India! I dare you to be rich

The microeconomics of governance: the principal-agent-subagent problem

Most (perhaps 98 per cent) of the economists across the world have a blind spot: the economics of governance. And 100 per cent of Indian economists have that blind spot.

Have you ever seen someone who keeps their home clean and beautiful but makes a mess outside? This is the key to understanding the microeconomics of governance.​ 

Collective decisions regarding which public goods constitutes part of public choice theory. This discusses the design of the institutions of democracy and their many limitations. 

But there is an under-developed branch of public choice theory which assesses whether the individual actors in specific institutions of governance can deliver the goods we want, and why most such institutions in the developing world perform so poorly. Essentially, this is about understanding the incentives of individual players at the microscopic level. There is a huge difference between managing something in the private sector (which the discipline of management looks at) and managing public goods, which is the subject of public administration. 

Chapters 4 and 5 of Breaking Free of Nehru contain an elementary discussion on the microeconomics of the main governance institutions of India. The analysis involves examining the principal-agent-subagent problem and consideration of the costs and benefits for the parties involved (politicians/ bureaucrats). In these chapters I pick up key variables in the electoral system and bureaucratic system and analyse why these are poorly designed, and will lead to perverse outcomes.

My slides prepared for the 2013 governance reforms conference  should be seen as forming part of this branch of microeconomics. My talk at that conference summarises key aspects of the microeconomics of governance:

Much of Arthashastra by Chanakya contains the microeconomics of governance (although he tends to present the conclusions of his analysis, not the underlying argument).

There is also a considerable analysis of microeconomics of governance in the new public management literature, followed in countries like Australia and New Zealand. My article on the Victorian bureaucratic system highlights part of this analysis. The aim of this branch of microeconomics is to ensure that there are sufficient incentives to perform and deliver results. 

In brief, this branch of economics is about understanding how the citizen (principal) can get the bureaucrat (his sub-agent) to do what he wants through his agent (politician).

This involves similar principles to the standard principal-agent problem, but because of the vastly greater information gaps, uncertainty, measurability issues, etc. involved, this is a more difficult problem to resolve than the more simple principal-agent problem typically considered in the field of management. There is far more gaming, far greater moral hazard, far more costs of monitoring and enforcement, than in a simple private sector principal-agent problem.

There are also issues regarding the social contract (which I've addressed in Discovery of Freedom). – on which far more work has been done by economists in the recent past.

I must say that practitioners of public administration in the West have largely understood the basics of this branch of economics, as a result of which they have designed largely functional institutions. But perhaps Singapore outdoes all of them in the depth of understanding displayed. 

Time permitting, one day I'll write a text book on the microeconomics of governance. Without understanding it, no one can deliver public goods at an efficient cost.


My comment here:

I believe the key issue is never ownership per se, but the incentives at the micro level. Government owned organisations can perform wonderfully well, as demonstrated by Singapore (see section on Tamasek in my blog post, linked below):
I've been investigating the microeconomics of governance – a subject deeply neglected by economists – over the past 15 years. Many useful insights are obtained from operating at the micro-incentives level. http://www.sabhlokcity.com/2014/08/the-microeconomics-of-governance-the-principal-agent-subagent-problem/
If the incentives are right, then government ownership should NOT present a problem for then the citizen (principal) is directly able to achieve his/her goals at the lowest possible cost.
In most cases, however, the incentives are not right – mainly because politicians are ignorant and economists don't care about details. In those cases Friedman and Rothbard are right (even if they may exaggerate in a few cases). Those are the more common cases.
Economists are generally unwilling to examine real institutions (their incentives to publish are stacked against such detailed analysis). If they do so they'll need to examine employee contracts, funding models, etc. That's a lot of hard work. Much easier for lazy mathematicians to make wild assumptions and preach "ideology". That's an unscientific approach, however. It is time for economists to study real institutions in great detail.

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Why economics is important >> Myths about the economy >> Delusions of policy makers

I thought I had published somewhere regarding the common myths about the economy but can't readily find it. [Found it now - 15 counter-intuitive lessons from economics that even most “economists” don’t understand ]. 

This is a placeholder for me to aggregate my writings and those of others regarding the common myths about the economy.

Highly competent economists (e.g. like Chanakya) are vital for any society to enable the production of wealth. India has not a single economist who comes even close – with knowledge both of economics and governance. But even ordinary economists who can provide sensible advice on micro-economic policy are scarce (although a few are certainly available). This means India continuously makes policy which even a basic graduate of economics from a decent university in the West will firmly oppose.


