Export of Free Speech can be India’s soft power

As the recent permanent ban imposed on President Trump’s social media demonstrates, Free Speech is under threat even in the home of the First Amendment. France’s craven response to the recent decapitation of a middle-school teacher who was murdered for using the Charlie Hebdo cartoons as a teaching aid underscores that Europe is moving away from enlightenment values. It is telling that in both examples of assault on free speech, the victims found more support in India than in their own countries. This suggests an opportunity for India. We can be the beacon for free speech in the rest of the world.

On the other hand, the recent example of Munawar Faruqui illustrates the dangers of untrammeled free speech for Indians. While we need to champion free speech across the world, there is obviously a need to balance this advocacy with India’s own policy priorities, including, but not limited to, preventing insult to our gods, maintaining peace between communities, stamping out criticism of our leaders and clamping down hard on contempt of court.

Fortunately, there is a tried and tested solution to this conundrum. This has been effectively employed in the economic sphere to balance the need to earn foreign exchange and the imperative of keeping Indians poor and dependent on government handouts. We could deploy the same solution here, in the form of SEZs, or Special Expression Zones. These SEZs can be used to host infrastructure for free speech exiles from other countries – for example, the social network Parler, currently subject to a brutal clampdown in the United States, can find a home here. The only condition should be that Indian passport holders should not be allowed to use these services, obviously as the policy priority is to export free speech. The regulation setting up these zones should provide for international arbitration to settle any disputes that arise, keeping them out of reach of capricious Indian courts to the extent possible.

I think there is great potential in this idea. Global export of Free Speech can be India’s Soft Power. We can be the Vishvaguru for the world. People around the world will look up to us and see us as a shining light and an example for the rest of the world to follow. This is apart from the economic opportunity that this obviously represents. I hope Prime Minister Modi takes this idea seriously, especially given that it already has a catchy acronym and has the potential to be a significant component of our post-COVID strategy in 2021.

Trump is Tamasik

The Bhagavad Gita and many schools of Indian philosophy speak of the three guNas, or categories of human nature – Satvik, Rajasik and Tamasik. My theory of Trump is that he is Tamasik while we expect people in his position to be good or bad in Rajasik ways. This is a mistake that his supporters as well as detractors make.

What are the three guNas? I don’t claim to be an expert, but here is how I would interpret them:

A person with the Satvik guNa will perform his appointed role in life unmoved by the pleasure or pain it gives him. A Satvik president or prime minister, when faced with a difficult political decision, will ask himself only “What will a platonic chief executive do when faced in this situation?” and do it. Whether the outcome of that decision is favourable to him or not does not come into the picture, and the question of what the decision will do to the next elections and to his own political survival are relevant only to the extent that they are good or bad for the country.

Needless to say, a Satvik guNa is an entirely theoretical construct, and no such person exists or has existed in real life. But people may:

  • Rise to the occasion and behave as such when the situation demands
  • Believe, and possibly convince themselves that they are behaving in a Satvik manner
  • At least make an attempt, and struggle with themselves in the process
  • Claim to be be Satvik, and try to convince their constituents that their actions are driven only by Satvik motives

The point to be noted though, is that do any of these things, you need to have the ability to conceive of these higher order motives. To an extent you have to fake it till you make it, but even when you are faking it, you should know what you are faking.

Lee Kuan Yew, the first Prime Minister of Singapore, demonstrated his Satvik nature when he planned his leadership transition – or did he? In his autobiography, he describes, with a high degree of self-awareness, that he realized that his mental acuity was reducing as he got older, and therefore, it was time for him to pass on the mantle to someone else. So he undertook a well-planned search for a successor, found one, and handed over the reins to him.

Except of course, he sincerely believed that his son, Lee Hsein Loong was the right person to succeed him, but he nominated Goh Chok Tong because it would be unseemly to pass on power directly to his son. And oh, having decided to retire, he did not actually retire. He stayed on in the cabinet as Senior Minister and then Minister Mentor till he reached an advanced age and was eventually forced out by his son a few years before his death.

