State Public Sector Undertakings

Most State PSUs in the country are in a financial mess and a range of reasons is responsible for their bad performance. Not all reasons apply to all PSUs. The reasons for underperformance vary depending on the product/service area of operation, the regulatory and political environment in which they operate, inability of management to strategically respond to changing scenario in the sector, subordination of organizational objectives to labour and public welfare.

 

A summary of CAG report on performance of West Bengal PSUs is given here.

As on 31 March 2017, there were 92 State Public Sector Undertakings (PSUs) in West Bengal which comprised of 73 working PSUs and 19 non-working PSUs. During 2016-17, the working PSUs registered a turnover of    INR 35,271.91 crore which was equal to 2.82 per cent of Gross State Domestic Product (GSDP). Further, the total turnover was 89.42 per cent of the aggregate investment (` 39,443.37 crore) in these working PSUs. They had employed 0.47 lakh employees as of March 2017. The return on equity of the working PSUs stood negative at 1.77 per cent. (Paragraph 1.1) Investments in PSUs as on 31 March 2017, total investment of the Government in 92 PSUs was ` 40,611.43 crores. Power sector accounted for 72.40 per cent of total investment in 2016-17.

 

During 2016-17, 21 PSUs earned profit of INR 621.59 crores, 11 PSUs incurred loss of INR 665.34 crores and one PSU incurred nominal loss. The total accumulated losses of 30 out of 73 working PSUs was INR   9,026.60 crores that exceeded their paid-up capital of INR 1,717.68 Crores.

 

 

CAG Audit of Government Companies of Andhra Pradesh submitted by CAG in 2018 shows that as on 31 March 2017, the State of Andhra Pradesh had 64 working Public Sector Undertakings (61 Companies and 3 Statutory Corporations) and 22 Nonworking Public Sector Undertakings (all       Companies), of which working Public Sector Undertakings employed 0.94 lakh employees. Working Public Sector Undertakings registered a turnover of INR 61,972.50 crores against investment of 61,345.31 crores in these companies. The Return on Equity of 60 Working PSUs exclusive to State and formed due to demerger was (-) 48.84 per cent based on latest finalized accounts as on 30 September 2017.

 

Of the 37 who had prepared their annual reports, se, 15 working PSUs earned a profit of INR 1,164.23 crores and 20 PSUs incurred a loss of INR 3,240.49 Crores. Nine out of 64 PSUs had accumulated losses of INR 25,367.89 crores. The huge accumulation of losses by these PSUs was             eroding public wealth, which is a cause of serious concern.

 

 

 

As per CAG report on Uttar Pradesh PSUs as on 31 March 2017, there are 103 PSUs in Uttar Pradesh, of which only 51 Government companies and six statutory corporations are working. The remaining 46 non-working PSUs are all Government companies. Out of 103 PSUs, only 40 PSUs finalised their accounts in the last three years, and 95 PSUs had arrears in accounts ranging from 1981-82 onwards. Delays/non-preparation of accounts are fraught with risk of misrepresentation of facts, fraud and misappropriation.

 

As per the latest finalized accounts of these 40 PSUs, 22 PSUs had earned a profit of INR 963.97 crores, 17 PSUs had incurred loss of INR 19,299.56 crores and the remaining one PSU had reported no profit or loss. The loss, if any, incurred by the remaining 63 PSUs (103-40) who have not finalized their accounts could not be assessed. These PSUs registered a turnover of   88,036.52 crores as per their latest finalized accounts as of 31 December 2017.

 

The 22 PSUs (PSUs in which the State Government has made investments) generated an average negative Return on Investment of 19 per cent on the investments made by the State Government. This remained well below the average cost of borrowings of 6.52 per cent during 2014-15 to 2016-17. Thus, the loss to the public exchequer as a result of the investment in the 22 PSUs as per their latest finalized accounts in the past three years (as on 31 December 2017) amounted to INR 11,920.32 crores.

