#Course #Anderson #MaxWebber #StephenDKrasner #MaxWeber #MahatmaGandhi #JohnMaynardKeynes #CharlesGoodhart #MikhailGorbachev

Pranay Kotasthane

8 Things to Learn

  1. Good Intentions ≠ Good Policy
  2. Theory of Change failures masquerade as implementation failures
    1. Input - Output - Outcome mapping
  3. Not good or bad, think in terms of better or worse outcome
  4. Correlation is not causation
  5. One rupee of government spending costs 3 rupees to the society
  6. Politics is the art of possible
  7. Economics is the study of scarcity
  8. Evidence based policy making - change needed as per evolving evidence

CORRELATION Vs CAUSATION ‐ Oldest Mistake in Public Policy

a large part of policy analysis is about identifying causalities for social phenomena in highly ambiguous situations and under severe time constraints. Moreover, control of variables that affect a social phenomena is also not possible for a policy analyst.

Causality should be concluded only when empirical evidence proves that change in one variable is a necessary condition for the change in the other, i.e. the change in the second variable can by no means be explained without the variation in the first variable.

ANECDOTAL Vs EMPIRICAL ANALYSES

An empirical analysis relies only on experiments and validated measurement tools before arriving at conclusions.

THE HISTORIAN Vs THE SCIENTIST ‐ Two Caps that a Policy Analyst Wears

the narrative approach where the historian uses imagination and knowledge of the past to construct a coherent story out of fragments of data. The disadvantage of such an approach is that it suffers from cognitive biases like bias against randomness and bias towards consistency

The scientist proposes a hypothesis, then tests this hypothesis by the collection and statistical analysis of data on many instances of the phenomenon in question. Even then, causality cannot be proved beyond all possible doubt. The scientist seeks to disprove a hypothesis, not to confirm it. A hypothesis is accepted only when it can not be rejected. And even after this, the theory formed 3 lacks in certitude ­ all that the scientist can conclude is that according to the current state of knowledge that is available for him/her, the hypothesis holds true. The assumption that it cannot be disproved in the future by an advancement in technology or the application of new fundamental laws is non­scientific in nature.

The ideal approach is to be a scientist while analysing a policy hypothesis and to be a historian while making a marketing pitch for one's theory

IDEOLOGICAL BLINDERS
Policy analysts operate in the political space which is inundated with ideologies of various hues. To remain non­partisan in politics is then the toughest task a policymaker faces.

BUREAUCRATIC BLINDERS
Another fallacy to be wary of stems from our inertia to resist changing the way a problem is tackled.

HOPE vs DESPAIR
A policy analyst needs to be dispassionate. Perspectives of hope and despair are inherent to the human way of thinking. However, policies originating from either of these perspectives lead to erroneous recommendations.

ETHICS IN PUBLIC POLICY
Ethical dilemmas are constant features of policy making. Professionals, both in public advocacy and public policy face ethical questions on a regular basis. Ethical dilemmas in public policy arise for two reasons:
resources are inadequate to meet all demands, and
people are biased towards differing values and ideas about 'doing the right thing

there are two possible stances that policy analysts and advocates can take: One, to deflect the moral decision making to someone else by arguing that any viewpoint, ethical or unethical, needs to be respected and presented, and that it is the duty of the political establishment to decide what's right and what's wrong. At the other end, the approach is to reject projects that violate one's sense of 'right and wrong'.

It is our stand that ethics in policy making is a 'categorical imperative' ­ a concept which Immanuel Kant eloquently describes as an absolute, unconditional requirement that must be obeyed in all circumstances and is justified as an end in itself

THE FIVE COMMANDMENTS FOR A POLICY PROFESSIONAL

  1. Ethical professionalism is the bedrock of credibility in policy making
  2. For non­ethical questions, think in terms of better or worse and not good or bad.
  3. Approach policy problems with humility and lack of certitude
  4. Policy problems can inflame passions. Dispassionate policymaking leads to objectivity.
  5. The plural of anecdotes is not data ­ policy must rely on empiricism and not anecdotes or ideologies.

Failure

Unintended Consequence is not Unanticipable

Moral Hazard, Rent Seekers, Over regulation etc.

