Thoughts on economics and liberty

Author: Sanjeev Sabhlok

A liberal perspective on taxes – Part I

[This write-up was published in Freedom First, November 2009]

Sanjeev Sabhlok

This month and the next I will outline a liberal theory of taxation: something that, surprisingly, does not yet exist (indeed, there are may arbitrary assertions about taxes in the liberal literature but nothing that is fully integrated with the liberal social contract). Before I propose such a theory, let me thank Mr. S.V. Raju for his generous review of my book, Breaking Free of Nehru, in Freedom First last month. I’d also like to remind you that the book, as published, is now available as a free e-book at http://bfn.sabhlokcity.com/.

Paying for the social contract

The idea of a liberal social contract to defend our life and liberty harks back to Thomas Hobbes. The contract authorises governments to provide us with public goods like defence, police, justice, and infrastructure.[1] Taxes are then the fees paid for these goods. The liberal thus considers the proper funding of government activity as an integral part of the free society. This perspective is dramatically different from the ‘New Classical’ or anarchic approaches which consider government activity to be a waste. The liberal notes that it is citizens who, implicitly or explicitly, authorise the social contract (and not companies or other legal entities). Therefore citizens, individually, must pay taxes: not companies or other such entities. Second, it must be mandatory on all citizens to pay taxes except when someone is simply too poor to pay.

How much should these citizens pay? Should there be one flat fee per citizen (poll tax) or should different citizens pay a different amount? There are basically two different price models in the marketplace. (1) In a perfectly competitive market everyone pays the same unit price (such as for a kilo of onions) irrespective of his or her willingness or ability to pay. (2) Monopolistic control, however, allows circuses to fix different prices for different seats for the same performance. Price discrimination (PD) of this sort is based on consumers’ differential willingness to pay (note that willingness to pay is the same as the ability to pay under most circumstances). PD is commonly used in markets, and includes student discounts and different fees charged from Indians and foreigners to enter the Taj Mahal.

Price discriminating taxation by the monopoly state Economic analysis (made from the demand side) of public goods provision leads us to “Lindahl prices” as the proper solution. According to this each person must pay a different price equal to the worth of the public good to him.[2] From the supply side the opposite problem becomes: what should the monopoly state (Leviathan) charge for its services to ensure that everyone gets what they really want?

The theory of monopoly tells us that where PD is feasible, the monopoly will increase its output to accommodate all preferences and thus produce “the same level of output as would a competitive industry”[3]. It does so by skimming off all consumer surplus.[4] Both these analyses lead us to reject outright the poll tax solution: thus, a “tax structure that levies the same tax on all citizens cannot in general be Pareto efficient”.[5]

But which of the two: flat tax or progressive tax is a better way to deliver the optimal level of public goods? Consumer surplus generally increases disproportionately with income for (as illustrated by auctions) the rich are willing to pay disproportionately more than the poor for a given product, since each incremental unit of money has a relatively lower value for them. A flat marginal tax will therefore lead to sub-optimal provision of public goods by not capturing the entire consumer surplus of the rich. A level of progression is therefore more appropriate. In general, tax levels should be set at the point where the rich and poor get equal disutility from taxes.

A few other arguments reinforce this conclusion. First, the liberal requirement of a social minimum (basically a universal insurance scheme funded through the tax system) adds an apparent measure of progression to the liberal tax system. More commonly, progressive taxation is needed to offset the many indirect taxes usually imposed, such as consumption and excise taxes which are highly regressive, hitting the poorest the hardest in relative terms. Even F.A. Hayek, the great advocate of flat taxation, accepted that a modicum of progression would be needed for these two reasons.

But there is one more very important reason that is often neglected. PD is optimal only when the same good is provided by a government. If an extra product is delivered to the rich, then a further increment must be charged. It is self-evident that the rich do receive a greater share of government services than the poor do. For instance, they use the court system disproportionately more. They also receive a higher quality of services. Thus, if a rich person’s daughter is kidnapped, the head of Police gets involved, but a similar complaint from a poor slum-dweller may not even get registered. Governments treat the rich as being of value, and the poor of no value. That is totally contrary to the social contract, and even the slightest such discrimination means the rich must be charged progressively.

The practical implementation of PD: hurdle pricing A monopoly can only price discriminate if it has complete information about consumer preferences and is able to keep transaction costs (of calculating different prices for each consumer) low. Without these preconditions, it will prefer to impose hurdle pricing by placing hurdles between ‘seats’ and pricing them differently. “[T]he more finely the monopolist can partition her market under the hurdle model, the smaller the efficiency loss will be.”[6] Governments generally follow a hurdle model with tax brackets based on citizens’ ability to pay.

The rich never pay a flat tax The reality all over the world is that only the salaried upper middle classes end up paying the highest marginal tax rates. The rich pay much less than an overall flat tax rate would require, by influencing politicians to create tax shelters, exceptions, exemptions, and loopholes. Thus, Warren Buffet noted in June 2007 that in 2006 he paid only 17.7% of his $46 million income as tax, while his employees paid 32.9%. And the rich never pay the worst tax of them all: inflation; because they own real estate and shares which are inflation-proof.

