A publication of the Project for Economic Education, co-sponsored by the Friedrich Naumann Foundation, the following text is a reproduction of the 7th C. D. Deshmukh Lecture. The lecture was conducted by the India International Centre and delivered by B. K. Nehru. Through the lecture, he examined India’s experiment with democratic socialism and why socialism retreated from the global political scenario.
I am thankful to the India International Centre for having invited me to deliver the Seventh C.D. Deshmukh Memorial Lecture thus giving me an opportunity to pay my tribute to a man whom I knew well and with whom I had the privilege of working for a number of years in various capacities. In fact, such knowledge of the mysteries of high finance that I ever had was due to the meticulous care which he took in chalking out the programme for training for me when I went to the Reserve Bank of India to be trained in those mysteries, as a fresh recruit to the then newly constituted finance and commerce pool of the Government of India 50 years ago.
Sir Chintaman Deshmukh, by which title his contemporaries knew him better, was then Secretary of the Reserve Bank and although he was physically absent, being on what was then called “home leave”, the stamp of what he had decided I should learn was clearly visible on the teachers who taught me.
Sir Chintaman was a man of extraordinarily variegated talents and interests which he pursued till the end of his days. His knowledge of finance was of course well-known. He made a name for himself in this field first as Finance Secretary, of the then Central Provinces, then successively as Secretary, Deputy Governor and Governor of the Reserve Bank of India, for a short period as Ambassador at Large for Economic Affairs – in which capacity I followed him after a respectful interval – and finally as Finance Minister of India, during all of which time I came into intimate contact with him.
His interest in botany was lifelong; it was evidenced in the striking beauty of the gardens of the houses in which he lived – I remember particularly the Reserve Bank House in Bombay and No. 1, Willingdon Crescent in Delhi which developed under his tender care and became things of great beauty. To spend an evening with him when he was in the mood to recite Sanskrit slokas was a memorable experience, though for ignoramuses such as myself his recitation went above our heads and had to be translated into elementary English.
His contribution to this Centre is well-known to all of you; it could not have become what it now is had it not been for his guidance and the care with which he tended this infant plant. This afternoon I have chosen as the title of my lecture “The Retreat from Socialism”. An alternative title could well have been “Chun kufr az ka’aba bar Khezad kuja manad musalmani”. For when the High Priests of Socialism in the Soviet Union and China have themselves forsworn it, it is time to ponder at some length over this complete “bouleversement” in the existing world order. I do not wish this evening to discuss at all the political changes that are taking place but to limit myself to the economic. This is because while the political consequences of the change are of great importance they are not likely overly to affect our foreign policy.
I say this for the same reason as Mr. Lee Kuan Yew so pithily summed up in his remark “It is well-known that when elephants fight it is the grass alone that suffers; it is not equally well-known that when elephants make love it is again the grass alone that suffers”. The economic changes on the other hand have lessons which it would be wise for us to learn. I propose to examine with you what this socialism is from which the world is retreating, the reasons why we in India adopted socialism as our guide, what the reasons are which have caused this retreat, the consequences of socialism in our country and finally what, in the light of changed circumstances, we should now do.
The word socialism literally is meant to convey only that society should be so organised that the interests of the members of that society as a whole should take precedence over the interests of a part of that society whenever there is a conflict between sectional interests~ and social interests that conflict must invariably be resolved in favour of the latter. With this objective nobody can possibly differ; whence it is that the word has got attached to it a magic connotation. But how this desirable end has to be achieved in human society, with its innumerable injustices and unfairnesses and illogicalities, is something on which people have never agreed.
Modern socialism, which has had its roots in the thoughts of seekers after a juster society in the Europe of the 18th and 19th centuries, can be separated broadly into two streams. One is the humanism of St. Simon and 3 Fourier in France and Robert Owen in England which believed in evolution, which culiminated in the Fabian socialism of the turn of this century in England. The other school was born in 1848 with the publication of Karl Marx’s Communist Manifesto which believed not in evolution but in revolution and which has had the most profound effect on the history of the world.
Fabian socialism (which was essentially what we adopted in India in common with much of the democratic world) while including in itself the humanism of the earlier thinkers was nevertheless powerfully affected by Marxist thought. While the Fabians rejected outright the revolutionary approach, they accepted certain parts of Marxism. These included, very importantly, the concept of ownership by the State of the means of production and distribution and the rejection of the free market economy, which they wished to replace with a command economy regulated through physical controls.