Was Lee demonstrating his Satvik nature and making disinterested decisions for the benefit of Singapore? Given that both Goh and the younger Lee have turned out to be good Prime Ministers, that is certainly a possibility. Or did he convince himself of the Satvik nature of his actions, but in reality, his decisions were tainted by his love for his family and desire to cling to life? Or perhaps he was aware of his imperfections and tried to do the best he could. Or it is possible that this was all a ruse. We will never know and perhaps he never did; such is human nature.

Most functional adults are Rajasik. They are driven by ambition and desire. This is not necessarily a bad thing. We recognize ambition as natural and even desirable. We celebrate romantic love and love for one’s children. When a politician we support displays the killer instinct and acts like he wants to win the elections, we appreciate it, though if he uses corrupt means to do so, we should ideally oppose it.

If Lee’s retirement was actually a long-drawn strategy to install his son in power, it was a perfect demonstration of the Rajasik guNa. The goal was driven by familial love, but in the means employed to reach it, he was able to control his impulses emotional drives and follow a multi-year strategy to achieve it. This is more than someone driven by his Tamasik nature would be capable of .

Trump, as I was saying, is Tamasik. He is driven by his impulses, and in his case, the impulses are all negative ones. Now, to be fair, all of us struggle with our impulses and emotional drives, but becoming a functional adult involves learning to rein them in, and converting them into higher order goals. We all have sexual desires, for example. The Rajasik nature involves sublimating them into a higher order emotion called love, and pursuit of love involves choosing one person and forgoing others; not giving into the impulse of going after every woman you find sexy. Trump has not made that transition at all. A Clinton may give into his impulse; Trump is his impulse.

You can see that in every one of his behaviours. An example of this that I found fascinating was the bleach incident. In the video, Trump is insecurity given human form. Any person who reaches a senior position in an organization will be familiar with the feeling. You find people reporting to you who have much greater expertise than you in their field. When you talk to them, you, who have always prided yourself on your knowledge, feel that bit of insecurity. You are afraid of asking a dumb question and being shown up. But you are an adult and you reach back to the techniques that you have learnt along the way. You display faux humility, you praise people for being very smart and say things like “Forgive me if this is a dumb question” and then ask your question.

Trump is completely unable to do that. He is unable to recognize his own insecurity and therefore unable to maintain a distance from it. He sees scientists talking and what matters to him is not the content of what they are saying, but the fact that they are coming off as smarter than he, so he has to say something to remedy the situation. Whether it is appropriate in that context is irrelevant to him.

A common thing people say about Trump is that he tells it like it is. That is not actually true. He lies quite flagrantly. The reason for the misconception is that people are confusing the transparency of his lies with honesty. He is like my six year old son, who, when woken up at 7:30 AM to be in time for his class at 8, throws a tantrum complaining about not being woken up at 6 AM as he had asked for the previous night (He always asks to be woken up at some ungodly hour, we say yes and wake him up when we want.) Of course, the real reason for the tantrum is that he is sleepy and is annoyed and having been woken up, but he knows that he can’t complain about that, so he makes up some reason, and it’s clear to us what the real reason is.

Now, we are all human beings, and we continue to get groggy when we do not get enough sleep even in adulthood. A person displaying Satvik guNas would have enough self-awareness to put a distance between himself and his grogginess. He will say “I am not the person who is feeling sleepy and irritable. I am the person who has a job to do and needs to rise about the irritableness.” The Rajasik person will have this self-awareness as well, but his lack of sleep will still steep through and he will show his irritation in some other way that seems completely justified to him but probably leave the target of his ire confused about what his fault was. My secondborn’s tantrum seems much purer in comparison to a Rajasik person’s and a lot more comprehensible.

Trump’s lies are like that – they are much more transparent, communicate his feelings much more viscerally than a normal adult’s lies do. When they reach others who share his feelings, they feel real, never mind the factual content.