Narratives Matter

Be Ready with Better Solutions - Overton Window

Tingbergen Rule

to successfully achieve 𝑛 independent policy targets at least the same number of independent policy instruments are required. - Jan Tinbergen

Change is a Marathon

Public Policy - Applied Science - Application of Economics

Public Policy Analysis

  1. Understand what state does, and how it affects us
  2. To access a state policy against some parameters (eg. it's goals)
  3. To place a state action in context (historical, geographic, economic, demographic, political, geopolitical, legal, cultural…)

Analysis - Understand, Predict, Control

Tools

Theories and Hypothesis

Model

Attempt to replicate an existing or imagined system or some part of the system in order to understand it better

Data

A variable
Can be real (observed / empirical) or synthetic (inferred / estimated / assumed)

Meet the Policymakers

Mental Model

What I have to do, can do, can not do, what is my interest in it?

Power and Constraints Are Structural

Article 12 - Definition of State
Article 13 - laws inconsistent with Fundamental Rights
7th Schedule - Union and States
11th & 12th Schedule - Power and responsibilities of local government

Interest

Policymakers have self interest
Public interest and self interest may or may not align
Public Choice Theory

Bias

Evidence

Policy - System & Institutions = People

Ten Takeaways

  1. we live inside policy system
  2. we understand by analysing its parts and their interaction
  3. Context matters
  4. History Matters
  5. Power Matters
  6. Analysts love data - and seldom get data they want
  7. We are all biased Bias
  8. Time matters
  9. Institutions Matter
  10. Don't give up

Nation

Nationalism

belief that humanity is naturally or inherently divided into nations

State

human community that successfully claims the monopoly of legitimate use of physical force within territory #MaxWebber

Nation State

nationalism and nation state

Government

Government vs State

Sovereignty

#StephenDKrasner
Domestic
Westphilian
Interdependent
International - Legal

Country

Geographic Concept

Empire

Democracy

Republic

Paradoxes

  1. legal vs legitimate
    • law differ from customs
    • social revolution
  2. Development vs Democracy
    European Model
    Ethiopian Model - Meles Zenawi
    India's Precocious Democracy
  3. Premature non industrialisation

Is India a Flailing State

Government

a complex hierarchy of principals and agents
subsidiarity

Evaluation
de Zwart's Framework
Modified de Zwart's framework

Types of Government Action

8 things government do

  1. do nothing
  2. Engage in Rhetoric
  3. Nudge (change perceptive without changing incentive)
  4. Umpire
  5. marginally change incentive
  6. Drastically change incentive
  7. Do it yourself
  8. Change / Reassign ownership

Allison & Zelikow's 3(+1) Model

  1. Optimise
  2. Satisfice
  3. Negotiate

Two level games
Zone of possible agreement
hidden equilibrium / double win set
tied hands
transgovernmentalism

What Objectives of Public Policy Are appropriate?"

Book is grounded on "appreciation of 'self-organizing systems', of the uncoordinated decisions of individuals left to themselves, that discover order by themselves"

"The state is the most powerful actor in society. The state has the capacity to coerce, the capacity to inflict violence upon private persons"

"A state is a human community that (successfully) claims the monopoly of the legitimate use of physical force within a given territory". #MaxWeber, The Vocation Lectures, 1919"

at the heart of the state, there is violence. The state acquires a monopoly upon violence

"The individual has a soul but the state is a soulless machine. The state can never be weaned away from violence to which it owes its existence. #MahatmaGandhi"

"The big idea of liberal democracy is to limit state violence into a controlled, predictable and just form"

"The important thing for government is not to do things which individuals are doing already, and to do them a little better or a little worse; but to do those things which at present are not done at all. #JohnMaynardKeynes"

"Where the free market fails to deliver efficient economic outcomes, this is termed Market Failure'. Market failures come in four kinds:

"Externalities are the situations where persons impact upon each other in ways that are not intermediated through voluntary agreements between these persons, where people impact upon each other in ways that were not negotiated."

"Whether positive or negative, externalities involve gains or harms that are imposed upon bystanders, which do not directly feed back upon decision makers through the normal market process"

"A high degree of asymmetric information can create conditions under which voluntary or market-based transactions become infeasible"

"Market power is found when a few firms achieve a dominant position in a market."

