In defence of Smriti Irani: Why Madhu and Maken are wrong


Vivek Kaul

So Smriti Irani cannot make for a good human resources development minister because she is not a graduate.
Or so we have been told by the likes of Madhu Kishwar and Ajay Maken.
In short, people who have degrees make for better politicians is the conclusion being drawn. But is that really the case?
Let’s take the case of a certain Lalu Prasad Yadav, who was the defacto Chief Minister of Bihar for more than 15 years. Lalu has a Bachelor of Laws and a Master in Political Science. How did his degrees make any difference?
During his rule Bihar went from bad to worse. In fact, when Lalu was questioned about the lack of development in the state, he was very open about admitting that development did not lead to votes.
Such was Lalu’s lack of belief in development that even money allocated to the state government by the Central government remained unspent. As Santhosh Mathew and Mick Moore write in a research paper titled
State Incapacity by Design: Understanding the Bihar Story, “Despite the poverty of the state, the governments led by Lalu Prasad signally failed to spend the money actually available to them: ‘…Bihar has the country’s lowest utilisation rate for centrally funded programs, and it is estimated that the state forfeited one-fifth of central plan assistance during 1997–2000.’”
Interestingly, between 1997 and 2005, Rs 9,600 crore was allocated by the Ministry of Rural Development to Bihar. Around Rs 2,200 crore was not drawn. Of the amount that was drawn only 64% was spent.
During Lalu’s rule Bihar went from bad to worse and a whole generation lost out on progress. But yes, Lalu had two degrees.
Let’s take an even better example of former prime minister Dr Manmohan Singh, a PhD from the University of Oxford. Now compare his degree to the mess that we have ended up with under him. Interestingly, most of our politicians who have a degree, tend to have a degree in law. How does that help in anything other than running the law ministry or the ministry of corporate affairs or other similar ministries? And that is assuming that having studied law, the politician understands its intricacies (not every lawyer has the same command on the subject like Arun Jaitley does).
If we take this argument further, what it means is that to become a minister an individual should be an expert in that particular area. So, a finance minister should either be an economist or a finance professional. Arun Jaitley is neither. A defence minister should have experience in the area of defence. So, doesn’t that make General V K Singh an excellent choice for being the defence minister?
Further, in order to get an individual with the right experience or a degree to head a ministry, one would be looking at technocrats all the time. So, then why bother about electing MPs at all?
This would mean moving onto a more American form of government where the President is elected by the people and is allowed to choose his team, a lot of whom are technocrats who have the required experience.
Given this, insisting that a minister have a degree, doesn’t make much sense in the present system of government that we have.
That’s the general part of the argument. Then there is also the specific part regarding Smriti Irani and Congress’ criticism of her lack of a degree. To her credit Irani is a successful professional, who has risen on her own, in a very competitive television industry.
Also, what one needs as a minister is the ability to administer. Whether she has that or not, we will come to know in the time to come.
The Congress party is in no position to criticize her. One of their foremost leaders Rajiv Gandhi, never completed any degree after leaving the Doon School. He was the prime minister of the country. His mother Indira, never completed her degree at Oxford. Their current leader Sonia Gandhi’s educational qualifications are also nothing to write home about. So, they really are not in a position to criticise Irani. It’s like the pot calling the kettle black.
To make a totally different comparison, all the Ivy League MBAs, PhDs in Maths and Physics who worked on the Wall Street, created a major part of the financial crises that the world is currently going through.
To conclude, there is not much of a link between having a degree and having the ability to govern. Look at the mess Kapil Sibal, who held the human resources development ministry between May 2009 and October 2012, made in the education sector. He had got his LLM degree from the Harvard Law School.

