Saturday, January 20, 2018

Government’s Right to Coerce and Our Duty to Obey

Do the state (aka the government) has any right to coerce us and we have any duty to obey it? This is the question that philosopher Dr. Michael Huemer addresses in his important work, The Problem of Political Authority: An Examination of the Right to Coerce and the Duty to Obey. The answer at which Dr. Huemer arrives after logical and empirical analysis is: I shall ultimately conclude that political authority is an illusion: no one has the right to rule, and no one is obliged to obey a command merely because it comes from their government.

Dr. Huemer divides his book in two parts. Part one is devoted to logically and empirically analyze various theories of political authority and part two to the discussion of how a society without the state will function.

The method that Dr. Huemer uses to logically analyze various theories of political authority is to first juxtapose an action of the government in the private sphere and then see if a private individual is allowed by common moral instincts, that most people intuitively understand and share, to perform that action. If that action is unjust and immoral for a private individual then it is also unjust and immoral for the governmental political authority to perform e.g., will we allow an individual to rob Paul and pay that money to Peter and call it social welfare? Not at all. So if a private individual is not allowed to rob Peter to pay Paul then the government should also not be allowed to do so.

The Traditional Social Contract Theory
The first theory of political authority that Dr. Huemer examines is the famous theory of social contract. The theory of social contract says that there is an explicit contract between the state (political authority) and the society members re giving monopoly of use of violence and force to the state via an explicit so-called “social contract”. The theory holds that, at least in some countries, there is a contractual relationship between the government and its citizens. The contract requires the government to provide certain services for the population, notably protection from private criminals and hostile foreign governments.

According to this theory then the state has the right to coerce its citizens and the citizens have the duty to obey the coercion of the state according to the explicit social contract that they have signed with the state.

The first problem with this social contract theory is that it totally ignores the reality i.e., no citizen in the history has ever explicitly signed a document called “social contract” with its government. Did you, my dear reader, sign such a social contract ever in your life with your government? No citizen has ever been presented with such an explicit contract document that citizens read and after agreeing to its terms and conditions signed it. Dr. Huemer presents more such glaring problems with the theory of social contract: But even If there was an original social contract, how could this contract bind people born much later, who never participated in the original agreement and were never asked for their consent?

Because of this and other such glaring logical defects this theory only remains as an historical artifact in the political science. No one takes it to be the logical justification of political authority.

The Implicit Social Contract Theory
As the explicit social contract theory crumbled under the weight of logical scrutiny the statist theorists designed another social contract theory. This time the social contract is implicit instead of explicit. Implicit consent is consent that one indicates through one’s conduct, without actually stating one’s agreement. If citizens have not embraced social contract explicitly, perhaps they have embraced it implicitly.

There are various ways in which one can indicate agreement to government’s coercion without stating agreement explicitly:
  • One expresses an implicit consent by not explicitly opposing the contract (passive consent)
  • One commits oneself to accepting certain demands by soliciting or voluntarily accepting benefits to which those demands are known to be attached (consent through acceptance of benefits)
  • Consent through presence i.e., one indicates agreement to a proposal merely by remaining in some location; and finally
  • Sometimes one implicitly consents to the rules governing a practice voluntarily participating in the practice (consent through participation).
Any of these four kinds of implicit consent might be used as a model for citizens’ implicit acceptance of the social contract. Dr. Huemer analyzes these implicit forms of consent using conditions for valid agreements. A valid agreement is an agreement that is morally efficacious – that is, it succeeds in rendering permissible some action to which one consents or in generating an obligation to act in a way that one has agreed to act. Where these conditions are not present contract is invalid. An example of an invalid agreement is, for instance, suppose a criminal holds a gun to your head and demands that you sign over the movie rights to your latest book. If you sign, the contract would be invalid, because the threat of violence made it involuntary. A valid agreement requires that these conditions are met in an implicit contract. These conditions are:
  • Valid consent requires a reasonable way of opting out
  • Explicit dissent trumps alleged implicit consent
  • An action can be taken as indicating agreement to some scheme, only if one can be assumed to believe that, if one did not take that action, the scheme would not be imposed upon one; and
  • Contractual obligation is mutual and conditional
The implicit social contract fails to pass all these four conditions and so is not a valid agreement between citizens and their governments. Dr. Huemer concludes the analysis of the social contract theory saying that the social contract theory cannot account for political authority.