Benefitting from Population Dynamics

The Institute of health metrics and evaluation at the University of Washington in Seattle, a leading institution for population studies, has conducted a study of Fertility, mortality, migration, and population scenarios for 195 countries and territories from 2017 to 2100.

 

India’s population in 2017 was 1.4 billion and its fertility rate 2.1. The educational attainment of the country is seven years per capita. The following life expectancy graphs are very educative and we see that the actual observed life expectancy is very close to Expected life expectancy.

 

                                                Source: http://www.healthdata.org/india

Understanding future population dynamics is very important for planning growth and development in the country as well as for preparing for various needs, even though such estimates are surrounded by a degree of uncertainty. Future fertility patterns are a key input to estimation of future population size and age structure that have profound economic, social, and geopolitical impacts. The dominant discourse in the socio-political situation of the country determines fertility rates as well as future population and whose present value as well its progression determine the age structure of the population. The age distribution of the population as well as the total population significantly impact the economy, geopolitical aspects as well as social group dynamics within a geography.

Migration has potential to impact all these dynamics significantly. Existing social groups often resist migration when they sense a threat to their dominance. They work actively against movement of people and such behavior is commonly seen in all countries at different points of time. The push against migrants by the present US Administration is only an example case. Due to the uncertainties involved, we can just do with a rider that migration is likely to impact any population prediction.

 

FINDINGS OF THE STUDY

The study found that in the reference scenario, the projections in 2100 for India were India 1·09 billion [0·72–1·71]. An alternative scenario describes population dynamics when Sustainable Development Goals (SDG) for education and contraceptive met need would result in a global population of 6·29 billion (4·82–8·73) in 2100 and a population of 0.929 billion for India.

                                        INDIA POPULATION: SOURCE: In the graphic above

Findings also suggest a shifting age structure in many parts of the world, with 2·37 billion (1·91–2·87) individuals older than 65 years and 1·70 billion (1·11–2·81) individuals younger than 20 years, forecasted globally in 2100.

By 2050, 151 countries were forecasted to have a TFR lower than the replacement level (TFR <2·1), and 183 were forecasted to have a TFR lower than replacement by 2100. India now has a TFR of 2.0 and the same would be 1.42 by 2040 and would almost level off thereafter.

 23 countries in the reference scenario, including Japan, Thailand, and Spain, were forecasted to have population declines greater than 50% from 2017 to 2100; China's population was forecasted to decline by 48·0% (−6·1 to 68·4). India’s current population is 141 billion and the same is likely to peak at 161 billion by 2047 and reduce to 1.09 billion by 2100 in the reference scenario. Under the condition that SDG parameters are met the population would peak at 1.55 billion by 2040 thereafter reduce to 0.929 billion by 2100.

 

INDIA AND THE DEMOGRAPHIC DIVIDEND

 

India has more than 50% of its population below the age of 25 and more than 65% below the age of 35. The average age of an Indian is 29 years and India's dependency ratio is just over 0.4. The number of children in India peaked more than a decade ago and is now falling. UNFPA stated that, “A country with both increasing numbers of young people and declining fertility has the potential to reap a demographic dividend. With fewer younger dependents, due to declining fertility, and fewer older dependents, due to the older generations having shorter life expectancies, and the largest segment of the population of productive working age, the dependency ratio has declined dramatically in India leading to the demographic dividend.

 

However, this realization comes with challenges.

 

In absolute terms we would keep adding a large number of young people to the working-age population each year. Creating conditions for decent livelihoods will be an enormous task, especially given that, currently, a significant number of people in the working age are unemployed, underemployed or irregularly employed. Additionally, the shortage of financial resources will make it difficult to maintain, let alone increase, spending on health, education and nutrition.”

 

During the course of the demographic dividend there are four mechanisms through which the benefits are delivered.

