Part II Governance and institutions are

needed to check the big government

One malady which a society should avoid is having a big government which uses
scarce resources of a society without giving it back a matching amount of benefits

Monday, 7 September 2015

In a society of robbers, good governance is robbing
In the previous part published last Monday, it was shown how a society
would start decaying when robbers and cheaters are worshipped
by everyone as heroes. The good governance in such a society
is to rob and cheat others. If someone refrains from cheating
and robbing, he is considered as freak or odd. He is condemned
and ridiculed as a person who is practising bad governance.
One malady which a society should avoid, it was also
mentioned, is having a big government which uses scarce
resources of a society without giving it back a matching amount
of benefits. Since societies are unable to control big
governments, it is also a licence for those in power to rob from

people.
Robbing can be either illegal or lawful
The robbing can be done in two forms, illegal robbing and lawful robbing.
In the first case, those who are inclined to rob and cheat would use their
positions and powers to grab resources belonging to others against the law.
In the latter case, Parliament or the Executive would allow some selected
group to rob others by enacting facilitating laws or introducing enabling
rules and regulations.
Illegal robbers use discretionary powers to rob others
In the illegal grabbing, known as bribery or grafts, no option is given to the
other party in a transaction to choose. It is a take or leave proposition as
economists would call it. If you make the illegal payment, you get it.
If you dont, you lose it. If you do not pay, you are made to undergo many
obstacles and hassles before you get it. At the end, when you get it, you are
totally tired out and frustrated. That is because you have to wait longer and
spend more money to get the approval. Consider the case of discretionary
powers given to top bureaucrats or politicians to grant or reject approvals.
The bureaucrat or politician in this case becomes the master who would
frame the rules of the game.
Those rules which are informal and unwritten but widely known by
everybody are framed not to facilitate the delivery of the service under
reference. They are framed to facilitate them to get the maximum amount
possible by way of illegal grafts. When society starts treating such illegal
payments as normal, they get imbedded in societys culture represented by
its values, beliefs and ethos.
Governments facilitate lawful robbing to selected parties
But there is lawful robbing and cheating too. That happens in two ways.
First, a government may use its majority power to grab private businesses
and properties without the consent or approval of the citizens concerned.
The private properties acquired by Sri Lankas government in 2011 through
an expropriation law labelling them as underperforming and being
underutilised are a classic example for this. After they were taken over,
instead of making them financially self-supporting, they had to be
maintained at a huge cost by the taxpayers of the country. Thus, it was a
case of a double robbing.
The second instance arises when politicians and bureaucrats are given
extraordinary perks like duty free motor vehicle permits. The objective of
the permit system is to facilitate easy mobility of politicians and
bureaucrats. Thus, the government agrees to forgo a good part of the
import duty revenue for increasing the efficiency of these two categories of

citizen servants. But in actual practice, many of these car permits have
been resold, as reported in the media, thereby robbing a good part of the
tax revenue from the government. The government itself facilitated the
robbing by permitting the permit holders to transfer the vehicles
immediately after they have been imported for their private use.
When robbing is tolerated, everyone will become a robber
When a society tolerates and uphold such
illegal or lawful robbing by a section of its
members, an important economic law, known
as Greshams Law, gets activated. The Law is
attributed to advice given by the 16th century
financier, Sir Thomas Gresham, to Queen
Elizabeth I on the folly of debasing the metal of
the circulation coins to earn bigger profits for
the Crown. Gresham is said to have informed
the Queen that when such bad money money
whose metal content was less than its face
value was released into circulation with good
money money whose metal content was equal
to its face value people would hoard the good
money for its metal value and release only the
bad money to circulation.
Thus, over the time, bad money which is now
tolerated will drive out good money filling the
whole economy with only the debased bad
money. Though it was not Gresham who said so
first there had been many who had said so
before him including Copernicus the Law has
been named after Gresham. It is now applied by
economists to any situation where a bad thing
is tolerated by society: dishonest people will
drive out honest people, criminals will drive out
law-abiding people, robbers will drive out nonrobbers and so on.
Accordingly, when society accepts robbing and
cheating as good governance, it will invariably
drives out those who do not rob and cheat.
Eventually, the whole society will be filled with
people who uphold robbing and cheating as
good governance. This is where Sri Lanka stands today.
Put a stop to living on other peoples earnings

