My Economic Philosophy - 8 (Beyond Socialism and Capitalism)

(This is the eighth of n pieces on my emerging economic philosophy called Liquidism.)

I came across this hilarious illustration today:

While funny, it's also sad that both systems have come to represent a zero-sum game in the eyes of many people, a belief that one person's gain must always result in another person's loss. I don't believe this is true. I believe that wealth is potentially infinite, and human civilisation is constantly improving the incentive systems that cause us to apply our ingenuity and industry to increase our collective wealth, with everybody being better off as a result. I believe in the capitalist ideal based on competition and liquid markets (not the cronyism and oligopolistic markets that pass for capitalism nowadays). At the risk of appearing trite, I can sum up my economic philosophy with another illustration:

It could be argued that what I call Liquidism is just "capitalism done right", but it does involve some non-intuitive aspects. I arrived at this economic philosophy in stages, and it's the fortuitous result of many coincidental experiences in my life.

My journey began when I realised that "freedom" could mean two very different things, and that one kind of freedom is higher than the other. A freedom that cannot be taken away is superior to a freedom without restrictions. I thank the Free Software / Open Source software communities for sensitising me to this difference.

Then I discovered the beauty of Ayn Rand's philosophy (and its limitations). Ayn Rand opened my eyes to the fact that capitalism was not just an economic system but a political philosophy grounded in the notion of individual freedom. The economic aspects of capitalism flow out of the political philosophy.

With that insight, I tried to derive (from first principles) an economic system from a philosophy of freedom, but using the higher of the two kinds of freedom I talked about earlier. In essence, I was trying to redefine a "free market". In the process, I realised that a truly free market had to be a guaranteeably liquid market, not a market without controls. That meant that there was a legitimate role for government (in the absence of any self-correcting behaviour on the part of the market) to step in and enforce liquidity whenever required. In other words, antitrust is not an enemy of the capitalist system (as libertarians make it out to be), but its saviour. That's where Ayn Rand is wrong.

From there, it was only a short step to realising that Liquidism is the next logical step in prudent economic policy, taking the "Australian model" of prudent fiscal policy (avoiding budget deficits) and prudent monetary policy (keeping inflation low through alert interest rate manipulation) to its natural conclusion by ensuring high market liquidity as well. I have been privileged to be part of the Australian economy for over a decade now, and I marvel at the simple yet effective way in which the Australian government and central bank have together kept the economy consistently booming in the face of worldwide boom-bust cycles. The Australian model has many aspects of a welfare state, but that welfare state operates within the discipline of a balanced budget. Australia has shown the world how to reconcile capitalism and socialism. However, many segments of even the advanced Australian economy are held to ransom by oligopolies.

It's unfortunate that nowhere on earth can an example be found of the perfect economic system. Worse, very few people have shown an interest in getting there. Until now.

I have finally seen the vindication of my philosophy in the market failures of 2008, and I realised (as did an eminent economist and old classmate of mine), that capitalism has to be saved from the capitalists. In a truly liquid market, the effect of a single player (or even a few players) has no perceptible impact on the market as a whole, so bailouts using taxpayers' money are never required. But in our imperfect world, large players always act to preserve their oligopoly, by making it harder for themselves to fail (governments are forced to prop them up using taxpayer's money in the larger interests of market stability, making a mockery of the free market in the process) and by erecting scale barriers to newer entrants. I'm sure the downsides of having extremely large players in the market has become apparent to others as well. We just need to join the dots and go where the logic leads us, i.e., to a guaranteeably liquid market, where no player can ever become large enough to unduly influence the market.

However, entrusting the role of market "liquefier" to governments is fraught with danger. Governments are corruptible, as we all know. The timidity of competition watchdogs in our economies is testament to the power of incumbent market players to protect their interests. Governments and legislative bodies are influenced more by market incumbents than by companies yet to be formed. Therefore, liquidity-seeking behaviour needs to be driven into the DNA of the basic unit of capitalism itself - the corporation. Corporations need to have an "amoeba gene" that causes them to grow and split ad infinitum, rather than grow and merge. This is the only way that the market can inherently (i.e., without external intervention) be prevented from consolidating into an oligopoly or monopoly. Such a solution would satisfy Ayn Rand as well. In this context, it must be pointed out that divestitures do not reduce shareholder wealth. On the contrary, new wealth can be released when diseconomies of scale are eliminated and competitive energies are unleashed. The few examples we have of corporate breakups (such as AT&T in 1984) bear out this optimism.

I think it's time the world innovated a new kind of corporation that contributes to market liquidity instead of opposing it. This may need to be defined and enshrined in law, just as the notions of "joint stock company" and "limited liability" were previously formalised through acts of legislative bodies. The capitalist system can then be relied on to generate wealth in a sustainable way, without needing constant government oversight and intervention, and without suffering the periodic system-wide collapses it is prone to in its current suboptimal form.

My concept of Liquidism has been a gradual awakening rather than an epiphany. I still read semi-informed (yet heated) debates in many forums about the merits of different ideologies and varied reasons for our recent financial crises. Although I don't want to sound overconfident, I'm increasingly convinced that I have found the answer to these questions. I think Liquidism is the key to future financial stability and world prosperity.

My Economic Philosophy - 2 (The Limits to Rand)

(This is the second of n pieces on my emerging economic philosophy called Liquidism.)

I was a latecomer to the philosophy of Ayn Rand. I completely missed reading her novels in college, when everybody else seemed to have their noses stuck between the pages of "The Fountainhead" or "Atlas Shrugged".

Then one day, when I was almost 40, I stumbled upon the website "www.capitalism.org", and the ideas I read there almost blew me away. This site is dedicated to spreading the philosophy of Ayn Rand, Objectivism, which Rand believed was the capitalist ideal.

I was gobsmacked as I read the material on this site because I had till that point always thought of Capitalism as an economic system, as something to do with money and who controlled it. Wrong, it turned out. Capitalism is a political philosophy, and the economic system that is often confused with it springs naturally out of this philosophy.

And what is this political philosophy?

In two words, individual freedom. That's the core value of Ayn Rand's capitalist ideal. At this level, she doesn't talk about money. She does talk about "wealth", but wealth at this level means much more than just money. It is the sum total of all the kinds of satisfaction that one can derive.

There's more.

Reason is the source of all "wealth", and everyone is entitled to the wealth generated by the exercise of their reason. The only thing one may not do is restrict the freedom of others. The initiation of force is prohibited, and one may only acquire the wealth of another by one of these means - willing gifts by the other, through persuasion (not coercion), or through trade. Of these, trade is the best. Coercion and deception are taboo.

To say that I liked this philosophy would be an understatement. It resonated deeply within me. It struck me as the fairest of all possible systems. I even wrote an article defending the Capitalistic credentials of Free/Open Source Software called "The Capitalist View of Open Source", demonstrating the software model's scrupulous adherence to the principles of Ayn Rand.

But even at the height of my admiration for Rand, I was never completely in agreement with her.

She claimed animals had no rights, and I beg to disagree. I in fact expected her to extend her philosophy to include any living creature, not just humans.

She stoutly upheld the right to life as a fundamental right of every human being right from their birth, that no one had the right to take, but instead of expressing honest ambivalence about abortion, she glibly claimed that foetuses were not human and therefore had no such right. The mother, according to her, had the "right" to abort her foetus and this freedom could not be denied. I found this sophistry a little intellectually dishonest. Abortion is a tricky subject and I'm not sure there are any "right" answers. At what point exactly does a foetus with no rights turn into a new-born baby with full rights? For Rand to proclaim one viewpoint with an air of moral certainty didn't do much for her credibility in my eyes.

And then there was the ultimate "What was she thinking?" moment. When I read about Ayn Rand's essay "America's Persecuted Minority - Big Business", I knew that she had either lost her marbles or been coopted by that persecuted minority into advocating their cause.

