Friday, May 29, 2009

Market Justice

Market Justice by Sauvik Chakraverti 

7 Apr 2006, 0000 hrs IST, 

The gross miscarriage of justice in the Jessica Lal case is symptomatic of the fact that Indian socialists have an extremely warped notion of the role of the state.

To liberals, the only role of the state in a free society is to go after the bad guys. Our socialists have allowed the criminal justice system to go to seed because to them this was never the most important aspect of the state's functions.

Unlike the state, the market is deeply interested in keeping us alive. The biggest firms in any market economy are insurance companies and they want their clients to live long and keep paying their premia.

These big firms can effectively substitute the state's justice system. Insurers today protect us from fire, theft, accidents, natural disasters and the like. To this must be added aggression.

If we pay premia for aggression insurance, we will be much more secure. How would a case like the murder of Jessica be handled then? Under free-market capitalism, Tamarind Court would not be an 'unlicenced' bar: There would be no licences at all.

Thus, the Ramanis would insure their premises, and the insurance company would insist they hire a good agency for private security. These private guards would ensure that a man with a gun is denied entry.

Whereas the police only reacts after a crime is committed, with insurance there would be a great deal of crime prevention.

If an armed assailant still obtained entry, and then murdered someone, these guards would be responsible for apprehending the assailant and handing him over to the insurance company.

The insurance company would first pay the family of the victim to the extent of the full sum assured. It would also pay the owners of Tamarind Court.

Then, it would exercise its rights of subrogation and make monetary demands on both the assailant as well as the private defence agency that failed to keep the premises secure.

These cases would be brought before a private arbitration agency, whose decision would be binding. The assailant would have to pay a lot of money to the insurance company, the victim's family and her employers.

Instead of the state meting out 'punishment' in the name of 'society', this would be 'justice' to the actual 'victims' of the tragedy. 

Thursday, May 28, 2009

The advantage in comparison

The advantage in comparison by Sauvik Chakraverti

Posted: Thu, May 28 2009. 11:15 PM IST

Without comparative advantage, life in the city would be like life in the jungle: the survival of the fittest. But now the free market allows the lesser skilled to thrive 

How do atomistic individuals combine to form Society? And does this result in the “survival of the fittest”? Do weaker, lesser skilled or handicapped people face extinction in free market competition? 

The answer to all these questions lies in David Ricardo’s principle of comparative advantage, propounded in 1817. However, the manner in which Ricardo laid down this principle is flawed. It looks at nations trading, not individuals. Such abstract theorizing in economics has rightly been called the “Ricardian vice”. Yet, Ricardo’s principle is hailed by those who understand it correctly—such as the great classical liberal, Ludwig von Mises—as the law of human association, or the “first law of sociology”. There is much that misses our perception of earthly reality if this law is not firmly ingrained in the intellect. 

Recently, I was asked by a student if Ricardian comparative advantage applied to the modern world. It seemed his economics professor had questioned its continued relevance. As I groped for a quick answer, the doorbell rang and my gardener entered. I replied: “I am a better gardener than my gardener, but he has the job because he possesses a comparative advantage over me.” 

Indeed, this phenomenon of a lesser skilled individual being gainfully associated with one who has far better skills in the same area is common. The woman of the house is almost invariably a better cook than the person she hires. The owner of a car is often a better driver than his chauffeur. The only reason why these individuals with inferior skills hold jobs is because each possesses a comparative advantage. 

In a market catallaxy, each of us must specialize in our own area of comparative advantage. Among all my skills, which include gardening, cooking, driving, singing and writing, I must specialize in what the market will reward the highest. I have chosen to write. I therefore have to hire a second-rate gardener, a third-rate chauffeur and a fourth-rate cook. This is an economical arrangement because of comparative costs—I pay these people less than what it would cost me, in opportunities forgone, to do these chores myself. This is why they possess a comparative advantage over me. 

Note that I myself am not the “best writer”. Catallactic competition is different from “games” where the winner takes all. In catallactic competition, all are winners: The market merely grades them according to consumer choice. The best whisky sells alongside the worst. Life in the jungle is “survival of the fittest”. Life in the city is not. Stevie Wonder, blind from birth, is a superstar only because of free markets. 

Indeed, the law of human association is valid even in non-market situations, when individuals spontaneously specialize. My girlfriend does the cooking while I do the dishes because I am “least bad” at the latter task. She is better than me at both. But when we associate spontaneously, we both gain. I get better meals, while she gains from an extra pair of hands. Both the lesser skilled as well as the greater skilled individuals gain.

The poorer countries of the world have the most to gain by obliterating national boundaries. This means free trade, free immigration and free markets will not benefit the rich and the strong alone. On the contrary, poorer nations have even more to gain by obliterating national boundaries. By trading our poor skills, we will obtain the produce of highly skilled nations. So, by working at a call centre, a low-end skill, we can buy German cars, Finnish mobile phones, American software—all “hi-tech”. This means globalization is a good thing. Free trade will benefit the entire developing world. 

The law of human association tells us that there are eternal harmonies between all our economic relations. The rich, the poor, the unlettered, the scholars and even the blind and the lame can happily coexist in the free market—and all will gain. There are no mutual antagonisms. Rather, all dissensions are the produce of spurious ideologies, from pure xenophobia to protectionism and economic nationalism. These spurious ideologies, when translated into official policies, harm the entire world. 

A vital corollary: The personnel of the State do not associate with the rest of society according to comparative advantage. The State is but a monopoly on force, compulsion and coercion, while Society is formed by voluntary association. As Thomas Paine wrote in the opening lines of Common Sense (1776): “Society is created by our wants, and government by our wickedness; the first is a patron, the last a punisher.” The only purpose of the State is to punish outlaws. By not understanding the first law of sociology, we have also failed to understand the first law of political science—that the State must be limited by law if Society is to flourish. 

We Indians have placed the State at the “commanding heights of the economy”. This is an invitation to the misuse of coercion—the foundation of tyranny. Under an unlimited government, Society invariably collapses. The socialist confuses State with Society because he is blind to the law of human association. 

Finally, it must be realized that a great deal of mischief is being wrought in the minds of our youth by the State’s education system. We Indians are compounding our errors by also placing the State at the commanding heights of education. 

Sauvik Chakraverti is an author and columnist. He blogs at Comment are welcome at