The other reason for people getting confused about Trump is that it is difficult to imagine that a purely Tamasik person like Trump can get so far in life, so it is understandable that many people substitute him with an imaginary Rajasik person in their heads, and end up behaving as Vidyottama did with Kalidasa

The princess raised her index finger . Kalidasa, quickly replied by showing two fingers. He had thought that Vidyottama was meaning to poke him in one eye. He was obviously thinking of outdoing her. Actually she had indicated that God is one without a second. Kalidasa’s answer was wisely interpreted as the truth has two parts the supreme God and the individual soul. She was surprised by this wisdom. Venturing further, she showed her five fingers to indicate five senses. Kalidasa thought she was about to slap him so he showed his fist. This time Vidyottama thought it to mean that controlling the five senses can lead to ultimate greatness. Thus impressed, she then agreed to marry Kalidasa.

Growing into functional adulthood involves overcoming, sublimating or at least rationalizing your basest Tamasik impulses. Perhaps you overcome your cowardice and sublimate your pride into higher order values like courage, honour and bravery. Or perhaps you are a cynic who see your country as worth fighting for, and you rationalize that feeling into a higher order value called pacifism.

When we deal with a normal Rajasik person, it is sometimes possible to see the underlying Tamasik being powering him, but it is also possible to have a dialogue with the Rajasik person he has constructed. Perhaps he is a bully who has sublimated that emotion into support for strong law enforcement, but it is still possible to have a discussion with him on the merits of his policies around law enforcement. Perhaps he is a transactional person who is cynical about US foreign policy engagements and wants to pull back, but it’s still a valid policy option with pros and cons, the timelines around said disengagement and the extent of it.

With Trump, there is no higher order Rajasik person. Sure, maybe his gut feeling aligns with your policy preferences – perhaps his instinct for minimizing the COVID crisis and push for reopening the economy aligns with your considered policy preference on navigating the tradeoff between deaths due to the pandemic and the economic disaster, but do you want someone as impulsive as he in charge of making that tradeoff? In case of Trump, we need to ignore Eleanor Roosevelt’s dictum that “Great minds discuss ideas; average minds discuss events; small minds discuss people”. There are no big ideas sitting on top of his personality flaws. He is entirely his flawed personality.

It is not just his supporters who mistake him for a Rajasik person. His opponents do as well. Look at Trump’s COVID response. Yes it is not the response of a decent or competent person. But it’s also not the response you would expect if you model Trump solely as a populist authoritarian either. Dictators are Rajasiks. A Rajasik dictator would have taken advantage of the crisis. He would have blamed China, whipping up xenophobia. He would have rallied his people, made it sound like he was fighting a war and he would have cast the inevitable economic hardships as wartime sacrifices from which the nation would emerge stronger. Which idiot dictator wastes a crisis like this? Trump got the blaming China and the xenophobia part down, but his genius was to make himself sound whiny and weak while doing so. The rest of the tricks from the dictator’s playbook were useless to him as it required him to display Rajasik guNas which he is unable to even play-act at, just like my secondborn.

He is unable to make inspiring speeches because he is a cynical man. To cast the economic hardships as wartime sacrifices from which the nation would emerge stronger would require three things that were out of his capability. First, it would require him to acknowledge setbacks, which he is chronically unable to do, because he is continually looking for wins. Secondly, the notion of making sacrifices for the common good is foreign to someone as self-absorbed as he. Thirdly, he is unable to conceive of the future. He lives in the past and the present.

He and his supporters endlessly whine that the Coronavirus crisis was engineered to make him lose his reelection. That is amusing, because there was nothing about the crisis that made it inevitable that his election would be at risk. In fact, if you had told an unbiased observer in 2019 that a virus from China was on its way and that it would cause hardship to the people of the US, that observer, assuming he did not understand Trump’s personality flaws, would have predicted that it would lock in Trump’s reelection, as my friend Karthik did (though this was in April 2020, not 2019).