1. The first is the increased labor supply. However, the magnitude of this benefit will depend on the ability of the economy to absorb and productively employ the extra workers rather than be a pure demographic gift.
2. The second mechanism is the increase in savings. As the number of dependents decreases individuals can save more. This increase in national savings rates increases the stock of capital and leads to higher productivity as the accumulated capital is invested.
3. The third mechanism is human capital. Decreases in fertility rates result in healthier women and fewer economic pressures at home. This also allows parents to invest more resources per child, leading to better health and educational outcomes.
4. The fourth mechanism for growth is the increasing domestic demand brought about by the increasing GDP per capita and the decreasing dependency ratio.

 

There is a strategic urgency to put in place policies which take advantage of the demographic dividend and this urgency stems from the relatively small window of opportunity countries have to plan for the demographic dividend when many in their population are still young, prior to entering the work force. During this short opportunity, we should help the young people be more productive during their working years. Failure on this count will result in rising unemployment and an increased risk of social upheaval.

Public Private Partnerships in Infrastructure

In his excellent piece on the aviation sector and infrastructure contracting in India, Gulzar has discussed the roadblocks that have appeared in public private partnerships (PPP) in the airport sector.

 

Even under the best of circumstances, PPPs in infrastructure projects are not easily successful for a variety of reasons. For example, NHAI conducts traffic surveys on its highways for a limited period of time and projects future traffic based on assumptions regarding rate of traffic growth. When bids are called based on these projections, the PPP partner has no additional information other than the survey to base the bid upon. It has been seen that in a significant number of cases the projections are way off mark. Since bidders offer a revenue share to NHAI based on survey conducted by it, inadequate future traffic causes financial stress for the concessionaire and they are not in a position to service their debt obligation. This usually results in non-payment of revenue share and poor maintenance of the assets. There have been many cases of assets being sold at low prices resulting in difficulties not only to the concessionaire, but also to the lending institutions and investors.

 

Given the excessive oversight and environment of suspicion that prevails in the country, the management of NHAI is willing to renegotiate the concession agreements based on present reality. The dispute continues till the partner is unable to run the show anymore. Even when a renegotiation clause is introduced into the concession agreement, officials are usually unwilling to take reality into account, probably due to the fact that the concessionaire provides factual information required for re-negotiation. And in all cases NHAI stops traffic monitoring once the project is handed over to the concessionaire.

 

In view of increasing litigation, some governmental organisations have taken to the practice of stating that the survey conducted by them may not be relied upon to offer a bid. This appears perverse, as the owner of the asset is unwilling to do thorough homework and desires that in the short period provided to offer bids, the concessionaire would conduct a survey and offer a bid. Such practices skew the possibility of a placing workable bid. It raises a deeper question about the intellectual integrity of the bid process as the owner is unwilling to even venture to project traffic. The process gives a go-bye to the basic principle of assigning risk that is, the agency which is best placed to handle risk should be assigned the task of handling it.

 

The Adani Group has cited the force majeure arising from Covid 19 to inform the Airports Authority of India (AAI) that it cannot take over three (Lucknow, Mangalore, and Ahmedabad) of the six airports it had won in February 2019. The Group has not taken over the remaining three airports at Jaipur, Trivandrum, and Mangalore since they are already stuck in litigation. In simple terms, we have now come the full circle on airport bids. Gulzar had blogged earlier cautioning about the wisdom of handing over all projects to one developer and had suggested, to limit optimistic and excessively aggressive bids by developers. There can be nothing said against this argument. As a method of spreading risk, AAI should have taken necessary precautions to ensure that one player did not corner all bids by aggressive bidding.

 

There is a point of view that the company's decision to step back from the airports appears to have little to do with the merits of the original bid but a devilish strategy to grab a large chunk of the business space and then plan actual investments, renegotiating as required. The covid pandemic has resulted in huge business losses and layoffs in the airline sector as well as in established airports. I feel that a new player facing difficulties of this magnitude would be certainly put to ruination. One would expect a bidder to absorb losses but not to the extent of leading to closure.

