To be fair to the monopolies that produce power, how could they have guessed that demand would go up during summer? It isn’t like summer is hot every year and people come to demand more power through increased use of fans, coolers, air conditioners, refrigerators, etc.

Below is an excerpt from the poem ‘Samar Shesh Hai’ by Ramdhari Singh Dinkar written few years after India’s independence in 1947.

Atka kahan swaraj? Bol dilli! Tu kya kehti hai?

Tu rani ban gayi vedna janata kyon sahti hai?

Sabke bhagya daba rakhe hain kisne apne kar mein?

Utari thi jo vibha, hui bandini, bata kis ghar mein?

Loosely translated, it reads -

Where is ‘swaraj’ being held up? Speak Dilli! What do you have to say?

While you have become the queen, why do the masses continue to suffer?

Who is controlling the fate of everyone in their hands?

In whose house is the ‘prosperity’ that came down being held hostage?

The poem may have been penned some more than 50 years ago, and Dinkar may have something entirely else in mind when penning it. But to me, the poem is as apt today as it could ever have been. Here Ramdhari Singh Dinkar is asking Delhi, the capital city, the seat of power, where the idea of ‘swaraj‘ or self-governance is lost. Even when Delhi has gone on to become the queen, the common man continues to suffer. He asks why the fate of everyone is being controlled by one person and not be people themselves. For Dinkar, the hope and promise of prosperity and a bright future that was carried in the idea of independence has been hijacked.

So what does this poem have to do with frequent power cuts and load shedding in Delhi? Everything. It is the same control of power in one hand, the same monopolistic attitude, the same disbelief in the common man’s judgement and capability in deciding what is good for him and the same unawareness (or intentional overlooking) of the spontaneous order of markets, that led central planning as India’s preferred path to development after independence.

New Delhi is rightly considered as the power centre of the country. However, it is the wrong kind of power – the power to grant special favours, the power of arbitrarily allocating resources to the few that is taken away from the many, the power of doing things it has no business doing.

While we have freed many sectors from the shackles of centralised planning, many continue to remain in the control of only the government and its special invitees. It is the fear of the unknown when letting go of power that is causing this slow rate of growth, slow pace of reforms, and subsequently, these power-cuts.

The food-grain entitlement under the proposed bill covers up to 75 percent of the rural population and up to 50 percent of the urban population for subsidised food-grains under the Targeted Public Distribution System (TPDS), besides provision for nutritional support to women and children. Who could be against an idea so noble? Without getting ahead of ourselves let’s see what this entitlement translates into.

According to the 2011 census, 68.8 percent of India’s population is rural while 31.2 percent is urban. Thus, according to the 2011 census, the entitlement would extend to 67 percent of India’s total population, about 814 million people. Thus, it is safe to say that the bill assumes that 814 million Indians are poor and cannot afford basic food-grains at current market prices. Is that so?

Periodic surveys conducted by National Sample Survey Organisation (NSSO) show that, over the years, increasing proportions of people have come to respond in negative to the question, “Have you been hungry in some or all months of the year?” In 1983 survey, some 18.9 percent of the rural respondents and 6.7 percent of urban respondents answered that they went hungry in some months of the year. It fell in 1993-94 to 5.5 percent in rural and 1.9 percent in urban areas. By 2004-05, these percentages had fallen to 2.6 and 0.6 percent respectively. If India continues to grow at a healthy rate, we can safely assume that the 2011-12 survey will throw an even smaller percent of respondents answering in the affirmative.

This fact has been covered in detail in 2012 book India’s Tryst with Destiny by Jagdish Bhagwati and Arvind Panagariya. This was also the central theme of a recent article in Economic Times by Swaminathan Aiyar and Arvind Virmani’s 2006 working paper for the Planning Commission titled Poverty And Hunger In India: What Is Needed To Eliminate Them.

This establishes that India may be a poor country, but it is not a predominantly starving country.

