#111 'Tu Tu Main Main' In the Information Age


This newsletter is really a public policy thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question: how do I think about a particular public policy problem/solution?

PS: If you enjoy listening instead of reading, we have this edition available as an audio narration on all podcasting platforms courtesy of the good folks at Ad-Auris. If you have any feedback, please send it to us.

Global Policy Watch #1: A Bit About Bitcoin

Bringing an Indian perspective to burning global issues


What should we make of bitcoin? Should we think of it as the best performing asset class in the last decade? After all, it was priced at $1 in April 2011 and its current price is about $45,000. But was it designed to be an asset? Surely, no. Satoshi Nakamoto, who invented bitcoin, was driven more by angst than greed while writing the 31,000 lines of code that he put out to the world on Jan 3, 2009. Satoshi (a pseudonym) wrote a 500-word essay - Bitcoin: A Peer to Peer Electronic Cash System - to explain the working of the system he had created. The logic was simple - a software system that would spew out some 21 million bitcoins over two decades with people interested in the coins ‘mining’ for them using their computing prowess. 

Satoshi was clear about his aim. He had seen the global financial crisis and he could no longer trust the conventional currency (also called fiat currency) issued by the governments. All he could see around him was central bankers printing money mindlessly to prop up a system where the ordinary individual had no say. And the banks were willing to design more creative and more toxic products that only benefitted them. As he wrote:

“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.”

So he decided to take the governments and the banks out of the equation by his design of bitcoin. People could now transact with a currency that was purely digital, encrypted and anonymous with a distributed public ledger that kept track of the movement of the coin to ensure it isn’t used twice by the same owner to dupe someone. It was quite neat. More importantly, there was no bank or intermediary to get in the way of the transaction nor was there any central banker that could decide arbitrarily how many coins should be in circulation. This was a libertarian utopia. The last bastion of the state could fall now. Fiat currency, an imagined and a coercive construct of the state could now be challenged.

As the last decade has shown, bitcoin hasn’t exactly replaced fiat currency as a medium of exchange in any meaningful way. But that doesn’t mean it has slunk away into anonymity. It has seen a remarkable rise in the last six months with some of the smartest people in the world betting big on it. Bitcoin or cryptocurrency has never been a more mainstream part of discourse ever. 

There are multiple ways of looking at cryptocurrency and make sense of what’s happening here. I will take the most traditional one for this edition. And, maybe, over the next few months go a bit deeper into this area. 

Today, I will take the economic theory lens to evaluate cryptocurrency and its most valuable manifestation, bitcoin.

Let’s understand fiat currency a bit better. Why do all of us believe a Rs. 500 note has any value? Well, Econ 101 class would tell you that’s because the sovereign has decided it is a legal tender that’s worth Rs. 500. There’s a promise right there on the currency note signed by the RBI governor. That’s very reassuring. But does that explain why we don’t use any other commonly agreed medium of exchange? Back in the days when I stayed at a hostel, we used cigarettes or Old Monk as a medium of exchange. There were always more cigarettes and Old Monks in the hostels than currency notes (this was the pre-ATM era) and these had a stable range within which its value moved. If someone needed my help with an assignment, 2-3 cigarettes did the trick. Now the question is what if this was replicated at a larger scale? The demand for Rupee notes would fall and its value would fall notwithstanding the Governor‘s promise. 

So, why does this not happen more often? The answer is that old reason for most things in our society. Network effect. Since most people use Rupee as a medium of exchange, it is easier for the next person getting into a transaction to use it as well. Network effects create an exit barrier for people to adopt any other new medium of exchange and an entry barrier for that new medium wanting to usurp the position of the Rupee. You will need a lot of initial momentum going if you were to establish yourself as an alternative. And how will you generate that momentum? I mean why will people use you as an alternative? It isn’t like the Rupee is failing to meet your expectations as a medium of exchange.

But is that enough? Is Rupee valuable because we all collectively believe in the myth it is valuable? That sounds more Harari than real economics. So, let’s go back to the question of why do we think a Rs 500 note has a value. 

Some of the more original thinking in this area was done by the formidable Austrian school economist Ludwig Von Mises at the beginning of the last century. His view was that we use something as a medium of exchange today because at some point in the past it actually had a real intrinsic value. In his time most currencies traced their origin to a precious metal and overtime were backed by that real asset however nominally. 

