The Answer Is Transaction Costs
"The real price of everything is the toil and trouble of acquiring it." -Adam Smith (WoN, Bk I, Chapter 5)
In which the Knower of Important Things shows how transaction costs explain literally everything. Plus TWEJ, and answers to letters.
If YOU have questions, submit them to our email at taitc.email@gmail.com
There are two kinds of episodes here:
1. For the most part, episodes June-August are weekly, short (<20 mins), and address a few topics.
2. Episodes September-May are longer (1 hour), and monthly, with an interview with a guest.
Finally, a quick note: This podcast is NOT for Stacy Hockett. He wanted you to know that.....
The Answer Is Transaction Costs
Transaction Costs and Constitutions: India's Balancing Act, with Shruti Rajagopalan
What if transaction costs could shape entire political and economic systems? Join us for an insightful discussion with Shruti Rajagopalan, a senior research fellow at the Mercatus Center, as she takes us through her fascinating journey from the University of Delhi to George Mason University. Her research on India's economic liberalization shaped her understanding of economics and public choice theory, and now she is looking at the Indian Constitution as a subject of study. She shares how India's socialist elements and frequent amendments navigate the balance between democracy and central planning.
Explore the contrasting worlds of constitutional amendments in the United States and India, where transaction costs play a pivotal role. We unravel the philosophical differences in how these two nations interpret their constitutions, impacting citizens' rights and governance in uniquely distinct ways. Through metaphors like the Ship of Theseus, we evaluate the stability and adaptability of these constitutions, shedding light on how they sustain their respective democratic frameworks amid evolving societal needs.
Adding a dose of humor, we recount a satirical tale of international contractors bidding for a White House fence and explore the complexities of voting systems influenced by transaction costs. The episode takes a reflective turn as we discuss Ulysses S. Grant's memoirs, highlighting themes of personal sacrifice and political intricacies. This conversation promises to enrich your understanding of how economics, law, and political systems intricately intertwine, offering both serious insights and light-hearted moments to ponder.
Links:
Dr. Shruti Rajagopalan's web site at Mercatus and her personal web site
Dr. Rajagopalan's podcast, "Ideas of India" and publications
Book o'da'month: U.S. Grant, Personal Memoirs, Modern Library, 1999.
A note on the TWEJ: Some listeners may find the joke racist. But in fact each of the three stereotypes captures a kind of "excellence," though the three kinds of excellence might not all be equally socially admirable. Gordon Tullock, who was discussed in this episode, made some observations about corruption that are worth keeping in mind: Western nations abhor, or pretend to abhor, corruption, though in fact there is plenty of it in the West. Tullock's point was that, in a nation with dysfunctional institutions, corruption can be efficiency enhancing. Institutions matter. The point is not that Germans are inherently organized and methodical, nor that Mexicans are inherently hard-working and efficient, and certainly not that Indians are all corrupt. But the political and economic systems of those nations create a setting where such actions are "rational," and even expected. I wrote a piece for Public Choice on Tullock's insight, and the problem of India, and that's why I enjoyed this joke!
If you have questions or comments, or want to suggest a future topic, email the show at taitc.email@gmail.com !
You can follow Mike Munger on Twitter at @mungowitz
This is Mike Munger, the knower of important things from Duke University. Today's guest is Shruti Rajagopalan. She's a senior research fellow at the Mercatus Center and a fellow at the Classical Liberal Institute at New York University School of Law. She leads the India Political Economy Research Program and Emergent Ventures India at Mercatus. A new twedge this month's letter plus book it a month and more. Straight out of Creedmoor. This is Tidy C.
Speaker 2:I thought they'd talk about a system where there were no transaction costs. It's an imaginary system. There always are transaction costs.
Speaker 1:no, transaction cost. It's an imaginary system. There always are transaction costs when it is costly to transact. Institutions matter and it is costly to transact. My guest this month on the Answer Is Transaction Cost is Mercatus economist and scholar, Shruti Rajagopalan. I have asked her here to talk about, of course, the problem of transaction costs. Economists generally focus on getting rid of transactions cost as a means of allowing groups of people to accomplish more because they can make deals.
Speaker 1:In politics, the problem of transaction costs may go in the opposite direction and in fact, there are some features of politics that are explicitly designed to raise transaction costs. So the so-called Australian ballot, the secret ballot, is a way of making it more difficult to have successful bribes. I go in, I cast my ballot and I come out and I promise the person who offered to pay me, no, no, I voted the way that I said, but there's no way of knowing. Whereas it used to be that ballots had colors, the ballot would be handed to me by someone on the way in. That reduced transaction costs, but in politics sometimes we want transaction costs to be higher. Transaction costs, but in politics, sometimes we want transaction costs to be higher.
Speaker 1:Well, Shruti has done a series of articles both on the Indian constitution and on the incompatibility between socialism and central planning and constitutionalism, and so I invited her here today to talk about those things, or whatever else she would like to talk about. So, Shruti, welcome to. The Answer is Transaction Cost, and I hope that you will give us an introduction about where you came from and how you came to study this important but not widely known field.
Speaker 2:Thank you so much for having me, mike. I'm a fan of the show, as you can imagine, and I have not just heard the show, but I've also read all your books to your immense embarrassment, and a lot of the papers, so I'm really thrilled to be here. The way I got started was I was studying economics at the undergraduate level at Delhi University and it was a lot of the old curriculum. We were still learning things like national income accounting and you know the input output matrices that used to be used for central planning and things like that. And one of the summers I was interning at the Center for Civil Society, which is this free market classical liberal think tank, and the lunch routine used to be.
Speaker 2:The largest table was in the library, so we would all gather together in the library to eat lunch and Parth Shah, who was one of my early mentors you know when we would have a conversation about something would just hand out books from the shelf and say, oh, I think you'll find this interesting, and that's how I started reading Hayek. That's how I got started on reading Buchanan and Tulloch. I remember very clearly he had a first edition signed copy of the Calculus of Consent and he just pulled it out of the shelf when I was talking about constitutions and my interest in going to law school after my undergraduate degree and he just gave it to me and my first copy of the Calculus of Consent. I couldn't find a copy in India. I had to stand at a Xerox machine and Xerox parts, entire copy and then highlight it. I think that copy is still floating around somewhere in this house, so that's how I got started on this.
