I purchased a used car last weekend. As a poor grad student, it is easily my most expensive purchase ever. Naturally I was cautious and wanted to get the best deal, and spent a disproportionately high time searching for the right car.
I called/emailed 70 used car owners, ran 54 carfax reports, and finally chose a few for a test drive and an inspection. It took me a few hours a day for a few weeks to achieve this.

The last few days I have been wondering why I spent a disproportionately high time over it. Perhaps I read Akerlof’s paper too many times, and I was petrified of being stuck with a bad car. One particular incident with a lemon during my car search made me even more distrustful and cynical.

I come from a background where institutions are so weak, and contracts are so weakly enforced, that one learns to be cautious during the time of purchase rather than litigate later. Add to this the usual skepticism ingrained during my training as a lawyer.

Finally I ended up buying the car from a Tamil speaking Indian (like me), because the car was in impeccable condition and also because I was able to judge him well given my past experience. At the DMV after the title was transferred, he didn’t even count the money I gave him and just shook my hand wishing me luck. I think I need to rewire myself to living in a more trusting society where trading with strangers is far easier.

This is why India is far poorer than it could be. People show reluctance in trading with strangers and markets do not flourish.

If we look at Singur, it is a simple case of conflicting wants and divergent preferences among people. Tata wants land to build its wonder car, thousands of workers want the jobs that will be generated; but many farmers want their land which would be acquired.

Now, there are many ways of resolving such conflict. Tata could use violence, employ some gunmen and get rid of the opposition. Unfortunately the government holds the monopoly over violence and Tata cannot legally employ such violence. The second is using rent seeking methods to ensure that the government will favour Tata over others. This sounds like an alternative to violence, but what was witnessed in Singur is violence against this kind of decision-making mechanism. And the last alternative is to use the market to farmers better off than when they owned the land; to make people in the area better off than before by offering them jobs and making Tata better off than before by allowing it to make profits.

The most important thing about the market is that it is an alternative to violence. When people could pillage and plunder the market provides a way of resolving conflict.

The problem with Singur is that the market alternative is unavailable. The government has ensured through that people cannot directly interact with each other; that farmers cannot sell agricultural land for non-agricultural purposes and so on. This is the reason for the violence.

One can hardly blame the Tata for leaving. Anyone who operates peaceably in the market will find it impossible to operate in such an environment and the added costs of police and private protection are probably too high. The only way to bring Tata and others to West Bengal may be to allow sale of land without government acquisition and let the market resolve all conflict. 

My piece on the Indian Constitution endorsing socialism in the Wall Street Journal Asia appears today. You can read it here. The full text is also reproduced below.
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India is a democracy, but according to the Supreme Court it’s less democratic than you might think. The justices recently shot down a challenge to Indira Gandhi’s 1970s-era ploy to stamp her economic policies on the country in perpetuity. At issue: Does the word “socialism” belong in the Indian Constitution? And is every political party required to be socialist even if such a requirement is antithetical to free speech?

The Good Governance India Foundation, a small think tank, had petitioned to remove “socialism” from the Constitution’s preamble. The text currently opens with: “We, the people of India, having solemnly resolved to constitute India into a Sovereign Socialist Secular Democratic Republic. . . .” The foundation argued that this wording conflicts with the original intent and the “basic structure” of the Constitution. The court disagreed, choosing to believe that “socialism” has many meanings and its inclusion in the preamble is not antithetical to open debate.

It’s more than a question of semantics. Following the preamble’s lead, the election law, the Representation of the People Act, requires every political party to aver its commitment to socialism. And they do mean “require.” SV Raju’s application to form a free-market party called the Swatantrata Party was rejected by the Election Commission when he refused to include “socialism” as one of the principles of his party. He’s been petitioning to overturn that decision since 1996. The Supreme Court has at least asked the government and Election Commission to reconcile this outcome with the principle of free speech.

India’s Constitution as originally ratified in 1950 didn’t include any mention of socialism, although the idea was proposed. The man who would become the country’s first prime minister, Jawaharlal Nehru, was as socialist as they come in his economic policies. But he was also a political liberal, and he felt that forcing his personal ideology on all Indians through the preamble would be contrary to the broader spirit of the Constitution. Other founding fathers, notably B.R. Ambedkar, agreed.

Sentiments changed in the 1970s. The declaration of a State of Emergency in 1975 gave Nehru’s daughter, Indira Gandhi, a convenient opportunity continue her agenda of nationalization, repaying support from the socialist parties, while expanding her own power. Amid a raft of Constitutional amendments she pushed through parliament to enhance her authority, she included one adding “socialism” to the preamble. She did this despite the Supreme Court’s finding barely three years earlier that the preamble was part of the “basic structure” of the Constitution and thus not subject to amendment. The succession of socialist-leaning governments in subsequent years meant few people were interested in challenging this provision.

Instead, Indira Gandhi’s successors made it worse. Her son, former Prime Minister Rajiv Gandhi, amended the Representation of the People Act in 1989 to require all political parties to include socialism in their party platforms to align with the values espoused in the Constitution’s preamble. Mr. Raju’s new party has run afoul of this provision.

Since the early 1990s, India has been gradually liberalizing its economy. The results are palpable — an average 8% annual growth rate the past few years is just one. But the country’s political underpinnings haven’t kept pace. The Supreme Court has passed up a good opportunity to right a wrong inflicted on Indian politics 30 years ago. Parliament can still fix this mess, but no party is likely to take up the cause because in political circles capitalism and profit are, like Nehru said, “bad words.” India could use the same kind of competition in the ideological sphere that’s starting to work for the economy.

