Centralisation, Decentralisation

In this post I discuss the effects and characteristics of centralization and decentralization of institutions. Let us consider a few cases that shed light on the properties displayed by institutions  based on the extent of their centralisation.

I was once listening to a man in the garment industry. He said that his company was engaged in the weaving, dyeing and stitching of fabric that they finally sold to big retail brands. This was done on extremely low margins and the inflated prices that we see in the stores largely serve as profit to these retail companies.This raises two main questions. One, if the prices are really inflated, then where are the cheaper goods of the same quality in the market? Second, if these are available then why does anyone buy from this big retailers. No, I am not going to argue that the retailers market it better. Instead the answer lies not in the quality of the goods themselves, but in the assurance of quality.

Consider for instance, a marketplace that contains several small shops selling clothes. These clothes would obviously be bought from people like the man I mentioned above. Indeed, from almost the same sources that the big companies buy their goods from. However, among these suppliers, there will be some that will provide quality products and some who will cut a few corners. The smaller retailers will buy from a mixture of such suppliers and a consumer would be unable to discern, in advance, the quality of the clothes. Hence, out of several clothes that a consumer would buy, only a few might last beyond the first few months of usage. Thus the effective cost of a single cloth increases, along with the added disadvantage of unpredictability. While some shopkeepers might make a point of sourcing their materials from the right places, a consumer must experiment a great deal before finding that shop. In contrast, a known brand requires relatively little experimentation due to their smaller numbers and larger scale. Thus, they are able to provide an assurance of quality that is of critical importance to a consumer who is short of time. It is this value that the companies provide, that enables them to put a premium on their products. This is not to say that smaller shops do not have a customer base. Indeed, people fond of experimenting on clothes, people with an ability to discern the quality of clothing or people on tight budgets will form their customer base. But here, we can clearly see the advantage provided by a centralised system to the end user.

Now, consider another example from the retail business. That of their cash counters. Smaller shops, typically owned and run by the same person, do not need complicated and organised methods for their accounting. Instead, a simple system based on the cashier’s memory suffices. However, for a big retail store, the owner (or shareholders) probably never visit the shop and the cash counter is manned by an employee. Due to this impersonal and long distance relationship, a trust deficit is created, which necessitates the use of computerised accounting and cash handling. This leads to the infamous queues and the famous ‘free’ shopping experience in modern retail outlets. True, a computerised system also helps in managing logistics, but trust deficit is a larger reason for its widespread use. This centralisation enables faster expansion and efficient logistics, but it also restrains flexibility in haggling, a favourite and commendable habit of Indian customers (it is commendable because it helps determine the market price more accurately, but more on that later). Also it necessitates the use of standardised barcodes and product locations which adds additional overheads not present in the ‘small shop’ model.

But, one might say that any large organisation performing a task requiring more than a small number of people needs to be centralised. True, but its extent can vary. Highly successful examples of decentralised systems can be considered which are found to have efficiency far exceeding that of a centralised organisation. A shining example of such a system is the ‘Mumbai Dabbawalas’.

These ‘dabbawalas’ take tiffin carriers from people’s homes in the afternoon and deliver it to their earning family members. The system is so decentralised, it would probably take a very long article to describe in its entirety. But for our purposes, it suffices to say that there are no names on the boxes (only numbers), the person receiving it is not the same as the person delivering it or the person transporting it, the box always reaches on the right place at the right time and everybody gets the fair share of their money. To a ‘person in coats and suit’s, this is entirely incomprehensible, and being part of that section of society myself, I too cannot comprehend it. But the fact is that it works, and it works well.

I also recollect reading in my textbook about the water sharing system in some villages. In this system, each village takes only the required amount of water and the downstream villages take the water before the upstream villages. Such a system has been continuing for a long time based on mutual consent and fair play, and has been beneficial to all concerned. After India’s independence however, the government took over this system and needless to say, made a complete mess of it. Now, the entire canal system is dysfunct and the relationship is not as amicable as it was.