Speaker 1:Well, that's a start. Now in India, my impression is that's kind of a heterodox position. So how did you happen to go to that think tank? Because basically you were going to study law. You have an LLB, you have a degree in economics, also from the University of Delhi, which is really a great university. I'm not sure people realize people in the West realize the hierarchy of Indian universities. University of Delhi is awesome. There's a bunch of Indian Institute of Technology at something and that's where all the cool kids go. If you get a high enough score in math, then I mean you can study law, you can study economics. You did this weird thing, basically meaning that it was impossible for you ever to get a real job in India by studying public choice. And then you compounded this error by getting a master's in law and then going to George Mason. How did that happen?
Speaker 2:Okay, so the two parts to that answer. So the first part is you know I wasn't studying economics to be an economist. At that time I thought, you know, I need an undergraduate degree and I'm going to go to law school and economics seems to be this great degree. You know it'll give me enough analytical skills. It has a lot to do with public policy. I was the first generation that was going through India's liberalization. So you know, we saw a lot of policy changes and a lot of reforms on the trade side, on the currency side and so on. So I just thought this is a great thing to study. And a lot of what I was studying was also something I could see outside the window, like you know, the real world changes that were taking place. But I never thought of oh, I need to master these models because I'm going to go get a master's and an MPhil and a DPhil or something like that. So I think I studied economics the right way, if I may say so. Just, you know, to truly try to understand the world. I was really struggling how to make sense of the world, because they would make arguments on both sides and anyone could make up anything and if they said it well enough and passionately enough, it would fly in class, or if you wrote it well enough. So I, the moment I went to law school I realized, oh, the analytical framework in economics is really the way I saw the world and now I can never unsee the world that way. And then I decided to go back to economics.
Speaker 2:To answer the second part of your question about partway through law school I got a fellowship through the Institute for Humane Studies to come and do a summer policy sort of internship program here in Washington DC. So when I showed up here I was trying to figure out what to do next and suddenly it was like I had met my tribe and my people. I met Gordon Tulloch. I met Jim Buchanan, vernon Smith all these folks were at the department that time Tulloch was at the law school and I just thought this is a great place to study and I thought I would go to the law school and sort of become a legal academic. And I met, you know, many of my now colleagues and folks you know and have had on the podcast, like Todd Zubicki and Don Boudreau, charles Rowley you know these are the public choice, law and econ guys who have a law background and an economics background and all of them just I think after 30 minutes of talking to me said you're an economist, you should probably go to the econ department.
Speaker 1:The interesting thing about George Mason is that even in the economics department there are both people who study Austrian economics, but particularly when Jim was there less so now, but when Jim Buchanan was there there was a serious economic study of constitutionalism. Yes, absolutely, and I don't know the literature well, but it is my impression that not that many people have taken a public choice approach to the Indian constitution.
Speaker 2:I think that sample size is one and maybe there are a few reviewers who you know sort of work in the adjacent areas and are able to review my papers. But that's. It's a very tiny subset.
Speaker 1:Well, that's unfortunate, because constitutional theory of public choice, and particularly the journal Constitutional Political Economy, is supposed to be about constitutions plural and there have been some work on European constitutions. So the constitutional political economy does have some presence in Europe, a little bit in Latin America, very little in Asia, although there has been some work on the Japanese constitution. How did you come to think, wait, I need to go back and think about the Indian constitution, because you had mostly made the break. You're working in the United States. Much of your work was on policy.
Speaker 1:The first paper that I know of yours was the 2015 CPE paper about the Indian Constitution, and you have continued that line of work, drawing a tension between constitutionalism and socialism and central planning, and that is your explanation for some of the dynamics that we have seen in Indian policy and really Indian economic life was a change from the initial aspirations and even the text of the constitution which was passed in 1950. Now, in preparation for this, I actually went and read a number of the provisions of the Indian Constitution and I actually thought I knew something about Constitution. So I don't so this long introduction. What I'm hoping you'll do is two things. One, just say something about the passage of the Indian Constitution in 1950. What were its provisions? It's enormously long. Why is that? And then say something about the tension between socialism and constitutionalism.
Speaker 2:Sure so, for I think most of your listeners will know, India has a very long colonial past right. So the East India Company comes to India and, sort of the late at least starts out as a dominion territory in the late 18th century, and then that continues for the next 250 years. Of course, at some point it passes over to the British crown and there are a lot of local, smaller and larger monarchies by native Indian princes, but they all have some kind of you know, varying levels of treaties with the British crown, and that's how the Union of India, or the subcontinent, was stitched together. Now, when the moment comes to actually become independent, there are a few different pieces of the puzzle that need to be put together. So one part of the puzzle is just administrative right. So that is an organizational question. Till yesterday this was the plumbing crew that was sort of, you know, making sure the pipes worked, sure the pipes worked. And now tomorrow that plumbing crew is going to go offsite to a different job, and who's going to be, you know, taking care of this from now on? So that's one small part of it. Luckily, most of the administrators were actually Indian civil servants, so that was a little bit more straightforward. So very large administrative part of the constitution was just borrowed from previous legislation that was passed by the British Parliament, in this case the 1935 Government of India Act. So that's the administrative part.
Speaker 2:However, now the major break, or the reason to step away from this colonial government, is to become a self governing people, and a very large part of having a constitution and saying we'll be a self-governing people is not just to decide that we're going to be a self-governing people, right, and we're going to choose as a group. So that's one part of it, but the second part of it is how are we going to decide large and small matters going forward, Right, that is fundamentally the constitutional compact, and that was what they tried to figure out using what they call the Constituent Assembly of India. This was not direct but indirect representation from, you know, elections that were held in 1945, after the Second World War, and these people got together and they said okay, a very large part of being a self-governing people is to actually constrain the state and guarantee rights and privileges which were not available to Indians under the British crown because they were not really equal subjects of the crown. So India then borrows, you know, in very large parts the American Bill of Rights. So there's an entire fundamental rights chapter which is inspired and then adapted to Indian circumstances. So that's a big chunk of it.
