In recent times, the Nobel prize has gone to economists who have challenged the efficacy of markets by empirically outlining circumstances in which market failures can occur repeatedly. This year?s winner Elinor Ostrom too has received the honour for showing how community management of natural resources such as water, forests, etc produce better results than if they were privatised. It is interesting to note that the Nobel Committee with its award seeks to drive new thought processes among the western political/intellectual classes. Just as it sought to bestow the Nobel peace prize on Barack Obama, who has embarked on some big initiatives like global nuclear disarmament, fixing Afganistan and constructive engagement with Iran, the awards for economics also reflect the need to look at things from fresh perspectives.
For instance, the economics awards in recent years have tended to focus more on the impact of social sciences and anthropology on collective economic behavior. This resulted from certain gaps in understanding, which economics alone could not fill. However, it is interesting to note that the timing of the Nobel awards, in terms of new thought processes that it seeks to generate, is always driven by Western concerns. And not surprisingly so. For instance, in the 1980s the discipline of economics engaged with the role of mathematics in anticipating rational outcomes in the financial markets. This was done to advance and refine capitalism?s role in enhancing society?s wealth. Trading in complex debt and equity derivatives was a result of these efforts. The Nobel Committee encouraged this until big market failures began to occur. Before the market failures started occupying mindspace, economists appeared to be an arrogant lot who did not give much quarter to social sciences and history as guides to collective behaviour. The currently raging battle between the two prominent intellectuals, Paul Krugman, an economist, and Niall Ferguson, an historian, is also reflective of this inter-disciplinary tension. But the point to note is such debate is confined to western academia. This is not surprising because the entire discourse is shaped by the academic institutions in the US or Europe.
It is also instructive that such debate in the West comes at the end of one big cycle?lasting many decades?in which the market has indeed played its role in the overall advance of capitalism and wealth creation. In fact, the same process has also resulted in the creation of state-driven institutions which created safety nets for workers in general. Europe has refined welfare institutions far ahead of America. Barack Obama is under renewed pressure to create such welfare institutions post the economic crises of 2008.
However, the search for new knowledge?aided by the Swedish Nobel Commitee?on how to avoid market failures should not worry emerging economies like India, China and Latin America. Simply because these societies are still at the beginning of the cycle where the evolution of market institutions are playing a big role in wealth creation. The institutions aiding greater wealth distribution will also follow. It will be a while before India, China or Brazil should need to worry about the nature of market failures that western academics are obsessing about.
In the interplay between the State and market institutions, the former clearly dominates in emerging economies. If anything, countries like India, Russia and China have their own versions of oligarchy where State institutions consciously aid the development of a few big businesses. This also results in sub-optimal outcomes because of the lack of competition inherent in crony capitalism.
Prime Minister Manmohan Singh had sometime ago rightly observed that all societies go through the phase of crony capitalism. The United States also saw this phase in the early-20th century. But the trick lies in evolving and refining market institutions and independent regulation in a manner that a new level playing field is created for thousands of emerging small and medium businesses to be able to maximise wealth.
The current tensions among India?s dozen top business groups over the use of natural resources?whether gas, coal, spectrum, iron ore, etc?merely shows that the State and market institutions are in the process of mutating to their new roles. The battle between the Ambani brothers can also be studied as a model example in this context. The positive outcome of the messy corporate war between the Ambani brothers is the realisation that the government must leave the job of encouraging competition and ensuring a level playing field for all businneses to independent market regulators. The government takes time to give up this power, as was seen in the case of telecom services sector where many players went through years of court battle, eventually settling for a semblance of independent regulation.
The interesting dialectic playing out here is that it is precisely the ills of crony capitalism and concentration of economic power in a few big businesses that is leading to tensions, which are in turn aiding a further refinement of market institutions. There is also currently a debate over the nature of regulation needed to align India?s financial sector with global practices. Here, too, there is a need to ensure that India does not draw all the wrong lessons from the global financial meltdown.
mk.venu@expressindia.com