So I remained stuck with an intellectual model that was almost perfect, but not quite. Until I read the other article, the one that posed the question about the two types of freedom.

My Economic Philosophy - 7 (The Place of a Welfare State in a Capitalist Economy)

(This is the seventh of n pieces on my emerging economic philosophy called Liquidism.)

The Welfare State has always been synonymous with Socialism and generally viewed as incompatible with Capitalism. This belief has polarised opinion along rather simplistic lines, between those who favour government support for the needy, and those who believe that all economic decisions should be made by "market forces" (a term that implicitly excludes the government). And then there are the pragmatists who believe in a mixture of the two, unencumbered by any ideology.

I have evolved a different view, and my philosophy not only provides an ideological basis for the pragmatic approach but also lays down clear guidelines for how big the Welfare State can be.

I have written about what is known as the "Australian model". From a social perspective, the Australian model is a wonder of the modern age because it manages to reconcile a capitalist economy with elements of a Welfare State, such as state-subsidised healthcare and social security. From a purely economic perspective too, the Australian model is a wonder because it has managed to deliver 17 straight years of growth while the rest of the world reconciled itself to the "inevitability" of periodic recessions.

What's the secret?

The economic model is no big secret. It lies in responsible government spending that yields a (growing) budget surplus and thereby refrains from provoking the inflation that unfailingly follows deficit financing. As a bonus, the budget surplus delivers flexibility in investing for the future (the Future Fund) and acts as a cushion against economic shocks. The secret also lies in an alert central bank that promptly raises interest rates as inflation rises and lowers them when the economy slows. These two levers of the economy, when prudently applied, maintain conditions of low inflation, low unemployment and uninterrupted growth.

Of course, the Australian economy could do with even greater efficiency, and this can only occur when the oligopolies in its various markets are broken, but that is not the topic of this post.

Returning to the social perspective, how does Australia manage to be a successful capitalist economy while also supporting aspects of a Welfare State? Even if it works (as it clearly does), isn't there at least a theoretical contradiction between the two?

My answer is no, there's no contradiction, because the perceived dichotomy between a Welfare State and a capitalist economy is false.

It leads back to the fundamental definition of "freedom". If freedom is taken to mean the untrammelled freedom of individuals to act, only constrained by the rights of other individuals and with no "controls" by external authorities, then every act of government (as a player in the market) is seen as a violation of freedom. The model of a "free market" by this definition of freedom is a laissez-faire system where government does not interfere with the functioning of the market, either as a regulator or as a bulk consumer.

If, however, freedom is seen as something that must be guaranteed never to be taken away, then some controls are inevitable. The model of a "free market" by this definition of freedom is a liquid market with a large number of buyers and sellers, where no single buyer or seller (or a small group of them) can significantly influence prices or the stability of the market as a whole. Actions by government violate no principles as long as the market stays liquid.

And this explains the seeming paradox of a Welfare State within a capitalist society. By itself, government action in a market is neither good nor evil. The crucial question is whether such action breaks one of what I would call the three pillars of the economy (a balanced budget, the right level of money supply and healthy levels of competition in the market).

The Welfare State is an example of government spending. Is this a legitimate activity in a market economy? In a democracy, government is an agent of the people in a legal sense, and so government spending on behalf of the people is really no different from individuals spending their own money. The various mechanisms of democracy ensure that the agency of government spends the money of its principal (the people) in a way that serves the interests of the principal. I believe that government spending in a functioning democracy is legitimate, as long as it does not lead to a budget deficit.

(One could argue that government spending that leads to a deficit budget is also legitimate because in a democracy, it reflects the will of the people. I disagree, because deficit budgets in effect borrow from the future. They are inflationary, and they rob our descendents of wealth. Our children, grandchildren and unborn descendants do not have a vote, even in a democracy. We have no right to rob them of their wealth without their consent. And so government spending has legitimacy only as long as the budget stays balanced.)

The constant demand by "free-market" advocates to privatise social security seems pointless to me. I can't see any economic reasoning behind it, merely an ideological one stemming from the dubious definition of freedom as an absence of external controls.

So how large should the Welfare State be? As large as the budget allows. The government is a consumer on behalf of the people, and like any consumer, should live within its means. "Free-market" advocates tend to criticise "big government", but to my mind, the problem is not "big government" but "irresponsible government". I say, if the government has the revenue to sustain a large Welfare State without running into deficit, then go for your life! There are no absolute limits (in dollar terms) to the size of a Welfare State. The only limit is the size of the budget.

So in my opinion, there is no contradiction between a capitalist economy and a Welfare State. Those who start off with an inferior definition of freedom ("no controls on individual freedom") exhibit a knee-jerk opposition to any action by government, which seems a bit silly to me. To those who define freedom as something that cannot be taken away, it is obvious that there are clear-cut principles that determine what governments can and cannot do. As long as the Welfare State abides by those principles, its proponents need not be apologetic or defensive about its existence.

We can have our cake and eat it too.

My Economic Philosophy - 4 (Liquidism as "Extreme Economics")

(This is the fourth of n pieces on my emerging economic philosophy called Liquidism.)

In spite of its seemingly revolutionary approach, Liquidism isn't really a radical departure from current "best practice" in economics. The three schools of macroeconomic thought I referred to in my third post on this topic do not really contradict each other, either.

Those who assert that governments must not run deficit budgets are in fact agreeing with those who claim that inflation needs to be kept in the vicinity of 2-3%. Government budget deficits are known to be inflationary, so balanced or surplus budgets greatly assist central banks in their task of controlling inflation through the manipulation of interest rates.

Similarly, those who believe that the most important parameter is low unemployment, and therefore clamour for growth-oriented economic policies are not disagreeing with the other two schools of thought. Growth occurs best in an environment of stable and low inflation. Witness the example of Australia, the clever country (not the lucky country, by the way, because Australia's prosperity is the result of smart management, not undeserved good luck). Australia has enjoyed an unprecedented 15 years of nonstop growth, while the rest of the world has seen periods of both growth and recession. Unsurprisingly, during this period, the Australian federal government budget has been largely balanced or in surplus, and inflation has been vigilantly maintained in the 2-3% range by an alert and active central bank.

So we seem to have stumbled upon the magic formula that reconciles seemingly different schools of macroeconomic thought. Keep inflation low by constantly tweaking interest rates, avoid contributing to inflation by running budget deficits, and you will achieve steady growth that will keep unemployment low.

Liquidism only carries this argument one step further, because all the above techniques, impressive though their results may be, do not succeed in driving inefficiency out of the system. Inefficiency, in the terminology of modern software development, is a "smell" that suggests that something is wrong somewhere.

Lest anyone think that I'm a blind devotee of The Australian Way, take a look at the Australian banking sector. It's an oligopoly, with only four major banks. I have a unique inside view into the functioning of these organisations, having worked in two of them. I will not jeopardise my current employment by going into specifics, but most activities in these organisations are highly wasteful, compared to similar activities in organisations in more competitive industries. And yet the big four banks remain highly profitable! If organisations can show huge profits year after year while being extremely inefficient and wasteful (as is obvious to an insider), it's a "smell". Something is rotten in the system, and it's not a problem with the banks themselves. Their inefficiency is a symptom, not the problem. The problem is with the competitive environment. Less competition, less efficiency. Wealth is vanishing from the system, being eaten by the friction of inefficiency between its wheels. In the case of the banks, customers are picking up the tab and paying more than they should, while shareholders are earning less than they should.

What do we do? Let's take a leaf from the software development industry, specifically, a recent methodology called "Extreme Programming", called XP for short. The father of XP, Kent Beck, explains the technique in these words:

"When I first articulated XP, I had the mental image of knobs on a control board. Each was a practice that from experience I knew worked well. I would turn all the knobs up to 10 and see what happened. I was a little surprised to find that the whole package of practices was stable, predictable, and flexible."

