It should be emphasized that in crafting good economic policy it is important to treat the various players on the market —the policeman,the ration-shop owner and the ordinary citizen—as reasonably self-seeking, rational agents. If these agents get the opportunity to earn some extra moneywith little effort, they will seize the opportunity. Hence, to cut down on corruption and pilferage, we have to design policies in such a way that there is no incentive for ordinary citizens and the enforcers of the law to cheat. Accordingly, good mechanism design is the heart of the problem. Many a noble plan to reach out to the poor and increase the welfare of our citizens has fallen on hard times because of the policymakers’ propensity to assume that the policies are delivered by flawlessly moral agents or perfectly- programmed robots. Models based on such faulty assumptions are destined to fail. It is important for Indian citizensto understand this because, in democracies, popular opinion plays an important role in promoting progressive policies.
These sentences, while reading from the recent Economic Survey of India, instigated some valid as well as practical ideas related to how trust worthy and honest are we, when it comes to business and making money. Are these two qualities, to be honest and to make money mutually exclusive OR complementary ? Do they have a relation at all ? Some hits on how to approach these questions…
There is a growing literature in economics arguing that pro-social behaviour, which includes altruism and trustworthiness, is innate to human beings and, moreover, forms an essential ingredient for the efficient functioning of economies. In otherwords, human beings have a natural ability to forgo personal gains for the sake of other people or because that is what is required because of a promise the person had made. This trait may well have evolutionary roots but its existence is now well demonstrated in laboratory tests.
‘[The] commerce of mankind is not confin’d to the barter of commodities, but may extend to services and actions, which we may exchange to our mutual interest and advantage. Your corn is ripe today; mine will be so tomorrow. ‘Tis profitable for us both, that I shou’d labour with you to-day and that youshou’d aid me tomorrow. I have no kindness for you, and know that you have as little for me. I will not therefore take painson your account; and shou’d I labour with you on my own account, in expectation of a return, I know I shou’d be disappointed, and that I shou’d in vain depend on your gratitude. Here then I leave you to labour alone: You treat me in the same manner. The seasons change; and both of us lose our harvests for want of mutual confidence and security.’
For India to develop faster and do better asan economy, it is therefore important to foster theculture of honesty and trustworthiness. Thanks to the fact of this social prerequisite of economic development remaining unrecognized for a very longtime, this has not received adequate attention in the scientific literature. Fortunately, a large body of recent economics research has been stressing the importance of these social and cultural factors. While it is true that we do not as yet have a hard science of how to develop these cultural qualities in a population, we know that even the mere understanding of the importance of certain qualitiesfor promoting the economic development of a groupof people, helps nurture these qualities in people !
After all, people have learnt not to smoke in a crowded room even when not smoking is not in theirself-interest simply because they have come to understand that this is not in their collective interest.
P.S. : As I suggest most of the times, Please go through the latest (2011) Economic Survey of India, published by the Ministry of Finance, Government of India. Booklet 2, especially, is one of the finest discussions on the current state of economy, the futuristic trends and policy initiatives to be taken. The survey, surprisingly, was very well written in an easy, understandable and yet intuitive and going to the depth of the issues.
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