Resolution of Moral Hazard in Democracy:
Unanimously Agreeable Fundamentally Fair Rational System of Governance

Sankarshan Acharya[1]
Founder, Pro-Prosperity.Com and Citizens for Development

First Draft: May 7, 2016. Revised May 30, 2016

To: President Barack Obama of USA, Prime Minister Narendra Modi of India, Presidential Candidates of 2016 US election and all global leaders and denizens.

Note: This revision is available and updated at pro-prosperity.com. Please feel free to circulate.

This is a significant revision of my rejoinder, dated May 7, 2016, to U.S. President Barack Obama's proclamation that there exists no unanimously agreeable "better" alternative system of governance to the currently practiced democracy.

President Obama did not spell how should the term "better" be measured. The only unanimpusly agreeable goal of every individual is freedom. The only unanimously agreeable measure of whether a system of governance is better than another is, therefore, less costly way (e.g., without violent wars) of attaining freedom.

Moral hazard (blackmailing) is antithetic of freedom. The current system of corporate as well as public governance is based on a presumption that moral hazard cannot be resolved efficiently. This presumption is a mistake at best and self-serving for blackmailers at worst.

What is moral hazard in corporate governance?

The term "moral hazard" is an academic euphesim for the commonly understood term "blackmailing."

The academy of economics and finance presumes, for example, that the chief executive officer (called the agent) is privileged by his monopoly over the valuable information of running a company. The CEO uses this privilege to arrogate first-best status (pays and perquisites) by subjecting the true owners (principals) of the company to second-best sustenance, e.g., by paying significantly lower dividends than that feasible without such monopoly. The academic literature presumes that the principals have no better alternative than granting such monopoly to the CEO. The blackmailing of principals by the CEO of a company is, thus, ordained by the extant academic literature.

This blackmailing problem in corporate governance can, however, be efficiently resolved if the principals (i) choose the directors on the BOD (board of directors), each with a skills and capability to replace the current CEO and each allowed to share all valuable information (now being monopolized by the CEO), (ii) disallow the CEO to nominate/appoint any BOD member, and (iii) recruit each BOD member as diligently as hiring of the CEO. The principals can, thus, maintain a virtual rivalry among the CEO and every BOD member. The Principals must monitor such rivalry with corporate accomplishments through periodic general body meetings. This way, the principals can avert being blackmailed by the current corporate system of a monopolising CEO with a crony BOD.

Moral Hazard in the Current Democracy

Democratically elected leaders are wont to spreading a myth that the existing democratic system is the only form of governance of We the People with a propaganda that nothing better exists to attain individual freedom efficiently. The democratically elected leaders sermonize We the People that no better unanimoualy agreeable form of governance exists. By indoctrinating We the People with such sermons, democratically elected leaders have arrogated power to enact significant rules and policies to facilitate legalized systemic robbery of enterprising wealth creators. This democratic system so financially eviscerates the vast majority robbed of their wealth and wherewithal that they cannot easily contest against the established democratically elected leaders. This has resulted in inefficiency (decay in national competitiveness), social instability and fundamental unfairness (unconstitutionality). This is moral hazard (blackmailing) of We the People by democratically elected leaders.

President Obama, for example, proclaimed at Howard University on May 7, 2016 that no better alternative to the exisying system of democracy. Churchill said it (House of Commons, 11 November 1947)—but he was quoting an unknown predecessor. From Churchill by Himself, page 574:

Many forms of Government have been tried, and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all-wise. Indeed it has been said that democracy is the worst form of Government except for all those other forms that have been tried from time to time...

President Obama and other democratically elected leaders including Churchill have obviously meant that there is no unanimously agreeable better alternative to the currently practiced democracy. They have all seriously erred.

Here is a unanimously agreeable better alternative (to the currently practiced system of democracy) which is necessary for civilized coexistence of humanity with social stability, economic efficiency (national competitiveness) and fundamental fairness:

Unanimously Agreeable and Fundamentally Fair Democracy. It is democracy with a new constitutional preamble that explicitly proscribes enactment (by elected leaders) of any rule or policy to facilitate legalized robbery of individual or common wealth, even surreptitiously. 

