Atanu Dey On India's Development

Happy 100th Birthday, Uncle Milton

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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.

  • http://thehologram.blogspot.com Sailesh

    Atanu, I agree with you that planning was a very bad decision taken by India. But do you really think Nehru should take the entire blame for that? The idea of planning developed in the first half of the twentieth century among many of the thinkers in India. Even many economists (though not all) seemed to suggest that socialism was better than free markets. I think even if Nehru had been a staunch supporter of free markets, he would not have been able to implement it in that environment. More likely, he would have been sidelined much like Patel was. I would not be so harsh as to put the blame for planning entirely on Nehru. The thinking of the entire country was geared towards planning.

  • Anonymous

    I like the statement
    “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”
    Whether Nehru alone is to be blamed or he was only the victim of circumstances, is not the central issue. Great leaders do not get bogged down by circumstances, they change it. Unfortunately Nehru was not.
    I also tend to think that Nehru did not even understand the great history of India (although he has written the discovery of India which his sycophants rate high). India was a country with great pool of skills, enterprise and a great trading nation, because the people were free and they developed millions of local solutions around local resources (I do not think this needs any evidence, and it is not statement coming out of mere patriotism). In the name of central planning, all the local solutions were killed. For example at the time of Independence we were the biggest textile producer in the world with thousands of local designs, local production and leading to unimaginable variety- imagine what it could have done, if we had retained that position. Nehru did not even bother about it. My guess is that he was indignant of the great production and trading skills of Indians.
    A great post, although it makes one feel sad that how generations of Indians are made to live in utter poverty – a poverty which is totally man/woman made.

  • http://www.deeshaa.org Atanu Dey

    Sailesh,

    Let me take a stab in the dark and assert that you don’t know the name of my grandfather. I can claim with certainty that I don’t know who your grandfather was. Neither of the two gentlemen are known or remembered by people. They were ordinary people who lived out their lives in obscurity. They have no special claim to any extraordinary achievements — just like the vast majority. Their names don’t grace thousands of institutions, roads, ports, airports, prizes, etc. They did not command vast armies, did not direct the ship of state.

    Nehru, may I remind you, is hailed as India’s architect, its guiding light. Do you not see that he has to be held to account? If he, like my grandfather, can be let off the hook for the disaster that India has become, shouldn’t his name also be erased from all that it festoons now?

    You have to choose — either he was a visionary or he was blind. He cannot simultaneously be a great leader and also be the one who made the asinine choices that others warned him about.

    Is he entirely to blame? Yes. YES. YES!! Or do you think it was some unknown person to blame? Think for a while and tell me who was at the helm of affairs? The person who ultimately takes the decisions has to be held responsible.

    Even the feeblest attempts to deflect blame from Nehru is utterly and completely silly.

  • Nobody

    If we have to assign a share of the blame to one other person, that would be Shri MK Gandhi. I still cannot believe he supported the power-hungry Nehru for PM – who did not understand his (g)Ram rajya model for India’s redevelopment, something which Milton seems to have understood. Today many small towns in US are quietly implementing ideas from our gramrajya model, focusing on hyper-local, small government, self-organized, inclusive, eco-friendly. We could have done all that and more for the past 65 years, if not for Gandhi’s biggest blunder of supporting Nehru.

  • Nobody

    Vipin Veetil will soon get his PhD in economics, as he is making all the right noises: http://pragati.nationalinterest.in/2012/07/a-lesson-from-500-bc-india/

    “Traders – many of whom came from the vaishya caste – grew wealthy and their economic position came in direct conflict with their position in the Hindu Caste system. … Also Hindu ideas like “ritual pollution” were impractical for an economy where mercantile activities would bring people from different castes in contact with each other. Buddhism resolved this conflict. … The spread of trade, commerce and Buddhism went hand in hand. This process came to an end with the collapse of the Mauryan Empire, breakdown of central government and reassertion of Hinduism with its caste system. … Nehru declared profit “a dirty word” and the Hindu idea of ritual purity was reborn. … India kept its social order largely intact except perhaps in Kerala and West Bengal :) where land was redistributed. … What India needs is an ideological shift – akin to the adoption of Buddhism. … Buddhism meant more trade, more taxes, a more potent army and expansion of the empire. Also Buddhism allowed for the weakening of the more traditional Hindu power groups which could threaten the ruler’s grip.”

  • Kaffir

    The entire philosophy of Buddhism is predicated on renunciation and monk-hood. I fail to see how adopting Buddhism could have led to (or can lead to) “more trade, more taxes, a more potent army and expansion of the empire.” If anything, the ransacking of Nalanda by Khilji and the Buddhists unable to defend it, should be an eye-opener.

    While Buddhism has much to admire in it, it is incompatible with trade and defense. I mean, look at Dalai Lama and how he is a refugee in India, forced to live far away from his home.

  • Nobody

    Kaffir, true. But that wont get you PhDs, Pulitzers and Nobels. You have to know what white masters like to hear from us brown sepoys, and cater to that. I am a regular reader of NationalInterest.in – I just don’t understand how they allowed this sepoy to publish there. Too bad they don’t allow comments. I wonder if there has been some regime change at that site.

    This is how West cultivates the next-gen of “intellectuals” who will go on to represent India everywhere, and pontificate on “development”, “equality”, “peace” etc… For career advancement, the first-stage rocket fuel is Hindu bashing (caste, feminism, etc). We can see this process in-progress here.

  • Dr Subroto Roy