Thoughts on economics and liberty

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The economic foundations of religion

Came across an excellent hypothesis about religion in the April 2010 issue of the Journal of Political Economy.  The paper by Daniel L. Chen of the University of Chicago is entitled: "Club Goods and Group Identity: Evidence from Islamic Resurgence During the Indonesian Financial Crisis". 

In brief, it finds that organised religion has a strong economic basis. The existence and survival of an organised religion depends on crises! If we get rid of crises, and allow credit markets to freely operate, religion would collapse. I haven't fully read the paper but its hypothesis seems plausible and likely underpins the following phenomena:

1) Religions tend to prosper during financial crises (personal/ society-wide). (The crises in communist societies led to a huge revival of Christianity.)

2) Societies with good social insurance programs are likely to see the most precipitous declines in religion (Generous social insurance in most parts of Europe has led to serious declines in religion. This doesn't explain home-grown Islamic terrorism, for which see point (3), next.

3) As the financial markets in a society become more complete, religion will decline (being replaced by fanatic environmentalism, perhaps!). The major religion that currently benefits from incomplete financial (primarily credit) markets is Islam. If Islamic societies (e.g. Palestine, Arabia) allow the financial services sector to prosper, fanatic fringe Islam will be significantly hit, through lack of demand for its economic services. 

It might be worthwhile exploring whether Islamic terrorists from the West (i.e. home-grown Western terrorists) were personally affected by financial or other crises, and found it difficult to raise credit to start a business or go for higher study.

The underlying low credit-worthiness of the relatively uneducated Islamic youth in the West could well be driving them into fanatic Islam. Giving them loans at low interest rates might reverse the tide of home-grown Western terrorism (I'd caution, though, that the government should have NO ROLE in giving loans. That must be endogenous to the financial markets. If total freedom is allowed, finance companies will give loans by charging a higher risk premium from youth coming from relatively less educated religious groups, but at least there would be no credit constraint).

While I don't have the time to type out the text published in the JPE paper, Chen's draft paper is available online (here). The following extract from the draft paper provides a few glimpses into the arguments.
Religion is "a risk-sharing mechanism where people pool their resources and redistribute the pool according to their relative religious intensities. Agents choose a proportion of income to put in Pengajian. This proportion represents their religious intensity. The pool is divided according to how much agents contribute as a fraction of their income. The model has the empirical implications that those who are hit harder by economic distress will increase their religious intensity and those who are hit less hard will decrease their religious intensity. The effect should be mitigated when other forms of credit are available."
"[R]eligious intensity is associated with alleviation of need for alms or credit to meet basic daily needs during the peak of the crisis. The effect of economic distress on religious intensity essentially disappears in places where credit is available. And religious institutions appear to facilitate consumption smoothing among villagers, suggesting religious intensity functions as expost social insurance".
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Signalling quality through public rating surveys

The other day I was reading about Gavin Fitzsimons in the magazine of The Australian, and read some of his articles (here). What struck me was the power of questions and the signals we send when we ask questions. A very powerful set of ideas.

This led me, in contemplating my response to Downtown Host, the web-hosting company I host all my domains on, to the hypothesis that the HIGHEST SIGNAL OF QUALITY that a company can send to the world is to ask for an independent survey such as by Ratepoint (

The very act of asking a question IN PUBLIC is crucial. Only a company of HIGH quality like Downtown Host can afford the luxury of being rated publicly.The very act of asking an open ended question, with the response guaranteed to be displayed in public, is clearly the HIGHEST SIGNAL OF QUALITY a company can send.

All shoddy and shabby companies tend to  hide behind their 'Contact us' web page, hiding behind their useless customer support people, rather than exposing their inner working to public review.

I wish the Victorian bus (and public transport system in general) would expose itself to such a rating system! I've had the most horrendous experience with the Ventura Bus Company and indeed, with senior bureaucrats I dare not name, whose competence to run this system I deeply question. Most public sector agencies in the world would be totally blasted out of the water if they ever seek such feedback. That, once again, is proof of the universal rule that the public sector is, on average, miles behind the private sector in the provision of quality.

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Is there a science of personality type?

Between 1980 and 1981 I studied psychology intensively for the Indian civil services examination. I bought a handful of the latest books and browsed through virtually everything on the subject I could find in good libraries in Poona (Pune). Mind you, Poona had some outstanding libraries, including the British Council and Deccan College libraries. I perhaps skimmed through 50 good books on psychology, some in more detail than others. The subject fascinated me but I did form a bit of disdain for it, for it was mostly speculative, with little experimental confirmation of various theories.

