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TECH TALK: PM to CII: Social Contracts

June 14th, 2007 · No Comments

Continuing with Atanu Dey’s perspective of the speech that the Indian Prime Minister should have made to the CII last month:

Friends, the primary job of industries is to produce goods and services. The first necessary condition for a successful economy is that it produces sufficient amount of stuff. If industry cannot meet that goal, all other activities are futile. Distribution of insufficient production however equitably will not solve the problem that we face. Nor will merely generating employment because employment is a means, not a goal, of economic activity. Lets not confuse means with ends. Given sufficient production, the problem of equitable distribution can be tackled if necessary by the government.

Which brings us to one important distinction between industry and government. Baldly stated, industries engage in productive activities whereas the government, at best, engages in activities that are sterile. A government takes part of the production in the form of taxes and redistributes it according to some objective function that is arrived at through a process of political bargaining among the electorate. This redistribution is often necessary but is not costless. Part of what it extracts with the purpose of redistribution, the government consumes in the process of redistribution. That is a deadweight loss which grows not just with the size of the amount redistributed but also with the size of the government mechanism doing the redistribution. One of our former prime ministers, Mr Rajiv Gandhi, had famously stated just only 15 paise out of every Re 1 gets redistributed; the deadweight loss is 85 percent in India. Therefore increasing the efficiency of distribution is paramount if taxes have to be reduced without actually reducing the transfer to those who need it.

Reducing the size of the government is important for increasing the efficiency of transfer, of course. But there is another more compelling reason: reduction of corruption. It is a simple matter to recognize that the larger a government is, larger the control it has, which in turn creates an incentive for people and firms to capture the government. It creates an unholy nexus between the government and industry, with the former being lobbied by the latter for licenses, permits, and quotas.

We both, the industry and the government, have a social contract. Yours is to produce efficiently without imposing social costs, and to make a profit. Market forces will ensure efficiency and the laws will ensure that externalities are compensated for. Our social contract is to make and enforce the laws fairly and efficiently, and to correct for any imperfections that exist in society.

Lets take the matter of employment to distinguish between the two social contracts. You will compete in the marketplace to employ the best that you can. Who you hire and how much you pay is not our business. Today your survival in the global marketplace is determined by how well you run your business. The government will not dictate how you go about conducting your business. If your employment policy discriminates against people based on any criterion not relevant to the job, the discipline of the market will weed you out in short order.

The governments job is to ensure that every citizen irrespective of caste, religion, sex, or economic status has an equal opportunity to be what he or she is capable of being. The government must enforce equality of opportunity but cannot, and must not attempt to, enforce equality of outcome. Discrimination is abhorrent and the government will not practice it nor force the industry to do so. To give equal opportunity, the government will support the education of the poor without discrimination. That is, the playing field will be level but who plays well and who doesnt will depend on the individual.

Your job is to produce as much as you can and as efficiently as you can. Our job is to make the rules and ensure that everyone has a fair shot at playing in the game. To level the playing field, we have to do some appropriate redistribution of production. We must keep the amount we redistribute within reasonable limits so that we dont cripple the industry. We have to become more efficient in effecting the transfer and this means we will reduce the size of the government.

Tomorrow: Of Economic Freedom and Bondage


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