The musing shared below is a 1970 piece published by the Forum of Free Enterprise and authored by K Santhanam. In 1948, Santhanam was the Minister of State for Railways and Transport in the Government of India, followed by a stint as the Lieutenant Governor of Vindhya Pradesh. A prolific writer, Santhanam also served as the first editor of the Indian Express from 1932 until 1940, subsequently becoming the joint editor of the Hindustan Times. In 1962, Santhanam was appointed as the chairman of the Committee on Prevention of Corruption. The recommendations of this Committee, also known as the Santhanam Committee, resulted in the establishment of the Central Vigilance Commission in 1964.
You can read the unabridged version with contributions from Dr R C Cooper and Prof. C L Gheevala here Socialism or State Capitalism
It is bad enough that India should be a hundred years behind advanced nations in industrial development. It is a much more serious handicap that intellectuals and politicians should be more out of date in their ideals. This is particularly true of capitalism and socialism, the nature of which has undergone a great change since Karl Marx expounded his theory. Both these concepts arose out of the industrial revolution. In the early stages, the main characteristics of industrialisation were:
1) low wages based upon the ordinary wages of persons engaged in agriculture and cottage industries;
(2) harsh conditions of labour, long hours, unhealthy and unsanitary conditions and no provision for sickness etc.
(3) large surpluses due to the productivity of machinery in comparison with manual labour and cheap labour; and
(4) appropriation of the surpluses by a small number of capitalists owning the new industries.
Karl Marx put forward his doctrine of socialism, assuming that these were inescapable conditions of capitalist production. He argued that in order to prevent the exploitation of labour, ensure reasonable conditions for workers and utilise the surpluses produced by machine production for social welfare, it was necessary to socialise the means of production. He did not mean by socialisation State ownership or management of industry or commerce. In his essay, “Socialism, Utopian and Scientific”, Frederick Engels wrote, “The modern state, no matter what its form, is essentially a capitalist machine, the state of the capitalists, the ideal personification of the total national capital. The more it proceeds to the taking over of productive forces, the more it actually becomes the national capitalist, and the more citizens it exploits. The workers remain wage-earners-proletarians. The capitalist relation is not done away with. It is rather brought to a head.”
When the revolution took place in Russia, industrialisation had not proceeded far in that country, and such industrialisation as existed was controlled by foreign capitalists to a large extent. Therefore Lenin turned to State Capitalism as the only means of industrialising Russia.
Stalin wanted to make dictatorship absolute and totalitarian and, therefore, made State Capitalism the exclusive form of economic development in the USSR, and this has to a large extent, been followed by other communist countries of Eastern Europe.
As a matter of fact, the capitalism of modern times is almost the opposite of that of the 19th century. The capital of big industrial undertakings is not owned by a few individuals and their families but by thousands of shareholders distributed over a wide area. They are managed by highly skilled and trained managers who almost dictate their terms to the Board of Directors. Far from being exploited, the workers in such undertakings are members of labour unions, which are recognised and regulated by law and are able to bargain with the management on equal terms. Not only are high wages provided, but the undertakings are obliged to provide proper conditions of health and sanitation, medical care, bonus, provident fund and other benefits which the 19th-century worker did not even dream of. Finally, a major part of the profits earned by the undertaking is taken away by the State in the form of taxation and utilised for providing social services like education, health, roads etc. In advanced countries, these undertakings have also contributed substantially to a comprehensive social security system available to all citizens.
The company laws under which these organisations function are complicated and seek to ensure that they work largely in the spirit of public trust. In India, the remuneration of the Directors and their perquisites, limitation on investments of surplus profits and proper auditing and publication of accounts are all provided for. It is, therefore, a misnomer to call a public limited company as belonging to the Private Sector. It is private only in the sense that it is not a direct Government undertaking and has got its own Board of Management responsible to the shareholders.
There are, of course, industrial and commercial undertakings managed by cooperative societies and individuals or partnerships. The latter is generally only medium and light industries where the capital requirement is not much.