We now know that certain economic practices work well. Keeping inflation low is one of them. We also know that competitive (liquid) markets are efficient, while oligopolistic or monopolistic (illiquid) markets are inefficient. How do we, in Kent Beck's words, turn all the knobs representing good macroeconomic practice up to 10?

1. Turn the fiscal knob up to 10 (manage spending and income to avoid a deficit budget at all costs)
2. Turn the monetary knob up to 10 (actively manage money supply through the interest rate vehicle and keep inflation within 2-3%)
3. Turn the market efficiency knob up to 10 (aggressively enforce antitrust and keep markets liquid)

I believe that Liquidism represents the "complete" macroeconomic philosophy, with its inclusion of the final leg in the triad of macroeconomic policy.

It's not a rejection of current economic thought, but merely the next necessary step in our thinking.

It's "Extreme Economics", if you will. And if the vaunted results of Extreme Programming are anything to go by, it could be wildly successful.

My Economic Philosophy - 6 (The Next Innovation after the Corporation)

(This is the sixth of n pieces on my emerging economic philosophy called Liquidism.)

It may not be obvious to many (and in fact may actively be denied by some!) that the great prosperity enjoyed by enormous masses of people in the world today has come about thanks to some ingenious inventions in the area of finance as much as in the areas of science and technology. What Science discovers and Technology invents, Business produces for the mass market, and Finance funds that production. The Industrial Revolution could not have had the impact it did without a corresponding Financial/Legal Revolution.

My personal choice for the most important financial/legal innovation of the past five hundred years would be the joint stock company with the added clause of limited liability.

This is the innovation which allowed the mass of humankind to participate in and guide the exploitation of ideas, not only directly (by funding them), but also indirectly (by favouring some over others). By limiting the liability (the risk) of investors to the amount they invest (and preventing creditors from pursuing them for the debts of the corporation), the limited liability company encouraged shareholding on a scale never seen before.

This set in motion a virtuous circle of truly gargantuan proportions. A large mass of investors funded the practical applications of theoretical innovation. In turn, the corporate vehicles that converted ideas into tangible goods and services made their investors richer. Wealth began to flow to society on a scale unparalleled in history, and the mill has never stopped churning since.

In terms of an actual date in history, perhaps 1855 could be considered the official turning point. This was when the Limited Liability Company finally became the accepted norm in Britain thanks to an act of parliament.

The LLC has served the world well, but the world may be discovering the limitations to its usefulness. The world economy today is dominated by limited liability companies, but what use is a system that suffers major upheavals every few years? Capitalism may have created enormous wealth over the past two centuries, but all that seems to register nowadays is the wealth that is wiped out in a single day of a stock market crash.

I have written in the past (1, 2, 3, 4, 5) about my economic philosophy of Liquidism, and how a liquid market can be relatively immune to systemic collapse even if individual players in the market fail.

The problem with ensuring liquidity is that enforcing it is hard in practice. Ensuring liquidity goes against the grain of the capitalist system as it is currently structured. Calls for the break-up of monopolies and oligopolies are wrongly depicted as "leftist", whereas a high level of competition is in fact the capitalist ideal. This inherent contradiction is summed up in the book "Saving Capitalism from the Capitalists". I've elaborated on this earlier.

Today's firms are geared for individual growth, whether organic or through mergers and acquisitions. Firms are not at all well suited for divestiture or corporate break-ups, which can facilitate market growth with its associated liquidity advantages. We need both types of growth, going hand in hand, to achieve wealth creation without the dangerous instability that seems to accompany the concentration of wealth among a few very large firms.

Are there any mechanisms available to achieve that?

In today's world, a new kind of company is becoming common - the company designed not for independent existence, but purely as a takeover target. Venture capitalists often fund startups whose sole business plan is to be taken over by a larger company at an attractive price. This is the way the startup repays its investors.

Why can we not consider the opposite (the business division that is designed to be spun off as an independent company)? Shareholders in the original company are automatically offered a stock split, with ownership in the newly formed company. As more and more units are spun off, the original shareholders' holdings become more diversified. And as the child entities begin to thrive and grow in their respective niches, the wealth of the shareholders begins to grow as well.

The constant creation of new companies increases the liquidity of the markets in which they operate, reducing systemic risk. From time to time, a governmental competition watchdog (suitably renamed to reflect its systemic risk mitigation role) provides a friendly nudge to encourage some divestitures (if antitrust is an ugly word to some), but in general, the spin-offs are internally driven.

In this newer world, continuous amoeba-like phases of organic growth and splitting are seen as the best way to grow shareholders' wealth.

What we need, therefore, is the next major financial innovation. We need a built-in mechanism within a corporation that will propel it to seek out wealth through a combination of growth and divestiture, rather than through growth and merger.

Arguments based on economies of scale have often been made in favour of mergers, but having worked in small companies as well as large ones, I can testify (anecdotally) to the extreme diseconomies of scale that are exhibited by large companies as well. Large companies in an oligopolistic market charge their customers more than they should and pay their shareholders less than they should. The difference is lost through sheer inefficiency. On balance, I think shareholders are served better by smaller and more diversified players.

I wrote before about injecting "amoeba DNA" into the modern corporation, so that it naturally supports market liquidity instead of opposing it. I believe that is the next financial innovation that needs to happen, perhaps with some legislative support to push the world in that direction.

In sum, capitalism has served us well so far, but we have lately stumbled upon some of the limits to its wealth-creating potential. The reasons have to do with market liquidity as a whole, which individual firms are not designed to address. Newer firms must be built in smaller and more agile units that can be readily started, shut down, combined or (more importantly) spun off from larger ones. That will take the capitalist system to the next higher plane of its existence.

Human civilisation has evolved in sophistication to the point where sustainability should now be built into its powerful wealth creation vehicle.

My Economic Philosophy - 1 (The Definition of Freedom)

(This is the first of n pieces on my emerging economic philosophy called Liquidism.)

I won't lay claim to the following piece of wisdom - I remember reading someone's article (dashed if I can remember who it was!) where he asked a most profound question:

"Which is the greater freedom? A freedom without restrictions, or a freedom that cannot be taken away?"

He was asking this in the context of a big argument among advocates of Free Software and Open Source. Though Free Software/Open Source software is "free" (and I mean freedom, not price), there are actually two very different kinds of freedom implied by the term, and the two major categories of software licences tend to reflect this dichotomy. One set of licenses grants users full rights to do anything at all that they want with the software. The other set allows them to do anything except make proprietary enhancements to it. That's because such a right will give a one-way benefit to those making the proprietary enhancements and always place the users and developers of the original, free version at a disadvantage.

[I won't discuss the software issue in greater detail because this is not a technical blog, but I can't help citing another brilliant document at this point. This one is a highly technical software critique, by the way, which may go over the heads of even techies (I had to read it a few times to understand it), but the best thing it did for me was introduce me to the phrase "usefully contrary trade-offs" (See the section titled "The API Fallacy").]

The two definitions of freedom we talked about make usefully contrary trade-offs in what they offer to recipients of such freedom, but my eyes didn't open until I read the question posed in this way.

A freedom without restrictions is a laissez-faire system. Anything goes, as long as fundamental rights are not violated. One side-effect of giving freedom to all players is that, through entirely legal means, some players will ultimately end up with much more power than others. Then those others will find that they have very little freedom, after all. They are left with only their fundamental rights, but without much economic freedom, they must pretty much agree to any conditions imposed on them, "of their own free will".