To summarize, I believe that people’s misunderstanding of Trump comes about in one of two ways:

  • His Tamasik nature is good at communicating his unadulterated visceral feelings to others who think like him. This communication is mostly one-way. He is unable to understand others, pick up cues from others and adjust his messages accordingly, which is why his playbook is limited and repetitive.
  • People are unable to believe that he is who he is, so they mentally substitute a Rajasik in his place. But his madness does not have a method to it. As Groucho Marx said ““Gentlemen, Chicolini here may look like an idiot and talk like an idiot but don’t let that fool you. He really is an idiot.”

And that is all there is.

It could get worse after Trump

I believe that Donald Trump is not an aberration, but that he is the continuation of the same tend that gave us Barack Obama, Bernie Sanders, the Tea Party movement, the Occupy movements, Brexit, and a whole bunch of other people or movements.

It is a well-established now that the communication and coordination tools associated with the Internet – social media, email, blogs and independent media etc. have made activism, self-organizing and building political movements easier. When it is cheaper to make something, there will be a greater supply of that thing,it should not be a surprise that we see so many of these movements.

When we see a lot of passion and fervour among followers of a movement, we tend to believe that there must be an underlying fundamental reason behind that passion and fervour. I think that this belief is a mistake. Any organized movement where followers spend most of their time with one another, feeding on each other’s grievances and sense of injustice can generate in its followers the same self-righteousness, an inability to see other points of view and an unwillingness to compromise.

The American political system is more vulnerable to these internet-enabled movements because it is unusually bottom-up. Party leaderships have very little control over politicians’ careers, which are instead made or unmade by popular voting, either in the general elections or at the primaries.

American politics over-promises, but under-delivers change. Obama is a much better and saner man than Trump, but the fact is that the rise of both to power was fueled by movements whose followers fervently believed, against all evidence, that the American system was broken so badly that a complete overhaul (in Obama’s case) or complete destruction (in Trump’s case) is worth risking in order to make it better[1]I am not questioning the idea that some changes are necessary. I am flabbergasted that the richest nation in the world is risking annihilation to solve the problem of some people being richer than … Continue reading.

Trump’s contribution to worsening the trend is norm breakdown. Norms are what cause people to stop saying ?? ???? ????? ??????and start saying ???? ??? ???? ?????[2]For some reason the Hindi font isn’t showing up. The first phrase is “Hum Paanch Hamaare Pachchees” and the second is “Sabka Saath Sabka Vikas”. Trump has gotten away with saying and doing outrageous things, and this means that he has also reduced, for future presidential candidates, the cost of saying and doing outrageous things. Again, when cost reduces, supply increases, and the US’s supply of crazy leaders with outrageous policies will increase.

I’ve made the argument that US version of the two-party system with two big-tent political parties and open primaries gives them everything, good and bad, that a multi-party democracy would. But the system has an important structural constraint, which is that ultimately two candidates face off against each other. This used to mean that craziness got airtime during the primaries, but moderation won out in the general elections. With so many movements that can’t stand one another, the structural constraint that pushes candidates towards moderation will prove inadequate.

And what stops the US from turning into a de jure multi-party democracy? Just the fact that it’s a stable equilibrium. The Republican Party won’t split as long as the Democrats stay united, and vice versa. But this equilibrium won’t hold if there is a three-way split where the third party is formed by slicing off chunks from both parties. Or a four-way split where the two parties split simultaneously.

The multi-party system could be a phase. But even a phase lasts multiple election cycles. During this phase, the US will have presidents who are electoral accidents, disliked by most of the voters. India has gone through this phase – it lasted over 30 years for us. The defining feature of the age will be presidents that prefer radical policies, but lack the legitimacy and political capital to implement them.

Americans are worried about Fascism under Trump, and yes, Trump has the instincts of a Fascist. But the democratic institutions of the US are strong enough to prevent Fascism from taking hold; that is not what they need to worry about.

India’s experience should prove instructive in this regard. We complain that the Supreme Court has taken over so much of policy-making. This process started with judgments like the basic structure doctrine and Maneka Gandhi vs. Union of India[3]I wrote much of this post before Trump had his first run-in with the judiciary with his Executive Order on immigration, and events are already proving me right. There is a parallel here with Maneka … Continue reading that were responses to the authoritarianism of the India. It gathered pace and became a full-blown problem during a period of weak governments of dubious legitimacy. We recently had this controversy over the propriety of a decision to bypass seniority when appointing the Chief of Army Staff. Principles like these stem from the idea that the government cannot be trusted with any discretion at all, lest it be misused. They were solidified at a time of weak minority governments that lacked legitimacy.

