(Versions of this essay has appeared in a range of publications including The Asian Wall Street Journal, The Economic
Times, Ideas on Liberty, during 1998-1999.)

In the battle over economics, the victory of the market forces seemed decisive. It had not been easy. Since the days of Adam Smith, the world economy had to cross the turbulent waters of colonialism, mercantilism, socialism, fascism, and communism before liberalisation, globalisation, privatisation, became accepted part of our general vocabulary. But even before the process of consolidation is over, it now seems that free market ideas are faced with insidious threats as never before.

Indeed, the popular appeal of socialist ideas was not primarily based on economic principles but on its ethical and political ones - an egalitarian worldview. (Discussions rarely focussed on the morality of the methods that would be necessary to create such a world order.) On the other hand, the advocates of free market rarely went beyond economics and utility, and generally ignored the moral basis of the marketplace.

This is best reflected in the criticism of the market that has inevitably followed as the so--called "transition" economies, in Eastern Europe, Russia or Latin America, ran in to rough weather. This view has gained considerable currency after the turmoil in the currency markets in Asia over the past one year. Not surprisingly, "liberalism with a human face" has become the new mantra.

No one today epitomises this sentiment more than Prof. Amartya Sen, the 1998 Nobel Laureate in Economic Sciences. President of India, K. R. Narayanan, in his congratulatory message said, "You have brought to bear upon the science of economics a compassion for the ordinary human being and a vision of an egalitarian world society". Prof. Sen's recipe for inducing long-term sustained growth involves empowering of the poor through education and health, entitlements, removing gender disparity. His method for delivering these services is democracy. And he mainly rests his case on the evidence that independent democratic nations have been more successful in eliminating famines than others.

There is much more than a grain of truth in Prof. Sen's arguments. However, grains are necessary but not sufficient for a balanced diet! Just as democracy is a necessary but not a sufficient condition for alleviating poverty. Otherwise, India, the largest democracy at that, would not have remained among the club of poorest nations of the world.

Let us take a closer look at a few of Prof. Sen's propositions. Democracies, with periodic elections, and a free press, keep the elected representatives on their toes and the government more responsive to the population. In times of large scale tragedies, such as famines or floods, with opposition parties and the media on the look out for opportunities to discredit the authorities, the elected representatives work overtime to get as much relief as possible to their constituents. Indeed, so successful has this process been that, today, whether in the US, the oldest of modern democracies, or India, the largest, or any of the others in between, politicians continually vie with each other to declare some of their constituents victims of one disaster or the other -- famine, flood, fire, cyclone, earthquake, crop failure, indebtedness, bankruptcies, job loss, child welfare, old age, to name just a few. Pork barrel politics is the natural outcome of such an approach. After all, if the benefits could be appropriated to a few and the cost distributed among the whole population, it would be irrational not to try and corner as large a share of the "public pie" as possible. Nobel laureate James Buchanan and others of the public choice school do provide a clear explanation of this aspect of political economy.

Apart from social and economic damage this may cause, this approach legitimises state intervention through control and expropriation even if only in "social sectors". Once the principle is accepted it becomes almost impossible to draw any line. Since all such intervention is always justified on some alleged social good. Secondly, the governance in such a set up becomes extremely short sighted, moving from one opinion poll to another, from one election to the next.

Such a government is hardly ever in any position to concentrate on programmes that require a much longer time frame, e.g., education or health, two of Prof. Sen's principle concerns. On one hand, he laments the failure of the leftist forces in democratic India to capitalise on their natural constituency among the poor by stressing on these two most basic of "entitlements". On the other hand, he points to the success of the non-democratic, socialist economies in this regard, implying an astonishing lack of regard for the methods that were adopted by these countries to achieve that "success".

There is no doubt that education and healthcare are the two basic tools with which an individual can add value to himself. So Prof. Sen's concern for those who apparently are not in a position to secure these, and his fear that they may not benefit from a liberalised and globalised economy needs to addressed.

First, as Prof. Sen has been consistently pointing out, the performance of the Indian State in areas of primary education and health has been dismal even without liberalisation. Indeed, the power of the vested interests and pork barrel politics in the field of education is distinctly visible. For instance, in a country where almost half the population is considered to be illiterate, the higher education is most heavily subsidised! Or, at a time when provincial governments are promising to ensure at least a primarily school within a reasonable distance from every village, students in Delhi travel almost free to their colleges and universities. An icing on top of their cheap education cake! Another fall out is that content of education has been completely politicised.