As a more recent and probably a closer example, consider the internet. It is a massive network of computers that is owned by none but run by all. With only a few, not very powerful, standard setting bodies, we have an efficient eco-system that follows the protocols perfectly and evolves them as required. While a large portion of international and intercontinental traffic flows through cables that are centrally owned, the cost of using them is decentrally paid for by all the benefactors of the internet. Newer platforms and standards are evolved as required in a very efficient and businesslike way, despite there being no all-powerful governing bodies. This decentralised and efficient system is not a utopia reminiscent of a past, but a fact of the present. It serves to give us confidence that a decentralised system can indeed exist and beat any centralised system in efficiency by a very large margin.

In these examples, we can noticing a few prevailing trends:
First, centralised systems have a governing entity that is mostly disconnected from the ground reality and tends to mould the system in a way that it can understand. For instance, Richard Feynman, a physicist and nobel laureate, pointed out inefficiencies in NASA while investigating the Columbia accident. Here, there were workers were aware of a very efficient method to perform an operation, but were constrained by a very inefficient process prescribed in the NASA guidebook. While such standards are certainly necessary to ensure quality and reliability of construction, it does lead to inefficiencies. Here, I do not mean to propose that we decentralise everything. That would be anarchy. But instead, I suggest that we understand its disadvantages and centralise only when absolutely necessary.

Second, whereas a decentralised system takes time to evolve, centralisation provides a quick fix solution that may prove to be very useful in many situations. An army can be commanded to march at a moment’s notice, but a public revolution takes time to evolve. Similarly, while it is very easy for an individual to start a tiffin carrier logistics service, it take a lot of time for a large number of people to come together to create the likes of the Mumbai dabbawala service.

Third, centralised systems tend to have a very well defined hierarchy, whereas this is not so in a decentralised system. For instance, a retail store has a very strict line of command to enforce accountability. Here, not all stakeholders are shareholders. Contrast this with the Mumbai dabbawalas, where each person has a dual role of performing the actual work and ensuring that his or her peers are also accountable to what they are doing. Such also is the case with the internet, where each user is a direct benefactor and there is very little formal ‘management’ required. Here almost all stakeholders are shareholders and hence the system is more equitable. Also management merged with working ensures a greater efficiency than can ever be expected out of a typical centralised system.

Fourth, centralised systems seem to be necessary when an entity needs to make profit that is disproportionately large profit in comparison to the labour performed by that individual. That is, an individual contributes to production more by supplying capital than by supplying labour. Decentralised systems on the other hand tend to thrive where labour is the dominating component of production and the capital required is easily supplied by the workers. In case of the internet, although a large amount of infrastructure is used, each user of the internet pays for their share of infrastructure that they use. The providers of the infrastructure, like the telecomm. companies, are centralised, which emphasises this point. This explains the difference in hierarchical organisation noted previously.

A democratic government too can be considered a form of centralisation, with accountability decreasing from the local level to state level to country level and finally ending in absolute chaos at the international level.

Thus, we can see that centralisation is very good at providing a quick fix solution and essential if one intends to make profit by the labours of many. Whereas a decentralised system takes a very long time to evolve and once forcibly broken, is not easy to revive, as it is difficult to transcend the barriers of people accustomed to be forced to do their bit or to forcing others to do their bit. A decentralised system provides greater efficiency by combining production with management and ensures equitability in distribution of profits, but only seems to work where the workers are themselves able to supply the capital required.

Advantages and Pitfalls of Foreign Investment

India has a trade deficit. This means that we import more than we export, consume more than we produce. This is no new thing, we have had a negative trade deficit for many years now. Then, how is it that we are still surviving? The answer lies in foreign investment, whether in the form of the direct establishment of an MNC (ie. FDI) or as an external investor in a local company (ie. FII). It is this foreign investment that holds our economy together and enables us to grow.Thus, we are effectively getting free cash to run our country. Or are we?

Consider why anybody would invest in a country, say India. It is because they believe that their money has the potential to grow here. How does money grow? It grows because the money is used to fund productive activities (ie. economically productive, even if it is destructive otherwise), and it is this produce that the investor gets in return for providing the means of production. Obviously, foreign investment has some very definite advantages. First, it increases the production in the country and hence provides employment. Wages from employment increases our earnings as a country and makes the economy stronger. In case of FDI, competition from foreign companies can help local companies improve their efficiency and competitiveness, while helping consumers get cheaper goods. In case of FDI, a company also brings new technology.