It should be carefully noted that modern industrial production is essentially capitalistic. It does not matter who owns the capital or manages the undertakings. The characteristics of accumulation of capital, expert management, satisfactory labour relations and elaborate accounting are all common characteristics. It is also generally agreed that competition is a necessary factor to enable these undertakings to function responsibly and in the public interest, and monopolies should be prevented and, where it is not possible to do so, should be strictly regulated.
From the beginning, the Planning Commission in India has made the mistake of confusing State Capitalism with socialism. There may be some scope and even necessity for State Capitalism in India. Railways, Posts and telegraphs, Irrigation, Roads, Forts and other services which constitute the indispensable infrastructure of the modem economy can best be developed as State enterprises, mainly because private capital will not flow into them, especially in undeveloped countries. But it is a great mistake to think that these undertakings managed by the State serve the people in some unique way which cannot be claimed for corporate, cooperative or individual capitalism. As a matter of fact, State Capitalism suffers from three special disadvantages, which makes it less beneficial to the interest of the people than the other forms of capitalism. It tends to become a monopoly as it finds it difficult to compete with the more efficiently and economically managed undertakings of the same kind run by corporate or other forms of capitalism. State Capitalism also suffers from bureaucratic management and complicated official procedure. Thirdly, its management is liable to be interfered with by politicians in power and their party henchmen.
It is also not true that labour gets a better deal in State Capitalism. Wages and conditions of labour benefit in proportion to the economy and efficiency of the undertaking, and as State Capitalism is generally wasteful and inefficient, its capacity to pay the workers is proportionately less. In the case of disputes between the management and labour in a non-State undertaking, the Government can come in as an impartial conciliator and arbitrator. Still, where there is a dispute in a Government undertaking, all the official influence is bound to be on the side of the management and against the labour. In the rather unstable political conditions of India, workers in State undertakings may be able to bully the management through threats of strikes and go-slow methods. Still, no sooner than the Central and State Governments become strong and well-established, then their first task will be to ensure labour discipline through banning or severe restriction of the right to strikes and participation in absenteeism and go-slow methods. It is the only way by which state undertakings can show even moderate results and escape incurring unbearable losses. The record of the Public Sector in India during the last 20 years has not been such as to justify their expansion. The myth has been propagated that the State should control the commanding heights of the economy as the necessary means to socialism in India. State Capitalism tends to expand its activities without limit till it monopolises all economic activities. The more inefficient and unprofitable it is, the greater its hunger for expansion. The Government of India has recently decided to set up a Government undertaking for the manufacture of a small car, for establishing a scooter unit and for taking over the cotton trade, both imports and exports. Pressure has been exercised on the U.P. Government to take over the sugar industry in the State. It is to be noted that none of these projects has been recommended by the Planning Commission or included in the Fourth Plan, nor can it be contended that any of these three is necessary for promoting the welfare of the masses or for the reduction of economic inequalities or for purposes remotely connected with true socialism. The concentration of economic power under the influence of the State has become an obsession.
In communist countries, the evils of inefficiency and unprofitability of State Capitalism are sought to be mitigated through the banning of strikes and forcible disciplining of labour on the one hand and judging management by performance accompanied by stern punishment to those who cannot deliver the goods. Even with all these, not only Yugoslavia but also other communist countries like Romania and Hungary are seeking to find a way out of rigid State Capitalism without reverting to ordinary capitalism. They are experimenting with the idea of autonomous and competitive industrial and financial undertakings. In India, State Capitalism suffers not only from the inefficiency and inability of bureaucratic management but also intransigence and indiscipline of workers. The costly Durgapur Steel plant and its allied industrial complex are paralysed. Owing to the sudden illegal strike in Ashoka Hotel, an official lunch in honour of the visiting Japanese Foreign Minister had to be transferred at the last moment to another hotel. In the case of private undertakings like the Standard Motors of Madras, they have the remedy of closure on account of labour trouble. Big Government undertakings cannot close without incurring intense popular displeasure. In these circumstances, it is sheer madness and irresponsibility for the Government of India to seek to enter new fields which are not of essential importance. It would be strange if those who are shaping the industrial policy of the Government of India were not aware that motor cars, scooters etc., are not considered to be important in communist countries. Only a small number of persons are allowed to possess them for functional purposes. It is indeed strange socialism that the major concern of our government should be to increase the differences between the upper and lower middle classes, which can be the only result of the production of large numbers of small cars and scooters in the Public Sector. While cotton is produced by individual farmers and is finally used by the textile mills, which are in the non-Government sector, is it not altogether foolish that the Government should intervene in the middle stage?
