In economics, the most significant task is to make working models based on knowledge that we do not possess. The knowledge of ‘the market’ exists within the market and is possessed by the many individuals that form the market. This knowledge can never be concentrated and therefore, much of economic ‘planning’ is dependent on a set of concepts that basically get their steam from abstractions. Even if we held fairly credible data, it would still disregard human action and motivation, which is an absolutely essential parameter in gauging the tides of the market. While Adam Smith’s invisible hand might not exist in absolute terms, neither does the possibility of absolute ‘visible’ control. Our fundamental problem with planning, then, is the presumption that we possess such knowledge or at least, are in a position to gauge the extent of its ramifications.
To quote Hayek from his last book, ‘The Fatal Conceit,’ “the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” To paraphrase further, the naïve mind conceives order as the simple product of deliberate arrangement – and this arrangement, or at least the perception around it, is largely conceptual. The seminal question here is, does order, as we know it truly exist? And if such order doesn’t exist, then we’re in a serious predicament as to how we must proceed in the field of economics.
The most significant case in point in recent times is the global recession in the mid-late 2000s. Rewinding back to 2001, when the US Federal Reserve slashed interest rates in order to boost economic activity, which led to the eventual bursting of the property bubble, we can see, in retrospect, exactly how important it is for us to revisit Hayek. The Hayekian argument here wouldn’t be that the central bank got rates wrong, but that the state should not be in the business of setting interest rates in the first place. This is squarely different from the view of other prominent free marketeers. If the market had set rates, they would be much higher and the question of a kickback wouldn’t surface at all. This is just another manifestation, almost a century later, of Hayek’s prediction of the US market crash in 1929. The central idea is that the seeds of the bust are sown in the boom. The setting of unrealistic rates ends up in an unsustainable boom that leads to the unavoidable bust that follows.
This is of crucial significance, especially in light of the recent #RExit and the debate around interest rates. Whilst discussing interest rates in India, which by all measures could be reduced significantly, we run into a major roadblock. This is because of two major reasons. For one, the Indian economy has a deep-rooted tint (which is why, perhaps, the likes of Hayek are mysteriously absent from our economics classes) and secondly, because the individuals that comprise the market might not necessarily be satisfied with procuring lower interest rates on lending. It is common knowledge that if borrowing rates are to be reduced, lending rates will have to correspond. How then is the system to perform this balancing act of interest rates, deficit, trade and the innumerable sops that are a part of our economic DNA?
This is where the argument for a free market steps in. Of course, it would be thoroughly naïve to expect this change to be instantaneous, but let’s play with the idea for a while. Imagine a market the government doesn’t meddle in, which would act as a communications system with billions of unique pieces of information. This system would impartially influence the use of resources and by extension – prices, which would guide our actions as they rise and fall. These prices, as Hayek points out, are abstract signals, the knowledge of which we do not possess and therefore, we cannot tutor the signals that inform us about circumstances we don’t know about. This, in contrast with the government setting interest rates and prices – which may or may not be in tandem with the swings of the market, thereby sending wrong signals to the players in the market. Post the great depression and the (now) great recession, it would be prudent for us to learn while we can. Besides, it is impossible to guarantee other freedoms to people while they do not enjoy economic freedom – the less the economic freedom in the market, more will be the need to control other areas of people’s lives. This is because, to start with, tastes and preferences would have to be moulded to conform to the direction in which the market is being steered leading to a domino effect affecting all other areas. As a result, it is almost impossible to be a market collectivist whilst adhering to all other principles liberal.
In light of this, let’s explore a theory about why Hayekian policy has been ignored in large parts. The idea that the manufactured boom is unsustainable has a very sinister undercurrent. That is, that the recession that follows is essentially a return of the economy to normalcy. The notion that the recession must be left alone to do its job, essentially liquidating unsustainable ventures and letting ‘the fittest survive’ is too bitter a pill for politicians or the populace to swallow. While it is almost impossible to separate the two, this is more a moral question than an economic one – the question of social justice.
Hayek’s answer is simple, that any system, which is to ‘decide upon’ a general functioning of the market, cannot take into account the merits or the needs of any individual. It has to be absolutely dispassionate. It is true that individuals make up the market, and that is precisely why each one cannot be taken into consideration individually! Prices come about as a result of the action of individuals, but they aren’t and shouldn’t be decided by such individuals. However, such a colourless view wouldn’t only be counterproductive to our commitment as a welfare state, it would be against any standard of what we call social justice. Therefore, we must inch towards providing a minimum standard of living for all individuals beyond which, we must rely upon the signaling system of prices. The great problem with achieving this is that it is possible only in a wealthy society. Not only is India not wealthy, it is also a democracy – and as much as we love that, there’s no escaping democracy’s little sister, tyranny. Consider land acquisition; the new law facilitates the acquisition of land in four years. Compare that to the two and a half years that China took to not only acquire the land, but complete the Beijing-Shanghai railway line.