Modest progressive taxation recommended Since the rich don’t even pay a flat tax, introducing a genuine overall flat tax will always be an improvement. But other factors prevent the practical implementation of progressive taxation, as well. First, a government can never determine the precise level of progression that captures everyone’s consumer surplus perfectly. Second, progressive taxation can lead to injustice when those with variable income flows (e.g. sports celebrities) are taxed at the highest marginal rate during the few years when they receive high incomes, while others who receive the same total income that is distributed more evenly are possibly (not necessarily) taxed less (in theory, this should not happen as the annualised lifetime worth of individuals must be used as the base of taxation; but this requirement can’t be implemented precisely). The third problem is that if a country sets its highest marginal rate too high, its rich will promptly abandon it or smuggle out their capital. Practical difficulties with progression and the reality that the rich never pay even a flat tax mean that only a modest level of progression can be recommended. Hayek’s prescription on taxation[7] can now be extrapolated to yield a broad rule of thumb, namely: that where income taxes are the primary source of taxation (as should be the case), then the highest marginal tax rates should be just above the proportion of taxes to GDP, with two tax brackets equal to, and below, this proportion. In India, this could mean the highest marginal tax of (say) around 21 per cent with two brackets at 18 and 15 per cent each. Of course, such low rates will demolish our tax collections because of our narrow income tax base. But in this article I’m only discussing the theory; the practicalities will be dealt with the next month.

Freedom Team of India You are hopefully aware of the work of the Freedom Team of India (http://freedomteam.in/) to find leaders to contest elections on a liberal platform. A new concept called Adharshila has also been proposed (http://adharshila.freedomteam.in/) to promote liberal discussion and advocacy across India. I hope you will participate in these important efforts to reform India’s governance.


[1] Details in chapter 4 of my draft manuscript, The Discovery of Freedom, http://discovery.sabhlokcity.com/. [2] Joe Stevens, The Economics of Collective Choice, Westview, 1993, p. 106.
[3] Hal Varian, Microeconomic Analysis, W. W. Norton and Company, 3rd edition, 1992, p. 243.
[4] The amount over and above the market price for a product that that different consumers would be willing to pay if its supply were significantly reduced.
[5] Robert Frank, Microeconomics and Behaviour, Irwin McGraw Hill, 3rd edition, 1997, pp.622-23.
[6]Ibid, p.418.
[7]In his book, Constitution of Liberty, Routledge & Kegan Paul,1960, p.323.

ADDENDUM

1. Minimising tax a rich man’s game, by CLARE MARTIN, November 16, 2009. The Age.
2. Captains of industry or pirates? Private investors flee without paying taxes. 3. Australia: tax-free for foreigners. The Age 16 Nov 09
3. These slides summarise some of the traditional issues in public finance.
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Greek thought, the harbinger of world liberty, has its direct source in INDIA

While revising my manuscript The Discovery of Freedom‘ (DOF) I could not but help noting how similar the view of Indian sceptics including Buddha, and Socrates were. And that Indians came earlier in historical time than the Greeks. So yesterday I had this question: did India influence Greece? A bit of reading from books at home and a bit of research on Google seems to have ‘solved’ the puzzle.

When, upon reading A Critical History of Greek Philosophy by W.T. Stace (MacMillan,1965) I came across his rather niggardly view on Indian philosophy, arguing that Indian thought doesn’t arise from ‘pure thought’ and that it is ‘poetic rather than scientific’ (p.15), I decided to investigate further. I have now found a recent American PhD dissertation (2000) that uses the most recent sources to firmly demonstrate that it was INDIAN scepticism that traveled to Greece through Persia and brought out the temperament of questioning that finally led to Socrates. I’ve extracted a short section from the dissertation below (the dissertation is publicly available). I encourage everyone to read the entire dissertation, if for nothing else but to learn more about the sophists and to understand the importance of Protagoras who may ultimately turn out to be more important in world history than even Socrates.

Does it matter to me whether humanity has benefited in the areas of mathematics (number system) and philosophy more from India than from, say, Greece? I’m not particularly fussed where the source is, India or Greece. These ideas belong to all of us. Humanity. No country owns them, at least not today. What I do want, though, is accurate attribution of sources. It won’t do to attribute the first seeds of rational thought in the world to Greece when these ideas arose in India, and were transmitted by Indians to the Greeks. I’m not a specialist in history so I won’t finalise my opinion on this issue, but I will note in DOF the strong possibility of Rahula’s research findings being true.

EXTRACT

Extract from The Untold Story about Greek Rational Thought: Buddhist and Other Indian Rationalist Influences on Sophist Rhetoric, PhD dissertation by BASNAGODA RAHULA, found as PDF on the internet. [Copy on my server] [This is a conversion from PDF to text – a painful process with a lot of errors. A lot of manual editing, and references have been removed. They are all available in the original PDF].

