From the time we learnt about seat reservations in government colleges, to actually getting into one of these colleges, we have pretty much pondered about why do we have this body of unknown people poking into our interests. We all know the best about our interests and we are rational enough; then why do we need a group to sit in a lavish presidential estate and make these laws?
Interestingly, someone from 18th century also thought the same. My co-fellow Esha tells me, he was indeed the world’s first economist. His name was Adam Smith. Doesn’t it feel great to connect with a wise old man? I know it does. He believed in the fact that markets will take care of themselves and there will be a perfect balance of demand and supply. The most basic block of his argument stands on the belief that humans are rational beings and they operate on self-interest. For instance, we hire maids because we have a busy life and there’s no time to manage home. Similarly, the maids have less money and so they work in our house. There was no need of an external force to setup this system. The market itself found the balance, in short, a perfect market was setup.
When someone has a demand, another person creates the supply to fulfill it. This is how Adam perceived the world to be. But if we can think of a case where demand is always increasing yet the supply is very limited, Adam Smith’s theory will fail because the market will be unable to create a perfect balance between demand and supply. This also brings us to the fact that we humans are not always rational. Let’s take the case of healthcare. There’s a huge need of doctors in village but doctors tend to stay in urban areas as urban places are more comfortable and ensure more income. Demand is still high but no one is willing to fulfill it. This is what economists call, a Market Failure. Market failure is exactly when the government’s role comes into place . It make sure that resources are distributed equally among the society. They can bring doctors to work in a rural area either by giving them incentives or penalizing them for not going. So, for example – if government says every doctor has to spend a particular period of time in villages to get a practice license, they will have to do it. This single law will brings back the balance in the market and hence, justify the existence of a government. That is to ensure that everyone gets an equal opportunity and society functions in favour of a greater good.
Even NGOs exists to address similar market failures. Instances of inequity and cases of injustice, all have their roots in a market failure. This similarity in ideals can be seen as a huge ground for NGOs and Governments to collaborate effectively. Also, collaborative effort of the two will have both insights and power, to create a remarkable change.
Image via peopleforresearch
p.s. Yatti is trying to explain to us the concept of a Market Failure and the eventual need of a Government in this post, her two bits on a session done during the Induction Training. Would you like to add something?
As a student of public policy, this made for an interesting read. Hope you’ll continue to explore the topic further. Adam Smith and his ideas makes for an interesting topic in itself. Although he’s now regarded as the father of modern free-market economics, in his own time he was considered a moral philosopher (and wrote quite a few great books in that field) and had quite a bit to say about government and its role. And the idea of forcing or incentivizing doctors to devote a few years to rural practice in order to get their licenses has actually been mulled over by our own govt. in the past. Also, modern public policy is very interested in the third institutional sector (civil society, after state and market). I look forward to reading more of your thoughts on these issues. 🙂
Thank Shankar. I’ll try to read more about the topic and come up with a follow up to this. 🙂
You have simplified it so well. Easy to read and understand.
Yayy! Thanks Swati 😀