Rent-seeking

Two excellent pieces in the popular press that are worth reading and understanding. One is from LiveMint.com titled “Return to Rent-seeking.” It does not have a byline — perhaps because it does not say nice things about Dr Manmohan Singh.

The subheading says it all, “India needs economic reforms as never before. They are unlikely anytime soon.” The article clearly points out the failure of reforms in sector after sector. The reforms that did take place around 1991 did point the way for the further reforms, but since they were not undertaken willingly, no progress was made once the pressure to reform was lifted. People usually credit Dr Manmohan Singh for those reforms. Some people know that he does not deserve credit for it since it was PV Narasimha Rao who did it, and MMS took the credit. As I say, MMS is a most despicably dishonest man.

Agriculture needs reform. Only the severely deluded would expect MMS to deliver. The man is a statist, aside from being despicably dishonest, that is.

The costs of not liberalizing agriculture are there for all to see. As income of individuals has gone up so has the demand for food. Unlike telecom, agricultural commodity markets remain regulated. From farm gate to retailers, the government controls every single step: prices are “advised” by the commission for agricultural costs and prices and “set” by a cabinet committee. There is little scope for price discovery by economic agents. The results are in marked contrast: telecom services are dirt cheap; food is often so expensive that the poor have to go without it.

This story of failure is repeated in sector after sector. Perhaps, the biggest victim is industry where labour laws have ensured that manufacturing remains concentrated in very small firms that employ less than 25 persons. Big industries that can suck out unemployment have, at best, a scattered presence. The government has, now, proposed a solution: a manufacturing policy replete with incentives to be administered by bureaucrats. Were it not for the calendar, one could have mistaken the year as 1948 when the government embarked on a similar misadventure.

The 1948 “misadventure” (a nice euphemism for “total absolute fuckup that tragically destined a billion people to suffer unimaginable horrors of poverty and deprivation”) was the doing of Mr Jawaharlal Nehru. His spawn have carried that tradition forward and how!

Bad, clueless leadership is not confined to poor, impoverished third world countries alone. Even advanced industrialized countries can be subject to idiocy at high levels.

Russell Roberts of George Mason University explains, “Why Technology Doesn’t Destroy Jobs” in the Wall Street Journal.

Why do new jobs get created? When it gets cheaper to make food and clothing, there are more resources and people available to create new products that didn’t exist before. Fifty years ago, the computer industry was tiny. It was able to expand because we no longer had to have so many workers connecting telephone calls. So many job descriptions exist today that didn’t even exist 15 or 20 years ago. That’s only possible when technology makes workers more productive.

It’s true, there are some structural issues in the labor market. New jobs are being created but not at the usual pace and not fast enough to soak up the unemployed. But President Obama is wrong to blame innovation. A bigger problem is housing, where hundreds of thousands of workers have lost their jobs. The source of that problem isn’t technology but an over-reaching housing policy and distorted finance. The solution is to let the housing market clear—let interest rates rise, stop subsidizing mortgages, and clean up the foreclosure mess. That would let housing starts return to something like normal.

The other challenge is simply confidence. Businesses aren’t hiring because they’re uneasy about the future. There’s no easy way to instill confidence, but we know how to kill it—create uncertainty about taxes and regulations. Reducing that uncertainty would certainly help.

In the meanwhile, enjoy the ATM machine and the kiosk at the airport with a clear conscience. Doing more with less is the road to prosperity. When confidence returns, even more Americans will share in the bounty from innovation.

People confuse ends with means. Employment and jobs are means, not ends. I wrote about that in Dec 2005 in the Indian context. Go read “Employment versus Production.”

Production, rather than employment, should engage our policy makers more than it currently does. Why? Because if you don’t produce — irrespective of how many people you employ — you cannot distribute. Even if you distribute scanty production very evenly, you are left with a system that fails everyone.

Production is a necessary but not a sufficient condition for a good economic system. Getting everyone employed, on the other hand, is neither a necessary or sufficient condition for a good economic system. Like I said, I would be happy to be ‘unemployed’ if, say, the economic system was run by robots and it produced the goods that I need and if the economy simply gave me my ’share’. I would spend my time contemplating the universe and eating lotus, I guess. And I suspect that there are others like me who would be happy to let the job of producing to others — human or non-human.

Production is a precondition to distribution. Fair distribution is a problem in itself but only arises after we produce enough.

Mechanization and automation expands the ‘production possibilities frontier’ and thus we can get more out of less — mostly less labor. Is that good or bad? Let me use a simple example.

That’s it for now. Bye.

4 thoughts on “Rent-seeking

  1. Very insightful as always. By the way, I’m a very new fan of yours. Landed on your page through Google Reader around a week back. I have been reading your articles since. I would like to thank you for the service you are doing for the motherland.

    Like

  2. Dr. Dey,

    Extract from Tocqueville’s very absorbing work on ‘welfarism’ called “Memoir on Pauperism”. The do-gooders pleading for NREGA should read this

    ‘But I am deeply convinced that any permanent, regular, administrative system whose aim will be to provide for the needs of the poor, will breed more miseries than it can cure, will deprave the population that it wants to help and comfort, will in time reduce the rich to being no more than the tenant-farmers of the poor, will dry up the sources of savings, will stop the accumulation of capital, will retard the development of trade, will benumb human industry and activity, and will culminate by bringing about a violent revolution in the State, when the number of those who receive alms will have become as large as those who give it, and the indigent, no longer being able to take from the impoverished rich the means of providing for his needs, will find it easier to plunder them of all their property at one stroke than to ask for their help.’

    As you say – go read it all – http://www.civitas.org.uk/pdf/Tocqueville_rr2.pdf

    I have pondered over the concept of welfarism for a few weeks now. Markets seem a good solution – but (as Dr. Pranab Bardhan shows) many folks simply do not have the werewithal to participate in the market economy. What is the best way to help them without ‘increasing their vices’?

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s