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Note ban philosophy

Six months on, there appears little justification for demonetisation in theories of politics, governance.

Written by Richa Roy |
May 8, 2017 12:56:38 am
demonetisation. currency ban, note ban, 500 rupee ban, 1000 rupee ban, john rawls, john rawls justice theory, jeremy bentham, indian express, india news Image for representational purpose.

Demonetisation has been evaluated through multiple dimensions — political, economic, constitutional, legal — and the role of the institutions involved. However, what were the philosophical underpinnings for “the most sweeping change in currency policy that has occurred anywhere in the world in decades”?

One might think demonetisation was from the utilitarian school (given the rhetoric around short-term sacrifices for the longer term good); or that it drew on John Rawls’ theory of justice, which follows from the social contract tradition and emphasises the need to make the worst-off as well-off as possible; or perhaps the libertarian tradition on the right to property and the conditions under which the state has the right to expropriate it.

The utilitarian school, pioneered by Jeremy Bentham and developed by J.S. Mill and others, is predicated on of maximising the greatest “good” for the greatest number of people, even if this involves short-term sacrifices, the so-called “scapegoats”. Bentham intended it to be anti-elite, since each individual counted one as well as providing a firm basis for policymakers to make decisions, rather than arbitrarily. However, the reason the utilitarian school is not a justifiable basis for a policy of this nature is that the “good” is not and arguably cannot be defined. The theory of what constitutes the “good” in utilitarian philosophy has varied from pleasures and happiness to “nobleness of character”, to the possession of traits and exercise of certain capacities. Given that utilitarianism does not have a precise conception of the “good”, knowing what should be maximised will be obscure and capricious. The goal posts of demonetisation have similarly been consistently moving — data analysis shows that the objectives for demonetisation have changed from “countering black money”, to “fake currency”, to “promoting cashless and digital payments”.

Other than semantics, the policy responses shape-shifted around the narrative in the first few weeks — with announcements on penalties for declared funds followed by incentives for digital payments. It could be argued that there are multiple objectives for any policy. However, these must be clearly defined in the first instance and not be variable. Uncertainty in definition, ironically, make the policy subject to the whims of its creator — exactly what Bentham sought to prevent.

Later conceptions of utilitarianism focussed on creating rules the general adoption or internalisation of which would maximise utility. In some ways, this is a precursor of libertarian paternalism, where rules are meant to be “nudges” to change behaviour.

Representatives of the government writing in these pages have stated that demonetisation intended to inculcate changes in behaviour in line with the government’s moral “goals” and one may argue that it is a form of rule utilitarianism. However, the shock caused by the exercise was more a nasty shove than a nudge from the government. Further, the institution of rules often has multiple additional costs and unintended consequences — provoking other acts to subvert it and acts to avoid the detection of such subversion. Demonetisation has, for instance, created an alternative market for the demonetised (old) notes at a premium as well as newer forms of corruption. Even advocates of demonetisation believe that corruption will continue under newer arrangements. The multiple amendments to the policy are a drain on state capacity and there is an opportunity cost to the use of that time. Since utilitarianism is also consequentialist, it is important to measure the loss caused by these externalities in any measurement of the purported benefits.

It is tempting to see demonetisation as a scheme for the least advantaged to be better-off. However, by being seemingly neutral, the policy did not take into account the justifiable differences between subjects — it hurt the very constituency it sought to help. Demonetisation inflicted suffering on all, despite the deeply unequal manner in which that suffering can be borne. Demonetisation did not specifically target any section of the population (despite claims that the rich were sought to be penalised for their corrupt behaviour). It created a uniform policy that devalued all currency; and therefore (ironically) left the relatively affluent who are already in the formal banking system unscathed and disproportionately hurt the poor, the unbanked, the marginalised.

Demonetisation did not distinguish between those who receive cash by choice (say, businessmen seeking to stay below the tax radar) and circumstance (a financially excluded daily-wage labourer); those who do not have bank accounts voluntarily and those out of circumstances beyond their control. A policy made behind the Rawlsian “veil of ignorance”, keeping in mind the difference principle would definitely not victimise the worst-off in this way. In being outwardly impartial, demonetisation was also blind to the structural injustices of caste and gender in its application. Women in India face marginalisation and powerlessness — evident in the fact that nearly 80 per cent do not have bank accounts. For the more marginalised, demonetisation magnified their deprivation.

Finally, demonetisation also violates libertarian rights to property by effectively expropriating citizens’ cash and by restricting their ability to access funds in their account. It is important to point out that libertarianism does permit the expropriation of property by the state when the original acquisition of such property was unjust. One could argue that demonetisation sought to do that, by expropriating the ill-gotten gains of corruption. However, the “impartial” utilitarian policy of demonetisation did not distinguish regarding the manner of acquisition of cash, expropriating all cash.

The writer, a finance lawyer, is presently a public policy scholar at University of Oxford

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