Market, State or collective action?

Farmers are protesting against laws that deregulate the sale of crops, allowing private buyers freer rein in a marketplace that has long been dominated by government subsidies. Farmers say the reforms to laws that have long protected small landholders' place in the market will put them at risk of losing their businesses and land to big corporations.

However, what is surprisingly missing in this narrative is the culpability of the market in the mess that the agricultural profession is in today, as well as evidence on whether, and how, the state and market have responded to the agrarian crisis that germinated over six decades. The results after decades of agriculture development suggests that farmers continue to be vulnerable to frequent episodes of losses in their economic activity that neither the state nor the markets have been able to mitigate.

Market and State

In his book, Wealth of Nations (published in 1776), Adam Smith explains that in a market economy, guided by the motive of self-interest, individual decisions collectively determine economy's allocation of scarce resources through free markets for the social good. The concept of "self-interest" has been at the core of his economic theory postulated as "invisible hand" of the market.

Nobel Laureate Joseph E Stiglitz says pointing to Adam Smith's "invisible hand" that the reason that the invisible hand often seems invisible is that it is often not there. Whenever there are "externalities"—where the actions of an individual have impacts on others for which they do not pay, or for which they are not compensated—markets will not work well.

Operation of demand-and-supply forces, through perfectly competitive market, results in optimal allocation of resources. That is why it is said that a perfect market leads to social efficiency and maximum social welfare. But, in the real world, perfect competition is not so 'perfect' as it appears at first. That means unless demand and supply reflect, respectively, all the benefits and all the costs of producing and consuming a product, the prices determined in perfect competition may not necessarily be 'perfect' or 'right' ones. If so, perfect competition cannot ensure maximum social welfare or markets fail to achieve social efficiency.

Economists call this 'market failure'. In ordinary sense, market failure means that prices fail to provide the proper signals to economic agents—consumers and producers— so that the market does not operate in the traditional way. This is also precisely reflected in agriculture markets in India, where neither the producing farmers nor the consuming citizenry is satisfied with the prices.

However, government policy interventions, such as taxes, subsidies, wage and price controls, and regulations, may also lead to an inefficient allocation of resources, or government failure. Given the tension between the economic costs caused by market failure and costs caused by "government failure", policymakers attempting to maximize economic value are sometimes faced with a choice between two inefficient outcomes, i.e., inefficient market outcomes with or without government interventions.

Government should play an important role in banking and securities regulation, channel its investment support through direct transfers, to enforce contracts and property rights. The real challenge today is about finding the right balance between the market and government and to explore own institutions beyond the market and the state.

Collective action

The collective action or cooperative approach demonstrated by Elinor Ostrom and others challenges the current economic orthodoxy that there are indeed alternatives to state, privatization and markets in generating wealth and human wellbeing. As is known, between the individual/market/government a range of voluntary, collective associations, producer organizations, cooperatives, and producer companies can evolve efficient and equitable rules to get the most out of common resources. We know that today there is an alternative secure, stable and sustainable model of business owned and controlled by 800 million people worldwide. Agriculture cooperatives with over 400-million-member farmers are responsible for over 50% of agricultural production and marketing in the world. It is no coincidence that the world's most successful and stable economies generally also happen to have the world's most co-operative economies.

Farmer collectives are therefore viewed as an important element in linking smallholders with modern markets (input and output) as they provide many benefits for this interface. Further, primary producers' organizations or collectives are being correctly argued to be the only institutions which can protect small farmers from ill-effects of globalization or make them participate successfully in modern competitive markets.

Producers' organisations not only help farmers buy or sell better due to scale benefits but also lower transaction costs for sellers and buyers, besides providing technical help in production and creating social capital. A striking example is The Gujarat Co-operative Milk Marketing Federation whose Amul brand is a household name transfers 82% of its retail price to farmers in the supply chain. A number of successful cooperatives are running today in India and the need to promote them in the interest of small and marginal farmers is immense.

A unique initiative of Farmer Producer Organizations (FPOs), which are member-based farmers' institutions with the objective of integration of smallholders into agricultural value chain was taken by Government of India, NABARD over the last 10 years. About 5000 FPOs were formed out of which around 3200 FPOs are registered as Producer Companies which require not only technical handholding support but also adequate capital and infrastructure facilities including fair market linkages for sustaining their business operations. Such basic model of "beyond markets and states", is possible in communities with high levels of autonomy and internal trust when people have a reasonable expectation of influence over the things that affect their lives.

This is because unlike market or state it is only collective action and cooperation where efficiency and equity can be combined and the profits arising out of their business are returned to those who trade with the business, thus keeping the wealth generated by local businesses in the local community for the good of the local environment and families.

(The author is MLA and Humboldt Expert in Agriculture, Environment and Cooperation)