 

There are things to be said on both sides of the argument. As owner of the assets, the Airports authority of India had a purpose in calling for private partners to run the airports. Having set out, AAI should be willing to deal with circumstances along the way. Bureaucratic inertia and fear of being incriminated at a later date (when circumstances are different) usually prevents any relook or examination, whatever may be. I feel that the issue should be looked at from business/financial perspective without moralistic issues clouding judgment.

 

 

Gulzar has rightly stated as below:

            Much as we may loath admitting, it cannot be denied that there may be           a need to exercise caution and discretion while pursuing white-collar    crimes of a large company in an important market segment and with      deep financial market exposures. Its collateral damage consequences           need to be weighed appropriately. In a context where none of the major        stakeholders are immune from these allegations, a high-profile      investigation can end up spooking the system and freezing them up.

 

 No individual or company should be allowed to make super profits or collect rents. However, we should be ready to re-examine issues, if assumptions made before the bid have gone wrong.

 

Rule of Law

Rule of law is not very easy to define as it means many things at once and not the same to all people. It is even further difficult to quantify. In the absence of a reliable metric, the state of of rule of law in countries cannot be compared. Most often, comparison of countries are likely to be based on perceptions as well as value systems of the judging individual or group of individuals.

 

Some of the commonly accepted ingredients of Rule of Law are: a government bound by and ruled by law, equality before the law, effective law and order, efficient and consistent application of justice and the protection of human rights. Each of these ingredients has a very wide scope composed of many sub-concepts.

 

A word of caution here is that we need to understand the circumstances and people by whom laws are made. In many countries we have seen that interest groups disproportionately influence legislatures and laws enacted tend to favour the proponents more. If the law making process is subverted, the foundations of rule of law gets administered iniquitously leading to eroded credibility of the Law and Judicial system. The capture of the different institutions of the law enforcement mechanism by narrow interest groups not only causes trust deficit but also is likely to lead to breach of Human rights.

 

Selective application of laws leads to severe trust deficit. In some cases we see archaic laws being used to punish people inimical or critical of the system. At the same time, similar action acts by people in favour are usually ignored.

 

Rule of Law and equality before law is very often subverted by the cost of the legal process. In many cases inability to engage the best advocates leads to losing of cases by individuals. It is a common refrain in many countries that the rich get away with crimes that the poor would not be able to escape from.

 

Delay in disposal of cases also subverts rule of law. All levels of courts in India are hugely overloaded with work and oftentimes it takes around a decade to dispose civil litigation. Even criminal trials take a very long time if we account for the time taken in the appeals process. The rich and influential use the loopholes in law and the caseload of courts to their advantage and obtain undue benefit. This evident miscarriage of justice reduces faith in rule of law and people look at extra judicial solutions.

 

Correction in any system is possible only when it is an open to discussion and criticism and where Government shares information, empowers people with tools to hold the government accountable, and fosters citizen participation in public policy deliberations. Requests for information should not be deflected even if the machinery at large tries to mask happenings.

 

An active civil society plays a vey important role in enforcing transparency and rule of law. Hence, as a society we should create the framework for protection of freedom of speech, assembly and association.

The State

Fukuyama spoke on the importance of the three pillars of the modern state: the state, Rule of Law and Democratic Accountability. He argues for a fine balance between the three institutions, as they need to counterbalance one another and prevent any institution from going overboard.

 In an ideal system, a powerful and efficient state is kept in check by the people, and by the law so that it does not become despotic. The State needs to be efficient to deliver on its mandate, maintain peace and order in society and create the framework for economic and social well being of people.  The state in India has not been effective in effective delivery of these objectives. They have met some of them to some extent, but service delivery remains far from satisfactory.

There is a widely prevalent feeling that “too much” democracy has been one of the major contributors of this inefficiency. Democracy has come to be synonymous with street level justice and not adherence to law and procedure and the opportunity to question state actions in prescribed fora. The legal system, judiciary, civil society, the press, political parties, need for transparency in democracy all act as pressure points against the state. All of them look at the same issue from their narrow perspectives and the objective that the state needs to be achieve gets watered down in an effort to meet the requirement of all these institutional and informal pressure groups.

