In 1776, Adam Smith, professor of moral philosophy at the University of Glasgow, effectively brought the discipline of economics into being. His idea was that selfish mortal humans end up creating a market, which left on its own, regulate itself for the larger betterment of the society through the invisible “Hand of God”. In other words, laws of economics are as fundamental as perhaps the Newton’s laws of motion and therefore can function on its own without the need for government interventions. Smith’s basic assumption was that ordinary mortals are likely to behave rationally, and will not seek to amass wealth disproportionately, once a certain level of prominence was achieved. But the experience point to a totally different fact, that markets are driven mortals who hardly behave rationally. If left on their own, they sometimes end up diluting the overall “social value” — than enhancing it — requiring the need for regulation.
However, this makes the role of regulators becomes very important, as the proper functioning of the market rests on their shoulders. Unless they behave responsibly, the damage caused might be more, compared to the situation when the markets are left to operate on its own. Hence, the regulators must follow the following principles.
Avoid Preemptive Regulation
This means that the regulator must allow the market to function unabated till it is clearly established (based on sound economics) that market leaders have been exploitative — harming the consumer’s overall interests. Preemptive regulation plays a role in preventing harm which is irreversible (for example, someone getting killed by free usage of firearms etc). It also helps in managing situations where it is impossible for the regulator to monitor and prove market abuse. But, with the monitoring capabilities enabled by modern technologies and economical tools, market abuse can be detected at lightening speeds, thereby enabling the regulator to intervene, thereby preventing the abuse. This will enable the businesses to innovate and rediscover new means of monetizing investments, in case the tariffs are under stress due to competitors trying to enter the market. For example, the operators could have monetized their investments through differential data tariffs (prevented by TRAI as a preemptive measure), when the basic tariffs are under huge stress on account of free voice. See my earlier note — “ The Shrinking Telecom Sector”.
Regulate When Necessary
The regulator needs to act decisively, where is proven (through sound economics) that the actions by market players are impacting the larger interest of the consumers. The best example in India is rising spectrum prices. It was clearly evident that the prices emanating out of the auctions are very high and do not reflect business realities, but these were not curated by the regulator — resulting in diminished competition, profits and players exiting — preventing expansion of data networks in the rural — poorer networks — impacting overall consumer’s interests. See my earlier note — “ Is Spectrum Price a True Reflection of its Value?”
Markets left to themselves will find means to self-regulate, provided the environment in which they play are nurtured well through responsible intervention by the regulators. Else the markets will fail to sustain — impacting overall interests of the consumers.
