The following text was originally delivered as a speech by Abid Hussain at the 24th A. D. Shroff Memorial Lecture held in October 1989, originally published by the Forum of Free Enterprise. The author was an Indian economist, civil servant, and member of the Planning Commission, Government of India.
It is a great honour to be speaking at the Silver Jubilee celebrations of this august institution. I offer you my deepfelt thanks for inviting me. And I offer you my sincere congratulations and those of the world business community represented in the International Chamber of Commerce, on your first, immensely successful, 25 years. May you go from strength to strength during the course of your next quarter century!
The Forum was, of course, founded by a very great man, the late A. D. Shroff. And the high standards he set have been admirably maintained by the eminent persons who have followed him as President- the late Murarji Vaidya, J. H. Doshi, and your present distinguished leader, N. A. Palkhivala, who enjoys the profound respect not only of his fellow countrymen but of informed people and decision-makers throughout the whole world. His annual lectures on the Union Budget must rank as one of the most remarkable phenomena of the modern age and I’m sure I do not need to remind you how fortunate the Forum is to have such a celebrated statesman in its Presidential chair.
I have been greatly impressed by the work this Forum accomplishes in this huge country. May I suggest that one of your objectives for your next 25 years should be to share your ideas and methods – your recipe for success, as it were – with as many other countries as possible. So very many of them desperately need their own Forums of Free Enterprise. Could not India take the lead in encouraging their establishment elsewhere? The ICC would be more than willing to help with such an initiative. Your shining example would be a major asset in inducing others to pursue the same path towards a better future for a larger part of mankind.
It is with some hesitation that I rise to address you today – you the descendants of those great entrepreneurs which this sub-continent produced. They were far-sighted individuals who both believed in and practised free enterprise. They ventured all over the world, men of no formal education or technical knowhow, but honest and hard-working and with a firm and confident faith in the free economy system. Is it not presumptuous of me to lecture the sons and grandsons of such masters of entrepreneurship on the virtues of free enterprise? Or is it perhaps salutary to remind ourselves of those virtues in an age which so takes freedom for granted that it is being whittled away under our noses, diluting the blood of entrepreneurship in our veins without us fully realising it?
Any individual who did business at the beginning of this century would be shocked by today’s world if he had not gradually got used to it over the passage of time – as many of us have. He would be shocked not so much by the oneness of the world and the closeness of different countries forged by the revolution in communications and transport- advances of which humanity is justifiably proud. Rather he would be shocked by the degree to which business is restricted, hampered and fenced in by government regulations and controls. In this sense, distances are far greater than before. You may be able technically to finalise a deal over the telephone or by telex in a few short minutes or hours – and may even be able to rush supplies to wherever they are needed with what must effectively be considered no delay at all. Bu·t and it is a very important ‘but’ – these technical gains in speed are frequently more than offset by the tediously protracted processes of completing official formalities and seeking bureaucratic permissions and approvals. In this respect, we live in many different worlds which relate with each other only over and around considerable man-made obstacles. As has been the case throughout history, the unifying forces of commerce are frustrated by the divisive forces of politics.
Barriers to trade and investment between countries, though regrettable by the absolute standards of the one-world ideologue and frequently harmful to the cause of maximising global economic efficiency, are not alone and of themselves a major catastrophe. What does the real damage is that government controls and restrictions extend deep and wide into our national economies, thwarting and distorting competition and the free enterprise system on a massive scale.
The fundamental raison d’etre of the free enterprise system is that it harnesses for progress the energy and drive of individuals and their yearning for self-betterment. It achieves this through a competitive process which encourages people to work hard and efficiently in producing what consumers wish to buy at minimum cost. Remove competition, and private enterprise stands defenceless. Profit ceases to have either economic significance or moral justification. If we allow controls to proliferate which strangulate both competition and individual initiative, why do we need private enterprise at all?
In my own mind, I have no doubt whatsoever that the free market economy is the key to all freedoms. In fact, the market and freedom are really synonymous terms. We should never forget that the only thing governments can control is people. One yard of textile does not care what its price is. But people care: the people who manufacture the textile, the wholesalers who sell to the retailers, and the retailers who sell to the consumers. And that is all controls can ever mean: ‘people’ control. It is never prices or goods and services but only people who are controlled, subsidised or supported by government. It is this that so many citizens fail to see or choose to ignore.