The policymakers may have had the best of interest of poor people in heart while conceiving the idea for provision of food security. However, the facts say that this is an act of forced philanthropy at taxpayer’s cost, declaring people hungry even when people themselves respond otherwise. The total cost of the bill could range from USD 17 billion to USD 23 billion per year based on various estimates. This is no small sum. Why not use some of this money to strengthen first order public goods like our inefficient law and order system.

The assignment was to answer the following:

Is there such a thing as the morality of capitalism? Or do you think the values of capitalism are amoral or immoral? What about in times of economic crisis? Do markets still work? Please use examples from your own country or another country in Asia to illustrate your argument.

Congratulations, Ujwal!!  

Here is the full text of his essay.  I hope you enjoy:

Values in the Marketplace

The Morality of Capitalism

Morality is not so much a matter of systems as it is a matter of men. It thus follows that if we are to form a basis for the morality of capitalism, we must first examine the tendencies and workings of man. Proceeding from there, we may make a case for the moral basis of capitalism.

Men are guided by self-interest. They have goals, and they employ means in the pursuit of these goals. This is the basic structure of human action—it is impossible to even conceive an alternative. You may alter a man’s environment but you cannot alter his basic tendencies.

Indeed, it would be absurd to negate the functioning of men, or to dismiss men pursuing their  ‘self-interest’ as being immoral, for the simple reason that men must necessarily function so. The only question worth addressing then would be this—is it prudent for men to pursue their self interest vis-a-vis  the ‘larger interests of society’ (whatever that term may mean)? Or, putting it differently, is self-interest in conflict with, or does it negate the interests of society?

This leads us to that peculiar expression—’the public good’ or the ‘interests of society.’ To address this, we must first understand what society is, and what the ‘interests of society’ are. Also, if we indeed are to admit that term, we must examine the means best suited to attain the ‘interests of society.’

Society is but the name we give to our fellow human beings. It is a collection of individuals interacting in certain ways, holding certain values—with their interactions culminating in a certain pattern, a certain culture. The only constituents of a society are men, and the only interest of society is the interests of the men who constitute it. The fallacy of the ‘societal good’ divorced from the good of men stems from imagining society to be an entity divorced from the men who comprise it—with a will and interest of its own.

The interests of society, may thus be captured by the Utilitarian expression—’The greatest happiness of the greatest number.’

So, how must society proceed to achieve ‘the greatest good of the greatest number?’ This is the central question underlying the debate between alternate forms of social organisation. Socialism envisages a powerful state as the means to secure the prosperity of men, while capitalism puts the individual in the center of society and believes in the power of individuals to secure the happiness and prosperity of all men.

It seems relevant here to examine Capitalism and  its basic propositions.

Capitalism, in its essence, is a system that establishes certain conditions for the interactions among individuals. These conditions stem from the workings of men. The most basic of these conditions is the right to hold, acquire and dispose of property i.e. private ownership of the means of production. The other condition is a limited government and a proper rule of law that does not impinge on the liberties of the people.

I have come to understand capitalism to be different from other economic systems in the sense that it does not explicitly define, or rigidly map out, the interactions between different elements of an economy. It simply states the necessary conditions in which human interactions can flow unimpeded. It thus concerns the conditions conductive to human interaction and not the interactions themselves (as we see in socialism).

This flow of human interactions—when it proceeds unimpeded—creates its own order that is not strained or imposed. Order in capitalism, therefore, is not an ideal to be ceaselessly pursued, but is a byproduct. It stems from freedom and results in order. And therein lies its morality.

Its morality also lies in its prudence. Men, acting freely, weave miracles. A society, a subset of which are the interactions in the marketplace, is a living thing. It cannot, and must not be subject to institutions and systems that prevent its flowering. Dynamism, then, is the essence of the market. That dynamism finds expression in market signals, in accordance with which men act and resources get channeled in their most productive outlets. For a system to be sustainable, it must necessarily be dynamic, it must respond to the needs and aspirations of the people. It must not be left at the mercy of the state to dictate what men may produce, and how they are to produce it.

Weaving Miracles

Enabled by this dynamism, time and time again we see individuals weave miracles.

South Korea, once dismissed as ‘a hopeless case’ back in 1960s, today has emerged as one of the most powerful economies of the world, after following a capitalist pattern of development.

