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February 16, 2012

A liberal vision for India

India yearns for its liberals to unite behind a vision of great prosperity

In 2011, India made a distinct turn away from economic freedom with the failure of FDI in retail and the Cabinet nod for the so-called Food Security Bill—‘food’ for none, job ‘security’ for babus and a ‘bill’ for the rest of us. This turn towards statism will not be without terrible consequences. In spite of the two decades of progress brought about by a marginal increase in economic freedom, India has lost the plot. The question is why.

At least in part it is because economic freedom is not, and was not even in 1991, defended as a matter of principle. To defend opening up of the retail sector to foreign investors or doing away with import duties on used cars as singular measures is playing in socialist terrain, for those against liberty will point to specific gains from curtailing freedoms while promoters of freedom have only yet unknown gains to offer. There is an urgent need to change the very terrain of public policy debate in India, and we must begin by paying heed to the following passage from Nobel Prize winner, F A Hayek’s book The Constitution of Liberty: “…freedom is almost certain to be destroyed by piecemeal encroachments. For in each particular instance it will be possible to promise concrete and tangible advantages as a result of curtailment of freedom, while the benefits sacrificed will in their nature always be unknown and uncertain. If freedom were not treated as the supreme principal, the fact that the promises which a free society has to offer can always be only chances and not certainties, only opportunities and not definite gifts to particular individuals, would inevitably prove a fatal weakness and lead to its slow erosion”.

And a defence of liberty as a principle ought to offer a vision for India—a vision with answers to three fundamental questions. One, how can India become rich? Two, what about income-inequality? And three, what about the caste-system? We look at each in turn.

One, how can India become rich? Modern economic growth happens through widespread application of science to production processes. And this happens not by government intervention but by entrepreneurship. Simon Kuznets, who won the Nobel Prize in 1971, tells us that “many economically important inventions of the late nineteenth and early twentieth centuries were the results of attempts to apply new scientific discoveries, attempts by people like Edison and Marconi who were no scientists but who understood the scientific advances and were impelled to look for practical applications”. The Soviet Union despite having had a very high number of PhDs per capita at one point did not produce a single innovation in consumer goods! This is because entrepreneurs bloom only in free market economies. Economists James D. Gwartney, Randall G. Holcombe, and Robert A. Lawson in a cross-country study of 99 countries for the period 1980-2000 find that “holding constant geographic factors and changes in human and physical capital, a one-unit increase in a country’s EFW [an index of economic freedom] rating increases the growth of per capita GDP by about 1.24 percentage points.” And 1.24 is not a small number; with the magic of compound interest a two unit increase in EFW could by itself double incomes in 29 years. In short, both theory and history tell us that the only – and yes only – way ordinary Indians can become wealthy is through a market economy.

Two, what about income distribution? The market process is a leveling process both on the production and consumption side. A characteristic feature of a laissez faire economy is the introduction of new products and new production methods. This means capital employed in old production methods continuously become obsolete, and the wealth of owners of that capital depreciates in value. New entrepreneurs rise to riches and old fall, Vilfredo Pareto called this the “circulation of elites”. The elite in capitalism (unlike in Feudalism or Communism) are like the occupants of a hotel, the hotel is always full but never of the same people! That is the story on the production side. As for the consumption side, suffice it to quote the great Joseph Schumpeter: “the capitalist achievement does not typically consist in providing more silk stockings for the queen but in bringing them within the reach of factory girls…” The vast majority of government redistribution plans appear pale in contrast to the capitalist redistributive process. And redistribution through profit- motive rewards success in serving others unlike redistribution through vote-motive which reflects success in stealing from others.

Lastly, what about the caste system? Capitalism nailed feudalism in the Western Europe, and it promises to do far worse to the caste system in India. Kuznets tells us that “Amongst the concomitants of modern economic growth are…an increase in the non-personal forms of economic organisation, and a rise in the relative important of economic achievement in the scale of social values”. Non-personal forms of economic organisation—no city dweller knows the caste of her milk producer—limits the domain of discrimination. And the growing influence of economic achievement flies in the face of by- birth social values. Interesting fairly modest increases in economic freedom seems to have brought above significant improvements for Dalits in India. In a 2011 paper, University of British Columbia scholars Hnatkovska, Lahiri and Paul find that wage gaps between Scheduled Castes (people from the bottom rung of the Hindu caste system) and non- Scheduled Castes have declined since the 1980s. This is no surprise, profit seeking firms link wages to worker productivity, not caste! Progress however is not merely an income- story. A recent survey of 19,087 Dalit families in two districts of Uttar Pradesh found that access to markets had improved Dalit grooming and eating practices, and increased access to jobs traditionally considered to be non-Dalit. In short, a market economy is the antidote to the age old caste system. And unlike the government’s lets-enlighten-the- masses formulas which work well solely on Ministry of Education’s policy documents, markets revolutionise the minds of real people—bottom up.

A liberal vision for India is thus a vision of great prosperity, less inequality and an inequality which is more a reflection of individual choices and abilities rather than birth, and a system whose very logic is antithetical to the caste system. India yearns for its liberals to unite behind such a vision; 2011 tells us that halfhearted measures might just not be enough. The liberal must say to the collectivist, ‘this is my vision for India, what is yours?’


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