The Hypothetical Social Contract Theory
The hypothetical social contract theory proponents say that individuals would consent to the state under certain hypothetical conditions. These conditions may involve stipulations regarding he knowledge, degree of rationality, and motivations of the parties to the social contract, in addition to the stipulation that all members of a society be given a choice as to what sort of society they shall live in. Dr. Heumer defines the conditions under which a hypothetical social contract can be judged valid. These conditions are, first, the defenders of this theory must show that people would accept the social contract in their hypothetical scenario; second, they must show that this hypothetical consent is morally efficacious, in the sense that it generates obligations and ethical entitlements similar to those generated by a valid actual consent. After a lengthy analysis Dr. Huemer concludes that, the move to a merely hypothetical contract cannot save the social contract theory. There is no reason to believe that agreement could be reached even in the hypothetical scenarios envisioned by most theorists nor that such hypothetical consent would be morally relevant if it could be reached.

The Authority of Democracy
As the theory of social contract between all citizens and the state fell apart, the theorists of the state needed something else to justify its political authority to legitimize its coercion. They came up with a compromised idea of majority consent. Can the agreement of only a majority of citizens give the state a right to coerce all of us? A simple scenario can expose the fallacy of democratic majority rule argument. Suppose you have gone out for drinks with few of your friends. You are all busy talking about philosophy, when someone raises the question of who is going to pay the bill. A number of options are discussed.  A friend suggests dividing the bill evenly among everyone at the table. You suggest that everyone pay for his own drinks. Another friend then suggests that you pay for everybody’s drinks. Reluctant to spend so much money, you decline. But your friend persists: “let’s take a vote”. To your consternation, they proceed to take the vote, which reveals that everyone at the table except you wants you to pay for everybody’s drinks. ‘Well, that settles it’, declares your friend. ‘Pay up’. In this scenario are you ethically obligated to pay for everyone’s drinks? Can your friends collect the bill money from you by force? I am sure your answer is no. This is the normal generally accepted ethical instincts of most people when it comes to such private scenario, but same situation exists in the case of democratic majoritarian government. Majority alone doesn’t generate any right to coerce the minority. It also doesn’t generate any duty for the minority to obey the majority.

Dr. Huemer then analyzes theories of deliberative democracy, argument from equality justifying political authority etc., and concludes, democracy does not solve the problem of political authority. The fact that a majority of persons favor some rule does not justify imposing that rule by force on those who do not agree to It nor coercively punishing those who disobey the rule.

After logically analyzing and refuting various theories of political authority Dr. Huemer discusses very important topic of the psychology of authority. Why people abide by the coercion of authority and why some people like to coercively rule over others. The motive of Dr. Huemer to review the psychological evidence re authority is to throw light on two issues. First, how much trust we should place in our institutions about authority, and second, how desirable or harmful it may be to encourage skepticism about authority. Dr. Huemer goes on to analyze famous psychological experiments like the Milgram experiment, the Boston Prison experiment, the Stockholm syndrome phenomenon, the problem of cognitive dissonance, the social proof and the status quo bias etc., to throw light on these issues. Dr. Huemer concludes that, human beings come equipped with strong and pervasive pro-authority biases that operate even when an authority is illegitimate or issues illegitimate and indefensible commands. And this is the reason why the standard intuitions about authority are not to be trusted because they are products of systematic biases of the human mind.

What if there is no Authority?      
Dr. Huemer dedicates part two of his book to the discussion of a world without any kind of political authority. This world is not a typical world of chaos portrayed by the opponents of this idea of a world without political authority. This world simply replaces state coercion with voluntary agreements and contracts. In this world most of today’s laws will be unjust because they are coercive. 

Dr. Huemer goes on to discuss how this stateless society will provide goods like protection and security, justice etc. He concludes that a market based voluntary system is much better than coercive state system of today.