This situation of excessive checks and balances leads to small interest groups blocking measures beneficial to the public at large. Dysfunctional political divides results in small networks capturing political outcomes. Special interest groups excessively influence the legislative process, steer public spending and taxes in narrow directions, introduce self-conflicting mandates to bureaucracies, and use the judicial process to challenge and delay actions in costly proceedings. These weaken the state and erode its effectiveness. Colonial era state was primarily concerned with protecting British business interests and the welfare state was marginal at best. The democratically elected governments of the time were limited to action that did not impact the British interests and looked at local and provincial issues including welfare. Post independence governments in the country faced an active democratic process while dealing with welfare and public good which is delivered by state governments and local bodies.

Most of the democratic processes and institutional mechanisms even today have very little impact on “Central List” issues, as grass roots democracy gets limited in its reach and understanding of wider issues. Civil society, for example, has little ability to influence the Income Tax law and Company Law, but focus their attention on the distributive aspects of Governance. As in colonial era, the influence of democratic and people institutions on trade, industry and commerce remains little, even today. In aspects of distribution of national income and wealth the actors are too many and simultaneously warring for the same pie. The state hence has become weak in delivering public welfare while is better off in the area of Trade, Industry and Commerce.

Francis Fukuyama:Political order

Francis Fukuyama, an American political scientist, has written “The origins of political order” in 2011 and “Political order and political Decay: From the industrial revolution to the present day, both describing political institutions, their development and role and importance in different countries. A good description of his political theory is available here and here.

He traces the development of these institutions over time and relative to one another in different countries. Fukuyama stresses the importance of the three pillars of the modern state: the state (executive capability to exercise power), Rule of Law and Democratic Accountability. He argues that the strength of these three institutions need to be finely balanced in liberal democracies. In an ideal system, a powerful and efficient state is kept in check by the people, and by the law so that it does not become despotic.

He says that different regions and countries developed these three institutions, at different times. China, for example, developed a strong state early on, but never fully developed the rule of law or political accountability. India developed institutions akin to the rule of law early in its history, but not strong states.

He traces the development of these institutions in China, Japan, Prussia, Latin America and the United States, before warning against the decay of institutions. Fukuyama describes the early U.S. having a weak state, with goods and offices handed out based on corruption and patrimony, partially because democracy entrenched itself without a strong state with capacity to rule effectively. However, the Progressive Movement and the New Deal transformed the American state and made it much stronger and more effective.

Today, The system of excessive checks and balances leads to small interest groups blocking measures beneficial to the public at large. Dysfunctional political divides results in small networks capturing political outcomes. Special interest groups capture Congress, excessively influence the legislative process, distort taxes and spending, introduce self-conflicting mandates to bureaucracies, and use the judicial process to challenge and delay actions in costly proceedings.

This results in a vicious cycle where a poorly performing state, reinforces distrust and lessens investments in the state, leading to even poorer performances. 

Political Economy: What is it

Political economy is the study of production and trade and their relation with law, custom and government; and with the distribution of national income and wealth. The term “economics” usually refers to the study of the economy without factoring political and social considerations, while the term “political economy” represents an approach which is more practical on account of its ‘people centered’ approach.

In common parlance, “political economy” may refer to the advice given by economists to the government, which is not strictly based on maximising utility of Individuals, but also considering political factors that need to be addressed. Naturally, such policy choices would not be an economist’s first choice, but are more likely to find acceptance in governments in modern democracies.

Increasing savings

Gulzar has good post on increasing use of Jan Dhan Accounts that were opened for the poor with great effort by Governments (http://gulzar05.blogspot.in/2015/06/increasing-utilization-of-jdy-accounts.html). He suggests three means of increasing usage of banking by the poor. Firstly, having multi-tiered accounts with each tier being used for a different purpose, instituting a lottery prize for Jan Dhan account holders and increasing commitment of the poor to save for a purpose by increased incentives to saving.

