Learning lessons from Tunisia's market failure

It all started in a Tunisia's small town named Sidi. A suicide by self-immolation of a college-educated street vendor Bouzid took place, blaming the Tunisian government of the existence of wide inequality and of failing domestic market. In this episode, the local police had, in fact, confiscated Bouzid's wares of selling goods in the street because he did not possess a permit to sell.
The young man was forced to do all this because the common man lacked earning opportunities. The event's details spread through online social networks like facebook and twitter. And the information led to acceleration of demonstrations and ensuing events were shared by the citizens through home-made digital videos. Scenes of each confrontation with the police further solidified people's will to bring change.
The demonstrations escalated on the afternoon of January 13. And the country's top military official, General Rachid Ammar, refused to shoot protesters. It is believed that Tunisian army is far less pervasive than internal security forces. As a result, the government of President Zine el-Abidine stood packed. Never has the divide between rulers and ruled seemed so yawning in Tunisia, and perhaps never it has been so dangerous.
In this background, an attempt is being made to assess the lessons from this episode, particularly from government's role in the economy and causes of market failure in Tunisia.
In the Marxian economics, high levels of inequality are considered as 'market failure'. In fact, colloquial uses of the term, 'market failure' reflects the notion of a market failure to provide desired attribute different form efficiency for instance. So, both equity and efficiency issues almost always arise in a failing market. These are serious questions always raised against the government's role in adjusting for externalities.
It is evident form the Tunisia's news analysis that market failure took place due to the existence of inequality prevailing throughout the economy. There stood wide difference in income and wealth between different groups and it lead to a wide gap in living standards between affluent households and those experiencing poverty. And the Tunisian society came to the conclusion that too much inequality is not only undesirable but also unacceptable.
A market economy helps to safeguard political rights against encroachment by the state. Private ownership and decision-making circumscribe the power of the government - or, more accurately, of those who run the government - and hence its ability to infringe on the domain of rights. Where the government fails to maintain balance in the market, chaos appears and the resultant situation makes it difficult for the government to satisfy its voters and ultimately they loose the right to govern. And exactly the same happened in Tunisia.
High levels of inequality and lack of earning opportunities portray externalities and the same are the main causes of market failure. In the absence of collective action, the external costs generated by production or consumption activities are likely to be excessive and unless the same are not reduced, welfare gains cannot be obtained and the situation increases the gulf between rulers and ruled. To avoid such market failure, it is necessary that inequalities in wealth and income be reduced by the government through intervention, possibly taxing the higher income groups and by improving the redistributive system.
Perfect markets not only minimise the need for coercion as a means of organising society; they also reduce the need for compassion, patriotism, brotherly love, and cultural solidarity as motivating forces behind social improvement. Societies, seeking to achieve a high standard of living, have three major options in organising individual citizens toward that end: coercion (by democratic majority rule or authoritarian dictate), self-interest incentives, and what we might loosely call the "emotional" forces listed above.
Every society relies on some combination of the three, but in the matter of emphasis, there are vast differences. Maoist China is unique in placing its chips heavily on cultural solidarity and an encompassing egalitarianism. It is far too early to tell whether this approach will succeed, and what its costs will be. Far less than China, but far more than the West, Japan relies on cultural solidarity as a principle of social organisation. In any event, cultural solidarity as a central organising theme is hardly relevant for Western nations. And, however, vital they may be to a civilised society, compassion, brotherly love, and patriotism are in too short supply to serve as substitutes. Harnessing the "base" motive of material self-interest to promote the common good is perhaps the most important social invention mankind has yet achieved.
A second advantage of the markets as an organising principle for a social activity is that it reduces the need for hard-to-get information. Because we are paying out large sums to improve teacher - pupil ratios, enrich curricula, and build facilities, we want to know the relation between these factors on the one hand and educational results on the other - that is, to determine a production function for education. Consequently, we think it a major problem that educational research has failed to come up with any evidence that convincingly tells us what will make Johnny read better. There are a number of reasons for this failure, but chief among them is our inability to define and measure either the inputs or results of education satisfactorily.
Why don't we also worry about our inability to find a production function for the output of the recreation industry? One reason is that its inputs and outputs are as hard to measure as those in education. What, for example, constitutes a satisfactory "recreational experience"? But the difficulty in answering is beside the point; in fact, we do not even ask the question, except perhaps in making decisions about public parks. The reason lies in the fact that most recreation is provided by the private market. Because individuals can choose freely, the prices that millions of them are willing to pay reflect the values they put upon various forms of recreation. Moreover, as far as the efficient provision of recreation for society is a whole is concerned, even individual sellers of recreational opportunities do not, in any formal sense, need to know their own production functions. Those who provide what the public is willing to pay for at costs that permit a reasonable profit survive; the others do not. To the extent that individual sellers do not know the precise shapes of demand and cost curves, the Darwinian selection process may waste some resources in the form of investments in failed ventures. But as compared to alternative forms of social organisation, the market process is an efficient information processor through feedback mechanisms that do not depend on explicit knowledge of the unknowable.
A third advantage of the market as a means of social organisation is its "devil take the hindmost" approach to questions of individual equity. At first blush this is an outrageous statement, worthy of the coldest heart among last century's Benthamites. And, obviously, I have stated the point in a way designed more to catch the eye than to be precise.
The political system enforces the "does no direct harm" rule by very loose arrangements, in which the effective vote of a particular group on a particular issue is weighed according to the potential harm that a decision might inflict on it. Farmers have much greater weight on a parliament than on the, education and labour departments where the voice of educators is assigned far greater importance than on another department. As a consequence, concentrated large harms to a small group are assigned more weight in the benefit-cost calculus of politics than are small harms to large groups.
The final virtue of market-like arrangements that I wish to stress is their potential ability to direct innovation into socially desirable directions. While the formal economic theory of the market emphasises its static-efficiency characteristics - its ability to get the most out of existing resources, and technology - what is far more important is its apparent capacity to stimulate and take advantage of advancing technology. Living standards in most of the countries are, by orders of magnitude, superior to those of the early seventeenth century. Had the triumph of the market meant only a more efficient use of the technologies and resources then available, the gains in living standards would have been minuscule by comparison. What made the difference was the stimulation and harnessing of new technologies and resources.
What the Tunisian government failed to understand is that the market needs a place, and the market needs to be kept in its place. It must be given enough scope to accomplish the many things it does well. It limits the power of the bureaucracy and helps to protect individual's freedoms against transgression by the state. So long as a reasonable degree of competition is ensured, it responds reliably to the signals transmitted by consumers and producers. It permits decentralised management and encourages experiment and innovation.
Most important, the prizes in the marketplace provide the incentives for work effort and productive contribution. In their absence, society would thrash about for alternative incentives - some unreliable, like altruism; some perilous, like collective loyalty; some intolerable, like coercion or oppression. Conceivably, the nation might instead stop caring about achievement itself and hence about incentives for effort; in that event, the living standards of the lowly would fall along with those of the mighty.
(The writer is an advocate and is currently working as an associate with Azim-ud-Din Law Associates)