#35 Market: How much - how little - is within its power*
That old debate - has market failed us or have we failed the market?
This newsletter is really a public policy thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question: how do I think about a particular public policy problem/solution?
Welcome to the mid-week edition in which we write essays on a public policy theme. The usual public policy review comes out on weekends.
Still Swearing by the Market?
— Raghu Sanjaylal Jaitley
If you have been reading us for a while, you’d have a sense of our ideological orientation. We support free markets, individual liberty, a limited role for the state and Hindi films from the 80s (a vital thinking aid). We aren’t exactly fundamentalist about these values. They provide us with a framework to analyse an issue. We like to believe our conclusions aren’t predetermined to tailor to our biases. In a way, the only value we are absolutist about is scepticism.
Now, the current crisis has given us a bounty of policy missteps where the state has tried to override market mechanism by arbitrarily setting price caps or defining allocation principles that have inevitably led to worse outcomes for the society. We have highlighted these follies and their unintended consequences with much relish. However, it would only be fair to acknowledge the crisis has shown the importance of state capacity and the limitations of the market in confronting a global health and economic crisis.
Political and social analysts have framed these in simple questions. How is it the workers considered essential during a lockdown have relatively lower wages? Why does the market value the roles of public health officials, nurses, workers delivering to us electricity, water and essential supplies, farmers, and teachers below those of consultants, hedge fund managers, tax planners and software engineers? Should markets shoulder the blame for the unfolding humanitarian crisis of millions of daily wage workers losing their livelihoods? What happens when we get a vaccine for the novel coronavirus? Will the market be the most efficient way of allocating the vaccines to society?
The proponents of markets have their responses ready for these questions. They would patiently explain the philosophical underpinnings of markets. That free individuals transacting goods and services in their self-interest would reach the most efficient outcome for society. The price is the value that’s discovered through millions of these interactions. Every good or service can be ‘commodified’ in this way to which the principles of marginalism will apply. The key questions in microeconomics then are to understand marginal cost and benefits for each good and to optimise for consumer preferences based on this. This explains why gold is more expensive than water though we all know we can’t live without the latter (Bappi Lahiri can’t live without the former but we can leave exceptions aside at this time). Value is derived at the margins and through the preferences of the consumer. There are instances when markets fail to arrive at the right price or allocate efficiently. Only in these specific cases of ‘market failures’ should the state intervene. There is a fairly large literature on market failures and how to solve for them in economics.
More specifically to the questions that have been raised above during this crisis, market advocates will have three retorts. Firstly, they would argue, these distortions are a result of the state not letting markets functions efficiently complete with individuals exercising their choices with ‘negative freedom’. The answer to these problems is actually more market instead of less. Secondly, markets have built-in correction mechanism and given a length of time, it would redress these imbalances. Lastly, the market-driven allocation mechanism (price) might seem ‘unfair’ but it is the least unfair among all available systems.
However, these don’t seem satisfactory to those who question the moral limits of the markets. For them, to use definitions, values and allocation methods from within the economic domain and then extending it to every other sphere of human activity is moot. They have three questions that fundamentally challenge the assumptions of a market-driven social model.
Question 1: What is value? Can the value of every good or service be arrived at through a market-determined price?
At the heart of this question is the value that we get from a good or service. Is the instrumental use of something the only value we derive from it? For instance, is the only value of education a degree or a job? Or is there more to it? What about friendship? Or critical healthcare? Michael Sandel, the rockstar professor of philosophy at Harvard, has written a book (What Money Can’t Buy) filled with examples on this. More importantly, if you believe all value (instrumental or otherwise) can be captured through price in a market, do you end up corrupting or degrading that good or service? Sandel gives the example of a website that writes a best man’s speech for a price. Would you be happy if your friend read out a speech that’s not written by him? Would it not degrade the idea of a best man and his ‘personal’ speech at the wedding?
Question 2: Can every good or service be ‘commodified’?
Take the migrant labour situation. In many ways, the market for daily wage labour in India is a free market with almost no intervention of the state. The market arrived at their wages and their employment terms. What have been the outcomes? Weren’t the labourers so desperate that they accepted the salaries and the lopsided terms that left them without any kind of security? Shouldn’t the deeply disturbing images that have emerged during the lockdown be viewed as the perverse result of commodifying labour and human dignity?
Question 3: Free markets use efficiency and freedom as values for allocation of scarce resources. If free markets should pervade everywhere, are those the only values to be used for allocation? Or is the market crowding out non-market mechanisms of allocation?
