F.A. Hayek’s Dreaming of Swatantra

Dreaming of Swatantra

Modern India's only stab at a successful liberal party started in
August 1959; the Swatantra Party would have entered its 50th year this
month, if it had survived as a national political force

Cafe Economics | Niranjan Rajadhyaksha

Nobel laureate Amartya Sen — who is not a free-market liberal — has
spoken on how contemporary India needs a right-wing political party
that is both secular and committed to an open economy. This is a good
time to go back to the issue, for two reasons. First, we have seen how
economic reforms were blocked by the Left to begin with and have now
been hijacked by the crony capitalism of the Samajwadi Party. Second,
modern India's only stab at a successful liberal party started in
August 1959; the Swatantra Party would have entered its 50th year this
month, if it had survived as a national political force.

Countries with low levels of trust and high levels of corruption tend
to be more wary of free market capitalism Fifteen years of high
growth, thanks to economic reforms, should have created a strong
political base for liberal party. It hasn't. I am often surprised at
how even people who have benefited from economic reforms still believe
that the government should control prices to beat inflation or that
companies are making too much profit at the cost of society. Is it any
wonder that no party is ready to face the electorate with a free
market agenda?

The interesting question is why this happens. The answer involves more
than political failure. The nature of Indian society and capitalism
are also part of the answer.

An interesting new research paper by Philippe Aghion of Harvard
University, Yann Algan of the Paris School of Economics, Pierre Cahuc
of the Ecole Polytechnique and Andrei Schleifer of Harvard University
offers one set of clues. They have mapped the relationship between
demands for regulation in a country and the level of distrust between
its citizens.

What these four economists show from their study of rich nations is
that people ask for more government regulation when they do not trust
their fellow citizens. They have used a concept that has attracted a
lot of attention over the past decade and more — social capital. Any
economy needs physical capital (tools), financial capital (money) and
human capital (skills) to grow. It also needs social capital (trust).
Economist Kenneth Arrow once said that virtually "every commercial
transaction has within itself an element of trust, certainly any
transaction conducted over a period of time. It can be plausibly
argued that much of economic backwardness in the world can be
explained by the lack of mutual confidence."

Aghion and his three fellow authors show in their July paper,
Regulation and Distrust, that countries with low levels of trust in
other persons, companies and political institutions are more likely to
have more regulations on economic activity. But this regulation leads
to low growth and corruption, as we know from our own experience of
the licence permit raj. "What is perhaps most interesting about this
finding…is that distrust generates demand for regulation even when
people realize that the government is corrupt and ineffective; they
prefer state control to unbridled production by uncivil firms," say
the economists.

The way companies earn profits does affect the popularity of
capitalism. In a paper published in 2006, Rafael Di Tella of Harvard
Business School and Robert MacCulloch of Imperial College ask: Why
Doesn't Capitalism Flow to Poor Countries? They say the most important
factor is corruption, which cuts into the "moral legitimacy of
capitalism". Di Tella and MacCulloch add: "Existence of corrupt
entrepreneurs hurts good entrepreneurs by reducing the general appeal
of capitalism."

These two pieces of research show that the popularity of a free market
political party will depend on both the level of trust in a country
and whether profits come from competitive markets or oligopolies
protected by the state.

Economic historian Douglass C. North and his colleagues have given us
what they call a conceptual framework to interpret human history. They
say that societies emerge as "limited access orders". Here, the
political system is used to limit economic participation and impose
social order. The lack of economic competition leads to excess profits
that are used to limit violence and maintain political stability.

North says that some societies later evolve into "open access" orders.
Here, there are few restrictions on economic and political
participation, which is another way of saying that these societies
have open economies and open political systems. Order is maintained
through the competitive process.

There is a famous story about Margaret Thatcher. Soon after she became
head of the Conservative Party in the UK, she is said to have reached
into her briefcase and pulled out a copy of F.A. Hayek's Constitution
of Liberty, a book that explains with great clarity why liberal
systems lead to freedom and prosperity. Interrupting the speaker, she
is said to have banged the book down on the table and said: "This is
what we believe."

