Decision Making as Output and Bounded Rationality

  The classical economics theories proceed on the assumption of rational agents. Rationality implies the economic agents undertake actions or exercise choices based on the cost-benefit analysis they undertake. The assumption further posits that there exists no information asymmetry and thus the agent is aware of all the costs and benefits associated with the choice he or she has exercised. The behavioral school contested the decision stating the decisions in practice are often irrational. Implied there is a continuous departure from rationality. Rationality in the views of the behavioral school is more an exception to the norm rather a rule. The past posts have discussed the limitations of this view by the behavioral school. Economics has often posited rationality in the context in which the choices are exercised rather than theoretical abstract view of rational action. Rational action in theory seems to be grounded in zero restraint situation yet in practice, there are numerous restra

Economic Theory of Partition


As the world welcomed 1947, the clouds of partition hung around the Indian sky. Jinnah’s intransigence coupled with Congress obduracy to bow to Jinnah’s demands resulted a standstill. To borrow from game theory or chess, it would have been uneasy existence, a cold war but Muslim League had different ideas. Violence was low cost option for breaking the standstill, and therefore riots intensified after the Direct Action Day. Authority collapsed in many places leading to a free for all in some areas. India was on throes of a civil war that might perhaps last more than Byzantine Ottoman War in the Middle Ages. Despite pretensions of neutrality, the British were more than sympathetic to the idea of Pakistan. The roots of British-Jinnah nexus could be traced to the events in the declaration of Second World War and the subsequent Congress reactions to the same. A this stage it is suffice to state heading to 1947, Indian constitutional formation was in a limbo, no agreement on the anvil over the future set up of India and at the ground level, every sign of prolonged Hindu-Muslim bloody conflict.  Thus a curiosity to decode the underlying economic logic of Congress accepting partition.

In 1946, the Constituent Assembly commenced its functioning in the midst of incongruities on the prospective future directions of the Indian statehood. Incontestably, Congress pushed for unified India whereas Muslim League remained unyielding in its demand for partition. To Jinnah, Hindus and Muslims could not co-exist and hence, Muslim majority states would need separate country. Complications arose with states like Punjab. Bengal and Assam which had mixed majorities. Further there were nearly 550 princely states tied to British by symbiotic cord yet independent in almost all aspects. There was Hyderabad with a Nizam and significant Muslim population yet the majority was Hindu. There was Jammu and Kashmir having a Dogra ruler but significant concentrations of Muslim majorities existed. Baluchistan was centrally administered whereas Kalat was an independent Muslim state.  Post-Independence, evidently princely states could not remain independent and would have to join India or if partition happened either of the two countries. In the meantime, attempts to find a middle ground led to many formulations.

The Union of India at the central level would deal with subjects like foreign affairs, defence and communications in addition to perhaps few others like currency, customs etc. Provinces would be clustered into three groups, first Hindu majority provinces, second the Muslim majority provinces in the West and third, the Muslim or mixed grouping Eastern provinces  Groups would decide on the subjects to be administered in common and the rest of the subjects to be administered at the provincial level. The residuary powers in such cases would reside with the provinces. There were of course fundamental differences between Congress and Jinnah over the composition and administration of the same. To Jinnah, Assam was to form part of Muslim group of provinces which Congress opposed whereas NWFP sort of rejected joining Muslim provinces which Congress used as tool of to deride Jinnah’s demands. Subsequently, the third group was created comprising Bengal and Assam. The members of the Constituent Assembly would meet group wise separately in New Delhi to decide on the future directions.  The provinces were given an option of opting out of the group in case the legislature elected after the coming into the force of the new Constitution decided so. This was the crux of the Cabinet Mission Award announced on May 16. 1946.

The Congress opposed what it termed the arbitrary slotting of provinces into the groups. Its objection arose from Assam being grouped with Bengal. Any impending resolution on partition would have preordained Assam or at least large portions of Assam being part of Pakistan. Therefore, its proposal was to leave it to the province’s wisdom to decide on which group they wish to join. Given political configuration in provinces, they anticipated NWFP to reject Group II and join Group I. The other objections were related to power sharing and thus bargain chips for positions in the government. To the Akalis, bringing Punjab into group II was problematic as it would predominantly be Muslim grouping. Punjab was essentially a mixed ethnic state with Western part Muslim dominated but significant pockets of Hindus and Sikhs whereas the Eastern part predominantly Hindu-Sikh dominated with few Muslim pockets. Similar was the case with Bengal with the Eastern part predominated by Muslims, yet the Western portion, Hindu dominated also comprised of Calcutta, the fulcrum of the province. Assam too had Muslim pockets while the state was Hindu majority on the whole. While Muslim League had conditionally accepted Cabinet Mission proposals, there was deadlock of over parity or lack of it in the Executive Cabinet.

Deadlock over government formation led to riots instigated by the Muslim League and India seemed descending rapidly into chaos. The Congress meanwhile went ahead and formed the interim government which Muslim League joined later on. While there is lot of debate that can happen on the road and roadblock to government formation and it’s functioning, what is material to the piece is the debate on the formation of groups of provinces and the fight over the same.

