Every day when I get to work, I notice something peculiar while getting on the elevator. There is a rush to get in as the lift opens and everyone gets in indiscriminately. Even then, one pattern is clear: Those who are to?disembark earlier (say, on the ninth floor) are the first to get in. Those who have to leave the last (say, on the 16th floor) get to enter last. The result is chaotic. Every time the lift stops on a particular floor, some people have to get out, making way for those who have to leave and then get in again. The scene is repeated almost on every floor the lift stops at.
There are two ways to look at the problem. One could say that coordination costs for ensuring orderly entry and exit from the lift are too high. Another explanation would be that users of the lift are short-sighted. Their time preferences/discount factors/“patience” are low. I favour the second explanation: Most users of the lift have sufficient education or experience in using the lift so that coordination should not be a serious problem. The odd first-time user or a person unfamiliar with its operations can be excused. Such cases are rare in comparison with the number of daily users.
The lift is an example of many situations encountered in our public life: from the political business cycle whereby politicians recklessly spend public money close to elections to behaviour in various policy domains (telecom, oil and gas and power sectors being good examples). Corruption and electoral vices (money for votes and exchanging votes for personal favours after a successful election) too fit in the same pattern: Citizens are impatient to have it “here and now” instead of waiting for normal delivery mechanisms to work. Foreign policy is a more complicated situation, but with some qualifications it, too, is hostage to the same problem.
Illustration: Jayachandran / Mint
At one level, this explanation is complete: Low discount factors ensure that individuals are impatient and want to consume income or goods (getting in and out of the lift before others being one such good) instead of saving/investing them for a future time period or periods. This is where school economics ends: The professor rarely tells you why the discount factor is low. You can make any situation or person short-sighted or farsighted by choosing any arbitrary discount factor. Unless there are explanations that tell you why individuals have low discount factors, they remain stuck at an “intermediate” level, bereft of explanatory power.
Unlike financial markets, where discount factors are formed due to tangible reasons such as interest rates and new information that is priced and updated daily, explaining their genesis in day-to-day life is more complicated. There are two factors that come to mind: First, historical experiences and second, investment in envisioning a good future (education and good healthcare being two key investments).
The historical explanation was suggested by a colleague. Her argument was that present-day social and political behaviour has roots in India’s socialist economic experiment. Pervasive shortages of goods and opportunities generated opportunistic behaviour: You got a telephone or a gas connection by some influence peddler dispensing a favour on you; railway reservations by the mercy of some relative who was in the civil service. An economy of shortages produced impatience. This, in turn, generated discount factors that encouraged short-sighted behaviour. A large section of the population continues to have short, or very short, time preferences.
Those who are in their 40s (and above) today formed their ideas about how the world works in that age (before 1991). Their behaviour shows what is known as hysteresis, or a lag between changes in material conditions and political/social orientation. Our daily behaviour at workplaces (“office jobbery”) and elsewhere suffers from such a lag. Perhaps, this will not be a problem for the generations that escaped Indian socialism. Maybe they will be less opportunistic.
There is, however, another aspect to this explanation, one that goes beyond immediate material conditions in generating adverse discount factors. Discount factors that permit cooperative social behaviour require envisioning a brighter future for oneself. There are costs to imagining such a future. A good education, one that is not provided in the local pathshala, goes some way in imparting confidence and abilities in an individual. Parents know the value of a good education and their desperation to get kids into good schools has something to do with this intuitive understanding. Nobel Prize-winning economist Gary Becker was the first to point this out (“The Endogenous Determination of Time Preference,” The Quarterly Journal of Economics, volume 112(3) August 1997, P729-758).
Today, the vast majority of Indians have few, if any, resources to generate such patience. And the socialists in our midst suggest more of the same bad medicine, the one that led to the malady in the first place. Where will the money for good schools and universities come from? Government institutions are, at best, degree mills. Hardly the kind of places where patience can be generated. When the products of such a system enter the labour market, they, unsurprisingly, don’t get good jobs. A new cycle of short-sighted behaviour begins again.
For the present, this problem has generated perverse incentives that help perpetuate it. For example, electoral vices owe a lot to low discount factors. A majority of the electorate can be simply bribed with small sums of money or a bottle of liquor. At a slightly higher discount level, personal favours such as a government job for a son or a relative and other petty tasks ensure the same result. This is a progressive ladder, all the way up to cronyism at the policy level. It will be a while before we learn to use lifts in an orderly manner.
Siddharth Singh is deputy editor (views) at Mint. Comment at email@example.com