A 100 years ago on this day, July 31st, Milton Friedman was born. The one passion that motivated his entire life was the quest for freedom for every individual, freedom from coercion and violence from others. He spent his life arguing and persuading people about the value of being free and why they should be free to choose and that they should choose to be free. He cared about India and wanted India to succeed. I believe that India’s success is ultimately tied to India’s freedom — and the fact that India is not a successful economy supports my claim that India is not really a free country. Here are a few selections from Uncle Milton’s voluminous writings.
Friedman visited India briefly in 1955. Prof Arvind Panagariya of Columbia University in a column he wrote back in 2001, Heed the Words of Wisdom,
“A FIVE per cent per annum rate of increase in real national income seems entirely feasible on the basis of both the experience of other countries and of India’s own recent past. The great untapped resource of technical and scientific knowledge available to India for the taking is the economic equivalent of the untapped continent available to the United States 150 years ago.” If these opening words in a memorandum addressed to the government of India do not impress you, think again: the date on the memorandum is November 5, 1955 and its author is Milton Friedman, the 1976 Nobel Laureate in Economics.
Friedman visited the ministry of finance briefly during 1955 and wrote the memorandum at the invitation of the government of India. Less than 5,000 words long, today the contents of this memorandum have become standard thinking among reform-minded economists in India. But at the time it was written, it must have been nothing less than heresy. It certainly did not see light of the day for 37 years until it was published in a volume edited by Subroto Roy and William E James.
India took the road to central planning. Nehru set India on that road. Shiny objects catch the attention of people with dim eyesight. Somewhat similarly, dim-witted people get attracted by the superficial and are unable to see the underlying reality. Nehru perpetuated a system which is basically characterized by a lack of freedom. As Friedman in 1963 in a brief note titled “Indian Economic Planning,”
. . . centralized economic planning is adverse to economic development. First, and most basic, it is an inefficient way to use the knowledge available to the community as a whole. That knowledge is scattered among millions of individuals each of whom has some special information about local resources and capacities, about the particular competence of particular people, characteristics of his local market, and so on in endless variety. The reason the free market can be so efficient an organizing device is because it enables this scattered information to be effectively coordinated and each individual to contribute his mite. Centralized economic planning substitutes the knowledge and information available at the centre for this scattered knowledge. The people at the centre may individually be exceedingly intelligent and informed much more so than the average participant in the economic process. Yet even so their combined knowledge is meagre compared to that of the millions of people whose activities they are seeking to control and coordinate. It is the height of arrogance – or perhaps more realistically, of ignorance – for central planners to suppose otherwise.
In the second place, growth is process of change; it requires flexibility, adaptability, and the willingness to experiment; above all, is a process of trial and error that requires an effective system for ruthlessly weeding out the errors and for generously backing the successful experiments. But centralized economic planning tends to be cumbersome and rigid. So-called plans are laid out long in advance and it is exceedingly difficult to modify them as circumstances change. Inevitable and necessary bureaucratic procedures mean that the right hand does not know what the left hand is doing, that a long process of files going up the channels of communication and then coming back down is involved in adjusting to changing circumstances. Above all, the unwillingness to admit error, and the political costs of doing so, mean that the unsuccessful experiments are rarely weeded out; unless they are failures of the most extreme kind, they will be subsidized, protected, supported, and labelled successes.
He saw that what Indians needed most was freedom. If only Indians were “not hampered and hindered in every direction by governmental interference and control, India could achieve a rate of growth that would exceed today’s fondest hopes.” Note that that was written 50 years ago — and it still holds true.
. . . the correct explanation for India’s slow growth is in my view not to be found in its religious or social attitudes, or in the quality of its people, but rather in the economic policy that India has adopted; most especially in the extensive use of detailed physical controls by government.
“Planning” dose not by itself have any very specific content. It can refer to a wide range of arrangements: to a largely laissez-faire society, in which individuals plan the use of their own resources and government’s role is limited to preserving law and order, enforcing private contracts, and constructing public works; to the recent French policy of mixing exhortation, prediction, and cooperative guesstimating; to centralized control by a totalitarian government of the details of economic activity. Along still different dimension, Mark Spade . . . defined the difference between a planned and an unplanned business in a way that often seems letter-perfect for India. “In an unplanned business”, he writes, “things just happen, i.e. they crop up. Life is full of unforeseen happenings and circumstances over which you have no control. On the other hand: In a planned business things still happen and crop up and so on, but you know exactly what would have been the state of affairs if they hadn’t”.
In India, planning has come to have a very specific meaning, one that is patterned largely on the Russian model . . .
(We all know what happened to the Russian model — the Soviet Union disappeared. If India does not change course, the Indian union will also disintegrate.)
More about Uncle Milton to come.