That’s fine but what explains the value of Rs. 500 today. There is no real asset backing this except some vague notion of trust. Also, there’s no real reason why should we all believe that this myth of the Rupee having value will continue forever. What if we continue printing money endlessly leading to spiralling hyperinflation sometime in future? What if there’s a worse global pandemic in future that cripples the global economy? What if we know a meteor is on course to collide with Earth in the next 12 months? What happens then? Will we accept a medium of exchange that has no real value if we know our future is uncertain or doomed? Think of that last person willing to accept a fiat currency as a medium of exchange. Why would he take that risk? Doesn’t make any sense for him because there's no future person to whom he can give this currency for its value. We believe in fiat currency because someone in future believes in it too. No future means no such belief. Now work backwards. Why would the last but one person accept it if he knows the last person won’t? If you follow this backward induction logic to its end and if we all know the future is uncertain and (somewhat) doomed, you will conclude the value of fiat money will be zero in future and therefore it should be zero today. 

If you think about it this way, fiat money and this whole business of printing money to get over a crisis is a giant Ponzi scheme. Fiat money should have no value today. Whatever value it has now is a bubble. 

So why do people call bitcoin a bubble and not fiat money? 

Well, turns out there is one big use case of fiat money  - paying tax liabilities owed to the state. If you remember this was an argument used to explain modern monetary theory (MMT) too. If the only way to pay taxes to the government is through fiat money, then there is a periodic demand for it by the citizens. This goes up as the economy grows or as the government taxes more. Now we can avoid the backward induction logic problem that we discussed earlier. The fiat money has a value that’s non-monetary; it pays your taxes. This won’t allow its value to go to zero in future. Therefore it will have value today too.

On such arbitrary plank of state coercion the edifice of human progress rests.

So, what about bitcoin then? Like I said earlier it is as much a bubble as any fiat currency of today. There are three problems it has to solve. One, its unique architecture is both a feature and a bug. That there can only be that many bitcoins prevents anyone from flooding the market with them. This keeps its downside protected and makes it a stable store of value. But on the other hand, a limited stock of coins means the value of bitcoin will continue to rise to preclude its use as a medium of exchange. I mean why will you use bitcoin when you know it will be more valuable in future. You will store it. The ‘good money’ will go out of circulation. The old Gresham’s law will apply. Two, if people don’t use it as a medium of exchange, it won’t create network effects. Lack of network effects will mean it won’t create enough momentum to replace fiat currency. This is a chicken and egg problem. Three, there will be transactions where people will seek anonymity or privacy that will be good use cases for cryptocurrency. But will illicit goods and services on the dark web or those sought for by fringe libertarians be a market large enough to justify the crazy valuation that bitcoin has currently? 

Through a conventional economic prism, the whole bitcoin or cryptocurrency opportunity looks like an asset bubble. There’s a small probability that many Silicon Valley founders and mavericks will ‘bootstrap’ the network effect for a cryptocurrency by making their goods and services available only in that currency. This will bestow intrinsic value to them beyond being a medium of exchange. That’s the only chance it has. Unless the sovereign decides to start its own cryptocurrency that can be used to pay its tax liabilities. But that is for another edition.

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Global Policy Watch #2: Disagreement in the Information Age

Bringing an Indian perspective to burning global issues

— Pranay Kotasthane

A democracy is as good as the discourse it fosters. And it needs no convincing that discourse has plunged many levels in many democracies across the world.

Redeeming our discourse requires two necessary but insufficient components: education in critical thinking, and praxis in disagreeing well.

Critical thinking is where we desperately need philosophers. Philosophy’s focus on argument as a topic of study has a lot to offer. Only when we have a methodological understanding of arguments can we train ourselves to reason well. Only when we reason well will we be able to reflect and reach independent conclusions.

If I were asked what is one course that should be added to high-school curricula, it would definitely be critical reasoning.

The other component, learning to disagree well, is a skill that needs a massive upgrade in the information age. We are not good at handling disagreements. We have a tendency to equate an attack on our opinion as an attack on us. This verb ‘attack’ itself illustrates how strongly we perceive disagreements.

All this was known yet manageable until we didn’t have social media. People disagreed but within their social circles, with people they shared some similarities they could always go back to when confrontations got ugly. But social media changed things dramatically. For one, it put us in contact with the opinions of people we otherwise know very little about. And two, it put our online selves in an endless status competition. The result: outrage without real disagreement, confrontation without camaraderie.

None of this is going away. And this is precisely why diagreeing well is a core skill in the information age. We are still only beginning to scratch the surface of what it means at an interpersonal level or a social media platform design level. Nevertheless, Ian Leslie’s Guardian Long Read article makes a good start.

His answer is two-fold. One, narrow the status gap. Leslie writes:

“People skilled in the art of disagreement don’t just think about their own face; they’re highly attuned to the other’s face. One of the most powerful social skills is the ability to give face; to confirm the public image that the other person wishes to project. In any conversation, when the other person feels their desired face is being accepted and confirmed, they’re going to be a lot easier to deal with, and more likely to listen to what you have to say.”


