The Invisible Hand

A lot of people are understandably very excited about Prime Minister Narendra Modi’s recent initiative to discontinue the Rs. 500 and Rs. 1000 notes , throwing down a direct challenge to the existence of India’s notorious black economy.

People are also excited (Say…whaaaat?)about Donald Trump’s victory in the 2016 US Presidential elections.
No wonder many are referring to these events as the 11/9 or the new 9/11.

One would imagine everyone ought to be concerned with policy changes as significant as one affecting the currency in the hands of over a billion people, or a highly polarizing figure now becoming the Head of State of the world’s most powerful economy (No China, that isn’t you. At least, not yet.)

The truth though, is a little bit more nuanced.

For starters, as many as 100 Million Americans might have sat out the elections, possibly because they believe that voting doesn’t matter a great deal .

This would imply, as a corollary, a strong belief in an inability to change the status quo, that neither choice would result in either significant good or significant bad.

That would explain why a day after the demonetization of the Rs. 500 & Rs. 1,000 notes, an Uber driver told me :
“Chor tho chori karte rahenge (The thieves will continue stealing)”

But then this feeling of helplessness is also not without a valid basis. After all, this isn’t the first time India has demonetized high value denominations. In fact, it has happened at least twice before, in 1946 and 1978, when notes with denominations as high as Rs. 10,000 (Yes, you read that right, Rs. 10,000 notes)were taken out of circulation.

Technological progress and the government are often seen as two sides of a rather unusual dichotomy. Perhaps the greatest appeal that the concept of capitalism offers, is the faith that the best and most deserving individuals and businesses rightfully earn that place, and the government has hardly any role to play in this ecosystem.

For the proponents of Free-markets, it is therefore difficult to accept a situation where the government holds considerable power in influencing business and market outcomes.

In this context, any intervention or influence from a government in a capitalist democracy would be seen as a rather glaring irony.
If we were to put these inclinations aside though, the evidence that government leadership and policies have a direct bearing on innovation and economic growth is overwhelming.

Perhaps the most obvious example of this in today’s times is the Great Firewall of China, which many might see as draconian and narrow-minded, but which has also led to the creation of an entire generation of Chinese entrepreneurs and businesses that have capitalized on the opportunity it represents (I am thinking Jack Ma & Alibaba).

If we were to go back in time, we would find that the government had a strong role to play in one of the most successful companies in history — The Dutch East India Company.

The Dutch East India Company, also known as VOC, is, by most accounts, the first ever multi-national corporation, the first company to issue equity ( For just shy of 200 years the company paid an annual dividend ranging from 12%-63%). By some estimates, VOC would be worth nearly $7.7 Trillion today.

Numbers like these leave little room for debate.

VOC’s mind-boggling success was the result of a monopoly it enjoyed over the Asian trade, beginning with spices.
This monopoly was the result of a royal charter awarded to them by the Dutch Government.

The first and most successful global and publicly owned corporation in history was the result of government intervention.

Until not too long ago, the list of top-10 largest companies in the world (by market capitalization) was dominated by oil majors such as ExxonMobil , Royal Dutch Shell & PetroChina (At the time of this writing, Saudi Aramco is privately held, but should it go public, will almost certainly find a place in the list).

The modern oil industry is celebrated as a triumphant demonstration of how technology can impact the lives of generations and create massively successful businesses.

But what if I told you the oil industry might never have taken off if not for some help from the government ?

In the early 1800s, whale oil emerged as a leading source of lighting fuel and found other applications (Engine fluid, Soap manaufacture etc.)
The use of whale oil eventually posed some (obvious?) problems, especially the diminishing supply of whales, which made the whaling process more and more cumbersome, dangerous and expensive.

The fact that kerosene had become the dominant lighting fuel by the late 19th century is used to present a very elegant narrative that explains how the petroleum technology and industry arrived in the nick of time to save the whales as a cheaper and more environment-friendly alternative.

If only that was the truth.

Owing to the dwindling supply of whales, whale oil production peaked out in 1846.

By 1850, a consumer had a choice of:
Camphene or “burning fluid” — 50 cents/gallon (combinations of alcohol, turpentine and camphor oil — bright, sweet smelling)
Whale oil — $1.30 to $2.50/gallon
Lard oil — 90 cents (low quality, smelly)
Coal oil — 50 cents (sooty, smelly, low quality) (the original “kerosene”)
Kerosene from petroleum — 60 cents (introduced in early 1860s)

In 1860, shortly before the introduction of Kerosene, alcohol-based fuels were already the cheapest source of fuel and at 90 Million gallons annually, had 5 times as much production as whale oil

Why then do we use kerosene today and not alcohol fuel ? The answer lies in just one powerful word : Taxes

Use of kerosene rose quickly after 1862 when, a tax of $2.00 per gallon was imposed on alcohol to pay for the Civil War. The tax quickly forced burning fluid and camphene off the market. A far smaller tax (10 cents per gallon) was imposed on kerosene.

An entire technological and business paradigm can be created or lost based on what the government supports (or ‘taxes’).
Is the demonetization of the Rs. 500 & Rs. 1000 notes the ‘kerosene moment’ for the Indian economy, one that threatens the existence of the black economy by ‘taxing’ them for not being connected to the digital ecosystem ?

Time will tell.

Oh, and about Trump……

South Park might have nailed it in a recent episode :




For more of such posts, head to Shubhankar.co

Image source