The expression “control” frequently conjures up an image of government action to help people. But when we give it its correct descriptive title of “people control”, quite another image comes to mind. For obviously, when government controls people it necessarily deprives them of some freedom. Economic controls are automatically destructive of the market economy in which people voluntarily buy and sell on mutually acceptable terms. For controls involve compelling people to act in ways they would not necessarily choose voluntarily.
In many developing countries where there is a conscious striving for economic progress, almost every policy of government has come to be justified as necessary for development and the success of the PLAN. Yet there is scarcely any yardstick by which such claims can be measured and evaluated. This would be a difficult enough exercise even if we had access to the sort of sophisticated statistics and tools of analysis available in the developed countries. Given the notorious unreliability of total absence of data in the developing countries, it is downright impossible. So the policies and programmes campaigned for by vocal sections of our population can all be justified as promoting development without fear that their actual impact might be subject to critical measurement.
I am not at all against the idea of government publishing its view on future developments in a country in the form of an overall development plan for the general guidance of its own agencies and the private sector.. But that is all it should be. Unfortunately, as far as the private sector is concerned, our experience both now and in the past is just the contrary. I once engaged in a discussion with a planner in a high official position who Clearly believed that, without his forecasts and guidance, his country’s economy would be “flying blind”. To him, as to all planners, the world of private enterprise was one in which everybody works at cross-purpose and takes decisions solely in his “private” interest rather than in the wider “public” interest – whatever that may be.
Planning always involves compulsion even when, as it usually is, dressed up in a variety of guises to misguide its victims. Government planners will, of course, try to persuade people that The Plan has been drawn up for their own good and that the only persons who will be subject to coercion are those whose activities are “not” in the public ”interest”. They will claim, in their new-fangled phraseology, that their plans are not “imperative” but merely “indicative”. They will make a great public parade of democracy, freedom and co-operation by “consulting all groups in society” — “business”, “industry”, “workers”, and even “consumers” — to seek their help in drawing up The Plan and their acceptance of its specific goals or targets.
But, of course, if the planners really succeeded in accommodating the wishes of everyone, if The Plan allowed everyone to arrange their economic activities in the manner they intended to do anyway, then it would be quite pointless and useless exercise, a complete waste of time and effort. The Plan is only meaningful if it compels individuals to produce and consume different items — or different quantities of those items — than they would have done voluntarily given the freedom to choose in unfettered markets. If The Plan is to be meaningful, it must in the nature of things resort to compulsion.
Two excuses are invariably offered for the inevitable coercion. One is that the free market produces the “wrong” goods and only government planning and direction can assure the production of the “right” ones — with the bureaucracy, of course, possessing a monopoly of mystical powers to determine what is right and what is wrong. The second excuse is that the free market does not produce enough goods and that government planning is needed to speed up the production process. In actual practice, of course, government planning does not so much speed it up as impede the progress.
I want to dwell a little on this strangely powerful notion that government direction and coercion can in some magical way increase production above the level achievable by individual citizens applying their own enterprise and taking their own decisions in a regime of economic freedom. It seems to me self-evident that when people are free, welfare tends to be maximised — or, at least, optimised. This is because in a system of free markets and private enterprise everybody’s reward tends to equal the value of what he produces. What he gets for his production (assuming he is allowed to keep it) is what it is worth in the market — the value placed on it by voluntary, uncoerced buyers. If he wants to double his income next year, he is free to try — and may succeed if he is able to double his production over the year, or if the market worth of his production rises. If he is content with the income he has – or if he feels he can only increase it by excessive effort or risk, then he is under pressure to raise his output. In a free market economy everyone is at liberty to maximise his own satisfaction, whether this consists of more leisure or more goods.
There is among planners a profound mystical belief in the power of words. They declare, for example, that they are not content with an annual growth rate of. a .mere 2.8% and stipulate that henceforth it shall be 5%. And having thus stipulated, they assume that that in itself has propelled the economy half-way to their new target. I am not being frivolous. Such must be their assumption for, otherwise, it would be impossible to explain the deep earnestness with which they argue among themselves whether the growth rate ought to be 4 or 5 or 6%. The only thing they always agree upon is that it ought to be higher than whatever it actually is.
But why do they assume that setting their magic targets will increase the rate of production? By what processes do they imagine that the behaviour of millions of individual citizens will suddenly change to ensure that the national economy as a whole hits their targets? Is the man who is already making 50,000 rupees a year to be coerced into working for an income of 52,000 next year? Is the man who is making only 5,000 rupees a year to be forbidden to earn more than 2,500 next year? If not, what is gained by setting a specific annual growth rate as a government target? Why not just permit or encourage everybody to do his best and make his own decisions and let the average growth be whatever it turns out to be. Rapid economic growth is a by-product of good government policy; it cannot be a government policy in itself.