So how does one go about this goal in a country like India? This author has a few broad ideas. Firstly, the government must get out of all industries that it has no business running and/or has not the means to manage. Profit driven private or PPP models will provide the same employment and better production, in all probability, while being far more efficient than our cobweb ridden public system. The way roads and airports have been built is a good case in point. Besides, it makes no sense whatsoever for the state to be running airlines, hotels and the like when it has failed miserably to provide the basics that are necessary in a civilised society – basic education and health, law and order, sanitation and so on. The Nehruvian hangover of state sponsored productive growth must certainly be questioned at this point in history.
Better communication systems must be set up rapidly – roads, low budget airports, waterways and IT infrastructure – to boost trade and inch towards the setting up of more urban centres. The only way to ensure upper mobility without overburdening our cities and environment is the development of more urban clusters. Agricultural output must be increased in order to provide skills to and move the labour force (landless farmers, for instance) into the production of secondary and tertiary commodities. For this, we need better conservation of water and the apt application of technology. The production of value added commodities is of utmost importance – here, we can learn a thing or two from China and other East Asian countries.
One of the most damning mistakes India made in the post independence years was to look wholly inward. With a large population immersed in poverty, it is but natural that we must concentrate our energy in trying to solve domestic problems, however, that can’t be done at the cost of international trade. India has been an economic prison for a long time and as a result, we’ve missed the train in several spheres. It would be foolish to try and compete with the likes of China; as TN Ninan puts it, trying to make a China out of India is like asking Greece to be like Germany! But with China’s demographic and other problems, it is essential that we manage to secure our space in the world as the next great manufacturing hub. It would be prudent to delve into services and the manufacturing of commodities that are uniquely indigenous in nature or commodities to which the value added is attractive beyond the simple labour-capital paradigm. In a word, innovation. A good example is the textile and garment industry where Bangladesh, for instance, has superseded our output – for our lack of labour reforms, tax reforms and the like.
This brings us to how we inherently look at industry. India has a history of looking towards industry to fuel development, especially in backward areas. However, there’s a crucial flaw in that reasoning. While industry provides employment, its primary role is to be productive – this cannot be reversed. If it is more productive and efficient, employment becomes a natural by-product. The anecdote of the Andhra Pradesh electricity board comes to mind where, upon being asked to create 10,000 odd jobs, the chairperson’s reply was that the role of the electricity board is to generate electricity, not jobs. There is a great lesson to be learned from that. The natural response of the state that more government jobs must be created in order to curb unemployment might not be the best way out, especially when it doesn’t possess the resources or the level of efficiency required. The state must also cease to regulate prices arbitrarily. Look, for instance at sugarcane. One wants farmers to be happy and therefore, gives them a higher price for their harvest; on the other hand, one also wants sugar to be cheap in the market! In this little game, what happens to the industry? This can be seen across sectors. Another example is the power sector – India, for the first time, has a power surplus, but regulated pricing disallows this power from being distributed! Couple this with the artificial rise in price via the hoarding of essential commodities and other skeletons from the License Raj closet, and we’re in a soup.
Our view of the profit motive is of importance too. If a system of prices is to govern economic activity, thereby giving birth to healthy competition, the profit motive is the most important means to be employed. Our Fabian Socialist roots might drive us to view the profit motive with disdain, but it is the only objective incentive that can be relied upon in a market. An anti-profit view then, is indistinguishable from an anti-market view. Indeed, if private players are to be observed, there is little else that one can point out to as an ‘ultimate driving force.’ Of course, this must be in line with the principles of fair practice. A good way of ensuring that is to ensure a low cost of entry, letting smaller players enter the market with greater ease. In this regard, the emphasis on entrepreneurship, especially in the service and IT sectors seems to be a step in the right direction. Small and mid-level players entering the market would, without a doubt, give birth to healthy competition – the invisible hand.
Of course, in order to move towards freer market conditions, we need massive structural reforms, especially in the tax regime, labour laws, investment, the banking sector and infrastructure development. But India’s sheer size makes certain of the fact that it is and will remain one of the largest contributors to world growth, this growth however, must not be jobless and certainly mustn’t be concentrated. Our demographic dividend and heterogeneity is a boon, the challenge is to not let it slip into stagnation. The question is, how do we avoid concentration? We’ve tried to do it artificially; perhaps the time has come to consider freer market conditions. In our land of contradictions, the greatest contradiction is that we have a profound love for freedom and liberty, which for some reason, doesn’t extend to the economy!