Shivam Vij* makes the strange, but all too common case that we libertarians pay insufficient attention to unethical business practices. He says this, not exactly in the main post, but in the comments section where Yazad tries to answer him. I think that Shivam’s criticism is misplaced -in a rather fundamental way.

Suppose that there are too many murders taking place in society. If you are going to write about them, what approach are you going to take? Are you going to write hardhitting editorials condemning the murderers and explaining clearly how they are a menace to society? Are you going to write in great depth trying to understand the psychology of murderers? Are you going to write about what policies are leading to, or failing to prevent, the spate of murders?

I think that all three are valid things to write about. But the first is pointless. Not many doubt that it is a bad thing to murder people. The second is promising. If we understand the psychology of murderers, we can probably prevent murders. But I think that the last is the most promising approach. If there is a general breakdown of law and order, murders go unpunished and the streets go unpoliced we are going to have a lot of murders in the country regardless of anything else.

So that is the first answer to Shivam. It is no use only “attacking” unethical businesses. It is a more productive approach to investigate which policies will reward ethical behaviour and punish unethical behaviour.

At this point Shivam will probably ask “So why don’t you investigate those policies?” and we will answer “We are already doing it!” and the confusion will be compounded.

The source of the confusion is Shivam’s fear that businesses will “misuse” economic freedom to engage in unethical practices. I am afraid we don’t take it as a given that the free market gives more opportunities to businesses to be unethical. We explicitly think that it is the other way round.

Yes, we say that privatising banks is a much more effective approach to reducing NPAs than any other law Shivam can think of. In fact, in this particular case, putting in place stringent regulation is worse than useless. Remember that a bad loan can be caused either by outright fraud or by an honest mistake. If you set the vigilance commision on every officer who makes a bad loan, it is equivalent to hanging the sword of Damocles over every honest officer and honest entrepreneur. If on the other hand you don’t hang that sword, you will let them get away with outright defalcation.

The missing element, we say, is the profit motive. Public sector banks run up a lot of NPAs because for various reasons, they aren’t good at trying to make profits. You may disagree and we can argue about that, but you cannot argue that we are ignoring the question of unethical behaviour. Shivam will also find that it is the staunchest supporters of liberalisation who are the loudest at complaining that it is impossible to foreclose loans in case of defaults. We are the most enthusiastic supporters of laws to punish defaulters. But sorry, we will continue to insist that none of those laws can ever substitute for privatisation of banks. Asking us to ritually denounce “unethical businesses” that default on their loans while you insist that we do nothing to solve the structural problems that cause those bad loans is like, as Gaurav put in another context, complaining to an MBBS doctor that the Tantric remedy you tried isn’t working.

*Are you the same guy who took my interview and never published it in the Lucknow TOI?