Popular fallacies of Public policy.

We often tempt to blame our government for all our economic woes. Popular media accuse government of the day for not creating enough jobs, price rise, exchange rate depreciation, farmer’s suicide, farm crisis and what not?. Let us see whether the government is really responsible for all these and if so, is it because of any omission or commission by the incumbent government?. Let us examine the issue in perspective.

We all agree that we are living in a market economy and not in a government controlled socialistic economy. In any market economy, prices are decided by the market participants through demand and supply dynamics. In other words, no government officer can dictate prices in a market economy. If the demand is high and supply is not matching towards it, naturally the prices will shoot up, which will compel people to consume less. When prices increase, more producers will be entering in to the market and hence after some time, prices will have to moderate.

Government simply can’t directly interfere in this market and ask the producers to reduce their prices. Of course, government can intervene to frame policies that will help to increase the production, increase level of competition, reduce entry barriers, if any, which will help more players to enter in to and produce more. Government can unleash competition by preventing any monopolistic tendencies and enforcing competition.

So, before blaming government for price rise, please see whether it was because of any particular action or inaction by the government that caused prices to increase. If not, wait for a while and let the market itself to correct it.

How many of us blame government for ‘unemployment crises’. Let us go back to our fundamental ideas. In any market economy, government don’t and can’t create any jobs. Jobs are created by firms, factories and entrepreneurs. They recruit and retrench people as per their need and production cycle.  Government can’t ask these people to create ‘more jobs’. At the best, government can give some tax concessions and subsidies for creating more employment but this can only be a short term solution that comes at the cost of tax payer’s money.

Instead, what the government can do is to create policies for promoting industrialization, exports, which includes provision for land at concessional rates, ease of approvals, providing physical and electronic infrastructure and many more. On the other side, government can ensure quality education which will churn out youngsters with necessary skill sets and are readily employable.

Thus, if we want to put the blame on government for not creating enough jobs, we will have to convincingly argue that because of these omissions and commissions, that the government can be blamed for job crisis.  Simple rhetoric of ‘unemployment’ cannot be put across against the government if it is not substantiated.

Similar is the issue of Farm crisis- Farmers are believed to be in a crisis as their products are not remunerative enough and hence the government is blamed for a ‘farm crises’. Opposition parties are taken up cudgel against the government for neglecting agriculture and farm sector.

As said earlier, no single individual can decide the price of any particular product including farm products. Because of improvement in production and storage technologies, we are living an era of abundant production. Prices are suppressed because demand has not been increased proportional to production. Market clearing price cannot be go up unless demands shoots up or supply drops down.

The main demand of protesters was that Minimum support price (MSP) may be declared on all agriculture products. If so, the prices of those items will be increasing and correspondingly, the consumption will come down. It will result in excess stock of the product which no one will be willing to buy.

As per my early principle, government can’t dictate a price and expect other market participants to transact under this price. The government at best can subsidize the farmers and his produce. However, this unsustainable way of ‘protecting farmer’ will be too burdensome for other taxpaying citizens.

It may sound cruel, but the fact is that every individual farmer is an economic agent who will have to shift his production, techniques, and reallocate his resources according to the market price signals. It is the market prices and incentive structure that should guide his behavior and if not, he will remain a miser. He can’t put the onus on the government for not getting remunerative price for his product. If that’s the case, he should abandon his farm and look for some other gainful employment.

 If enough number of people leave farming and look for factory jobs, the remaining few farmers will get a reasonable income from their produce. Government in its side should encourage more people to discontinue farming and facilitate their migration to urban areas where they can be more gainfully employed. Only solution for the ‘farm crisis’ is factories and not MSP.

Let us learn few fundamental characters of a modern market economy and how it differs from a state dictated socialist economy. In any market economy, the role of the government is believed to be limited and it is not supposed to interfere in the market unless there is a market failure. It can influence prices, wages, interest rates, job creation etc only through its tax and fiscal policies which includes subsidies. Primary economic role of a government in a liberal market economy is to collect taxes and spend it wisely for the larger public interest. Any attempt to breach this role by interfering in prices or wages will have a serious negative impact even though it may appear to be attractive and beneficial for some.

 It may be our economic illiteracy or intellectual errors that prompt us to support these kinds of interventionist ideas. However, all these above mentioned popular fallacies are something in common. When somebody/ some group is perceived to be in a crisis, we wish to have quick-fix solution. This is because, these ideas appeals to man’s darker side which is primitive, non creative, dependent, non- productive and destructive side of human nature. These bad ideas are easy to define, articulate and spread faster.  But its end results are also equally disastrous in the long term. Despite, demonstratively failed in every country, this is the reason why still many of us are attracted to the socialist and communist ideas of this nature. It is a ponzi scheme whose initial illusion of success attract many, and seductive at times. However, end result will be always the tyranny of the government and misery for millions.  

Besides economic argument, there is another dark side of the whole issue. A modern liberal democratic government is based on a fundamental assumption that it will grant liberty to the citizens to pursue any legal economic activity and will respect the sanctity of private property. If government interferes too much, not only our economic freedom will be at peril, our political freedom will also be threatened. A Government which can dictate market prices can also dictate our private life. If government can enforce price control, it can enter in to our bed rooms and arrest us as well. After all, our economic freedom and political freedom are intrinsically interlinked.  As proverb goes, the road to hell is paved with good intentions.