Friday, October 26, 2007

The need for governance

Many of the fights that I had picked with my arm-chair economist friends who support the extreme form of free market economics was due to their utter disrespect to the role of governance in facilitating market solutions. Some of these folks seem to confuse governance with government and without blinking an eye would oppose the view that markets need to be overseen by regulatory bodies. I guess their peeves are more with the government than with governance per se, but what I fail to comprehend is the fact that they somehow think "governance" would be endogenous to market solutions while history has proved time and again that it is not. The entire scenario has played out so according to scheme in the recent sub-prime mortgage crisis.


Banks and mortgage lenders competed with each other in figuring out exotic loan instruments that enabled the poorest to own homes – the American dream being fulfilled. The extremists free-market guys assumed that the market would somehow police itself (the free hand remember) and those firms that went overboard would be punished appropriately. A Krugman points out so eloquently in his column, the powers-be decided that the government should stay away from this, and as a result millions of consumers will end up losing their houses. These millions are the ones who belong to the low-income category, and thus proving once again that without proper oversight – read as lack of governance, consumer surplus would be reduced. However, lessons will not be learnt and such scenarios will be more eloquently played out in developing countries like India where an even bigger real estate bubble is seething to just go "plop" one day. The government fails to oversee housing loans, not due to its free-market inclinations, but due to its inefficiency. Even it did, there would be ineffectiveness in such oversight.


The case against government's meddling role in economic growth has been made eloquently. However, considerable evidence exists "for" the role of governance in certain contexts. Its is high-time we all figure out the difference between the two.

1 comment:

Joshua said...
This comment has been removed by a blog administrator.