Is there any Indian politician who has similar convictions — and the
guts to make them public?

Your comments are welcome at cafeeconomics@livemint.com
http://www.livemint.com/2008/08/13000901/Dreaming-of-Swatantra.html

Aleksandr Solzhenitsyn Is Dead at 89

Aleksandr Solzhenitsyn Is Dead at 89

http://www.nytimes.com/aponline/arts/AP-Obit-Solzhenistyn.html?_r=2&hp&oref=slogin&oref=slogin

MOSCOW (AP) -- Aleksandr Solzhenitsyn, the Nobel Prize-winning author
whose books chronicled the horrors of the Soviet gulag system, has
died of heart failure, his son said Monday. He was 89.

Stepan Solzhenitsyn told The Associated Press his father died late
Sunday, but declined further comment.

Solzhenitsyn's unflinching accounts of torment and survival in the
Soviet Union's slave labor camps riveted his countrymen, whose secret
history he exposed. They earned him 20 years of bitter exile, but
international renown.

And they inspired millions, perhaps, with the knowledge that one
person's courage and integrity could, in the end, defeat the
totalitarian machinery of an empire.

Beginning with the 1962 short novel "One Day in the Life of Ivan
Denisovich," Solzhenitsyn devoted himself to describing what he called
the human "meat grinder" that had caught him along with millions of
other Soviet citizens: capricious arrests, often for trifling and
seemingly absurd reasons, followed by sentences to slave labor camps
where cold, starvation and punishing work crushed inmates physically
and spiritually.

His "Gulag Archipelago" trilogy of the 1970s shocked readers by
describing the savagery of the Soviet state under the dictator Josef
Stalin. It helped erase lingering sympathy for the Soviet Union among
many leftist intellectuals, especially in Europe.

But his account of that secret system of prison camps was also
inspiring in its description of how one person -- Solzhenitsyn himself
-- survived, physically and spiritually, in a penal system of
soul-crushing hardship and injustice.

The West offered him shelter and accolades. But Solzhenitsyn's refusal
to bend despite enormous pressure, perhaps, also gave him the courage
to criticize Western culture for what he considered its weakness and
decadence.

http://en.wikipedia.org/wiki/Aleksandr_Solzhenitsyn

Mao's "Cultural Revolution" - Real facts

http://members.fortunecity.com/stalinmao/China/Cultural/Cultural.html

The Cultural Revolution was launched by Chinese Communist Party
chairman Mao Zedong during his last decade in power (1966-76) to
renew the spirit of the Chinese revolution. Fearing that China would
develop along the lines of the Soviet model and concerned about his
own place in history, Mao threw China's cities into turmoil in a
monumental effort to reverse the historic processes underway.

During the early 1960s, tensions with the Soviet Union convinced Mao
that the Russian revolution had gone astray, which in turn made him
fear that China would follow the same path. Programs carried out by
his colleagues to bring China out of the economic depression caused by
the Great Leap Forward made Mao doubt their revolutionary commitment
and also resent his own diminished role. He especially feared urban
social stratification in a society as traditionally elitist as China.
Mao thus ultimately adopted four goals for the Cultural Revolution:
to replace his designated successors with leaders more faithful to his
current thinking; to rectify the Chinese Communist Party; to provide
China's youths with a revolutionary experience; and to achieve some
specific policy changes so as to make the educational, health care,
and cultural systems less elitist. He initially pursued these goals
through a massive mobilization of the country's urban youths. They
were organized into groups called the Red Guards, and Mao ordered the
party and the army not to suppress the movement.

Mao also put together a coalition of associates to help him carry out the
Cultural Revolution. His wife, Jiang Qing, brought in a group of
radical intellectuals to rule the cultural realm. Defense Minister Lin
Biao made certain that the military remained Maoist. Mao's longtime
assistant, Chen Boda, worked with security men Kang Sheng and Wang
Dongxing to carry out Mao's directives concerning ideology and
security. Premier Zhou Enlai played an essential role in keeping the
country running, even during periods of extraordinary chaos. Yet there
were
conflicts among these associates, and the history of the Cultural
Revolution reflects these conflicts almost as much as it reflects
Mao's own initiatives.

