What's wrong with the increasing reach of free markets?

Over the past half century or so, there has been a definite increase in the reach of free markets and in its vociferous proponents. More and more things have come to be ruled by the power of the market. There are indeed only a few things money can’t buy. That sounds bad, but really what’s so wrong with it? 

Economics of time

When more and more things are governed by the ‘free market’, essentially more and more can be bought by money. The result is that money becomes more and more important and one starts measuring every activity in economic or monetary terms. For instance, it makes economic sense for me to take a cab rather than drive, if the work that I can do in the cab in the time that I would have spent driving myself is worth more than the extra cost of the cab as compared to driving my own car. The risk of this direction of thinking is that it dissuades people from performing any daily chores that are typically mindless and can be outsourced at little cost, such as cleaning the house, washing utensils and now even arranging one’s own cupboard. The very fact that there is such a profession as wardrobe arrangers tells, apart from the obvious hypothesis that we have become lazier than ever before, the extent to which we are now so taken over by the idea of making every waking moment useful. 

An unequal society

These activities, as mindless as they may seem can be a break for our brains. And more importantly, I think they are levelers when everyone has to do them. They ensure that people respect all jobs and consequently respect the people who do those for them. People are strong and weak, rich and poor, educated and illiterate but there need to be some things that remind them that they are all human, all members of the same society and there are some things they have an equal right to. So when, everyone has to go out and throw their own garbage in the trash chute (imagine it is something that can’t be outsourced, you can’t ask your maid to do it) it’s an equalizer. 

The growing divide

When everything is determined by money, ones whole quality of life is determined only by how much money one has. The amount of money one begins one’s life with is a matter, of course, of pure chance and that now determines the quality of ones upbringing to an increasing degree. This will then go on to determine how much money this individual has in his or her life, leading to a vicious or virtuous cycle depending on which side of the average you were born in.

How can we break this cycle?

One way is to work towards giving everyone a similar upbringing irrespective of where one is born. This means ensuring that every child has access to quality education, adequate healthcare, sufficient and healthy food, and a healthy and nurturing home. Now no one would argue with that, right? Of course, every child deserves all this. However, this can’t happen if the best schools in our country are private schools and the best hospitals are private hospitals and are consequently governed by the principles free markets.

I am not against the idea of free markets. They have worked in a lot of places and have resulted in efficiency and self- regulation, but let’s be wary of how far we extend their reach. Let's take a moment and think about who and what we leave behind as we praise the freedom and efficiency that the free market promises.

Cabs and the love for free markets

Surge pricing by cab aggregators has attracted controversy many times and in many places. Most agree that surge pricing during natural or man- made calamities is inhumane and insensitive, as it allows people to make money out of someone else’s misery. And this sounds rather repulsive, so that issue is settled rather simply. But when we are talking about regular situations, it sounds legitimate that people should be allowed to make money and profit according to the laws of supply and demand, right? That’s what free markets are all about.

Let’s for some time assume that it’s okay to apply the principle of free markets to cab pricing. If we are applying the principal of free markets then shouldn’t we apply it to everything related to plying cabs? Plying cabs requires the use of public infrastructure such as roads and highways. Maybe all roads, not just highways and expressways should be tolled and the tolls should vary according to the traffic. Plying cabs also imposes cost on the environment by polluting the air. Cars should be taxed according to the pollutants they emit, and the rate of this emission should also be varied according to the number of the cars on the road, as the same amount of pollutants are more harmful when the air is already polluted. If this were to be done, even then, if all the costs were passed on to the consumer, the prices would be more when the demand is higher, but at least the increase in prices would not be as arbitrary as the present model of surge pricing followed by aggregators.

Now let’s look at why the principle of free markets should or should not be applied here.

The free market believes that the ones who can pay the highest amount for a good or service are the ones who value it the most and hence we can bring greatest utility by letting them have that limited resource. First let’s differentiate between willingness to pay and ability to pay. Willingness to pay may still be an indicator of how much one values a certain good, but what we have here is actually ability to pay. Then, is willingness to pay really the best or only way to allocate this resource, assuming its limited? Why shouldn’t it be allocated instead by waiting in a line? Waiting too is a measure of how badly one needs a cab, right? Or why not just leave it to luck, let’s have a lottery to decide who gets a cab?

Cabs are a means of transportation, and transportation is in a way a public good. It is a necessity for people to carry on with their normal business. One can argue that public transportation like trains, metros and government run buses are supposed to take care if the needs of the public. However, public transportation is clearly inadequate in most parts of our country, and private cabs play an important role in bridging that gap. Given this, it should be treated like a public good and prices should be regulated. There is also the possibility that surge pricing may give drivers perverse incentives to create a situation of artificial scarcity. Drivers can go off the Uber grid and then come back when the prices are higher.

All I am trying to say is we really need to rethink our faith in the power of free markets. 