Contrast this with a situation where basic economic freedom is guaranteed to all, so that no one can be forced to do anything against their will. This goes beyond fundamental rights, by the way. Obviously, to protect such freedom, restrictions must be placed on all players to prevent an aggrandisement of power such as what would happen under a purely laissez-faire system. So some freedom is being denied to all, in order to preserve a minimum of freedom for all. By way of example, most countries have a Restrictive Trade Practices Act or the equivalent, which limits what market players can do, in a bid to protect the freedom of others.

That's the crux of the issue. Both systems claim to value freedom, but they are talking about subtly different concepts. One is a freedom without restrictions (with the risk of that freedom being taken away by other players through entirely legal means). The other is a freedom that cannot be taken away under any circumstances (with some consequent restrictions being placed at all times on what players can do).

We will return to this dichotomy again and again, because understanding the philosophy of Liquidism requires an understanding of these two usefully contrary trade-offs. Before you read further, think for a moment about the difference. Which do you think is the greater freedom?

My Economic Philosophy - 3 (Les droits inaliénables)

(This is the third of n pieces on my emerging economic philosophy called Liquidism.)

Pardon my French, but if we're going to talk about two distinct definitions of freedom, and the first is called laissez-faire (a freedom without restrictions), what do we call the second (a freedom that cannot be taken away)? Droits inaliénables (inalienable rights)? Quite a mouthful, so I'll tell you what. We'll call it Liquidism.

Why? Because as any student of economics knows, the system where no individual player has the power to force any other player to act against their will is called Pure Competition. A market that demonstrates Pure Competition is said to be liquid. Oligopolistic and Monopolistic markets are highly illiquid.

Want a system where players' rights can never be taken away? You're basically asking for Pure Competition. Is that too idealistic?

Look at the Free Software/Open Source ecosystem. The GNU General Public License (GPL) guarantees a freedom that cannot be taken away. Most other licenses (BSD, MIT, X11, Apache, etc.) represent freedom without restrictions. Which is the more successful in practice? About 68% of all software projects on SourceForge (the world's largest repository of Free/Open Source software) have adopted the GNU GPL, which shows that most Free/Open Source software developers seem to believe that a freedom that cannot be taken away is in fact the greater freedom.

I think this latter view of freedom is an idea whose time has come. Economists of every shade have been brandishing their single favourite economic parameter. Some claim that a balanced government budget is the holy grail, with government controlling both spending and taxation to achieve this goal. Others claim that inflation must always be contained within 2-3%, with the central bank flicking interest rates up or down to keep inflation in its place. Yet others claim that full employment is the state to be aspired to, with all economic parameters primed to encourage constant growth.

So let me throw my hat in the ring. I want a free market, and I don't mean a laissez-faire free market. I mean a free market whose freedom cannot be taken away. And that means an activist government unafraid to wield a powerful instrument - Antitrust.

Liquidism's distinguishing feature is a highly competitive market, maintained if necessary, by aggressive antitrust enforcement on a hair-trigger.

I know it sounds radical, and it conjures up a vision that may be deeply disturbing to some.
See an emerging monopoly or oligopoly? Break 'em up!
Receive a merger proposal between major players? Deny permission.
Detect a pricing cartel? Throw the bosses in jail and ban them from holding similar office in future.

It may seem like a wild-eyed, revolutionary and ultimately impractical idea, but is it? In the fourth piece on Liquidism, I will argue that this is merely the next evolutionary step in modern macroeconomic thought.

My Economic Philosophy - 5 (The Greater Freedom, redux)

It looks like the debate about which is the greater freedom (a freedom without restrictions or a freedom that cannot be taken away) is taking place again in the context of blog netiquette.

The incident that triggered this latest debate concerns technology persona Kathy Sierra. (I owe a personal debt of gratitude to Kathy for her excellent book "Head First Servlets and JSP" that helped me achieve my Sun Certified Web Component Developer for J2EE certification. I have also read and enjoyed her other books "Head First Java", "Head First EJB" and "Head First Design Patterns").

A few people left disturbingly graphic insults and death threats on her blogsite, and the pattern of intimidation continued, with similar comments appearing on other blogsites, until she began to fear for her own life. The freedom of speech exercised by those who made the death threats resulted in a very real loss of freedom for Kathy, who felt compelled to cancel a speaking engagement and stay at home out of fear. My heart goes out to Kathy. I hope she recovers from the trauma soon and continues to contribute to technology and the world in general.

I guess this incident mirrors how a laissez-faire market can result in some players losing their freedom through the aggressive actions of others, even though those others may technically be playing within the rules.

Following the Kathy Sierra incident, Tim O'Reilly proposed a blogger's code of conduct, which I think is a good thing. One of the proposals in it concerns banning anonymous comments.

I have been a bit laissez-faire about comments so far, but (inspired by Tim's guidelines) I will ban anonymous comments on both my blogs from now on, and delete uncivil ones (but not comments that merely disagree with my views), in order to be consistent with my philosophy of the greater freedom. Because these are related concepts, after all.

According to a news report, Tim said the guidelines were not about censorship.

"That is one of the mistakes a lot of people make — believing that uncensored speech is the most free, when in fact, managed civil dialogue is actually the freer speech," he said. "Free speech is enhanced by civility."

Amen to that.

Ten Great Epiphanies Of My Life

I turned 54 today. I've been planning to write down all the things I've learnt in life so far. When musing on these, I realised that while some of them have been gradual learnings, others have burst upon my consciousness in a sudden flash. These latter epiphanies are the subject of this post, and that's why I have chosen to mark every one of them with an exclamation point. They represent the surprise with which I realised each truth when it made itself known to me.

An epiphany - a lightbulb that turns on suddenly inside your head

(In a later post, I hope to write about my more gradual learnings in life.)

Here are the most surprising things I learnt about myself and the world, in roughly the order in which I experienced them.

1. "They are the people!"

I was born in India, and my background is an upper-middle-class, upper-caste, academic one. My sister and I were brought up in relative comfort from our earliest days (although my mother says that when I was a baby, my parents had financial constraints because they had to contribute towards paying off some debts incurred by our extended family, and therefore had to make do with a curry with their rice only once in two days). I don't remember seeing any financial hardship during my childhood, though. My extended family and all my friends were from similarly privileged backgrounds. I was of course aware of the presence of people not of our class, because we always had domestic help, and all the people we encountered during our expeditions to the outside world, such as shopkeepers, bus conductors, autorickshaw drivers, watchmen and the like, were also of an obviously lower socio-economic stratum. However, it's one of the aspects of privilege that I never thought much of this class of people except as an adjunct to our own lives, which were of course the most important!

Many Indian middle-class families employ servants, but it's only in recent times that they have also begun to be viewed as fellow human beings

It was only in my teens, when I read about the Russian revolution and learnt new words like 'proletariat' and 'bourgeoisie', that I was able to make some connections between these abstract concepts and the reality of our own lives. One day, during a conversation with my father, I suddenly burst out with, "They are the people!"

In that moment, I had realised that we the privileged were not representative of the population of the country at all. We were the tiny elite crust of society, and the bulk of the country was made up of less educated, poorer, "lower caste" people. Socialism had leapt out of my textbooks and taken concrete form in my mind.

My outburst remained a family joke for many years, and whenever we had any trouble with a maid, gardener or other domestic help thereafter, my father would slyly remark, "What to do? They are the people."

This epiphany remained with me throughout my life. I know now that I have been greatly privileged, and that the majority of the people of the world are less fortunate than I am. They are the people.