Speaker 2:And the second you know part of it is India decides that it needs to be a federal union because it's stitching together 560, you know, local monarchies with the British India provinces and in the midst of all this partition is going on, India provinces, and in the midst of all this partition is going on. So you know, the East and Western bits of the country are actually sort of getting stitched out of the union. So this entire thing is going on and we realize that India is just too diverse and it has to be federal. So that's another important innovation that's built into the constitution.
Speaker 2:And then there are some very important institutional decisions, such as India will have an independent judiciary, which was, you know, in the British system. The parliament is, you know, sovereign and of course they've had their own amendments more recently with more and more power given to the judiciary. But India brought in something that was a little bit more like the American separation of powers, but not all the way. So these were some of the major institutional changes. Of course it had 395 articles and you know eight schedules, so it's an enormously long constitution and I am happy to talk about individual bits and pieces, but this should give you a rough sense of what it is that they were doing.
Speaker 1:It struck me that it was like the casuists in the period after Aquinas in medieval times. The casuists tried to anticipate all of the moral situations and then write a and here's what you would do in that situation. So, rather than a set of broad general principles you don't have to work it out they actually tried to anticipate it in a very sort of mathematical and engineering way. In a very sort of mathematical and engineering way, but ultimately probably doomed, because if you're trying to do that, then the situations are going to proliferate and you're going to have to continue to write a longer and longer set of contingencies, to the point where people don't actually know what the principles are. And so it raises one of the themes that you have talked about is that raises the transaction cost of knowing what the principles are, and it invites rent seeking in the sense that we can now go to the independent courts and argue for a particular interpretation rather than some other.
Speaker 1:So can you say something about that problem? It wasn't really true in 1950. In 1975, socialist was actually added to the preamble, which is bizarre. We need another adjective in the preamble to the Constitution, and democratic is not enough. We're going to have to be socialist. So at what point did that start to become a difficulty? But the real interesting thing that I thought in looking through it was this attempt to anticipate every possible contingency, and it had not occurred to me until I read your work that that actually was kind of a necessary consequence of trying to be socialist.
Speaker 2:Absolutely. So I'll answer this question in three parts because you managed to pack in a lot there. So, on the first part of the contingencies, I you know, when I teach Indian students and Indian law professors I often joke that I call the Indian constitution the non obstante constitution. So you know, whenever it says, notwithstanding anything in article blah, blah, blah, x, y, z, you know this is what is going to stand. So there are lots of exceptions that keep getting written into the constitution, sometimes the original, sometimes through amendment, and this is what in law school we are taught is called a non-obstantate clause, notwithstanding what was in the previous section, and so on. And I feel like the entire Indian constitution is a non-obstantiate constitution. So you've really picked up on something important there.
Speaker 2:The second part of it is, if you permit me, before I get into the Indian constitution, to just talk more generally about constitutions, right? So there are a few things that set a constitution apart from a regular set of laws or a gentleman's handshake, you know, or a set of norms that you follow in a parlor game and so on. So the first is that the decisions will be made as a group. You know, which was that? You know, we'll convene a constituent assembly and so on. Now, that's an important choice and I want to highlight it because a lot of countries fail even at that level. Highlighted because a lot of countries fail even at that level. And you know all of India's neighbors, which, many of which were carved out of the same, you know, british colonial country, have failed at that. The second part of the constitution is that, now that we've decided that we're going to do things as a group, the constitution is going to decide how we are going to decide other things. Right, and buried in that second part and this requires a little bit of an underlining is that constitutions are different from general laws in that the constitution will tell you how to amend itself, whereas regular laws don't have that provision right. So now, not only are we going to decide how we're going to decide. If something falls outside that purview or we want to deviate from how we decide things with the current knowledge and the current form, then we will only follow this specific procedure and nothing else. And that's what makes something constitutional versus not. So you know, mrs Gandhi did a bunch of really crazy things, right. I mean, she sort of suspended some democratic norms, she suspended the Bill of Rights and writs like habeas corpus she put in, she changed the preamble, but all of it was done following the procedure outlined in Article 368. So we still call that a constitutional amendment and not a coup, d'etat, right? So I think that's an important thing to keep somewhere at the back of the mind.
Speaker 2:Now, coming to your question about socialism, this I really got, I got this set of insights really from reading Hayek and the Road to Serfdom. Now, most socialist countries don't have a constitution that actually constrains them. They have a constitution like animal farm right. We write a bunch of commandments almost on the wall and they're sort of like guiding principles which we can ignore at our convenience. But they're not going to have any of the characteristics I mentioned, which is, we're going to decide as a group. This is the set of rules that we have decided is going to be how we decide future things and if we deviate, we're going to follow the procedure to deviate. So they don't follow any of those things.
Speaker 2:So, if you look at it, the Soviet Union had a constitution right. In fact I think they had more than one. Many such centrally planned economies had constitutions. India was not a completely centrally planned economy in the Soviet style and they kind of wanted to have the best of both worlds. And this was really the Fabian project, which was we want to be democratic and we want to have some of these liberal principles you know that we care about, such as free speech and that all people are equal and will have equal protection under the law. But we will gradually move towards a world where we will redistribute resources the way we want to plan it, because the emergent order has thrown about a distribution that we're not quite happy with, and that's really, in a nutshell, the project. So India gets trapped in this tension where it has a machinery to be democratic, to be constitutional, but it's still going to try a very extensive sort of socialist planning exercise. So the Soviet Union doesn't have the problem I'm describing in India, because their constitution is not constraining, and the US doesn't have the problem that India has because they're not pursuing central planning right. They're going to govern themselves as a liberal market economy. So this is a very peculiar problem which only India and a handful of post-colonial countries that went down the Fabian Road had.
