The absolutism of demonetisation
Source: By Rohit Prasad: Mint
It takes a strong leader to take bold decisions. Demonetisation puts the seal on Narendra Modi’s claims of strength. Since independence, radical decisions have rarely been taken. The abolition of zamindari by Jawaharlal Nehru in 1953 and the nationalization of banks and mining by Indira Gandhi in 1969 and 1972, respectively, come to mind. Those decisions could be called populist because they took on the elites in the name of the disenfranchised.
There are other decisions which disadvantage the poor in favour of the elites, in the name of a national priority—for instance, development. The promulgation of laws that allow private parties to acquire land without the consent of the displaced is an example of this kind of policymaking. These decisions can be called plutocratic.
There is a third type of decision-making which I call absolutist. Absolutist decisions make demands of all sections of society in the name of a higher purpose. The demonetisation decision falls in this category of decisions. Not only does it threaten to shrink the country’s gross domestic product by undermining the currency, devastating the authority of the central bank, and delivering a negative supply-demand shock, it also systematically targets the poor who comprise the lion’s share of the unorganized sector.
Any strong leader can win the support of people by taking on the mighty on their behalf. But only a demigod can make the entire population take on personal suffering gladly for a dream sold to them by him. And if the bubble bursts, then so does the demigod, for it is not the dream but the demigod that really animates the people. Through a political prism, demonetisation appears to be the most ambitious and risky attempt to gain absolute power in the history of independent India. Such absolutism draws its strength from the very suffering that the economists allude to with such dismay. The greater the travails the public is willing to bear, the more powerful the hold of the leader. No doubt Modi hopes the self-righteousness of the tax-paying public and the schadenfreude of the masses will override their sufferings to give him victory in this campaign.
A simple parallel to what is going on is found in the ultimatum game, the very first game studied on the topic of sequential games in which players can see what others have played before choosing their moves. An ultimatum is defined as a final demand or statement of terms, the rejection of which will result in retaliation or a breakdown in relations. In the ultimatum game, there is a certain sum, say $100, to be divided between two players. One player, the leader, demands a certain amount. The follower can either accept the demand and receive the remainder, or reject the demand. If the demand is rejected, neither player gets anything.
This game has a multiplicity of equilibria. For example, a $60 demand of the leader along with the follower’s strategy of accepting any demand less than or equal to $60 and rejecting every other demand is a Nash Equilibrium in which the leader gets $60 and the follower gets $40 (note the follower’s strategy requires her to reject many demands that would leave her with a positive pay-off, a seemingly irrational move). In this fashion, any demand of the leader from $0 to $100 can be part of a Nash Equilibrium.
Fortunately, the multiplicity of equilibria can be resolved by invoking the principle that every player should play rationally at every point (subgame) at which they are called upon to play. This principle, called subgame perfection, rules out any strategy in which the follower rejects a demand that leaves her with a positive pay-off. This leaves us with a single non-degenerate equilibrium, in which the leader demands almost the entire amount and the follower accepts a tiny pay-off.
Given the enormous increase in power that would accrue to Modi if the Indian people were to accept the sacrifice he is asking them to make, and the unpredictable and long-term nature of the gains flowing to the country at large, it appears that he is attempting to enforce the sub-game perfect Nash Equilibrium of the ultimatum game. The question is—will his demand be accepted?
While theory predicts a clean sweep for the leader, experimental evidence on the ultimatum game is less conclusive. A wide variety of factors appear to influence the follower’s proclivity to accept unfair offers, including genetic variation (zygotic twins are more likely to accept an unfair offer made by a fellow twin), being part of the same social group, and even the level of intoxication (more intoxication leads to more rejection of unfair offers)!
If Modi succeeds in his quest for power, it will be because he has succeeded in embodying the aspiration of ordinary Indians for a powerful leader, a role he is seen to personify with his surgical strike on cross-border militancy and his carpet-bombing of the black economy (irrespective of continuing border attacks and the conceptual confusion of attacking the cash economy instead of the black economy). However, it must be remembered that the Indian electorate has rejected aspirants for absolute power before, most notably during the Emergency. It remains to be seen if the excesses of notebandi will match the traumas of nasbandi in weaning off the population from their enchantment with Modi.
But even if this move fails, whoever occupies the seat of power will be expected to demonstrate the propensity for strong action. They will receive a mandate in which the siege on corruption occupies a significant place. Shorn of unnecessary and unethical absolutism, a targeted approach to shrinking the black economy would be eminently welcome.