2. I like strong women!

Growing up male in India can be somewhat toxic to one's attitudes, and I will not deny having imbibed attitudes of male chauvinism as I emerged into manhood. This was to some extent counteracted by a few examples of strong women that I grew up seeing. My mother herself was (and still is) a very strong woman. She had a formidable intellect and memory, two masters degrees, and was very well-informed. Her logic and wicked wit made her a formidable opponent in any debate, and I grew up with many scars from the verbal battles that I lost to her. My maternal aunt was even more formidable. She was a gynaecologist, and I was born in her nursing home. Her tongue was even sharper than my mother's, and both women were fearsome disciplinarians. While I chafed under their authority, I guess those experiences familiarised me with the idea of what a strong woman was like.

Male insecurity was not unknown to me, and I have had several experiences of feeling threatened by opinionated girls who argued with me, but one of the most exciting experiences of my life in this area came when I was in my late teens, walking along a road in Bangalore. A jeep came roaring up a side road, and paused briefly at the main road. The driver gave a quick glance in both directions, then the jeep turned swiftly into the main road and roared off.

I stood transfixed. The jeep had a solitary occupant, a young woman with shoulder-length hair, in a blue full-sleeved shirt and jeans. The confident, even contemptuous, look she had as she glanced up and down the road before accelerating off, made a powerful impression on me. I didn't know driving then, and I suppose I should have felt threatened by the sight of this confident young woman. Instead, a strange feeling came over me. I clearly remember thinking that it would be just wonderful if all the women in the world were like this. All I felt at that moment were strong feelings of attraction and admiration.

That experience put me in touch with a side to myself that I didn't know existed. Looking backwards from that point to my childhood then showed me how to join the dots to where I had got to. I had grown up with a lot of science fiction comics, and many of them featured female scientists, female astronauts, female pilots. In retrospect, strong women had featured throughout my impressionable years, and I had been duly impressed.

While a lot of science fiction objectifies women, there are enough role models here too

Of course, the more regressive aspects of cultural conditioning are not that easy to shake off. It has been a long journey since then to accept my own vulnerabilities as a human being and to unlearn the idea that being male has anything at all to do with "superiority". The journey continues...

3. I like people!

My parents were socially very reserved. We hardly ever had guests over to our house for tea or dinner, and we rarely visited anyone else at home. The rare occasions when something like that happened were very exciting for us children. Even when my friends came home to call me out to play, my parents never encouraged them to come in. I have only ever played with my friends outdoors or in their homes, never in mine. We did have a room that was outside our living area, and I could take my friends there, but more relaxed socialisation indoors was out of the question.

I didn't think to question this level of interaction when I was living with my parents. It was just the way things were, and it seemed the most natural thing in the world. Social interaction was not encouraged very much, and that was that.

When I went to IIT after school to do my B.Tech. degree, it was in Madras (now Chennai). I stayed in a hostel along with about 150 other boys. I had a room of my own, and I could decide what to do with my time. I wasted most of it, but I don't regret it at all. I spent a lot of time socialising. I would spend hours in the rooms of other guys, usually in groups, and we had lots of fun in aimless discussions.

A typical scene from hostel life

It was when I was returning to my own room one night after a delightfully long conversation in a friend's room that it suddenly struck me that I was not like my parents at all. I liked people!

Realising this about myself has been a very pleasant epiphany. I'm naturally gregarious, and even though I'm introverted in other ways, these two sides of my nature balance each other out quite nicely. I'm very comfortable being by myself, and I also like company.

4. Religion is evil!

When I was a child, I was brought up to be quite "pious". My parents were believing Hindus, although not very ritualistic in their practice. I had attended a Catholic school for five years, and then a Hindu school for another seven. Religion was part of my education, and in my mind, religion and morality were one and the same. I didn't see much difference between one organised religion and another, and I believed that all of them led to the same destination, whatever that was. Most of all, I believed that religion was an absolutely essential good. In one of my previous posts, I have spoken about the fanatical lengths I was prepared to go to in order to defend faith from unbelief.

I distinctly remember when this comfortable belief changed. For a few years, I had been reading about communal riots in various Indian cities where people of two different religions (usually Hindu and Muslim) clashed with and killed one another, but it had been in the background of my mind. One day, when I was a student at IIT Madras, and I was reading the newspaper in my hostel, I came across a news item about yet another such inter-religious riot, and I remember thinking with a shock, "Religion is evil!"

Inter-religious riots have been a depressingly familiar part of Indian life for as long as I can remember

This epiphany shook me profoundly. I remember being thrilled by the shocking nature of this heretical idea. I, who had always looked upon religion as a necessity for goodness, had now seen something I could not unsee.

Although I did not realise it then, this epiphany set me on the path to my eventual atheism. At this point, all it did was cause me to denounce organised religion. I still believed in a God, but I no longer considered organised religion to have any claim on morality.

5. Porn is not sexist!

This is probably a risky area to write about, since watching pornography is still technically a crime in India, but this is important.

When I was living in the hostel at IIT Madras, the local TV station used to broadcast a Tamil movie every Sunday afternoon. On one such afternoon, I found myself sitting in the hostel's common room when the day's movie started playing on TV. It was a popular one called "Poovaa Talaiyaa" (loosely translated as "Heads or Tails?").

In the story, two brothers share a house along with a distant aunt or similar relative. The aunt is the villain of the piece, and she plots to set the brothers against each other. After she frames the younger brother in some situation, the elder brother decides he has to mete out justice. He takes a whip and delivers a few lashes to his younger sibling. The domestic violence represented by this scene didn't seem to bother anyone. Towards the end of the movie, the brothers realise the mischief wrought by their aunt. At that point, the elder brother grabs the whip again and begins to lash his aunt! Setting aside any misgivings we may have about the violence against women represented by that scene, just pay attention to what the aunt says. She not only confesses to her mischief, but also says that it's wrong for women to have positions of power, and that it's only men who should rule!

The melodramatic finale to the 1969 movie Poova Thalaiya
(The subtitles on this clip are atrocious too)

I was shocked by what I was seeing. It was such a blatantly regressive social message, and yet it was allowed to play on prime-time television with no warnings about its appropriateness or otherwise. On the contrary, it had a 'U' (for Universal) certificate from the board of film classification, which meant that it was appropriate for all audiences, including children!

Park that thought for a moment.

In the early 80s, VCR technology had just started coming into the country, and some of the students decided to smuggle in a few porn movies and watch them in the dead of night when everyone else was asleep. It was my batch that hatched the plot, and we stealthily carried the TV from the common room to the roof of the hostel, ran the electrical wires down to someone's room on the floor below, and began excitedly watching the first of three hardcore porn movies.

It was sometime during the second movie that I had a shocking epiphany. Porn was not sexist! Scene after explicit scene depicted men and women enjoying sex - as equals. In no scene was there even a suggestion that the women were inferior, or that they existed only for the pleasure of the men. All the characters were shown to be enjoying themselves and giving one another pleasure. It was one of the most egalitarian examples of interaction between men and women that I had seen up to that point. Besides, both the men and the women were well-built and had figures that were pleasurable to look at. I could see how a woman might be turned on watching the same scenes I was watching. There was nothing to demean the experience of being a woman. It was designed to be universally exciting. Anyone could be a sex object to anyone else, and therefore the status of being a sex object lost its sexist sting.

Porn's revolutionary idea - Women can demand pleasure on an equal basis

This experience, especially coming so close upon the heels of the mainstream Tamil movie that was so regressively sexist, made a powerful impression on me. It provided such a contrast, and raised basic questions of morality. On the one hand, we had a movie that had no sexual content in it, but propagated an unhealthy message about the fundamental inequality of the sexes. On the other, we had a movie that showed explicit sex, but with men and women depicted as perfect equals. Which represented the healthier message for children to imbibe?

