Free markets, Transparency and Human Development

The correlations and their implications

Inexplicably, but fortunately, the Indian blogosphere is discussing free markets.

The debate on Mall Road and The Examined Life sparked off (tangentially) from a post on corrupt politicians. So it is timely to consider the linkages between free markets, transparency and human development.

Analyses on this blog demonstrate that both transparency and human development positively correlate to free markets. They show that the world’s most open economies are the least corrupt. They also show that the most open economies also have the highest rates of human development. Instead of debating whether a perfect free-market is possible, it is more useful to debate what these correlations imply. If they indicate causation — that is, if free markets cause lesser corruption and greater human development, as The Acorn believes they do — then there should be little reason to object to India embracing them. But even if causation cannot be proved, the case for embracing free markets is still strong: firstly, because India’s half-century love affair with socialism left most of its citizens in poverty and hopelessness; secondly, because where free markets and enterprise have got a chance, they have led to job and wealth creation; and thirdly, because there is China.

In the The Acorn’s view, the desirability of giving normal human beings complete economic freedom is not predicated on its ability to deliver economic growth or combat corruption:

Economic freedom is a fundamental right and must be seen as such. That it correlates with prosperity and development is an advantage.[The Acorn]

Related Link: DesiPundit’s coverage of this debate

53 thoughts on “Free markets, Transparency and Human Development”

  1. Thanks Nitin, the post here seems to be much more balanced than a few that I saw when this discussion started. As I said earlier, criticising private corportations should not be seen as supporting license raj. They are two different things.

  2. It would be useful to prove the causation, Nitin. And I am not arguing against free markets per se or in favour of socialism. The issue here is regulation, the issue is the extent to which free market champions see private enterprises as inherently good-intentioned who can do no wrong, who do not resort to unethical, unfair trade practices. In my view, unfair trade practices result in a not-so-free market, and a free market society needs strong watchdogs against the corporate sector.

  3. Shivam, who among us disagrees with a statement like “unethical business practices are wrong”? Who among us is so naive as to see “private enterprises as inherently good-intentioned”? Who among us supports “unfair trade practices”? No one.

    So what’s your point? Having come to a conclusion about how free markets work, what specific policy recommendations do you have? What do you think is the way forward? More regulation, from whom, in what form, etc? Tell us those things, and we can discuss this further.

  4. “Shivam, who among us disagrees with a statement like “unethical business practices are wrong”?

    Amit if I can barge in again, I get this sneaky feeling that you do not agree with the above statement by reading your blog. I have been visiting your blog for a month or so only, and though I have seen countless links to government frauds, like have hardly seen anything like this.

    I might be wrong but at least, this is what I feel. Even if you agree with the above statement you do not show it on your blog.

  5. I’ll reply later Amit, have to rush, but what Mridula says in the comment after you, is one of the things I have been trying to hint at. Why is our govt bashing to accompanied by bashing unfair trade, with the exception of IIPM!

  6. Shivam,

    I think the crux of your argument is the (usually correct) belief that private enterprises do not behave ‘morally’. This makes them engage in unethical behaviour and unfair trade practices.

    But if you start off with a view that businesses have no business to be moral, and instead, their only business is to make money (for their shareholders), then you would not expect them to behave morally. And then you would structure public policy to allow them to do so without allowing them to engage in behaviour that is immoral, unethical or unfair.

    As I argued in my post on MPs taking bribes, the manner in which behaviour is shaped is through incentives. In other words, a well-designed system of incentives will allow private corporations to do what they do best (create wealth) while ensuring that they do not do things which society considers undesirable.

    Thanks to License Raj and its still-lingering shadow, private enterprise in India is hobbled by a complex maze of regulations that ends up creating incentives of the undesirable kind — more unethical and unfair than may have happened otherwise. Clearly, adding more regulations is only going to worsen this picture (imagine how thick the Income Tax manual is now, and what pleasures taxpayers will have if it gets any thicker).

    So yes, I do believe that the state has a role to prevent unfair and ‘unethical’ behaviour — through such acts as preventing monopolies from building up, ensuring that consumers lawsuits against corporations are quickly and efficiently settled, setting standards in areas which impact life and safety (eg environment, healthcare, food) and where such standards help inter-operability (eg in telecom). More generally, the state has a role in addressing information asymmetry between corporations and citizens; either by forcing corporations to release information, or by acting as a watchdog in those industries that where this is not feasible.

    All this does not require the massive amount of red tape that the Indian government has wrapped its economy in.