The US is likely to be in for such a stint at a time when it can least afford it. Checks and balances are great at preventing bad things from happening. They aren’t very good at ensuring that the right things happen. The best way to understand this is to imagine that the government is your employee, and the institutions imposing checks and balances are his manager.

If the manager consistently finds that she and her subordinate don’t see eye to eye, or if she finds that the subordinate is too incompetent and won’t follow broad directions, the only solution is for them to part ways. But what if, for some reason, she is stuck with the subordinate? She may try to make the best of a bad situation by micromanaging, by giving increasingly detailed instructions and by having too-frequent reviews. As any manager who has tried them should know, these don’t work.

There is no easy or good way out of this situation. Yes, Trump needs to be impeached. But impeach him too soon and it will seem like a coup – a legitimately elected president, still reasonably popular with his base, taken out by the establishment. Leave it too late and his actions are normalized – if you didn’t impeach a president for clear evidence of ties with a foreign country, what will you impeach him for? The longer you wait, the more damage the institutions of the US will suffer, if you impeach too early, you are left with President Pence, a weak president with little legitimacy. Of course, impeaching Trump does nothing about the structural issues that made him possible.

The only way out of this is if the USA somehow finds a moderate, unifying, likeable and decisive person as president. It may yet happen, but if it happens, it will be a stroke of good luck rather than the system correcting itself.


I am not questioning the idea that some changes are necessary. I am flabbergasted that the richest nation in the world is risking annihilation to solve the problem of some people being richer than others
For some reason the Hindi font isn’t showing up. The first phrase is “Hum Paanch Hamaare Pachchees” and the second is “Sabka Saath Sabka Vikas”
I wrote much of this post before Trump had his first run-in with the judiciary with his Executive Order on immigration, and events are already proving me right. There is a parallel here with Maneka Gandhi vs. Union of India. In that case, Maneka Gandhi was denied a passport by the Janata Party government for clearly political reasons. The case reached the Supreme Court, and the Court ruled in Gandhi’s favour. In doing so, it expanded the definition of the right to life to such an extent that it could then be used for almost any intrusion by the courts into the realm of policy-making on the grounds that they were securing the right to life and livelihood. Earlier the job of the courts was to prevent bad things from happening (i.e. preventing the government from taking away your life without due process). Now, it is to ensure that the “right” things happen (making sure that the government does things that guarantee your life and livelihood). The dispute in the courts over Trump’s immigration order runs a similar risk of the courts getting into policy-making to prevent him from screwing up.

Third Parties in the United States

The two-party system is well-entrenched in the United States, and the blame usually falls on the First Past the Post (FPP) system.

It is true that FPP discourages third parties. Suppose that you have an election in one constituency, and three candidates A, B and C are competing to be first past the post. Now suppose that A and B are likely to finish at first and second place respectively. If you are a supporter of candidate C while B is your second choice, voting for C will in fact help A. Once you realize this, you, as a voter will shift your vote to B. When enough voters do the same, C will realize that he or she has no chance, and drop out of the race. Over a long enough period, the lesson will be learnt, and the constituency will be left with only two parties.

Does this explain why the US has only two parties? Not really. What is true for one constituency does not necessarily hold when scaled up. You could have only two viable parties in a constituency, but they don’t have to be the same two parties across the nation.

In a parliamentary democracy, for example, third parties have an incentive to exist, because they can punch above their weight in coalition governments. It is claimed that the presidential system in the US favours a two party system because it makes the whole country a single constituency. But that does not make sense. The US also had a fairly strong Congress that takes its law-making duties seriously. Why aren’t there multiple parties representing differing interests in the Congress?