Talking about India, where I come from, the last two decades saw its transformation from being a socialist economy to being a relatively free economy. India largely followed a ‘Socialist’ pattern of growth in the decades that followed its independence in 1947.  I often hear my parents talk about the years that preceded its phase of liberalization, of how one had to wait for 7 years to get a telephone connection, and 15 years to get a car. Despite the noblest of intentions, successive 5 year plans and elaborate mechanisms to secure prosperity among the people failed. There was widespread poverty, misery and starvation. It took nearly 5 decades for India to acknowledge its mistakes and change course.

The results are for all to see. Per-capita income has almost quadrupled compared with 1991. There is an unmistakable rise in the prosperity and standard of living of people.

And yet, a lot remains to be done . India ranks a dismal 111 in the latest Economic Freedom Index, published by the Fraser Institute. A business still has to make its way through endless Red Tape and bureaucracy. Another unfortunate fact is that the Right to Property is not recognized as a Fundamental Right and the state can, in its pursuit of ‘the public good’, deprive men of their property.

Capitalism and Economic Crisis

If we are indeed to examine the morality of capitalism, we must make a case for its sustainability as well. And this leads us to the question of economic crisis. There are two concerns to be addressed here. One, is the free market prone to crisis, with its business cycles and recessions? And two, if it indeed is, what forms an adequate response in times of crisis or recession?

In response to the first question, the answer is yes. The free market is prone to recurrent crisis. But we need to understand the significance and meaning of a crisis. The standard ‘Keynesian’ view holds the market to be an imperfect mechanism, forever in need of intervention and government interference. A recession, in its understanding, signifies a collapse of the market and is an assertion of its imperfection.

The lesser known ‘Austrian’ perspective, holds precisely the opposite view. In their theory of the business cycle, a recession signifies not a collapse or a breakdown, but is a necessary, inherent and self-correcting mechanism of the market. A slump in economic activity is an indication of resources wrongly channeled. The breakdown is a signal to revalue and reallocate resources to better channels.

It is this latter view, I believe, which is rooted in fact and holds merit. In times of crisis, if the market is allowed to be, it would take care of itself. This is a significant departure from what is commonly believed and followed by economists worldwide. It is absurd to believe that an outside agency, like the government, can ‘correct’ the workings of the market. The government has neither the capacity, nor the initiative and certainly not the knowledge that market participants have.

The River Creates the Banks that Hold It

I once heard a wonderful expression—’The river creates the banks that hold it.’ As the river creates its banks, it also defines its boundaries—and it flows within those boundaries. This quite aptly captures the essence of capitalism. Markets continuously evolve, in pace with the needs and aspirations of the people. To borrow an expression from Hayek, there is a ‘spontaneous order’ in play, forever channeling the efforts and creativity of people. This great system of social cooperation has made possible the innumerable amenities that surround us. It is more complex than any human mind can fathom or design, and yet it proceeds with a certain discipline. Here thus lies the morality of capitalism—in its discipline,  its dynamism, its order, and above all—in its freedom.

Image from Hindustan Times “Bhopal market has a ‘currency’ of its own” Ashutosh Shukla May 07, 2013

This is a nice example of private enterprise producing coin, which is often thought to be something that only government can or must do.

This occurrence in Bhopal reminds me of a book I’m eager to read by free banking scholar George Selgin, Good Money: Birmingham Button Makers, the Royal Mint, and the Beginnings of Modern Coinage, 1775-1821.  The book outlines how private initiative in minting small denomination coins played a vital role in facilitating the Industrial Revolution in Britain.

The Independent Institute blurb on the book says the following:

In Good Money, George Selgin tells the fascinating story of the important yet almost unknown episode in the history of money—British manufacturers’ challenge to the Crown’s monopoly on coinage.

In the 1780s, when the Industrial Revolution was gathering momentum, the Royal Mint failed to produce enough small-denomination coinage for factory owners to pay their workers. As the currency shortage threatened to derail industrial progress, manufacturers began to mint custom-made coins, called “tradesman’s tokens.” Rapidly gaining wide acceptance, these tokens served as the nation’s most popular currency for wages and retail sales until 1821, when the Crown outlawed all moneys except its own.