"My goal – by teaching basic, foundational, principles of microeconomics – is to inoculate students against the bulk of the common economic myths that they’ll encounter throughout their lives – myths such as:
1) that the great abundance of goods and services available to us denizens of modernity is the result of a process that can be easily mimicked or understood in detail by smart people or planners
2) that the market value of goods or services can be raised by price floors (such as a legislated minimum wage) or lowered by price ceilings (such as rent control)
3) that benefits can be created without costs
4) that government is an institution capable of rising above the realities that ensure that private institutions never perform ‘perfectly’
5) that intentions are results
6) that destruction of property is a source of prosperity
7) that exchange across political boundaries differs in economically meaningful ways from exchange that takes place within political boundaries
8) that the only consequences that occur or that matter are those that are easily anticipated and seen"   [Source]


Twenty false reasons to denigrate freedom and capitalism


Basic introduction to economics – please share widely!


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International strategy for the Sone Ki Chidiya reform movement: Melbourne, Sydney, London

The SKC movement needs a number of levels of action. Farmer cells are being established (more about these later), but internationally we need to establish cells of the Sone Ki Chidiya reform movement I am hoping that some work can begin in Australia and UK, two countries with a reasonable presence of SKC/FTI members outside India.

The cells would comprise people who are interested in liberal reforms in India. These cells could meet periodically, but mostly would operate over email.

I'd like to invite those interested in such activity in Melbourne, Sydney and London to write to me, in the first instance.

More later once these cells are formed.

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10 main reforms to take to the people of Delhi in the forthcoming elections

There are some tricky jurisdictional issues about Delhi that come into the picture, as well. These will need to be better understood. However, I had done some thinking around this issue some time earlier, so I'm noting these points for ready reference. I'd like to add that I'm not committed to these being the ten top reforms, and am open to being persuaded about more promising reforms for Delhi. The manifesto of the Swarna Bharat Party will contain a more comprehensive package, but this is a preliminary list of top 10 reforms.

1. Change in the departmental structure and bureaucratic management to ensure accountability

Without making the bureaucracy accountable, NOTHING can be achieved. This reform will not be as comprehensive as that detailed in SKC agenda. But much can be done directly by the Delhi government. The reform includes combining departments into a few large departments, each headed by a Super Secretary to the Government. The Super Secretary of each department – who will supervise all IAS and other officials in the departments – would be appointed on a contract of three years in the first instance at a salary of around Rs.75 lakhs per annum. Such Super-Secretaries would be eligible for a performance bonus of up to Rs 25 lakhs per annum for meeting their performance contract, which would include tight control over corruption and the delivery of high quality services. Such persons would be recruited from the open market. Any IAS officer wishing to be considered for such a role would need to resign upon appointment to such a position.

This reform will ensure hassle free interaction with government offices, e.g. licensing (RTO), water and electricity departments, etc. As accountability dramatically increases, corruption will dramatically decrease.

This will involve a radical increase in the level of transparency. The Super Secretary will be required (through KPIs) to pro-actively publish data related to government activities along with expenditure records (such as details about each road or park). 

2Drastic increase in the number of necessary jobs 

The overall theme of liberty with accountability in the SKC agenda will ensure that Delhi becomes the golden land of opportunity. In addition, government jobs will be created in two basic areas: (a) radical reshaping and improvement of roads and waste management; and (b) radical improvement in landscaping and public amenities in Delhi.

These jobs will create hygienic living conditions in Delhi. All open drains will be closed and strewn garbage eliminated. These will also create aesthetic surroundings through god roads, clean parks, greenery, underground electric cables etc. In particular Delhi's roads need to be straightened (particularly around older villages, and all tiled sidewalks replaced with cemented blocks.  All sidewalks will provide disabled access for people with impaired mobility. These actions will generate a vast number of new jobs and also make Delhi the most liveable city in India. In a few years time, Delhi could aim to compete with the better cities of the world. 

Public safety will be made the direct liability of the Super Secretary of the infrastructure department, with any damages for injury from roads/ sidewalks paid personally by the Super-Secretary. Parking on sidewalks will be heavily fined. Specific parking places will be created and auctioned across Delhi in the colonies, to ensure that no car blocks traffic or the side walk.