General Signs of Indian Influence on Protagoras and Gorgias

Three factors may justify the possibility that the unusual resemblance of Indian rationalist thoughts to Greek sophist thinking was caused by a connection between the two societies. First, Protagoras, the alleged father of Greek sophistry, was given Persian education, an easy route to the access of Indian wisdom. During Xerxes’ invasion of Greece, Protagoras’ father, an extremely rich person in Abdera, entertained Xerxes and received the emperor’s permission to educate Protagoras under Magi. This report was supported by Herodotus’ notes that Xerxes, during his return journey, “stopped at Abdera and made a fact of friendship with them [people in Abdera].” As Untersteiner noted, Protagoras was a young child when Xerxes’ visit to Abdera took place, and Protagoras education under Magi could have been arranged for a later date (2). Based on the traditional practice of the pupil’s visiting the master, one may conclude that Protagoras later went to Susa and studied under Magi. This visit would have been more profitable for Protagoras since he would hardly miss Indian wisdom those days in the central part of the Persian empire. On the other hand, wherever Protagoras was educated, knowledge coming from Persia could have included Indian thinking since Darius had already accommodated, as the next chapter will elucidate, Indian wisdom in the Persian empire. Protagoras’ Persian education seems to be a strong support for his possible acquisition of Indian concepts in epistemology and other fields.

Second, Protagoras was the pupil of Democritus who was presumably benefited by a multitude of Indian concepts, including Buddhist concepts as his major source of influence. Philostratus was the first informant of Protagoras’ learning from Democritus,’ and this information can also be true, “concerning the intellectual development of Protagoras” (Untersteiner 2). Particularly, Democritus’ theory of knowledge seems to have enkindled a new interest in epistemological inquires among his followers, and Protagoras’ directions in the same field may have been guided by Democritus. Protagoras’ closeness in his epistemological studies to the Indian counterparts will be discussed later, but here it should be briefly stated that Democritus’ possible Indian influence could hardly leave no marks on his pupil Protagoras.

Third, Gorgias was the student of Empedocles, whose philosophical theories reflect his possible familiarity with Indian idealistic and rationalistic views. Laertius and Quintillian and some others reported that Gorgias studied under Empedocles, and there is no reason to doubt these reports. As Untersteiner indicated, Empedocles’ influence on Gorgias is “generally recognized by scholars” (92), and Gorgias’ particular interest in epistemology is a possible sign of this influence. It is probable that both Protagoras and Gorgias exhibited a similar interest in epistemology and both maintained skepticism towards metaphysical concepts since the teachers of the two sophists retained a particular interest in the same field.

The major aspects of sophist rational thought and their similarity with the Indian counterpart will be discussed in separate sections, but it seems apt to highlight here a unique flavor in argumentation entertained by Protagoras-the flavor for arguing for or/and against any topic-as a possible Indian derivation. Perhaps this hypothesis appears to be an overstatement since argument on probabilities is said to be of Greek origin. Nevertheless, a careful examination of the practices in Indian debating during the sixth century B.C.E. and comparison of those practices with Protagoras’ attitude towards argumentation justify the possibility of this hypothesis.

Interestingly, there was a group of Indian debaters namely Vitandavadins who roamed among all sorts of thinkers and challenged other views. “He [a Vitandavadin] had no views of his own but merely indulged in eristic for the purpose of securing victory in argument” (Jayatilleke 217). Even though the word Vitandavadin did not occur in the Sutta Pitaka, one finds numerous examples that during the sixth century B.C.E. these debaters frequented debating halls, parks, and other meeting places, challenging all sorts of views of other traditions, without maintaining any particular philosophy or theory of their own:

There are recluses and Brahmins who are clever, subtle, experienced in controversy, hair-splitters, who go about breaking to pieces by their intelligence [pannagatena] the speculations of others. Were I to pronounce this to be good, or that to be evil, these men might join issue with me, call upon me for my reasons, and point out my errors.’

These remarks suggest that those “recluses and Brahmins” were not those who held any particular view or theory but those who were indulged in debating rarely for the sake of defeating the opponents and establishing rhetorical power. Whatever concept or theory one held, those debaters opposed one’s position using their intelligence and verbal skill. This practice is farther confirmed by the sentence, “Some recluse or Brahmin is addicted to logic and reasoning.” Saccaka, who earned the description of “one who indulged in debate, a learned controversialist, who was held in high esteem by the common people” was, undoubtedly, one of them. The Majjima Nikaya has preserved a very important sentence that reflects his theoretical practice and skill:

