The Limitedless Market

I've been hiding under some stone, which has kept the wit of Ramchandra Guha safely hidden from my knowledge. An email this morning managed to rectify this gross shortcoming in my education. [Update: Thank you Makarand.]

In a piece in The Telegraph, Guha proposes an interesting theory about why Indian intellectuals hold markets in disdain:

My own theory about Indian economists is more specific and hopefully less facetious. It runs as follows; Gujarati economists place faith in the market, while Bengali economists are prone to trust the state. In the Fifties, when P.C. Mahalonobis drafted the Soviet-inspired second five year plan, A.D. Shroff responded by starting the Forum of Free Enterprise. In the Sixties and the Seventies, about the only economist of pedigree advocating Indian integration with the world economy was the Gujarati, Jagdish Bhagwati. He was opposed by an array of Marxists, many of whom (naturally) were Bengali.

On a broader level this issue has been addressed (but perhaps not satisfactorily tackled), by intellectual heavy weights like Ludwig von Mises in "Anti-Capitalistic Mentality", Friedrich von Hayek in "The Intellectuals and Socialism" and Robert Nozick in "Why do Intellectuals oppose Capitalism?". There is also a Mises Institute commentary here.

Guha's theory is amusingly similar to the Commanding Heights documentary that proposes a clash of ideas. He takes it a step further Indianising the concept to identify the ideas closely with communities. Presenting the clash of ideas as a conflict of attitude between different ethnic groups, playing on well-worn stereotypes of cosmopolitan India. I am always amused at how intellectuals use stereotypes in public discourse (or is it discord).

My own theory of attitude of intellectuals is that the market is too big to control, so massive that it can't be understood in conventional frames of thought too caught up with the overt symptoms to delve into the underlying framework. If it can't be easily controlled, or easily understood, it evokes fear. This fear prompts calls for regulation and state intervention. I wish it prompted a fresh look at the frames of thought. Alas...

That aside, the main object of interest and disagreement I have with Guha's otherwise pro-market piece is his attempt to hold the middle ground with a very weak argument:

The market does have its imperfections. One is that left to itself, it tends to pollute and degrade the environment. A second is that employers generally do not pay attention to the health and safety of the worker. A third is that without consumer vigilance and action, industrialists do not always deliver on quality. A fourth is that the market disregards those without purchasing power. A fifth is that one cannot rely on the market to deliver on goods and services whose value cannot be reduced to monetary terms, such as primary education and basic healthcare.

The limits he perceives are at best a product of ignorance and at worst, conviction. All five points are perhaps illustrative of the problem that will face the Bengali intellectual of Guha's cosmology once he/she overcomes his/her disdain of the market. The challenge is to look beyond the obvious symptoms which are easily attributed to the market and to the underlying regulatory framework within which it functions.

All the objections he lists are founded on the mistaken notion that the market is some independent autonomous entity. In more virulent mythology it is perhaps controlled by a cartel or a syndicate managed by a group of scheming capitalists.

We are the market! If only intellectuals realise and understand that our anonymous interactions with people we will never meet are the driving force of this wonderful spontaneous institution perhaps such popular mythology would be dispensed.

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For those with the patience to read I have refuted each of the 5 points he raises, below:

1. The Market tends to degrade and pollute the environment.

This is true of our current situation where a lot of property is owned by no one at all. Of course the title lies with government, but ownership also means active management. The public perception of rivers, lakes, air etc. as public property also prevents any specific members of the public from taking responsibility for them.

Say the Ganga belonged to the Ganga River Cooperative, whose stakeholders were the people living along the river. They would be able to charge the Mathura oil refinery for the chemicals it pours into the river. This would force the refinery to think through the technology it uses, so that it can minimize the pollution charges.

Blaming the market for pollution caused by the government's insistence on maintaining its control over the environment is more than a little unfair.

2. Employers don't pay attention to the health and safety of workers.

This varies. There are industries in which workers get the short shrift. However the regulation of industrial employment, through imposed health and safety standards raises the cost of doing business, and would perhaps have a negative effect on the industries ability to hire more workers.

The group of employers worst affected are start-ups and small businesses, for whom such regulation would just raise the entry barriers. If new competitors do not emerge for the existing pool of labour the large established employers will likely find ways to cut corners on health and safety.

In industries and professions where companies compete with each other for the best talent, employees come out the winners. Software companies and call centers are classic examples. The best workers protection is minimum entry barriers for employers, competition and technological progress.

3. Consumer vigilance and the quality of output

Consumer vigilance is important, but competitive pressure is far more potent force keeping quality and standards high across industries.

The simplest instance I know of is the dramatic improvements in quality at my local pani puri shops. Initially there was only one shop, which served the standard fare. Then shop next door noticing the traffic, started its own stall. Over the next 12 months there was a dramatic series of quality improvements. When I last visited the stall, apart from embellishment to the product the pani puri walas had uniforms and put on disposable plastic gloves, while the stuffing was covered in cling film. There was no consumer movement for better pani puri.

The threat of business going elsewhere causes producers to compete on quality, without any consumer vigilance. The problem with vigilance movements is that they will tend to suffer from the problems of rational ignorance. Most of the time people just wouldn't care enough to go out and act politically or civically. They would just switch to using another product. So the best consumer protection and quality assurance is competing producers.

4. Markets disregard those without purchasing power (i.e. the poor)

This is perhaps the most brutal misrepresentation of them all. Take the simple instance of drinking water in urban slums.

Two enterprising interns at CCS (Aditi Dimri and Amiya Sharma), spent 2 months walking around and observing Sanjay Colony a slum in South Delhi. They surveyed various aspects of the colony's economy, but their findings relating to water are pertinent here.

The Delhi Jal Board is responsible for the provision of water. However since the colony is illegal they can't provide taps in each house, because that would imply legalisation. Instead they send in tankers, which are assigned to individuals who are responsible for its distribution. This politically distributed water is insufficient and unsafe for drinking. So where does Sanjay Colony get its sip of water? Small sachets of water sold for Re. 1 each. Here is the market explicitly creating solutions for those with "limited purchasing power".

There are innumerable products ranging from water, to primary education to health care to shampoos, cold creams and telephones (here I am thinking of the PCO) that are packaged and priced especially for the poor. The real question is why are the poor poor? The answer will lie in the regulatory framework that continues to strangle their lives, a framework supported by unjust laws that empower and enable corruption.

5. The market doesn't provide primary education and primary health care

A quick glance at Aditi and Amiya's paper on Sanjay Colony will disabuse the reader of this myth as well. But it is important to get into a few specifics just to know how badly off the mark this statement is.

The most comprehensive work here is done by James Tooley, who has looked at instances around the world where private schools provide access to primary education to the poor for a price. The standards are not the greatest in the world, but often exceed free government schools, and parents are willing to pay to secure their children's future.

The problem here again is regulatory. In Delhi most private primary schools providing education to the poor are unrecognised. This means that children going to these schools have a tough time moving into secondary education. The quality or access to government schools is often bad enough for parents to send their children to these unrecognized schools.