We go back to vaccines here. What happens when a vaccine is found for the novel coronavirus? Should it be given first to those who can pay the high prices that’s set by the market when the number of doses produced are low and the claimants many? Or should it be based on some kind of assessment of the need (those who are old, co-morbid or too poor to keep themselves away from the virus) or merit (frontline healthcare workers who need the vaccines to serve others)? Similar arguments have been made for the market for organ transplants? Should the highest bidder receive the first available kidney for a transplant? Or, should it be based on need (determined by the doctor)? And, if there are more than one whose needs are equally desperate, based on equality as an allocation mechanism (through a lottery, for instance).
These aren’t new questions. But as we go through a global crisis that seems to be taking a disproportionate toll on the poor, old and the minorities (based on mortality data), it is useful to engage with these questions again. The moral basis for market more than any other economic model rests on its acceptance by its participants as fair, efficient and, largely equitable. If the evidence at the moment seems to suggest otherwise, it is useful for market advocates to explain their positions or rework their assumptions on limits of the market.
* from the two-line poem of Emily Dickinson (In this short Life that only lasts an hour)
It’s Governments all the Way Down
— Pranay Kotasthane
Raghu raised some excellent points. He also gave me an excuse to rewatch my all-time Bappi Lahiri favourite Yaar Bina Chaeeeen Kahaan Re.
That apart, I disagree with him on three counts.
One, if anything, this pandemic has made us realise the importance, rather than expose the incapability, of markets.
The basic insight behind the price system and a well-functioning market is that they allow you to buy and produce without getting into gory details and without central planning. Alfred Whitehead’s observation that ‘civilisation advances by extending the number of important operations which we can perform without thinking of them’ has an eternal case study in the form of the price system.
Hayek writes about this in The Use of Knowledge in Society:
the most significant fact about the price system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action.
So before COVID-19 hit, you ordered a baby diaper online and it arrived at your house in just a few days. You didn’t need to worry about the supply chain details — whether the courier services were up and running, whether the cotton harvest had taken place, or whether the packaging industry was an “essential service”.
Not any more. Our central planners made up a list of what was essential and what was not. The ‘economy of knowledge’ was replaced by ‘a cognitive load of information’. You had to plan your grocery runs. You had to strategise online ordering. You couldn’t get a leaky tap fixed. You couldn’t find anyone to jumpstart your depleted car batteries. A whole lot of additional cognitive load for things you just took for granted earlier, precisely because markets worked.
The lockdown period is a trailer of the movie whose lead actor is the State. If anything, the chronic shortages, the broken supply chains, and the impending human tragedy should scare us about what happens when the State displaces markets.
Two, the market for Indian labour is a “free market” in the same sense as the market for illicit alcohol is.
Both exist because the State has framed egregious policies making a large number of transactions go ‘underground’. Labourers have to accept lopsided terms precisely because government interventions have made our employers far too small and far too many. Because there are so many rules, the general equilibrium effect is that we end up exempting many employers from those overbearing rules. These employers end up attracting employees who have little bargaining power and zero security.
So, when we invoke the free market, it’s not this kind of a market that’s being referred to, one that’s absolutely free of government rules, and where a fatalistic matsyanyaaya system operates. A free market is the one where players compete in the presence of sufficient information and where exchange happens voluntarily. Bridging information asymmetry, ensuring that exchanges are voluntary, and enforcing contracts are all pivotal roles of the government, roles which Indian governments have been terrible at fulfilling.
Next, think of the immediate reason for the human tragedy that’s unfolding. The PM went on TV and gave notice of just 4 hours for the lockdown. Most businesses were shut and employees left stranded. No assurances were given to those who could neither earn a living nor go back to their homes. The responsibility of unleashing this indignity lies squarely with the Indian government and not markets.
It’s the governments’ fault all the way down.
Three, Raghu’s point about vaccines is a caricature of markets.
No sane policy analyst even of the market fundamentalist type will argue that a COVID-19 vaccine should be administered first only to those who can pay.
There’s a clear market failure here called a negative externality. My choice of not getting vaccinated also increases the chances of others contracting the infection. In such cases of market failures, the role of government is not just desirable but imperative. If and when a vaccine is designed, the government should start a mass programme to administer it for free besides allowing market providers to do so.
Bonus reading: spare an hour and read Hayek’s The Use of Knowledge in Society.
* from the two-line poem of Emily Dickinson (In this short Life that only lasts an hour)
Reading and listening recommendations on public policy matters
[Book] Elizabeth Anderson’s Values in Ethics and Economics
[Article] Gene B. Sperling in The New York Times on how coronavirus has shown ‘all labour has dignity’