3. Dramatic change in the real estate system to eliminate all black money from the system.

This change would take around three years to implement, but after that there should be no possibility of any black money in any real estate transaction. This will also include complete overhaul of the developer system to ensure that the mafia that currently operate in this sector are brought to book.

4. Dramatic change in the school system to ensure that the poorest of the poor start receiving high quality education

This would involve full implementation of details outlined in the SKC agenda. This would take around 3-4 years to implement, given the significant change involved. In the meanwhile, great focus would be given to improving teacher quality. This will ensure that all schools have decent infrastructure, e.g. toilets, library, furniture, etc.

5. Radical improvement in the water supply and sewage system

This will involve either implementing incentives in the government water undertaking for performance, or if that's not possible, then entirely privatising the system through public tender and bringing it under regulatory control. Supply will be provided at a regulated cost that takes into account future infrastructure needs. Unauthorised habitations will also be provided water – at cost. Temporary Infrastructure will be built as matters of property rights are resolved (these matters can take around four to five years to resolve, after the land system is entirely modernised). Sewage management will be professionalised, as well, with appropriate incentives.

6. Radical improvement in the electricy system

This will involve more intense regulation, and ensuring that incentives are aligned with desired outcomes. Supply will be provided on payment.

7. Transport system to be revamped entirely

In particular, focus will shift towards managing the demand side through appropriate congestion levy. The taxi and auto markets will be fully liberalised, and bus competition will be increased through innovative models such as kerb rights allocation. Supply side improvements will also be undertaken to the extent these are cost effective.

8. Revamp of agriculture

The APMC acts will be abolished and farmers in and around Delhi freed from the requirement to sell in mandis. This will allow for competition in the wholesale sector, In the long run, proper wholesale produce markets will be established. 

9. Drastic reduction in unnecessary business regulation

Delhi will be made the most business friendly city in India by drastically eliminating all unnecessary regulation, and ensuring that all modern techniques are implemented to make it easy to do business in Delih. Under no circumstances will innovative technologies like Uber be prevented from operating in Delhi. [I request the PHD chamber of commerce and other industry associations to provide their business improvements suggestions for Delhi]

10. Radical modernisation fo the health system

Delhi does not exercise control over many of the large hospitals in Delhi. However, the SKC agenda will be implemented in Delhi to the extent possible, and all means of increasing competition in the health sector considered and implemented.

In addition, overall administration will DRAMATICALLY improve and corruption will reduce even more dramatically, almost to be come non-existent in three years. 


1. Electoral reforms as outlned in SKC agenda

2 Change in the local government system as outlined in SKC agenda

3. Full reform of the justice system

4. Rezoning of lands to allow high rise residential buildings within 20 kilometres of Connought Place (subject to aircraft clearance requirements)

5. Elimination of poverty as outlined in the SKC agenda

6. Security: Although the Delhi Government does not have Delhi Police under it's control, the Delhi government can cover all public places with world-class CCTV infrastructure with active remote monitoring. In addition a citizens' volunteer force can be organised to help people report crime. 

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The views of a great proponent of liberty: James Madison

I've taken quotes from here.


“In Europe, charters of liberty have been granted by power. America has set the example and France has followed it, of charters of power granted by liberty. This revolution in the practice of the world may, with an honest praise, be pronounced the most triumphant epoch of its history and the most consoling presage of its happiness.” ― James Madison

 “Foreigners have been encouraged to settle among you. Industry and virtue have been promoted by mutual emulation and mutual inspection; commerce and the arts have flourished; and I cannot help attributing those continual exertions of genius which appear among you to the inspiration of liberty, and that love of fame and knowledge which always accompany it. [Letter to William Bradford Jr. April 1 1774]”  ― James Madison, Writings

“Liberty is to faction what air is to fire, an aliment without which it instantly expires. But it could not be less folly to abolish liberty, which is essential to political life, because it nourishes faction, than it would be to wish the annihilation of air, which is essential to animal life, because it imparts to fire its destructive agency.” ― James Madison


 “The advancement and diffusion of knowledge is the only guardian of true liberty.”  ― James Madison


“It may be a reflection on human nature, that such devices should be necessary to control the abuses of government. But what is government itself, but the greatest of all reflections on human nature? If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself.” ― James Madison, The Federalist Papers

