smugglers have no reason to pay the police officers or customs officials anything at all. The only reason the latter get their bribes is that they can be a nuisance to the honest businessman if they are not paid off.

How can these forms of corruption be eliminated?

The answer is simple – get rid of the laws that restrict trade and the corruption vanishes. This has been demonstrated amply in the case of Gold and electronic goods. The same principle, by extension, is true of every other good, trade in which is restricted or prohibited by the Law. This includes liquor, narcotics (I know this can shock, but I am leaving the explanation for another day), guns, sexual services (prostitution and pimping), etc. A major chunk of the corruption in this country can be eliminated with the stroke of a pen. The only question is whether we are prepared for the same.

Corruption – A Social Evil – Its Cause and Cure – Part 1

Everyone loves to hate corruption. We face it nearly everywhere we go, especially in our interactions with officials of government and related bodies. Whether it is getting a driver’s licence or a ration card or a passport or even getting your property assessed for payment of property taxes, work usually does not move unless the appropriate amount is paid to every person in the chain. Even a tax refund gets delayed if you do not pay a suitable bribe.

Another form of corruption involves the siphoning of money by those in positions of power. Recent examples are the CWG Scam, the 2G Scam, the Adarsh Scam, the discretionary allotment Scam in Tamil Nadu and Karnataka and others. In all these cases, those in a position to influence the list of “beneficiaries” are being accused of enriching themselves, in most cases by draining the exchequer. In the 2G Scam, for instance, the charge is that the minister’s actions have caused a revenue loss of around Rs. 1,67,000 crore to the central government. In the Adarsh Scam, on the other hand, a number of bureaucrats and senior officers of the defence services are accused of getting houses allotted in a housing project on what is land originally owned by the defence services and which was transferred to and developed by a private developer without proper approvals.

The popular view of corruption

Most ordinary people view corruption as a result of the weak moral fabric of the corrupt individuals.  So they feel that if better people were in those very positions, corruption can vanish or at least diminish. In addition, they attribute it to the lack of proper systems of checks and balances and inadequate deterrents. “Have strong vigilance, catch offenders and mete out punitive punishments and corruption will go down” is something a number of people feel.

Is this view justified?

In my opinion, the answer has to be a categorical and big ‘No’. Like on many other issues, the popular view appears to have been formed more by social conditioning than through a rigorous, logical route. A classic example of the social conditioning is the Tata Tea ads based on the “Jago re” slogan. The strong moral grandstanding in the ad reflects the intensity of the social conditioning.

Why is the view not justified?

The problem with the general “holier than thou” attitude to corruption is that it completely misses the real picture. How many of us really bother to ask the simple questions “Why is there corruption?” and seek an answer beyond the generally accepted one? Let me take a very simple example to demonstrate the failure of thinking on the part of most people.

The Driving Licence Problem

It is well known that it is near impossible or at least extremely difficult to get a driving licence in India without paying a bribe. But have we ever pondered the more fundamental question of why we seek to get a licence? Would we even bother to get a licence if we were not going to go through harassment on the roads driving without a licence? Isn’t it the very point that we are compelled by the aggression of the police officers standing on the roadsides and fining us for non-possession of a licence that drives us to get a licence in the first place? In simpler terms, would you consider paying a bribe to get a licence if there were no compulsion, i.e., no fines for driving without a licence, probably not even being stopped for questioning?

Let me explain a little elaborately. While it may shock (for the sheer audacity of mentioning it) a number of readers, you do not need a driving licence to drive a vehicle. You can be an excellent driver of 2 or 4 wheelers but not possess a licence. For the sheer physical act of driving a vehicle, you need to develop the knowledge and skills required to pilot the particular vehicle. Most of us learnt to drive well before we took out a driving licence.

Why then do we take out driving licences? We do so to avoid near-certain future harassment. All of us are familiar with the sight of the police sergeant stopping a young rider on a motorbike to produce his licence and in the event of non-possession of the said document, to fork out a fine, or better still, an unrecorded payment that goes into the pocket of the police sergeant himself. The reason we get a driving licence is to avoid getting into this situation ourselves. Anyone who drives a vehicle knows all too well the importance of driving that vehicle to their own lives. We just can’t achieve as much in life without the driving. Given that, it is better to avoid the disruptions and the harassments, all the more so if all it takes is getting a driving licence.

What is undesirable about the current driving licence system?

The main problem is that it is coercive and the customer is prevented from exercising an option. The government’s own police force is prepared to accept only the government’s own certification agency as the valid licensing authority and is prepared to harass unlicensed drivers through fines and general harassment. By putting such power in the hands of the licensing authorities, we are in effect giving them the power of “life and death” over every applicant for a driving licence. You cannot drive with peace of mind if you do not get a licence. You can be stopped any time and troubled by a representative of The Law. Such power is wholly unjustified and constitutes the primary reason for the licensing authority’s ability to extract bribes from applicants for licences. The Law is clearly wrong on driving licences simply because it just becomes a justification for the aggression of representatives of The State against ordinary citizens. In fact, the very existence of The Law and an enforcement mechanism for The Law constitutes the aggression.

