He had passed up a video shoot with a UNDP team to meet me in his office located in a quaint and charming suburb of old Bengaluru. My ulterior motive for meeting him was to sign him up as a contributor for a book I am putting together on India’s seemingly unsolvable problems around education and employment, and looking at alternate approaches. And what a fascinating three-hour conversation it turned out to be! My single biggest takeaway from the conversation is the essence of this article.
A free market is not the right mechanism to solve many of these problems
Over centuries a free market has proved to be an efficient mechanism for solving a wide range of problems. A lot of the innovation in technology and industry, and the associated improvement in the quality of life, are attributable to the entrepreneurial spirit that the free market mechanisms unleashed. Adam Smith’s invisible hand has been far more effective than most government sponsored interventions when it came to innovation and development.
However, unbridled free market mechanisms driven by purely commercial motives have often created its own set of problems.
While the quality of life of those who managed to become a part of the circle of development improved significantly, it worsened the quality of life of those who were excluded. Free market mechanisms are excellent at solving problems where the solutions are linear and where the incentives are neatly aligned. However, where the problem is complex, where the motivation for solving the problem needs to come from within, and where the path to profitability is uncertain or non-existent, the free market mechanism fails totally.
Let’s take a real problem: “How do we improve the quality of life of the sex workers of Bangalore”? Does this problem have a straightforward solution? The market size is $300 million. Given the TAM, would an entrepreneur find it an attractive problem to address? Will a VC fund it? Will it scale and turn profitable in a pre-determined time frame? The answers to all these questions are a clear “no”. Does this imply that solving this problem wouldn’t create an impact? Of course it would create a huge impact.
So, how does one go about solving a problem like this? Is this unsolvable? No, it is not unsolvable. But solving this isn’t easy either, because if it were then why would their lives be miserable in the first place? Are these sex workers not willing to pay for a solution that would enhance the quality of their lives significantly? Of course they would pay. Then why didn’t an entrepreneur step in and address this? The answer is straightforward: The solutions are complex, the outcomes uncertain, a belief that this problem needs to be solved not easy to come by, and the path to profitability totally uncertain.
So, let us build on this. An ability to solve a problem like this needs the following:
- A deep understanding of sociology – why a problem like this manifests in the first place and the underlying social causes.
- Problem solving skills and rigor – the solution is not straightforward; root cause analysis is needed; and, no solution will stick unless it is self-sustaining.
- Understanding of marketing and finance – benefits need to be communicated to a sceptical audience.
- An ability to deal with a wide range of stakeholders – government, sex workers, philanthropists, and healthcare providers.
- Tremendous patience – things won’t move fast; doubts have to be overcome; very good chance that it won’t produce the desired results after a lot of hard work.
It is evident that the talents needed for effectively solving problems on the social side need to be of a higher calibre because the nature of problems calls for a rigorous corporate style problem solving along with a deep understanding of sociology and politics.
This combination is rare. In my quest for understanding these problems better and getting them into mainstream conversations I realised that people (at least at the leadership level) that are engaging with these problems through alternate mechanisms are more deeply committed and more competent than most of the talent engaged in solving the more traditional market driven problems of the corporate world. This was good news!
The point is that several problems that are intellectually not out of reach remain unaddressed because the free market mechanism, that ubiquitous invisible hand that steps in every time, fails for some of these problems.
We need alternatives to a free market mechanism for solving these problems. The beauty about the free market mechanism though, as Adam Smith described, is that it takes care of itself. It is an aggregation of invisible forces that get activated on their own whenever there is an opportunity and the incentives are aligned.
It needs minimal regulation or oversight since the risk is being taken by the actors who take responsibility for the consequences of their actions. Therefore it is very efficient. Efficiency is automatic when people do what they are supposed to do without being convinced, cajoled, coerced or reminded. Any alternative to a free market is prone to creating distortions and inefficiencies.
Many of the problems that India is grappling with in education and employment are the kind that cannot be easily addressed through free market mechanisms. But they can be solved in a sustainable way if some intelligence is applied by using technology and creating alternate mechanisms that come close to free market mechanisms in terms of efficiency.
The capital that needs to be deployed for solving these problems ranges from pure profit seeking venture funding on the one extreme and pure philanthropy driven funding on the other extreme. There are several intermediate funding methods.
In one of my subsequent pieces, I will touch upon the different funding mechanisms and implementation challenges in greater detail.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)