The "Dear..." War

What better way to kickstart my flagging blog-spirit than to jump headlong in the little storm in a tea pot that is the "Dear..." War. In the last installment we saw Shivam, a prominent blogger and recently uncovered undercover journo-sleuth raising the following extremely important issues, each of which is worthy of being addressed. I think these are genuine concerns who anyone with a social conscience might raise and be bothered by. I also think that all of these are commonly over-emphasised if not completely misunderstood issues.

To begin with let me lay the ground work. A market is a human institution, a product of human action, rather than design. It is a not just a forum for exchange but a also a source of knowledge about social values of goods, commodities, services you name it. It is not perfect, as humans are not perfect. However it draws on a very valuable human resource in the least biased manner available. That resource is the knowledge that each of us carries around in our heads and uses as a basis for our actions. By extension a free market exists when these processes are allowed to function without governmental interference.

A lot is required not to happen in order for a market to be truly free. If I were to articulate all that must not happen it might shock many people into screaming heresy. So I'll get on to fleshing out the particular issues that Shivam raises.

1. Regulating Monopolies

The traditional economic treatment of monopoly, is based on a few technical limitations. First of all it deals with a static economy, so time is not a factor. Second the model has no consideration for space. So if time stands still and there is only one place that exists, then a monopoly can cause serious deviations from a perfectly competitive market. A perfectly competitive market is an abstract construct meant more as a mental exercise than as a description of the real world. So in theory a monopoly deviates from a mental abstract, not from reality.

Further the model illustrates that these deviations are constrained by consumers. So a monoplist can either have full control over the quantity that he produces, and let the market fix the price, or vice versa. But never both. A monopoly also comes along with a dead-weight loss. An irredeemable loss of social welfare, with respect again to the mental abstract. So if a monopolist had never invented a product, that he would then go on to monopolise, in theory there would be no loss to society because there couldn't have been a perfect market for that product.

Now flash to the real world. In the real world when we consider the fact that more than one place exists, and time also runs its course, and there is such a thing as human ingenuity, only one type of monopoly remains. The legal monopoly, and its cousin the legal oligopoly.

An often cited but perhaps forgotten instance of a legal monopoly was the British East India Company. It was endowed by Queen Elizabeth I in Parliament no less to have a monopoly over all trade between England and the East Indies. It grew to such heights that it controlled territories larger and richer than the great queen's own Island. As a counter-factual thought experiment, I wonder what would have happened if the EIC had never been granted a legal monopoly, and in its place there had existed free entry and exit.

Bharti, Hutch, Idea, BSNL, MTNL, Essar, Reliance, Tata... This is India's legal oligopoly in telecommunications. This unholy alliance is presided over by the TRAI, which apportions to it self more credibility as a judge of true values in telecom, than the consumer.

What are possible examples of non-legal monopolies and oligopolies in India? Perhaps because I have not been looking, I can't think of any off the top of my head. But when you think of any monopoly, think of these two questions:

1. Is the government involved in anyway in ensuring that this monopoly does not face competition?
2. Is there a possibility given the way that this monopoly is structured, that with time or by expanding the spacial context of the monopoly, competition might emerge?

The questions are absolutely loaded. If you get 'Yes' on the first question then you can't get a 'No' in the second, and vice versa.

People can be nasty, and they can be benevolent, or both at the same time. Same goes with firms and monopolies.

Government is a monopoly on the production of regulations, laws and justice. In most modern democracies, individuals are trusted to choose the right people to represent them, and produce the right regulations, laws and met out justice. Should then these individuals also not be trusted to choose whom to buy from and whom to sell to. If an 18 year old can vote, does a 40 year old have to be protected when he chooses a tariff plan?

Having said all of that. I don't expect regulations of monopolies to disappear, nor do I expect legal monopolies to. But expecting the primary producer of the monopoly phenomenon, to also be its antidote, is just one of the many contradictions in our expectations of governments. Perhaps this is a necessary evil, resulting from a healthy democratic diversity of opinion. It however does not take away from the contradictory foundations of the government regulation of monopolies. It also does not exonerate clear thinking people, who hold this opinion, of a gross misunderstanding of both the theory and reality of monopolies.

I originally intended dealing with all the issues in one post. However as time has run its course, and attention is a scarce commodity (both for me and my reader), I will go the Dickens way and serialise my response. So stay tuned for more on:

2. Consumer interests
3. IIPM and the Education mafia
5. Free market not a utopia
6. Incentives in government
7. Media as a watchdog
8. RTI and corporations