Yet there is a big drawback. All the profits go back to the foreign investor. But this is fair, because otherwise people would not invest and we cannot avail all the above mentioned benefits. Yet we must look at what we are losing. A foreign investor, by virtue of his/her investment, gains control of our resources and markets. And it is these resources and markets that they use to make their profits. Thus, we are in effect, selling off our country to balance our trade deficit. This is a dangerous habit, as a country controlled by entities which are not democratically responsible to the people is not a happy country, especially when they have the support of powerful foreign governments (read: the US government, G8 etc.) to back unethical activities that could have been stopped if they were domestic companies.  As more and more of the production happens via money from foreign investment, the lion’s share of the profit goes to the investors, while we are left with a meagre salary.

But resources are continuously created in any economic system. People get more skilled (what is called as education), new markets and opportunities develop and new natural resources are discovered and exploited. While we cannot exactly measure this growth, there is no reason to suppose that it will compensate for what we are selling. Indeed, the increasing presence of foreign MNC’s indicates the contrary.

Yet one cannot completely stop foreign investment, for it does have its advantages. The trick is in allowing it at the appropriate areas, and not assume that all foreign investment is good. We should take our lessons from Japan, which allowed its own domestic companies to mature before exposing them to foreign competition. This ensured that they benefited from the competition, but yet were not wiped out by it. They encouraged technological development and worked towards improving the producing and earning capacity of the people. They also appropriately ignored western cries for ‘liberalisation’ when it was not in their interest (which is almost always the case in a developing economy). Most importantly they had competent and sincere leaders who did what was good for the country, instead of a coalition that remains passive throughout and implements nonsensical policies at the end. Our government has opened up retail FDI despite the disastrous consequences that we have seen elsewhere and is engaged in meddling with the higher education system, instead of focusing on primary education.

Politics apart, some might argue that Japan could open its doors much earlier than India and survive. Why can’t we? Two reasons. One, India was brutally exploited by British colonisation, during which it was stripped off all its resources and the population was left languishing in poverty, making formal education all but impossible. Japan, on the other hand, escaped this to a large extent because of an advance warning of european missionaries that they had received, due to which, its competent leaders wisely threw the europeans out and shut their doors. Two, once it opened its doors, it learned very fast. They copied western technology, becoming better at it than the west, but preserved their culture which is so famous for it’s richness. We, on the other hand, ignored western technology and copied all the bad aspects of western culture and glorified it above our own. At the same time we have discarded whatever good western culture has. Obviously, it will take our industries more time to catch up, and direct comparisons to other countries without taking into consideration the surrounding situation is a formula for disaster (refer to my previous post: Ubiquity of Superstition).

Ubiquity of Superstition - Why capitalists are wrong but not necessarily foolish

Superstition may be defined as a belief that seems irrational to those who call it a superstition. One can be fairly certain, that in most cases, people holding the belief do not consider it to be a superstition in the duration that they hold it.

Superstition is often the result of insufficient or incorrect reasoning. It may also be the result of ignorance of certain facts, the knowledge of which would abolish the superstitious belief in any rational person, given sufficient time. One may like to say that modern science has removed superstition from the educated class and only the ignorant indulge in superstition. Yet we find instances of what we may consider to be superstition in daily life among those whom we consider educated. In this blog I attempt to analyse the nature of superstition and whether it is really possible to remove superstition and whether being ‘superstitious’ necessarily labels you as an ‘idiot’.

We said in the beginning that superstition is the result of of insufficient or incorrect reasoning. Yet, one is usually only able to find such instances of incorrect reasoning in hindsight, unless the flaw is very obvious. This is because it is not feasible, or even possible, to critically analyse every assumption that we make in daily life. As the number of assumptions, possible fallacies in reasoning etc. are very large or even infinite, we with our finite processing powers (like the brain), no matter however great, cannot search all of them. Let us now take instances of famous superstitions that have existed in the past, and demonstrate that there was no way one could have discriminated them from other beliefs.