Mao formally launched the Cultural Revolution at the Eleventh Plenum of the
Eighth Central Committee in August 1966. He shut down China's schools,
and during the following months he encouraged Red Guards to attack all
traditional values and "bourgeois" things and to test party officials
by publicly criticizing them. Mao believed that this measure would be
beneficial both for the young people and for the party cadres that
they attacked.

The movement quickly escalated; many elderly people and intellectuals were
not only verbally attacked but were physically abused. Many died. The
Red Guards splintered into zealous rival factions, each purporting to
be the true representative of Maoist thought. Mao's own personality
cult, encouraged so as to provide momentum to the movement, assumed
religious proportions. The resulting anarchy, terror, and paralysis
completely disrupted the urban
economy. Industrial production for 1968 dipped 12 percent below that of 1966.

During the earliest part of the Red Guard phase, key Politburo leaders were
removed from power--most notably President Liu Shaoqi, Mao's
designated successor until that time, and Party General Secretary Deng
Xiaoping. In January 1967 the movement began to produce the actual
overthrow of provincial party committees and the first attempts to
construct new political bodies to replace them. In February 1967 many
remaining top party leaders called
for a halt to the Cultural Revolution, but Mao and his more radical
partisans prevailed, and the movement escalated yet again. Indeed, by
the summer of 1967 disorder was widespread; large armed clashes
between factions of Red Guards were occurring throughout urban China.

During 1967 Mao called on the army under Lin Biao to step in on behalf of
the Red Guards. Instead of producing unified support for the radical
youths, this
political-military action resulted in more divisions within the
military. The tensions inherent in the situation surfaced vividly when
Chen Zaidao, a military commander in the city of Wuhan during the
summer of 1967, arrested two key radical party leaders.

In 1968, after the country had been subject to several cycles of radicalism
alternating with relative moderation, Mao decided to rebuild the
Communist Party to gain greater control. The military dispatched
officers and soldiers to take over schools, factories, and government
agencies. The army simultaneously forced millions of urban Red Guards
to move to the rural hinterland to live, thus scattering their forces
and bringing some order to the cities. This particular action
reflected Mao's disillusionment with the Red Guards because of their
inability to overcome their factional differences. Mao's efforts to
end the chaos were given added impetus by the Soviet invasion of
Czechoslovakia in August 1968, which greatly
heightened China's sense of insecurity.

Two months later, the Twelfth Plenum of the Eighth Central Committee met to
call for the convening of a party congress and the rebuilding of the
party apparatus.
>From that point, the issue of who would inherit political power as the Cultural Revolution wound down became the central question of Chinese politics.

When the Ninth Party Congress convened in April 1969, Defense Minister Lin
Biao was officially designated as Mao's successor, and the military
tightened its grip on the entire society. Both the Party Central
Committee and the revamped Communist Party were dominated by military
men. Lin took advantage of Sino-Soviet border clashes in the spring of
1969 to declare martial law and further used his position to rid
himself of some potential rivals to the succession. Several leaders
who had been purged during 1966-68 died under the martial law
regimen of 1969, and many others suffered severely during this period.

Lin quickly encountered opposition. Mao himself was wary of a successor who
seemed to want to assume power too quickly, and he began to maneuver
against Lin. Premier Zhou Enlai joined forces with Mao in this effort,
as possibly did Mao's wife Jiang Qing. Mao's assistant Chen Boda,
however, decided to support Lin's cause. Thus, despite many measures
taken in 1970-71 to return order and normalcy to Chinese society,
increasingly severe strains
were splitting the top ranks of leadership.

