Sunday, January 8, 2012

Inhuman economics and policy making

It is rather often that we miss the woods for the trees, but in the realm of policy making and economics, this more of a rule than exception. The development of nations is like a proverbial beast outside the city of blind men. The selected group of men from the city (read scholars of economics and policy making) visit the beast often and try their best to describe the beast in terms of tangible statistics. But alas the beast is much more.

It is almost impossible to accurately describe the ultimate economic goal of any nation or society in terms of tractable statistical variables. At a given point of time, we may be lucky to see the symptoms of the economics malaise in terms of GDP, but soon the goal of the treatment shifts to removal of the symptom and not the cause. This trend has carried on far to long in the present world, that while all the economic indicators may look great, the man on the street is not. The occupy movements in various parts of the developed world are an instance of that. We got too busy, looking at the GDP numbers that the distribution of wealth and the mobility of persons from the bottom of the economic stack to the top became worse. Now we can latch on to these parameters and then we shall soon find the goal slipping away through some other unforeseen parameter. 

While the goal of a society should be the development of it citizens, it has been replaced by the more tractable one - increase in GDP of the nation. At some point of time the two seemed synonymous but the correlation between the two has been getting weaker and weaker. Many nations with huge GDP suffer with low median incomes, and in some places it is not unusual to give a human sacrifice for the health of the national GDP (have a look at the arguments against even the basic social support services like health in US and food in India). Why is it that the complex notion of development of nation and its citizens has been reduced to a simplistic single number? It is a very dangerous mental block for all the policy makers. Whenever they sit and decide about the development of the society and the nation, they think not of the development as a whole and how to ameliorate the conditions of the citizens. They rather think how to make sure we get a better set of statistics the next time. It is like a student whose only motive is to get good grades and not to learn. The student may just rub off the grades put in by the teacher and forge new ones because what was once an indicator of progress has become the goal. 

While the numbers have taken precedence over humans in the way we see the development of a society, the holy grail of the policy makers has remained unchanged -  to build laws and institutions which shall be fail safe even when the most corrupt persons run the shop. This seems like a good idea, but it has made sure that the zero hypothesis of the policy makers is the every man is corrupt until proven otherwise. Thus we build the most cynical institutions and laws to govern our society. A doctor would rather let a patient die than take up the case and give his best, for the fear of malpractice suit designed to protect patients from clumsy doctors with evil motives. People would rather throw the left over food in the bins than feeding the homeless because the law protects us from all beings who would poison us or offer us rotten food.

We live in a grey world and the laws try to make things black and white for us. It works for the most part but there are still many grey areas where human beings suffer just because of the attempt to have everything in black and white. Informal economy is one of the grey areas that has been a source of relief and pain for many people. An informal economy runs outside the fence of rules and regulations set by the state. It may just be a person occupying the side walk to sell trinkets or some private car plying on the road as an informal taxi. This kind of activity causes a lot fuzziness in the world of formal economy. A driver running an informal taxi has an unfair advantage over the other taxi drivers as he does not pay any taxes nor need to follow any regulations. Similarly the person selling wares on the street usurps the public place and sets shop for no price at all. The response of the state in these cases has been to penalize such activities and prevent them from happening. This may seem all good but as the enforcement agencies get better and better at doing this, the hope for people who fell out of the rat race grows dimmer and dimmer.

The informal economy offers hope to a lot of people who live on the street and are without jobs. It is not only the source of some income for the people barely able to scrape by, but also a means to keep one occupied on the street and not to over obsess about the conditions which led them to the street. Informal economy is an important social safety net for the ones at the bottom of the hierarchy. It is also a stairway for many of them to come out of the situation they are in.

Informal economy must stay informal. Making the informal economy formal is not the solution. Take the example of slums- they are a form of informal urban housing for the poor. The slums are very effective in making sure that only the poor remain in the slums. This is done through the system of negative incentives. The conditions in the slums are bad enough that no one who can afford to leave them shall stay. The slums remain as illegal housing on city map. This ensures that many public amenities provided by the government are scarce in the slums. Also the question of ownership of the land remains unanswered. The ones who live in the slums do not own the land and the state often tries to remind the people of the fact by demolishing a part of the slums from time to time. Yet there are informal systems which ensure that you can leave your house in the morning and come back to the same spot in the evening. This system is usually enforced by corrupt officials who assign ad-hoc rights of property to the people or though a local strongman or group. Thus the slums are a permanent refuge of the destitute and the destitute only. The day the state grants slums a formal status and grants some kind of property right to the dwellers- the slum, as the refuge for poor, dies. The slum property becomes a fungible object that can be traded, inherited and improved upon by the occupant. Soon as all the public amenities follow with the granting of the formal status, the incentive to leave the slums without staking any claim goes down. Thus the slum which is a dynamic haven for the poor- a safe house for them in times of hardship- becomes a permanent settlement and the fresh batch of poor people find a new place which is further outside the fence of laws, public amenities and regulation as the boundary keeps expanding.

Conventional economics and modern law is unable to to handle to these situations as it breaks the binary nature of law and the goal of the policy makers to have institutions, free of the discretion of people, which are able to protect the citizens from the monster- a person will turn into if the laws are lax. But is it possible to develop economic theories which do not depend on numbers alone, but still be objective? Is it possible for policies to be framed which do no assume that every person is a terrible being unless proven otherwise, but still make them fail safe from the corrupt? Is it possible for the laws tolerate the grey area in society which may help bring people out of the dark, but still making sure that the whole world is not grey?