Thursday, 4 September, 2008

All roads lead to hell

I am listening to an audio book on basic economics delivered by Dr X. In the lecture on subsidies, he first argues against price control, then for broadly social taxes to generate targeted prices. I’ve read this sort of thing in every introductory economics text and heard it repeated again and again on TV debates. I hold it as an axiom that when too many people agree on something, only three things are possible: 
(a) What they agree on is so obvious that their saying it is redundant, e.g., the sun rises in the east 
(b) They are actually saying different things without realising it, e.g., all men are equal (but I am more equal than you)  
(c) Thinking has stopped and rote has taken over.

I strongly suspect that the third has happened in this case. Targeted subsidies assume perfect identification of beneficiaries. It also assumes the targeting will be wholly fair and seen as fair. 

Now, educational reservations for scheduled castes & tribes are a form of targeted subsidy. If we think of marks as a currency, scheduled caste students have to have less of it to get reserved seats. Thousands of years of discrimination should make it extremely easy to identify the beneficiaries too. And since the benefits are, for all practical purposes, available only in state-funded educational institutions, the price is, in effect, paid by the broadest range of people. 

Yet SCST reservation is one of the ugliest issues today, and has been so for as long as I can remember. 

One reason for that is beneficiaries cannot be branded anywhere as easily as economists think. There are too many poor Brahmins out there who believe reservations should be income-based and not caste-based, and any number of other backward castes too, who are sore for being left out. 

Second, education is directly linked to jobs. Being deprived of seats due to reservation is as bad as being deprived of jobs, and so on. In other words, subsidising a certain purchase of a certain group instantly and invariably affects all other purchases of all other groups.  

If proponents of ceiling prices of farm products are brainless because they don’t think through the hundred and one unwanted penalties of their short-sighted policy, one can’t see how those who call for food coupons are vastly better. 

And if a government is insanely overambitious in wanting to control every production and price so is one that thinks it can inspect every purchase. What stops me, a person with a Brahmin surname from paying a bribe and obtaining a SCST certificate? The temptation is huge.

Besides, if price control leads to unforeseen harms, why can’t it lead to unforeseen gains as well? For instance, paying less for food than I should (don’t see how though) allows me to buy more economics books than I otherwise could... which lets the bookseller keep a maid... which means the poor woman to send more money to her village... which lets her brother, the farmer, buy more fertiliser... I mean, why can’t a web of flawed markets cancel out each other’s shortcomings and create a unflawed economy?

Finally, can someone please suggest a book that defends price control in a way an economic innocent of above-average intelligence can understand? I don’t care if it was written by Marx himself. 

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