I have just finished reading the section of the book that deals with the concept of fairness. And what struck me û particularly with the news of the coup in Thailand û is the parallels between Thaksin ShinawatraÆs situation and that of Dick Grasso.
Surowiecki uses Grasso as a case study, and examines why GrassoÆs $139.5 million pay package caused such an uproar. Indeed, such a public uproar, that the former New York Stock Exchange CEO was forced out of office.
ôWhy was the public so outraged?ö asks Surowiecki. ôAfter all, they did not have to foot the bill for GrassoÆs millions. The NYSE was spending its own money. And complaining about GrassoÆs windfall didnÆt make anyone else any better off. He had already been paid, and the NYSE wasnÆt going to take the money it had promised him and give it to charity or invest it more wisely. From an economistÆs point of view, in fact, the public reaction seemed deeply irrational.ö
There is an answer, suggests the author. ôThe explanation for peopleÆs behaviour might have something to do with an experiment called the æultimatum gameÆ, which is perhaps the best known experiment in behavioural economics.ö
The rules of this game see two anonymous people given $10 to divide. One person is the proposer and decides the split ie 50/50, 70/30. The proposer then makes a take-it-or-leave it offer to the other person (the responder). The responder can accept the offer, or reject it û the upshot of rejection being that neither of the pair gets to keep any of the money.
ôIf both players are rational,ö writes Surowiecki ôthe proposer will keep $9 and offer the responder $1, and the responder will take it. After all, whatever the offer, the responder should accept it, since if he accepts he gets some money, and if he rejects, he gets none. A rational proposer will accept this and make a lowball offer.
ôIn practice, though, this rarely happens. Instead, lowball offers û anything below $2 û are routinely rejected. Think for a moment about what this means. People would rather have nothing than let their æpartnersÆ walk away with too much of the loot. They will give up free money to punish what they perceive as greedy or selfish behaviour. And the interesting thing is the proposers anticipate this û presumably they know they would act the same way in the responderÆs shoes. As a result, the proposers donÆt make many low offers. The most common offer in the ultimatum game, in fact, is $5.ö
The conclusion? ôTurning down free money is not something that, in most circumstances, makes sense. But people are willing to do it in order to make sure that the distribution of resources is fair.ö
Surowiecki reckons this is what caused such uproar at GrassoÆs exorbitant payout. The public did not think it was æfairÆ û ie that it reasonably matched the accomplishment with the reward. The furore was so great that the NYSE board was forced to push Grasso from office.
That brings us back to Thaksin, and the situation he has found himself in. A successful businessman and a strong prime minister, Thaksin horribly miscalculated the political mood when he sold his familyÆs stake in Shin Corp to SingaporeÆs Temasek.
His family pocketed a $1.85 billion gain from the sale, but aside from paying a relatively small amount of VAT on broking fees, he paid hardly a baht of tax û and this was at the same time as his own finance minister was trying to raise the yearÆs tax take by $400 million.
To be clear: the method by which Thaksin sold the stake was perfectly legal, and tax-friendly. Just like GrassoÆs payment, it was all totally above board.
But just like in GrassoÆs case, the public went crazy at what it perceived to be a grossly unfair situation. How could no tax be paid when Shin CorpÆs business had grown stronger and stronger during ThaksinÆs time in office? Some local commentators explicitly said that Thaksin should pay taxes on the sale for ômoralö reasons, even if he wasnÆt legally obliged to.
About 50,000 Thais took to the street to protest; and Thaksin saw his political position badly damaged.
It is tempting to think that if Thaksin had thought about the Grasso case, he might have behaved differently. Indeed, had he volunteered to pay a æfairÆ amount of tax, he might have defused the entire controversy. Indeed, if he had magnanimously stepped forward and said ôI need not legally pay tax, but I want to set the right example for the nation. So I will pay $400 million and ensure the yearÆs tax budget is hitö û then would anyone in Thailand have been able to label him as anything other than a great leader? Would sufficient anger have existed to foment successful street demonstrations? I suspect not.
Of course, this is not to say that Thaksin had not made a host of enemies through his tactics and his policies, nor that the situation wasnÆt deeply complex. But the Shin Corp sale will forever be remembered as the catalyst that united the anger of those disparate groups.
The chain of events that have followed can all be traced back to that catalyst. And now we have tanks in the streets of Bangkok.