These strains first surfaced at a party plenum in the summer of 1970.
Shortly thereafter Mao began a campaign to criticize Chen Boda as a
warning to Lin. Chen disappeared from public in August 1970. Matters
came to a head in September 1971 when Lin himself was killed in what
the Chinese asserted was an attempt to flee to the Soviet Union after
an abortive assassination plot against Mao. Virtually the entire
Chinese high military command was
purged in the weeks following Lin's death.

Lin's demise had a profoundly disillusioning effect on many people who had
supported Mao during the Cultural Revolution. Lin had been the high
priest of the Mao cult, and millions had gone through tortuous
struggles to elevate this chosen successor to power and throw out his
"revisionist" challengers. They had in this quest attacked and
tortured respected teachers, abused elderly citizens, humiliated old
revolutionaries, and, in many cases, battled former friends in bloody
confrontations. The sordid details of Lin's purported assassination
plot and subsequent flight cast all this in the light of traditional,
unprincipled
power struggles, and vast numbers of Chinese people began to feel that
they simply had been manipulated for personal political purposes.

Initially, Premier Zhou Enlai benefited the most from Lin's death, and from
late 1971 through mid-1973 Zhou tried to nudge China back toward
stability. He encouraged a revival of the educational system and
brought back into office a number of people who had been cast out.
China began again to increase its trade and other links with the
outside world, and the economy continued the forward momentum that had
begun to build in 1969. Mao personally approved these general moves
but remained wary lest they call into question the basic
value of having launched the Cultural Revolution in the first place.

During 1972, however, Mao suffered a serious stroke, and Zhou learned that
he had a fatal malignancy. These events highlighted the continued
uncertainty over the succession. In early 1973 Zhou and Mao brought
back to power Deng Xiaoping. Zhou hoped to groom him to be Mao's
successor. Deng, however, had been the second most important purge
victim at the hands of the radicals during the Cultural Revolution.
His reemergence made Jiang Qing and her followers desperate to firmly
establish a more radical path.

>From mid-1973 until Mao's death in September 1976, Chinese politics shifted
back and forth between Jiang Qing and those who supported her (notably
Wang Hongwen, Zhang Chunqiao, and Yao Wenyuan, who with Jiang Qing
were later dubbed the Gang of Four,) and the Zhou-Deng group. The
former favoured ideology, political mobilization, class struggle,
anti-intellectualism, egalitarianism, and xenophobia, while the latter
promoted economic growth, stability, educational progress, and a
pragmatic foreign policy. Mao tried unsuccessfully to maintain a
balance between these two forces while he struggled to find a
successor who would embody his preferred combination of each.

From mid-1973 until mid-1974 the radicals were ascendant; they whipped up a
campaign that used criticism of Lin Biao and of Confucius as a thinly
veiled vehicle for attacking Zhou and his policies. By July 1974,
however, the resulting economic decline and increasing chaos made Mao
shift back toward Zhou and Deng. With Zhou hospitalized, Deng assumed
increasing power from the summer of 1974 through the late fall of
1975, when the radicals finally convinced Mao that Deng's policies
would lead eventually to a repudiation of the Cultural
Revolution and of Mao himself. Mao then sanctioned criticism of these
policies by means of wall posters (ta-tzu-pao), which had become a
favoured method of propaganda for the radicals. Zhou died in January
1976, and Deng was formally purged (with Mao's backing) in April. Only
Mao's death in September and the purge of the Gang of Four by a
coalition of political, police, and military leaders in October 1976
paved the way for Deng's subsequent reemergence in
1977.

Although the Cultural Revolution largely bypassed the vast majority of the
people who lived in rural areas, it had serious consequences for China
as a whole. In the short run, of course, the political instability and
the constant shifts in economic policy produced slower economic growth
and a decline in the capacity of the government to deliver goods and
services. Officials at all levels of the political system learned that
future shifts in policy would jeopardize those who had aggressively
implemented previous policy. The result was bureaucratic
timidity. In addition, with the death of Mao and the end of the
Cultural Revolution (the Cultural Revolution was officially ended by
the Eleventh Party Congress in August 1977, but it in fact concluded
with Mao's death and the purge of the Gang of Four in the fall of
1976), nearly three million party members and countless wrongfully
purged citizens awaited reinstatement. Bold measures were taken in the
late 1970s to confront these immediate problems, but the Cultural
Revolution left a legacy that continued to trouble China.

