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We can tax all of the people all of the time!
November, 28th 2006
With the Budget not too far away, it may be apt to study James Mirrlees' Welfare, Incentives, and Taxation. Inputs on free trade are to be had from Deepak Lal's Reviving the Invisible Hand, while Follow the other Hand by Andy Coh en uses magic as a metaphor to explain the success of some of the largest companies. An interesting handful of reads, says D. MURALI.

Ten years ago, James A. Mirrlees shared the Economics Nobel with William Vickrey, for "one of the most important and liveliest areas of economic research in recent years", as the press release dated October 8, 1996 stated on http://nobelprize.org . The duo's work was about `economic theory of incentives under asymmetric information' applicable to `situations where decision-makers have different information'.

Examples of such informational asymmetries make for interesting reading: "A bank does not have complete information about borrowers' future income... an auctioneer does not have complete information about the willingness to pay of potential buyers; the government has to devise an income tax system without much knowledge about the productivity of individual citizens."

With the Budget not too far away, it may be apt to study Welfare, Incentives, and Taxation, by Mirrlees, from Oxford University Press (www.oup.com). The book brings together about a score of the Nobel Laureate's papers about welfare economics.

The first essay, a transcript of the Nobel Prize Lecture, is about `the economics of carrots and sticks'.

The essay starts with a discussion of `the invisible hand' that Adam Smith had described in The Theory of Moral Sentiments. According to Smith, the rich, `in spite of their natural selfishness and rapacity', would be "led by an invisible hand to make nearly the same distribution of the necessaries of life which would have been made, had the earth been divided into equal portions among all its inhabitants."

A theory with serious defects, points out Mirrlees. "If a perfectly equalising policy were carried out, the ordinary incentive to work would be eliminated."

What follows `the invisible hand' is `taxation'. Then comes the very visible and dreaded `income taxation'. The author cites Vickrey's model of optimum tax problem in which redistributive taxation can be described simply as income tax that has `the effect of determining an individual's consumption as a function of that individual's labour income'.

Mirrlees agrees that income tax can be `a highly complicated function of income'. Also, income-tax is a much less effective tool for reducing inequalities than has often been thought, he says.

The book demands a good grounding in math and economic theory, so that you can make meaning of lines such as: `the total substitution effects of a proportional change in all tax and subsidy rates should be proportional to a weighted sum of dividends,' and `the weight is the difference of a term proportional to the marginal utility of income, and the income derivative of the household's income net of taxes', apart from the many Greek letters and calculus notations that fill the pages.

"Economists are accustomed, perhaps surprisingly, to think about the world in terms of what I can only call proverbs," is a friendly snatch of Mirrlees-speak, from his speech at the Nobel Banquet, on December 10, 1996.

"Corrupting some famous words, we might be felt to have shown that `One can tax all of the people some of the time; and some of the people all of the time; and if we put our minds to it, we can tax all of the people all of the time,'" quipped the economist before declaring, "The dismal science lives up to its reputation!"

The Rest can follow the West

As if to remind you of Adam Smith, again, here is Deepak Lal's Reviving the Invisible Hand, from Academic Foundation (www.academicfoundation.com). "The book is about an ancient process (globalisation) and a modern set of economic institutions (capitalism) which are transforming the world," begins the intro. Lal puts up a stout defence for `a revival of the invisible hand of free international trade and global capital', as against interference by the government and organisations.

"Many Third World countries, like India and Chile, are fearful of completely removing their trade barriers, as they would have nothing to bargain with the US and the EU (European Union) in the reciprocity game the largest trading entities still insist on playing," writes Lal. He rues that the promoters of the new LIEO (liberal international economic order) have paradoxically become its weakest adherents. Another paradox that the author points out, in conclusion, is that even as the former repressed economies of the Third and Second Worlds are gradually adopting `the twin classical liberal policy of laissez faire', the rhetorical champions of free markets continue to have bloated governments.

Can democracy come to the rescue of development efforts? Doubtful, says Lal. `Statistical proxies used for the political variables' don't inspire much confidence, he avers, after studying `thirty-year economic histories of 25 developing countries'. Rather than the form of government, what matters is `the availability or lack of natural resources'.

A chapter titled `morality and capitalism' notes that the Rest (of the world) has the option of adopting the West's material beliefs, for the sake of prosperity, without surrendering their own morality. "It is possible to modernise without Westernising," assures Lal. "Japan was the first non-Western country to realise this, and the two Asian giants, India and China, after a century of fruitlessly trying to find a middle way to marry tradition with modernity, are now following the Japanese example."

The failure of Africa, according to the author, is due to `the predation of nationalist elites in natural resource rich countries'. He proposes the formation of INRF (an International Natural Resources Fund), by conjoining the staff of the World Bank and the IMF (International Monetary Fund). What should that body do? "Obtain the rents from the natural resources of failed or failing states and put them in escrow for use only in the country in which they were generated."

Magic as a metaphor

Harry S. Truman (1884-1972), a former President of the US, is said to have once fretted: "Give me a one-handed economist! All my economists say, `on the one hand... on the other.'" So, it may do good to veer off to Follow the other Hand by Andy Cohen, from St. Martin's Press (www.stmartins.com).

The author is `an expert magician and board member of the Society of American Magicians,' so you can sit back and relax with the book. But Cohen is also `an expert in helping the world's largest companies, including Time Warner, Nestle, and JPMorgan Chase, think differently about branding, marketing, advertising, CRM (customer relationship management), and change management.' The secrets revealed in the book, with magic as a metaphor, have helped produce `a billion dollars in sales for some of the world most recognised brands,' lures the blurb on the dust jacket.

"To survive today, you must be able to come up with more than just great ideas; you also need to be able to produce ideas on demand," insists the author. A new idea isn't enough, unless it comes `with a guarantee that it works'. Explains Cohen: "Creativity is fine, as long as the new ideas are not so fresh and original that they trigger our fear of the unknown."

You can nose-land, on the other hand, as it happened to Unilever, when it AXE-ed conventional wisdom that a body spray would never succeed in the US. "They challenged the view that the main reason people buy deodorants is to avoid sweat and smell." Then? "Unilever decided to position the body spray to guys aged 18 to 24 as a way of helping them `get the girl'." Worth getting... the book, I mean!

Quite a handful of reads to wrap up the penultimate month of the year.

D. MURALI

 
 
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