 “The powers delegated by the proposed Constitution to the federal government are few and defined. Those which are to remain in the State governments are numerous and indefinite. The former will be exercised principally on external objects, as war, peace, negotiation and foreign commerce. … The powers reserved to the several States will extend to all the objects which in the ordinary course of affairs, concern the lives and liberties, and properties of the people, and the internal order, improvement and prosperity of the State.” ― James Madison

“The operations of the federal government will be most extensive and important in times of war and danger; those of the State governments, in times of peace and security.” ― James Madison, The Federalist Papers


“A good Government implies two things: first, fidelity to the object of Government, which is the happiness of the People; secondly, a knowledge of the means by which that object can be best attained.” ― James Madison, The Federalist Papers



 “Wherever the real power in a Government lies, there is the danger of oppression. In our Governments, the real power lies in the majority of the Community, and the invasion of private rights is chiefly to be apprehended, not from the acts of Government contrary to the sense of its constituents, but from acts in which the Government is the mere instrument of the major number of the constituents.” ― James Madison, Letters and Other Writings of James Madison Volume 3

“Democracy is the most vile form of government.” ― James Madison


“I believe there are more instances of the abridgment of the freedom of the people by gradual and silent encroachments of those in power than by violent and sudden usurpations.” ― James Madison

“The truth is that all men having power ought to be mistrusted.” ― James Madison

“All men having power ought to be distrusted to a certain degree” ― James Madison

“The accumulation of all powers, legislative, executive, and judiciary, in the same hands, whether of one, a few, or many, and whether hereditary, selfappointed, or elective, may justly be pronounced the very definition of tyranny.” ― James Madison, Federalist Papers

“The means of defence against foreign danger have been always the instruments of tyranny at home. Among the Romans it was a standing maxim to excite a war, whenever a revolt was apprehended. Throughout all Europe, the armies kept up under the pretext of defending, have enslaved the people.” ― James Madison, Notes of Debates in the Federal Convention of 1787 Reported by James Madison

“You must first enable the government to control the governed; and in the next place, oblige it to control itself.” ― James Madison, The Federalist Papers

“Where an excess of power prevails, property of no sort is duly respected. No man is safe in his opinions, his person, his faculties or his possessions. ” ― James Madison


“It will be of little avail to the people that the laws are made by men of their own choice if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood.” ― James Madison


“The purpose of separation of church and state is to keep forever from these shores the ceaseless strife that has soaked the soil of Europe in blood for centuries. [Letter objecting to the use of government land for churches, 1803]”

“The civil rights of none shall be abridged on account of religious belief or worship, nor shall any national religion be established, nor shall the full and equal rights of conscience be in any manner, or on any pretext, infringed.” ― James Madison


“Religious bondage shackles and debilitates the mind, and unfits it for every noble enterprise, every expanded prospect.[Letter to William Bradford Jr. April 1 1774]” ― James Madison, Letters and Other Writings of James Madison Volume 3

“Religious bondage shackles and debilitates the mind and unfits it for every noble enterprise…. During almost fifteen centuries has the legal establishment of Christianity been on trial. What have been its fruits? More or less, in all places, pride and indolence in the clergy; ignorance and servility in laity; in both, superstition, bigotry, and persecution.” ― James Madison, A Memorial and Remonstrance, on the Religious Rights of Man: Written in 1784-85


“Equal laws protecting equal rights…the best guarantee of loyalty and love of country.” ― James Madison.


“In no instance have the churches been guardians of the liberties of the people.” ― James Madison

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A partial draft Hindi translation of Breaking Free of Nehru is now online

Some years ago, Sh LK Kandpal, founder Trustee of the Freedom Team of India, volunteered to take up the challenging task of translating Breaking Free of Nehru into Hindi. I am delighted that roughly a third of the book has since been translated. Although he'd like to have the draft translation reviewed and tested by a professional (and completed), I think it is good enough to give a flavour of the book in Hindi to those so interested.

Therefore I'm publishing both the Word (use Arjun Wide font – download from here) and PDF versions, below. 

Word version

PDF version

I have requested a professional translator for a cost and time estimate to finish this work.  I've not yet received any estimate, so if you know of any high quality professional translator interested in undertaking this work, I'd be keen to discuss with such person. I think the reform work is now beginning to reach the ground and we need to have a Hindi (and other regional language) translation of this book freely available on the internet.

Once again, I'd like to thank Sh. LK Kandpal for his effort. I look forward to his continuing contributions to liberty in India.

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