Emotions Vs. Insights

When it comes to controversial topics, it's always a battle between the Heart and the Mind. In Business as much as in Personal life.

When Arvind Kejriwal started his 'anti corruption' campaign many years ago, I put forward an argument citing the Keynesian Multiplier and how small and petty businessmen (think street hawkers, peddlers, food shop vendors) needed to spend on small bribes to keep their business running. While bribes and corruption were very bad, I pointed out that they was a necessary evil to tolerate until we improved our overall wealthiness as a Nation. My point was not accepted by readers and I was castigated as a "Bad Guy". Emotion had no place for Economics in the Arvind Kejriwal sentimental wave.

I was quite surprised to read this case story in the Lalit Doshi Memorial lecture by Kaushik Basu (reknowned Economics Professor Cornell University).

"Let me put in a footnote on India here. Dr. Y.V. Reddy, then Governor of RBI, had observed that India had a similar sub-prime risk; but a crisis did not happen for the wrong reason.

The fact is, black money saved India from having a sub-prime crisis.

It is quite interesting what happened. In India, very often when people buy homes they will show the value of the house as half the real value, since the rest of the transaction is in cash and unaccounted for. So the bank loan that you take will typically be for 40% or 45% of the full value of the house, that is, 80 or 90% of the value declared. So even if that part goes sour, the real asset is much higher than what is being backed up by the mortgage. This meant fewer defaults; even when there were defaults there was no worsening of the balance sheet of mortgage companies and banks. In brief, the black transaction actually prevented the excessive lending that had taken place from translating into a sub-prime crisis in India.

As an economist, it annoys me when people, after listening to this, say, "So, are you saying black money is good?". That is not the case at all. It is the same mistake as saying that on the way to the airport you had a minor car accident and hence you were saved because the plane you were supposed to take crashed, and the listener coming to a conclusion you are saying that car accidents are a good thing. You are not saying that the car accident is a good thing; you are saying that it is a bad thing, which had a good consequence. It is in this spirit that I relate this story of black money."

This is the complete video of the lecture

My Takeaways:

• Examine an issue deeply before judging it. Emotions are usually responsible for bad decisions
• There is always Ying for Yang. Being an extremist prevents you from learning from the other side!

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Alok Kejriwal is a digital entrepreneur, based in Mumbai. He sold his last Company to Disney. He currently runs Games2win and is the founder of therodinhoods.com - India's only social network for entrepreneurs. Connect with Alok on Linkedin, Twitter @rodinhood & Facebook. Read his best articles here!

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