If I attacked a lifeless pillar with my language, it [the pillar] would totter, tremble, quake; how much more a human being!’ Saccaka was more a demonstration of his verbal power than a theorist. Here, he has presented no theory, but simply boasts about his invincible rhetorical power. ‘Whoever he argued with, he defeated the opponent’s theory without insisting on a particular view of his own but only using his verbal skill (eristic) and argumentation (antilogic) that would suit to the occasion. The Samyutta Nikaya has provided “an eye-witness’s account of these recluses and Brahmins in action” (Jayatilleke 221). Kundaliya, a visitor to the Buddha’s monastery, told the Buddha that he (Kundaliya) would visit parks and frequent assemblies as a regular habit because he had found interest in seeing some recluses and Brahmins having being engaged in debates. The purpose of those debates was only to emphasize their own argumentation (itivadapa mokkhanisamsam) and to disparage that of others.” All this evidence indicates that debating for the mere sake of reflecting the opposition had become a prevalent practice, as well as a crowd-gathering entertainment, during the time of the Buddha. The topics reportedly argued about by those controversialists speak a volume of this peculiar practice of debating. Most of the topics were in pairs, representing the thesis and the antithesis of the same subject. The following is the first list of such topics given in Pali texts:

The fact that they were originally in pairs is confirmed by the remarks attested to one particular pair of topics:

1.The universe is eternal/The universe is not eternal.
2. The universe is finite/The universe is not finite.
3. The soul is identical with the body/The soul is different from the body.
4. The enlightened person exists after death/The enlightened person does not exist after death.
5. An enlightened person does and does not exist after death/An enlightened person neither exists nor does not exist after death.'” A more expanded list of thirty-one topics, all in pairs and each pair dealing with the opposite of the same subject as given above, is found in the Lankavatara Sutra.’ The fact that they were originally in pairs is confirmed by the remarks attested to one particular pair of topics:

The threefold world is caused by ignorance, desire, and Karma. The threefold world is not caused by ignorance, desire, and Karma. This pair too belongs to the Lokayata category of questions. (qtd. in Jayatilleke 53)

It is obvious that this development of questions in pairs echoes the practice of debating, in which the mere skill in argumentation was emphasized. Debaters such as Saccaka, whose primary interest was “displaying dialectical skill and defeating their opponents, regardless of the nature of the arguments used” (Jayatilleke 219), would probably argue one day in favor of the infiniteness of the universe and the other day against it, depending on the position of his opponents. Even though some debaters actually held some theories of their own, rhetorical skill was the main weapon that they employed to attack the opposition and defend their own views. The important point here is that in India there was a predominant and widespread debating practice in which both the proponents and opponents vehemently debated on the thesis and the antithesis of the same topic, adducing equally powerful arguments.

In Greece Protagoras was the first rhetor to introduce this kind of argumentation. Laertius said that “Protagoras was the first to say that on every issue there are two arguments opposed to each other.” Clement repeated the same statement, saying that Greeks said, “Every argument has an opposite argument,” following Protagoras.” Seneca wrote, “Protagoras says that one can argue equally well on either side of any question, including the question itself whether both sides of any question can be argued.” Not only did Protagoras introduce this “eristic argument” as remarked by Hesychius,” but he also demonstrated the truth of his theory, arguing “by the method of questioning, a practice he originated.” Protagoras also “wrote down and prepared disputations on notable subjects.” Thus it is evident that Protagoras held his two-logoi theory as one of his major concepts, having introduced it, practiced it, and written treatises on it.

This theory of argumentation seems strikingly similar to the popular Indian concept of arguing for and against the same topic. Just as the topics used by Indian debaters consisted of the direct affirmation and the direct negation of the same statement, Protagoras’ topics also consisted of pairs of two extreme opposites. Similarly, the field from which these questions were drawn seems to be exactly the same for both Protagoras and the Indian debaters:

Protagoras, when once the existence of ‘two logoi in opposition to each other’ was discovered as inherent in all reality whenever one tries to consider it abstractly, translated this properly of the metaphysical world into contradictory pairs of opposites, making of it a precept for argument; that is to say, he must have demolished by dialectical arguments and with a certain systematic severity all the principle concepts created by Reason, beginning from the problem of God in order to pass on to the others. (Untersteiner 35)

Notably, Protagoras’ “contradictory pairs of opposites,” as Untersteiner has stated above, did not originate in traditional Greek rhetoric; rather, it originated in metaphysics, the field from which the Indian debaters also selected their topics. There is the possibility that Protagoras learned this practice from Democritus, who could have been very much exposed to the Indian way of debating while he was in India. One should also wonder why Protagoras was not exposed to the same theory of argumentation while he was receiving his Persian education.

