Principle of free markets is the most enduring empirical law in the whole of Economics . This principle is the very essence of modern capitalism. It says that any economic system when left to evolve according to the independent actions of its participants produces the most efficient resource allocation for all concerned. Adam Smith has called this seemingly miraculous mechanism by which the economic systems consisting of selfish participants who have primarily their own interest at heart, produce a generally agreeable resource allocation - the invisible hand. Ofcourse, for this system to function in a socially harmonious way it is necessary that the participants do not engage in activities which are against the spirit of fairness, that they play by the rules which are established before hand. Ensuring fairplay and order is the job of the government. Governments are the super market participants, who should make sure that everybody else is playing by the rules. Their role is that of a watch dog not that of a resource allocator or selfish market pariticipant. Whenever governments forget this role and start acting like any other market participant working for their own selfish ends in the economic system, the results are generally disastrous. An extreme example is that of communism where government was the biggest market participant, who made the decision of resource allocation by themselves rather than let market mechanism decide it.
Union government of India with their reservation policy is going against this basic principle of capitalism. Indian government, blinded in one eye by the failed nehruvian ideology of socialist welfare state and with the other eye firmly on the huge vote banks of backward castes, is not able to envisage the essential roles of government. Governments are not supposed to decide who studies what and where, just as a mere doorkeeper is not supposed to decide who gets to live in the apartment he is watching. Government is a watchman , it does not own social infrastructure it is watching, it merely takes care of it on behalf of society, who is the true owner of its social infrastructure. Government of India is forgetting this essential role of a democratic government and is acting as if they are the true owner of social assets which they can distribute as they please. The current reservation proposal is an expression of this prevalent attitude in the government. Not only this will produce an inefficient resource allocation, for example inevitably it will create inferior engineers and doctors than otherwise would have been produced had there been no reservation policy , this is also an act of intrusion by the government onto the civil liberties of its citizens. A democratic and secular constitution holds that all citizens are equal in the eyes of the law, however reservation policy implicitly assumes inequality between different social groups. It creates different standards of achievements for different social groups in a society implying an overt discrimination and no society can function stably for long where discrimination is official policy.
It is a highly condescending and demeaning thought to suggest that people from a particular social group when given opportunity can not succeed in a meritocratic system. Surely, differences of castes, colour, class etc. exist in every society and in Indian society deeper than most advanced countries. These differences are what an economist would characterise as market distortions, inefficiencies which should be ironed out by the governement. A policy akin to reverse racism is not a solution, it is only going to replace those flaws in the society with different set of problems. The role of a government is that of a facilitator, if a social group like many OBCs in India are disadvantaged because of historical reasons, government needs to make sure that they are presented with opportunties which will help them overcome their disadvantages. Government should provide them with good schools, good teachers enabling them to achieve same standards of excellence which more fortunate groups of society are availing of. An aggressive affirmatory action policy without the mandatory quota system like the one practiced in the United States can be considered as well. The pro-active reservation policy will only dilute the academic standards of the institutions of higher learning which is the last thing a progressive modern society should do especially when it is facing competitive forces from countries like China. Whereas China is modernizing its universities aiming high to compete with intellectual giants like Harvard, Yale and MIT, India instead of creating a modern educational infrastrucure is destroying a few stalwarts it has in the higher education sector. If India chooses to ignore the principle of free markets and government's role in that market, it will do so only at its own peril.