To this day, I remain an unabashed advocate for pornography, to be precise, the category called "non-violent erotica". I believe that sex is not just harmless but emphatically good. Sexual pleasure is the birthright of all, both men and women. This is also why I refuse to use the word 'slut' in any context. The word is meaningless, because the desire for sexual pleasure is not a negative feeling to be condemned. It is entirely positive and should be encouraged. The only thing that should constrain sexual intercourse is consent. No one should be subject to a sexual experience without their consent, and by the same token, any sexual activity between consenting adults should be above criticism. This includes (voluntary) prostitution, pornography, stripteases, homosexuality, orgies, etc. None of these should carry any kind of social stigma, either for men or for women. Society must accept human sexuality as a normal and natural thing.

What I'm particularly happy about is that I arrived at this philosophy independently, long before I realised it had a name - the Sex-Positive Movement.

6. I like Hindustani classical music!

I grew up with two kinds of music in Bangalore. Kannada film songs would always be on the radio, and I grew to love them without being consciously aware of them. My family had a set schedule every morning so we could leave for school on time. The radio would be on, and when the program changed, that would be our marker to start or complete an activity, for example, finish breakfast by the time the English news started. Kannada film songs would be on for about half an hour every morning, I think, so I got to know them over many years. I didn't know who the singers were or which movies they were from. I just liked them passively. I only started to miss them after leaving Bangalore. Today, thanks to Youtube and other websites, I can listen to my favourite ones once more.

I guess if I had grown up in Bombay or in North India, I would have heard a lot more Bollywood (Hindi) film music. As it happened, although I was familiar with the most popular Hindi film songs, they weren't a big part of my life at all.

The other kind of music I grew to like in the late seventies was Western pop. I very quickly got hooked onto groups like ABBA and Boney M, and my favourite was The Carpenters.

My parents knew Indian classical music (the South Indian, or Carnatic, variety), but were not so strongly into it as to play pieces at home. There was a phase when my mother used to learn the veena, and that was when I got to hear some Carnatic music. It was OK, but I never warmed to it.

Then when I went to IIM Ahmedabad to do an MBA after my B.Tech., I heard another genre of music for the very first time. There was a "DJ Club" in the campus, with wall-to-wall mattresses. There was a music system that could play audiocassettes and vinyl LPs (this was 1985). I liked going to the DJ Club and lying down on the soft floor with closed eyes, just listening to whatever other people played. Most of the time, the music was Western pop, with the occasional Hindi film song. One day, when I was lying there, someone came in and played an LP with something very different. It was an instrumental piece, and I found it haunting. I got up and went over to look at the LP cover. It was an album of the sitar player Nikhil Banerjee. The description had strange words that made no sense to me: "Raag Malkauns" and "Raag Hemlalit". I had no clue about any of this, except that I liked it, so the next time I went to the DJ Club, I played this LP myself. And I liked it even more the second time. And the third time. And the fourth. Then I got adventurous and decided to play other LPs from the same genre. There were about 20 LPs in the "Hindustani Classical Music" genre. The next one I tried was not instrumental. It was an album featuring a singer called "Pandit Jasraj", and again the description at the back had strange words that made no sense to me: "Raag Shuddh Sarang" and "Raag Bhimpalasi". The vocal LP had an even more powerful impact on me than the instrumental. I found myself going, "Wow! Why have I never heard this music before in my life?"

The very first Hindustani Music LP I ever heard - Nikhil Banerjee's Malkauns and Hemlalit

Today, if I had to name one genre of music that I love, it would have to be Hindustani Classical music. It transports me. When the music starts, I relax and smile almost reflexively. And to think that I missed hearing any of this for the first 22 years of my life!

7. Hindus can hate!

I had grown up in a benign home atmosphere where my parents never spoke in harsh generalities about other communities. There were light-hearted generalisations of course, but nothing that could be remotely considered "hard thoughts". On the contrary, there was plenty of self-disparagement about our own community. My mother even advised me when I left for hostel at the age of 17, "Only Christians and Malayalees will help you if you are in trouble. Tam-brahms will never help you." Perhaps this was based on her own hostel experiences.

In any case, I had never heard my parents, or even any member of my extended family, say harsh things about people belonging to other communities. To be sure, Christianity as a religion was spoken about with more acceptance than Islam, because it was considered more benign, but Muslims as people were never spoken about with hatred. Indeed, I would have proudly told anyone who asked that Hindus were the most tolerant people because we never thought ill of people of other religions. We were fine with them following their own faiths and never wanted to convert them to ours.

My first rude awakening came when I was at IIM. I met another Hindu student who had worked for a year or two at one of the South Indian manufacturers of two-wheelers. In those days in India, customers couldn't just walk into a showroom and drive off in a car or two-wheeler. They had to register for them and wait months until they got their allotment. This particular manufacturer had a monthly draw in which one lucky person from their waiting list would be selected for a free allotment, or something of that sort. This student told a group of us that he used to work in the IT department of this manufacturer, and that his team was responsible for running the software program that randomly selected a name from the waiting list each month. "If a Muslim name came up, we'd simply run it again," he laughed.

I was horrified at more than one level. The sheer unfairness of the act was the first thing that struck me, then I thought about other disquieting implications. Can a person hate another community so much that they would knowingly be unfair to them or do them harm?

The VHP's Pravin Togadia making one of his hate speeches - In the years since my IIM days, things have only become worse

In the years that followed, the answer to the latter question was reinforced again and again. In the last few years, especially since the explosion of social media, and the willingness of people to reveal some of their innermost thoughts, I wonder how I could ever have been so naive as to imagine that Hindus were incapable of hate. This has been one of my most depressing learnings about the world.

8. I'm a Bombayite!

After my graduation in 1987, I went to Bombay (Mumbai) for my first job at CMC Ltd. I had lived all my life in South India (mostly Bangalore, with some experience of Chennai and Madurai), and had just spent two years in Ahmedabad, the closest thing to a "North Indian" city. I had also briefly stayed in Delhi for 2 months during a summer project. However, my experiences in Bombay changed me in many fundamental ways.

For example, in my very first month in the city, I was waiting at VT station (now called CST) to catch a train. I saw a train leaving the platform, and a man running beside it, trying to get in. The train was already chock full, and people were hanging out of the open doors. I stared in disbelief, thinking there was no way this guy was going to be able to jump into such an overflowing train. But as I watched in astonishment, four arms reached out from the human mass in the compartment's doorway and grabbed the running man. He was pulled into that mass of humanity as the train disappeared from the station. I stood there in wonderment for a long time, trying to process what I had just seen. Instead of pushing the man away saying "No room!", the people in the overcrowded carriage had made space for him too.

I realised intuitively that this was a peculiar aspect of the culture of this particular city. No other city I knew had this level of civic camaraderie. There was this sense of "We're all in this together. Let's help each other get by as much as we can."

You may not think it's possible to get into this train, but these guys could make it possible

Bombay was a place so egalitarian that a restaurant patron and a waiter could both call each other "boss".

Over the next 8 years that I lived in Bombay, I experienced many more examples of the city's no-nonsense can-do attitude. People didn't waste time complaining. They just rolled up their sleeves and got things done. And the characteristic sense of humour was something else. I remember telling myself, "I like this city. This is the kind of person I want to be. I want to be a Bombayite." The city moulds your attitudes into something much more positive.

In a literal sense, I grew up in Bangalore. But I really only grew up in Bombay.

9. No community should have a majority!

Over the months that I worked in CMC Bombay, I began to realise something about the culture of the various regional offices in the same company. I had been to CMC Madras, and also met people from other offices (CMC Delhi and CMC Calcutta (now Kolkata)). What I learnt was that CMC Delhi was dominated by North Indians, mostly Punjabis. CMC Calcutta was dominated by Bengalis, and CMC Madras by Tamils. Being a Tamil myself, I should have felt most at home in the CMC Madras office, but I didn't! I felt most at home in the CMC Bombay office, and I asked myself why I felt that way.