Also, the US is geographically large, moderately diverse and a strongly federal country. Why aren’t there regional parties as we have in India? “Presidential Elections” is not a good answer. The parties could easily line up behind two major candidates at election time. The continued persistence of the two party system in the US requires an explanation.

I believe the explanation is that political parties in the US are unlike parties anywhere else in the world. They are big-tent parties. They are much more bottom-up than parties elsewhere. Their leaderships, such as they are, have very little leeway to steer their parties in their preferred direction.

Third parties form when a faction or an ideological grouping feels too constricted within the confines of an existing party. Because the two major parties are big tents, that is but a dim possibility in the USA. In other countries, if you disagree with the party leadership, you often have no option but to split and form another party. In the US, the party leadership has very little control over your career. Your career is decided by your performance at the primaries.

In India, regional parties are a way to handle the diversity of the country. They also provide popular local leaders the freedom of manoeuvre they wouldn’t have if they were part of a larger national party. But in the US, all politicians are free agents anyway. There is no need for a local politician to form a regional party to be independent of the national leadership.

Given this, how would a third party improve the politics of the USA? Aspiring third parties like the Libertarian Party and the Green Party complain that the two mainstream parties do not give space to minority viewpoints. Really? What stops someone from forming a libertarian wing of the Republican Party or a green wing of the Democratic Party? If those ideas have enough appeal to win elections, they should have enough supporters who would be willing to register as members of those parties and vote for libertarians or greens in primaries.

Actually I suspect that the third parties’ real complaint is that if they tried to work within the two major parties, they would have to compromise on their core principles. That is a valid complaint. The politicians and policies that emerge from within the two major parties are the result of compromises forged among the major wings of those parties.

But how would it be any different if, instead of a two party system, you had multiple parties, each with a core set of principles of its own? Those parties would still have to join together in a coalition to come to power, and in a coalition, they would have to compromise on some of their principles. We have seen the weird results that coalitions throw up in India.

I could be wrong here, but third parties in the US seem to show up exclusively for the presidential election. They put up candidates, they complain a lot about how there is no space for alternative voices and then they disappear for 4 years. This seems to me to be no way to build an alternative. If they really need to build a party, there’s a lot of organizational work that would be needed. I would expect them to focus on winning lower level elections first and then work their way upwards. They are either not doing this, which means that they are not serious; or they are trying to do this and failing, which supports my point that there is really no need for them.

And if for some reason, they think that a presidential candidate that doesn’t fit clearly into one of the two major groups coming out of the blue and getting elected just like that is the right way to change the political system, the recent election of Donald Trump has proven that that too is possible within the two party system. (I mean that the election is possible, not the change.)

Overall, I do not understand the case for a multi-party system in the US. There is nothing that such a system can bring to the table, either good or bad, that the two-party system with American characteristics does not already provide. It is precisely those specifically American characteristics that have stopped third parties from emerging, not the generic stuff like the FPP system or the presidential form of government.

What Just Happened?

I have tried in the past, with some success, to explain how economies work with the help of The Model Village, so let me try again. This time I will try to explain how the American Economy got into the situation it is in. These, by the way, are the fundamental reasons that I will be explaining. There are many, equally valid and mutually consistent ways of looking at the situation. I will be explaining just one aspect of it, which I hope, cuts to the heart of the matter.
So, in The Model Village, there was a huge Zamindari. By huge, I mean really huge. It was a mini-economy by itself. Many crops grew on its lands, it had cattle, goats and chicken. It also had small factories that processed the produce of its land into finished goods that could be sold outside.

Of course, this Zamindari, while enormously productive, did not produce everything it needed. What it did not, it would buy from the traders of The Model Village. And while the Zamindari was extremely rich, it still needed credit to smooth out its consumption cycle – it needed to borrow early during the planting cycle and repay when the harvest came in. Also, the Zamindar was focused on making improvements in his lands and factories, and he needed credit for that.

