On economic freedom, competition and the role of government

Note: I'm cleaning up the files in my laptop. Found some old articles I wrote. I'll put some in this blog, whenever I have the time. The one below was written for a discussion on economic freedom in an event in Bangkok last year. A related, longer version was included in a volume published by Economic Freedom Network Asia.

On Economic Freedom
Arianto A. Patunru

On the first day of 2007, local newspapers in Indonesia brought a bad news, breaking the Happy New Year celebrations across the country. They ran a headline about a Boeing 737 jetliner that never reached its destination. With it, one hundred people were missing. After two weeks of searching with no avail, families started to loose hope. What they were left with was prayer, to at least see the bodies of their loved ones. Especially when later one fisherman found part of the plane’s tail floating in the Makassar Strait close to the western coast of Sulawesi island.

Winds and storms aside, many people started to blame the accident on competition. Some fifteen years ago Indonesia’s domestic flights meant expensive tickets. Most people traveling across islands in the archipelago opted for sea transportation as they could not afford flying with air planes. Today, nearly everybody can get cheap air ticket. It is so cheap, sea vessels’ customers are shifting from people to big-size containers. Even long distance in-land buses are competing with airlines.

In the wake of the missing air plane, grieves led many to reflect, albeit with misunderstanding, on how they had been enjoying cheap tickets. Thanks to liberalization in the Indonesian airline industry, private airlines started to mushroom. Next was a race to providing the least expensive tickets to win a sizable market share. The carriers, they cut on meals, they printed tickets online, and so forth. But apparently some went even further. Realizing the fact that the safety standards enforcement was rather lame, they started to get loose on safety. Why not use old fleets? Why bother with regular maintenance? Why hire the most qualified pilots? In short, cheap air tickets were made possible not only by some cut on decent meals or some boost in fly frequency, but also by less safety. Enter the premature accusation: competition has caused this entire race to the cheapest tickets. With that, safety is sacrificed. And all they get is accident. (They do not even bother to look at the ratio of accidents over the fly frequency. It is likely that the ratio gets smaller, given the far busiest air traffic today then ten years ago). In conclusion, competition is evil. Better get the government to fly us, because private simply can not do.

Accidents are saddening. But so is the misunderstanding. It mixes up competition issue and the issue of law enforcement. In the story above, it puts blame on the liberalization of airline industry instead of on the government alleged failure to enforce safety standards regulation. While the two are closely related, they lead to very different policy implications. Solving the competition issue might lead to giving airline business back to the government. Tackling the law enforcement issue will lead to stricter monitoring of how the business is run. True, if effective, both will possibly result in more expensive air ticket, but the causes are different: in the first case it is because the private airlines are no longer able to cut the costs by risking on safety; while in the second case it is due to the monopoly power of the government. History has taught us, the latter case might increase the price higher than the former. Nonetheless the second case is more attractive. Who denies that curbing competition is easier than monitoring it?

Maximizing profits is a form of economic freedom. Given opportunities to raise revenues or to cut costs (or both), a firm would be stupid not to use them. Ethics aside, this includes an opportunity to play around rules, should there be a room. In the absence of competition, the incentive to find all opportunities to maximize profits is rare. Rather, it is the monopolistic power that is used to do the task. But (non-natural) monopoly denies the freedom of others to engage in business. Worse yet, it denies the freedom of consumers to access more choices and lower prices. Competition therefore has a lot to do with freedom.

However, freedom does not mean anarchy. They are starkly different. The former requires rules of the game, the latter not. This is where people tend to mix things up, as illustrated above. When problem arises, is it a problem of competition i.e. freedom or is it a problem of law enforcement? You can not really put and enforce standards on ethics, but you can put and enforce standards on safety. This is why and where we need the government. That is, to make sure that rules are in order. Alas, many times inability to enforce rules leads the government to do other things, including running the business itself and/or curbing competition. Authority to guard rules also brings another problem: the incentive to over-regulate. Sometime governments establish rules only as a vehicle to abuse their power. Another time, they simply put (good) rules in a wrong place. Requiring seat belt in cars and setting age standard for air carriers might sound similar as far as policy objectives are considered. But they are different: you can see if the car you are about to get in has a seat belt attached or not. But you can not know the condition of the air plane you are about to board in. In the former case, there is no need for the government to step in, but in the second case, there is: to make sure that the plane is safe for you and other passengers. In the first case both you and the car owner/seller know that the car is seat-belt-less. Here the market can work well, as indicated by the resulting price. In the second case, the information is asymmetric. The airline knows exactly how old its plane is; you, most likely, do not. The government helps to ensure that the information reaches you, so the market can work as properly.