Ed Dolan's Econ Blog

Best Economics News Story of 2011: Dickens Meets Hayek in a Mumbai Slum

My one-man committee has met and made a decision: The award for best economics news story of the year goes to Jim Yardley of The New York Times for an article titled “In One Slum, Misery, Work, Politics and Hope,” published in the December 29 issue.

It is a story about Dharavi, Mumbai’s most famous slum, a seething hive where perhaps as many as a million people live in 60,000 structures on an area smaller than central park. Not surprisingly, in every alley, there are scenes of appalling poverty:

The streets smell of sewage and sweets. There are not enough toilets. There is not enough water. There is not enough space. Laborers sleep in sheds known as pongal houses, six men, maybe eight, packed into a single, tiny room—multiplied by many tiny rooms. Hygiene is terrible. Diarrhea and malaria are common. Tuberculosis floats in the air, spread by coughing or spitting. Dharavi, like the epic slums of Karachi, Pakistan, or Rio de Janeiro, is often categorized as a problem still unsolved, an emblem of inequity pressing against Mumbai, India’s richest and most glamorous city. A walk through Dharavi is a journey through a dank maze of ever-narrowing passages until the shanties press together so tightly that daylight barely reaches the footpaths below, as if the slum were a great urban rain forest, covered by a canopy of smoke and sheet metal. (For an even more vivid view of Dharavi, don’t miss Adam Furguson’s wonderful pictures that accompany the story.)

But Dharavi also has something else: A GDP estimated at as much as $1 billion. Nationmaster lists 24 countries with GDPs smaller than that.

“Dharavi is Dickens and Horatio Alger and Upton Sinclair,” writes Yardley. It is also Friedrich Hayek. One of Hayek’s most famous concepts was spontaneous order—the idea that people could organize themselves on their own, by interacting with those around them and making use of local knowledge, more effectively than they could be organized by central control. Spontaneous order is a flock of starlings swooping in formation, a flow of traffic on a highway, or a market economy. Dharavi is spontaneous order on steroids.

The secret of Dharavi’s economy? “A skilled labor force, as well as cheap costs for workshops and workers, and informal networks between suppliers, middlemen and workshops.” The networks include labor exchanges, supply chains, sale and leasing of real estate, finance, recycling, you name it. All of it spontaneous, none of it top-down.

Hard as life is in Dharavi, people come there voluntarily. They stream in from villages where life is even harder. Karl Marx, in the Communist Manifesto, famously called it the escape from “the idiocy of rural life.” They come, they raise families, and they do everything they can to enable their families to move on:

Sylva Vanita Baskar was born in Dharavi. She is now 39, already a widow. Her husband lost his vigor and then his life to tuberculosis. She borrowed money to pay for his care, and now she rents her spare room to four laborers for an extra $40 a month. She lives in a room with her four children. Two sons sleep in a makeshift bed. She and her two youngest children sleep on straw mats on the stone floor.

“They do everything together,” she said, explaining how her children endure such tight quarters. “They fight together. They study together.”

The computer sits on a small table beside the bed, protected, purchased for $354 from savings, even though the family has no Internet connection. The oldest son stores his work on a pen drive and prints it somewhere else. Ms. Baskar, a seamstress, spends five months’ worth of her income, almost $400, to send three of her children to private schools. Her daughter wants to be a flight attendant. Her youngest son, a mechanical engineer.

Could life in Dharavi be better? Sure it could. In fact, it is improving. Not long ago, it was dominated by stinking tanneries (not that its open sewers now smell exactly sweet) and violent gangs. Now its crime rate is lower than the rest of Mumbai. People are too busy working to commit crimes.

Perhaps the biggest threat to Dharavi is not the pollution and the tuberculosis, deadly though they are, but the risk of well-intentioned government intervention:

A sweeping plan approved in 2006 would provide free apartments and commercial space to many Dharavi residents while allowing private investors to develop additional space for sale at market rates. Many Dharavi civic and business leaders endorsed the plan, even as critics denounced the proposal as a giveaway to rich developers.

For now, the project remains largely stalled, embroiled in bureaucratic infighting, even as a different, existential debate is under way about the potential risks of redeveloping Dharavi and shredding the informal networks that bind it together.

The bottom line: Do you want to understand markets? Do you want to understand capitalism? Do you want to understand why so many people think Hayek had a better grasp of economics than Keynes? Take a few minutes of your New Year’s Holiday to read the story of Dharavi.