It is natural that the State Government in India also should wish to imitate the Centre in extending its own share of State Capitalism. Successive Finance Commissions have found that the States are not able to run their transport and electricity undertakings without incurring losses. If they are allowed to take up commercial undertakings like the Standard Motors or Sugar factories, the finances of State Governments are bound to deteriorate further, with a consequent increase in bitterness in the relations between the Centre and the States.
Socialism is essentially a doctrine relating to the equitable distribution of national work and income. Its principal objectives are
(i) full employment on living wages,
(ii) progressive development of social services free for all members of the community, and
(iii) a comprehensive system of social security ensuring the development of children and generous protection for the old and the unfortunate victims of sickness, accident or other misfortune.
Developing on these ideas, the Scandinavian and other countries of Western Europe, including the UK, have developed a modem and highly beneficial conception of socialism which deserves to be understood and accepted by Indian politicians and economic thinkers.
It is now conceded that one of the major objectives of socialism is full employment on living wages. This is perhaps the most difficult as well as the most important objective to be aimed at in this country. On the one hand, scientific and mechanised agriculture is likely to displace agricultural labour. On the other, the adoption of the most modern equipment and management, including computerisation in our factories, is likely to render a certain fraction of labour unemployed. Ultimately, when our economy is fully modernised and highly productive, the expanding needs of social services and social security may be expected to absorb a large number of our educated youth. Still, the transitional problems are bound to exist for some decades, if not for a century, and are so difficult and complicated that they require endless patience, farsightedness and human sympathy.
It is in this context that the claims of large-scale industries, small-scale industries and cottage industries have to be equitably adjusted. Such adjustment has necessarily to be flexible and capable of readjustment after a period of 10 or 15 years. It is a matter of surprise that while, on the one hand, the Planning Commission and the Government of India are anxious to promote small-scale industries to provide employment for the technicians coming out of our higher technological institutions and polytechnics, large rice mills and bakeries should be established in various parts of the country. It may be admitted that modem rice mills and bakeries have advantages from the point of view of the consumer. Still, it cannot be claimed that without these, there would be any serious inconvenience.
It is necessary to sort out what products can be economically produced in cottage industries, small-scale industries using power, medium industries and large-scale industries. There should be no rigid schedule for coding any product to any of these classes. Still, taxation, particularly customs duties on raw materials, export duties, import duties and sales taxes, should be so adjusted that where there can be no competition, cottage industries may get a preference of about 20 per cent over small-scale industries and the latter, the same amount over medium and large scale industries.
In order to provide full employment, develop social services and provide social security, it is necessary that all material production by whatever agency should produce a surplus after wages, depreciation and interest on capital are met. Efficient means should be evolved through taxation to appropriate these surpluses for the development of social services and social security. It is a great pity that too much concentration on inefficient and unprofitable State Capitalism has prevented the Government of India from making even the beginning of a social security system, which is particularly essential for the poorer sections of the population in rural and urban areas.
