The Evils of Competition

The principle that exposure to economics should convey is that of the spontaneous coordination which the market achieves. — James M. Buchanan

The last time I was out having lunch with my economics guru, I pondered the question that is foremost in the minds of most Indians. “What,” I asked the great guru, “explains the shoddy quality of goods and services that one finds in India generally?”

“That I can tell you in one word: competition.”

“How so?” I said. “Isn’t competition supposed to ensure lowest prices, and highest quality instead?”

“Certainly. But you have to remember that a market has two sides to it. There is the supply side. And then there is the demand side. It is the competition in the supply side that ensures high quality and low prices. But if for some reason, there are barriers to entry in the supply side of the market, then you have a problem.

“Here is how it works. Suppose you restrict the entry of firms into the market by decree such as done in the “License Permit Quota Control Raj.” Suppose this leads to low quantities supplied relative to the demand. Then on the demand side, there is competition for the limited quantity supplied. So the quality goes to hell in a hand basket and the price goes up.”

I sort of realized the problem. But I needed a ‘fer-instance.’ “For instance?” I asked.

“Competition in the demand side is what drives out quality and pushes up the price. You do recall that not too long ago, the telephone system was the sole preserve of the government. No private sector firm could enter the market. What was the result? If you wanted a phone, you had to wait for years on end, sometimes as long as eight or ten years. Given the enormous waiting lines, the public sector firms supplying telephony were assured customers who would be willing to put up with shoddy phone service because the demand far exceeded the supply even at the exorbitant prices being charged.

“In those bad old days, you had competition on the demand side. Compare that to today. The competition has shifted to the supply side of the telecommunications market. Now private firms compete with each other to provide phone service. The years of waiting time has been entirely eliminated and now you can get phone service in a matter of hours.”

“Are there any other examples?” I asked.

“Lots and lots. Whenever you see shoddy services or crappy goods, ask yourself where the competition is. You will invariably notice that the competition is on the demand side. Train service? Government monopoly and therefore poor quality. Air transportation? Used to be shoddy but now it is much better because there is at least limited competition.

“Excess supply of goods and services is rarely a problem in over-populated underdeveloped economies; it is always excess demand.”

“So what was the reason for not allowing entry into the markets? Why restrict entry on the supply side in the first place?” I said.

“Greed. If you restrict entry, you have monopoly power. That allows you to collect monopoly rents. Here is how it works. Suppose you want to collect the monopoly rents from, say, the two-wheeler market. You decree that for a firm to manufacture two-wheelers, it has to obtain a license. How much will a manufacturer of two-wheelers be willing to pay for a license to produce and sell them? Almost as much as they will make by charging a high price in a non-competitive marketplace.”

“Who gets these monopoly-like rents? I have not heard of any rule that seeks a hugh license fees from manufacturing licenses,” I said.

“Well, you don’t have to have an explicit rule. You just have discretionary powers as to who you hand them out to. For instance, as the Minister for Two-wheelers (assume there is one), you will hand it out to the firm that pays you a lot of black money and also fills up the coffers of your political party. Corruption of the political process is a handy by-product of the license quota permit control raj.”

“Damn,” I said. “That explains to things in one shot. First, why we have lousy quality high price goods and services. Next it explains why it is so hard to get rid of the license permit quota control raj. Is there a way out?”

“Yes, there is. But it won’t happen till the last politician is strangled with the entrails of the last bureaucrat.”

Seeking Causes

… Professional publicists know there is always a good living to be
made by catering to the public’s craving for optimistic reports. Such
behaviour finds no justification in the attitude of the Buddha,
expressed five centuries before Christ: “I teach only two things: the
cause of human sorrow and the way to become free of it.” The present
work, though written by a non-Buddhist, proceeds along the Buddhist
path — first to reveal the causes of human sorrow in population
matters and then to uncover promising ways to free ourselves of the

Hearing the Buddha’s statement today many people think, “How
depressing! Why accept such a pessimistic outlook on life?” But they
are wrong: it is not a pessimistic view if we reword it in terms that
are more familiar to our science-based society. Reworded: “Here is
something that isn’t working right. I want to fix it, but before I
can do that I have to know exactly why it doesn’t work right.” One
who looks for causes before seeking remedies should not be condemned
as a pessimist. In general, a great deal of looking for causes must
precede the finding of remedies.

‘Living Within Limits’ by Garrett Hardin – Prof Emeritus UCSB.

The Hunger Banquet (or How to Fix the System for Good)

Imagine you get invited to a feast and when you arrive, at the door they hand you a ticket randomly drawn out of a hat. That ticket determines which of three different meals you will receive at this feast. You, like 15% of the invitees, could get a top-class ticket. You would have a lavish meal with meats, fruits, and desserts seated at a nice table and be served the food.

Continue reading

Scribble, scribble, scribble

“Another damned, thick, square, book! Always scribble, scribble, scribble! Eh! Mr. Gibbon?

– William Henry, Duke of Gloucester, upon receiving the second volume of The Decline and Fall of the Roman Empire from the author, 1781.

Well, what do you know!

This blog won the Best Indiblog Award. To be more specific, of those who cared to vote (around 600), this blog got around 38 percent of the votes. Thanks to each of you who considered my modest attempt worth noting. My sincere appreciation for that vote.

I admit that I am not surprised that some people actually find my writing acceptable. Nor I do not find it entirely surprising that 62 percent who voted did not vote for this blog. I don’t expect to be popular. More about that later. The topic that I concentrate on largely is not a happy one. One does not like to be reminded that one’s country is in dire straits. We see the evidence all around us if we care to just see.

Some people have criticized my point of view. I don’t like criticism. I don’t want to be told that I am wrong. But I need to be told my faults. While I like to be told that I am right, I need to be told even more where I am wrong. I am a pretty smart cookie but I am not so smart as to know all by myself where I screwed up.

Back to the topic of being popular. I think that if one is totally honest, one is not likely to be popular. Which may partly account for the fact that politicians are inveterate liars. They seek popularity and they lie. They lie because they know that people are gullible and that they can get away with transparent lies and blatant falsehoods. People would rather believe in some feel-good fiction than in hard facts.

Given the gullibility of people at large and their need to believe in happy fiction, democracy has a near-fatal flaw built into it. A person who states it like it is is going to be at a disadvantage when it comes to unpleasant truths. And most of the time, a society or an economy confronts hard facts, irrespective of how rich or powerful it is. I recall Walter Mondale telling the hard truth to Americans that taxes will have to be raised, and George Bush, the Elder, said, “Read my lips: No New Taxes.” Later, after having won, Bush went on to raise taxes like nobody’s business.

The poorer the country is, the more its politicians lie. The most adept at lieing win. They have to — because the truth is too awful to bear. Farmers are suffering? Promise them free stuff. Can the country afford it and will it actually make them better off? No and no, but do it all the same because that is what guarantees winning at elections.

India is caught in a trap. Venal politicians lie and the gullible public votes them to power because they would rather hear a pleasant lie than hear the unpalatable truth. Anyone with any sense in their heads would reject them outright but then when were the good and the holy in majority anyway? Democracy assures the rule of the venal over the gullible.

In any event, I will go on scribbling and only time will tell if I am correct in my assessment that we are doomed unless we face some rather harsh reality.

Goodnight, goodbye, and may your god go with you.

PS: I have loads of emails. Please bear with me if you have written and haven’t heard back from me yet. I am going to reply to all my emails.

Notice of Suspension

I will be traveling till the 25th and will not have access to the web. That is why I will maintain web silence and not because I am done with the topic at hand.

I stand corrected by TTG on the point about the entire khandaan of Nehru-Gandhi family not having one single solitary degree. It appears that Cha-Chaji was not entirely untutored. Thanks to TTG I actually came to learn another fact about another hero of mine — Mother Teresa, the Merciless — she had supported Indira Gandhi’s dictatorship. I had known that Teresa the Merciless used to hobnob with dictators, but that she was in the thick with Mrs Gandhi is news to me.

I will have to devote a few keystrokes to the devastation of Teresa the Merciless one of these days and I expect the usual deluge of hate-mail. But all that hate mail is worth it because in the end I get to change a few people’s opinion about the true nature of Teresa the Merciless.

Please do visit the archives if you are new to this blog. Recommendations: Agriculture and Development from Jan 2004. Or from Feb 2004, Why don’t they feel the pain. The part 2 of Agriculture and Development is also worth a read.

One final point: Please do include an email address if you post a comment. If you don’t wish to post the email address (because of possible spam), please do send me a copy of the comments to atanudey at gmail dot com.

Nehru and the Indian Economy (…Why is India Poor? )

The last posting, Why is India Poor?, has drawn sufficient attention that there needs to be a follow-up addressing some of the points raised in the comments.

It is interesting to note that the arguments against my view of Nehru and his failed economic policies are generic. I will repeat them and my counter-arguments here.

My argument. Economic policies matter. If you have sound economic policies, you get commensurate economic performance. India’s economic performance sucks. It performs dismally in any sort of ranking of human development and economic performance tests. Half the illiterates of the world call India their home. A third of all global poverty is in India. All things considered, India has been a colossal failure so far.

Why has India been a failure? Are Indians collectively stupid? Unlikely.

Did GOD decree it? I asked him and he categorically denied it.

Did nations around the world gang up and rape India for the last 60 years? Not that I know of.

I am left with the hypothesis that perhaps India’s economic policies sucked chrome off a bumper of a pickup truck parked at 400 yards.

Who makes economic policies? You? I? No, economic policy is made by the so-called leaders and visionaries of this sainted land. Who were the most powerful leaders of this land since its independence from Britain? Nehru and his descendants. He dictated policy—economic, foreign, domestic, you name it. The most charitable way of putting the matter is to say that Nehru was clueless.

He wasn’t just clueless about this or that. His cluelessness was all encompassing. He was clueless about foreign policy, military strategy, domestic development &#151 you name it and he is the greatest screw-up that India has ever produced.

Then come the rebuttals which often start with the admission that Nehru was clueless but . . .

. . . but during his time, many others–including a few people one cannot dismiss as being clueless thought that Central planning was beneficial for countries like India. These included Nobel winner Gunnar Myrdal (Asian Drama, an Inquiry into the Poverty of Nations) and Mahalanobis.

The argument above says that it wasn’t the man, it was the circumstances. By that logic, everything is justifiable. Every crime can be explained away as the result of compelling circumstances and hence there can be no accountability.

Take, for instance, the WorldCom and Enron cases where executives committed theft on unprecedented and unimaginable scale. One could point to the fact that other companies were also doing shady accounting, that the internet boom was going strong, that the economy was very strong, that the GAAP was being followed. All those explanations would also paper over the fact that the crime arose out of the greed of the perpetrator. Given all the circumstances but absent the greed of the executives, the grand theft would not have taken place.

Now back to Nehru: even if one were to grant all the circumstances that you cite above (but only for the sake of argument), the fact remains that central planning was personally very convenient for the Cha-cha.

The children of Imperialism are not weaned on the milk of humility; they are brought up on heady diet of hubris. Nehru was an imperialist who believed that his destiny was to rule the brown masses and he continually rejected sane advice. Look deeply into any problem that India faces and you will see Nehru’s finger-prints all over it.

Take Kashmir. Who was it who let the matter get out of hand? Nehru with his idiotic insistence that the UN be called to mediate the dispute. Talking of the UN, who was it who rejected the proposal that India take a seat in the permanent security council? Nehru. There is not enough space here to go into all the horrendous mistakes.

Then there is the argument that says, “Don’t blame Nehru for the screw-up that India is. We, Indians, are to blame.” That line is similar to the one Niket made in the comments in the last post.

Yes, in fact, we are to blame. Indians are basically collectively a bunch of clueless retards. They collectively elect leaders who are clueless retards and these clueless retards choose policies that keep the country of hundreds of millions of people in abject poverty. No argument there. A country deserves the leaders it gets, especially so in a so-called democracy. I agree that Bihar deserves and gets Rabri Devi and Laloo Prasad Yadav.

So if the collective is to blame, why is Nehru elevated to the position of a demi-god? Not just that, anyone associated with his family is elevated as well. With very rare exceptions, everything in India which has a personal name associated with it is named after the Nehru-Gandhi family. The Borivali National Park close to my abode is named “Sanjay Gandhi National Park”. All sorts of educational institutions are named after the members of a family that collectively have fewer educational achievements than yours truly.

Allow me to repeat that: The entire Nehru-Gandhi family — Cha-chaji, Indira, Rajiv, Sonia, Sanjay, Rahul, Prianka – collectively haver fewer educational qualifications than I (an average person) do. If I am not mistaken, they don’t have one solitary single college degree among the whole lot of them.

{To be continued.}

Why is India Poor? (Note #382)

What India is today is to a large extent the result of policy choices made by its leaders — especially post India’s independence. Prior to 1947, India’s fortunes were dictated by the British. The British were in India for — not to put too fine a point on it — looting the place. That is totally understandable. Every institution they created was directed towards the final goal of enriching themselves. Colonizers don’t go about colonizing foreign lands out of a sense of altruism. They do it for the moolah.

After independence, however, Indian policy was in the hands of Indians. What were the objectives of these Indians who stood at the helm? I really don’t know. What motivated them? I don’t know for sure. What were their declared motives? I believe it was to lead India to prosperity. Cha-cha Nehru said as much in his famous Tryst with Destiny speech. Talk is cheap. Especially pretty talk. Talk about scaling commanding heights is pretty as a picture, and as cheap as a picture. I have written critically about Cha-cha Nehru and his talk elsewhere. (See Nehru, the Nabob of Cluelessness, for instance.)

Justice Louis Brandeis wrote (Olmstead v US, 1928):

Experience should teach us to be most on our guard to protect liberty when the government’s purposes are beneficent. Men born to freedom are naturally alert to repel invasion of their liberty by evil minded rulers. The greatest dangers to liberty lurk in insidious encroachment by men of zeal, well-meaning but without understanding.

I remind myself that the British were the evil minded rulers that all were naturally wary of. What Indians did not realize is the danger of men like Nehru and his descendents.

Despite all Nehru’s pretty speeches, I believe he was motivated by a deep megalomanical zeal to command and control.

Shakespeare’s Mark Anothony says at Ceasar’s funeral, “The evil that men do, lives after them; The good is oft interred with their bones.” Well, we do have the evil they did living after them. My wish is that their pretty speeches were also interred with their bones.

The Importance of Producing Stuff

To my mind, the ability to make distinctions is one of the more important characteristics of a fully civilized human being. Savages, very small children and animals do not share that characteristic. An untutored person will not be able to distinguish between two related but separate concepts. Indeed, the ability to do arithmetic depends on the ability to distinguish numerical information. I cannot stress enough the importance of being able to do arithmetic because those who refuse to do (or cannot do) arithmetic are doomed to speak nonsense. A bit of arithmetic is often all that is required to demonstrate the idiocy that pervades public discourse around the world.

Take the matter of poverty, for instance. If one were to think about it for a moment, one immediately realizes that the simple division operation throws much light upon the issue. Here is what I mean. You aggregate the stuff available in a specific period and divide by the number of people. If the result is a small number as opposed to a large number, you have poor people as opposed to rich people. Stuff matters. What is stuff? Things that you find, things that grow, things that you produce, and so on. At the very bottom of the structure of any economic system is stuff. Economists call it “goods”.

This does not appear to be quantum mechanics. But it might as well have been quantum mechanics given the widespread ignorance of that fact that goods – or stuff, as I like to call it – lie at the foundation of the economy. Sure there is “services”. Haircuts, dentistry, advertising, computer programming, and so on are services. But underlying any service you can imagine, there is stuff. If there wasn’t stuff, there would be no services. For instance, I sing you a song (hypothetically that is, because my singing is nothing to write home about) and you pay me for it. That payment is just a simple transfer of claim to resources that finally end up in stuff. I take the money and buy stuff to eat or to wear or some such. That transaction we can call ”transfer”, since we have not produced any more stuff, only you have transferred your claim to stuff to me.

Stuff matters. The aggregate amount of stuff available to a population matters. Like I said, you could just find it (oil in the ground, fish in the oceans), or you could grow it (in farms and orchards), or produce it (factories). Only when you have stuff can you indulge in transfer (via services rendered) or exchange (trade). Pure exchange does not increase the aggregate amount of stuff available. Taking from Peter to pay Paul does not make more stuff available.

Stuff is produced using land, labor, and capital – the factors of production. Advanced industrialized economies use relatively more land and capital (and use them more efficiently given that they have advanced technologies) and relatively less labor and produce a lot of stuff. The average amount of stuff available is therefore high because they have fewer people to divide the stuff among. So they are rich. They are rich not because they have more money, but because they have more stuff per capita. Since they can produce a lot of stuff using less labor, all of the labor is not employed in producing stuff and so the surplus labor can produce services. and the labor involved in services can be given a share of the aggregate production of goods. That share is called “income”. And this income is denominated in monetary terms. Money, in this case, is for facilitating accounting of the stuff produced and who gets how much. If you don’t have stuff backing the money, it is useless. That is, handing out money to people does no good unless there is some stuff behind it all.

Production of stuff matters. That labor is required to produce the stuff is an unfortunate fact of life – so far at least. In a perfect world, robots would produce stuff and people would be unemployed, free to compose music or watch the grass grow or whatever. In the imperfect world we live in, we have to use labor to produce stuff. But the less labor we use to produce stuff, the better off we all are – with the obvious caution that we have to distribute the stuff equitably, of course. But the problem of distribution only arises after we have produced stuff. If little is produced, little can be distributed on average and therefore on average we will be poor. Distribution is a less taxing problem than production.

Now here is the point that I am building up to. If an economy produces a heck of a lot, and yet a significant percentage of the population is poor, then we know that there is a problem of distribution. In that case, we can improve the situation by a better distribution through transfer of stuff to those who are poor. But if the aggregate production of stuff divided by the total population is a small number, the economy will be a poor one irrespective of the distribution. Merely taking from Peter to give to Paul makes no difference to the aggregate amount of stuff available.

So here is the basic question we need to ask: Will a proposed scheme or policy produce more stuff or not? If the answer is no, then we have not solved any problem. Take internet kiosks in rural areas. From what I gather, they are being mainly used for astrological charts, internet chat, e-governance services such as the printing of caste certificates (whatever that is supposed to be good for), “learning computers” and other such services. If internet kiosks in rural areas does not directly, or indirectly, lead to the production of more stuff, it is pointless. Or take the “Employment Guarantee Scheme.” Merely giving people employment does no good if in the end more stuff is not produced. Might as well get people to dig holes in the ground and then fill them up again for all the good it does to the overall economy.

We need to distinguish between employment and production, between money and income, between aggregate production and distribution. India’s economic policies have stressed employment and not production. That, in no small measure, is why India is poor. Until India’s economic policies shift away from employment and towards production, India’s fortunes are unlikely to change.