A controversial situation might arise from this disclosure since the argument about probabilities has long been accepted as an essential, inherent characteristic in traditional Greek rhetoric. It should be repeated, however, that the origin of systematic persuasion in Sicily was a little over two decades old when Protagoras came to Athens, and whatever arguments on probabilities that might have existed in Sicily before Protagoras began his rational persuasion in Athens was probably in legal discourses. Contradictory references to the existence of argument about probabilities in Sicily would make this second assumption even more doubtful. Plato, referring to the example of a weakling’s assault on a strong man, indicated that Tisias argued about probabilities in legal discourses. However, Aristotle cited the same example to suggest that Corax, not Tisias, argued on probabilities in legal speeches. In contrast to both, Cicero, relying on another Aristotelian source that is now lost, remarked that Corax and Tisias prepared only a handbook for the civilians to regain their (civilians’) lost property from the fallen tyrants.” Another alleged reference is that Corax “developed a tripartite scheme of oratory to help the citizens speak in the assembly” (Kennedy, Art of Persuasion in Greece 59). However, no argument about probabilities was ever mentioned in this scheme of oratory that was invented at least a decade after the origin of judiciary discourses. If whatever persuasion on probabilities ever achieved any importance in Sicily before Protagoras entered upon rational argumentation in Athens, that would probably be only in legal speeches.

As noted in the introduction, when Gorgias and Tisias visited Athens about three decades after Corax and Tisias prepared the earliest handbook on legal discourses, Protagoras had already enkindled an interest in debates, eristic, and antilogic, using his two-logoi theory. He introduced “the method of attacking any thesis,” conducted debates, and earned the nickname “master of wrangling.”‘ His two books—The Art of Debating and Contradictory Arguments in Two Books—may further authenticate his intention and interest in this field. This rhetorical situation, which apparently had no roots in Greek culture, connects, both in appearance and content, only to the debating habits practiced by the Indian debaters during the late sixth century and the early fifth century B.C.E.

The difference between Protagoras and Sicilian Gorgias may be marked by the latter’s overemphasis on the invincible power of language, ft is apparent that Gorgias had developed this attitude towards language before he visited Athens in 427 B.C.E, as an ambassador to Leontini since his sensational speech in Athens against the impending attack on Leontini by Syracuse bears witness to his confidence in the power of language and his demonstration of that power, “Encomium on Helen” farther clarifies his attitude towards language, “Speech is a powerful lord,” which affects the mentality of all sort of people,” Words are like magic and drags that cause unbelievable changes in individuals,’ While Protagoras maintained that antilogic and eristic would empower the opposing argument, Gorgias mainly held that the power of the language itself might determine the skill in persuasion.

One may observe a close similarity between Gorgias’ emphasis on the power of words and the Indian debater Saccaka’s assertion of the same, Saccaka, as quoted above, maintained the invincible power of words, giving his own exaggerated skill of frightening a lifeless pillar with his words. Based on the awareness of the highly competitive debating background during this time, it may be assumed that there were a host of Saccakas in India, maintaining the same power of words with some variations. This widespread emphasis on the power of language might invite one to investigate a possible Indian influence on Gorgias, who also asserted the same power of words. Overemphasis of language as a tool to beat the opposition in India and to convince the opposition in Sicily was determined by the demands in each society, but the invincible, almost magical power of words might have originated from the same source.

One important clue available to suggest a transmission of this concept to Gorgias is the possibility that Gorgias’ teacher Empedocles had known about the debating practices of Saccaka and of similar Indian debaters. The discussion in the previous chapter revealed that at least two contemporaries of the Buddha-Ajita and Kacchayana­ had held the theory of elements exactly in the same form as Empedocles held it, providing strong support for Empedocles’ possible borrowing of that theory from the Indian sources. Both Ajita and Kacchayana were themselves debaters, but the vital point is that they both were engaged in debates with Saccaka:

Saccaka is made to say that when he joined them [the six famous debaters including Ajita and Kacchayana] in debates, they evaded in one way or other, shifted the topic of discussion, and showed signs of irritation, anger, and displeasure. These are among the recognized ‘occasions for censure,’ and their mention here implies that Saccaka was victorious in these debates. (Jayatilleke 219)

So the probable assumption should be that, if Ajita’s and Kacchayana’s theories of elements reached Empedocles exactly in the same form, the Greek thinker should also have heard about the debating power and practices of Saccaka, the more famous figure than the two theorists of elements. The rest is understandable. Even though one may not hear Gorgias say anything about Empedocles, it is probable that Gorgias came to know about the invincible power of words from Empedocles. This assumption will be farther justified in the next section of the present chapters when Gorgias’ theory of knowledge is evaluated in the light of Indian skepticism.

The lives of the other sophist thinkers except of Critias are surprisingly obscure; little is known other than the reports that several of them were the pupils of either Protagoras or Gorgias. Nothing is known about Thrasymachus other than that he came from Chalcedon in Bithynia and lived in the second half of the fifth century B.C.E. Hippias was a contemporary of Socrates, but his life is unknown except Suidas’ report that Hippias learned from virtually unknown Hegesidamus.’ Antiphon the Sophist was mixed up with two other Antiphons, and, despite having a certain collection of his writings, his early life remains unknown.