Ms. Rajagopalan is an Erasmus Mundus Scholar pursuing her masters in law and economics at the University of Ghent.

In school I learnt about Market Failures in Microeconomics. For a while I believed that in case of public goods there is market failure at which point government regulation is required to fix the problem. Many economists who would otherwise support markets also seem to believe this.

For the uninitiated, public goods are those where consumption is either non-exclusive or no-rival or both. Because it is difficult to exclude parties there is the free rider problem and because sometimes it may be non-rival consumption there may be no incentive to bear the costs to exclude the free riders. This leads to the classic Free Rider Problem which leads to market failure.

This part is fairly correct, but the presumption that market failure can only be fixed by government intervention is grossly misguided. Market failure is often solved by markets. And far more efficiently might I add.

I was in Prague last weekend, which is for another more detailed post, and saw the most wonderful example of markets fixing market failure.

A tour guide taking around groups at tourist spots faces the free rider problem all the time. It is difficult to exclude other tourists who are also at the monuments and the consumption may be rival as those who paid for the guide get crowded out. In Prague I saw that the tour guides have small microphones and each person in the group has headphones. A passerby can’t hear anything and cannot free ride on the tourists who paid the guide. It is also wonderful because they don’t cause any nuisance to other tourists who just want to look around peacefully.

How would the government deal with this problem? They would regulate the number of tourists each guide can have in a group. Furthermore they would regulate the distance each group must maintain and each individual must maintain from the groups. Then they would issue licenses to guides and have Tourist Inspectors for enforcing the regulations and ensuring the correct distance is maintained. So much more efficient isn’t it? Or so they said in school.

Update: I am particularly interested in market failure in the tour guide business because I could have an alternative career as a diminutive tourist guide!

Mary Kissel, the editor of the edit pages in WSJA, has an excellent piece today on Chandni Chowk.

It started fairly innocently. Mary asked me to list the interesting places to visit in Delhi and I thought Humayun Tomb, Red Fort and my favourite Chandni Chowk. She was as excited as I was apprehensive about sending her alone.

She surprised me. She took about three seconds to get used to the madness and then maneuvered her way around the market saying China had already prepared her for such a situation

Now the coolest thing about Mary is not that she can write like this, but that she is a foodie who is not to scared to try out anything new and has a special place for Indian food. From parantha’s to sandesh to besan ke laddoo she wanted to tickle every taste bud. I was only too pleased to accompany her.

As we tried not to get crushed by the madness in CC, between the food and the shops we squeezed in philosophical discussions about Smith and an almost perfectly competitive market and the division of labour and specialisation and spontaneous order. Mary describes it all far more succinctly in her piece, so I’ll stop here.

But I must say, just days before leaving Delhi, this experience was all that I really needed. A friend, lots of food, some silver and the smell of everything bought, sold and provided in Delhi and most importantly a feeling of being free. So thank you Mary, for the experience, the piece and for taking my very own Chandni Chowk to the pages of WSJ.

Brilliant piece by Russ Roberts, Where Do Prices Come From? Even a ten year old would understand this one.

Tyler Cowen’s How to Study Economics in Your Spare Time. To his list I would add Animal Farm and The Road to Serfdom. It’s not strictly economics; but the insight found there is fundamental to everything else.

Landsburg’s A Brief History of Economic Time on Human Progress and what prompts it. (Link via Amit and Yazad)

Tunku Varadarajan on Princess Di and how she “brought the British Monarchy to the brink of collapse”.

…………… is on EconLog where Caplan has given a rave review to Landsburg’s More Sex is Safer Sex.

I haven’t managed to get the book yet but Caplan quotes a part of it here.

“Imagine a country where almost all women are monogamous, while all men demand two female partners per year. Under those circumstances, a few prostitutes end up servicing all the men. Before long, the prostitutes are infected; they pass the disease on to the men; the men bring it home to their monogamous wives. But if each of these monogamous wives were willing to take on one extramartial partner, the market for prostitution would die out, and the virus, unable to spread fast enough to maintain itself, might well die out along with it.”

“Considering the milk situation the cabinet has decided to ban export of milk products till September 30, 2007,” said Mr. Chidambaram.

We will never learn. Or so it seems.

(Link via Shrayana)

Gautam is finally back to blogging after his long break. In his post he writes about Ramachandra Guha’s new article.

“The market does have its imperfections. One is that left to itself, it tends to pollute and degrade the environment. A second is that employers generally do not pay attention to the health and safety of the worker. A third is that without consumer vigilance and action, industrialists do not always deliver on quality. A fourth is that the market disregards those without purchasing power. A fifth is that one cannot rely on the market to deliver on goods and services whose value cannot be reduced to monetary terms, such as primary education and basic healthcare.”

I think the reason why Guha makes ambivalent statements sometimes for and at other times against markets is because he doesn’t quite understand markets. This is just fear of what markets could do given his ignorance on the various market solutions to various problems.

Gautam’s post beautifully explains the market solutions to all five issues raised by Guha.

Well when asked if the government does anything better than the private sector Russell Roberts (from Cafe Hayek) replied, ” Sure. Killing people.”
The whole post is here.