Speaker 2:Now you put all these different ingredients together and what you get is an entangled mess where you have a constitution that actually constrains the hands of the planners. Every time the planners run into these very strict constraints, they don't know what to do. So one option would be to just say, to hell with it, let's walk away. But they didn't want to do that, because we had already decided that we're going to decide things as a group. Right, and India is too diverse.
Speaker 2:So if you let that compact go, then the question is which group is going to be on top and govern everyone? So they still wanted to keep the decision making as a group, but they didn't like the constraints. So now what did they do? They kept amending the constraints, one at a time, and the peculiarity of the Indian constitution didn't make it any, you know, just made it much easier, because it's quite easy, relatively speaking, to amend the Indian constitution. It's harder than just passing simple legislation, but it's nowhere close to as stringent as the US constitution or some of the other constitutions in the world. So that's sort of you know how I would place India's socialism from 1950 to, say, 1980 in context.
Speaker 1:Well, that raises a bunch of questions. I actually looked at some of the parts of the Indian constitution that talk about rights, and one of the problems they have is you're going to specify, in effect, private property rights, and a lot of the activities of the economy in India are not literally state-owned enterprises. Then the ability of the state to control those actions, they run into a constraint, and it is just the way that Hayek describes it. For the good of the society, we're going to manage prices. That creates a new distortion, and then that there's a cascade of new regulations that are required. But then you start to run up against the constraints of the Constitution and so you have to amend it.
Speaker 1:I was surprised at the extent to which the constitutional amendment process can also be informal. We're used to the United States. The Constitution means what the Supreme Court says. It says, but it is a little bit unusual for the court literally to say all right, here's what the Constitution means in great detail. So I looked at Article 21, which is very short. It's protection of life and personal liberty, and what it says is no person shall be deprived of his life or personal liberty except according to procedures established by law.
Speaker 1:Now my reaction to that as an American is that doesn't protect you at all against the law, because anything that the law says, that's the procedure for taking my property. Then there are it was four pages, single spaced, little, tiny agate type of major Supreme Court decisions that had interpreted that and so that those words, if I read those words, the actual meaning of those in the Constitution has nothing to do with what they actually mean. You would need to be a very skilled scholar to be able to interpret those apparently simple words. But even on their face he said, his voice rising in outrage even on their face it says that property can be taken if it's legal, if it's according to the law. You talked about the formal process. I was surprised about the informal process because it means that we're never sure. I keep coming back to this, but it's a big transaction cost problem. We're actually not sure what the law means. We're going to have to litigate it.
Speaker 2:So okay. So there, let me peel back a little bit. So one piece where I would quibble with you is I'm not sure I would call it an informal process, I would just call it amendments by the judiciary. Right? This happens in most constitutional republics that have an independent judiciary. The United States also has a relatively sparse constitution and a lot of things are written into it by the judiciary. In fact, if you take, you know, your first two or three sequence of constitutional law classes in the US, mostly you're studying case law, because you can sort of learn the constitution inside out, you know, over lunch. So that's something I just want to highlight. That, of course, the problem you mentioned that we have in India is much, much more severe, and we have this problem of we just make stuff up as we go along, and we're going to add both more new content to, or meaning or interpretive meaning to, article 21.
Speaker 2:But we're also going to add a whole new bunch of rights, such as the right to preserve your heritage and the right to have housing and the right to have privacy, dignity dignity, right, the right to have a clean environment, all of these things and the right to have housing and the right to have privacy, the right to have dignity, dignity, right, the right to have a clean environment All of these things and the kitchen sink get stuffed into Article 21. So your point is very well taken. The way I look at this problem from the transactions cost lens is amendments to the Constitution are an entirely a transaction cost problem. Right, because you literally need to whip up votes to pass something. Now in the United States you can have amendment two different ways, you know. One is Congress passes the amendment and then the states will ratify three quarters of the states. Or there's the Constitutional Convention method, which is not really in use effectively and the bar for these is so high that the United States has only had 27 amendments. So this is because you need two thirds majority of the House and Senate and then you need three quarters of the state legislatures to vote in the amendment.
Speaker 2:Now in India the transactions costs to pass the amendment are much lower, right, so amendments to most provisions of the Constitution, including fundamental rights, will be made by Parliament and they require a majority of the total membership of the House with not less than two thirds of the members present and voting in each House, and then presidential approval, and that's a mouthful. If I had to simplify it, I would say the following way. Let's say, you know, the lower or upper house of the parliament has 100 seats. If all 100 show up, then you need 67 ayes to pass the amendment. If only 75 members show up, you need 51 votes to pass the amendment, because it has to be both, you know, majority of the total membership of the House and two thirds of those present in voting.
Speaker 1:It's kind of a quorum requirement. You have to have a certain yes exactly.
Speaker 2:It's a dual requirement, yeah, and, but if only 51 show up, then all 51 need to vote to pass that amendment. So that's really what it means. So the transactions costs are relatively lower to pass the amendment. And there's a second weird aspect, which is India has selective entrenchment. So to amend, you know, provisions that pertain to federalism and to the independent judiciary and so on, they need to be ratified by half the states. And then there are some clauses which just require simple majority, right. So you know, these are some very administrative provisions. Sometimes you're talking about, like a borderline of two states which needs to be redrawn, things like that. So there are certain schedules in the constitution which require very, so there are these multiple different levels and this is a very transactions cost way of looking at the problem. Right, for really big problems, we'll set the bar much higher so that it's more entrenched. And for you know, little things and administrative questions, we'll set the bar relatively low.
Speaker 2:Now that we have the transactions cost part out of the way, it's great to have high transactions costs to amend the constitution, as long as the more generally the people who are voting for these representatives also are willing to go with it, because there's a constitution on paper, you know, which has some meaning. There's a constitution as a procedure which has some meaning, but there's also constitution as this sort of like public imagination that has some meaning, meaning. And if it's going to be very, very high transactions cost to change the constitution, then people may revolt and just tear up the document. And this hasn't happened in the United States and that's really exceptional given how difficult it is to, you know, amend the American Constitution. But in most countries in the world they just tear up the constitution and sort of move on to a different version or a simpler version.
