Saturday, July 25, 2009

Visible Hand?

Someone recently forwarded me an article calling for the disbanding of the Planning Commission. It was a typical libertarian argument that does not trust the government's ability to pretty much do anything of consequence. This line of thought does raise a valid objection - how would you expect the government, which does not have any direct stake in ensuring that scarce economic resources are optimally distributed in societies be expected to do that very function? It is tempting to believe that - especially if you look at the kind of people running our governments. So what is the alternative - you may ask. Do we leave it to the Invisible hand (i.e. the marketplace) to figure this out?
And this brings to a fundamental problem in these extreme political/economic schools of thought - with Libertarians on one side and the Communists on the other. One wants the Invisible hand while the other wants the Visible hand (i.e. the government/commune/labor unions - some organized form) to be the only one around. While the Communist experiment has blown up spectacularly, we are yet to see the Libertarian one at work.

Throughout modern history (at least after the initial euphoria of the industrial revolution settled down), some centralized authorities (king, democratic governments etc) have had to undertake a very visible, redistributive justice role. It has always been clear, even more so in the industrial world, that there is a section of the population that is not fortunate to be equipped with the same set of factor endowments as the remaining, more successful section. The former are almost doomed to be stuck in the vicious cycle of poverty while the latter can aspire to climb up the economic and social ladder. And in the absence of any redistributive function, it is almost inevitable that the poor would be squeezed even further.

And so, should the Planning Commission stay or go? Part of the problem, to me, appears to be the name - it sounds very Fabian Socialist and reminds everyone of the days when the Five-Year Plans tried to dictate the output levels in all sectors (from soaps to scooters to watches). And all they gave us was the Hindu rate of growth ! As to what they do now - it is clearly a mystery, since there is precious little planning that seems to be going on in the governments. Which makes the whole concept straight out of the 'Yes Minister'.

That function has, thankfully, come down significantly - gone are the days when the budgets used to announce the production targets for matchboxes! So what should the Planning Commission do - to start with, they should re-brand themselves as Economic Advisors, which would give them the necessary level of legitimacy while keeping them from causing too much damage in terms of policy making. There is definitely a case for a think tank type of body - so long as they are brave enough to balance diverse economic views and evaluate policy options for the government, which is what an advisory role ought to be doing.

Roses vs. Rice

The other day, happened to stop by at a florist to pick up some flowers. What stuck me was the price of flowers - an astonishing Rs. 10/rose. And this guy was doing brisk business - as are the other florists dotting the city. Go to the local specialty grocery (e.g. Namdharis) and you see all sorts of exotic fruits/vegetables flying off the shelves. And then you step out of this bubble - only to realize that the country, as is rest of the world, is going through a food crisis of sorts. A combination of events, ranging from the global economic downturn to global warming to rising prosperity have put the world on a slow trajectory of demand outstripping supply (much like oil and in time to come, water).Of course, not many of us actually notice the price of food anymore - when was the last time you tracked the price of onions or rice/wheat etc? In that sense, we are truly on the indifference curve, which in itself may not be an issue - so what if a small sliver of the population doesn't let the price of essentials drive consumption any more? However, what may be a problem is the fact that the demand for 'luxury' products like roses, exotic vegetables could be taking precious land and resources away from essential food products. Add to this the fact that these products show an overwhelmingly urban bias - which is probably leading to the agricultural land around the urban settlements increasingly moving towards these cash crops. That would drive up the prices of the essential produce even further - handing out a double whammy to the urban poor, who were driven to the cities in the first place to escape the lack of opportunities in the countryside.

And so this leads to the inevitable economics question - if this is what the market demands, who is anybody to blame? Indeed, you could even argue that this is the efficient markets hypothesis at work. After all, this line of argument goes - commodity exchanges are closest to efficient markets. Try telling that to the person who is struggling to make her ends meet in your urban neighbourhood (she is much closer than you think - look around and see the vast army of direct and indirect help that goes to make your uber-cool lifestyle uber-comfortable). And as the wedge between the haves and the have-nots keeps growing, we will see more of these phenomena around us. Over the course of history, first it was the ruling classes, then it was the landlords, who were then followed by the colonials, and now it is the sons and daughters of the great economic liberalization. In all this, I continue to marvel at the general ease with we continue to live with all these contradictions - we may have some of the worst records of child malnutrition records in the world and we have long been used to farmer suicides as a regular fixture of the economic and political landscape - do not forget that we are also one of the fastest growing wine producing countries in the world. Not to forget the Washington apples which are so conveniently available at our doorsteps throughout the year, all the way from across the world so that we can get our daily fruit fix. That we can import it from the USA, also frees up some more land around our cities so that the supply of roses and carnations can continue without interruption.