George Bernard Shaw with characteristic cynicism noted that a government that robs Peter to pay Paul can always depend on the support of Paul. Regardless of their specific stripes, all Indian governments, because they are “democratically” elected, naturally solve the problem of identifying the Peters and the Pauls by a numbers game: Pauls must outnumber the Peters. So it should come as no surprise that yet another idiotic scheme is hatched by the party in power to gain the support of a large underclass by promising them something that will not in any substantial way be of any use to them but gives the appearance of providing relief.

Allocating quotas and reserving seats for economically backward classes (and for other historically discriminated and disadvantaged groups) in higher educational institutions is economically inefficient, morally wrong, strategically flawed, and tactically ineffective. The policy does not help the underclass and ends up victimizing both the underclass and the so-called privileged class. The policy epitomizes what is called a “lose-lose” solution, while foregoing a “win-win” situation.

A general observation is in order here. India is an extremely poor country of over one thousand million people. This state of poverty could not have come about without India following a consistent set of economically flawed policies over a substantially long time. Persistent and widespread poverty is a consequence of asinine policy choices, just as much as prosperity is a consequence of wise policy choices. Since the mindset which in the past consistently evolved and doggedly pursued illogical policies has not changed, it is reasonable to expect (after all, we are all Bayesians) that any proposed new policy is also going to be flawed. To move beyond the clichéd observation that a proposed policy is idiotic, one has to look inquire into the different ways in which it is so, and that is what I propose to do here. Later on in this series, after pointing out the specific ways in which the policy is flawed, I will outline the solution which will evolve naturally enough once we have understood the problem in detail.

Observing the Indian educational system brings to mind John Maynard Keynes’ skeptical definition of education as the inculcation of the incomprehensible into the indifferent by the incompetent. I would extend it by defining the Indian educational system as a structure created by the incompetent and uneducated to produce more of the same sort of people. It is a system which ensures its survival through self-replication.

The most visible of the problems plaguing the education system is that it is “supply-constrained.” In other words, the potential quantity demanded outstrips the capacity of the system to supply. Putting aside for the moment the question of why the supply does not increase to meet the demand, let’s look at the various ways in which the limited supply can be “rationed.” In a free market, price is a rationing mechanism: the price rises sufficiently to equate the quantity demanded and the quantity supplied. There are no shortages. Thus, for instance, there is no “shortage” of diamonds or of Microsoft shares: the price rises to equate supply and demand. (Diamonds are a special case because the supply is monopolistic and limited by the cartel to maintain a certain price level. Microsoft shares, on the other hand, will be bid up if the demand goes up and the price will rise in the stock market till all those who want to hold them have as much as they want.)

There are no shortages in free markets. Shortages arise only when the price is not allowed to rise to what is called the “equilibrium” or “free market” levels for whatever reasons. It is a valid generalization to note that prices are not allowed to rise for a number of reasons, ranging from ignorance of basic economic principles to plain old-fashioned “rent seeking behavior.” Ignorance leads policy makers to believe that by imposing a price-ceiling, a more equitable distribution of resources will be obtained. In fact the opposite occurs as can be seen from the classic case of rent control: the poor are hurt differentially more than the rich. Rent seeking behavior, on the other hand, is not motivated by ignorance; it is motivated by greed and is informed by knowledge of how the system works. Here is the strategy. First, limit the supply. Then impose a price ceiling so that at that price, demand outstrips the supply. Having thus done away with rationing through the price mechanism, rationing is done through non-price mechanisms such as licenses, quota, and permits. These are handed out as favors to particular constituencies as a quid pro quo. This, in short, is the situation in higher education in India.

Now on to the specifics of why quotas in higher education for disadvantaged groups is bad policy. First, the economic efficiency argument. All economic policies create gainers and losers. If the gainers gain more than the losers lose, then it is theoretically possible for the gainers to compensate the losers for their loss so that after the compensation, the losers are not any worse off than before and the gainers are better off than before. Such a policy effects what is a called a “Pareto improvement” and is therefore an economically efficient policy. Conversely, if the losers lose more than the gainers gain, then the policy is economically inefficient and there is an overall welfare loss.

Quotas, if they have any effect on the system, effectively replace qualified candidates with otherwise unqualified candidates. Unqualified candidates who enter the system are by definition unable to benefit from the opportunity to the extent that a qualified candidate would have done. The quota candidates are unable to compete within the system. Aside from the welfare loss in terms of wastage of real resources, the quota students suffer psychologically as they fall behind their colleagues who are better prepared for the academic rigors. They are looked down upon by those who “earned” their place in the school. (I say “earned” because it is strictly not so, as I will explain later.) This reinforces the perception—within both groups—that the group which enjoys the quota is intrinsically inferior. This is perhaps the most pernicious of all the unfortunate effects of a quota system in higher education.