Despite the unavailability of biographical details about these sophist thinkers, strong similarities exist between their thinking and Indian thought. Particularly, the common Indian theory of knowledge and the Buddhist theories of sociology and ethics bear an undeniable resemblance with the thoughts of Prodicus, Antiphon, and Critias. Perhaps, Protagoras’ and Gorgias’ inquiry into epistemology paved the way for the rest of the sophists to continue with the same investigation. All sophist thinkers generally maintained a close relationship with other sophists. Several of Platonic dialogues have shown that sophists gathered together and held conversations together. It is possible that the younger sophist thinkers learned from more honorable Protagoras and Gorgias, whose teachers were the possible borrowers from Indian sources.

Addendum: I made the following entry on Wikipedia on 23 March 2010, but my experience with them is very poor and it is that they will likely delete it. So be it. Let this information stay on my web page.

Indian thought as direct precursor of the Sophists

Basnagoda Rahula, in his PhD dissertation (December 2000) entitled, ‘The Untold Story about Greek Rational Thought: Buddhist and Other Indian Rationalist Influences on Sophist Rhetoric’ (Texas Tech University), provides evidence on the influence of Indian philosophy on Protagoras, the founder of sophistry. In particular, “a careful examination of the practices in Indian debating during the sixth century B.C.E. and comparison of those practices with Protagoras’ attitude towards argumentation justify the possibility of this hypothesis.”

Further readings

Accidental compilations of references that may be useful to me for further investigations if time permits:

1) India in early Greek literature: by Klaus Karttunen: here and here

2) India and the Greek World; A study in the transmission of culture by Sedlar, Jean W.

here

 

3) Early maritime linksIndian Economic & Social History Review, Vol. 31, No. 1, 65-88 (1994)

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Educating our children: A free market in schools

(This article of mine was published in the July 2009 issue of Freedom First.)

In the May 2009 issue of Freedom First I suggested that in addition to ensuring defence, internal security and justice, the free society must commit to equality of opportunity (EO). Delivering EO requires removing discriminatory obstacles to achieving public office, ensuring a good universal school education system, and guaranteeing a social minimum.

School education as a key element of equal opportunity

No child’s future should be jeopardized because its parents happen to be poor. We must guarantee good school education (including vocational training, where appropriate) to all children who want to study to year 12 (or age 18). Twelve years of education has now become a minimum given the complexity of technology that must be mastered in order to become a productive member of society. Such education will generate an enormous economic dividend for India through positive externalities including social capital formation.

In this article I outline how we can successfully deliver high quality school education at a relatively modest cost to the taxpayer (details are available in my book, Breaking Free of Nehru, Anthem Press, 2008).

A fully privatised school system

Children from rural areas or slums cannot even dream of equal opportunity today. These luckless children are destined for a lifetime of failure by the inefficiencies and corruption entrenched in our government school sector. The best these children can hope for is to get some patchy education in government schools where such schools exist (many government schools are found only on paper, or teachers are paid without attending school).

But why does a government need to operate schools? Managing a school is a hands-on exercise, much like managing a business, and governments are terrible at managing anything that must deliver value. Government officials and teachers have little or no incentive to deliver world-class education at the lowest possible cost. In comparison, the private sector can only survive if it delivers value for money. Therefore, parents who can afford it, prefer to send their children to private schools.

Governments are also unusually soft on their own failures. A Director of School Education in a state government will demand stringent standards from private schools even as he ignores the shoddy education provided by the government’s own schools. Governments should therefore not directly manage schools. However, they could regulate school standards, noting that self-regulation by a body of experts is the preferred way for such a task.

As a first step, our governments should stop building, owning, and maintaining schools. That would include an end to the appointment of lakhs of school teachers, an activity that is a source of great corruption and favouritism. School assets (bundled with a long-term lease on the school’s land) should be auctioned to educational consortiums that are at least partially owned by local teachers and residents. I have suggested a transitional mechanism for this in my book that will protect existing teachers.

This will immediately ensure that the incentives of school managers are better aligned to the needs of the local community. Further, the lands and buildings belonging to schools will also be much better maintained and utilised.

Customised vouchers for each child

Privatisation is only the first part of this model. Parental choice is the other part. School education vouchers would be issued by the government for each child and mailed out to parents. Children of poor parents would be issued high-value vouchers. Rich parents will not get any vouchers. The lower economic classes may get vouchers, depending on how much it costs to deliver good education. All parents would thus be empowered to send their children to almost any school they want to. All they would need to do is to pay a top-up amount over and above the value of the voucher.

Under the current model, government schools receive funds unrelated to the size or nature of their enrolment(s) or educational outcome(s). In the new model, they would get money based on a reimbursement of vouchers. They would therefore need to enrol as many children as they can. They will have to go out and literally beg the poorer parents – such as the parents of child labourers – to send their children to school. Where necessary, schools would provide a breakfast for these children: anything to ensure that parents agree to send their children to school. Enrolment rates would therefore shoot through the roof.

Second, schools would need to ensure that the children they have enrolled achieve the required educational standards. Only then will they be able to invoice the government against these vouchers. The more the number of children these schools enrol and pass out at an agreed, independently tested standard, the more the money they will receive.