One of my project teams at CMC Bombay (That's me at the bottom right in the brown jacket)

I realised it was the sense of being left alone and not judged. The strange thing about CMC Bombay when compared to the other CMC offices was that it was not dominated by members of any one community, not even Maharashtrians, even though Bombay is the capital of Maharashtra. I actually sat down one day with the office phone book and marked the community of every single person in the office against their name, then tallied them up. I found that no community in my office accounted for more than 30% of the total (that was the Maharashtrians). No matter who you were, you were in a minority! It created a unique kind of culture where people were left alone and not judged. That's when I realised two things:

1. If one community forms a dominating majority, it makes members of the minority communities feel somewhat marginalised.

2. Even for members of the majority community, there is an oppressive pressure to conform. This is what I felt in CMC Madras. There was a set of "Tamil values" that I was expected to conform to, whether I approved of them or not. For example, managers felt entitled enough to upbraid younger staff if they socialised too much with members of the opposite sex!

That's when I distilled my learning into a general principle for the world. The best societies are those where no cultural group is in a majority.

10. I want to live abroad!

When I was younger, I never had the slightest interest in leaving India. My classmates at IIT, almost to a man, wanted to go to the US for higher studies, and most of them wanted to settle down there. I hadn't the slightest interest in going to the US. Besides, I had always been politically aware from my early teens, and US foreign policy had always infuriated me. I couldn't see myself living in that country or even going there to study. My parents often tried convincing me that a foreign degree might help me in my later career even if I chose not to settle abroad, but all those words fell on deaf ears.

When I started working in a software company, I found myself surrounded by people whose only aim was to acquire enough IT skills to be hired by a consultancy that supplied manpower to an American company. Like with my former IIT classmates, most of my CMC colleagues also ended up settling in the US. I still didn't care.

Then, four years after I started working at CMC, I was sent on a 5 week consultancy assignment to Mauritius. CMC was accommodating enough to book my return flight via Singapore, since that was only marginally more expensive than the direct return flight. I took 3 days out of my annual vacation to see Singapore.

To say my mind was blown would be an understatement. The place seemed too good to be true. Not only was everything amazingly clean, but the very systems seemed so well designed. I experienced this when I was walking out of the airport. I thought to myself at one point, "I need to get some local currency", and I saw a sign that said "Currency Exchange". Then I thought, "I need to get out of the airport and catch a taxi", and right there was a sign that said "Exit, Taxis". And people were so honest! I had to pay an airport surcharge to the cabbie when I arrived, and when I was leaving, I tested the second cabbie by asking if I needed to pay an airport surcharge. He said, "No, only when coming out." I was amazed at the pervasive honesty.

This country changed my mind in three days

When I was in the plane leaving Singapore, I swore to myself that I'd be back. I had realised one thing during those three days. I wanted to leave India and live abroad. My eyes had been opened to a different plane of existence. I had often thought about whether I wanted to leave India and live abroad, but had always contemptuously dismissed the idea. Now that I saw what that life was really like, my mind changed so fast and so emphatically it surprised me. As I joked to my friends later, "CMC made a mistake by sending me abroad."

A few years later, I had migrated permanently to Australia and never regretted it. It was a struggle to get to that point, as I've written about here, but it was worth it.

[If you liked this post, you might like these other autobiographical pieces as well:
Ten Things Teachers Taught Me
Ten Books Challenge - The Ten Non-Fiction Books That Have Influenced Me Most
Ten Books Challenge - The Ten Fiction Books That Have Influenced Me Most
The Comics That Made Me What I Am]

Progress Should Depend On Systems, Not Individuals

This post does not refer to India alone, although that's how I first thought about it. It's actually much more general and applies to any country at any time.

During a discussion on Facebook recently, one of my friends mentioned Narendra Modi, the Indian politician who looks likely to lead his party, the BJP, into the 2014 elections, and who quite probably will be India's next prime minister if the BJP wins.
[Update 13/09/2013: Narendra Modi has been officially named the BJP's prime ministerial candidate for the 2014 election.]

The comment was very interesting, because it offered a different viewpoint from what one normally hears.

I am not a BJP supporter per se. I am a Narendra Modi supporter, and that too because he is a capitalist. I am of the firm opinion [...] that India needs a strong dose of free-market capitalism, and if Modi does not come to power I don't know if anyone will administer the dose. I don't think anyone else has the vision, and I think it is DESPERATELY needed in India. I'd place that above all other priorities for India. To me, the BJP is a vehicle for NaMo to assume power. [...] he can do it. And he will. [...] in my opinion, Modi's economic policies are what India desperately needs.

Now, I share many of my friend's thoughts and ideas. I too believe India needs to unshackle itself from its innumerable rules and restrictions of socialistic vintage and embrace free-market capitalism. [By "free market", I mean neither crony capitalism (the unholy nexus between politicians and business interests) nor laissez-faire capitalism (the complete absence of regulation). My idea of a "free market" is a liquid, or highly competitive market. It is a market from which stifling bureacracy is eliminated but where antitrust legislation is aggressively enforced. See my blog entries on the economic philosophy I call "Liquidism".]

So I actually agreed wholeheartedly with my friend's comment on India's need for a strong dose of free-market capitalism.

However, I didn't agree with the corollary that Modi therefore deserved my support. Where I diverge from my friend's views are in two respects - the particular and the general.

In particular, I am convinced of the complicity of Mr Narendra Modi in the 2002 anti-Muslim riots in Gujarat. His protestations of innocence and inability to act fast enough are unconvincing. After all, this is the man with an image of hands-on governance, who is said to have shown his dynamism and administrative superpowers when he rescued Gujarati pilgrims who were stranded after floods in the state of Uttarakhand. If he had wanted to stop the riots, he would have done it. The fact that the riots went on for 4 days and resulted in the deaths of over 2000 people strongly suggests that the rioters had his full support. I do not believe that this man should be trusted with the reins of an entire country, when a life term would be more appropriate.

In general, I do not believe in placing the destiny of a country in the hands of a single individual, however capable and promising they may be. The process is fraught with danger. But if every other politician and political party is incapable of ushering in the slew of changes that India badly needs, to whom can we turn?

I'm actually sanguine about the answer. India's move to free-market capitalism is inevitable, although it may not start as early as 2014. It will come about because power has been steadily slipping away from the central government to the states over the last two to three decades, and the process shows no signs of abating. Coalition governments have been the norm since 1989. The names used in political discourse have moved away from those of parties in the 1980s (Congress, Janata Dal) to those of coalitions today (UPA, NDA). Regional parties have become kingmakers and begun to wield disproportionate power. The states have never been stronger vis-à-vis the centre. India today is much more federal than it was at its birth. Indeed, with the creation of smaller states from larger ones (3 in 2000, 1 more due in 2014) and the increasing demand for statehood from minority groups, it looks like India will before very long be a federation of many small and semi-autonomous states.

[From a professional standpoint too, I wholeheartedly approve of India changing from a monolithic polity with a strong centre to a loose federation of small and internally cohesive states. In the IT industry where I work, high cohesion with low coupling is an architectural principle that leads to highly robust and flexible systems. Centralised systems, in contrast, are brittle and costly to maintain.]

I see India becoming stronger and more dynamic with increasing federalism. Smaller states with more cohesive and engaged electorates tend to have governments that are more responsive and focused on delivery. This is not peculiar to India. People everywhere have begun to demand governance and punish governments that don't deliver. Islamist governments that came to power in the wake of the Arab Spring are discovering to their cost that ideology may win elections but does not guarantee lasting power. The people of Tunisia, Libya and Egypt have signalled strongly to their rulers that what they want is good governance, and Islamic ideology is not an acceptable substitute. In India too, the worm has turned. Electorates are no longer docile and can no longer be taken for granted by the elected.

