Rent Seeking, Indian Politicians and “Bombay Club”

Sometimes in early 90s a group of Indian industrialists formed an informal club in a five star hotel in Mumbai (then called Bombay). The agenda of this club was to oppose liberalisation of Indian economy.

Then prime minister of India PV Narsimha Rao and finance minister Dr. Manmohan Singh wanted to liberalise Indian economy so that competition would improve the quality of goods produced, bring down prices so that customers i.e. citizens of India will benefit.

“People have been given the wrong impression that the Bombay Club is protectionist and wants the reforms process to be rolled back. Let me clarify that there is no such thing as Bombay Club. As I am perceived to be a spokesperson for this Club, let me make myself clear: I believe that almost all the big Indian companies in future should not become foreign-controlled.”

-Rahul Bajaj, Industralist

Indian industrialists were afraid of competition; they decided to lobby for protection, to prevent entry of foreign companies. Bombay Club was formed to influence government to slow down the pace of liberalisation. By preventing competition Bombay Club wanted to increase their share of profit at the cost of customer. Customer would end up buying low quality good for high price.

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Bombay Club also tried to justify status quo under the guise of national interest.

“It wasn’t a Bombay ‘club’ in the sense that there was no constitution, nor a clubhouse. Also, some industrialists such as the late Lalit Thapar who attended its meetings were from Delhi. But those meetings did take place and their agenda really was stalling or slowing reforms”

-Sucheta Dalal, Reporter

While Bombay Club got support from non-ruling parties esp. Communists, the ruling party stood firm and Indian economy underwent liberalisation. Communist mouthpiece Frontline magazine published article by Rahul Bajaj which justified opposition to liberalisation.

“Nowadays, we are constantly reminded about the interests of the consumers. No one can argue against this. Companies that do not satisfy their customers will not survive. However, we must keep in mind national interests and national pride.”

-Rahul Bajaj in Frontline

This activity is called as rent seeking (it is different from paying rent to your landlord).

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Rent-seeking is the use of the resources of a company, an organization or an individual to obtain economic gain from others without reciprocating any benefits to society through wealth creation.

An example of rent-seeking is when a company lobbies the government for loan subsidies, grants or tariff protection. These activities don’t create any benefit for society; they just redistribute resources from the taxpayers to the company.

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Opposition to liberalisation is just one aspect of rent seeking. Political parties need funds and votes. The pressure groups force political parties to indulge in rent seeking by continuing grant of subsidies, continuing existence of bankrupt public sector companies like Air India, all under the guise of national interest.

 

Icarus Paradox, Bajaj Scooters and Romila Thapar

Danny Miller is a Canadian economist who wrote a book on how companies which become very successful also bring about their downfall. In this book he introduce concept of Icarus Paradox.

Icarus was a Greek youth whose father a master craftsman called Daedalus. Daedalus designed wings, made from feathers and wax, for his son so that he could fly. But also warned his son not to fly too close to sun as it would melt wax and destroy wings.

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Icarus while flying forgot his father’s instructions and flew close to sun and fell in sea. What took him to height also resulted in his downfall.

Icarus Paradox applies to companies whose success ultimately leads to downfall. Success makes companies arrogant and soon they lose contact with reality, leading to downfall.

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Bajaj scooter is good example of Icarus Paradox. Bajaj scooter was a big success when it was launched, at one stage it had 10 years waiting period, a customer had to wait for almost a decade after booking to get delivery. Success  resulted in decline, company was not innovating, competition from Japanese two wheelers lead to decline in sales of Bajaj scooters as it had outdated design and was manufactured in factories which were inefficient. Finally Bajaj had to stop production of scooter.

Icarus Paradox is not confined to just business; it is also applicable to field of academics.

Post-independence, Jawaharlal Nehru become prime minister of India. Nehru was impressed by progress made by communist Russia and was influenced by leftist ideology. He encouraged people with leftist ideology to occupy important position in field of art. Taking advantage of this situation leftist soon got jobs in universities, government bodies etc. These were well paying and comfortable jobs. One such beneficiary was historian Romila Thapar. Even without knowledge of Sanskrit or Tamil, managed to get herself labelled  as eminent historian of ancient India and retain her job in Jawaharlal Nehru University.

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“Universities in USA like Harvard, Berkeley and Stanford have often half a dozen Nobel Laureates each of whom have made scientific discoveries, and have thus expanded the frontier of knowledge. What genuine research is done in JNU ( or for that matter in most of our Universities ). Most of such ‘research’ is worthless or plagiarism.”

-Justice M Katju

Leftist historians soon became arrogant and started producing mediocre work. To maintain status quo, they consider themselves above criticism and they labelled their critics as “rightists”, “communalists”, a strategy used by Stalin and Mao to destroy their opponents. JNU has failed to produce any significant work in field of social sciences.

After enjoying era of prosperity, due to hubris, the leftist historians are now on decline.

