Recently I’ve been seeing a lot of articles about slums (the NYT on Gurgaon, India, and the Guardian on Cairo), and inevitably the phrase “free market” gets thrown around. And as it should – so-called “slums” often have very minimal active governance, and as a result they often have very dynamic economies and upwardly mobile citizens (something even the New York Times and Guardian, two very liberal papers, recognize).
But it’s lazy to equate them with the free market, and unfortunately I see a lot of people doing that. One problem with slums, from a free market point of view, is that only certain investments are secure. People and their houses (well, at least the owner-occupied ones) are the safest, especially in democracies like Brazil and India. Though of course there are stories of people’s homes in slums being demolished or taken by the government without compensation, it’s my understanding that this is becoming rarer as slum dwellers grow in number and political power. Residents are likely to get titles in some Hernando de Soto-inspired regularization scheme, so people invest in their homes. Residential areas harden as sheet metal turns into bricks, houses get proper roofs, and we start to see two- and three-story structures.
Infrastructure, however, is another story. While many newspapers I think generally exaggerate the lack of services (I refuse to believe the Times’ assertion, for example, that Gurgaon only has employer-funded mass transit – there must certainly be share taxi/small bus services, or at least motortaxis), there does appear to be a real lack. The poorer areas often have open sewers, and running water in homes is rare. Many critics take this as evidence that infrastructure – paved roads, mass transit, electricity, waste collection, water – will not be adequately provided for in a free market, which is a reasonable thing to believe if you think slums are the free market incarnate.
But they are not. It may appear that way because the government isn’t helping, but bribes are still being taken and certain regulations are sometimes enforced, especially against high-profile things like infrastructure. Take, for example, the issue of electricity. Normally what slum dwellers do is hook up their homes and businesses to small generators, which is very inefficient, expensive, and polluting. (Oftentimes they also steal from the government, but obviously you can’t blame that on the free market.) A generator is small and doesn’t attract much attention, and it’s difficult to extract bribes from them because they are distributed among the population – in other words, people get away with them. Real power plants, however, even though they are more beneficial to society, are much more likely to come to the government’s attention, and thus are too risky for entrepreneurs to invest in. Given their prominence, the government will ask the operators for a bribe if they’re lucky, but more likely will just shut the power plant down for not complying with whatever draconian regulations are forcing people to opt out of the “legal” world in the first place.
And though consumers would benefit from these illegal power plants (or sewers, or water pipelines, or railroads) just as they benefit from their illegal homes, consumers are often hostile to the businessmen they are served by (think about the wild anti-rail sentiment of turn-of-the-century urbanites, or the anti-ISP sentiment that we have today), so they aren’t likely to come to their aid when the state tries to seize their property. Their customers might in fact be the ones with pitchforks at the gates, demanding regulation or nationalization. Ditto with water pipes and sewers – they’re just not safe investments given the governments they’re working with, so investors don’t make them. And even multifamily structures are tenuous, since, if regularized, they might have to comply with rent controls (which I hear are very popular in India, at least), making the initial investment less attractive.
Furthermore, there’s the issue of corruption, which would not be present in a true free market. The Guardian says of Cairo, “satellite cities […] mushroomed on the back of dirt-cheap land sales by the state,” and the New York Times cites critics as saying that “graft and corruption are widespread” in India. But crony capitalism is not the same thing as capitalism, even though leftists often like to equate the two. The Guardian, for example, blames Cairo’s slums’ huge wealth disparities on “the retreat of central government,” but this is directly contradicted by its earlier assertion that the wealthy benefit from underpriced land sales.
Anyway, I guess my point is that while gawking at slums and saying, “Look! The free market sucks!” might be a fun and easy game, it’s not very helpful. Slums might appear lawless to outside observers, but the hand of government and specter of its return are real concerns for its inhabitants and entrepreneurs, who shape their actions and investments accordingly.