Occam's razor is the idea that when two rival theories explain a phenomenon, the simpler theory is to be preferred. Aristotle's epicycles fit the data as well as Kepler's ellipses, and a pure empiricist could have been agnostic between the two. Occam's razor guides us in preferring Kepler's ellipses on the grounds that this is a simpler explanation.
By Dr. Ajay Shah
Occam's razor
is the idea that when two rival theories explain a phenomenon, the simpler
theory is to be preferred. Aristotle's epicycles fit the data as well as
Kepler's ellipses, and a pure empiricist could have been agnostic between the
two. Occam's razor guides us in preferring Kepler's ellipses on the grounds
that this is a simpler explanation.
In the world
of public policy, a useful principle is:
"When two
alternative tools yield the same outcome, we should prefer the one which uses
the least coercion."
Example:
Punishment
When we want
to drive the incidence of a certain crime to the desired rate, we want to find
out the lowest possible punishment that gets the job done. You can reduce theft
to desired levels by promising to cut off the hand of the thief. We would much
rather achieve the objective using a reduced use of the coercive power of the
State, with mere imprisonment.
The purpose of
punishment is deterrence, not vengeance. And, in the class of deterrents, we
seek to find the smallest possible use of the coercive power of the State that
gets the job done.
Suppose 4
years of imprisonment and 2 years of imprisonment are equally able to get the
incidence of a particular crime down to the desired level. Suppose a person
says: I am not a liberal; I am not squeamish about using the coercive power of
the State; I hate the people who commit such crimes; I don't care whether they
get 2 years or 4 years in jail. But an α fraction of all convictions are in
error. In these cases, we are inflicting the punishment upon an innocent. The
harm is minimized when we have deployed the lowest possible punishment.
Example:
Spending on government programs
All government
spending is grounded in taxation, present or future. All taxation is grounded
in the coercive power of the State. If there are two different spending
programs that get the job done, we should favour the one which spends less.
Example:
Infrastructure bonds
When the
market for infrastructure bonds in India does not work, too often, solutions
are proposed which use extreme force. Some people propose tax breaks. Some
people propose harsh interventions such as forcing every bank to buy
infrastructure bonds or forcing every bidder to NHAI to issue infrastructure
bonds. As an example, we in India force insurance companies to buy
infrastructure bonds.
If, on the
other hand, we trace the failures of financial sector policy which have held
back the market for infrastructure bonds, this would show how to get the job
done while actually reducing State coercion (i.e. getting the State out of inappropriate coercion).
Example: The
journey to cashless
Cash is an
abomination and we should have a thousand flowers of electronic payments
blossoming. India is one of the most backward places in the world in the
domination of cash.
Tax breaks for
electronic payments or high taxes for cash transaction or outright bans of cash
transactions: these are all ways that get the job done using a lot of force.
If, instead,
we understand the failures of financial sector policy which have hobbled the
sophistication of payments in India, we will get the job done while actually
reducing the use of the coercive power of the State. We would have less cash in
India if RBI did not use the coercive power of the State to block the clever
Uber cashless transaction.
Example:
Family welfare
A government
which runs counseling services on family welfare is using less coercion when
compared with forcible sterilization or a one-child policy.
How to reduce
the use of coercion: go to the root cause of a market failure
Market
failures can be addressed in many ways. When we go to the source, with well
understood causal claims about the source of the market failure, we will find
ways to address the market failure using the smallest use of the coercive power
of the State.
If we don't
have a deep understanding of the sources of the market failure, we may often
endup hitting a symptom rather than the disease. Getting the job done may then
require the use of a lot of coercion.
As an example,
for some market failures that are rooted in information asymmetry, if an
intervention can be found which rearranges the structure of information, this
can get the job done using the least coercion.
Why are big
punishments often favoured in India?
A person who
thinks of violating a law to obtain an ill gotten gain Gfaces a probability p
of being caught and the fine imposed upon him will be F. Standard economic
arguments suggest that we must set F=G(1−p)/p. In this case, the expected gain
from violating the law is 0, and a risk averse person will favour the certainty
of compliance over the lottery of breaking the law.
In India, too
often, the executive works poorly and p is quite low. This creates a bias in
favour of driving up F. This is giving us very large penalties. This induces
its own problems. We are inflicting terrible harm on the α fraction of innocents
who are wrongly convicted. We are giving great power to front-line
investigators and judges at a time when institutional capacity is low.
If we are able
to build institutional capacity for enforcement, and p goes up, we will then be
able to come back to lower punishments that generate adequate deterrence.
Why does
Occam's Razor of Public Policy make sense?
It is
consistent with the liberal philosophy that desires that humans should be free
to pursue their own life with the minimum interference.
At best,
governments work badly. The information available to policy makers is limited,
many wrong decisions are taken, many decisions are poorly implemented.
Governments do not know the preferences of citizens. Politicians and officials
are self-interested actors and work for themselves. The Lucas critique comes in
the way: rational actors change their behavior when policy changes take place
in ways that confound the original policy analysis. Many government actions
fail to achieve the desired outcome, but they always have unintended
consequences.
It's good to
be humble, and swing the smallest stick that would get the job done.
Limitations
All this, of
course, presupposes that all use of coercive power of the State is a purposive
activity aimed towards achieving a certain well specified objective. This is
not always the case. As an example, the objectives of exchange rate policy or
capital controls are hard to decipher. Before we get to discussion of more
coercion vs. less coercion, it would be a great step forward if all government
intervention were fully articulated in terms of market failure, objective of
the intervention, demonstration of the causal impact of the intervention upon
the objective, and cost-benefit analysis.
The examples
above have featured comparisons where more versus less coercion is easy to
identify. Amputation of the hand >imprisonment for 4 years > imprisonment
for 2 years. Forcing banks to give out 40% of their loans into priority sector
lending is more coercion than information interventions which make the credit
market work for poor people. Opening up to private and foreign telecom companies
is a way to get phones to everyone with less use of State coercion when
compared with forcing banks to open accounts for everyone.
In many
situations, however, it is not easy to identify which of two alternative policy
pathways involves more coercion. A government program which educated parents
that their kids should get immunized seems to involve lower coercion when
compared with a forced immunization program, but this is perhaps not the case
when we envision an education program that must generate eradication of polio.
A government program to educate young people about saving for old age involves
less coercion than forcible participation in the NPS.
Conclusion
The State has
a monopoly on violence and is the only actor who can coerce citizens to do things
against their will. All public policy initiatives involve the use of the
coercive power of the State. In the field of public policy, we should be humble
about our lack of knowledge, respectful of the freedom of others, and use this
power as little as possible.
Acknowledgements
I am grateful
to Jeff Hammer, Shubho Roy and Renuka Sane for useful conversations.
About The Author:
Dr. Ajay Shah, (F-4465-2010),
Professor,National Institute
for Public Finance and Policy, New Delhi (2007-) Consultant, Department
of Economic Affairs, Ministry of Finance, New Delhi, (2001 – 2005). Assistant
and then Associate Professor, IGIDR, Bombay (1996-2001). President, CMIE,
Bombay (1993-1996). Consultant, Rand Corporation, Santa Monica (1990-1993). Website
This article was originally published at Dr. Ajay Shah's blog on January 31, 2016.
All rights reserved by the author and original publisher.