"public goods such as clean air are underproduced by the free market."

"public goods are things that are 'non-rival' and 'Non-Excludable'."

Excludability is essential for firms to obtain a revenue stream"

"The free market does not, on its own, solve these four kinds of problems. The interventions by the state should be primarily located around these four problems."

When market failure is not present, we should be sceptical about state intervention

All activities of the state are grounded in coercion: either

Private persons overproduce things that impose negative Externalities as pollution and underproduce things that impose positive externalities;
modifications to tax rates can help improve the outcome.

The state can choose to spend tax revenues in two ways.

  1. It can run state organizations such as the police, which produce certain public goods.
  2. Or, it can transfer money to private persons All states do some amount of redistribution

For example, relief work done by the government after a natural disaster is a case of transferring the money obtained in coercive ways (through taxation) from the populace to the affected people." Subsidies can be unconnected to externalities; they can be pure redistribution."

These transfers can be linked to market failure (e.g., using education vouchers to address the externalities in education) or they can be pure redistribution

"The world of public policy is about these three levers: rules about behaviour, taxation, and spending money."

The state is supposed to be a machine that converts coercive power into human welfare. A coercive agent is poorly placed at solving failures of negotiation.

The essence of market failure is the channels of influence between two persons which are not governed by negotiations and choice:

The state is a coercive agent. At the heart of market failure is a failure of coordination, of a lack of negotiation. There is a tension at the core, where problems of coordination are not easily solved through the tool of coercion.

Some people might like to have a paternalistic government. Coercive power gives the state the ability to take from one and give to another, and this will make some people happy at the expense of others. State paternalism can then only be in favour of some and not all.

People Respond to Incentives

People respond to incentives. Human behaviour is not fixed; it changes when the incentives change. When policy changes, human behaviour changes.

Politicians and officials also respond to incentives

A government organization that is riven with corruption is not one which was unlucky to get a lot of corrupt people. It is one where the rules of the game facilitate corruption."

The task of public policy research is to identify the formal rules which have incentive implications for the behaviour of officials and politicians. When the rules change, the culture will change. Politicians and officials respond to incentives. This has a big and optimistic implication. Changes in the rules of the game will generate behavioural changes on politicians and officials also. The behaviour of politicians and officials is also malleable. The puzzle of policy design is that of finding the checks and balances, and the rules of the game, through which politicians and officials will generate good outcomes for society when they pursue their own self interest.

Deploy Incentives with Care - Caution in Setting up High-powered incentives"

When 'high-powered incentives' are set up, the agent single mindedly focuses on achieving that measure, and sacrifices everything else.

This proves to be particularly important when transplanting ideas from advanced economies into India

Caution in Setting up Incentives around Statistical Measures

When a measure becomes a target, it ceases to be a good measure. Goodhart's law, 1975

#CharlesGoodhart

People's Responses to Incentives Can Be Wonky

"Liberalism—the respect for the values, beliefs and decisions of others—is integral to economics as it is to no other branch of human knowledge."

While human beings mostly do well in understanding incentives and doing the best for themselves, the new field of 'behavioural economics' has documented many kinds of mistakes that human beings make in understanding information, risk and time.

Cost of Acquiring and Processing Information

In practice, obtaining and processing information is costly. Humans are rational in choosing where to expend such effort

Thinking across long time Horizons

The field of behavioural economics has emphasized that humans seem to exhibit a very low regard for events deep in the future. There is a certain kind of short-termism that is wired into us; we tend to make decisions based on outcomes nearby in time.

These concerns have gone from novel criticism of the mainstream, with the 'bounded rationality' of Herbert Simon of the 1950s, to becoming the mainstream, with the 2002 Nobel Prize in Economics.

The optimal stance of policy is not obtained if we think of human beings as perfectly effective at understanding information and making sound decisions."

Price System

Rules of Public Policy

  1. Supply and demand make the price,
  2. Demand curves slope downward and supply curves slope upward,
  3. There is a law of one price,
  4. The policymaker should have no opinion on the price, and no tools to directly control it."

A gap between supply and demand is a problem. Prices move in order to remove imbalances between supply and demand. The movement in price solves this problem by inducing changes in both supply and demand. Every time a government interferes in the movement of a price, it hampers this adjustment process.