  7. Nitin, if I understand any history, changes in systems, be it political or corporate, come when ordinary people like you and me stand up and demand them. Not because of the governments and not becuse of corportae good will.

    Both of them have too much power to worry about a NHB (normal human being). If the debate is about who is more corrupt the answer is the one who has more power today and it may change tomorrow.

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  9. Mridula, here’s one reason I criticise government misdeeds far more than corporate misdeeds: because it’s a waste of my money. Mine and yours and Shivam’s and of all of you who are living in India and pay taxes. And I have a right to demand that people be accountable for what they do with money that they take from me.

    What Enron and Black and gang do is equally wrong, but does not concern me so much because anyone who invested money with them did so voluntarily. They had a choice in the matter. Caveat Emptor and all that.

    Also, Enron and their like are correctly being punished for the frauds they commit. Most of my tirades against government wastage come because no one is accountable for them, and they are certain to be repeated, time and again.

    And if you have any sneaky feelings about me in future, please substantiate them with links. 🙂

  10. Nitin: Good points, but there is no ‘moral’ element in my argument. What I am saying is that private enterprises often violate the law (in letter or spirit), do what is legally unethical, and get away with it by bribing regulators, politicians and by buying the media through advertisements (Slime style). Even the so-called citizen journalists, the bloggers, don’t want to attack the corporate sector, they’re happy blaming the govt (and I agree there is a lot the govt is to be blamed for). So that’s why you have all sorts of businesses doing what is not ‘ethical’ and ‘legal’ (no morality please): bank NPA’s, environmental pollution, duping students… As we become a capitalist economy more and more by the day (we already are to a great extent since 1991, and we were never 100% socialist), we need to realise that corporations need watchdogs that work: govt and independent civil society institutions, the media, consumers who speak up, a consumer culture that realises its rights vis-a-vis corporations, and most importantly, a free press. And shall I say an unbiased blogosphere!

    Amit, you have a good point there about why you attack the govt’s inadequacies but not private sector malpractices. But why do I suspect that you don’t attack private sector malpractices because you fear that will bring discredit to the concept of free markets?

  11. Exactly, Mridula, I’m a classical liberal (not the American sort), which is more or less the same as a minarchist libertarian. So? What’s your point?

    Shivam, you’re resorting to a Type M argument by speculating on my motives. Tsk tsk.

    Also, who here doesn’t believe in watchdogs?

    Would you like to answer the questions I’d asked earlier, instead of making all kinds of unsubstantiated assumptions and then attacking them?

  12. For people who site telecom revolution as an example for Free market. When this telecom business started, what did reliance do?? They promised the CONSUMERS, a lot of things. What did they do, when the rules by TRAI made them go back on the promises that they made to the CONSUMERS. They did nothing, who lost?? THE CONSUMERS. The reliance did not do anything to protect the interest of its own CONSUMERS.

    So if the free market theory is correct and the CONSUMER is the king and we expect them to get the benefits. But what happened, reliance benefited and consumers lost.

    Now for the people who say the government should regulate everything, so that the interests of the people are protected. For this reliance issue, what the TRAI regulations should have been, keeping in mind about the people who have already bought reliance. They should have ruled that reliance keeps its promise to the existing consumers, that were already made. And made to follow the new rules for the new consumers. But what did they do?? They made reliance pay and forgot about the people.

    So if the government regulations are to benefit the citizens of this country, why in this case only the government benefited and citizens lost.

  13. “Exactly, Mridula, I’m a classical liberal (not the American sort), which is more or less the same as a minarchist libertarian.”

    Ah, I misunderstood. So government should not intervene because one day (and we are waiting for that day at least since 1776) ‘free market’ will save us all. Amen to that.

  14. So what this situation describes is,

    The capitalists, anywhere, are not to be trusted with our money unless otherwise there is a proper regulatory authority.

    The regulatory authority (politicians), are not to be trusted in India.

    So what I understand from this is, free market or fucked up market, we as Indians will not see the benefits.

  15. Senthil: more or less, exactly! 🙂 the only hope is media, but thanks to unethical business practices (‘Medianet’ et al) that too is f*-ed up!

  16. GOD HAVE MERCY, people are moving in such circles.
    Here’s the precis of the conversation, which would hopefully clear things.

