'The logic of competition', The Hindu, 13 June, 2000.

The proposed constitution of a Competition Commission marks, by itself, a significant change in the mindset, if not the resolve, of the economic-policy maker in India. Now, the recommending committee have, dissenters in tow, in their Report done the decent thing as it were and called for more competition, even as some have complained that they have not been shown the way there. Of course, more competition is seldom a bad for much of economic activity. However, when more competition is also identified as the raison d’etre of the reforms now allegedly underway we may be advised to assess its true potential.

            As societies mature attention inevitably shifts from the `standard of living’ to the `quality of life’. While no universally agreed upon metric of measurement exists for either, most reasonable persons are likely to agree on the essential inputs into each of these outcomes. At its simplest, the standard of living is defined in terms of a basket of private goods while the quality of life is defined more broadly to include the socio-economic environment. This statement really reflects the difficulties we face in defining the quality of life, but then it is no use denying it. In any case, it does convey adequately that the sort of goods that define the quality of life are not commodities. A commodity thought Marx, that original prophet of capitalism, is produced for the market. It does require of course that a market exist. On the other hand, the quality of life, describing the conditions in which we live, depends much on goods that are not commodities in the Marxian sense. These are what economists refer to as public goods. Far from being something esoteric, these refer to everything from the paved sidewalk along which you would stroll after dinner to the bicycle lane on which your child would ride to school.

            Public goods have a precise meaning to the economist. As distinct from commodities, these are non-rival in consumption. Quite simply, your consumption of a public good leaves no less of it for me. Priya’s park is Zuhra’s too, so to speak. The downside of this idyll though is that in any proposed scheme for the provision of a public good, I would have no economic incentive to offer to pay. Indeed, were my willingness to pay for the good ever solicited, I would be inclined to understate my valuation of it for fear that the subsequent tariff would be based on the valuation revealed by the cohort of beneficiaries. After all, if the good were ultimately provided my consumption of it would be unaffected by what either you or I have paid, but more importantly by the amount that you consume. Remember this is a public good, defined as non-rival in consumption! To potential private parties now there is insufficient incentive to provide the good. Essentially, assured profitability would be in question, for either the willingness to pay is likely to have been understated or the non-paying citizen cannot be excluded. This precipitates non provision, a story that every Indian must be more than familiar with from our derelict cities or our despoilt countryside. It is a classic case of market failure, in this case the market being unable to provide an optimal volume of public goods. Here the potential for competition has not helped.

            At this stage it may help us to think a little harder than usual as to what markets amount to. Markets may be usefully seen as a site of unrestrained interaction among humans. This is an objective, in the sense of being a purely descriptive, definition. Contrast this with the normative one often encountered that the market is whatever private effort that delivers the desired outcome. Frankly, this is unhelpful because we do not have a clue about the mechanism whereby the outcome will be produced. In any case, some of the instances of the failure of markets, defined in the descriptive sense alone, that I have referred to above show us that in some crucial situations to which we may scarce remain indifferent the market fails to deliver the goods. It is obvious that in the instances when the market does fail we are in need of some non-market mechanism to attain the end that we are interested in. While it has been customary in the discourse of instruments in Economics to speak of state intervention where markets fail this can be seen as a somewhat mechanical response. More importantly, the exhortation to state intervention has often been devoid of an enunciated rationale. This lacking is of the essence, for it in turn leaves us without any criterion by which to evaluate the success or failure of the original intervention. Faced with this it is useful to see that the only true reading of market failure is that it throws up the need for co-ordination in the economy.

            Coordination stands in stark contrast to competition. Indeed, we can see that there is something fundamental in the relationship between the two. This flows from the fact that coordination is required not only for its own sake, as it would be in areas of the economy where it is obviously required, but also to create the conditions that must prevail for competition to reign elsewhere. This can clearly be seen when we recognise that markets, by themselves, cannot ensure competition requiring a competition policy of which `Antitrust’ in the United States is an example. All this must make efficient coordination as a pervasive aspect of economic policy, often even prior to expecting to find competition. While none of this privileges coordination over competition it must alert us to possible excessive praise of the market mechanism. It is sometimes glossed over that competition does not inevitably emerge from free markets and that even where there are no barriers to competition untrammelled markets do not necessarily deliver the entire range of goods that we as social beings may be interested in. Surely the examples of public goods that I have given cannot be brushed aside as either elitist or plebeian. On the contrary, they can be seen as being basic.

            The crucial distinction between competition and coordination within an economy may be drawn in terms of what motivates agents in each case. While under competition agents act exclusively in their own interest co-ordination requires an agency acting in the general interest. Now, human organisation would not be interesting if conflict were not rife and the general interest were not so horrendously difficult to define. But then sorting out human affairs is not only not for the faint-hearted, it is neither for those with a penchant for formulaic resolutions. Further, our common history of despotic clerics and maniacal temporals may have naturally left many wary of efforts to even define the greater common good. However, is it all so bleak then as to leave us weary even before we embark? I think not. The history of mankind shows us that the range of issues on which we need agreement is neither so wide nor so controversial as to make this a staggering task. We have examples of non-market solutions ranging from the inter-state highway system in the United States to the National Health Service of the United Kingdom. The fact is that in India we have not made a serious start on the business of public-goods provision. For a nation so full of idealism in its infancy we have, oddly enough and for fifty years, encouraged the production of private goods albeit in the public sector.

            The crux is that governance – perhaps the single most important input into coordination – is itself a public good. First, it requires co-ordination in order to be brought about. Secondly, good governance is a public good in the purest sense that where it is in play none can be prevented from enjoying its benefits. This is the `non-rival in consumption’ aspect of public goods which I have spoken about. Essentially self-centred micro-agents free-ride the system only to collectively precipitate misrule. This is the principal defining characteristic of the Indian polity today. Now onto the other side of the relationship between governance and coordination. It is not only political conservatism that leads some to confine governance to the preservation of law and order. Alas, it is also plain ignorance that makes it so. The law-and-order perspective fails to recognise the substantial need for coordination in a society, or, to put this differently, it fails to see that much of societal malaise is `coordination failure’. In speaking of the need for coordination in wide areas of the economy I have not for a moment lost sight of the role of competition. Only, in evaluating its potential I am also guided by its limitations. Joan Robinson, who is perhaps likely to have thought about it more than any other economist, had appositely remarked that "when there is competition it will end in monopoly". This, after all, is the logic of it.