In the absence of the “life and death” power identified above, no applicant for a licence has any need at all to bribe the licensing authority and has nothing to gain and something to lose by doing so. Therefore, if you eliminate compulsory licensing, you eliminate corruption in that area. That’s as effective a solution as you are going to get for the menace of corruption.

If you eliminate compulsory licensing, won’t you have chaos on the roads?

It is common to jump to the conclusion that if you do not have a government authority that makes driving licenses compulsory, you would have a deluge of incompetent drivers on the roads and that our roads would become highly unsafe. This notion too is part of the conditioning that we go through and the best way to tackle it is to understand the fundamental concepts involved.

A very important point to bear in mind is that absence of government does not mean chaos. What will come into existence is a spontaneous order that evolves from the action of market forces. To understand how, let us ask the fundamental question “What is a driving licence?” and then move on to the question “If no government forces people to do so, will people develop competence in driving and get a driving licence?”.

A driving licence is a certificate of competence. The only way to assess competence in driving is by having driving tests. So, driving licences are usually issued after a process that includes, among other things, driving tests. Further, driving is not just about skill in handling the vehicle. It is also about “road sense”. So, the process for issuing a driving licence also often includes tests to evaluate the applicant’s road sense. This usually takes the form of written tests, oral tests or plain observation by the driving inspector during the actual driving test. In some countries, if you do not first adjust the rear-view mirrors the moment you sit in the car to drive it, you fail your driving test and are refused a licence.

This, however, does not tell us why people would work to get a driving licence on their own without the hand of government. The answer lies in the consequences of driving without a licence. Rather, it lies in the consequences of driving without possessing the competences that make one a good driver. The main risks we face while driving are

  1. Injury to self and damage to one’s own property and
  2. Injury to others and damage to their property

due to errors in driving and the accidents that result. Either of these carry costs. In the case of injury to oneself, the driver bears all consequences of the error or lack of competence. In the case of injury to others, however, the incompetence of one person has undesired consequences for the other person.

How would these be handled on a free market, i.e., in the absence of a Law mandating licences?

On a free market, this problem would be handled through the route of insurance. Since it is only probable and not certain that any individual has an accident while driving and since every individual is fundamentally intent on his/her own safety, it pays for an insurer to pool the risks across many people and provide accident insurance coverage. The premium they charge would clearly be linked to the perceived probability of an accident given the profile of each customer.

Since the risk of an accident while driving is linked to the competence of the driver, it is in the interest of the insurance company to strive to link the insurance premium to the competence (at driving) of the customer. This is precisely where certifying agencies that provide certificates based on the competence of each applicant enter the picture. The premium charged would depend on the certification obtained. Different certifying agencies would have different level of credibility and hence their certifications would be of different statures. If a customer is refused by a certifying agency A, he could go to certifying agency B. Though the premium could be a little more because Agency A has more credibility than Agency B, the customer can still get his certification and hence his insurance, thus making driving less risky.

In any case, even if he does not have a licence, he is still free to drive though his risk is higher. The certification of competence at driving then becomes a tool to reduce his insurance costs thus giving him a reason to get one. The most important part is that the entire process is voluntary. He who wishes to reduce his insurance premium gets a certificate of competence and he who cannot and is prepared to take the chance does not do so and faces higher costs at the time of an accident. Thus we see that there are forces operating on the free market that will bring about a spontaneous development of a system of licensing that serves the same purpose that the current coercive system seeks to achieve.

Conclusion

As seen in the case of the system for issue of driving licences, one of the important reasons for corruption is the unjustified power (to cause harm to citizens) that we place in the hands of government functionaries. Shorn of this power, the government functionary has no means to extract his bribes from ordinary citizens. Further, it is false to claim that the absence of a mandatory, government, monopoly licensing authority would lead to chaos on the roads with large numbers of incompetent drivers driving recklessly causing accidents left, right and centre. The best solution for eradication of corruption in all such cases is the abolition of the very government departments that have “life musically hearts hack and death” power over people and leave the services they now provide to the free market.

The Black Money Saga

The last few days have been rather hectic on the black money front. Wikileaks came out with an announcement that it had obtained access to hitherto secret records of money stashed away in Swiss banks.  Questions were being raised as to why the Indian government was not making public the names of the account holders of these Swiss banks. The Supreme Court of India got into the act and called the stashing of black money in Swiss banks as an act of plundering the nation.

http://timesofindia.indiatimes.com/india/Plunder-not-tax-evasion-SC-tells-govt/articleshow/7323122.cms

http://www.asianage.com/india/sc-slams-govt-over-black-money-and-theft-and-plunder-nation-046

Ordinary citizens too, I am sure, are quite anguished to see that no action is being taken. While I do understand their anguish, what struck me the most was that this episode highlights certain issues so fundamental that it is indeed most shocking that almost no one (save for social misfits like myself) recognises them. However, before I delve into that issue, it is important to understand the basic issues involved in this matter.