Cutting a cake

Last week, as we walked back into the Public Policy class, post the break, there was a cake on the table much to our surprise. After some quick banter on being past the number of sessions when students can opt out of the course, one of us was asked to volunteer to cut the cake. One of the students volunteered. As he approached the cake and was ready to begin cutting it the instructors cautioned him that he must make sure to cut it into equal pieces. So then came about the question of how many pieces we needed to cut the cake into. One of the students said there were 25 students registered in the class, so 25 would be the number. Meanwhile a few students counted the number of people present in the room and they added up to 31, including the students, the instructors, teaching assistant and a couple interns. Then the instructors asked if there was anyone who didn’t want to have the cake. Two students said they didn’t want the cake cause it had egg and they didn’t eat egg and three others didn’t want to eat as they simply didn’t like cake.

Right based on membership

The instructors pointed out that we should keep in mind that the cake had been bought from the tuition fees that the students paid for the course. There thus ensued a discussion whether that would mean that only the students who had paid the fees to attend the course had a right to the cake. And the instructors, teaching assistant and interns attending the course should thus not be given the cake. We also realised that one of the students was not present and would thus miss out on the cake. However, if being a registered student who had paid the fees was what decided one’s right to the cake, then he too deserved the cake. Also, this was unfair to the students who didn’t like cake or eat egg.

Do only the ones who can pay have the right to use a resource?

Do only the ones who are members of a group have the right to use the resource?

Is it fair to the ones who didn’t eat cake that a part of their fees had been used to buy a cake that they couldn’t eat?

Right to vote on how the cake should be divided

The class discussed if there should be a vote to discuss on how the cake should be divided, and if yes then who should be eligible to take part in that vote. Would the non-registered students also be given a chance to vote?

Immigrant rights

Should immigrant have rights? Should immigrants have the right to vote?

While there was an almost unanimous agreement on the fact that immigrants should have access to resources like food and water there was some debate on whether immigrants should be allowed to vote. Many said that only the legal citizens of a state should have the right to vote. But there was a counter-argument that if one lived in a place and paid taxes then she/ he should have a say on how that money is used. While some countries have provisions of naturalisation by which immigrants can become citizens many countries don’t. Even countries that do have such provisions could prevent certain categories from becoming citizens as the process has elements of subjectivity.

Need

Another aspect we considered was ‘who needed the cake more’. The cake could also be looked at as mere food and hence someone who needed the cake more should probably be given more of the cake. Hence we discussed if more of the cake should be given to the ones who were hungrier. We then asked around as to who all hadn’t had lunch. We then also discussed their reasons for not having lunch and whether or not they were legitimate. Some reasons like having to read for class were considered in a way more legitimate than simply being lazy to go to the mess.

Should resources be allocated based on need?

Can deprivation be a measure to decide how a resource should be allocated? We realised that even if deprivation were considered to be a valid way to allocate a resource, society does not consider all deprivation to be equal. We judge the reason behind the deprivation and try to decide if the reason is not legitimate or not.

Contribution

We also had a discussion on whether the cake should be divided based on who had contributed more to the course. The contribution itself could be in the form of the fees that were used to buy the cake, the time and effort that the academic associate had spent in getting the cake or the instructor’s idea to get the cake in the first place. We could also consider contributions of thoughts and insights that everyone had made to the class.

Should resources be divided based on contribution of individuals? If yes, what kind of contribution should be considered while dividing the resource? For instance, in this case should we just consider monetary contributions for buying the cake or since the cake is being cut in class, the contributions that everyone has made to the class by means of their thoughts and arguments should also be considered?

Deservedness

If the cake is meant for everyone who was in the class, we also questioned if some deserved to be in this class more than others. For instance, may be someone who had bid a greater number of credits for the course had given up more to be here than someone else who had bid less and hence deserved to be here more than others.

Representation

We also discussed if the cake should be divided in such a way that ensured that different groups were represented well. So should the cake be divided into two halves and one half divided among all girls and the other among all boys when the number of girls and boys in the class was not equal?

Should there be quotas based on categories like gender or caste to ensure that all categories are represented equally? This could be in the context of educational institutions, jobs, elections etc.

Level playing field

The instructors then asked if it would be fair if they gave all of us similar forks and asked us to reach out and eat the cake with those forks. The class had several concerns – the ones who got the fork earlier would have a head start, the ones who were closer to the cake would have an advantage etc.

Is it fair to give equal opportunities?

All people don’t have the same starting point and hence equal opportunities may not actually be equal. For instance, an award for the best scholastic performance may not really be fair as different people have different starting points and hence have to make different leaps to reach to the same point.

We extended this discussion to talk about the process by which students are selected into institutions like ours. Even though we offer equal opportunities by means of a single, fair exam for all, the playing field is not really level. Looking at gender, the proportion of females in IIM A is much lower than the ~50% that we see in society. This at least in part can be attributed to the fact that in a large part of India girls are still discriminated against, not encouraged to study, not given the same quality of education as children and often forced to marry early.

Nature of the resource

Underlying all the above discussion was a fundamental question – what was the nature of the cake? Was it to celebrate something or was it merely food or something entirely different from the above two?

The right way to divide a resource is not universal but in fact depends on the nature of the resource – a resource which is a necessity may be treated in a different way from one which is not. A resource which is a necessity like water may be divided such that every person has equal right. The same can be said for primary education. However, we don’t treat high education in the same way. Higher education is often allocated based on deservedness and equal opportunities rather than being divided equally among all.