As a result of this year of self-taught study of a subject entirely new to me (I had formally trained in pure science and mathematics) I scored enough marks in psychology to get me into the civil services. After that, however, I didn't find time or opportunity to read psychology again. Plus, more importantly, my interest shifted to economics. Popular articles in psychology did continue to provide me with useful information over the years, and I did gather that psychology was improving, particularly abnormal psychology. Many old theories were crumbling and robust foundations being given to others.

Since the mid-1990s, my interest has incrementally and sporadically veered towards psychology again, particularly with Kahneman and Tversky's famous contributions to economics, Steven Pinker's fine book, How the Mind Works that I managed to find and read only recently, and the recent works on neuro-economics. But this stuff is more about how our brain is designed and how we acquire knowledge, i.e. about epistemology, than about differences in personality. On the latter my knowledge has remained outdated (I still retain Wolman's 1979 "Contemporary Theories and Systems in Psychology" in my collection!).

In 2006 I was administered the Myer Briggs personality test (Myers-Briggs Type Indicator or MBTI) which came out with the result "INTJ", with "I" being relatively mild, and others dimensions clearer (see here). I didn't bother much with this result, and given my skepticism about psychological theories, didn't read up much about this issue, either.

Just two days ago, though, I've gained some respect for psychological testing! While randomly browsing through a library, I came across the book, Do What You Are by Paul Tieger and Barbara Barron-Tieger. The title was interesting so I flicked through it.

There I accidentally hit upon the section dealing with the strengths and weaknesses of INTJs, and was gripped at once. I don't recall ever coming across something that represents me so closely. Of course, I can argue about some of the detail, but the broad picture was astonishingly "on the money".

Out of curiosity I checked the internet and found many sites that deal with personality types, including MBTI. The MBTI was designed in 1962, based on Carl Jung's earlier work. I should start reading up on psychology once again, for it does seem to throw useful light on people. Things like MBTI might turn out to be big business in India, as a more robust way to match couples than horoscopes! More importantly, as far as I am concerned, the fact that one can get a list of one's likely strengths and weaknesses is a powerful tool. Armed with this information, one can try to overcome one's weaknesses.

Having said all this, one should remain cautious about all this, and keep an open mind. But worth exploring further.


The remainder of this post of interest only if you are INTJ. This blog is going to act as my storehouse for useful information about INTJs that I come across, things that could help me understand myself better and, where feasible,  improve.

What INTJs are like: herehere | here | here | here | here | here | here | here | here | (this is funny!)

Hints for improvement included in the above, plus: here | etc. (to be developed).

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The proper role of government in health

(Published in Freedom First, January 2010)

A government has three core functions: defence, police and justice. These are vital for ensuring our life and liberty. After these are provided for, we must take on the responsibility, as citizens, to look after our health through appropriate diet, exercise, and risk management – such as by taking health insurance and steps to prevent accidents. There does remain, however, a small (second-order) role for the government in ensuring our health. This month I explore this role and suggest its proper boundaries.

Emergencies and poverty

It is possible that despite our best preventative efforts, we can become involved in a severe traffic accident that makes us unconscious. The free society must ensure that under such circumstances, all of us are able to receive the best treatment without demands being placed on us (when unconscious!) to show our insurance documents. Indeed, the free society cannot turn away even those who have not insured but who land up in critical condition on the doorsteps of a hospital. Other life-threatening events such as natural calamities require a similar emergency response. Indeed, even foreigners injured in accidents should be treated till they recover their senses and can make the necessary payment through their travel insurance.

Then there is the matter of poverty. In my May 2009 article in Freedom First[1] I showed that the state should ensure reasonable equality of opportunity. That would include the elimination of poverty. But providing money for food isn’t enough. To ask the poor, who can barely purchase enough food, to buy their own medicines will force them to go to the village quack and receive dangerous concoctions, or worse: witch-doctor ‘treatments’. They may also sell themselves or their children into bonded labour. No free society can countenance that. Lastly, the government has a role in vaccinating citizens against communicable disease and in providing succor (including healthcare) during natural calamities.

We therefore need a social insurance scheme that would do the following:

a) pay those below the poverty line a small additional sum (as part of the negative income tax payment) to empower them to bear the routine costs of minor healthcare;

b) ensure universal emergency hospitalization, including healthcare in natural calamities; and

c) vaccinate every citizen against dangerous pandemics where such a vaccine is available.

Beyond these interventions, the state clearly has no role in healthcare. Everyone must take out private health insurance, self-insure or depend on charity, for all other health requirements.