This was because quite patently a market economy unregulated by the State was not necessarily free. Being subject to enormous pulls and pressures of powerful vested interests, it did not result in the best utilisation of resources that the divine hand of Adam Smith thought that it would. The Great October Revolution of 1917 established for the first time in history a State based on Marxist principles. It is a strange irony that while Marxist theory, as propounded by its founder, said that communism could really only be established as a result of the growth of the contradictions inherent in a capitalist society, and therefore predicated the existence of a fully grown capitalism society before communism could be established, his greatest follower, Lenin, established, or at least attempted to establish, a fully communist state in a society which was, at that time, still at the threshold of capitalism.
That the kind of society that Lenin had in view was never in fact established; that the dictatorship of an individual, that the leadership of the communist party, as a result of the natural wastage of the earlier idealistic leaders and the long monopoly of power, resulted in corruption and inefficiency is another story.
The heyday of socialism as the ideal form of social organisation and the panacea for all the ills of society was between the 1920s and 1930s. It was then that in the colleges and universities throughout the world and certainly in the United Kingdom (from which we used to borrow, and continue to borrow, all the modern ideas which we have) it was believed that all progressive thought was socialistic.
The Soviet Revolution and the apparent success in the establishment of socialism in that country gave a great fillip to those ideas, and people began to look towards the new society that was being created in that state as the ideal society. I recall that Sydney and Beatrice Webb, two of the founders of Fabian socialism in Britain, published in 193 1 a book after their return from that country and called it “Soviet Communism – A New Civilization”. We all looked towards that new civilization as something which we should try and establish in our own countries; its seamier side, which started to become apparent soon after, was then quite unknown.
The socialist creed spread throughout the world. Socialist and Communist parties had great support in the Western democracies; many had socialist governments in power then and later. India was no exception. There were in fact additional special reasons for its popularity in our country. It was during this period that there were trained, largely in the United Kingdom, that band of young people who occupied in India the seats of power after Independence and helped enthusiastically in the attempt to establish here what we thought would be a socialist society.
Jawaharlal Nehru’s own early upbringing was during the beginning of Fabian thought, his later reading was that of socialist thinking as it developed, his visits abroad where he met the leaders of socialism and his visits to the Soviet Union (where he was shown and saw only the better sides of the new society) all helped to strengthen his belief in socialism. He was convinced that the socialist form of organisation was the only one which could give the answer to the problems of our country, and give to the enormous mass of the underprivileged who surrounded tiny islands of privilege, the rights which were by nature theirs.
The great appeal of socialism to all noble and sensitive minds, among whom Jawaharlal’s was pre-eminent, was that it stood for the poor and the depressed and the oppressed as against those who were the possessors of property, the masters, the rulers and the oppressors. World War I1 again had the effect, though not deliberate, of encouraging socialism. It becomes essential in wartime for the state to play a far greater role in the regulation and management of all aspects, political, social and economic, of a country’s life than it normally does in peacetime.
And the results among all belligerents was &t -taxes went up steeply, the play of the free market was interfered with and largely suppressed, the production apparatus of the country was put under government control producing exactly what the government needed for the war and not what the people wanted and the distribution of major commodities was controlled by the government. Production was largely taken up directly for the war effort and price control and large scale rationing introduced virtually all over the world. The war could not be efficiently fought except through these means. Additionally, during and particularly after the war, in the countries of Europe there were large scale nationalisations of industries which had nothing to do with ideology but which were caused by the political effects of the aftermath of the conflict. After the peace it was assumed, as it were, that if the economy could be made to produce and distribute during wartime all the goods and services required for the war, the organisation which had proved so successful in meeting the challenge of the enemy could also be harnessed to meet the challenge of underprivilege and poverty throughout the world. The United Kingdom voted to power in 1945 a socialist government wedded to the theory of Fabian Socialism.
It continued the controls and rationing of wartime into peacetime; it nationalised the basic industries such as coal and steel. Nationalisations were also practised in France and other European countries, and where fresh nationalisation was not undertaken, no 4 attempt was made to return to private ownership the industry which the government found itself owner of after the war. This was particularly true in Italy and Germany which had, as Italy continues to have, a very large 7 proportion of industry under government ownership. The combination in India of the controls on production, distribution and prices, and of rationing were continued in peacetime after Independence. Not only were they thought to be appropriate ways of organising the economy but they corresponded to socialist thought and the practice then prevalent in our mentor the United Kingdom.