Speaker 2:So all these safety valves of informal, you know, amendments or amendments by the judiciary, I think these are actually very important parts of solving the transactions cost problem, but in an institutionally contingent way that has high fidelity to the original compact right.
Speaker 2:So you want to reduce the transaction costs a little bit, but not so much that it becomes a tin pot republic right, but not so high that people kind of take to the streets and with pitchforks and they tear up the document and that's really the balance that the Indian sort of polity has struggled with all those years. Depending on which day of the week I'll tell you how I feel about it or which amendment and how I feel about it, but I think it's important to highlight that India has managed to keep a constitutional republic functioning for 75 years, which is no mean feat in that neighborhood or in that culture right, and at the same time it should have and could have done a lot better, because in the process it has actually sort of compromised a lot on what a constitution is supposed to do, which I believe is to constrain the hands of the government.
Speaker 1:They have a difficulty that there is a kind of Rousseauian conception and this is more like the British that what the parliament does is by its nature the representation of the general will. And the US had a more antagonistic. The states that became the United States had a more antagonistic sense of that because they hated the British parliament, because the British parliament would pass these things that they thought violated their rights as Englishmen. So I was again surprised looking at Article 19. Article 19 says all citizens shall have the right freedom of speech, assemble peaceably and without arms, so no revolutions form associations to move freely through the territory to reside and settle anywhere in the territory to practice any profession or carry on any occupation, trade or business. That sounds very American. And then there's a bunch of notwithstandings and they're very careful about the notwithstandings because they correspond. It doesn't say you know, for all of the above, yes, it's.
Speaker 2:19.2 is the notwithstanding for 19.1a and so on.
Speaker 1:Right. So, notwithstanding that, if there's a law that says different, then forget it. You don't have that right and that's just astonishing to me and some of those are amendments Some of those notwithstandings, or the way that the some of those notwithstandings, or the the, the way that the the some of the notwithstandings are pretty long yeah, they've been amended more than once.
Speaker 1:Yes, because you really have to get rid of some of what was withstanding or holding back the state from doing what it wanted to accomplish, and so these rights rights which sound that's great, they're over time are eviscerated by this sense that and I think Americans have this also, and I think the reason that this is a timely discussion the US Constitution is often revered sort of generally by American citizens, but there is a sense that the Constitution is holding back the state from accomplishing good things, and why would you want that?
Speaker 1:Let's amend it, and that may very well happen in the United States. It appears to me that that is what has happened in India and, as a result, I can't rely on the people in power continuing to want to do things that I consider good, but it's very frustrating to say I am going to limit the state to do things that I want it to do, because it will also do things that I don't want it to do, and so that experience in India has made the idea of constitutionalism, even though Indians seem to revere. I was surprised. I watched some videos. Indians seem to revere their constitution almost as they're proud of it, almost as much as Americans do so. That was a big hodgepodge of stuff. You can react to any of it.
Speaker 2:So, you know, I think one of the things and maybe it's good to bring Buchanan back here is when we think of constitutions from a transactions cost perspective and from its amendability or how many amendments it has, it's always a question of what is the starting point or what is the status quo, right? So many people say that, oh, the calculus of consent is the starting point, or what is the status quo right. So many people say that, oh, the calculus of consent is great, but it's got the status quo bias. Well, what else could it have? Right? I mean, you are going to start somewhere In India. We drew the line, you know, in 1950, and then that's where you go from.
Speaker 2:So I think the two important distinctions between the American and the Indian experience is what was the status quo in America at that time? Right, america was really born out of a revolution and yet they were very much descendants of the British people. Right? This was not a question of Native Americans saying, okay, we don't want to be under the British crown anymore and we're going to draft our own set of rules and figure this whole thing out, right? I think that changes. And second, is the group that actually, you know, convened or wrote the Constitution was incredibly homogenous and I know that has come under increasing criticism of late. Under all these you know the new diversity and pluralism politics In India. That was not the case. So the first point of departure in that status quo is India was not born out of a revolution.
Speaker 2:India very much wanted something like the British administrative state because it did promise things that got India out of that tribal state of anarchy that it was trapped in. You know, in the early 18th century they wanted rule of law, they wanted, you know, equal protection under the law and so on. However, they thought that the reason they didn't have these rights and dignity and agency is because of the ruler and their identity, in that they were foreign and there's no way that their own people will ever commit a fraud upon their fellow countrymen, right? So when I read like thousands upon thousands of pages of constitutional sort of debates and discussions, constitutional sort of debates and discussions, the number of times it pops up that someone will try and, you know, bring in some good sense and say, hey, I think this provision gives too much power to the government, and they'll say, but no one's going to commit fraud upon their own people. That's what the outsiders, you know the colonial masters would have done. So I think that's an important point of distinction.
Speaker 2:And the second is it was an incredibly diverse group and, as we know, you know, when it's a very diverse group then the transactions costs can be very high, which means if you need to get anything done, you need to lower the transactions costs of you know the procedure to every single decision that is made in the post constitutional setting. And that's why it is not just easy to amend the constitution. The quorum required to pass legislation is 10%. It's super easy to pass legislation in India. There's a lot of powers given to the executive and the cabinet to do things by executive order or ordinance. So all of those things now kind of work their way in, because the status quo or the starting point of the Indian constitution was this completely different thing.
Speaker 2:And it wasn't a bunch of gentlemen who were largely sort of you know from one part of the world and land owning and property owning and speaking the same language, who came together to have an agreement and say we'd rather do this than punch each other out. And this is again and I think the historical importance is underappreciated, and you've written about this in your book with Hinnick. Right on how many times when we talk about these constitutional rules or you know how we have these decision making processes, we do this in a completely ideologically and historically antiseptic way. Right, especially political economists. Right Like we study this as like a cost curve, right, and external costs will be decreasing downward sloping and a decision making cost curve will be monotonic, increasing upward sloping.