In the last chapter from democracy to anarchy Dr. Heumer discusses strategies of transition from a statist society to a stateless society. He concludes,
 It is reasonable to believe that anarchy may come to the world in due time. The most plausible transitional model is one in which democratic societies move gradually toward anarcho-capitalism through progressive outsourcing of governmental functions to competing businesses. No obstacle but public opinion and inertia prevents government from turning over policing, dispute resolution, or even the conduct of criminal trials to private agents. Governmental armed forces can be drawn down and ultimately eliminated through an extended ratcheting-down process in which each country repeatedly cuts back its military forces to only those needed for defenses. … 
The most important determinant of whether this process will occur is intellectual: if anarcho-capitalism is a good idea, then it will probably ultimately be recognized as such. Once it is generally recognized as desirable, it will probably eventually be implemented. Abolishing the state is more realistic than reforming it, because abolition requires people to accept only single philosophical idea – skepticism about authority – whereas reform requires people to familiarize themselves on an ongoing basis with the myriad of flaws of specific policies. (Emphasize mine)
Dr. Huemer’s book is a must read for anyone who is interested in issues of political authority. Most people in their day to day lives are ethical and moral, but when it comes to the government (political authority) they become vulnerable. As Dr. Huemer shows, we need to apply the same ethical standards to the government that we apply in our private sphere. Application of those standards tells us that the government has no right to coerce us and we have no duty to obey the government. Once we start questioning the political authority and legitimacy of the statist governmental system, its days will be numbered. Only then we will be able to build a peaceful, just, civilized and prosperous society for all of us on this planet.   

Sunday, December 24, 2017

Will imposing import duties on foreign electronic products boost ‘make in India’ campaign?

Recently the government of India raised import duty on electronic items including cellphones and TVs to allegedly boost its Swadeshi campaign of Make in India as well as government revenues (sic).

Let us analyze this protectionist policy of government using sound economic laws and see if it is capable of achieving its stated goals.

Economics and Psychology of Protectionism
In the immediate aftermath of this hike in import duties the price of the imported electronic goods will go up choking some of the demand. This price rise will though not choke all of the demand. Those people whose price elasticity of demand is inelastic, e.g., a diehard iPhone fan, will continue to purchase these now costly imported goods. The price rise will reduce the purchasing power of their money e.g., if the iPhone was selling at 100 rupees before the 10% duty hike then it will now sell at 110 rupees. This means consumer will have to now spend more on iPhone leaving that much less income in his pocket to be spend on other items e.g., suppose his nominal income was 200 rupees before import duty hike and he was spending 100 rupees on an iPhone so his remaining income, which he can spend on, let’s say, other Indian manufactured items, was 100 rupees; but after the hike that income has come down to 90 rupees, which means he has 10 rupees less left to spend on other make in India items! This means the demand for make in India items, in the non-electronic market, will actually go down because of this import duty hike; and lower demand means higher unemployment. This policy will help only few sellers of electronics market while hurting consumers and sellers from all other sectors! This is zero sum outcome of this policy which is antithetical to the make in India goal.

Another problem is with the make in India products itself.  The reason why Indian consumers buy imported products is because they are not satisfied with the price and quality of the make in India products! Forcing them to buy make in India product via protectionist measure of import duty hike is not going to solve this original problem of low quality and higher price of make in India products! Here there is no incentive for the Indian manufacturers to compete in the market for customers by implementing innovations and improving quality of their products and reducing their prices to the lowest possible level. In fact, the protectionist measure erects exactly opposite incentive structure for the make in India manufacturers. Import duty hike eliminates the competition coming from the foreign manufacturers. In the absence of this pressure of competition, the Indian manufacturers will relax and not improve either quality of their product or its price. They will continue to fleece the Indian consumers by providing them low quality high price products as has always happened in past!

Not only this, this policy will indirectly result into higher smuggling and creation of another vast underground economy in the electronic market. As I explained above, the import duty hike is not addressing the problem of why Indian consumers don’t want to voluntarily buy make in India products. Import duty hike might deter some demand of imported electronic goods in the short run, but in the long run it will remain ineffective because the underlying cause of imported item’s demand will be still present. In the absence of high quality low price local electronic goods, consumers will still want to buy imported items. This continuous demand will give rise to new entrepreneurs, in vulgar language they are known as smugglers, who will now take risk of providing these contraband items to the needy customers. In this way huge underground market of smuggled imported electronic items will come into existence as it used to exist during the Nehruvian era of import substitution policies. This underground economy will also create more corrupt customs officials increasing corruption in India! And this underground economy and corruption are the two things that Modi government is supposedly trying to eliminate.  As usual, governments never learn from their past mistakes. Modi is creating the same monster that he is trying to eliminate!

