There is a sequence in the late Sir Terry Pratchett’s novel, Making Money , where the protagonist discovers an astonishing fact about his city’s mint — the wages of the mint workers were paid by printing more money, and so, if the employees worked overtime, they had to do even more overtime to pay for it! This absurdity, as with most of life’s more irrational aspects, was arrived at through a committee’s vote.
This brings us to the new kid on the block, committee-wise — the Monetary Policy Committee (MPC). Tasked with bringing about transparency and clarity to the setting of monetary policy, the MPC, for the layperson, is the new body that will be in charge of setting interest rates. It will do what one man, the governor of the Reserve Bank of India, used to do. The problem, according to some, is that the committee’s structure has rendered it barely more than an advisory council — there is no real decision-by-committee that will take place.
The idea behind the MPC was that, with a mix of RBI and government-appointed members, it would bring balance and continuity to monetary policy and reduce the discretionary powers of any one interested party. One RBI governor is usually very different from the next, the argument went, and so what will provide monetary policy continuity when the governor changes? What if the new governor is not as strict about inflation-targeting, or as adamant that the government stick to its fiscal deficit targets? These questions become all the more immediate with Raghuram Rajan’s decision to return to academia.
The Government on Monday finally notified the changes to the RBI Act that would bring the MPC to reality. In doing so, it formalised the composition of the MPC: six members, three from the RBI and three appointed by the Government. The RBI members will include the governor who will be the chairman of the committee and, most importantly, will have the deciding vote.
While the announcement of this composition in the Budget and its subsequent formalisation on Monday put to rest a lot of speculation around the issue, the decision to give the governor the deciding vote brought forward a number of critics. The argument is that giving the governor the deciding vote in effect puts monetary policy squarely in his hands, as it ever was. What change has the committee brought?
While this may seem a valid argument, there are several benefits to having a committee in place, and still more benefits to having a committee where everyone gets to vote, but one person is first among equals. The argument in favour of a committee is the easiest one, and has been made by Rajan as well: a committee can take the brunt of any pressures that vested interests might exert far better than an individual can. In other words, it is more difficult to influence six people than one person.
Also, there’s the advice. Everybody, even the RBI governor, can do with some advice.
Manipulating manipulationThere is a technical reason behind giving one person the deciding vote in a committee. The Gibbard-Satterthwaite theorem, named after Allan Gibbard and Mark Satterthwaite, shows that in a voting system there is always a tussle between complete democracy and complete honesty. The problem, the economists found, was that if a system was completely democratic (that is, everybody has an equal vote) then it was subject to tactical voting — people voted in a calculated manner that didn’t necessarily display their true preferences. Put bluntly, given the chance, people try to manipulate the system.
The only way around this, according to the theorem, was to give one person more powers than the others. In this case, that would be the RBI governor’s deciding vote.
The other, more practical, reason behind making one person first among equals is to guard against the pitfalls of majoritarianism. Just looking at the results of the Brexit referendum can show how simply going by majority rules can lead to an adverse outcome. Pratchett’s mint example makes the same point through heightened absurdity. You need somebody to put the brakes on a bad decision, however popular it might be. Sure, that power should be used sparingly, but it still needs to exist.
The MPC in its current form is what is needed: a committee to diffuse the external pressure that often goes with monetary policy decisions, and an individual to protect the committee against itself.