6 Responses to “Best Economics News Story of 2011: Dickens Meets Hayek in a Mumbai Slum”

burkbraunDecember 31st, 2011 at 9:14 am

I frankly don't see what Keynes has to do with this at all. This slum would be devastated by a macro-economic downturn as much or more than the rest of Indian society. Keynes was not some wild-eyed anti-market communist, but functional macroeconomist in a free market setting, especially relevant for this era of government-managed fiat money.

Ed Dolan EdDolanDecember 31st, 2011 at 9:30 am

Point taken; it was my point I failed to make clear. I wanted to say that the reason Hayek is considered the greater economist than Keynes by many of his followers is the breadth of his understanding, not just macroeconomics but the microeconomic and institutional underpinnings of a market economy.

fp3690January 2nd, 2012 at 8:58 am

Your point is still odd. It's not a popularity contest – though if it were Keynes would win by large margins. Hayek probably was better in micro thinking, at the very least because Keynes only looked at the macro picture, but he was consistently wrong on the macro side.

In any case, Hayek in this setting merely formalised a pretty straightforward idea, namely that even chaos will be somewhat structured. But that does not mean that government intervention would make things worse. There is no counterfactual here, and in fact you could argue equally well that there wouldn't be a shanty in the first place were it not for proper wealth redistribution. So I really don't see the point of your argument. Incidentally, Mises institute were saying pretty much the same thing about Somalia a few years back, and we can agree that it didn't work out well

Ed Dolan EdDolanJanuary 2nd, 2012 at 9:53 am

OK, let me try once more to make my point clear. And please just forget I ever mentioned Keynes. I now see that was a red herring; I definitely do not want to get into the whole Hayek vs. Keynes macro debate here, it has nothing to do with the issue at hand.

Let me start by thanking your for the very ineresting link from on Somalia. I agree that parts of it sound pretty sophomoric, especially five years after it was written. One could read the piece as saying that government intervention always makes things worse, and I don't really think that. As you will know if your have been reading, for example, my posts here on energy and the environment, I do think there are places where government intervention in markets can be constructive.

However, I do agree with one point the article makes. That is the idea that government interventions that ignore traditional, informal social structures and linkages can very well fail to make things better. argues that was the case with a top-down imposition of Western-style institutions of democratic government, which (according to them; I don't know that much about Somalian society) ignored clan structures, etc.

In the same spirit, I stick to my point that top-down efforts to "clean up" Dharavi at the cost of tearing apart the informal commercial linkages that now exist would almost certainly only make the people there poorer than they now are. On the other hand, well-conceived policy changes, for example, making it easier for Dharavians to register property or enforce contracts, might very well make life better for them.

So, my real point here was to congratulate Jim Yardley for seeing both sides of Dharavi: The Dickensian poverty of the place, due in part to bad government policy (or absence of good policy), and at the same time, the Hayekian channels through which the locals manage to prosper despite all the notorious dysfunctions of the Indian legal system and bureaucracy. That is not an idea unique to Hayek; I could have mentioned Jane Jacobs' similar arguments.

I do think there is something much more nuanced and subtle to Hayek's idea of spontaneous order than the simple notion that "even chaos will be somewhat structured." The lens of spontaneous order actually helps us see two things that many people do not see at all. The first is that what superficially appears chaotic, including markets, may be much more orderly than they appear, if one knows what to look for. The second is that what appears orderly, e.g., the remarkable choreography of a flock of starlings in flight, is not always orderly because of central direction. It was not long ago that people believed that the birds flew their beautiful patterns at the command of a flock leader. Modern studies, including stop-motion photography, computer modeling, aerodynamic analysis, etc. indicates instead that each bird is spontaneously adjusting to the behavior of the three or four birds nearest it in the flock, and that it is our human brain that produces the illusion of leadership.

Footnote: Although I agree that things haven't worked out so well in the south of Somalia, I think in some ways the past five years' experience in Somaliland come much closer to vindicating the views of They should do an update.

FelixIntDebJanuary 10th, 2012 at 12:05 am

"All of it spontaneous, all of it top-down."

Typo? "top-down"

Thanks for the article.

I don't think Keynes / Hayek was a red herring. It was key to the point. But, horse, water. You can't win 'em all.