Tipping Point

I am rather amused to hear opinions that argue that tipping to waiters is an act of generosity, and a barometer for how we treat those less fortunate than we are.

From a first order economic perspective, tipping shouldn’t matter. What you are willing to pay at the restaurant table depends on the economics of dining, and what the restaurateur pays his staff depends on the vagaries of the labour market.

 An economist would point out that a tip comes out of your pocket as much as the rest of the  bill does, and if you are in a society where a 15% or 20% tip is customary, you will factor that into your dining decisions. In other words, when deciding whether to eat out or not, or when deciding whether to eat at a particular place or not, you should mentally translate an expected bill of Rs1,000 to Rs1,200 ( assuming a 20% tip) and decide on that basis.

 Likewise, when a waiter’s salary is negotiated, the tips that he can expect must surely be taken into account. How can it not be? A restaurateur  will certainly tell a candidate for the post of waiter: “Look, your official salary is X, but you can expect tips of Y per month, so your take home is actually X+Y.”

 So, at first glance, it must seem that the custom of tipping should make no difference. If there were to exist two cities that were identical in all respects except  that Stingy City has a culture that tips 5% and Generous City has a culture that tips 20%, the menu prices and waiter salaries in the two cities must adjust themselves so that diners pay out approximately the same amount to the restaurant and the waiters take home around the same amount in both cities.

 As I have taken care to mention, all this is the first order perspective. What about when we look more closely? This is where things get a little more interesting.

 Suppose that you have a culture where tipping up to 20%  is customary, but any tip in the range of 0 to 20 is acceptable, depending on how much you think you can afford, and how much you liked the service. What will happen then?

 First, from the perspective of economics, this increases flexibility, which is a good thing. One of the biggest problems that economies face is that wages and prices are rigid. Actually, it is worse than that – wages are rigid downwards (i.e. it is difficult to reduce wages) while prices aren’t very rigid, but to the extent that they are, they are rigid upwards – i.e. it is difficult to raise prices. This makes it difficult for economies to get out of a downturn, because you can’t reduce people’s salaries when faced with reducing profits. So you hold on to employees, and when you can’t do that, you lay them off (or if labour laws make it difficult to do even that, you struggle for a bit and close down the company)

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Missing the Point

Gaurav responds to a couple of my posts on democracy. He misses the point in both.

He claims that my argument that democracy provides stability for the rulers is incorrect, and cites the examples of Bhutto and Allende. Both were democratically elected and both were deposed and killed. These are puzzling counterexamples. It should have been clear from my posts that I do not classify a country as democratic just because it manages to elect its leaders in free elections once in a while. There is a great deal of truth in the statement that for a country to be  considered democratic, the test is not its first election, but the second.  To hold one election is easy. To hold the second one requires a significant amount of “infrastructure” in terms of cultural acceptance of orderly transition of power, a free press, a neutral military, etc. The coups that deposed Bhutto and Allende tell us that their countries were not democratic – by definition.

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Ambani Fights Inflation

As I have explained earlier, concentration of wealth at the very top is an excellent way to cut inflation. Mukesh Ambani has done his bit to fight inflation by building an expensive house.  Those who are decrying this as an example of conspicuous consumption are missing the point. If, instead of  building an expensive house, Ambani had distributed the money as salaries to Reliance employees or as profits to shareholders, the money would have chased goods that the poor also consume. By keeping the money for himself, he has caused a reduction in prices. The consumption of the super-rich is different from that of the rich and the middle-class.  As long as the super-rich spend money on status-goods and as long as their money goes to other super-rich people – such as when they pay M F Hussain for a painting, or Hafeez Contractor to design their house, it keeps money out of circulation from the general economy. The super-rich should, as a social obligation, take utmost care to ensure that their money circulates among themselves and does not leak out.

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