There existed, for example, a severe generation gap; individuals who
experienced the Cultural Revolution while in their teens and early
twenties were denied an education and taught to redress grievances by
taking to the streets. Post-Cultural Revolution policies--which
stressed education and initiative over radical revolutionary
fervour--left little room for these millions of people to have
productive careers. Indeed, the fundamental damage to all
aspects of the educational system itself took several decades to repair.

Another serious problem was the corruption within the party and government.
Both the fears engendered by the Cultural Revolution and the scarcity
of goods that
accompanied it forced people to fall back on traditional personal
relationships and on bribery and other forms of persuasion to
accomplish their goals. Concomitantly, the Cultural Revolution brought
about general disillusionment with the party leadership and the system
itself as millions of urban Chinese witnessed the obvious power plays
that took place under the name of political principle in the early and
mid-1970s. The post-Mao repudiation of both the objectives
and the consequences of the Cultural Revolution made many people turn
away from politics altogether.

Among the people themselves, there remained bitter factionalism, as those
who opposed each other during the Cultural Revolution often shared the
same work unit and would do so for their entire careers.

Perhaps never before in human history has a political leader unleashed such
massive forces against the system that he created. The resulting
damage to that system was profound, and the goals that Mao sought to
achieve ultimately remained elusive.

http://members.fortunecity.com/stalinmao/China/Cultural/Cultural.html

Excess speculation or excess money?

Excess speculation or excess money?
By Swaminathan S. Anklesaria Aiyar

From ancient times, Indian rulers have always blamed inflation on the
perfidious bania. That is happening globally today. Politicians
everywhere are blaming speculators for high inflation.

Actually, inflation occurs when too much money chases too few goods.
Today, no great shortfall in goods is evident. World oil production is
rising, though slowly. Mineral and metal production is up. The FAO
predicts a record global harvest in 2008.

But the world has long been awash in money. The US kept interest rates
at just 1% for years after the 2001 recession. This encouraged
Americans to spend more than they earned, creating a huge US trade
deficit and corresponding trade surpluses in China and other Third
World exporters. Initially, this flood of dollars lifted all global
boats — world GDP grew at record rates in 2004-08. Inflation was kept
down by rising productivity, and by outsourcing manufacturing and
services respectively to low-wage centres in China and India.

Money supply expanded fast in Third World countries too (including
India). This was partly because central banks bought up dollars in
forex markets rather than let their currencies appreciate.

Alas, a flood of money cannot for long lift production alone. Soon it
starts raising prices. First the excess money raised housing prices,
and everybody was happy. Then it raised stock market prices, and
people were very happy. Finally, the flood of money raised consumer
prices, and suddenly people are very unhappy.

When world growth is so high that spending outpaces commodity
production, commodity prices will rise to signal that growth needs to
slow down. But this is politically unpalatable. Slower growth hits
jobs and incomes. Rather than permit this, governments everywhere try
to stimulate the economy with even more money.

The US Fed has not only slashed interest rates to 2% but provided
hundreds of billions of dollars to the stricken financial sector to
help it escape the consequences of its excesses. This new dollar flood
has worsened inflation.

World commodity prices have shot up in the last two years, spilling
over into higher consumer prices. Politicians globally are looking for
culprits, and finding them in speculators. Hundreds of billions of
dollars have gone in recent years into two investment areas. First,
purchases in forward commodity markets — contracts for delivery of
commodities at specified future dates. Second, commodity index funds —
mutual funds that mimic the price of a group of commodities by buying
and selling futures. Such funds have attracted $240 billion in recent
times.