This alternative system of governance is fundamentally fair and unanimously agreeable because even the robbers (including, e.g., the democratically elected leaders that turn selfish and greedy to vote for laws for legalizing systemic robbery) do not like to be robbed of their power and wealth (e.g., by people eventually turning conscious of systemic robbery and revolting against such democratically elected leaders). 

This alternative system of governance has evolved over decades of research within dynamic microeconomics models of general equilibrium in which individuals, households and corporations maximize their net-worth with the government operating not-for-profit and efficiently and with the markets pricing and trading securities without government-ordained intervention. 

Democracy is, theoretically, unnecessary to attain a fundamentally fair system with efficiency and stability for individual freedom. The theoretical Walrasian central planner - who can allocate resources for everyone efficiently- is sufficient. But practically all nations that tried the Walrasian central planning system (in the name of socialism and communism) have failed. Countries like China and India had to amend, if not completely disband, their central planning systems. On the other hand, the Anglo-American system of capitalistic democracy - practiced in USA, Europe and Japan and copied by other nations like India and Brazil - have degenerated into systemic robbery of enterprising wealth creators and, therefore, failed to attain the unanimously desired goals of fundamental fairness, efficiency and stability for freedom.

Systemic robbery has, in the real world, created rampant subsidies, quotas and privileges funded by (or bonding) the robbed enterprising wealth creators. Stifling freedom of enterprising wealth creators has unmotivated them to slog their best for the indolent usurpers. This has resulted in economic inefficiency (eroding national competitiveness), deterioration in innovation and productivity and lethargy among usurpers. This real-world experience shows that democracy per se is insufficient to beget individual freedom.

The unique common cause of failure of all the existing systems of governance in providing individual freedom is, thus, systemic robbery of enterprising wealth creators by either the democratically elected leaders and their allies in industry and academy or by the self-anointed authoritarian leaders.

The Unanimously Agreeable Fundamentally Fair Democracy is a unique system of governance available for We the People worldwide to attain individual freedom with efficiency (survival with limited resources), stability (without social internecine) and civilized coexistence.  This path naturally begets individual freedom by proscribing moral hazard (blackmailing of We the People) in the currently practiced system of democracy. Proscription of moral hazard (blackmailing) is essential for individual freedom. Moral hazard has bonded enterprising people everywhere in the world. Unanimously Agreeable Fundamentally Fair rules could sans democracy is sufficient to beget individual freedom, but a democractic system with freedom of expression can facilitate even an apolitical individual (such as this author) to challenge any potential deviation from such rules.

This discovery has, therefore, virtually crucified its sole author with: (i) credible threats of unemployment, (ii) actual collusion to block publication of his research discoveries with steps taken to purge him from the academy (which no longer is a fountain of epistemic truth), (iii) raids of his research center (perhaps to plant evidence for prosecution as a criminal), (iv) decimating his income to a paltry one-fifth of the pay of the vanquished antithetic pundits of systemic robbery (which ironically proves penultimate efficiency of the author), etc.

Despite such threats from the colluding established powerful interests everywhere, the author and his philosophy of Unanimously Agreeable Fundamentally Fair Democracy have triumphed. I can rationally vouch for every step that I have taken since 1991 for such triumph. One may still question how, despite all the odds stacked against me, I could take such steps on time. One can irrationally avoid this question by terming it as providential. Rationally, however, I see this as mutation of the human gene fighting for survival to produce eventually someone to undo a system turning rampantly destructive. This has happened, historically, since the ancient humanity struggled and cultured to devise a system of governance for survival which was first written as Gita in 3500 B.C.

If we proclaim the existing form of governance - democracy with systemic robbery of people on the left, right and center - as the ultimate system for civilized coexistence, the human species may be destroyed, just like the powerful dinosaurs died on earth. The triumph of a single individual over very powerful mega vested interests of systemic robbery, however, indicates that the human gene can survive eternally through Unanimously Agreeable Fundamentally Fair Democracy.

With best regards,

Dr. Sankarshan Acharya
Director, Research Center on Finance and Governance