 The article originally appeared on on May 28, 2014

(Vivek Kaul is a writer. He tweets @kaul_vivek) 

Everybody loves a good story


 Vivek Kaul

I am writing this piece sometime in the middle of April 2014. The stock market in India has been on fire over the last one month, with the NSE Nifty and the BSE Sensex regularly touching new highs. Every time the market touches a new high, editors of newspapers/magazines/websites have to look for a new reason to explain the bull run.
Several reasons have been offered during the course of the last one month. First we were told that the stock market investors were betting on Narendra Modi becoming the Prime Minister. The numbers in this case didn’t really add up. The domestic institutional investors sold stocks worth Rs 13,130.77 crore during March 2014. Their selling continued in April as well. Till April 11, 2014, the domestic institutional investors had sold stocks worth Rs 3,728.06 crore. If these investors are really supporting Modi, then why are they selling out of the stock market?
Then we were told that the foreign investors were betting on Modi coming to power and setting the faltering Indian economy right. In this case, the numbers do add up. In March 2014, foreign institutional investors bought stocks worth Rs 25,376.45 crore. In April, the trend continued and by April 11, they had bought stocks worth Rs 3,658.21 crore.
But is the logic as simple as that? It is worth remembering here that the Western central banks have been running an “easy money” policy for a while now. The Federal Reserve of the United States, has been reducing the amount of money it has been printing since the beginning of the year. But at the same time it has reiterated time and again that short term interest rates will continue to be close to 0% in the near future.
Interestingly, the Fed repeated this in a statement released on March 19, 2014. The foreign institutional investors invested Rs 4,222.10 crore on March 21, 2014, in the Indian stock market. This is the highest amount they have invested on any single day, since the beginning of this year. So, are the foreign investors investing in India because they have faith in Modi? Or are they simply investing because “easy money” continues to be available to them at rock bottom interest rates? The stories appearing in the media haven’t got around to explaining that.
Another theory that went around briefly was that the stock market is rallying because India’s economic data had been improving. Inflation was down. Industrial output as measured by the index of industrial production had marginally improved. And the current account deficit had been brought under control. This theory lasted till the index of industrial production for the month of February 2014 was declared. Industrial output for the month was down 1.9%.
The conspiracy theorists also suggested that it was the black money of politicians coming back to India. They needed that money to fight elections. Well, if they needed that money, they would have sold their stock market holdings, and the stock market would have fallen. But that hasn’t really happened.
So what is happening here? As Ben Hunt writes in a newsletter titled Epsilon Theory and dated February 28, 2014 “Ants, bees, termites, and humans – the most successful species on the planet – are constantly signaling each other so that we can make sense of our world together. That’s the secret of our success as social animals.”
The point is that everybody loves a good story. We want coherent explanations of what is happening in the world around us. As Nassim Nicholas Taleb writes in The Black Swan—The Impact of the Highly Improbable “We love the tangible, the confirmation, the palpable, the real, the visible, the concrete, the known, the seen, the vivid, the visual, the social, the embedded, the emotionally laden, the salient, the stereotypical, the moving, the theatrical, the romanced, the cosmetic, the official…the lurid. Most of all we favour the narrated.
And this is where the media comes in, which tries to give us convincing explanations of what is happening in the world around us. Whether the reason behind a market movement is the real reason or not, does not really matter, as long as it sounds sensible enough. Taleb gives an excellent example of the same in The Black Swan.
“One day in December 2003, when Saddam Hussein was captured, Bloomberg News flashed the following headline at 13:01: U.S. TREASURIES RISE, HUSSEIN CAPTURE MAY NOT CURB TERRORISM,” Taleb writes.
Basically, what Bloomberg was saying was that the capture of Hussein will not curb terrorism and hence, investors had been selling out of other investments and buying the safe US government bonds, thus pushing up the price.
Around half an hour later, Bloomberg had a different headline. As Taleb writes “At 13:31 they issued the next bulletin: U.S.TREASURIES FALL: HUSSEIN CAPTURE BOOSTS ALLURE OF RISKY ASSETS.”
What had happened was that during a period of half an hour the price of the US government bonds had fluctuated. First they had risen as investors had bought the bonds. In half an hour’s time some selling had happened and the prices were falling. Bloomberg now told its readers that prices were falling because investors were selling out of US government bonds and looking at other investments given that with the capture of Hussein, the world was a much safer place.
Hunt offers a similar example in his newsletter. On November 28, 2008, Barack Obama, who had just been elected the President of the United States, appointed Tim Geithner, the President of the Federal Reserve Bank of New York, as his Treasury Secretary. The S&P 500, one of America’s premier stock market indices, rallied by about 6% on that day and Geithner’s nomination was deemed to be the major reason behind the same. As Hunt writes “All of the talking heads on the Sunday talk shows that weekend referenced the amazing impact that Geithner had on US markets, and this “fact” was prominently discussed in his confirmation hearings. Clearly this was a man beloved by Wall Street, whose mere presence at the economic policy helm would soothe and support global markets. Yeah, right.”
Geithner’s nomination was good news, but was it big enough to drive up the stock market up by 6% in a single day? As Hunt explains “So long as Obama didn’t nominate a raving Marxist I think it would have been a (small) positive development in the context of the collapsing world of November 2008. Was the specific nomination of specifically Tim Geithner WHY markets were up so much on November 24th? Of course not.”
The moral of the story is that first things happen and then people go looking for reasons. Hunt calls it “the power of why”. As he writes “It is the Power of Why, and it has no inherent connection to any true causal connection or the way the world truly works. Maybe it’s all true. Probably it’s partially true. But it really doesn’t matter one way or another.”
What is true of the financial markets in particular is also true for the world at large in general. As Taleb puts it “It happens all the time: a cause is proposed to make your swallow the news and make matters more concrete. After a candidate’s defeat in an election, you will be supplied with the “cause” of the voters’ disgruntlement. Any conceivable cause can do. The media, however, go to great lengths to make the process “thorough” with their armies of fact-checkers. It is as if they wanted to be wrong with infinite precision.”
So what is the way out? Taleb has an excellent suggestion in his book Fooled By Randomness—The Hidden Role of Chance in Life and in the Markets “To be competent, a journalist should view matters like a historian, and play down the value of the information he is providing, such as by saying “Today the market went up, but this information is not too relevant as it emanates mostly from noise.””
But that is easier said than done.

