This is the ninth installment of Viewfinder, my weekly column for Yahoo! India.
In 1944 a group of seven businessmen, including JRD Tata, GD Birla and Kasturbhai Lalbhai, came together to produce a document titled A Brief Memorandum Outlining a Plan of Economic Development for India. As the name indicates, it outlined an economic vision for soon-to-be-independent India. It envisioned a mixed economy with strong government intervention in markets, a huge public sector, and much protectionism so that Indian companies would be sheltered from foreign competition. Jawaharlal Nehru’s eventual economic policy would be on the lines of what this document laid out, and one of its authors, John Mathai, was even a finance minister in Nehru’s government. Because ‘A Brief Memorandum Outlining a Plan of Economic Development for India’ is a most unfunky name, the document eventually came to be called The Bombay Plan. (Just as Hindus may be offended at their religion being associated, in name only, with the Hindu Rate of Growth, I am not too happy about that document being named after my beloved city. Ah, well.)
In his fine book, India After Gandhi, Ramachandra Guha cites the Bombay Plan as an example of the support Nehru’s Fabian Socialism got from industrialists of the day, and writes, “One wonders what free-market pundits would make of it now.” At a colloquium of classical liberals I attended a few days ago in Bangalore, one attendee wondered why more industrialists in present-day India don’t speak up for economic freedom. The answer to this is simple: big business is as much the enemy of free markets as big government is.
The cornerstone of free markets, competition, is great for consumers, as it delivers better-quality products and services at lower prices. But it is terrible for established businesses, which are constantly under pressure to keep prices low and salaries high, and may be wiped out by more innovative and efficient competitors. There’s nothing they’d like more than high entry barriers in their industry, so that their place is secure. Thus, to expect the established industrialists of the 1940s to support free markets would be naive: economic freedom is actually against the interests of big business. The journalist Seetha Parthasarathy pointed out at the colloquium I attended last week that the Swatantra Party, which spoke up so ardently for free markets in the 1950s and ‘60s, hardly got any funding from businessmen and industrialists of the day. That makes perfect sense: they would have felt threatened by it.
This is why it irritates me no end when critics of free markets point to the evils of big business as a repudiation of our principles. The truth is that a libertarian or classical liberal is as wary of big business as a socialist is. Indeed, now that communism is dead, one of the greatest threats to freedom everywhere is not socialism, but crony capitalism. To look after the interests of the common man, we must beware of the cronies.
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Death, taxes and crony capitalism are inevitable. When I am in a pessimistic mood, generally after a bad meal or a spell of television surfing, I lose hope that we will ever have economic freedom. Free markets, indeed, seem slightly utopian. After all, we don’t live in an economy that is a blank slate. We live in times of big government. Big governments only get bigger, not smaller. (This is true even in the West, when the size of government expanded even under fiscal conservatives like Ronald Reagan and Margaret Thatcher.) It is not in the interest of those who run governments to curtail their power or the money available to them. (Like, duh.) It is a beast that keeps on growing, and feeding on us.
Power and money always go together. The more power government has, the more it can subvert markets, the more big business runs to it, with big money, to safeguard its own interests. Crony capitalism is inevitable. Big government is one ass cheek, big business is another, and together they’re shitting on capitalism.
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What about the recent financial crisis in the US? The notion that it illustrates the inadequacy of free markets is a simplistic one, like most narratives generated by the media. The crisis came about because of a melange of complex factors, and we’ll be debating the respective merits of those for decades. There is no shortage of actors to blame. The low interest rates of the Fed in the early 2000s played a key role. (It amuses me when Alan Greenspan is sometimes described as a libertarian. Whatever his youthful infatuations may have been, the chairman of a central bank can no more be a libertarian than General Dyer was a freedom fighter.) Defenders of free markets will also point to the Community Reinvestment Act, and the role played by Fannie and Freddie, both quasi-government entities. But it is true that there were structural issues with the way markets themselves functioned at the time.
