Sunday, November 10, 2013

On political freedom versus economic freedom

(This is an e-mail I wrote out to a group of friends some time back, so dives into content without giving much prior context. Hopefully it still makes sense. I have blanked out the names used with 'xxxx'.)


I thought xxxx made an interesting claim the other day, which diverged somewhat into a discussion of how best should government pursue its activities of commercial service provision. Laying out my thoughts on the initial question at hand. 

I saw xxxx as making a statement about the respective behaviours shown by people when exercising economic freedom vs political freedom. There's a fair bit of political science research into how people vote, which mostly concludes that the rational voter hypothesis and the self-interested voter hypothesis are both false. People vote largely to signal group affiliation and are usually too ignorant to put in place a government that acts to maximize their well-being. One chief reason why this is so is because there isn't much of a premium from selecting the 'right' government or a disadvantage from selecting a 'wrong' one , directly, to the populace at large. The benefits or harmful effects of governance performance seep in over long periods of time and very indirectly, so closing the rationality loop is hard. On the other hand, with economic decisions, people have relatively good and quick feedback mechanisms - they start losing money if they're stupid - which promote rational i.e. sensible decision-making. 

Note that this is at odds with the standard MIT-NeoKeynesian econ literature which assumes away the government as a benevolent and competent dictator which can step in every time there is an externality that the market fails to internalize or solve.

Thus, some have claimed that the presence of economic freedom is actually more liberating and optimal than the presence of political freedom - for example, we shouldn't really care if our political landscape is dominated by the same party/ same people  as long as the govt gets out of the citizens' everyday lives and lets them set up shops, businesses, pursue economic choices, etc. without much ado. Economic choice might be more important than having the vote. I thought this was the claim that xxxx was initially making.

It's an interesting, radical, powerful claim with more than a kernel of truth to it. I still disagree. 

My contention was that it is the claim of a deracinated individual, who begins with the individual as the unit of analysis, ends with the individual as the unit of analysis and thus reaches this conclusion. It could indeed be true for most of *us* . But it is not true for the world at large, especially in large, heterogeneous societies with tons of social correlations with existing opportunity. 

My contention is that the loop of feedback between your representative and you might be broken for geographically neutral, globalized individuals, but it is plenty strong for people in the 'hinterland'. They exercise choice through their representatives, quite frequently so, and multiple times even between the exercising of their vote. 

Why through your representative and not through individual economic decisions? The answer lies in what xxxx suggested was the issue with government - so many things happen in the background that affect/constrain your choices without your knowledge or control. This is true. And yet, it is as true of individual economic decision making as of the government, if not more.

I'll start with something quasi-financial in nature. Individual credit risk. Economic decisions can be financially optimized assuming away the cost of capital, which is often very *systemic* and beyond anyone's control. Consider the practice of bonded labour - now outlawed - in India, where failure to repay a money lender led to indentured servitude for the borrower for life. What is this transaction, financially? It is secured lending, collateralized by human capital. It seems like a terrible thing, but economically, it is about as free a system you're likely to see. The fact that modern systems with egalitarian sensibilities do not allow people to offer their human capital as collateral leads to restricted choices where the incumbent owners of financial capital - which *can* be offered as collateral - stand to borrow cheap and gain disproportionately. So why was this old system of securing borrowing through collateralized labour not successful? Why did it not lead to a reduction of credit rates across the board? Why was this near-risk-free borrowing extended at rates as high as 60% per month? 

The answer, perhaps, is that the borrowers were caught in a bad political equilibrium, where the exercising of economic choice did not - indeed, could not - liberate them. Their micro-economic decisions were overwhelmingly constrained by their macro-institutional exclusion. The market could not wrench them out of it, though political inclusion could.

Similarly, consider the perpetuation of influence through networks, politely called 'social capital'. This is again problematic for the brand of analysis that treats individuals in an ahistorical, arms-length fashion. Our lived experience, daily, reminds us that we are not so much as individuals as somebody's son, somebody's daughter, somebody's friend, part of some elite/not-so-elite cohort etc. Again, *our* experience might be somewhat different, as we operate in highly sanitised, almost game-like environs where a basic level of social capital has been accumulated, and hence assumed away. The rest depends on the individual and so we tend to observe and place greater weight on individual-centric explanations of opportunity, success, achievement. But this is simply not true for very vast sections of very large societies, where there is tons of path-dependent baggage to be utilised or shed away before one can even begin to make use of any little bit of economic freedom. 

Nevertheless, it is interesting that though my own country operates on a belief much similar to mine - political empowerment first, before economic freedom - the results have not been too good. This is probably because political empowerment, through its very nature, is handed out in a 'group' fashion, and the result in India has been that while many groups do indeed  reach better political equilibria, they often do so only at the expense of pushing another, worse-off group down below them. The scarcity of economic opportunity no doubt plays a part in creating this scarcity of political opportunity as well - so xxxx may have a strong point despite my arguments to the contrary. But not for the reason he thinks.

NB. Note that none of this has to do with the 'service delivery' aspects of governance, which is where the conversation turned the other day. For the record, I do believe that cash transfers done right go a longer way than direct provision for most goods or services. Development economics research consensus (to the extent that there is one) seems to be that the only interventions where in-kind benefits consistently outperform cash transfers seem to be health interventions (ORS/ mosquito bed nets) - but for everything else, cash works better. Education in India is a primary example, with a plethora of cheap private schools cropping up in cities - schools that we would be horrified by from a 'quality' perspective - but which still deliver better learning results than government schools.

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