This brings us to the point why quotas in higher education for disadvantaged groups is morally repugnant policy. It penalizes certain people based on their group membership. Discrimination based on caste, creed, origin, color, etc, is morally wrong. So is reverse discrimination. The right thing to do is to remove discrimination, not impose it from up on high. If, for instance, a person from a certain caste is not being allowed to enroll because of his caste, then the right policy is to remove that barrier. If students from economically backward classes were being denied admission despite being qualified, then the policy response should be to remove such discriminatory practices. Since it is not the case that qualified candidates of economically backward groups are being discriminated against, imposing quotas for them is not the solution.

So then, what is the solution? Pardon me for repeating my mantra (precisely why it is called a mantra—it is repeated) that before one can propose a solution, one should understand the problem. Here are two facets of the problem:

1. Seats are limited. If they were unlimited, you would not need a quota for anyone. They are limited because the government does not allow free entry into the higher education business.
2. Students from certain groups are unable to gain entry into the supply constrained system, and once inside they are ill prepared to compete within the system. If they were qualified, they would not need quota protection in the first place, and would be able to compete once there.

Both aspects of the problem need to be addressed by any proposed solution. The quota system addresses neither. The real solution has two main thrusts. First, get the government out of the business of controlling the supply of higher education. There are real opportunities for commercial establishments which will eagerly enter the business of education if allowed to do so. I use the phrase “business of education” advisedly since higher education should be a business like any other supplying a service which is essential for the larger economy and should yield a profit.

The second thrust is has to do with sequencing. It is undeniable that certain segments of the population are ill prepared to compete for seats in higher education. They are not intrinsically inferior in any sense; they are not naturally stupid. The fact is that they have not had the opportunity to prepare themselves for higher education. The solution therefore is that they have to be provided help in preparing for higher education, which basically means that they have to be given assistance at levels that precede higher education. They are handicapped at the level of higher education because they are handicapped at the earlier stages of education. If their handicap in the school level were addressed, you would not have to make special provisions for them in the post-school levels. This should be evident to the meanest intelligence, it would appear, but then perhaps our policy makers don’t make even the meanest intelligence grade. This is the most charitable explanation of why the minister in charge of education has not figured out this elementary point. The less charitable explanation is that the minister is a cynical opportunist out to ensure his re-election by giving out worthless gifts to unsuspecting victims of his own ambition.

This brings me to the point of whether those who compete on their merit have “earned” their place to enter these institutions of higher education. Sure, they have had to work hard at school and learn their lessons instead of goofing off. But they were lucky enough to have had the opportunity of going to good schools because their parents were rich enough to afford them. While commending them on their hard work (to the extent they had to work hard), it is important to keep in mind that they were privileged in having the opportunity which are not available to those who come from the backward classes. Much of the outcome rests on the luck of the draw which dictates which socio-economic class one is born into, and that fact should induce some degree of humility in those who protest that their merit is not being recognized as a result of the quota system.

The disadvantaged segments of the population are not disadvantaged only in their ability to gain admission to higher education, they are disadvantaged in all levels of education. The solution then is to help them with providing them opportunities in the lower levels first. Equality of opportunity at the lower levels (primary, secondary, and high school levels) is a necessary and sufficient condition for the disadvantaged segments to have a shot at competing with the others. Equality of opportunity is to be desired and can be engineered, but of course that does not guarantee equality of outcome. The policy makers need to understand the distinction between the equality of opportunity and the equality of outcome: the former is a necessity for social justice and can be obtained, while the latter is neither possible nor desirable.

At this point you would forgive me for repeating my other mantra: distinguish between the causes and symptoms (or consequences), and address the causes, not the symptoms if you want to solve the problem. The inability of backward classes not being able to compete in gaining admission to higher education is a consequence, not a cause of their backwardness. The cause of their backwardness lies elsewhere (which I will not go into now) and so by forcing them into higher education will not magically remove their backwardness.

Quotas, as I claimed earlier, are economically inefficient. Assume that the full cost of, say, a 4-year IIT education is $50,000 (or about Rs 22 lakhs). Further assume that a quota student ends up benefiting less than the full cost, say, $10,000, while a non-quota student gets at least $50,000 of benefits. The net loss is then at least $40,000. Instead of wasting $40,000 on one backward class student at the IIT, if the money were spent school education, 20 students could have been educated (with an average spend of $2,000) and out of which perhaps one would have been sufficiently bright enough to gain admission in the IIT on merit and subsequently compete within the system as well. This is the tactical flaw with the quota system: they have the sequencing wrong, and instead of creating more opportunities at the school level, it tries to equate outcomes at the college level.

To summarize: the fact that IITs and IIMs don’t have sufficient representation from some economically and socially disadvantaged groups is a symptom of a deeper problem. Therefore merely increasing the numbers from these groups by fiat will do no good, and indeed may end up harming the groups. I will outline the solution of the underlying problem in a subsequent post.