Further, there were large scale nationalisations of the basic industries and very large sectors of the economy were reserved for the government sector. Where the private sector was allowed to operate, it was permitted to do so only subject to controls which went on proliferating in their numbers and complexity so that in essence the private sector became indistinguishable from the activities directly owned by government.
The advent of planning helped this process because a planned economy, it was assumed, could not be run or developed according to plan, unless it was subject to the command of the planners. The market mechanism was in effect suppressed; the economy became a command economy. In short, what we attempted to do was to put into practice the kind of economy that we thought had been established in the Soviet Union but attempted, at the same time, to combine it as a free and liberal political democracy with all the rights and privileges of a democracy enforceable by an independent judiciary. This was an experiment that had never been made in the world; its difficulties were recognised by our leaders but it was expected that there would be no contradictions between the political and the economic system.
The one great pillar of Fabian socialism was the ownership by the State of the means of production and distribution; the other was high rates of direct taxation so as directly to transfer wealth from the rich to the poor. This also we put into practice raising our taxes on income to a level which was almost confiscatory. Additionally, with the zeal of the convert, we introduced a wealth tax, which in effect is a recurring capital levy, which even the more committed socialist countries like the United Kingdom had never introduced.
However, with our ignorance of the realities of life and the conversionary zeal with which we followed the theories of our teachers, we continued to raise the rates of direct taxation to levels at which they could, realistically speaking, not be paid at all. There was a time when the rate of income tax went up to 97% and the rate of wealth tax to 5% of wealth. This was carrying our theories to absurdity but though the tax levels have been somewhat reduced our thinking remains as it was.
The reason for the retreat from socialism is that societies which tried to base their economies on ownership by the State, economic equality and the replacement of the market by the command of the bureaucracy, simply did not work. Such societies produced neither the non-material nor the material benefits which were supposed to follow from this kind of economic organisation. Believers in socialism were convinced that socialism would guarantee individual freedom; the facts showed that the freedom of citizens of socialist States was in reality markedly less than in the capitalist States.
In the communist societies of Eastern Europe and China no individual freedom existed at all no matter what theoretical claims were made about it. The expectation that the worker and the peasant would work harder and more willingly for enterprises owned by the State or by a collectivity because he would feel that he was working for himself rather than for a capitalist, simply did not happen; people worked more or less as they work under capitalism, being driven by the twin forces of the carrot and the stick. In fact, there was more slackness and more pilfering on the part of the workers and probably more corruption on the part of the management than in capitalist societies. On the material side, it became obvious after the first spurt in production that the rate of growth of the economy of the genuinely socialist societies was markedly lower than that of the societies relying on the market to regulate their economies.
One of the most striking failures of State or collective ownership has been in agriculture where a super-power like the Soviet Union, possessing one sixth of the land surface of the Globe finds seventy years after revolution that it cannot feed itself. Nor has the quest for equality succeeded. Communist societies have reduced, in law, the differential between various categories of workers. They found the aim of virtually absolute equality from which they started quite as totally unworkable as the attempt, with which also they started, to abolish all ranks in the defence services.
They soon discovered that all organised society must necessarily have a hierarchy, and that the hierarchy must not only be differentiated by power but the differences have also to be economic. A very long time ago, therefore, the communist motto of “From each according to his ability, to each according to his need” was changed in the Soviet Union without fanfare and almost surreptitiously to “From each according to his ability, to each according to his work”. The Stakhanovites made a big dent into socialist theory by being given economic rewards for their work and the differentiation that has been subsequently introduced consists not so much in the money wage but payments in kind and in privilege to those who occupy higher positions in the hierarchy; this, if translated into money, would show a very substantial difference. One can live on revolutionary slogans and ideals for a short time but the flame does not last long. Lenin lived till the end of his life in one room in the Kremlin. Brezhnev lived in the equivalent of many palaces and owned a fleet of the most expensive of the world’s cars.
Last week’s musing: THE DANGERS OF JOINT CO-OPERATIVE FARMING