The import duty hike will not boost make in India campaign. It will, in fact, reduce the demand of make in India products! Also, protectionism will give rise to an underground economy in the electronic goods market in India resulting into loss of revenue (sic) for the government.

Sunday, December 17, 2017

Supreme Court wants to Regulate the Legal Profession

Last Tuesday the supreme court of India expressing concern over growing commercialization of the legal profession with lawyers demanding “astronomical” fees from litigants, which made it difficult for the poor to access justice, the Supreme Court asked the Centre on Tuesday to bring a law to regulate the field and to prescribe “floor and ceiling of advocates’ fees”.

Let us examine supreme court’s demand of regulating the legal profession in India using sound laws of economics.

First, the concern of supreme court re commercialization of the legal profession where lawyers are demanding ‘astronomical’ fees from the litigants is quite legitimate. But after this correct diagnosis of the symptom the treatment offered by the court isn’t sound at all. In fact it is antithetical to the concerns shown by the court as we will see in a while.

To understand the issue reflected in court’s concern one needs to simply ask the question, why the lawyer’s fees are astronomical (astronomical from whose perspective is also an important question, but I will not delve into that issue here)?  The reason of astronomical fees is simple demand and supply condition prevailing in the legal market right now. The legal market (profession) of India is monopolized by the legal professionals (lawyers, judges etc.) using the method of government licensing. Anyone who wants to become a lawyer will have to acquire a law degree (LLB or LLM) and then get a license to practice law from the monopolist Bar Association. Without this license no outsider is allowed to become a lawyer and practice law. This monopoly condition means the supply of lawyers in India is highly restricted. When this low supply of lawyers meets with the high demand of law services, arising because of myriad of governmental regulations and legislation, it results into higher prices (fees) of lawyer’s services. As with any monopoly, this law monopoly also results into high legal prices (fees) and low quality of services provided by the legal profession.

Now, because the root cause of higher lawyer fees is the monopoly practice of that profession, which is legally backed by the government and supreme court itself, the only sound solution is to dismantle this monopoly by dismantling the bar association and allowing free market competition in legal profession. Market competition will ensure lower prices and higher quality (including speedy resolution of all cases with justice being done to victims) of legal services. The moment legal market will be opened for competition more lawyers will start to enter this profession because of its present higher prices (fees) and profit. This entry of lawyers will increase the supply of legal services lowering its price (fees). Market competition will ensure that only top quality honest and just lawyers remain in the market whereas all inefficient unjust lawyers will be weeded out. Gradual lowering of legal fees will make sure that the poorest of the poor Indians can also avail top quality legal services.

But, alas, instead of offering this economically and ethically sound solution of the problems of the legal profession, the supreme court is offering the exact opposite and economically and ethically unsound solution in the form of ‘price controls’. As I said above, the measure of price control will prove to be antithetical to the goals envisaged by the supreme court. When the government will put ceiling and floor on the prices (fees) of legal services it will result into scarcity of lawyers and other legal professionals in the country. Lawyers are also humans and entrepreneurs who need profit to survive and run their live. Selfishness is what drives every life on this earth. Everyone is selfish and there is nothing wrong in being selfish. If people think people like lawyers or teachers are in a noble profession and they don’t require profit then they are making a big mistake. The matter is not whether lawyers and teachers should earn profit; the matter is how much profit they should earn. The answer is: as much as their services are valued by their customers in the free market. When the government will put limit on the maximum fees that lawyers can charge from their customers, as according to the law of supply, it will result into drastic reduction in the supply of lawyers in India. This will increase the prices of legal services even higher than at what astronomical levels it is today! This will make sure that no poor person will ever be able to access legal services! Not only this, it is quite possible that this increased scarcity will start a whole new underground market for legal services in the form of local mafias who will produce their own mafia justice! When people will not be able to get justice from the official legal system, they will resort to other alternatives. Many will take law in their hands. And all these results are exactly opposite to what the supreme court is eying for.