The effective route to rapid economic growth – assuming this is the aim – is to encourage production, saving, investment, and employment. And the way to do this is to maintain a free market economy and a stable currency freely convertible into others at a rate determined by the market. It is to respect profits – which will in turn promote both investment and jobs. It is to refrain from oppressive taxation which drives away funds for productive investment. It is to refrain from wage controls and cumbersome labour legislation which destroy jobs. It is to permit interest rates to find their own levels and thus maximise saving and investment.
The way to slow down economic growth is, of course, precisely the opposite of this. It is to discourage production, saving, investment and employment by incessant government interventions, controls, threats, harassment and exorbitant taxation. It is to frown upon profits, to repeatedly declare them excessive, to control prices by law or intimidation, to hold interest rates down artificially, to bestow exceptional privileges and legal immunities on labour unions so that their demands become chronically excessive and threaten chronic unemployment – and then to try to offset the ill-effects of all these policies by higher government spending and consequent deficits which have to be financed by inflationary recourse to the currency printing presses.
All persons of goodwill share the same goal of raising the living standards of mankind. The differences – about which men fight, including men of goodwill – revolve around the methods to achieve the goal. Let me briefly compare those methods.
The free market method permits individuals to use their own money, skills and hardwork to back their own economic decisions in the market place. They reap the rewards of good judgement and suffer the consequences of poor judgement. Under this system, no one buys or sells or participates unless his judgement tells him to.
The socialist or centralised method means that government compels individual citizens against their will and better judgement to contribute their money or time to implement its ideas and schemes. There is no sure way to determine whether the official decisions are commercially sound because the only true economic measurement there is – the test of the market – is forbidden.
And there is a third method now popular in several developing countries – a method which I call the “compromising way” and which stems from the delusion that a middle path exists between the market method on one side and the socialist method on the other. In my book, this middle path is the socialist method. The fact that government may permit a great deal of private ownership and some private initiative in partnership with itself in no way means that government is not fully in charge. When you think about it, why should government bother to nationalise productive assets or need to compel people to act in this way or that if they cooperate voluntarily and submissively? Stalin would never have murdered any one if he had been sure that everyone would willingly have done exactly as he wanted.
The advocate of the third method may sincerely and indignantly deny that his is the government way. He will claim to favour only certain specified controls by government. But, in so doing, he opens the way for one control after another because he cannot put his finger on any generally accepted principle defining the limits of government activity, and thus he has no logically defensible ground for protesting against an indefinite number of additional controls. This is how – even though they may be quite innocently unaware of the ultimate consequences of their acts – the proponents of the third method are paving the way for socialism and coercion.
I accept that, if we are forbidden a free market economy, then a half-free one is better than none at all. But I hope we all agree that a half-free one is not only very far from ideal but is also invariably unstable in the sense that the coercive part is inherently expansionist. And that is bad for business confidence, bad for investment, bad for jobs and bad for economic growth and development.
Let me try to pinpoint some of the specific consequences of the socialist method which has been adopted to a greater or lesser degree in practically all countries of the world today. I shall, however, gear my remarks towards the developing countries and towards the impact on the business sector.
Does anyone seriously believe that government intervention in the economy nowadays is merely to protect the weak or to redress the inequalities supposedly produced by the free enterprise system? I hope not. For, in reality, the intervention goes far beyond that. The truly disturbing aspect today is the intervention – large and growing – that takes place purely and simply to placate or curry favour with organised, vocal and politically powerful groups in society irrespective of their economic condition.
Out of this arises much of the wastage of human and other economic resources which holds production below its potenti.al capacity. Because the assets and dynamism of the free enterprise system are suppressed, distorted and prevented from translating their full capability into actual output of goods and services, poverty and misery persist and a large part of humanity lives in constant fear of unemployment and starvation. Glaring examples of this can be found in the developing countries of Asia, Africa and Latin America. And I would like to highlight some of the policies pursued in these regions in the name of industrialisation and economic development but which have the perverse effect of perpetuating poverty and backwardness. Not that I believe their poverty is entirely of their own doing, I may add. The developed world is far from blameless in pursuing policies – particularly on the trade front – which inhibit the progress of poorer countries and set the additional obstacles to overcome which they could well do without. But let us look at ourselves for the moment since prosperity – like charity begins at home.
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