Good Money not only examines the crucial role of private coinage in fueling Great Britain’s Industrial Revolution, but it also challenges beliefs upon which all modern government-currency monopolies rest. It thereby sheds light on contemporary private-sector alternatives to government-issued money, such as digital monies, cash cards, electronic funds transfer, and (outside of the United States) spontaneous “dollarization.”

It turns out people are people are people everywhere and that, not only are the principles of economic theory true everywhere, but economic events show such beautiful parallels over time and space.

Twenty minutes after being hung up on by the police and trying again, a cop arrived. The party who was responsible to the accident (they hit my friends’ stationary car from behind) did not have a licence. Instead of asking any investigatory questions, making sure people were alright, or following any procedure, the officer tried to elicit a bribe from the offending party to let them go.

Next, a contingent of cops responsible for helping injured people to the hospital arrived 45 minutes later, despite the fact that the police station was only ten minutes away. (Thank goodness there was no emergency!) My friends were fine and resisted going to the hospital, so these cops sat around doing nothing.

Finally, two hours after their second call, a cop arrived who explained that they were unable to give a challan to someone without a licence.  Nor was there a form or procedure for dealing with these kinds of accidents. So, he suggested that they work out their dispute between them. The process of waiting had basically been a complete waste.

Libertarians agree that most of what governments do (if not outright harmful or useless) could be done better through voluntary associations in free markets and local communities.

Minarchists (those who think there should be minimal government) believe that governments should organize defense against foreign aggression, domestic police services, courts, a few public goods from physical infrastructure to the keeping of public records, and perhaps some minimal regulations.

Anarchists, on the other hand, believe that the world would be better on net (both morally and materially) if even these functions were discarded or organized voluntarily.

Anarchism may sound shocking, especially in the case of such things as police services.  Isn’t protection of person and possessions of utmost importance?  Doesn’t the very operation of free markets and liberal society rest on the protection of individual rights?  How could this be done without state-organized police?

I’m sympathetic to these questions.  I would prefer a coercively-funded, minimal government that does a reasonably good  job of protecting individual rights over a world where people are so fearful and uncertain about their security that their lives are “solitary, poor, nasty, brutish, and short.”

But is this the choice we actually face?

The extent to which police bully and extort resources from people, especially the poor and weak, is well known in India.  My friends in Guatemala avoid the police like the plague. In the United States, the police have become more and more militarized, arbitrary, and aggressive, due to the Wars on Drugs and “Terror,” not to mention the millions killed by their own communist and Nazi governments in the last century.

If we didn’t have government funded police, people would be able to keep their taxes and demand protection services on the market.  Private security guards are already big business in India.  Resident welfare associations, malls, commercial areas can organize or buy their own security services. Competition in the market would make police more responsive, more competent, and less aggressive to their customers and their customers’ customers.

Some might ask, who will protect the poor?  But who protects the poor today?  If the police provide any useful services, I’m sure they are mostly provided to the wealthy who have political clout.  When I think about my neighborhood Shahpur Jat, for example, which is relatively poor, I wonder how people protect their property and handle disputes.  I’m sure the police are never called and that they probably ever come—except to extort money out of people.

At least if there is a vibrant market in protective services, these services may become more affordable to poorer classes over time than they are today.

So it seems to me that we would be better off without government-organized police.

The central questions that would have to be answered, however, are the following:

1. Does the existence of a general state police today, despite seeming generally useless and harmful, deter more predation than it causes? in the short term? in the long term?
2. Even if government police does decrease predation on net today, is it worth the cost in taxes, overbearing government regulations, and the threat of totalitarian government in the future?

What do you think?

Let’s consider the facts. A terror outfit threatened Mukesh Ambani’s life. In response, the government made a threat perception assessment and found the threat to be credible. After following due process, the government decided to provide “Z category security” to Ambani. Following protests on Twitter and Facebook, Mukesh Ambani agreed to pay for the security cover provided to him amounting to about INR 15 lakh per month.