Secondly, there is no real evidence that the opposition to liberalisation is coming from the millions of illiterate, low-skilled workforce, an overwhelming majority of which is engaged in the informal and unorganised sectors of the economy. They are providing a whole range of goods and services - from collecting garbage to manufacturing informal vehicles, which either the state has failed to deliver despite promises to the contrary, or the formal sector has been unable to provide. And since there is no welfare to speak of, these people would not have survived in any other form except for the support from their family and friends. Clearly, then, the basic problem is not lack of education, but almost total lack of employment opportunity in the formal sector.

According to official estimates, barely 30 million of India's workforce of 400 million, are in the organised sector. Not surprisingly, it is this small but entrenched minority, fearing the loss of their unearned privileges, that is at the forefront of the anti-reform group. Their share of the national pie is best indicated by the fact that since the 1970s, while the consumer price index increased by about 750%, the per capita emoluments rose by a whopping 1600%. A remarkable demonstration of the power of the vested interests. The only other explanation is an amazing increase in their productivity!! No wonder that the quartet of politicians, bureaucrats, organised labour and businessmen who have benefited from state patronage and thrived in protected environment are so keen to defend the status quo.

By adopting the "socialist pattern of development" since the 1950s, the Indian State has been very successful in choking the economy, and thereby wasting the most precious of all resources, the spirit and enterprise of her people. As Lord Peter Bauer, the other development economist, also deserving of the Nobel Prize, has said that it is policy not poverty that keeps people poor.

The result has been rampant underemployment, and consequently there seems to be little rational basis for these people to demand better education. Is it any surprise that despite achieving an enrolment rate of over 90% at the primary school level, the drop out rate after five years of schooling ranges between 35% to 40%.

Another issue Prof. Sen has stressed is that of land reform. But even, the much talked of land reforms in states like West Bengal, has not been able to empower and stimulate growth. Forcible land distribution has led to fragmentation of holding, and productivity has not improved much as a result. This has led to the rise of political brokers in the countryside, and forced people to stay on land. Lower labour mobility has meant that the state government could afford to ignore the virtual collapse of the industrial sector. Concerned as they were not so much about increasing employment opportunities, but preserving the privileges of the existing workforce. Clearly, land reforms in West Bengal have, perhaps unintentionally, helped in slowing down the pace of urbanisation and industrialisation, and consequently economic growth. Seen in this light, it should not surprise any one that West Bengal which topped on these two counts in 1947, has been consistently and continually sliding over the past decades.

Land reform is necessary. But again this cannot be looked in isolation from general economic policy. Today, the state is the largest landlord and is increasingly involved in disputes with indigenous people whose title to their traditional land is not being recognised. On the other hand, rural communities are being torn apart by contentious litigation, frequent violence. Maintenance of land records by state governments is pathetic, and open to rampant manipulation and corruption. Also, land reform cannot mean a one way street to land distribution. There is an urgent need to recognise agriculture as a profession, rather than a vocation. The ideas of productivity, efficiency, economics of scale are as much relevant for agriculture, as they are for other sectors of economy. By obstructing consolidation of land holding in the name of land distribution, we have been spectacularly successful in making agriculture unviable, and sealed the fate of 70% of the population that lives in our countryside in perpetual poverty.

To successfully move away from this self-destructive course, there is an urgent need for a new vision. Prof. Sen's concern for the poor, the hungry, and the deprived runs very deep. But there is need to go beyond good intentions, which though necessary cannot be a sufficient condition for the alleviation of these ills. Prof. Sen deserves credit for highlighting the need for reestablishing the relationship between ethics and economics. However, that ethical premise may have to be quite different from the one Prof. Sen is proposing.

It must be recognised that voluntary exchange that takes place in the marketplace is infinitely more moral than expropriation under the sponsorship of the state. It has to be acknowledged that the best way to empower the poor is to allow the market to operate unhindered so that even the poorest have the widest range of options. And the best way to ensure entitlement is to allow people the freedom to choose for themselves. This is the reason why market is so efficient in allocation of resources (as is increasingly being recognised), and this is also the reason which makes the market ethical (unfortunately, not yet widely recognised as such). Which means, democracy is necessary, but needs to be restrained within the parameters of individual rights, so that it does not succumb to special interest warfare and rides roughshod over the individual. And this makes the market truly democratic, since it respects the choice of each individual.

A few intellectuals, such as Nobel Laureate F. A. Hayek, the enormously popular novelist-philosopher Ayn Rand, have been trying to point out the ethical premise of free markets. The world has taken over two hundred years to just begin appreciating the power of Adam Smith's "invisible hand" in economics. Let's hope we don't take that long to appreciate the morality of the marketplace. It will be a tragedy if after winning the battle over economics, the war is lost on ethics.
 

Comments and suggestions are most welcome. Please write to