Note that through high-value vouchers for poor parents, schools in economically backward areas will be able to afford high salaries for teachers and potentially attract even better teachers than schools in wealthy urban areas. Good schools would thus emerge in rural areas and slums for the first time in India’s history. This would dramatically increase both the quality of education and competition in the school market. Very little central planning or quality control will be needed as the market will sort out good schools from the bad. (A self-regulating body of school experts would help.)

Above all, the preferences of parents in selecting the right school for their children will be honoured, and who can be a greater well wisher of a child than its parents?

Raising money for the vouchers

It is true that defence, police, and justice must take first priority for any government. However, universal high quality school education must receive a high priority as well. The system outlined above will not cost too much because the current funds allocated to tertiary education would be shifted entirely to school education. In the tertiary education sector, students would be asked to pay their fees through loans issued by the government (I’ll talk more about this topic in a separate article).

Second, funds needed beyond that could be raised through capital markets as a long-term investment loan. This should be easy, given that there is nothing in any society that yields higher returns on investment than good school education. Third, schools will be permitted to use their land and buildings for commercial purposes after school hours, thus using their assets more productively and keeping the fees in check.

A free market in schools of the sort described above is guaranteed to deliver high quality education – as guaranteed to succeed as India’s current socialist method is guaranteed to fail. There is an open and shut case for change.

Freedom Team of India

Sadly, this simple and effective model will remain a pipedream since ruling politicians in India currently use the school education system almost purely to ‘mint money’ for themselves. Education is simply not their goal. Money making is. To implement such a system liberals will need a mandate from the people of India to form an ethical, liberal government. The Freedom Team of India (http://freedomteam.in) is pushing ahead in that direction. I would encourage you to find out more about the Team.

Addendum

A new RCT look at educational vouchers From Matthew M. Chingos and Paul E. Peterson (pdf):

In the first study using a randomized experiment to measure the impact of school vouchers on college enrollment, we examine the college-going behavior through 2011 of students who participated in a voucher experiment as elementary school students in the late 1990s. We find no overall impacts on college enrollments but we do find large, statistically significant positive impacts on the college going of African American students who participated in the study. Our estimates indicate that using a voucher to attend private school increased the overall college enrollment rate among African Americans by 24 percent.

Private Schooling In India: Results from a Randomized Trial
by Alex Tabarrok on February 5, 2014

THERE IS NOT THE SLIGHTEST CASE TO HAVE A SINGLE GOVERNMENT SCHOOL

"private schools achieved equal or better outcomes at one-third the cost"

ADDENDUM

More evidence that all schools should be free schools

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Sex, Science and Profits by Terence Kealey

The death knell of government funding of tertiary eduation, science, and research.

I accidentally came across this book (London: William Heinemann, 2008) while browsing a bookshop last week and bought it because it was very well written and dealt with economic policy. By the time I finished it (just a few hours after starting it, so engagingly written is this book!) I found that I now have another personal companion for life: a book to live with; to carefully re-read when one has some time on one’s hands. It is on par with my top favourties: Julian Simon’s The Ulitmate Resource; Milton Friedman’s Capitalism and Freedom; Ayn Rand’s Capitalism: The Unknown Ideal.

What I like is that F. A. Hayek is very strongly vindidated through this book (even though Kealey doesn’t cite Hayek even once). The book offers the strongest possible support for sponteneous order and self-interested drivers for the advancement of science and technology. It tells us that freedom should be our first priority in life, along with the accompanying systems of justice and law and order. Everything else we can take care of ourselves. We want our governments to stay away from us as much as possible for they harm us badly each time they try to help us.

The book sends higher education and science bureaucrats packing! They won’t like it one bit. Indeed, the collectivists, mercantilists, and statists in our midst (most ‘intellectuals’ fall in one or other of these categories) will resist the message of this book and keep harping on the need for government funding of higher education and R&D for apparently that is the only way to foster innovation. But Kealey shows that innovation has overwhelmingly come through privately funded initiatives. Indeed, wherever the government supports higher education and research, expect it to damage all prospects of innovation.

Sadly (and as expected), many modern economists with fancy toolkits but with little understanding of business, science, or society have fared rather poorly. But the book vindicates some of my favourite economists: Adam Smith, Joseph Schumpeter, Armen Alchian, von Neumann, and Robert Axelrod, among others. The book has also reminded me that I should try to read up more on Thornstein Veblen when I get some time: a person much neglected today. Also William Baumol and a few other modern economists. Unfortunately, one simply doesn’t have the time to read everyone.

What was really surprising, though (and this is simply an aside; nothing to do with the book’s main theme), was my discovery that Keynes once thought that The Origin of the Species is ‘economics couched in scientific language’ (p.361). That is quite startling, for it implies that Keynes possibly had a broader, evolutionary view of society and understood the nature of competition and spontaneous order – but that view doesn’t seem to come through in his rather statist General Theory that demands collectivist intereference in our freedoms by the state.