Should the government be offering “Z category security” privilege to Ambani? If he is offered, should Ambani be made to pay for this service?

Mukesh Ambani is  worth US$ 21.5 billion (about INR 115,000 crores) making him India’s richest person. He lives in a billion dollar house. He owns Indian Premier League’s most glamorous franchise in Mumbai Indians. So why can’t he hire commandos and arrange for his own security. Well, he can’t because Indian laws don’t allow private security guards to carry high-calibre weapons that security forces use.

On the other hand, Reliance Industries Ltd. paid US$5.5 billion to the national exchequer in the form of various taxes and duties, contributing 5.5% to the Government of India’s total indirect tax revenue. This is not to say that this entitles Ambani and Reliance Industries to US$5.5 billion worth of public goods and services. But shouldn’t he be free to arrange for his safety the way he deem fit?

Furthermore, one of the first things we need our government to do, is to keep us safe from any internal or external aggressors against our body and property.

So, if a) government has forbidden Ambani to arrange for his own protection, b) government has taxed him a hell-lot of money, and c) government’s primary duty/promise is to provide protection to its citizens (taxpayers), well, you can figure out for yourself who I think should be paying for Ambani’s protection.

But is it unfair that he receive more security resources than others? One might question: how can the limited resources of the state be diverted for the protection of an individual, while the rising cases of crime clearly demonstrate the inability of the government to provide adequate security to the general public? (Prof. Ajay Shah  has a great discussion on the issue as an attempt to find a public policy solution on his blog here and here).

One issue is whether we all have an equal need for protection and whether we are already equally well provided with security.

Security is unequally available to all of us. Someone living in Lutyen’s Delhi is safer than someone who lives close to the ‘line of control‘ in Jammu and Kashmir. Similarly, someone living in a cantonment area or closer to a police station or living across the road from Manmohan Singh (like my uncle used to) is less likely to be robbed of their belongings than someone who lives in say, Vasant Kunj, an affluent residential colony in south-west Delhi, where personal stories recount that theirs is a theft-prone neighbourhood.

Similarly, threat to life is not equal to everyone. A terrorist organisation that wants to make global headlines will fail to do so if they successfully attempt to kill someone known only to his friends and family (like me). However, any attempt to harm a person like Ambani is sure to make global headlines, create doubts in the mind of other businessmen, businesses will shift out of this country, investments will dry up. This is not to say that one life is more important than another, just that the level of threat to life is different for different people.

Resources are scarce, including resources for security like police personnel, armed forces, border security force, jails, courts, etc. Some people have a greater access to these services than others.  First this is an argument for letting people defend themselves when they can, letting them lawfully obtain means of self-defence.  But especially if this is not allowed, and as long as the government demands huge taxes in the name of providing security (among other things) and does a poor job of it, it is only fair that a small fraction of the tax money paid by Mukesh Ambani goes on to pay for his security in the case of a credible threat issued against his life by a terrorist organisation.

In their new book How China Became Capitalist, which the Wall Street Journal just reviewed, Ronald Coase and Ning Wang argue that the principles guiding Chinese reform have been “pragmatism, experimentation and the Confucian injunction ‘to seek truth from facts.’”  However, it has been “the gradual withdrawal of government from the economy, rather than the strength or omnipresence of the political leadership . . . explains the success.”

It is true that there is still a huge sector of publicly owned enterprises and extensive interventionism in money, banking, and exchange rates, which is paving the road for some significant troubles ahead. Yet it should be understood that China has been developing despite these, not primarily because of them.

According to Marx, capitalists gain “profits” by “expropriating” a part of the value created by the laborers and only pay them the fraction of what they actually produce to ensure enough laborers survive to guarantee a sufficient supply of labor.

Based on this horrific picture, labor unions and Marxist revolutionaries argued that there was and is an inherent conflict of interest between laborers and the owners of capital and that the only way laborers could improve their lot would be to gain the power of the state to compel capitalists to treat them well.

