Ashish's thoughts

Invisible hand and National Interest

Many times you read editorials in various newspapers that politics is based on narrow self-interest and not national interest. So what exactly is the national interest? And how do we know if a particular policy is in national interest or not? And how do we motivate politicians to look after the national interest without expecting sacrificies from them?

National interest could be defined as interest of a Nation as a collective entity. Or it could be addition of interests of all the people of the Nation. However, a Nation as a whole should be greater than the sum of its parts. Thus, we have to understand National interest as a separate entity from the sum of the interests of its constituents.

One way to measure the National interest is to treat GNP (Gross National Product) as a proxy for National interest. It is calculated and published by Government regularly and is used by large number of economists, analysts and organizations like United Nations. Granted, it is not perfected but given the alternatives, it is the only thing that comes close to the National interest.

Once we define and find a way to measure our National interest, we need to figure out a way to motivate our politicians to look after our National interest. If we are going to ask our politicians to look after our National interests, wouldn't it be easier if we also compensate them according to the National interest? If we keep asking them to look after our National interests without tying their compensation to the National interest, what motivation will they have?

So, how do we tie the compensation of our politicians to the GNP? One way is that their annual pay and benefits should be proportional to the GNP of that year. That way, they earn more if GNP goes up. Also, their pension and retirement benefits should also be tied to the GNP of the year in which they are due. That way, we will motivate our politicians to look after our long-term National interests and not just short-term National interest during the period in which they are in power.

Not only this will improve living standards of our Nation in monetary terms, but it will also increase justice and fairness in our Nation. How? Here, I have a theory that any injustice or unfairness will decrease our GNP! Let's take an example. Injustice is caused when you forcibly take (or help take) something that belongs to others. When that happens, there is only wealth transfer. Thus, there would no increase in the GNP. Worst, because of the fight that will ensure (court case, dharnas etc.) and the ensuing decrease in the productivity of both the aggressor and the victim, the GNP of the Nation will decrease. The aggressor will enjoy something that is not rightfully his and hence will lack motivation to produce more on his own. Also, the victim will get disappointed because of the injustice done and will not produce as much as he would have produce without the injustice. In other words, injustice is a negative-sum game. This will reduce the current and future compensation of the politicans and hence will serve as an powerful disincentive against any policies that might cause injustice.

Now the question is, who decides the proportional compensation of the politicians! If politicians are themselves allowed (after getting elected) to decide their compensation they might overcharge! Why not let voters decides the compensation of the politicians? If yes, how? The best way would be to treat voters as buyers of the services of the politicians in serving the National interests. Thus, politicians who stand for elections also indicate what price they want in return for their services should voters decide to elect them. The voters, based on the compensation demanded by each candidate and plus any other factors that they use today, vote for the candidate they select. After a particular set of candidates are elected, their compensation is fixed according to the information they have put on ballot paper regarding the compensation demanded.

Another problem is that politicians can fudge the GNP data in order to increase their compensation. This is another form of injustice. And remember, injustice is a negative-sum game. That means, any nominal increase in GNP today by politicians in order to increase their pay will cause GNP to decrease tomorrow. And since, their pension is tied to future GNP values, this serves as an powerful disincentive against overvaluing GNP. And this in addition to the usual risk of detection of the fraud after power is lost.

In fact, if voters are smart, they will select politicians who demand greater proportion of their compensation in future (after their years of power and during retirement) and not in current years. Because, this indicates confidence in the policies they are promoting as well as greater synergy between politicians' self-interest and National interest.

posted by Ashish @ Friday, July 18, 2003