The drive to the airport last week in Mumbai was no different from most drives in Mumbai. It was congested and progress was excruciatingly slow much of the way. The line at the security check was long. Only two of the five machines scanning the carry-on bags were working and progress was slow. That was the cause of the congestion at the security check. When the boarding time came — and went — I asked at the gate when will boarding start. At the check-in counter, I had been told that the flight was on time. Now I was told that the flight had not landed and was circling overhead — because of congestion at the airport. It’s a repeating pattern and it tells an interesting story.
Earlier that day I had stepped on to the streets outside our Peninsula Corporate Park offices in Lower Parel in Mumbai. The sidewalks — 3-foot wide to begin with – are congested with shops spilling on to them, forcing people on to the road where they compete with bicycles, trucks, buses, cars, 2-wheelers, cows and dogs. The roads are dug up for various reasons ranging from laying of pipes and cables, to building of some fly-over to help ease the congestion. Progress is at a slow walking pace for all: fat cats in Mercs and BMWs, the commoners in dilapidated black-and-yellow taxis, yuppies in Suzukis and Hundais.
It’s always congested. There’s never enough capacity. The local trains in Mumbai run at 300 percent capacity. The long distance trains aren’t as bad if you can afford air conditioned class but the unreserved compartments are unbelievably congested. Even in the upper classes of the railways, reservations have to be made weeks or months in advance. Too often trains run late because the system is congested and one unfortunate delay propagates through the system affecting dozens of trains.
Congestion appears to be the defining characteristic of much of daily living. Prices are high, quantities limited, and quality is poor. Those features are normally associated with unregulated monopolies. A moment’s reflection is sufficient to see that much of what we suffer from in India can be explained by what is known about monopolies.
Monopolies are generally not good, even when there are justifications for their existence. The owners of a monopoly always have the temptation to restrict quantity in order to raise prices, and thus get super-normal profits. Monopolies make a simple offer: take it or leave it. “Don’t like what we have? Tough luck.” Monopolies have market power — they can set the prices and quantities and do so to maximize profits and don’t really care about the welfare consequences of their actions.
Nobody likes competition but in a competitive marketplace, no one has the kind of power that monopolists have. In a competitive market, no one has the luxury of setting prices. All are “price takers” — they take what they can get.
Monopolies exist for a variety of reasons such as scale economies and technological advantages. I call them “natural reasons.” Then there is one “unnatural reason” — where a monopoly is created by government fiat. The government legally restricts the production and sales of goods and services to one firm, which is generally a government firm.
The fun in being a monopolist lies in the control that one has. One controls the price and therefore can set the profit-maximizing quantity knowing what the demand patterns are like. The steeper the demand curve, the greater the wedge between the cost and the price, which means greater profits. The more essential some good or service is, the steeper is the demand curve. So it makes sense to be a monopolist for a good or service that has no close substitutes.
It’s good to be a monopolists, just like it is good to be a dictator.
As a monopolist, you control how much you will produce and at which price it will be sold, and you produce the quality that suits you, not the customer. You dictate, you rule. You reign. It’s your raj. It’s a license-control-permit-quota raj.
Talking of raj, the supreme example of a monopolist is the government. If you don’t like the government, you have no option other than migrating. Sure, you can vote this government out of the office – but then you are replacing one monopoly with another. The new monopolist has the same incentives to screw you over as the previous one.
Markets are magical things. Competitive markets are amazing things. Magically, competitive markets solve the most astonishing problems that no human agency can solve: they discover prices, determine the quantity to be produced, how productive resources are to be allocated, etc., and in some sense maximize social welfare. Monopolies leave much to be desired in terms of social welfare. They are good for the monopoly but not for others.
Of course, there are real world conditions under which markets fail to grind out the social welfare maximizing outcome. These failures are as well-known as the mechanisms for fixing them. But generally, even an imperfectly competitive market’s welfare implications trump that of a monopoly.
No firm in a competitive marketplace can make economic profits. For profit, one has to be a monopoly. That is why it makes sense to become a monopolist. How much would you be willing to pay to become a monopolist? Well, that depends, doesn’t it on how much profit you will be able to make as the monopolist?
One important bit about markets before we move ahead. Well-functioning markets have one characteristic: there are no persistent shortages. There may be acute episodic shortages but they disappear soon enough. You never have to queue up to buy some commodity in them. In response to demand, the price goes up or down, signaling to producers whether to expand or contract their production.
You have to engineer shortages that persist for years and decades. Careful planning is required to keep production low so that a rationing mechanism can be put in place for distributing the production. Monopolists can and do keep quantities artificially low – and somehow or the other, the government is involved in this. The implications of this are profoundly interesting.
Suppose you could make $10 billion a year profit as a monopolist. And suppose you are reasonably certain that your tenure will be around 10 years. That’s $100 billion in profits. You would be willing to pay say $10- or $30- or $70 billion or anything less than $100. In actuality, you may get the monopoly for much less than that provided you don’t have too many competitors for the monopoly.
The lure of monopoly profits induces competition. It is competition for “the market” because once you get control of the market, there is no competition in the market. Competition for the market is a substitute for competition in the market.
The government is a supreme monopolist, as I mentioned before. Whoever (or whichever group) is the government stands to gain immense amounts of profits. The greater the profits, the greater is the competition for being the government.
