Why the government cannot intervene if Jet Airways fails, or if mutual funds do badly

Following the recent episodes of stress in Jet Airways and in the debt mutual funds, there are calls from
some quarters for the government to intervene.
The essence of a market economy is that the various agents in the economy – employees, investors, firms
– take varying degrees of risks anticipating varying returns. A cardinal principle of this choice is that to
earn a higher expected return one has to assume greater risk. For instance, when an employee chooses to
work in the private sector instead of the government, he chooses to take the higher risk of losing his job
in return for the higher compensation that the private sector provides.
Similarly, when an investor chooses to invest his money in a mutual fund instead of a fixed deposit in a
bank, the investor makes this choice to earn a higher return from the investment in the mutual fund when
compared to the fixed deposit. Thus, based on his/her desire for returns, every agent in the economy
assumes the suitable level of risk.
Now, the definition of taking risk is that sometimes the returns may not accrue as expected. The investors
in the debt mutual funds enjoy significantly higher returns than bank deposits in some years as a quid pro
quo for unfortunately assuming losses when the NAVs of the mutual funds go down in other years.
Similarly, for the significantly higher compensation and perks that they enjoyed in the good years, private
sector employees have to regrettably face the problem of being retrenched if the firm goes belly up.
Government interventions in these cases create several problems. First, the intervention creates a situation
of “private profits and socialised losses”.
Second, and even more important, intervening in failed companies creates future moral hazard: If I expect
that the government will intervene to clean up the mess, then I will have minimal concern about creating
the mess.
Third, the essence of a market economy is that those that have failed to utilise their assets productively
must yield the space to others that utilise their assets well. In fact, it is this third process that enhances
the overall productivity in the economy. As productive firms create more jobs and contribute to economic
growth, enhancing the productivity by weeding out failures is a critical phenomenon in a market
economy.
As resources in a developing economy such as ours are scarce, we have to set our priorities right. So,
between providing succour to the poor and the vulnerable and intervening to ameliorate the genuine
difficulties of the better off, choosing the former is an economical and moral imperative.
Economically, enhancing the capabilities of poor and reducing the risks of the vulnerable fosters inclusive
growth. Morally, recall Gandhiji: “I will give you a talisman. Whenever you are in doubt, or when the
self becomes too much with you, apply the following test. Recall the face of the poorest and the weakest
man [woman] whom you may have seen, and ask yourself, if the step you contemplate is going to be of
any use to him [her]. Will he [she] gain anything by it? Will it restore him [her] to a control over his [her]
own life and destiny? Then you will find your doubts and yourself melt away.” The moral imperative is
therefore crystal clear.