 

 

 

 

 

Bernard Mandeville, Fable of Bees and Prohibition

“Bare Virtue can’t make Nations live

In Splendor; they, that would revive

A Golden Age, must be as free,

For Acorns, as for Honesty”

-Fable of Bees

 

Bernard de Mandeville was a Dutch philosopher, who was against the concept of virtue and vice as defined by religion. He felt that what was labelled as vice by religion also give rise to prosperity, while the virtue by destroying vice, also end up destroying prosperity.

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He wrote poem called Fable of Bees to explain his philosophy.

Once there was prosperous bee hive, though it was corrupt, bees lived in luxury.

“A Spacious Hive well stock’d with Bees,

That lived in Luxury and Ease;

And yet as fam’d for Laws and Arms,

As yielding large and early Swarms”

-Fable of Bees

One day some bees felt that they should lead an honest life and prayed god Jove to make everyone honest. Jove decided to make each bee honest.

“But Jove, with Indignation moved,

At last in Anger swore, he’d rid

The bawling Hive of Fraud, and did.

The very Moment it departs,

And Honesty fills all their Hearts”

-Fable of Bees

But honesty also destroyed the spacious hive. To avoid luxury and extravagance the bees decided to lead a simple life, they left the hive and started living in a hollow tree, thereby destroying the prosperous hive

 “Which so improved their Temperance;

That, to avoid Extravagance,

They flew into a hollow Tree,

Blest with Content and Honesty.”

-Fable of Bees

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 After winning state elections Bihar Government declared prohibition, Tamil Nadu government is also thinking of imposing prohibition. Prohibition already exists in some states like Gujarat.

Liquor industry besides providing safe liquor also provides employment and revenue in form of excise to state government. This revenue is used for welfare schemes. Prohibition destroys the legitimate liquor industry. It stops excise revenue putting pressure on state coffers.

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Secondly, legitimate liquor industry gets replaced by spurious liquor industry, resulting in loss of revenue to government, black money and danger to health of drinkers. Like fable of bees, some virtuous people in their quest to end vice, end up destroying industry, giving rise to alterative industry which is worse than what existed earlier.

 

Group Dynamics, Group Think and Abilene Paradox

Group Dynamics is branch of social psychology which studies behaviours that occur within a group and between groups. Group Dynamics when applied to real life situation helps us in understanding things which are otherwise difficult to comprehend.

One such aspect of Group Dynamics is Group Think.  In Group Think the members of group reach consensus without critically analysing the situation. Many aspects of situation get ignored, resulting in unanimous decision.

'As a team we can create problems none of us could cause as individuals.'

US Navy’s belief in its strength was so strong, that nobody thought that Japan could attack their fleet at Pearl Harbour. The possibility of Japanese attacking Pearl Harbour based was not even considered worth discussing. When Japan actually attacked, US Navy was taken by surprise and naval base was completely destroyed.

Group Think Time

Another aspect of Group Dynamics is Abilene Paradox. Term comes from anecdote narrated by Management expert Jerry Harvey.

A family is spending time playing game of dominoes in hot afternoon.  Father in law suggests that they should to go place called Abilene for lunch. His daughter and wife too agree, his son in law is reluctant but also agrees. Finally husband, wife, their children and in laws go to Abilene for lunch, the journey is uncomfortable due to heat and non-air conditioned car. The family does not like food at hotel. They come back home feeling tired.

Each member confesses that he/she did not want to go, but agreed because he/she did not want to displease others. Finally father in law said that he had casually made a suggestion, he himself did not expect others to agree.

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Abilene Paradox is different from Group Think. In Group Think all members agree on something because they feel that it is correct thing to do, in Abilene Paradox each member internally disagrees, but externally agrees, as he does not want to rock the boat or displease other members.

It is quite common in organisations for a team to do something in which no one believes just because the top boss wants it. Nobody wants to question assumptions of top boss. Everyone is eager to implement what top boss desires, knowing fully well that it is waste of efforts.

 

Murder in Chennai and Bystander Effect

Few days ago a lady was murdered in Chennai while she was waiting to catch a train. The murderer killed in full public view. No one tried to save the girl or stop the culprit. After the murder ran away, it was business as usual.

Post murder there was outrage, social media got active, and everyone blamed everyone except himself or herself.

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Social psychology has interesting explanation for this, it is called Bystander Effect. A crowd usually does not help victim because, individually each one feels that it is job of other person to help the victim, as a result no one helps the victim.

bystander

Police did a brilliant job of catching the murderer, but some things are really disturbing. It was not a hit and run case. The murderer had been stalking victim for more than 3 months. The family of victim should have least registered case in police station. But the victim was a “virtuous” Brahmin girl, so never complained, something to do with infamous Indian tradition of “ social stigma”.

Opposition party blamed ruling party, public blamed police, and victim’s elder sister blamed public. Blame game is on…