Speaker 2:That's not. That's a very, very sort of ideologically and historically and culturally antiseptic way of doing things. So I think once you read that in, you're suddenly like, oh, this is the correct equilibrium. This crazy mess with these crazy number of people. Maybe what you need is this crazy non-obstantive constitution where everything is a negotiation and, yes, it's slow and it's clunky and sometimes people's rights are compromised, but that's the equilibrium the reason that there's all these set-asides and benefits are that it's equilibrium.
Speaker 1:It reflects the power that different people have and you can't just say we're going to change it, because that would require a change. That's not politically possible. So India's constitutional structure might appear creaky to an outsider. If you think well, we're all going to sit around a table and design an ideal system, but if it's a system that recognizes all of these different impulses and it is such an enormous federal system, what is kind of surprising is that there have not been any successful. There haven't been giant wars of civil. There have been civil wars. There have been breakaway republics, attempts by individual states to break away, but they haven't been super serious in the sense that they lasted for a very long time. They were relatively small groups. That actually almost certainly counts as a success. As you said in that neighborhood, india has become a democracy. What it's failed to do is to stay capitalist.
Speaker 2:Yes.
Speaker 1:And that's the tension, ultimately, that I think you highlight. Can India be a capitalist country and a democracy?
Speaker 2:And a constitutional republic.
Speaker 1:Yes.
Speaker 2:I think for the capitalist part, we need to go closer and closer towards having more constitutional constraints, because a very large part of how things are done in the market is you have to minimize cronyism and you have to minimize regime uncertainty and by regime uncertainty I also mean policy uncertainty, right, which means your constitutional constraints must be much stricter. It should be much harder to sort of change rules on a whim, it should be much harder to centralize a lot of power, it should be much harder to expropriate property, and so on and so forth. So now I think we are at a very different point, as India has decided that it's going to have this form of sort of a market governing economy. I don't think the old clunky system that I have been defending so far can quite work out Right Now it's bringing in.
Speaker 2:So I always like to joke that India went from crony socialism to crony capitalism. Right, because not like the socialist state lacked cronyism. It had the same problems, but the constitution was almost too malleable. And now this malleability is getting exploited by, you know, very large oligarchs and you know, whatever, all the things that you would expect. And in this the second part of my critique is the constitutional courts haven't done a good job of staying on track, and there are a whole bunch of reasons for that. It starts with how these courts are appointed.
Speaker 1:How are they appointed?
Speaker 2:Oh, how much time do you have, Mike?
Speaker 2:This is another one of those. Let me let me try and give you the Cliff Notes version. So the the original provision said that there will be. There will be a consultation between the Supreme Court justices, the sitting justices and the law ministry, which is the cabinet, and they will, you know, come up with a list of names. And because this is one area where you would like to have as much vagueness as possible, they kind of just left it at that and they didn't say how many votes and who would get precedence and things like that.
Speaker 2:So the original norm was India's first Supreme Court was basically the British Federal Court, which overnight, you know, the flag changed and it became the Indian Supreme Court and they started recommending, and the norm was very much okay, the people that they put forth for recommendation, you know, the cabinet would sort of have some informal back channel discussions and then pass it. Similarly, who would become Chief Justice of India? They said, okay, the senior, most sitting justice becomes the Chief Justice of India, and so on. Seniority in terms of when they joined the bench, not age alone. So these were the norms that were crafted around this and Mrs Gandhi, when the courts went against many of her socialist plans, decided to violate those norms and just you know, sort of have a different process of appointing and transferring justices, and the court decided that they will, by judicial interpretation, amend the provision to appoint them. And then they said that, oh, this is going to be a self-appointing court. I love the expression on Mike's face right now.
Speaker 1:I. This is constitutional legislation. They wrote a procedure for themselves.
Speaker 2:Yes, so the original cases. This happened through two or three different cases in the 90s and the way they set it up was it's going to be a collegium of the five senior, most justices, that is, the Chief Justice of India, and you know the next four junior justices, and they will come up with a set of names and you know they'll send it to the law ministry who must appoint them, the law ministry who must appoint them. Now, again, this creates confusion, because what happens in case of a deadlock or if you disagree, because you can't effectively take away the executive's power to appoint justices, which is what they did, and in the process the court also kind of self-destructed. It became a very nepotistic court, right as you can imagine as a constitutional economist, anyone who comes up with this crazy rule that these five people are going to suddenly turn into Caesar and then appoint everyone else suddenly, you know it was all their friends and family and sons and nephews who started moving up the bench.
Speaker 1:Well, they are the best.
Speaker 2:And they are the best, of course and they became more and more corrupt and there was an erosion of public trust in the courts. So the Modi government actually tried to do something sensible. They tried to bring in a constitutional amendment to clarify how they'll appoint judges. Ok, but in India you can't just amend the constitution, right, because of this huge history. The court has to effectively ratify if the amendment is OK or not. And the court said no, the new system that the Modi government has suggested, we don't comply with it. So right now, believe it or not, I know this is going to make India sound like a tin pot republic.
Speaker 2:The method of appointing justices is through a memorandum of agreement between the executive and the judiciary. It has nothing to do with the original provisions of the constitution and it's like some backroom deal that they have had, saying you can say all you want that constitutionally you know, as justices you're going to appoint the people, but we're the ones who have to stamp it and pay them, and if you don't do as we say, then we're just going to drag it out. So there have been times when the courts have not functioned anywhere close to capacity because the executive is dragging its feet. So then they came up and hatched this deal and came up with a memoranda of understanding and it's a mess. So if you ask me in one sentence, how are they appointed, I honestly don't know. I know how they're supposed to be appointed, I know how they used to be appointed, but currently it's just like you know, some backroom deal.
Speaker 1:I had no idea. So thank you, Earlier. You used what you lawyers call a term of art because you said entangled, and we haven't talked about Richard Wagner, who has a. It isn't just a constitutional theory, it is a theory of the way democracies and economies interact. So can you say a little bit about how India fits into Richard Wagner's theory of entangled political economy?