To join the constituent assembly and the interim government perhaps Jinnah needed a face saver. The face saver would have to be categorical acceptance by the Congress on the structuring of the group of provinces as suggested by the Cabinet Mission. The Congress had objections to the same and in the meetings before, it was decided, the interpretations on provinces joining or opting out of the groups would have to be referred to the Federal Court for final verdict. The Congress took the Viceroy’s proposal of seeking a categorical acceptance of Cabinet Mission grouping of provinces was an appeasement of Jinnah and thus the entire matter was back to square one.  While there some steps to arrive at a truce between Congress and Muslim League, it was essentially very short lived. There was the issue of power sharing but more importantly, it was the grouping of provinces. The Congress was steadfast in its demand for the right of individual provinces to decide in joining the group, the Muslim League and the British government were insistent on the Cabinet Mission award of May 16, 1946.  In group B, the Sikhs demanded safeguards in Punjab, Hindus in Bengal demanded separate province, uncertainty arose in Assam over its future all leading to deadlock and recipe for civil war. Congress conditional acceptance was grouping was hinged on it being better than partition of the country on religious grounds.

Lord Wavell, the Viceroy, with good reasons, believed India had reached a point of no return and hence suggested phase wise withdrawal without getting into emergent conflicts. The withdrawal would begin from provinces like Bombay, Madras etc. with Punjab and Bengal being the last. The princely states would have to decide themselves their future and Paramountcy ended. However in early 1947, Lord Wavell was replaced by Lord Mountbatten. To Mountbatten, it was distraction to his naval career. He wanted to get rid of the India business as fast as possible.  This was clear from the moment he landed in Indian in March 1947.  Talk about partition began during this time and there were signs from the Congress about the inevitability of the same. However, there was one significant manoeuvre from Mountbatten and response by Cabinet in London decisively turned the tide towards partition. It would be instructive to turn to economics to do post ante analysis of the same.

Conventional economics assumes transitivity to hold good. Yet choice reversal happens given the contextual effects of the framing of choices, thus negating transitivity.  To Mountbatten, a man in hurry, given the deteriorating state of affairs, apprehensions arose on presence of authority in many regions at the time of transfer of power. To him, a solution was unilateral withdrawal from India on an appointed date along with the termination of Paramountcy of Princely States. To add, the amendments to same being proposed by British Cabinet in London, it virtually amounted to the Balkanisation of India. The provinces would be left to their wisdom in terms of exercising their preference either on joining the federation pursuing their path towards independence. Baluchistan’s future would be decided by representatives elected from council of elders, NWFP would perhaps rethink its desire to continue or not to continue in the Constituent Assembly, a portion of Assam might go to East Bengal and so on. India might end up divided into 12 independent provinces not to speak about centrally administered territories and nearly 550 princely states of varying sizes and population. It was a perfect recipe for civil war. Nehru was categorical in rejection of the plan sinking Mountbatten’s hope of early transfer of power. It was in the context VP Menon presented his plan of transfer of power. His plan discussed with Sardar Patel in late 1946 had been rejected earlier by the Viceroy and his other advisors. The plan was now given a fresh lease of life. The plan was to create a separate nation for Muslim majority provinces with the Princely states having an option of joining either nation. In case of Punjab and Bengal, if the legislators desire so would be partitioned on religious lines with the respective successor states joining their nations.

In conventional logic, the idea of acceptance, conditional or otherwise of the Cabinet Mission award by the Congress was preservation of India as single entity. This choice was preferred to partition. The choice of unilateral withdrawal leading to Balkanization should have been third in the list of preferences. Yet preference two now was accepted over three leaving the best choice in the circumstances side-lined. In the original scheme, the sacrifice of powers and functions at the centre towards the provinces and the groups of provinces might have resulted in multitude of problems and unintended consequences. Yet the hope of united India was the benefit which necessitated those trade-offs. The cost benefit analysis was skewed towards the former. Bargains of course existed in what primarily was a game of nerves translating into game of chicken.

Yet, choices were not independent and depended on third party, the British. Their actions could prospectively alter the dynamics of cost-benefits of the earlier two choices.  The new proposal, a game of bluff virtually abandoned the Award of Cabinet Mission, eliminating the choice from the table. The new choice architecture skewed the cost benefit semantics, and the framing meant continuance to fight till cows come home but with the rider of no arbitrating central authority. It was a bottom up game of chicken with no holds barred but potentially ending in Prisoner’s Dilemma. The marginal costs would be high given the high probability of civil war and loss of lives and property and fractured polity and country. A divided nation with central authority was preferable to the one with chaos. Therefore the new frame meant partition was the preferred choice, given the context effects.

Congress decision making was perhaps in hindsight an illustration of Prospect theory, two and half decades before it was proposed. A game of chicken with Jinnah could have been pursued assuming the desire for power on his part would force him to compromise. The uncertainties of gains were high. Cost of returns would be the loss of lives etc. in the interim. The cost benefit analysis is never deterministic. It is the conditional probability at play. Viewed through the prism of choices on offer, rational entity would opt for loss minimising behaviour or exercise of choice with the lowest opportunity cost. The expected utility was the highest for union of united India yet the new choices and timeframe for the choices meant that there was reduced probability for the anticipated expected utility. The choice of partition mean compromising for lower levels of utility was the higher certainty of the same. So as any rational entity, the Congress leadership accepted the plan of partition.
In hindsight, engaged in post mortem of partition, it is interesting to see how economics both behavioural and orthodox helps with the tools and techniques and perhaps consistent with other economic theories













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