This is why I believe India will inexorably turn to free-market capitalism. It cannot but. States are going to be competing ferociously with each other to attract foreign investment and talent. Their people will demand higher living standards and punish governments that don't deliver. How else can state governments meet such rising expectations? Heavy inflows of investment will be required, and governments will have to work very hard to attract such investment. Providing an environment that is friendly to business will be imperative, because corporations looking to invest in India can shop around looking for the state offering the most favourable terms. [An early foretaste of this inter-state competition was provided when homegrown corporation Tata Motors shifted from an unfriendly West Bengal to a welcoming Gujarat to establish a factory for the world's cheapest car, the Tata Nano.]

I also foresee radical changes to Indian labour law. I have long believed that a "hire and fire" environment, rather paradoxically, offers the best protection to workers by enabling a dynamic job market with plenty of opportunities, because employers don't hesitate to hire when they know they can shed staff at short notice. Labour "protection" laws have in fact stifled economies and reduced employment opportunities where they have been strongest (e.g., the long communist-dominated Kerala and West Bengal).

In sum, while I share my friend's dream for India to become a free-market economy, I do not believe this can only be achieved by one person, much less that that person is Mr Narendra Modi. I am confident that the vehicle for India's progress is India itself.

Saving Capitalism from the Capitalists

(The title of this post refers to a book written by an old classmate of mine, but more on that later)

They've done it again! After Bear Stearns, Fannie Mae and Freddie Mac, the Fed has bailed out the American Insurance Group (AIG) by effectively nationalising it. Bravo!

Once again, the ugly principle of modern capitalism has been revealed - "Privatise profits and socialise losses". No wonder the common man (or woman) thinks of capitalism as a system that helps the rich exploit the rest of society to get even richer.

This is no way to run a market economy! If we must let corporations succeed, we must also let corporations fail. Why must taxpayers' money be used to bail out failing companies?

The answer, we are told, is that "a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance".

Oh, yes? And pray to what do we owe this "market fragility"? (Uncomfortable silence from the government, the Federal Reserve and captains of industry)

I don't want to see a systemic collapse any more than the next person, but propping up failing companies isn't the right way to prevent that. It just postpones the inevitable. The next threat will be bigger and more dangerous. I want to see a situation where the collapse of individual firms does not trigger a systemic crisis.

How can we achieve this happy state where individual firms are incapable of taking the market down with them?

Let me provide my prescription to prevent the kind of financial instability we are witnessing today -- a liquid market.

A liquid market is one where no single buyer or seller (or even a small group of them) is big enough to move prices. All buyers and all sellers in the market are essentially price-takers. Consequently, the arrival or departure of any (or a small group) of them at any time will cause scarcely a ripple in the market as a whole.

Here is where I differ in philosophy from libertarian and other proponents of laissez-faire capitalism. Unlike them, I don't believe that a complete absence of government interference is the answer. Yes, in general, I'm against government regulation and intervention, - with one significant exception. I like the kind of government regulation that keeps markets liquid. I'm a strong proponent of -- brace yourselves for the A-word -- Antitrust.

Antitrust is the preventative instrument that governments must wield to ensure that no single player in the market can "add to the market's fragility" by its failure. Indeed, the sign of a healthy market should be the sheer number of companies failing (and being created) all the time.

Government regulators today work to contain risk at the level of the individual firm. While they study the industry as a whole, the sole instrument by which they control risk in the market is capital adequacy as applied to individual firms. They prescribe minimum levels of capital to be maintained by financial institutions to provide for their obligations in the event of failure. But this kind of regulation is very low-level. I call this "micro-regulation" along the lines of micro-economics, because it applies to individual firms. While micro-regulation is required, what we also need is "macro-regulation" (like macro-economics), which applies at the level of the economy as a whole. What is the use of adequate capitalisation at the level of the institution if the market is itself going to be fragile? How can we ensure that the market itself is adequately de-risked? The answer - liquidity.

A country's prudential regulation watchdog must act in concert with the country's competition watchdog to ensure that the micro- and macro- indicators of market health are maintained at adequate levels. We must stop thinking of competition watchdogs as populist agencies that do nothing more than ensure a fair deal to consumers. Their role is much more important than that.

The prudential regulation watchdog will operate based on triggers that correspond to capital adequacy levels. If the level is breached, the agency will swoop down on the offending institution and ensure restitution to required levels. (They already have the power to do this in most advanced economies, and many of them are quite proactive.) The competition watchdog will operate based on triggers like the Herfindahl-Hirschman Index (HHI), a measure of the degree of competition in a given market segment. They must similarly have the power to swoop down on markets where the index is breached, and effect restitution through any means necessary, including a break-up of the largest players. (In practice though, competition watchdogs tend to be rather weak-kneed, perhaps because the role they play is perceived as populist rather than economically critical. Anti-competitive action is viewed as economically disruptive, rather than as economically corrective, and both business and the investing public express annoyance at such activity. How often do we hear of corporate break-ups, or even of mergers that are blocked?)

Forcible break-ups of large players must not be considered a punishment for being successful, as they are often portrayed. Rather, they are in the interests of all players - shareholders, customers, deposit-holders, policy-holders and employees. When the US Justice Department broke up AT&T into 7 "Baby Bells" in 1984, that did not cause its shareholders any long-term loss. On the contrary, within a decade, each of the Baby Bells had grown to be larger than the original Ma Bell. [Of course, economic sense went out of the window later, and the Baby Bells obtained permission to merge and stifle competition once more.] The lesson is that shareholder wealth can grow through break-ups, and so they are not something to be feared, but to be welcomed. Indeed, a break-up may be the best way to help investors realise value once the original corporate vehicle's market capitalisation plateaus.

"Amoeba DNA"

But aren't corporate break-ups costly and a waste of everyone's time and energy? Well, as the eXtreme Programming folk over in the IT world like to say, "If something is hard, do it often." We need to inject "amoeba DNA" into corporations, so to speak, so that when they reach a certain size relative to their market, they are ready to split (or be split). In this way, there is always a large number of players in a market, providing diversity of investment opportunity, and there is a Darwinian system that rewards only the most efficient, so every dollar invested is used to maximum advantage. As a side-benefit, the market is immune to the failure of a few players, because no player is big enough to influence the market as a whole.

This is my economic philosophy. I call it Liquidism, and I have explained it here, here, here and here.

What does the title of this post mean? This is the title of a book (read a synopsis here) by an old B-school classmate of mine, Raghuram Rajan, who went on to become Chief Economist of the IMF. The book's main insight is that competition is the lifeblood of capitalism, but capitalists hate it. More precisely, incumbent players in a market will always try and manipulate government to protect them from failure and prevent newer competitors from entering their market. It is the duty of government to resist the pressures exerted by these petty capitalists and act in the larger interests of capitalism itself (i.e., a liquid market). I'm gratified to see that an eminent economist like Rajan makes pretty much the same arguments as myself (an amateur student of economics) - that markets must be liquid, competition maintained at high levels, and that governments must be prepared to let businesses fail even if it means employees are thrown out of work.

The book does not offer much comfort to employees facing the loss of their jobs due to downsizing or business failure, but there is a powerful argument that should appeal to them all the same. I would argue that job losses are inevitable in a dynamic economy, but what causes them to hurt is the lack of liquidity in the market. If no single firm is large in comparison to the market, then the constant loss of jobs as firms disappear will be mere drops in the ocean, and people will find other jobs almost as soon as they lose their old ones. The pain will be so diffused it will hardly be perceived. Far from being traumatic, the loss of one's job will be nothing more than an annoyance lasting a couple of days, maybe even an exciting opportunity to improve one's prospects.

Is anyone listening? Or must the world go through a lot more pain (and a lot more waste) before we learn to apply capitalistic principles rigorously and keep the engines of the economy humming?