Speaker 2:Yeah. So I mean, dick was a huge influence on me. He was, you know, one of my professors. I took multiple seminars with him. He was on my dissertation committee, dissertation committee, and I think there are two ways to think about it.
Speaker 2:So the first is what are the different parts which are entangled right? So one is that we tend, as economists, to think that there is this given set of rules, right, that are either given and fixed, depending on who you speak to, or relatively absolute absolutes, depending on you know who else you read. But there's this good, there's going to be this set of rules, and once we have those rules, there's going to be stuff that happens. And then we pause, right, if you need to change the rules or if something else needs to happen, then we'll go back to the level of the rules and do some magic and then we'll go back and play the game Right. So I think one part of it is hey, it's not, it doesn't quite work that way. These are not parlor games, where you play a game and you kind of take a break and you shoot the breeze and you have a drink, and then you go back and play the next game with a minor tweak in the rules. All this is happening as you play, right? So that's one part of the entanglement. So I think it somewhere smashes the distinction between what Buchanan and Tulloch described as constitutional, political economy and public choice. So the original distinction at least the Cliff Notes version that I learned in my graduate work was the constitutional level is the choice of rules, and then public choice is, you know, strategies within those rules and so on. So there is an entanglement between these two levels, and I'm my work is a great example of this, because constitutional amendments must be part of this entanglement, because if these two things are separate, then you shouldn't have any constitutional amendments, right, like you're done. But the fact that you have constitutional amendments means, without pausing play, you're constantly having this back and forth between the level of the rules and the strategies within the rules.
Speaker 2:The second part of the entanglement is the entanglement between what is governed through market decision making and what is governed by politics, right, and I think here I really like Randy Holcomb, and you know what he calls political capitalism, right, we like to make it seem like there's capitalism and then there's this tiny box of crony capitalism which is the separate and unsavory thing, and then we can all just kind of say, hey, that's not the real deal and then walk away from it.
Speaker 2:But in fact all systems we have political socialism, we have political capitalism they need to work within a given set of rules and whatever the emergent order is and even in socialism there is some room for emergent order, not a lot, but there is some room that has to be politically contingent. So that's the second part of the entanglement. And I think the third part of the entanglement that Dick talks about and this is really his, you know some of his older work with Buchanan is the intertemporal nature of the entanglement, right? So this is the idea of debts and deficits and how you tie your hands intertemporally. So it's very much you know the Odyssey sailing on the ship and you know not just tying his hands to the mast but also telling everyone to disregard him when he says untie my hands from the mast, because he's pretty sure he will. So I think that's the third nature of entanglement, which is intertemporal.
Speaker 1:And you know you can also read in like maybe the fourth layer will be political business cycles and you know so, on and so forth, but that's how I view overall Dick's project and the myth was that the ship gets older, parts of it are replaced over time. Is it the same ship? And I asked a little bit about the US Constitution. You said, and most people would say, that the Indian Constitution is 75 years old. Does India have the same Constitution that it had in 1950? Because many of the parts have been replaced. What is it that makes a constitution the same or different? And this is a question that goes back to Aristotle, aristotle when he talks about the politea, the heart of the nation. What is it that makes a constitution the same or different? And there's no obviously right or wrong answer to that. Some of it depends what you think the nature of a constitution is. But I'd be interested in your thoughts.
Speaker 2:So you know, I have a love-hate relationship with the ship of Theseus, metaphor for a constitution, and the love-hate is in the following sense I love it because it's so. I love it for its economy. That you know. I mean the idea of, you know, removing individual drafts and minor and major constitutional amendments fits pretty nicely, and then you can think about if it's the same ship, if it's the same constitution, that's continued. The point where I really start disliking it is that most constitutional amendments are not exactly akin to removing a raft or, you know, a rotting board or something like that. It is changing the fundamental design of the ship, right? And then I would ask is the new design making it more sail worthy or is it more likely to sink the ship? Because at the end of the day, the ship has one purpose and one purpose alone is that it must sail and not sink. And I think that's where I depart with the ship of Theseus, sort of analogy, or I think that's the limit of it.
Speaker 2:So I think the American Constitution has done very well. It's added some really crazy extensions, like suburban homes, you know, have these weird extensions and you can tell this was the old part of the house and the new part of the house. I think they've done some funky things, but largely the core design of those interesting extensions have made the ship more stable, more sail worthy and a greater ability to have more people on board and sail on longer journeys. I think the Indian constitution has become less stable in some sense. So the good news is that in changing some of its parts it made sure that the ship didn't like sort of go up in smoke or just sink overnight. So that's the good news about some of the amendments. But the bad news is it's not clear to me that it is really as stable a ship as it should be with all these weird new extensions which make no sense, and I don't think it can go on a long and fruitful journey.
Speaker 1:The reason that I like the analogy is that it requires that the changes be made in accordance with the logic that the original constitution spelled out, and so it might be the same constitution if the changes were made according to that procedure.
Speaker 1:You have taught me something I had no idea, and that is that the original procedures for choosing judges was not very specific, and it has broken, is perhaps too strong, but it is indeterminate, and that means that the constitution has failed its function of sailing and remaining afloat. And so it might be that there is something about the Indian constitution that has made it less ship worthy, that has made it less seaworthy, and that means that you're likely to see some threats from government, because once it's contestable, once this is a rent seeking contest, then, given the stakes, we might as well devote almost all of our resources to trying to win this battle, because if we can win it, then we get to interpret the Constitution which is just what you want the Constitution not to accomplish. Well. That all seems very pessimistic. What's the best thing about the? We'll make our last little bit here a little more optimistic. What is the best thing about the Indian constitution for growth and prosperity in India over the next 10 years?