The article originally appeared in the May 2014 issue of the Wealth Insight magazine

 (Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected]

Capitalism and the common good

thomas piketty

Thomas Piketty is a professor at the Paris School of Economics. Over the last few months he has become the most talked about economist globally with the release of the English edition of his book Capital in the Twenty-First Century (The Belknap Press of the Harvard University Press). The original was written in French.
Capital has been the second best-selling book on for a while now. This is a rarity for a book which is not exactly a bed time read and runs into 577 pages (without including the nearly 80 pages of notes). But that is not a surprise given the important issues the book tries to address. In this book Piketty deals in great detail about the “distribution of wealth”.
As he writes “The distribution of wealth is one of today’ most widely discussed and controversial issues. But what do we really know about its evolution over the long term? Do the dynamics of private capital accumulation inevitably lead to the concentration of wealth in fewer hands, as Karl Marx believed in the nineteenth century? Or do the balancing forces of growth, competition, and technological progress lead in later stages of development to reduced inequality and greater harmony among the classes…?”
In this interview he speaks to Vivek Kaul. Kaul is the author of the Easy Money trilogy which deals with the evolution of money and the financial system and how that led to the current financial crisis. The second book in the trilogy Easy Money—Evolution of the Global Financial System to the Great Bubble Burst releases in June 2014.


