Free Markets and State as a driver of growth, are on the face of it, oxymoronic. Yet Modi’s victory in Uttar Pradesh presents a synthesis of ‘growth for the poor’ and crony capitalism.
It was Adam Smith who is credited with inking the syntax of capitalism, when he wrote: “Market forces, as if by an invisible hand, will lead to welfare of all”. He was writing in the backdrop of industrial revolution when technology was making a tectonic shift in the wellbeing of European nations. Smith also underlined the importance of division of labour and ‘self-interest’ in bolstering the market forces. He had famously observed: “It is not from the benevolence of the butcher; the brewer or the baker that we expect our dinner, but from their regard to their own interests”. David Ricardo took the free market theory a step further when he argued that free trade would tap the comparative advantage in production of commodities between nations and increase global wealth significantly. Globalization as a concept owes its origin to this free trade theory of Ricardo. Export of goods and services has contributed to one-third of global wealth. The unbelievable prosperity of many emerging market economies like China, South Korea and Thailand owe their origin to this expert led growth strategy.
The Marxian theory of communism on the other hand was based on the concept of exploitation of labour in a capitalistic society, containing seeds of its own destruction. Between 1917-1987, one-third of the world became coverts to socialism. However, disintegration of USSR in 1988 led Francis Fukuyama to observe that with the death of communism, liberal democracy would become the only sustainable ideology of every country. The Washington Consensus (1988) was a direct offshoot of this optimism, which championed the cause of free markets.
Sadly, the US financial crisis of 2007-08 has given a rude jolt to the free market architecture when the subprime crisis unfolded how conflict of interest, lack of proper governmental regulation can lead to proliferation of unscrupulous financial instruments leading to the collapse of the banking system in the USA. This prompted Joseph Stiglitz to observe that the ‘invisible hand can favour a few unscrupulous elements’. In a remarkable reposte to the ‘trickledown theory’ of Robert Solow when he said that a rising tide will lift all boats, Stiglitz observed that “a fast rising tide followed by a storm will dash weak boats to the shore and smash into smithereens”. This provided intellectual ballast to the inescapable imperative of inclusive growth when State has to play a decisive role in promoting a just, equitable and humane society through distributive justice.
In this backdrop, it is profitable to read two interesting books of recent times; one by Michael J. Sandel, a political scientist from the Harvard University titled “What Money Can’t Buy” and Dani Rodrik, an economist of the same University titled “Economics Rules”. Sandel writes that markets do not only allocate goods, they also express and promote certain attitudes towards the goods being exchanged.
Debunking the concept of incentives in economics, he brings how two dollar per book is given to kids to encourage reading in New York. Paying kids to read books might get them to read more but it is likely to make reading a chore rather than a source of intrinsic satisfaction. Similarly, hiring foreign mercenaries to fight our wars might spare the life of citizens but it has the potential to corrupt the meaning citizenship.
Another example Sandel gives is having services of an Indian surrogate mother to carry pregnancy because it is less than one third of US rates. Reliance on incentives fosters values that are corrosive and undermines social objectives. Sandel, therefore, makes a spirited appeal to rethink on the role and reach of market in our social practices and human relationship.
Dani Rodrik, while accepting the gravamen of Sandel’s charge, assert that economics need a richer paradigm of human behaviour rather than a simplistic market model. However, he has been equally vocal to highlight that markets do lead to efficiency allocation of resources. He also thinks that free trade and commerce encourages people to seek virtues such as prudence, honesty and deliberations. Free trade and globalization do not merely lead to efficiency of material wealth but foster more ethical and harmonious society. Rodrik writes that it is ironic that three century later market is now being associated in many eyes with moral corruption. Just as the present votaries of the market overlook the limits of efficiency, the critics neglect some of the ways in such market do contribute to a spirit of cooperation.
It is in this backdrop one reads with pleasure John Ruskin’s “Unto this Last”. John Ruskin was the first to attack John Stuart Mill’s ‘Pleasure Principle’ and the Ricardian theory of making money as the most important volition in human life. Ruskin underlined the importance of trust, affection and community life over material wellbeing. This prompted Gandhiji to set up an ashram at Phoenix in December, 1904 to promote ideas of Ruskin. The inmates of the Ashram got a monthly stipend of 3£ and a plot of land to grow food. Sound business, with high moral values and community life became its leitmotif. Subsequently, Gandhiji set up Tolstoy firm on a 100 acre land donated by a Jewish architect 60kms from Johannesburg for this Asians who believed in non-violence and passive resistance. It was a unique case of globalization where an Indian was helped by a Jew to set up an ashram in South Africa based on the ideas and ideals of a Russian writer, Leo Tolstoy.
When Gandhiji sought Tolstoy’s permission to name the firm after his name, he wrote “this asserts with audacity that God is with us and that God got is more powerful than man”. For Gandhiji, ethics prevail over economics. Jeffrey Sachs writes “Our greatest illusion is that a healthy society can be built on mindless pursuit of wealth”. The predominant refrain of neoliberal India is growth; often overlooking the need for a healthy society and ethics in market economics. The rise of autocratic regimes, and gaining political legitimacy through demagogy, would have tormented Gandhiji, no end.
The author teaches Constitutional law
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(The views expressed are personal.)