Any economic system in which the socialistic objectives mentioned above are achieved satisfactorily will have automatically reduced the range of inequality between incomes. The people are not generally told that this range is less in many of the modern so-called capitalist countries of Western Europe and even in Japan and the USA than in communist countries or undeveloped countries like India, which profess socialism. The reason is evident. When all persons are employed, and productivity is high, the lowest wages tend to be high. On the other hand, where productivity is low, and production is inefficient, the lowest-level worker is paid low wages. At the same time, the technicians and managing staff have to be paid comparatively high salaries in order to induce them to use their talents to the utmost. While in most advanced countries, the general range between the highest and the lowest income is of the order of 10 to 1, in India, it is 1 to 40. It may be true that in the USA, Japan and other advanced countries, there may be a few individuals who derive very large incomes. Still, under progressive income and wealth tax, a very large part of their income is appropriated by the State.
Socialism is often claimed to aim at a classless society where there is no distinction between the classes and the masses. But when we look at the structure of the so-called communist States, which claim to be based on the teachings of Karl Marx, we find that the classes in those countries are as sharply distinguished from the masses as in the capitalist countries. The leaders and officials of the Communist party, the management personnel of their nationalised undertakings, and the academicians and professors of their universities occupy a higher status than even the upper classes in the non-socialist States. Even among the workers, the skilled, the semi-skilled and the unskilled form distinct sections.
The only difference between the classes in the socialist and the capitalist society is that in the latter, there is a class based on ownership of property and receipt of unearned income. At the same time, in communist countries, they are replaced by party officials for whom the profession of communist ideology performs the same function as possession of the property in capitalist countries.
Thus, the class structure is inherent in any social system, which is based on the division of labour and provision of inducements for the skilled and the unskilled labour and special facilities for highly complicated work such as scientific research, management of big industries and administering the big departments of modern government. The main thing is that these classes should not become rigid. There should be easy mobility from one class to another on the basis of skill and merit, and as I have stated already, the range of inequality should be strictly limited.
In India, almost all politicians and thinkers demand an immediate and visible improvement of the condition of our peasant masses and urban proletariat, but this is no issue between capitalism and socialism, and those who cherish the illusion of eliminating poverty and squalor through State Capitalism miscalled socialism is only postponing the attainment of this legitimate objective. All those who are interested in the uplift of the masses should let the protagonists of all forms of capitalism, including State Capitalism, fight amongst themselves and arrive at whatever compromise they deem fit.
The major issues for the masses in India, whether urban or rural, are employment, food, houses, health and education. Some efforts have been made under the plans to increase food production and promote health and education, but little has been done in the matter of housing. I would like any member of the Planning Commission or of the Government of India to stand up and say where and when the landless agricultural labourers and small peasants and slum dwellers of the cities and towns will be able to have houses which are fit for human living. I have no doubt that so long as these people live in miserable and unsanitary huts, as at present, neither education nor high wages will benefit them. If any of our leaders paused to think of the psychological, emotional and sanitary aspects of the problem of housing, they would have to admit that their indifference is almost criminal.
I think it is possible to have a housing programme by which the village panchayat and municipal corporations will undertake to build houses on a phased programme so that there will be no unsanitary huts and slums in our villages and towns. A similar concerted attack on unemployment is no less essential. It is almost a cynical contempt of our masses which permits the Central and State Ministers to talk airily of socialism when the number of unemployed in rural and urban areas is steadily increasing.
It is foolish to contend that there is no work for the 20 or 30 million unemployed in this country. At the same time, West Germany and Japan, which were almost completely destroyed in the Second WorId War, not only provided full employment for their people but provided work for the unemployed of the neighbouring countries.
State Capitalism cannot now or in the near future provide work for the unemployed. It is only through a wide decentralisation of economic initiative and active encouragement of all agencies of production and use of social services that the problem of unemployment and housing can be adequately tackled. India has still to make a beginning in social security which requires that our production be efficient and produce a surplus.
I stand whole-heartedly for true socialism in India, which I equate with efficient production, full employment, generous social services and comprehensive social security. Every form of production which is consistent with these objectives should be actively encouraged, and every form which, through inherent inefficiency or psychological inadequacy, is likely to obstruct their achievement should be rejected as inconsistent with true socialism.
Previous musing: Limits and Limitations of State Trading (1958)