I think he would like to see outcomes where the poor increase their savings and use the same for expenses more 'capital' in nature, thereby laying a path for coming out of poverty. None can fight this objective and we would like this to happen. However, as Gulzar himself laments, the same is not happening. He feels that one of the reason for the same is that the poor have too many needs and all they earn goes to meet their immediate needs. He is certainly right and i feel that unless the incomes of the poor increase, their savings rate would remain depressed.

Gulzar has offered suggestions on increasing savings rate even when the poor have low incomes. The effectiveness of the measures like those would be reasonably significant only when pushed with great vigour by Governments.

This assumes that it is possible to reduce non essential expenditure on festivals and functions and reorder spending priorities in favour of spends which are  'capital' in nature. I feel that governments would run into huge resistance in attempting this as they work against inherent human biases and behavior. All of us would have experienced the same when attempting to change behavior in ourselves. I have certainly found it difficult. One of the examples that i am willing to admit publicly is that as a graduate student in the US, i found it far more gratifying to use extra income to buy a good meal rather than to save for a rainy day.

I am not sure if significant savings can be achieved unless the incomes of the poor increase.

Handling Fiscal Deficit in India

On Oct 29 the Indian government Monday outlined a five-year fiscal consolidation plan that aims to nearly halve the deficit by 2017 and cut it to 5.3 percent (slipping from the targeted 5.1%) of the gross domestic product in the current financial year. The fiscal deficit had risen to 5.8 percent of GDP at the end of the financial year 2011-12. Higher spending on fuel, food and fertilizer subsidies along with sluggish tax revenues has led many economists to forecast a fiscal deficit this current fiscal year of about 6 percent of GDP. As per the plan outlined by the finance minister, the government's fiscal deficit would come down to 4.8 percent in 2013-14, 4.2 percent in 2014-15, 3.6 percent in 2015-16 and three percent in 2016-17. However, the government did not specify the measures that would help reduce fiscal deficit consistently. 

The International Monetary Fund this month slashed its economic growth forecast for India for 2012 to 4.9 percent from 6.1 percent previously. Rating agency Standard & Poor's said the country faces a one-in-three chance of a credit rating downgrade to junk over the next two years.

The government assigns several reasons for the fiscal stress including the slowdown in the world economy, lower growth in India, higher inflation, lower tax receipts and increased expenditure, including subsidies. The government feels that if it does not rein in expenditure at this point the economy may go into a cycle of low growth, high inflation and high deficit. The government feels that as fiscal consolidation takes place and investors' confidence increases, it is expected that the economy will return to the path of high investment, higher growth, lower inflation and long-term sustainability. The Kelkar committee has recommended rationalization of schemes and strict control and monitoring of expenditure. The process to contain the deficit will include the usage of unique identity number - Aadhaar - to distribute subsidies to the below poverty line population, thereby plugging leakages.

At this point I only fear that the government might go into an overdrive of reforms. It is attempting to manage the subsidy burden better by using an Aadhaar based system. The Public Distribution System (PDS) and fertilizer subsidies seem to be prime candidates for the effort. I feel that these are steps in the right direction and leakages of subsidies should be curbed. These are in any case low hanging fruits. Greater effort would be needed in better directing subsidies, a task at which most government s have balked. The capture of subsidies directed at the poorest of the poor by the well-off sections is omnipresent and all-pervading in most subsidies. 

I would like to illustrate my point with the example of the Aadhaar based delivery of essential food commodities. The Aadhaar ensures that ghost cardholders do not draw their rations and this is in itself no mean achievement. The District officials of the East Godavari district have stated that in their district wide pilot implementation they have realized savings of more than 30% in the commodities being distributed. The government has the difficult task of repeating this in all the districts of the country. This is a tall order in view of the differing levels of education and development across districts and ability to absorb the technology.