The way the Zamindari got credit was to issue IOUs in return for whatever they needed, and those IOUs could later be redeemed for fixed quantities of wheat, rice, etc. (And oh – by the way – this was a primitive model village, so no one had bothered to issue currency yet. They were still using barter.) But the IOUs suited the traders just fine. They knew that they’d get something of value later in return for those IOUs, so they applied the time value of money to calculate how much they could offer in return now. The Zamindari was extremely well-run, so its IOU was seen as extremely stable. It would soon perform the function of money. People in The Model Village traded Zamindari IOUs among themselves, their savings consisted of these IOUs, and so on.
After a time, the Zamindar announced a change. He said that these IOUs would no longer be redeemable against fixed quantities of wheat or rice. Instead, the Zamindari would buy whatever it wanted against the IOUs, and when it came to redeeming the IOUs, he’d auction the produce of his estate, and the price, in IOUs, would be determined by the results of the auction. When asked why he was introducing this change, the Zamindar gave an honest answer – he needed the flexibility to print IOUs to finance his estate’s expansion, and he found the constant need to worry about making sure that the IOUs were good constraining. But surely, the traders did not need to worry about? In any case, the IOUs were backed by the good credit of the Zamindari, and as long as the Zamindari’s lands were fertile and its people hardworking, there was no need to worry – after all, if the Zamindari was too reckless in issuing IOUs, it would not be in a position to buy what it needed next time round.

The traders saw the logic of this – and in any case, they had no choice. The Zamindari was the biggest deal in The Model Village, and not trading with it was not an option.

Things went fine for a while. The Zamindari continued to be well-managed, and the Zamindar was prudent in issuing IOUs. The IOUs continued to strengthen their position as the de facto currency of The Model Village. Its value began to be determined less by what the Zamindari could pay for it and more by what other traders would. Traders in turn began to measure their success by the number of IOUs they could accumulate. The rest of The Model Village got prosperous and began to produce a lot of stuff, much of which was sold to the Zamindari in return for IOUs.

The prosperity of The Model Village grew so much that very few took notice of the fact that the output of the Zamindari was in fact slowing down. The old Zamindar had died and his son had taken over. The new Zamindar was, compared to his father, a reckless man, and he had not failed to notice that the traders’ willingness to accept his IOUs was rather out of proportion to his ability to repay. His lands were turning infertile and his workers older, and he needed to keep issuing IOUs to keep up the expenses of his Zamindari, and so he did.

From the point of view of the traders, they were behaving prudently. While they intellectually understood the views of those who pointed out that this was a classic bubble, the fact was that they were working hard, making sales, making money (they no longer thought of it as IOUs) and saving. Everything they were doing was exactly what their wise men had told them to do. How could that be wrong?

But of course, things were bound to go wrong. Very, very wrong. It was just a question of how.

By now, most of you would have understood the elements of the allegory. The Zamindari is the United States of America. The IOUs are dollars. The Zamindar’s decision to cease setting the value of his IOUs is analogous to Nixon’s decision to take the dollar off the gold standard. The traders are those countries who, over the past few decades, have run an export surplus with the US – Japan, China, India, to name a few.

You will notice that it is rather difficult to fix the blame here. Was going off the Gold standard the mistake? Perhaps, but it also presents advantages – and which other country is on the Gold Standard? Was the Zamindar too reckless? Well yes, he was, but not too much. He issued the IOUs because there were always greater fools to buy them. Were the traders at fault? Yes, but it isn’t easy to notice at first glance, because, after all, they are doing what they should be doing – selling stuff, making “money” and saving it – the problem of course is that they shouldn’t have treated those IOUs as money.

You will also notice that this edition of The Model Village was not particularly difficult to understand. It is not even very controversial. In many bubbles, you will find many sensible people disagreeing over whether we are in fact in a bubble – if there weren’t such people, we wouldn’t have bubbles. But you won’t find that to be the case here. If you stop two mainstream economists who are vehemently arguing over the Debt ceiling debate and ask them if they, in essence, agree that the parable of the Zamindari is a valid model of the US economy, they will agree before moving on to argue over the specifics of how long the bubble will last, whether the bubble will burst or slowly lose steam and how to deflate it. And yet, we ended up here.