When the price goes up, less is demanded ('demand curves slope downward'). When the price goes up, more is supplied ('supply curves slope upward'). People are rational and change their behaviour. At a higher price, there is more supply and less demand.

Policymakers of a socialist vintage are hostile to the word arbitrage. However, arbitrage is the basic human instinct of removing the difference between two different prices for the same thing, and earning a profit while doing this.

The correct price is the one made by supply and demand, untrammelled with political influences.

The market is not an invention of capitalism. It has existed for centuries. It is an invention of civilization. - #MikhailGorbachev

Controls on prices are illegitimate and do not work.

"How do we break out of the cobweb model (decisions made based on past data)?

Storage (also called 'hoarding') is the technique through which goods are transported from a time point where they are cheap to a time point where they are expensive. Futures trading looks into the future, and produces a forecasted price at the harvest date which can be used for sowing decisions or storage decisions. Free trade (within India and across the border) generates arbitrage, where cheap goods are taken away and additional supply brought in when prices are high."

Four Forces of Stabilization —

  1. warehousing
  2. futures trading,
  3. domestic trade and
  4. international trade

The best functioning economy is one in which changes in supply and demand rapidly result in a change in the price

Supply and demand make the price. When prices go up, demand goes down. When prices go up, supply goes up. Free men and women will buy things where they are cheap and sell them where they are expensive, and thus arbitrage away pricing discrepancies. When there are large changes in a price in a short time, this can be disconcerting and impose problems upon some people. But if the government forces the price to change slowly, this makes things worse.

Prices are the mechanism through which the market economy adjusts to shocks; by hindering price movement we postpone adjustment. In India, the legislature, the executive and the judiciary have all repeatedly undertaken actions which go against the grain of the price system. These actions are doomed to failure. When the policymaker tries to control the price, this is harmful, and the greatest harm is done when the policymaker tries to control both the price and the quantity. The policymaker should have no opinion on prices and not try to control prices. Policymakers must strengthen their intuition into the working of the price system, and go with the grain. The field of public policy is about identifying and addressing market failure, not controlling prices.

More Competition Always

Competition pushes firms to cut costs, to innovate, and to deliver the best bargains for customers.

All across the economy, we require a progressive outlook supporting entry and competition. Policymakers must constantly use the power of the state to prise open closed systems, to create conditions of extreme competition, and to see the bright side of firm failure.

Creative Destruction and the Death of Firms - Needed

The prolonged survival of a weak firm, based on artificial life support, induces negative externalities upon healthy firms. The exit of these 'zombie firms' is a positive for the economy.

For this to work properly, we require a well-functioning bankruptcy process. In this, the key distinction is between firms with valuable organizational capital and those without.

The lingering presence of these firms increases the cost of Inputs for healthy firms, and reduces the profitability of healthy firms. When a policy framework encourages the lingering survival of failed firms, this harms healthy firms in that sector.

This is one reason why public sector companies are a problem for the economy: there is a greater risk of them becoming zombie firms backed by the exchequer. This is bad for public finance and bad for the economy.

Economic dynamism requires closure. When business failure turns into investigations, there is no closure.

A society that pillories entrepreneurs, and turns business failure into protracted disputes or entanglement in agencies, is one which will have less entrepreneurship.

Business Cycle Fluctuations and Firm Failure

Consider a future date when the bankruptcy process works well. Under such conditions, when a business cycle downturn commences, weak firms will go into the bankruptcy process and get rapidly processed, their swift exit will improve profit margins of the survivors, and the resource reallocation will generate GDP growth. Faster that this process can play out, the shorter the downturn will be. A sound bankruptcy process gives less severe business cycle downturns"

The Indian economy features the coexistence of high-productivity firms that abide by laws with low-productivity firms that violate laws. When law enforcement improves, and weak firms exit, GDP growth will be obtained through reallocation of labour and capital.

The Government as a Source of Market Power

Market power results in bad outcomes, regardless of whether the actor in question is public or private. We should be as zealous about dismantling state-induced barriers to competition as we are when attacking market power created by private persons.

Creative destruction is not alien to India: for small firms, it is the everyday reality. It is only with the large firms, and the areas connected with government, where competitive dynamics is poor."