Speaker 2:The best thing is exactly what you described as the worst thing and this is going to sound like a very Gordon Tullock answer, but if everyone is engaging in this crazy rent seeking exercise, that brings in some inherent stability and some path towards its own equilibrium. Right, because if you can flip that switch, so can someone else, and relatively easily, in fact. I find sometimes the American capture of the Constitution is a little bit crazy, because the level at which people try to capture the amendment, the American Constitution is a little bit crazy. Because the level at which people try to capture the amendment, the American Constitution is through lifelong appointments of judges and that seems to be, for an outsider like me, like an extraordinarily crazy thing to do right, which is why so much effort is devoted towards who gets to be on the bench, because that's the person who decides which amendment is going to go which way, because most amendments in the US Constitution are done through judicial interpretation.
Speaker 2:In India it's a revolving door of justices because there's a retirement age and there's this crazy procedure, or whatever we call it, to appoint them right. And there's going to be a lot of rent-seeking from state-level politicians, from whoever is in the federal government and parliament, from businessmen, from everyone, from the legal community, which means that has to end up in some kind of a crazy equilibrium. So maybe it's not that crazy. That's my today is Tuesday and today I'm speaking like Taluk Ask me on Wednesday and I might have a different answer.
Speaker 1:That is a really important point and it's not only a Talukian answer, it is a Kosian answer. Yes, so the fact that people are going to bargain and everyone has some stake in coming up with the solution to the bargain that produces the greatest total prosperity if they can contract to distribute that in some way. And so the contracting problem might mean that since I can't capture the gains I'm going to choose an inferior outcome would be the, since I studied with Douglas North, that would. The Northian response to the Taluckian claim is there's a contracting problem, but over time it's like the common law. Over time we chip away at this, we're constantly bidding and rent seeking can become Coasean bargaining.
Speaker 1:I think that's a really fascinating place to end, because it means that if transactions costs are low enough, we will tend over time to improve institutions. If transactions costs are prohibitively high, we can bump along at the bottom of the range of possible growth paths indefinitely, because it is hard for us to contract around it. So maybe the genius of the Indian system is exactly what appears to an American to be the problem. I think that's a really fundamental insight. Well, thank you. Thank you very much, shruti, for having been a guest on. The Answer Is Transactions Cost, and I'll look forward to seeing you at conferences and learning more about your work.
Speaker 2:Thank you so much for having me, Mike. It's always a pleasure to speak with you. This is a lot of fun.
Speaker 1:Whoa. That sound means it's time for the twedge. Three contractors were bidding to fix a broken fence at the White House in Washington DC. One was from Germany, one from Mexico and the third from India. They go to the White House office to examine the fence. German contractor takes out a tape measure, then uses a laser to make sure that it's level, does some measuring and then works out some figures on a laptop with a Starlink connection to a warehouse. Well, he says I figure the job will run about $901. $400 for the very best materials. $400 for the very best materials, $401 for my unionized team of workers and $100 profit for me. The Mexican contractor looks at the location size of the fence and then he looks down for a minute doing some figures in his head. Then he says I can do this job for $450. $250 for materials from my cousin wholesale, $100 for my other cousin who's a worker and $100 profit for me. The Indian contractor doesn't measure or figure and he's watching a Bollywood movie on his phone. After the others give their estimate, he leans over to the White House official and whispers $2,450. The official is outraged. He says you didn't even measure or think about it like the other guys. How did you come up with such a high figure? The Indian contractor whispers back a thousand for me, a thousand for you. And the government official says well, how are we going to get the fence built? And the Indian guy says oh, that's simple, we hire the Mexican guy. That's what the money is for this month's letter.
Speaker 1:Beginning of the letter Hello, dr Munger, I found the recent Tidy C with Randall Holcomb some of the best listening I've encountered recently. His ideas on competing elites I think are the most accurate, realistic analysis of our current economic system that I've heard. I wanted to comment on your application of transaction cost to voting. I wanted to comment on your application of transaction cost to voting, showing how the Australian or secret ballot increases the transaction cost of vote fraud via intimidation or the potential for negotiation. I agree with that analysis but note that with universal mail-in we have effectively undone this increase in transaction cost. With universal mail-in anyone with power over another person incompetent, illiterate, whatever can now easily demand that the person with power fill out the ballot for the other person.
Speaker 1:I've often mentioned this problem of compromising the secret ballot to defenders of universal mail-in. The response is also nearly universal they don't hear what I said, and they give a mostly correct explanation of how, given the mail-in procedures in their state, they are confident that their individual ballot will be counted correctly. Now, when I hear Australian ballot, I tend to think preferential voting. I know the term is supposed to mean secret ballot, but, having been an Australian resident for many years, the true distinction of Australian voting today is preferential voting and, of course, no universal mail-in. Er North Canton, ohio. End of letter. Well, I don't have much to add to that. That certainly seems right, and it is true that the people who are objecting to mail-in ballots and the people that are defending them are talking past each other. So it is true that if I do a mail-in ballot, it will probably be counted correctly. Question is, are there others? And that's the thing that's hard to know. I don't think there's much evidence that there is widespread fraud. There probably is a small amount. The difficulty is that voting like Caesar's wife needs to be above reproach.
Speaker 1:The Book of the Month. It's an older book In fact it was published in 1885, but it is one that I had just reread and I was impressed with how great a book it is and I want to recommend it to you. It's the Personal Memoirs of Ulysses S Grant. Now, the one that I read was published in 1999 by Modern Library, but the first edition came out in 1885. Grant died in July of 1885 at the age of 63.
Speaker 1:This book has candid insights into the backstabbing of politics. The economics of provision, his work on the economics of military supply are just remarkable kind of offhand comments. He wrote the two volumes in a few months, in 1884 and 1885, and he died just one week after having finished the final proofs. So he never saw the book in print. But the book earned $450,000 in royalties for Grant's widow. That really was his concern and reason for writing the book. He had lost almost all of his money in a fraudulent business scheme and he wrote the memoirs to provide for his family. Well, whatever the reason, his style is marvelous and the accounts are unforgettable. The next episode will be released on Tuesday, february 25th. We'll have a new topic, some letters and, of course, a new hilarious twedge. All that and more next month on Tidy C.