Murray Rothbard once said, “It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.”  The supreme court of India is in this state of economic ignorance, and in that state of ignorance it is better that it refrains from advising the government or anyone else on economic matters. In the zeal of doing good the busybody judges will harm (poor) people of India.

Thursday, December 7, 2017

Your Money in Bank is not Safe!

If Narendra Modi and Arun Jaitley get their way then when next time some bank will fail in India they will be legally allowed to confiscate all your hard earned saving, that you have deposited in that bank in the form of savings or term deposit accounts etc., to rescue themselves. Because doing so will be made legal by the government under the new bill that they are drafting, you will not be able to do anything about it once they do it! You will simply have to watch helplessly banks seize your lifetime savings. Modi government is drafting a new bill viz., the Financial Resolution and Deposit Insurance (FRDI) Bill, 2017 which will give these enormous powers to the banks and other financial corporations. In financial market jargon this method (sic) is known as ‘bail-in’. In just legal language this should be called embezzlement on a grand scale. After demonetization and GST this is another big scale confiscation scheme being devised by Modi and his ministers like Jaitley.

If you are thinking that such things cannot happen then think again because such bail-ins are becoming global phenomena and many have already took place in recent past e.g., most famously in Cyprus few years ago.

It seems Modi government is learning from or being advised by foreigners. This bill is just another logical step, after demonetization and digital money drive, in the direction of worldwide war on cash that governments are waging since long. Cash allows individual citizens to escape the clutches of the government. With cash economy it is very hard for the government to control its populace. With cash it is also very hard for them to do their central planning which requires tight control of everyone’s behavior, and that is the reason why governments hate cash and want to abolish it. Narendra Modi is trying to tighten his grip around our necks, and this bill is another sign of that process. And as usual, the government is calling this bill people friendly in that they are trying to protect citizens’ deposits in a better way! Remember when the government says it is coming for your help you better pack your bags and run.

The best thing in this type of environment is to diversify your portfolio and not to rely too much on banks. It is better to keep your cash saving in hard monies like Gold and Silver. Do whatever is possible to keep yourself safe from these coming shocks and prepare for the worst.

Sunday, November 19, 2017

Moody’s and Modi

US based bond credit rating agency Moody’s upgraded Indian government’s bond rating from Baa3 to Baa2. This is one level up from their lowest rating grade. They have changed their outlook of the Indian economy from positive to stable with this upgrade. Modi government ministers and its supporters are terming this upgrade as an endorsement of their policies of demonetization and GST for which they are under intense backlash and criticism of late.

One thing that I vividly remember about Moody’s is that this is the same credit rating agency which failed miserably in seeing the sub-prime credit crisis coming in 2007. Just before the sub-prime bubble busted in 2007, this agency was rating the toxic mortgage backed securities (MBS) with their highest rating level of AAA! After the crisis this rating came down to their lowest level of junk!

Does this upgrade matter so much?
The fundamental theory behind this bond rating upgrade is the flawed Keynesian idea of ‘borrowing and spending’ to boost economic growth. As we have discussed many times in past, economy doesn’t grow when the government or people spend (out of their income or via borrowing) and consume, but when people save, invest and accumulate capital. Government borrowing only siphons off private saving and investment funds which actually slows down economic growth in future. It lowers our standard of living. Most of the government spending is pure consumption in the form of various welfare schemes. This is sheer waste of society’s saved resources. And whatever little so-called investment like building roads, bridges, dams etc., the government carries out fails to pass the market test of profit and loss. All government projects are highly inefficient and very costly. They continue to make losses year after year, but unlike any private firm they never go out of business because they earn their so-called revenue not by satisfying consumers’ most urgent needs by providing them best quality products at the lowest possible price but by coercing and robbing the tax payers. This again is sheer waste.

And, if at all this upgrade will reduce the cost of borrowing for private companies of India that also will not help the Indian economy very much because this borrowed money will be used by the fascist business tycoons to shore up their empires, as has mostly happened in past, instead of serving the poor Indian consumers. Borrowed money will go in the stock or real estate markets where it will be used for speculation instead of any productive purpose.

All in all, borrow and spend policy will fail in the end because it can’t produce real economic growth. The big Indian government with its all out interventions in the economy is the real problem. This upgrade is a bad news for people because it will allow this big government to borrow and spend more and become even bigger!