You write that “It is an illusion to think that something about the nature of the modern growth or the laws of the market economy ensures the inequality of wealth will decrease and harmonious stability will be achieved”. Why is that incorrect? Has capitalism failed the world? Capitalism and market forces are very good at producing new wealth. The problem is simply that they know no limit nor morality. They can sometime lead to a distribution of wealth that is so extremely concentrated that it threatens the working of democratic institutions. We need adequate policies, particularly in the educational and fiscal areas, to ensure that all groups in society benefit from globalisation and economic openness. We want capitalism to be the slave of democracy and the common good, not the opposite.
A major part of your book deals with how capitalism leads to inequality…
History tells us that there are powerful forces going in both directions — the reduction or the amplification of inequality. Which one will prevail depends on the institutions and policies that we will collectively adopt. Historically, the main equalizing force — both between and within countries — has been the diffusion of knowledge and skills. However, this virtuous process cannot work properly without inclusive educational institutions and continuous investment in skills. This is a major challenge for all countries in the century underway.
What is the central contradiction in capitalism? How does that lead to inequality?
In the very long run, one powerful force pushing in the direction of rising inequality is the tendency of the rate of return to capital rto exceed the rate of output growth g. That is, when rexceeds g, as it did in the 19th century and seems quite likely to do again in the 21st, initial wealth inequalities tend to amplify and to converge towards extreme levels. The top few percents of the wealth hierarchy tend to appropriate a very large share of national wealth, at the expense of the middle and lower classes. This is what happened in the past, and this could well happen again in the future. According to Forbes global billionaire rankings, top wealth holders have been rising more than three times faster than the size of the world economy between 1987 and 2013.
That clearly is a reason to worry. Why are you confident that in the years to come economic growth rate will be lower than the return on capital. What implications will that have on capitalism and the inequality that it breeds?
Nobody can be sure about the future values of the rate of return and the economy’s growth rate. I am just saying that with the decline of population growth in most parts of the world, total GDP (gross domestic product) growth rates are likely to fall. Also, as emerging economies catch up with developed economies, productivity growth rates are likely to resemble what we have always observed at the world technological frontier since the Industrial revolution, i.e. between 1 and 2% per year. With zero or negative population growth, this suggests that total GDP growth rates will fall much below 4-5%, which has been the typical value for the average rate of return to capital in the very long run.
So what is the point that you are trying to make?
My main point is not to make predictions, which by nature are highly uncertain. My main point is that we should have more democratic transparency about how the different income and wealth groups are doing, so that we can adjust our policies and tax rates to whatever we observe. As long as top groups grow at approximately the same speed as the rest of society, there is no problem with inequality per se. But if the top rises three times faster than the size of the economy, you need to worry about it.
Your book is being compared to Karl Marx’s Capital. How different is your work from his?
One obvious difference is that I believe in private property and markets. Not only are they necessary to achieve economic efficiency and development — they are also a condition of our personal freedom. The other difference is that my book is primarily about the history of income and wealth distribution. It contains a lot of historical evidence. With the help of Tony Atkinson, Emmanuel Saez, Abhijit Banerjee, Facundo Alvaredo, Gilles Postel-Vinay, Jean-Laurent Rosenthal, Gabriel Zucman and many other scholars, we have been able to collect a unique set of data covering three centuries and over 20 countries. This is by far the most extensive database available in regard to the historical evolution of income and wealth. This book proposes an interpretative synthesis based upon this collective data collection project.
Any other differences?
Finally, Marx’s main conclusion was about the falling rate of profit. My reading of the historical evidence is that there is no such tendency. The rate of return to capital can be permanently and substantially higher than the growth rate. This tends to lead to very high level of wealth inequality, which may raise democratic and political problems. But this does not raise economic problems per se.
One of the most interesting points in your book is about the rise of the supermanager in the US and large parts of the developed world and the huge salaries that these individuals earn. You term this as meritocratic extremism. How did this phenomenon also contribute to the financial crisis?
According to supermanagers, their supersalaries are justified by their performance. The problem is that you don’t see it the statistics. In the US, between two thirds and three quarters of primary income growth since 1980 has been absorbed by the top 10% income earners, and most of it by the top 1% income earners. If the economy’s growth rate had been very high, rising inequality would not have been such a big deal. But with a per capita GDP growth rate around 1.5%, if most of it goes to the top, then this is not a good deal for the middle class. This has clearly contributed to rising household debt and financial fragility.