“When a debate becomes volatile and dysfunctional, it’s often because someone in the conversation feels they are not getting the face they deserve. This helps to explain the pervasiveness of bad temper on social media, which can sometimes feel like a status competition in which the currency is attention. On Twitter, Facebook or Instagram, anyone can get likes, retweets or new followers – in theory. But although there are exceptions, it is actually very hard for people who are not already celebrities to build a following. Gulled by the promise of high status, users then get angry when status is denied. Social media appears to give everyone an equal chance of being heard. In reality, it is geared to reward a tiny minority with massive amounts of attention, while the majority has very little. The system is rigged.”

Two, lower the identity stakes. Leslie writes:

“..what drags participants into destructive conflict is usually a struggle over who they are… That our opinions come tangled up with our sense of ourselves is not necessarily a bad thing, but it is something we need to be aware of when trying to get someone to do something they do not want to do, whether that’s stop smoking, adapt to a new working practice, or vote for our candidate. Our goal should be to prise the disputed opinion or action away from the person’s sense of self – to lower the identity stakes. The skilful disagreer finds a way of helping their adversary conclude that they can say or do something different, and still be themselves.”

More concretely, he identifies having a disagreement without an audience is one way of lowering the identity stakes. People feel more comfortable changing opinions beyond the performative glare. But this approach is suboptimal because it relies on reducing diversity of thought. The other approach is to “just be nice” at a personal level, to make an adversary feel that they can revise their opinion without losing face.

All this sounds quite difficult, of course. But the key takeaway for me was to think about disagreement as a necessary skill for the information age. I strongly recommend the entire article. It is an important theme of our times. and we need to pay a lot more attention to this line of inquiry.

PS: Two book recommendations for learning critical reasoning. Fundamentals of Critical Argumentation by Douglas Walton, and Critical Thinking Skills by Stella Cottrell. To get things started, there’s a good podcast by Oxford University as well.

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PolicyWTF: Compulsory Philanthropy — I Told You So

This section looks at egregious public policies. Policies that make you go: WTF, Did that really happen?

— Pranay Kotasthane

In #108, we subjected the Corporate Social Responsibility (CSR) Law to an “anticipating the unintended” treatment. Turns out there’s evidence to back all those claims too!

Gautam John, one of the most steadfast supporters of this newsletter, sent us a paper that analysed the impact of government intervention on CSR funding since the mandatory CSR law came into effect in FY 2013-14. The authors Rajgopal & Tantri conclude:

  1. Overall, there is a marginal increase in the average CSR spending since the law came into effect in 2013-14. But ...

  2. “High CSR” firms — companies that used to spend 4% to 5% of their profits on CSR before the law came into effect — reduced their spending to the mandated 2% level. “Low CSR” firms — companies that used to spend less than 1% of their profits on CSR before the law came into effect — increased their spending to the mandated 2% level.

  3. CSR contributions became highly sensitive to negative shocks to profits. This meant that companies reduced their CSR spending during bad times but did not increase CSR spending by the same amount during good times.

In sum, “mandatory CSR crowded out voluntary spending”. It became a checkbox to be ticked, a tax to be complied with.

The effect is similar to what you see while booking flight tickets in India today due to COVID-19 price caps in force. Earlier, the ticket prices were distributed according to scarcity — the prices rose as the journey day got nearer and different airlines had different prices. That’s no longer the case. All airlines charge nearly the same amount, the one that just meets the price cap, regardless of how early you book the ticket.

Azim Premji has consistently highlighted the futility of mandatory CSR. Premji alone donated in excess of Rs 7000 crores last year in comparison to the ~Rs 18000 crores total CSR spending by ALL companies in FY 2018-19. On Feb 21, he spoke on this issue again:

"I do not think we should have a legal mandate for companies to do CSR. Philanthropy or charity or contribution to society must come from within, and it cannot be mandated from outside. But that's my personal view. As of now, this is the law and all companies must follow it.”

So, my conclusion remains unchanged. CSR is a tax but only worse.



Reading and listening recommendations on public policy matters

  1. [Paper] Events described historic at the time when they occur are rarely so in reality whereas the events that will be viewed as historic many years later attract little attention at the time. A really important finding that also explains why progress is so underrated.

  2. [Podcast] RSJ was on The Seen and The Unseen,

  3. [Article] Barun Mitra’s take on the way ahead for agricultural reforms is educational.

  4. [Article] Sarthak and Pranay have an article out on the latest attempt at making state finance commissions work.

  5. [Article] Devesh Kapur highlights the low-level equilibrium that our federalism has settled at with respect to agriculture.

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