Thankfully, Marx’s predictions failed to materialize anywhere.  History shows that wherever relatively free markets have been tried for a sufficient period of time (and where the property rights of laborers, no matter how meager, were respected and protected), the real incomes of laboring classes have grown and grown and grown.

The reason Marx’s predictions failed was that they were based on a faulty Labor Theory of Value. The truth is, on the contrary  that wages for labor services are determined by the value consumers place on the goods those units of labor can produce.  (More precisely, wages are determined by entrepreneurs’ beliefs and expectations about what consumers will value. But entrepreneurs can’t lastingly pay much above or below this amount because if they do consumer behavior will cause them to suffer losses, or competing capitalists will attract underpaid laborers to their businesses.)

One interesting result of this is that capitalist-entrepreneurs actually forward money to laborers and bare the risk of the undertaking.  If consumers don’t like the product, the capitalists, not the laborers, suffer the loss. Thanks capitalists!

So what we see is that entrepreneurs, capitalists and factor-owners, such as laborers, trade with one another to satisfy each others subjective values, to create things that are valuable for one another.

The reason real wages have risen in relatively capitalist countries is that  investments in capital goods enabled by capitalist’ savings have increased what laborers can produce.  (Imagine digging a ditch with ones hands, vs. using a trowel, vs. using a spade, vs. using big earth-moving tractors.) So labor without capital is not as valuable and cannot have as high wages as it can with capital, and capital cannot produce value without labor.  Laborers are paid for the labor value they contribute. Capitalist-entrepreneurs are paid for delaying their consumption, for baring the risk productive undertakings, and for noticing value-creating arrangements of labor and capital.

(note: It is important to realize that laborers and capitalists can be the same people.  Laborers who have interest-baring accounts or insurance policies become “Capital” in one sphere of life and “Labor” in another.)

So there really is no inherent conflict.  What is crucial is the freedom to exchange to cooperate with one another to produce goods and services that enrich us and that increase our real wages.

The title implies a similar argument to this strawman video:

The question  ”Where Would You Rather Live: Small-Government Somalia or Big-Government Sweden?” implies that the “bigness” of government in Sweden is the reason for its relative wealth and stability, while the small government (or absence of government) in Somalia is the reason for its relative poverty and instability.  It implies further that Somalia would be like Sweden if it just had “a (big) government.” (We should distinguish between the size of government, on the one hand, from what governments do on the other.  But let’s take the argument on its own terms and talk about “big” vs. “small” government.)

The main point I would like to make is that the comparison made in the question is misleading.  A better comparison would be to compare Somalia with its relatively big government neighbors and also Somalia before and after it had a big government.  The same goes for Sweden.

There is evidence that Somalia (away from foreign-funded war zones) is actually developing faster than its neighboring countries (e.g. Ethiopia) with their “vampire governments.” There is also evidence that Somalia is developing faster than it was when it had a government.  This is not to say that Somalia doesn’t have severe problems or that it would be a better place to live than Sweden. But what must be compared is Somalia with and without the kind of government one could expect to have there.

It turns out, the same goes for Sweden.

There is a lingering myth that Sweden is still following the kind of socialist-learning mixed economy it was pursuing in the 1970′s and that it was this move that made them prosperous.  The truth is, however, that Sweden’s wealth and stability is mostly the result of a long period of cultural development and free markets that preceded the welfare state, that its wealth relative to other European countries and its social capital were severely eroded due to its welfare state policies. (See, for example, Reassessed: Affluence Despite the Welfare State.) Starting in the 1990′s, Sweden made significant reforms to avoid financial crises caused by its big government policies. Now it is one of the more capitalist leaning mixed economies in the world, approaching the outer limits of Milton Friedman’s idea of combining relatively free markets with voucher-type public services. Sweden remains wealthy “despite the welfare state,” not “because” of it.

Irrespective of the particular evidence about Somalia and Sweden’s economic and social performance with and without “big” governments, we should not be too quickly fooled by specious rhetoric comparing apples and oranges.  When dealing with empirical arguments we should try to compare like with like as much as possible and be aware not to be taken in by cheap tricks.