    Shivam/Mridula say:

    1. Businesses if let free, would cheat, commit crimes and steal your firstborn.

    2. Hence, free markets, if fully free, are bad.

    Amit says:

    1. Of course businesses, like humans, if allowed to do whatever they wanted would commit crimes.
    That is why you need a rule of law. A Rule of Law is a necessary pillar for free markets.
    FREE markets does NOT mean a lack of rule of law.

    Shivam says:

    Of course, I’m an advocate of free markets. I’m just not an advocate of unethical businesses,
    unlike you Amit, you evil Classical Liberal, who very clearly supports businesses stealing consumers’ firstborns.
    All I’m saying is that there should be watchdogs looking at businesses.

    Mridula says:
    Given that there should be watchdogs, why shouldn’t there be govt watchdogs.

    Amit says:
    Govt watchdogs aren’t accountable; they are subject to being taken over by business interests anyway, and only end up harassing and stifling legitimate businesses (using Governmental FORCE and COERCION), while doing nothing to stop unethical practices.

    Mridula says:
    What, no government watchdog? HALLLLP. Mommy.

  17. Senthil,

    I would argue that telecoms has not been deregulated properly in India. The fault is not that free-market in telecoms worked against consumer interests, but that vested interests did not allow a competitive telecoms market to come about.

    Despite all its shortcomings, telecoms liberalisation has left the consumer better off. Remember the days when the telephone was a ‘status symbol’, when people waited for years to have that black, rotary dialed phone installed?

    Today, if consumers are unhappy with Reliance, they can walk into the arms of Bharti, Hutch, Tata, BSNL or whoever else. It is difficult to accept your argument that Indian consumers have not benefited from the opening of the telecom sector to competition.

  18. “The fault is not that free-market in telecoms worked against consumer interests, but that vested interests did not allow a competitive telecoms market to come about.”

    That takes us back to ‘show me a completely free market, and I will show you an economics text book …’ I hope you do understand that oligopoly and other imperfect market situations are not completely ‘free markets.’

    Maybe when free markets do come about anywhere in the world, we should preach their virtures, till them let us live with the fact that markets are imperfect everywhere.

  19. Mridula

    Maybe when free markets do come about anywhere in the world, we should preach their virtures, till them let us live with the fact that markets are imperfect everywhere.

    Replace free markets with ‘freedom of speech’ and you will still be right. But that does not deter us from revelling in the virtues of free speech does it?

    As I alluded to in my post, the debate on whether perfect free markets are possible is of academic or philosophical relevance. The public policy issue is: will India benefit from a more open economy? The evidence suggests that it will.

  20. India will definitely benifit from open economy, no doubt about it, it is the way how it should happen that is where the difference lie. You say let us have ‘free market’ and some of you quote definition of a classical liberal. To that I say, show me a ‘completely free market with defensive government interventions and I will show you Enrons.’

  21. “Many analysts believe that this characterization of the Hong Kong economy is not entirely accurate, as the Hong Kong government, both under British and Chinese rule, have often intervened quite actively in the economy, for example by determining the amount of land to be sold and in quite actively maintaining the peg to the U.S. dollar.”

    “In August 1998, the government intervened in the stock, futures, and currency markets to fend off “manipulators.”

    Wiki (your source) is not that biased.

  22. Anti-free marketers arguments are classic socialist arguments recycle every few years – because it is difficult to regulate free markets, let’s bury it. Hence we get the license raj, FX control, gold control, drugs control, and on and on.

    Free markets works well when there are lot of companies in a market segment. It has less to do with consumers because if there are a lot of companies competing consumers will have lots of choices to pick and chose.

    The example about Reliance given above is flawed with respect to free markets (it is valid one for consumer rights).

    Market regulation should be about keeping a level playing field for all companies and reducing barriers to entry for new companies (beyond inherent business sector barriers to entry). Regulators work best when they are neutral parties irrespective of politicians or political parties. If it hasn’t worked, then we have to look for ways that will work; not scuttle the engine of prosperity for a vast majority of people in the country. We have the seen the other side with disastrous results for far too long.

  23. “Free markets works well when there are lot of companies in a market segment.”

    Exactly my point, and forget India, all over the world oligopoly situation rules. That is not good for consumers. Think Walmart, think Microsoft and think the opposition they face.

    I am repeating my self but not being ‘classical liberal’ does not mean anti-reform. At least not to me. The level of argument I have seen here: Since you question the functioning private enterprises you are anti-reform.

    Maybe someone will notice it if I right it in bold I am not anti-reform but I do question practices of powerful big business organizations because even if I am not a shareholder, I am a stakeholder.