Either way, the classical liberals have been strongly vindicated. Most mind blowing (as far as I am concerned) in the book was the vindication of Thomas Jefferson’s famous belief that ideas should be free. As he had said, “He who receives an idea from me without lessening me, as he who lights his candle at mine receives light without darkening me.” Kealey confirms that Jefferson was right and that governments should not issue patents (except in the pharmaceuticals industry) for issuing patents almost invariably harms innovation and significantly reduces wealth – including the wealth of patent holders themselves! Even patent holders are far better off by using their findings commercially and letting competitors try to improve things: that triggers further innovation rapidly and yields the highest profits for everyone.

This book strongly reinforces the purely market-based model for university education (supported by loans from government for students) that I have advocated in Breaking Free of Nehru. In particular, for the Freedom Team of India, my message would be: we shouldn’t advocate government funding for universities in India. Let the market work out what it needs, including the science it needs. Much material from this brilliant book will now find its way into my second book, The Discovery of Freedom in the coming weeks. It supports everything I have been saying. No wonder I like it so much!

A brilliant piece of work! STRONGLY recommended!

ADDENDUM

Excellent article by Peter Roberts in AFR 21 October 2010, p.68, “Funding’s role in science”

From catalaxy files

Terence Kealey on the economics of scientific research

A summary of the book appeared in a series of posts on the Cat a few years ago and this is theconsolidated summaries.
A few extracts to give the flavour.
Chapter 5. The Agricultural Revolution.
The area of innovation shifted to Holland and England. Vital innovations such as crop rotation and systematic improvement of crops and pastures were driven by gentleman farmers such as “Turnip” Townsend and associations such as the Lunar Society which consisted of a mix of scientists, engineers and industrialists.  By 1850 agricultural productivity in Britain was increasing by 0.5% per annum, unprecedented in history. Laissez faire ruled (almost) and there was no state involvement in research or industry policy.
Chapter 6. The Industrial Revolution.
Between 1780 and 1860 the population of Britain tripled from 7.5M to 23M and the real per capita income double in real terms across all classes.
The drivers were increased productivity of machines and the movement of labour from the land (and Ireland) to the factories.  The driver of machine technology was NOT science as predicted by the Bacon but the improvement of existing technology by ingenious artisans such as Newcomen, Watt, Trevithic and Stephenson. Amazingly, the scientists were struggling to keep up with the tradesmen! Hooke (the scientist) told Newcomen that his idea would not work while he was developing it (fortunately he persisted) and Carnot’s work on thermodynamics was prompted by Watt’s steam engine which could not work according to the laws of science as they were understood by leading scientists at the time.
France followed the Bacon model and set up glittering science laboratories and institutions of learning, while the state ran on the basis of taxes extorted by an army of Farmers-General (tax farmers) working on a commission basis with draconian powers of search, detention and confiscation. Hence the Revolution, while the science laboratories produced scientific advances without any impact on technology or the wealth of the French people.
Chapter 7. Economic History since 1870
This chapter is about the comparative economic performance of nations with some warnings about the valid and invalid comparisons that are often made. Invalid comparisons are often used to promote the Baconian approach to science with the aim of getting more state involvement by way of industry policy and public spending on science and education. A classic example is the comparison of Germany and Britain post 1870. Bismark’s warfare/welfare state sudsidised and protected local industries, especially steel. With the inflated cost of German steel it made sense for England to produce less and buy from Germany, still a lot of people just saw the decline of an industry, not wealth transfer from Germans to Britons. They also misread the play on technical education, being over-impressed by the network of state-funded technical colleges in Germany and forgetting about the 700+ industry-funded mechanics institutes that were established  in Britain between 1820 and 1850.
There is a stunning table on the economic performance of the current (1980) 16 richest nations from 1870 to 1980. These figures indicate  GDP per capita in 1870 adjusted to the $US in 1970.
Australia at 1393 leads the UK 972, Belgium 925, Holland 831, Switzerland 786, US 764.
On an index of  productivity Australia scored 1.3 compared with UK 0.8, Holland US and Belgium 0.7. Australia was at the bottom in growth of productivity since that time.
Chapter 8.  Science Policies of the Twentieth Century
In this chapter Kealey traced the evolution of science policy in the US and Britain. They both started with a substantially laissez faire economy and also minimal state involvement in science, then during the 20th century the Baconians and the Czars of science took over and they went for central funding and control in a big way. For those who have been receptive to Kealey’s argument thus far, the results are  predictable (cw 18th century France).
Chapter 10.  The Real Economics of Research
In this chapter Kealey looks at the economics of R&D and then the economics of academic science, in each case asking whether government funding is required to optimise spending.
He confirms three Laws of  Funding for Civil R&D.
First Law. The % of national GDP  spent increases with national DGP per capita.
Second Law. Public and private funding displace each other (compete). So public funds tend to displace private funds.
Third Law. The public/private displacement is not equal. Public funds displace a larger volume of private funds than the public input. (net loss).
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