I Wasn’t Talking to You

The dark lord says:

The typical arguments are made by the right too. If the economy is going good see, the deregulation has brought about unprecedented wealth. How can you propose more regulation?

When the economy goes bad, we get the answer see, the crisis is brought about due to regulation in the housing mortgage market. How can you propose more regulation?

Yes, the libertarian right makes this argument, but there is a consistency in it. We believe that most regulations do harm, and that a lightly regulated economy works best.

If the socialist left made the counter-argument, that too would be internally consistent. If you really wanted to regulate the economy all the way to the Soviet Union, you could justifiably claim that both the US and India are variants of the same system. But in my post, I wasn’t arguing with the socialist left – I don’t need to, as history has already answered them.

My argument is with those who say that “we need a free market with some regulations, but that doesn’t mean that we should be socialist”. If you hold that belief, I would expect you to believe that there is some point at which additional regulations do more harm than good, so you’d support some regulations and oppose others. But what I notice is that for supporters of regulation, the right amount of regulation is always “A little more than we have now”.

We Always Need More Regulations

As Ajay Shah points out, we don’t just regulate our financial system, we micro-manage it. When things are going well in the US, and we make the case for deregulation, we get the answer: “See, even in the US, we don’t have a completely free market system. Even they have regulations. How can you propose that we junk ours?”

When things go wrong in the US, we get the answer: “See what happened to the US because they followed a free market system? How can you propose that we junk our regulations? We need more.”

This bias ensures that we will always follow suit when the US moves left, never when it moves to the right.

Presidential and Parliamentary Systems

Rishi wants to know how I can claim that the Presidential System underdelivers change, and Ritwik angrily objects to my claim that in the Parliamentary System, the Prime Minister can handpick legislators. Both of them have missed an important qualifier: popular.

Change is rare in any mature democracy. This is as it should be. Obviously, I prefer change in the direction of less government and limited powers and others may prefer otherwise, but whatever the direction of your preferred change, I think that we should be wary of a system where a Chief Executive can, on the basis of just one election, bring about fundamental and drastic change in the structure of the polity.

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American Incentives

It istoo early for me to claim vindication for this post. Given the high expectations that President Obama came to power with, and the enormity of the task before him, itwas inevitable that his first 100 days would disappoint. But I want to make a point about he American political system that many people do not appreciate. The point is that:

The American political system tends to overpromise, but underdeliver change.

Why? Because of the preponderance of direct elections.Presidential candidates have to win many direct elections before they come to power. To win direct elections, you have to establish yourself as your own man even if you are in the same party as the incumbent. In other democracies, handpicked successors tend to gain the organizational backing of the ruling party. In the US, because of the unique organization of parties, there is very little to gain. Even if the incumbent was hugely popular, 8 years of him would have wearied the voters, and his successor needs to be wary of promising 4 more years of the same. George W Bush was, to put it mildly, not very popular in November 2008, which is why you had both candidates promising change, but similar dynamics would have applied even in 1988, when George Bush was running to succeed Reagan.

So why would it be difficult to deliver change? Because of direct elections again. Both the President and Congressmen are directly elected. Neither is beholden to the other branch. In a Parliamentary system, a popular Prime Minister would be able to handpick his legislators – in fact, he would have to, because otherwise there would be a chance that he would get dislodgeddespite his popularity. In the US presidential system, there is

a) structurally no way for a President to pick his legislators

b) no need for a President to do the same and

c) a risk if he attempted it, because the unpopularity of some legislators may drag him down.

For these reasons, a President, even if he is elected on a mandate for change, will find it difficult to push his legislative agenda through.

None of these explains Obama’s failure so far. That is another story.

Shameful Piece by the Economist

Five years ago, the Economist was cheering not only the invasion of Afghanistan, but also that of Iraq. Now, when it comes to India’s response to the Mumbai terror attacks, the Economist has declaredthat we should not emulate the US “mistakes” like… the invasion of Afghanistan. Worse still, now it turns out that the US incursions into Pakistan – the threat of which is the only thing that is keeping Pakistan in check, are also a bad idea.