  24. I’ve been snarky in prev. comments, but I’ll be more on the ball here.

    So the prime contention of Mridula et al is that Businesses are big and powerful and need to be reined in; among other things in order to have a free market and prevent market failure.

    Here is a question to Mridula et al: why do you not think “rule of law” machinery viz. judiciary is not enough for this? For e.g. big guys with large amount of testosterone are ostensibly more prone to commit violent crimes etc. and need to be reined in IN order to have a free society. But we still tackle this issue by standard rule of law machinery. We do not have BIG TESTOSTERONE GUYS regulators.

  25. There is only one Mridula, no et al. And how much ever you try, government is going to be there, if only to enact new laws. And for a better reply see Chetan’s comment at Desipundit, if you have the guts to read it all.

  26. The case for monopolies controlling a free market system is hard to make. Just because there is opposition, that does not make them right. One can read emotional stories of WTO protesters in Hong Kong by, say, Korean farmers. If there were ever a case for free trade, S. Korea would be Exhibit A. It went from poor Asian backwater to becoming an economic powerhouse in a generation mainly because of free trade. For every Korean farmer, there are probably ten Korean non-farmers prospering from free trade by export electronics and car and everything in between. Opposition to WTO does not mean free trade is bad.

    Walmart, Microsoft, Intel are big companies with huge market share, but that does not make them monopolies. For every product that Walmart sells there are probably ten stores that sell the same thing (probably 100s on internet). The perception is Walmart sells for less. Apparently this is a wrong one as discovered in the recent Walmart sponsored conference; most products in Walmart aren’t the cheapest. When that perception changes, Walmart will lose customers and revenue, even if there are pro-Walmart protesters.

    Similarly, successful tech companies tend to get big, as explained by Shapiro and Varian in their classic Information Rules, mainly because of externalities. Again, for every product that Microsoft sells there are alternatives: browser, OS, office suite, email, and servers. If Intel sat on it’s behind after, say, it’s 1GHz chip it would now be a second or third-rate chip company with a low PC processor market share. As Google is showing the way to beat tech giants is by new disruptive technology – not regulation.

    In pro-regulation socialistic market, winners usually are chosen by politicians or technocrats. And usually the permanent winners are incumbent (probably government controlled) stogy bureaucratic companies – now these oligopolies and monopolies. It would be hard to find a company with huge market share for very long in a free market economy without the active help of the government.

  27. So it is all efficieny and nothing to do with the power of the big companies? Then why so many successful court cases against Microsoft? But anyway, I am out. See Chetan at either at Desipundit or at Shivam’s.

  28. Mridula, I asked a very simple question, and you point me to a rambling comment on another blog.
    No, my question is not answered there.

    But all this is still irrelevant;
    as the last statement in Nitin’s excellent post says:

    Freedom (economic and otherwise) is a right on its own. You (by means of governmental force) do not have any right to dictate who and what I should trade (SO LONG AS I follow the rule of common law)
    That this leads to prosperity, and which was the crux of the discussion, is but a welcome side-effect.

  29. To me ‘economic freedom’ also means freedom from tryanny like Enron/Lord Black. I may not be a shareholder but I am a stake holder. Imperfect markets cannot ensure regulation on its own.

    By the way,just because you cannot understand something it does not become rambling.

  30. I have been following this debate from Shivam’s blog to this blog and I think I am going to puke. seven_times_six summarized the whole circular debating here. Mridula who probably has made like a zillion comments in which she talks about the same thing again and again again… oligopoly, imperfect markets, monopolies … yuck.

  31. “Mridula who probably has made like a zillion comments in which she talks about the same thing again and again again… oligopoly, imperfect markets, monopolies … yuck.”

    All the site owners are free to delete whichever comment they find repetitive. Yet, they have not done so, yuck!

  32. This is to complete half century .

    Do I get special prize like Corny cups 😉

    I do not know enough about economics, so will say this.

    Both sides agree on free market,But

    Amit/Ravi Free markets are self-regulating or can be made with enough initiative. Law and order enforcement is given, but any more regulation, in addition to plain old judiciary is unnecessary government intervention.

    Shivam/Mridula It is difficult to make free market self -regulating in many of the cases. Initiative can not be universal panacea in all the cases. Some amount of active intervention from government,in addition to judiciary which is more of a redressal mechanism in reactive mode, is required.

    I will side with Shivam/Mridula, but then I am a software engineer and work with bugs.

    Now where is the corny stuff ?


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