The Hindu Business Line : The invisible hand of market is still groping

CRICKET is too serious a game to be left in the hands of umpires and players, so we have TV channels, lawyers, and so on actively involved. Similarly, we know that markets are not so wise that we could allow "the invisible hand" a free play, as major debacles have shown.

"Economists understand that there are `market failures' just as there are `government failures'," notes the blurb of Markets and Governments, edited by Kaushik Basu, Pulin B. Nayak and Ranjan Ray, and published by Oxford University Press (www.oup.com).

Prescription, therefore, is "a proper system of governance" for effective markets, where we "reconcile to a second-best world, crafting a fine balance between markets and government". But what constitutes "appropriate regulation" and what is "good governance" are "very hard questions", concedes the book, brought out in honour of Mrinal Datta-Chaudhuri who was Professor of Economics at the Delhi School of Economics for more than three decades till the end of the last century.

The opening batsman is Amartya Sen in the collection of contributions, writing on two aspects of freedom, viz. procedures and opportunities. "The violation of freedom in the Emergency period in India" infringed both the aspects, Sen observes, but that is something the present Government may not like to remember. He argues that government intervention must be judged not only on the basis of outcome but also the procedure.

Then comes "a model of poverty and oppositional culture" by George A. Akerlof and Rachel E. Kranton, to study the phenomenon of discrimination that prevails in markets. Their observation about the Blacks in the US — that "left to itself, a market can breed a sense of marginalisation in non-dominant groups that then seek psychological fulfilment in counterculture" — may well apply to conflicts here too.

`Minimum wage laws and unemployment benefits, when labour supply is a household decision' is the title of what Basu writes with Garance Genicot and Joseph E. Stiglitz. For them, going to work is not simply an individual decision, but what his or her family dictates. Thus, when there is a lot of unemployment in the economy, you'd find more people entering the labour market, as if to exacerbate `the aggregate unemployment problem'. Why does that happen? Because each household starts worrying that its "main breadwinner may lose his job and thus be prompted to send other members out to seek employment, as a kind of insurance."

More so in India, point out the authors, because children and teenagers "are ready to step in whenever the adults find their wages or jobs threatened." The paper shows that a minimum wage, imposed at a level below the prevailing market wage, can result in "an overall drop in wages".

Pranab Bardhan's piece, catchily titled "Crouching tiger, lumbering elephant" compares India and China, with the latter showing "a greater capacity for large-scale policy changes". He talks of how the success of township and village enterprises, a.k.a. TVEs, has been due to competition among local governments, and constraint of budget that meant "a failing TVE could not expect a bailout".

In contrast, any announcement of `non-bailout' in India is not credible, says Bardhan: "When push comes to shove, the government yields to some pressure group or other for a bailout programme."

On government failures, Bhaskar Dutta gives a political economy perspective using two models. He contrasts `the rent-seeking behaviour of single-party and coalition governments' and shows that the latter will `typically be more predatory'.

We have a coalition now, do not forget, where "the ego rents have to be shared" among everybody and "each party in the coalition will attach a lower weight to re-election"! For starters, the phrase rent-seeking, as the www.economist.com explains, is: "Cutting yourself a bigger slice of the cake rather than making the cake bigger. Trying to make more money without producing more for customers."

Writing on the notion of optimality in welfare economics, David Fairis and Prasanta K. Pattanaik, look at the need for "alternative institutions". Dilip Mookherjee's discussion of market vs state draws attention to the scope for governments "to utilise the benefits of a private sector that is more cost conscious and innovative than most public enterprises". For watchers of the power industry, Kirit S. Parikh's paper titled `Reforming power sector markets' should be of interest. What are the economic costs of poor quality power supply? "Voltage stabilisers, inverters for storing electrical energy to tide over power failures, small diesel generator sets that adorn shops, burnt out motors and consequently overdesigned motors, and so on." Parikh makes a case for privatisation, plus effective regulation of prices.

Child labour is a subject that does not lie exclusively in the sphere of either markets or of government, writes Ranjan Ray. Moving the child from `work only' to `school only' status is achievable only in the long run, he says. "In the short run, any policy that moves a child from a `work only' or `neither in work nor in school' status to one where she/he combines schooling with employment must be considered to be a success." So, when saying `no child labour' we have to ensure that the children add to the headcount in schools.

The currently unpopular topic of privatisation is discussed by Eytan Sheshinski and Luis Felipe Lopez-Calva. They write that success is possible only if governance issues are sorted out and ample protection is available to investors.

Last comes an examination of Schumpeter's tax state, by Pulin B. Nayak. "Only in economic matters does everyone consider himself called upon to speak as an expert," is a quote of Schumpeter you can taunt economists with.

For him, capitalism was headed to ruin, and he had feared that "ever larger public expenditure will continue to grow while there would be a limit to the amount that may be generated by way of taxes and other imposts."

There is an old teaser: "What do economists and computers have in common?" Answer: "You need to punch information into both of them." One can adapt it and ask, instead: "What do governments and markets have in common?" Answer: "That there is the oft-forgotten customer to serve".

Economics@TheHindu.co.in