Short-term incentives in the finance industry weren’t aligned with long-term interests. If you worked in Lehman Brothers, and had to choose between chasing massive short-term profits (with the consequent bonuses for yourself) that carried a long-term risk to your company, and a prudence that would put you out of step with your peers, for absolutely no benefit to you and the risk of losing your job, what would you do? C’mon, it’s human nature. As Chuck Prince famously said, “As long as the music is playing, you’ve got to get up and dance.”
How does capitalism deal with this? Simple: when companies screw up, their bottomline gets affected, and sometimes they go bust. The learning percolates through the markets, and the incentives change for future players. The problem here is that when the long-term consequences of their short-term behaviour hit the finance industry, the government stepped in. Lehman Brothers was allowed to go bust, but others were bailed out on the grounds that they were ‘too big to fail’, and that their failure threatened the entire economy. (Was this really so? We’ll never know. We’ll just have to take their word for it.) The result: Moral Hazard. The sort of short-term risk-taking that led to the crisis wasn’t punished, and the incentives haven’t changed. On the contrary, the financial whizkids out there will now be further emboldened to keep taking wild risks, secure in the knowledge that when things go bad, the government will bail them out.
What would you call this? Free markets? I don’t think so.
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Until 1991, capitalism in India was crony capitalism. The license raj ensured that the markets were a tijori and the government held the key. All big industrialists had liaison offices in Delhi whose job was to deliver adequate chai-paani to government officials in exchange for licenses and other favours. Money chased power; power sought money.
The liberalisation of 1991 didn’t really change much. Firstly, it was a limited liberalisation, and most markets in India remain unfree. Secondly, the government still retains enormous power. As this paper (pdf link) points out, crony capitalism continues to thrive in India. R Jagannathan wrote in DNA last year: “In his current avatar as PM, Manmohan Singh, architect of the initial reforms involving delicensing, deregulation and downsizing, has presided over the largest expansion of government spending in living memory. In the current fiscal year (2009-10), government will borrow more than Rs 400,000 crore (probably Rs 500,000 crore, if you consider off-budget items like oil bonds), a figure that’s larger than the entire central expenditure for 2004-05, the first year of the UPA. Large government is invariably accompanied by crony capitalism. Reason: when government spends more, private companies do more business with it.”
And here’s an excerpt from a speech Manmohan gave in 2007: “Are we encouraging crony capitalism? Is this a necessary but transient phase in the development of modern capitalism in our country? Are we doing enough to protect consumers and small businesses from the consequences of crony capitalism? […] Do we have a genuine level playing field for all businesses? What should be done to inject a greater degree of competitiveness in the industrial sector?”
One has to wonder, why on earth was he asking those questions? He’s the prime minister, no?
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So should I be pessimistic? Naysayers of free markets argue that they’re a utopian construct, and that a perfect free market, with a government that limits its role to administering the rule of law and enforcing contracts, does not exist anywhere. Perhaps. But here’s the thing: perfect good health is also a utopian construct, and there is no one in the world who is perfectly healthy. And yet, it is something to aspire to, and as individuals, we’re constantly trying (or should be trying) to get as close to it as possible. (Just don’t ask me what I had for dinner last night.) Similarly, it is my contention that free markets are the surest route to prosperity, and we should keep fighting to make our markets as free as possible. We, the people, the consumers, are the biggest beneficiaries of this. Not the fat-ass businessmen, in bed with the sleazy politicians, who just want to milk us dry. As long as we are aware of this, there is hope—for we do live in a democracy, don’t we?
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Further reading: I’d written a column on this subject a couple of years earlier: ‘Arpita and the Bombay Plan’.
My column last week was on a related subject: Indian Liberals and Colour Pictures
Also, here’s a superb debate on Cato Unbound: ‘When Corporations Hate Markets’.
Previously on Viewfinder
Indian Liberals and Colour Pictures
Internet Hindus and Madrasa Muslims
The Hazards of Writing a Column
Postscript: My thanks to Chandrasekaran Balakrishnan, Mana Shah, Raj Cherubal, Sumeet Kulkarni, Deepak Shenoy, Vikramjit Banerjee, Parth Shah, Seetha, Arun Simha, Sunil Laxman and Devangshu Datta for their part in discussions that helped me refine my views on this subject.