There are legitimate reasons for why we need a government. In one word, government is necessary for solving the coordination problem. Without defining it here, let’s just say that there are some things that only something like a government can ensure – such as external security, internal law and order, some form of central bank, some legislative functions, etc. But that’s a very limited set of activities.
The government is not required for a whole host of other things. Private parties can and indeed do produce goods and services, from shoes and ships and sealing wax and whatever. A competitive private sector can produce practically all the stuff that we need – transportation, food, clothes, entertainment, education, . . . the list goes on. And they can do it efficiently and effectively.
Firms that cannot compete in the competitive market, go out of business. In the competitive market, shortages disappear because the incentive to remove the shortage is that one can make some profits – and that is self-limiting because they all rush in and soon the shortage disappears.
When the government decides to become the monopolist-supplier of some good or service, suddenly shortages become an enduring fact of nature. Recall that only by restricting quantities can the monopolist make profits. If a monopolist were to produce the output quantity that a competitive market would have produced, then the price would also be that of the competitive market, and there would be no profits and it would not be worth being a monopolist.
So there it is. India is a congested shortage economy because it is profitable to be a monopolist. The government is the supreme monopolist. The larger the government, the more the profits. And that’s why the government runs airlines, railways, schools, bakeries, hotels, steel, coal, . . . wherever you see shortage and congestion, think of the government.
Is that all there is to it – shortages? Unfortunately no. There’s something worse. Corruption. Corruption is a function of how big the government is. That is the core thesis of this post.
Suppose the government were only into legislation, law enforcement and security. More specifically, say it was not into running a million schools, or in the business of granting licenses to firms to run schools and colleges. Then being an official in the government would not be all that attractive. But since there are licenses required, and the quantity is limited, getting the licenses induces competition for the market for education. Competition in the market is limited by limiting the licenses. So education becomes a very lucrative business.
Note, private providers of education in a competitive market would not make any profits, the quantity will not be limited, the quality will not be poor, and there will be no shortages.
The only reason for what we have in education today – lousy quality, low quantity, and high prices – is because of government control. And we have government control because the government extracts rents (the super-normal profits) from the firms that provide education.
Continuing with the education theme for just a little bit more, here’s the scary part. The lousy education sector is going to become worse. I was at a roundtable meeting at the Observer Research Foundation in Mumbai a couple of weeks ago. One member of the Planning Commission who was instrumental in the new draft bill for the creation of an apex body called the NCHER – National Commission for Higher Education and Research – made a presentation. It was the stuff of nightmares.
The AICTE and UGC are regulatory bodies that have brought ruin to the country’s education system. Now they are going to be replaced by NCHER which is essentially AICTE and UGC on steroids with two solid-fuel rocket boosters strapped on the sides and supercharged with high octane aviation fuel turbo charged nuclear nanotechnology quantum super collider super cooled magneto-spherical resonating chamber horror.
The more control the government has, the more money it makes. Auctioning of the radio spectrum gets one say Rs 26,000 crores (or about US$ 5 billion.) That is a pretty penny. It makes sense to become the telecom minister. So you can afford to spend US$ 1 billion in making sure that you get to be the telecom minister.
Anyway, the problem of corruption is simply ingrained in this democracy (which I call the cargo-cult democracy – google for more). Becoming a minister is a sure-fire way of getting billions of dollars in overseas accounts.
The larger the government grows, the larger is the reward for being in it. The nation becomes poor because of the shortages and congestion. But those in the government make money because they engineer the shortages. Prices rise, poverty deepens.
And that deepening of poverty is the reason that the government says that it needs to expand. It enlarges itself to provide NREGA or some such mumble-thousand crores scheme, for instance. Of that, it siphons off 50 percent. That’s about US$ 30 billion every year. Nice pot of change, if you can get your paws on it.
Lee Kuan Yew said last year that Singapore became rich but its leaders did not. Indian politicians can make a similar claim: India did not become rich, its leaders did.
There is more but this has been a long post. I have not gone into the details of the linkage between multi-billion dollar corruption of India, the reason the democratic setup of the country will not allow good people to become leaders, why the middle-class is ignorant and apathetic, why the Congress party is a close substitute for the colonial British rulers, and so on.
I argue that when the Congress party inherited the government of India from the British, Nehru and his descendants found the conditions very good. They did not dismantle the institutions that the British had used to control the Indian economy for the purposes of extracting all they could out of India. They kept the economy in shackles. As time went on, they tightened their grip on the economy to the point that it was dying.
Fortunately, PV Narasimha Rao was not as crooked as the Nehru-Gandhi family. He freed the economy a bit from the chains that the GA-ndhi-Nehru-Hangers-on had forged for India. It is called “liberalization” – the freeing of something.
It is hard to fathom how people can hold the GANDH in such esteem as to actually vote for them. But then one must remember that half the population is absolutely illiterate and probably the large majority is totally ignorant of the truth – since the government controls what the people are told.
I think the chances are fairly low that India will actually get out of the hole that the Congress party and the Family has dug for India. From where I am, I see the stranglehold of the government only increasing. As the body thrashes more in desperate need for air, they will increase the pressure so that the body passes into a coma. Then they will eat the dead.
There is only one hope. That the people realize what horrors that party has committed against India and Indians, and what further horrors they have in store for India. If we have to save India, the only hope is public education.