Opinion Think

Politics vs Markets

Government action enriches the few at the expense of the many. The recent restrictions on Amazon and Flipkart illustrate that process.

Earlier this month, the government imposed some new rules on foreign e-commerce firms such as Amazon and Flipkart, stating that they could not own inventory, sell their own products directly or via subsidiaries, or have exclusive deals with suppliers of certain products (most often seen with mobile phones).

Thousands of products disappeared from the websites, overnight, as these firms complied with the regulations. Amazon Pantry, for example, had to be shut down, inconveniencing many people who used it to buy their groceries. Even when products returned, such as Amazon Echo speakers, they will be delivered only after 15-30 days, as opposed to the one day delivery earlier.

These new rules were put in place to benefit small traders, since they are a nice vote bank. They will also end up benefiting India’s richest man, Mukesh Ambani. These benefits, as we have seen, come at the expense of millions of consumers who have ended up paying higher prices and waiting longer to receive their products.

Government action invariably ends up enriching the few at the expense of the many, as I showed in my previous piece for Pragati. I also asserted that this is a fundamental feature of the political system. Today, let us analyse this phenomenon and try to understand why this must be the case.

Different Incentives

The fundamental difference between markets and politics is that in a free market, businesses can only succeed by reducing scarcity, while in politics, one can only succeed by increasing scarcity (or in other words, by impoverishing people).

Take the example of Amazon and Flipkart. Their economies of scale resulted in huge cost savings, which were passed on to consumers in the form of discounts and lower prices. They also let us have more time to ourselves than we would if we had to travel to physical stores to make our purchases. By reducing the number of physical stores required, they also freed up precious real estate for other uses.

With these ridiculous regulations, politicians have tried to capture a vote bank of small traders by not allowing Amazon and Flipkart to conduct business freely. In doing so, they impoverished tens of millions of consumers.

This process is not unique to e-commerce or to India. Consider Uber, which succeeded by providing people with more convenient and comfortable transportation at inexpensive prices. Politicians around the world responded by banning or heavily regulating Uber in order to please taxi-driver unions, making commuters worse off in the process.

Another good example would be Donald Trump, who succeeded by imposing tariffs and immigration restrictions in order to please his vote bank of labour unions. This is particularly egregious, because even Karl Marx understood that trade restrictions impoverish the masses.

Public Choice Kicks In

The reason this nonsense persists is because the benefits are concentrated while the costs are dispersed. Those who gain from these policies are concentrated groups such as labour and trade unions, which makes them great vote banks. Meanwhile, the costs are thinly distributed over millions of consumers.

This would not matter if political participation were costless. But it isn’t. Those who stand to gain a lot from passing a particular policy have every incentive to participate in politics. For example, a taxi union wanting to get Uber banned organises petitions, rallies and other demonstrations to make its demands known to politicians.  In doing so, it bears the cost of some foregone income that would have been made ferrying passengers during that time, and of creating posters and other materials for the demonstrations, among other things.

Uber’s customers, however, stand to lose relatively little on an individual basis, in the form of higher fares and reduction in quality. They don’t want to incur the cost of political participation, namely of informing themselves of proposed legislation and organising counter-demonstrations, since this cost is higher than the savings which would result from defeating the legislation.

As a result, all parties tailor their policies to benefit these particular vote banks at the expense of the masses, in order to gain the maximum possible votes. This is why all political parties are almost identical. In economics, this is called Hotelling’s principle of minimum differentiation.

The Solution

The incentives and constraints of politics make sure that impoverishing the masses will be politically profitable. Political participation is costly, so it would make no sense to ask people to sink more resources into it in order to defeat bad policies. This leaves us with one good option.

We must leave as few decisions as possible in the political sphere, and maximise the role of markets.

About the author

Jairaj Devadiga

Jairaj Devadiga is an economist. His work mainly deals with public policy and economic history. His writings have been published by various think tanks such as the Foundation for Economic Education, the Centre for Policy Studies and the Institute of Economic Affairs.