The minefield of healthcare

Provision of healthcare is bedeviled with serious problems that need to be understood, isolated, and overcome. Medical ignorance is frightening: doctors and scientists don’t have the correct answer for many serious health problems, and test results suffer from Type I and Type II statistical errors. As a result, doctors can differ dramatically on their diagnosis. Even where they agree on a diagnosis, their approach to treatment can vary significantly. To compound this confusion is the multi-faced problem of asymmetrical and incomplete information. People don’t disclose the necessary information to health and insurance professionals from ignorance, inability: or worse – they sometimes tell lies.

To this game of blind-man’s buff that is known as healthcare we should add normal human error and bad decision-making. In the end, while doctors manage to cure most patients (or rather, the body cures itself in most cases), in some cases they actually exacerbate health problems. This happens through misdiagnosis – which allows simple things to grow into dangerous proportions – or by passing on dangerous germs to their patients, or by operating on the wrong organ or even on the wrong patient! Finally, there is human greed. Health practitioners (like all ‘normal’ humans) have strong incentives to squeeze out profits from others. They may do so by asking patients to purchase irrelevant medical tests and treatments.

If to this mix of utter confusion we add a government bureaucracy, we are certain to get huge cost blowouts and corruption – a Frankenstein that will eat up its creator. Indeed, that is typical of most Western country health systems today. The entire West is now creaking under the weight of its badly designed health systems. Never empower a bureaucracy, and remain focused on the precise outcome at all times: that is the key message.

Delivering universal emergency hospitalisation

The design of universal emergency hospitalization must take into account these insidious incentives and undercurrents of human nature. The right way to ensure this objective is to give this task to the private sector, calibrate its incentives to ensure that it delivers the desired outcomes; and monitor it independently, punishing it for non-delivery and rewarding it for exceeding the requirements.

In my book, Breaking Free of Nehru (Anthem Press, 2008, I suggested an effective model that I will also outline here. As a first step, India’s geographical area should be carved into reasonably sized regions. A contract for the provision of universal emergency hospitalization should then be put out for tender. Emergency coverage during routine floods, minor earthquakes and ordinary cyclones should form part of the contract (vaccination coverage can be added but it is better to do so through a different contract). Private health consortiums capable of providing the prescribed services to everyone who needs such treatment in the region should then be requested to quote a flat (i.e., per capita) price. This per capita price would effectively become the social insurance premium, to be collected through the tax system.

In making their bid, these consortiums would need to consider the local costs of living, local disease patterns, predictable natural calamities, the difficulty of appointing doctors to remote areas, etc. The lowest (or fittest) bid must be awarded the long term (say 30-year) contract. The agreed amounts would be paid annually, indexed to the population size and inflation, and subject not only to agreed outcomes but to a productivity improvement factor.

A long-term contract will allow the successful bidder/s to establish low-cost, innovative hospital networks or to otherwise negotiate with service-providers to ensure the delivery of the contracted services. Making a per-head payment (i.e. not a reimbursement payment) will avoid wasteful debates about actual expenses, and eliminate unnecessary transaction costs and mindless bureaucracy.

Independent private bodies (more than one, each specializing in a different area of health specialisation) should then be funded to assess, monitor, and certify the delivery of the prescribed services. Financial penalties must be imposed on hospitalisation providers for non-compliance with delivery standards.

The administration of the system will, of course, need to be done well. For instance, migration flows (including part-year migrations) will need to be monitored, since these impact on the payments. After the system is fully operationalised, the current government machinery of hospitals and primary health centres can be shut down, and its assets auctioned off.

Freedom Team of India

The Freedom Team (, or FTI) has now completed six months of its formation as a legal entity. It is, however, well short of its target of leaders. Finding genuine citizens in India continues to be a major challenge. I seek your active involvement in helping the team find good leaders. The Team has now opened a bank account. Please donate liberally to FTI if you are not yet in a position to become a leader yourself. Let’s work towards a successful 2010 for FTI and for India.

[1] Available at:


Addendum (notes on health policy)

Some outstanding methods to improve medical diagnoses at low cost: Gut Feelings by Gerd Gigerenzer, Penguin, 2007, p.167

This blog post is related to this subject:



When communism comes to health care (as it has in most parts of the Western world in the name of the welfare state), communist incentives WILL kick into place.
The only way for this rot to stop is for government to ENTIRELY and comprehensively get out of medical care. Only one point of support: for the very poor. By having massive middle class welfare, the West has created huge and unrelenting bureaucracies (I commented on this in Catallaxy Files the other day). [My FB comment on this article]


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