Timeless Lessons in Citizenship and Governance from "The Nitopadesha"—Part 2: The Thread of the Science of Prosperity

This article is a part of the series "The Nitopadesha."

Other articles in the series:

• Timeless Lessons in Citizenship and Governance from "The Nitopadesha"—Part 1: The Jewel of Citizencraft
• Timeless Lessons in Citizenship and Governance from "The Nitopadesha"—Part 2: The Thread of the Science of Prosperity

The second book of The Nitopadesha, The Thread of the Science of Prosperity, reads like a lost economics textbook. It walks us through the intricacies of the markets, covering supply and demand, prices, opportunity costs, and even the management of public goods.

As I mentioned in the first part of this series, reading The Nitopadesha is quite humbling and strangely infuriating when you realize our ancestors understood more about economics than most modern politicians. Seeing this ancient wisdom get so much right while contemporary policymakers fumble through bad assumptions and worse decisions is surreal.

Perhaps our leaders would be better at their jobs if they paused to listen to what Bellikota, the cat, had to say:

A price is right, just and fair
Only when it reflects the scarcity of the resource,
And truly counts all costs incurred
And the opportunities foregone.

Without further ado, let’s explore these lessons together. I would, once again, encourage everyone to read The Nitopadesha and use this series of articles as a secondary resource to aid your reading and refer back in the future.

The second book follows Udaradevan and Bellikota as they trade stories, one recalling the teachings of his grandfather, the other speaking of his many, possibly infinite, cousins.

The Price is Right

The first story, The Story of the Generous Bear, teaches how prices work. The key idea is simple: effort adds value, and value determines price. This is precisely how markets work when left alone.

A wrong price is morally harmful to society!
Greed consumes buyers if it is too low,
And sellers if it is too high.

Bad pricing distorts behavior. It makes sellers exploitative or consumers hoarders. Fair pricing, on the other hand, reflects the scarcity of a resource and accounts for both real and opportunity costs. It signals to producers and consumers what is needed and what is not.

What’s impressive is how clearly The Nitopadesha articulates the supply-demand curve. Bellikota clearly knows his economics.

What Do You Do Best?

In the next story, we are introduced to Tarakaran, Udaradevan’s grandfather, and his brush with banditry and barter.

There are two ways to get what you want: one is trade, the other is theft.

Differences create value. Trade works because people want different things and value them differently. Despite what we’re told, in a good trade, both the seller and the buyer walk away happy.

But for trade to thrive, people need to specialize. Instead, when everyone tries to be self-sufficient, we end up with inefficiency and mediocrity (disguised as independence).

This is the problem I have with self-sufficiency campaigns like “Aatmanirbhar Bharat.” It makes sense when it is strategic, like for military or communications technology, but it distorts the free market and hurts consumers when applied to everything under the Sun.

Say it with me: autarky is terrible.

Incentives Move the World

The Story of the Singing Cats features Bellikota’s three Tamilian (?) cousins from Kovai—Rakamma, Thanakka, and Pallavi. The names of the characters in The Nitopadesha span the entire length and breadth of the subcontinent, and it makes me wonder just how far-reaching these ancient civilizations were and how much we’ve lost to time.

The cats teach us a simple but important lesson: all behavior is incentive-driven.

For without incentives no one moves, speeds up or changes direction.

People act when they’re motivated. It’s simple. Some respond to money. Some to status. To some others, it is fear, coercion, or shame. However, incentives only work when matched to the people and the situation.

That’s why a monetary fine is the best way to deal with traffic violations. Try shaming someone into wearing a helmet and see how far that gets you.

Listening to Bellikota talk about incentives, Udaradevan is reminded of what the Fearsome Four-Eyed Dog—perhaps the same one from the first book—told his grandfather Tarakaran.

The Market is Mostly Fair

The Handiwork of the Unseen Spirit drives home this idea:

Yet know this, bear! What we call the market is fairer than others that you can imagine.

The market, when left alone to function properly, is mostly fair. The market matches supply and demand. It ensures that the right quantities of the right things are produced at the right price. It aligns self-interest with that of others and rewards those who provide value.

What we often confuse as a failure of the market or cApItailSm is just crony capitalism, where businesses cozy up to the government to gain an unfair advantage. Think about all the times you were angry at a company; did the company have close ties with the government?

But markets do fail sometimes. And when Udaradevan finishes his story, Bellikota doesn’t let that slip by:

There are important conditions for markets to work, and they must be well understood. There are important conditions when markets fail, and they too must be understood.

The next story is of one such failure—a classic case of negative externalities.

Opportunities Have Costs

The Case of the Wilting Orchards is one neat parable about opportunity costs, negative externalities, and the tragedy of the commons.

The price is right only when it truly counts all the costs incurred and all the opportunities forgone.

All actions have a hidden cost: the cost of not doing something else, a.k.a. the opportunity cost. A fair price must reflect the opportunity cost.

The most obvious example is a negative externality, as shown in the story, where someone’s actions negatively impact a public good. A negative externality is a market failure where government intervention makes sense. Here, the opportunity cost is the damage done to the public good, which must be reflected in the price.

This is what I meant earlier when I said the market is mostly fair; sometimes, it needs an intervention. But as we’ll soon see, blindly interfering in the market usually makes things worse.

Don’t Touch the Prices!

Tarakaran’s rollercoaster of a life takes a predictable nosedive in When the Bear Was Sent to Prison—a cautionary tale about what happens when rulers start setting prices, even with the best of intentions.

A realm where the ruler sets prices will lose the path to prosperity and also fall into moral darkness.

When governments fix prices, they distort incentives and create shortages.

Take rent controls, for example. It sounds great—make housing affordable! But in practice, it kills the supply. Landlords have no reason to rent out their homes and even less reason to maintain them. Why fix a leaking roof if you can’t raise the rent?

Intentions don't mean a thing if the consequence is a disaster.

Argentina recently scrapped rent controls under its newly elected libertarian president, and guess what? Rents dropped, and more houses were on the market. All it took to fix the housing problem was getting the government out of the way. India needs to follow suit, even if it’s just mimicry.

Whenever someone lobbies for price-setting, assume there’s a hidden agenda. A good rule of thumb is that if there’s no clear market failure, government intervention is either a bad idea or a smokescreen to hide hidden motives.

Free to be Free

Bellikota’s cousin Jayarasi makes a comeback in The Case of the Three Heirs, a story that ties together the lessons we learned about economic freedom in this book.

Freedom is natural, and interference the aberration.

Freedom to trade. Freedom to build. Freedom to be left alone. Freedom is the natural state of affairs.

I’m convinced that if people paused for a minute to think about public policy from a freedom-first lens, they’d realize how many things are restricted for no good reason while claiming to help people.

Should the government or a private company run an airline? I know I’m seeing more Air India ads now than ever before, and I don’t know what to do with that information other than leave it here.

The Secret to Prosperity

The second book of The Nitopadesha ends with Udaradevan and Bellikota walking back home, quietly reflecting on the lessons.

Before parting ways, Bellikota summarizes the secret to prosperity in a few simple lines:

… the government’s role is all-important in holding the Thread of the Science of Prosperity. The government even plays a role by not playing a role. A good government knows what, where, how, when, and how much it should do in the matters of trade and enterprise. A bad one, just the opposite.

The third book of The Nitopadesha, The Subtle Scales of Judgement, wrestles with a simple question: “Why is judgment hard?” But that’s an inception of stories for another time.