The corollary of accepting this view as normal is that it incentivises people

to live by robbing and cheating and not by putting honest work. The
opportunities created for making such easy and unproductive money gives
rise to another unsavoury economic condition known as rent-seeking.
Its danger is that it gives a wrong signal to people that innovation, hardwork and self-development are unnecessary for creating wealth in society
and attaining prosperity. Thus, governance principles are relegated to an
unimportant position through they are needed for sustainable economic
prosperity due to a number of reasons.
Good governance also means accepting the rights of others
First, the governance principles followed by society should be conducive to
the continuous and long term sustainable economic prosperity. It requires
the members to accept the right of others: the right to live, the right to hold
property, the right to dispose of the property in an exchange of their choice
and the right to self-improve. When these rights are guaranteed by an
effective enforcement system without discrimination and foul play, each
member of society has the incentive to develop his property, both human
and physical, because at the end he knows that he can benefit from such
developments.
If, on the other hand, what is developed by one person is acquired by
coercion by the state or by another who has the support of the state, it
gives a bad signal to all. In such a society, members will desist from
developing themselves since at the end they stand to lose everything they
have built. Hence, the most important requirement which the governance
principles should underlie for a sustainable system is the motto, live and
let live.
Freedom of expression and thought are the pillars of innovation
Second, freedom of expression and freedom of thought are essential
requirements of continuous innovation and new discoveries which are the
cornerstones of economic prosperity. If members are in fear of losing their
occupations or lives because they speak the truth or what they feel as
correct, then, they do not have the correct mindset to get into innovations
and new discoveries. The advancement of science and knowledge has
taken place throughout the history by dissent and not by agreement.
All great innovators and creators in the world did so by critically questioning
the existing knowledge. This means that toleration of opposing views is a
must, if a society is desirous of spawning innovations and new discoveries.
Law and order ensures fair play
Third, the maintenance of law and order and observation of rule of law
should be a part and parcel of the legal structure of society. When law and
order are maintained, it prevents people from forcefully taking over the

property belonging to others. This applies to the state as well. In order to

maintain law and order, the state has been given power to take away the
right of a person to live, that is, to impose capital punishment on wrong
doers. But, this right has to be exercised by the state by following an
accepted moral code and not arbitrarily and unjustly.
Kautilya advised on just punishments
Kautilya, the 4th century BCE Indian Statesman and Guru, repeatedly
admonished in The Arthashastra that punishments awarded must be just.
He proclaimed that only the Rule of Law can guarantee security of life and
the welfare of the people. According to him, the maintenance of law and
order by the use of punishment is the science of government. He further
said that it is the power of punishment alone which, when exercised
impartially irrespective of whether the person punished is kings son or
enemy, that protects this world and the next.
Kautilya said that a king who metes out unjust punishments is hated by the
people whom he terrorises. About punishing innocent people, Kautilya had a
wonderful recommendation: An innocent man who does not deserve to be
punished shall not be punished, for the sin of inflicting unjust punishment is
visited on the king. To free the king from the sin, Kautilya advised the king
to pay compensation as high as 30 times the original punishment. He also
said that though previous sages had recommended cruel capital
punishment, simple death penalty without cruelty shall be exercised if
death penalty has to be imposed. It meant that even the man condemned
to death has a right to die honourably.
Hence, the punishment system to be enforced by a society desirous of
attaining sustainable prosperity should be fair, just and free from
arbitrariness.
Coercion is not the answer
Many governments have used coercion to have private property transferred
to the state. Such coercive laws will give only a temporary benefit to the
government. This is because when people realise that the fruits of their
labour are being robbed by the state without compensation, as pointed out
previously, they do not have incentive to develop their enterprises or
human skills. Hence, the forced transfer of resources from individuals to the
state gives only a very temporary solace and cannot be sustained in the
long run.
Hitlers war economics was short-lived
Economic historians have found that, as revealed in war crime trials in
Nuremberg, Adolf Hitler had coercively got the resources belonging to the
Jews transferred to the Nazi regime.

According to historians, Hitler had robbed Jews at four different stages. First
the movable property belonging to the Jews such as money, financial
assets, clothes, human hair and even the gold teeth in their mouths were
confiscated. Second, all the immovable property such as land, buildings,
factories, etc. was acquired. Third, in a somewhat horrible manner, the
accumulated calories of the Jews were used by feeding them with food less
than the needed daily requirement for a healthy life. Finally, when the Jews
died of overwork or ill health, their skins were tanned as leather, body fats
were used for manufacturing soap and bones for making artefacts or
fertiliser.
One may argue that Hitler was a good economist because he followed the
principle of zero waste policy, a policy which is advocated by many
environmentalists today. But, in reality, Hitler got only a temporary benefit
because he could not sustain a continuous flow of work and innovation with
dying Jews after one generation.
Coercion also affects the long term health of an economy and therefore, the
long term economic prosperity as well, because it does not tolerate
opposing views. People who are coerced will rise against the rulers, thereby
endangering social stability. The social instability is the killer of hard work,
innovation and new discoveries which are the essential requirements of
long term economic prosperity.
Treat opponents with honour
It is, therefore, essential to build up a tolerant society as a prerequisite of
generating sustainable economic prosperity. Treat Opponents with Honour
advises Emperor Ashoka. In this regard, it is pertinent to quote Amartya K.
Sen, the first and only Nobel Laureate in Economics from Asia.
Sen in his The Argumentative Indian published in 2005 highlights the value
of a tolerant society: Sen says that, it was indeed a Buddhist Emperor of
India, Ashoka, who in the third century BCE, not only outlined the need for
toleration and the richness of heterodoxy, but also laid down what are
perhaps the oldest rules for conducting debates and disputations with the
opponents being duly honoured in every way on all occasions. Sens
remark and Emperor Ashokas advice are a good eye opener for all of us.
(W.A. Wijewardena, a former Deputy Governor of the Central Bank
of Sri Lanka, can be reached at waw1949@gmail.com.)
Posted by Thavam