Sunday 25 November 2012

What the Taj Mahal can teach us about economics

John Kay of the Financial Times explains what the Mogul empire can teach us about economics today: the folly of rent-seeking. Shah Jahan, who built the Taj Mahal, may have appropriated up to 40% of GDP to maintain his ostentatious and self-indulgent lifestyle.

Kay argues that we face a similar problem today. Unlike the successful IT sector, industries such as the media, defence, pharmaceuticals and, in particular, finance are engaged in rent-seeking rather than wealth creation. He criticises politicians who protect the rent-seekers by confusing “being friendly to business leaders with being supportive of the success of business”.

He concludes:
Market economies succeed when they advance through disciplined pluralism – the process that gives maximum scope for experiment and innovation, while ensuring that when experiments and innovations fail they are terminated, and that when occasionally they succeed they are imitated. That is the origin of the advances in the IT sector.

The success of market economies is not achieved by policies that encourage people to be greedy and imposing as few restrictions as possible on what the greediest of them do.

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