The government hasn’t still sunk its teeth into the more difficult task of better directing its subsidies and ensuring that they reach the poorest of the poor. In the state of Andhra Pradesh there has been a proliferation of ‘white ration cards’ with an intention to corner several subsidies which are directed at the poorest of the poor. Governments have political sensitivities which make this task all the more difficult. In fact, such tasks have proved to be very difficult all over the world. However, without addressing these basic issues, the structure on which our growth is built would be weak. I feel that we need to be the master of where we decide to spend our money and we should not look the other way when resources are drawn away against our collective will.

I would only like to point out that that the social services net in India is still very weak and has large holes to be filled up. Under the circumstances across the board cuts might hurt our society more than any benefit that would accrue. I only hope that the manager involved in the task would ensure that we don’t weaken our social services net any more than it already is.

Rent seeking and Inequality - I

“ A simple definition of rent seeking[1] is spending resources in order to gain by increasing one's share of existing wealth, instead of trying to create wealth. The net effect of rent-seeking is to reduce total social wealth, because resources are spent and no new wealth is created.”  Rent seeking is not profit sharing as profit sharing attempts to create wealth whereas rent seeking does not do so. In economics, rent-seeking is an attempt to obtain economic rent by manipulating the social or political environment in which economic activities occur, rather than by creating new wealth.”

 The origin of the term is from extracting rents due to ownership of land rather than profit from actual cultivation. The mere possession of the given land resource entitled the holder to rent and the holder was not obligated to work the land and create wealth. In most cases the land was inherited wealth implying that the holder had no need to work to be in possession of the same. Hence the land holder was able to appropriate wealth on account of his position and not due to dint of hard work.

Rent seeking is seen in many areas of the economic sphere and is in its most vicious form when stemming from government regulation of free competition and thereby increasing inequality in society. An example of rent-seeking in a modern economy is effort made by firms and individuals to obtain control of various natural resources like mines, urban& rural land through lobbying and leveraging political strength and thereby corner profits from them.

Historically people and groups in power have always tried to increase their power and wealth and in the very least at least maintain them. They have a variety of instrumentalities to maintain the same. In the medieval ages, the king and the nobility ensured that they cornered a large part of the wealth of society. The religious classes also took shelter behind holy duties to maintain wealth and power. The spread of democracy and breakdown of medieval structures has made it difficult for these classes to corner wealth and power with the same reasoning and hence they had to search out justifications in tune with prevalent thought.

Post Industrial revolution the theory of marginal productivity primarily determined individuals who would get paid more for the work they put in. Demand and supply of labour determined the occupations which were better paid. The list of better paid occupations was never constant and varied with technologies of the time. Over a period of time the better paid occupations came to depend less on physical labour and more on brain power.

We can safely say that inequality in society would not increase if wages were paid based on marginal productivity. This however has not been the case and in present times the rules of the game have been skewed greatly to favor the wealthy. These rules, which are set by the governments and groups of individuals, affect the state of inequality in a society greatly. A famous example in regard to unfair rule setting is the limiting of access to lucrative occupations, as by medieval guilds or modern state certifications and licensures (Doctors, Lawyers etc.). Restricting entry to such professions help those that have already reached there to maintain their incomes and avoid sharing with newcomers. In economic parlance there are milking the rents of having already reached a given position by obstructing the cycle of demand and supply to the profession. People accused of rent seeking typically argue that they are indeed creating new wealth (or preventing the reduction of old wealth) by improving quality controls, guaranteeing that charlatans do not prey on a gullible public, and preventing bubbles.

As a country becomes increasingly dominated by organized interest groups, it loses economic vitality and falls into decline. [2] Olson argued that countries that have a collapse of the political regime and the interest groups that have coalesced around it can radically improve productivity and increase national income because they start with a clean slate in the aftermath of the collapse. An example of this is Japan after World War Two. But new coalitions form over time, once again shackling society in order to redistribute wealth and income to themselves. It looks as if a society needs to reinvent itself at regular intervals if it wants to avoid falling into the rut.

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[1] http://en.wikipedia.org/wiki/Rent-seeking

[2] Mancur Olson: The Rise and Decline of Nations