 (Vivek Kaul can be reached at [email protected])

The interview originally appeared in The Corporate Dossier, The Economic Times on May 23, 2014 

The wilful blindness of Manmohan Singh

Manmohan-Singh_0Vivek Kaul

The stock market crash of October 1929 started the Great Depression in the United States, from where it spread to large parts of the world. Some of the best books on the Great Depression, which are still being read, started to appear only 25 years later.
My favourite book the Great Depression is
The Great Crash 1929, written by John Kenneth Galbraith. The book was first published in 1954, twenty five years after the Depression started. Milton Friedman and Anna Schwartz’s A Monetary History of the United States, 1867-1960, which dealt with the Great Depression in considerable detail, came out only in 1963. This book set the agenda for how central banks around the world reacted to recessions.
In fact, books on the Great Depression are still being written. A recent favourite of mine is
Lords of Finance—1929, The Great Depression, and The Bankers Who Broke the World, written by Liaquat Ahamed, which was published in 2009. It won many awards including the Pulitzer Prize for history. What is true about the Great Depression is also true about Mahatma Gandhi. Some of the best biographies on the Mahatma, like Gandhi Before India, have appeared in recent times.
Dear reader, before you start wondering why am I talking about the Great Depression and Gandhi, in a column which is supposedly on Manmohan Singh, allow me to explain. The point I am trying to make here is that the best history is usually written many years after something has happened. The gap is probably necessary to allow historians to iron out the noise. Also, over the years new sources of information appear, which were not available in the first place. For one, documents get declassified. At the same time, letters that the men and women being profiled wrote, appear in the public domain and so on.
Hence, the defining history on Manmohan Singh’s years as the Prime Minister of India will most probably be written a few decades from now. Having said that, it is easy to predict that historians won’t project Singh in a good light.
The story that one usually hears about Singh is that he was an honest man heading a dishonest and a corrupt government. While his ministers may have made money being corrupt, he never did. This is a very simplistic explanation of the entire scenario.
A major reason why Manmohan Singh survived as the Prime Minister of India for a full decade was because he was ‘wilfuly blind’ to a lot of nefarious activities happening around him. Wilful Blindess is a legal concept that was first applied in the British courts in 1861.
As Margaret Heffernan writes in 
Wilful Blindness- Why we ignore the obvious at our peril“A judge in Regina v. Sleep ruled that an accused could not be convicted for possession of government property unless the jury found that he either knew the goods came from government stores or had ‘wilfully shut his eyes to the fact’…Over time, a lot of other phrases came into play – deliberate or wilful ignorance, conscious avoidance and deliberate indifference. What they have all in common is the idea that there is an opportunity for knowledge and a responsibility to be informed, but it is shirked.”
Manmohan Singh’s decade long tenure as the Prime Minister needs to be viewed through the lens of wilful blindness. He was wilfully blind to A Raja running the telecom industry for his own benefit. Singh was also wilfully blind to the coalgate scam where coal mines were given away free to both public sector and private sector companies. In fact, he was the coal minister when a large number of mines were given away free.
In fact, as Heffernan writes “the law does not care why you remain ignorant, only that you do.” Also, on some occasions the wilful blindness comes from that “we focus so intently on the order that we are blind to everything else.” Singh was so focussed on following the orders of Sonia Gandhi, who was the actual head of the government, that he chose to remain ‘wilfully blind’ to all that was happening around him.
Interestingly, when Enron went bust in the early 2000s, Jeffrey Skilling and Kenneth Lay, the CEO and Chairman of Enron, pleaded that they just did not know what was going on in the company and hence, could not be held responsible for it.
Judge Lake who was hearing the case invoked the concept of wilful blindness. As he instructed the jury: “You may find that a defendant had knowledge of a fact if you find that the defendant deliberately closed his eyes to what would otherwise have been obvious to him. Knowledge can be inferred if the defendant deliberately blinded himself to the existence of a fact.”
The phrase to be marked in the above statement is “closed his eyes”. The only way Singh could not have known about what was happening around him was if he had closed his eyes to it.
“Magicians never reveal their secrets,” writes Scottish writer Ian Rankin in his latest crime thriller
Saints of the Shadow Bible. Singh was no magician. If he wants history to treat him a little better than it actually might end up doing, it is best that he spends his years in retirement writing his memoirs of the ten years he spent as India’s Prime Minister, like Winston Churchill did.
Churchill in the years after the Second World War wrote his version of history of the Second World War and even won the Nobel Prize in Literature in 1953. Singh needs to do the same. That way history might also consider his point of view.

The article originally appeared in the June 2014 issue of Mutual Fund Insight

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected]