Yesterday morning I got to the Pune railway station early because I had yet to buy a ticket for Mumbai. A notice at the ticket counter informed me that the train – Deccan Queen – was full. Disappointed, I walked to the nearby intercity bus stop.
As one can expect, the place is a sort of transportation hub where you get trains, buses (both private and public), taxis, and rental cars. Walking along that stretch of the road is like running a gauntlet. A dozen people descend on you, each offering to immediately transport you to Mumbai in great comfort, quickly and cheaply. They compete for your attention and tell you why you should take their bus or their car. One over here says the new Innova (a comfortable Toyota minivan) is about to depart and will be in Mumbai before 10 AM; the other over there insists that the Neeta Volvo will charge much less and they will not even stop midway, and so on. The competition is loud and enthusiastic.
It is a delight to see the market working. On Sunday evenings and Monday mornings when demand is high, I have noticed, the private buses charge about Rs 250, which drops to about Rs 180 by mid afternoon when demand is low. Shared cabs constantly adjust their prices as well. During peak hours, prices often increase by as much as 50 percent. I sometimes hire a cab and a bit of bargaining is sufficient to discover a reasonable price. Sometimes I take the Volvo bus operated by the public sector. Surprisingly, even the state service is quite good and I am sure that competition from the private sector buses has something to do with it.
Traffic between Pune and Mumbai is increasing rapidly. I estimate that in the last ten years, it must have doubled at least. I am confident that the supply will keep pace with the demand for the service. Except for the occasional unpredictable shock, the buses and cars will neither be consistently bursting at the seams nor going empty. If there are too few seats, the prices will rise and with it the profits. The increased profits will attract the operators of more buses and cars on the route. With increased supply, the profits will once again fall back to normal.
Super-normal profits cannot persist in a competitive market for the same reason that chronic shortages cannot exist: the possibility of free entry and exit from the market. If there is one thing that one can confidently stake one’s reputation on, it is the claim that unimpeded markets adjust the supply to meet the demand. More about this in a bit.
Let me tell you a story. Many years ago, one evening around 7 PM I was rather puzzled to see a very long line of squatters around one of the main train terminuses in Mumbai. The line appeared to snake around the building for hundreds of meters. What were they waiting for, I asked one person sitting in the line. He was an office peon and his office had sent him to make a railway reservation. He, like the hundreds of others, was waiting there overnight for the ticket counters to open the next day at 6 AM. If he didn’t wait in line, his chances of getting a reservation were very slim. This was a daily occurrence.
Man-hours are cheap in India. Given the chronic shortage of train seats, waiting overnight in a queue was a rationing mechanism. I once found out about another mechanism one could use to jump ahead in the queue. You could go to the railways office and write an application addressed to the Member of Parliament in that jurisdiction stating that you had a particular emergency and that you should be given a seat from the reserved “VIP quota.” Every important long-distance train has them. The VIP quota is something that the MPs and other government officials either use personally or else hand out as rewards to those who are favored.
In the good old days, the same used to happen with flights when the only airline flying in India was the state monopoly airline. If you had connections, you could get a seat out of turn. Nowadays, unfortunately, the private sector airlines have totally killed the power that government officials had in determining whether some of us could take a flight or not. Allowing free entry does that – it eliminates chronic shortages and consequently eliminates the power that officials have in controlling people.
A brief note on basic economics is apt here. Shortages and gluts are transient phenomena in competitive markets. For chronic shortages, you have to engineer it. One has to work hard to maintain persistent shortages because left to its own devices, the market corrects shortages (and gluts) by the simple mechanism that more suppliers enter (or exit) the market. So to understand why shortages exist in some markets, one has to just follow the money: who exactly gains as a consequence of the shortage? The answer to that question would reveal who engineers the shortage.
Talking of basic economics, let’s just briefly touch on a related matter. There are three variables: supply, demand, and price. The quantity supplied and the quantity demanded are equal only when the price is discovered by the market. If the price is determined in any other way – say by diktat – then it is only by chance that the quantities supplied and demanded will be the same. In most cases, the moment you dictate the price, you will find that you either have an excess supply or an excess demand.
In other words, you can only choose two of the three variables. If you choose price and supply, you cannot also determine demand. Specifically, if you dictate the price, for any given demand, you will either be unable to meet the demand or overshoot it. Nobody – least of all some government bureaucrat – can figure out simultaneously (as the market can do) the quantities supplied and demanded, and the price at which the two are equal.
Here’s a lesson: only people who are so seriously deluded that they think they are god almighty believe that they can determine all three variable – supply, demand and the price – simultaneously. Mere mortals can only control two of the three.
Indian politicians and bureaucrats, judging from the kind of policies they try to implement, appear to be seriously deluded. They think that they know. But the truth is that they don’t for the simple reason that nobody knows. Everyone only has partial information since no one is omniscient. The fundamental problem is that no one is smart enough to aggregate all the partial information efficiently and accurately enough to reach the conclusion that the market can.
Let me underline this point. Nobody knows. Not eminent judges of whatever court, not bureaucrats, not politicians, not the leaders of industries, nobody. No single individual or committee knows. Yet what cannot be even in principle be known can be discovered by the market because the market is that one mechanism which can aggregate the dispersed local information to arrive at a solution that no individual can possibly obtain or process.
The market is the ultimate democratic institution. It discovers things.
All the above is merely a prelude to what I really want to discuss here. Recently, the Supreme Court of India ruled 4 to 1 that reservations in institutions of higher education for OBCs (other backward castes) are constitutional. I am not an authority on the constitution and so I am going to get into that question. My intention here is to ask a more fundamental question: why is there a need for reservations in the first place. The answer to that question may have some utility beyond the matter of education, important though the education question may be on its own merits.
The first thing about reservations is that it is a mechanism for rationing—for allocating a scarce resource among people when the demand exceeds the supply. Persistent shortages have to be engineered, as I have previously mentioned. So reservations have something to do with benefiting those in charge of rationing something in short supply. Therefore, those who benefit from the rationing through reservations are naturally inclined to engineer the shortage.
Pardon me for belaboring the most obvious but here goes. If there were no shortages, there would not be any reason for reservations. So shortages have to be engineered by someone because that someone stands to gain by having power over the rationing process. Shortages persist because someone gains.
My conjecture is that Indian politicians and bureaucrats gain from the persistent shortage in the supply of educational services. They deliberately engineer the shortage by controlling the supply. Monopoly control of education is the best mechanism for limiting supply. Disallowing free entry into educational services is the best way to ensure limited supply. They do this so that they can then buy patronage by rationing the limited quantities to favored groups.
I will develop this line of thought in the next post.
Next post: Part 2.