What is Black Money?

Black Money is money which was not disclosed as part of a person’s income (though it was earned) and on which, consequently, taxes have not been paid.

How does one come to possess Black Money?

The only way to do so is to fail to declare certain amounts received as income at the time of filing taxes. It may go all the way to not declaring income at all and holding all of one’s income untaxed. A number of ways exist to generate Black Money. All of these primarily revolve around engaging in cash transactions which one does not account for as income. For instance, you could sell a plot of land for Rs. 5 crore, accept Rs. 2 crore in cheque, register the land at a value of Rs. 2 crore paying registration fee on Rs. 2 crore and receive the balance amount of Rs. 3 crore in cash. Assuming you had bought the land for Rs. 20 lakh many years ago, you will now have to pay long-term capital gains tax on Rs. 1.8 crore. Assuming an LTCG tax rate of 10%, you would have to pay Rs. 18 lakh as tax. If you had received the entire amount in the form of a cheque, on the other hand, you would have had to pay Rs. 48 lakh as tax. The entire amount of Rs. 3 crore that was received is considered Black Money on which Rs. 30 lakh of tax has been “evaded”.

Where does one keep one’s Black Money?

It does not matter where exactly, but it should basically be kept such that the tax authorities do not get to know of it. In the form of cash in one’s own house is the most basic one. Accounts in Swiss banks that promise confidentiality of the account holder’s identity are probably among the more advanced ones.

Why is there a furor over the issue of  Black Money?

In government circles, the issue is that there is tax money that could be received on this Black Money. A lot of ordinary people are outraged because they feel it was money earned dishonestly, that it is money that ought to have been paid to government and hence that it is stolen wealth in the hands of its current possessors.

The deeper issue that this episode highlights

What a lot of people, especially those in government and ordinary people who are outraged, are missing out here is that their argument rests on certain assumptions that they have never questioned. It is simply that taxation is legitimate. If, on the other hand, one were to question the very legitimacy of taxation, the entire episode highlights a deeper problem – that the vast majority of people in this country do not even realize that they are being deprived of their freedom by the very government that they created to guarantee their freedom.

It is however very difficult for people to question the legitimacy of taxation or even stomach an argument questioning that legitimacy unless they understand certain fundamental issues and the philosophical underpinnings of the system of taxation as well of those people who consider taxation as illegitimate.

How can anyone argue that taxation is illegitimate?

To do this, one has to first understand that taxation is a coercive expropriation of an individual. In simple terms, it is the taking away of the property of an individual through the initiation of force against the individual. The “coercion” will not be visible to those who pay their taxes “properly”. It is the non-payment of tax that brings the coercion into play. Income tax raids violate the “tax criminal’s” property looking for documentary evidence and dragon city free gems 2017 stashed wealth. Unaccounted cash and other valuables found are seized and taken away and if the individual resists, he risks being thrown in jail. In any case, he can still land up in jail for the crime of tax evasion. In all cases, the taxes “due”, interest on unpaid tax and fines are levied and taken away without the consent of the “tax criminal”.

Therefore, we see that taxation is backed by the implicit threat to unleash coercion in the event of non-payment. Without the implicit backing of coercion, it is impossible for any government to collect taxes and depend upon those collections to fund its expenditures. Without taxes, no government can last beyond a few days or months.

The argument for the illegitimacy of taxation fundamentally springs from a more basic argument that coercive expropriation of an individual is morally unsound and hence illegitimate. A very common example of coercive expropriation is robbery at gun-point. When a robber points a gun at A, says “Your life or your money” and A promptly opens his purse and hands over the money in it, A has been coercively expropriated. Failure to give up his money would have resulted in injury or, worse, death.

If one were to accept the principle that coercive expropriation is immoral and hence illegitimate and applies this principle consistently, it is possible to argue that taxation is illegitimate.

What does this mean in the context of the current furor over the Wikileaks on Swiss Bank accounts?

It simply means that the entire furor is misdirected. Instead of focusing on “recovering” the Black Money stashed away in Swiss Bank accounts, we should be focusing on dismantling the apparatus of coercion that backs the coercive expropriation of individuals in the name of taxation.

It also means that a vast majority of the people in this country, especially the “honest” tax-paying variety, fails to consistently apply the principle that coercive expropriation is immoral and illegitimate and hence view individual and governmental actions through different lenses. Most of us are people who consider robbery by an individual as a punishable crime but consider taxation, which is robbery by a representative of government, as an honourable activity in the noble pursuit of the greater common good.

The latter is the sad part. The only hope is to keep talking about it with the idea that someday, enough people will wake up to this simple and obvious truth.