Consider for instance alchemy. From a modern standpoint, we would view it as little more than religious witchcraft attempting to create gold. Yet it was based on fairly firm principles in which matter was considered to be made of four principal elements, which could be combined in different ratios to give all substances. While a mere four elements may be considered an oversimplification when we know that the various properties actually arise from a lot of atoms connected in specific, complicated patterns, great complexities are known to arise from fairly simple rules. For instance all colours can be generated from just three colours (or even just two different wavelengths of light). Simple rules are also known which can generate very complex patterns in the form of cellular automata[1]. Thus we can see that the principles of alchemy are not totally outlandish. Alchemy gets it’s final stamp of validity from the fact that Isaac Newton himself dabbled extensively in it. That we now know it to be wrong is of no consequence to it’s validity before chemistry and Dalton’s theory of atoms. Indeed, chemistry can be said to have evolved from alchemy when people questioned it’s fundamental principles.

It is therefore rather likely that there are common misconceptions even today. Indeed all of science (most notably physics, due to the rather simple laws it entails[2]) is a sequence of correction of misconceptions. Newton’s intuitive laws were modified first by Einstein in his general theory of relativity and later again in quantum mechanics. When misconceptions are very widespread it is rather difficult to spot them as we do not think of verifying them. Breaking preconceived notions to reach radically different conclusions was the hallmark of many great scientists such as Einstein and Galileo.

One possible misconception that is most relevant to this blog is one of the impeccable goodness of free market capitalism. In fact, one gets to hear arguments as shallow as “you can’t be socialistic, you have to be capitalistic”. Supporters of capitalism who go slightly deeper say something to the effect of “capitalism is good because communism is bad”. Often such people are those who know very little about either of these systems and insist on having opinions based on very scarce evidence. Yet, one cannot classify them as ‘fools’, because they have never stopped to find any inconsistencies in their logic because nothing induced them to. A phenomenon totally understandable from our preceding discussion.

It is very probable that many such capitalists would see some sense in opposing capitalism when presented with some arguments, such as those that I have raised in this blog, especially when shown the graph of GDP Vs. time for various countries present in the in the second last post. Despite the rather strong arguments available against capitalism, a critique of capitalism is still seen as an impractical idealist who is too concerned with equality to see the benefits of capitalism.

Then, is there no way one can guard ourselves against ‘superstition’ or at least reduce our susceptibility to it. While no foolproof method for avoiding incorrect reasoning is yet known, it is indeed possible to ensure that we are at least capable of finding most of the assumptions made in a logical argument, whether presented as mathematical equations or as a verbal argument. The ‘scientific method’ itself can be viewed as a systematic approach to improve the accuracy of reasoning. Indeed Einstein once said that “all of science is nothing but a refinement of everyday reasoning”.

I feel that we are rather more susceptible to shabby reasoning than we need to be. If one is to put blame on a particular individual or practice for this state of affairs, I think the blame lies largely on the current education system. It seems to be hopelessly inadequate in teaching rigour in reasoning. Instead the single minded focus on rote learning completely removes any aptitude for proper reasoning that a person may originally have had. I have seen many people who make incredibly baseless ‘arguments’ and are supported by a vast majority. For instance, during a competitive group discussion in my school, we were asked to discuss whether or not world affairs will be more peaceful if women held the top positions. While the topic is rather intriguing, nobody could come up with any evidence or convincing reason to make any definitive statement on the question. In fact nobody gave any reasons at all, even those that would be considered totally inadequate by any scientifically minded person. Yet everybody managed to have a ‘view’ on the topic. One person said that it would become more violent, while everybody else other than me said there wouldn't be any change at all. Now, having opinions without reason is a dangerous habit. We run the risk of having beliefs that have only a random probability of being right. Beliefs that we would subsequently use to make assumptions later, which would also then have a random probability of being right. Thus the entire reasoning system fails.

Thus one must make it a habit to be as rigorous as possible while doing any kind of reasoning and as is relevant to this blog, point this out to ardent supporters of capitalism. However, as a footnote I should add that since I am not aware of any feasible system that can undo the evils of capitalism, the capitalists are right in a way. Yet that does not mean that we should be complacent with what we have, and this is the point I wish to make.

Notes:

1. For more details, refer “A New Kind of Science” by Stephen Wolfram
2. Simple in the sense that all of known physics can be reduced to a small set of basic equations as opposed to say biology, where each new discovery adds to more complexity, although occasional simplifications are achieved.