Has this sent commodity prices skyrocketing? Very doubtful. Yes,
investors are buying forward contracts worth billions. But for every
buyer of contracts, hoping for rising prices, there has to be a
seller, hoping for falling prices. Speculation is necessarily a
two-way street. Besides, every contract expires and is settled at the
due date, so such speculation is self-terminating.

Forward trading is mostly paper trading, and must not be mistaken for
hoarding. World commodity stocks today are generally low by historical
standards. Massive forward trading has not translated into hoarding.

Academic studies have long attempted to find whether forward trading
causes a rise in current prices. No clear link has ever been
established. Price manipulation is possible in thin, weakly regulated
markets. It is not evident in big commodity markets. The US has just
enacted legislation limiting the size and financing of forward trades
in oil. Past experience suggests this will have a marginal impact at
best.

There is hardly any forward trading in iron ore, yet its price is up
76-95% in new contracts. By contrast, huge forward trading in sugar
has left world prices low. Nickel futures are down from a peak of
$60,000/tonne last year to just $22,000. Wheat futures once spiked to
$13/bushel but are now down to $9/bushel. There is no clear link
between forward trading and skyrocketing prices.

When the interest rate is lower than the inflation rate — economists
call this a negative real interest rate — money supply is definitely
excessive. India, the US and many other countries have negative real
interest rates today. A recent Merrill Lynch study suggests that a 1%
fall in the real interest rate increases commodity prices by 17% in 10
months. If this is even partially true, the main culprits have been
not speculators but governments printing excess money. Worse, this
excess money was often used to subsidise oil prices, stoking demand
further.

Today, at last, governments across the globe are reluctantly reducing
oil subsidies and starting to fight inflation through a monetary
squeeze, even if it means slowing growth. Squeezing money in India
alone will produce only limited results. For good results, central
bankers of the world should get together for coordinated action. But
no such initiative is in sight.

Politicians are quick to take the credit when the economy does well,
and to blame others when things go wrong. They must take the
responsibility for bad as well as good policies. Banias may be quick
to grasp the inflationary potential of bad policies, and profit from
it. But the root cause of rising prices lies elsewhere.

http://www.swaminomics.org/

Surplus value theory

 

Surplus value theory fails to take into account the efforts of the capitalist / manager ; MOTIVE power is the most basic issue here. all capitalists and great industrial captains like Ford, Rockfeller, Carneige, Birla, etc started as workers (in any one generation ago) and there are no permanent super rich family for thousand years or so. All these people, thru their industry, skill and strong organising power rose to the top.

Unlike caste in India, class as understood by marxists is not a fixed and inflexible division. workers can become capitalists and vice versa thru indiviual efort or folly. hence the rigid division of class is not scientific or valid.

What prevents all the workers to turn into entrepreners and make it big ? only a few are able to it inspite of severe hardships. G.D.Birla's grandfather was a ordinary worker in the 19th cent. now we have Bill Gates, N.R.Narayamurthy, Sameer Bhatia, textile barons in Karur, Thirupur, etc. all started with nothing and bare hands and made it to the top while their peers remained in their worker status. so what is the compasision ?

the term expolitation is a misnomer. huge population (which increases supply of labour to high volumes), govt deficts which erode real wages, high taxes, etc are major reasons for worker 'exploitations'

The organising power and the ability to motivate, manage and uplift a industrial unit cannot be quanitfied easily like the hours or amount of labour a worker puts in. Marxisim fails to understand this vital aspect of human nature. The drive and involvement needed to build up a business. hence most communist factories are less efficent and crumbled in the long run as histroy proves repeatedly. there may be exceptions where exceptionally driven and talented individuals, who were genuine communists (that is they are ready to put in their best effort for the betterment of the 'commune') create efficient eneterprises. For such efficency and sucess, all the palyers must be motivated to do their best in return for minimum salary (to each according to his needs).

the crux of the problem is 'from each according to his ability' ;without proper and logical rewards (as in a free market economy) such output of individual is simply not possible.

humans are ego centric and will put in their best efforts and drive only when there is a proper reward or profit.

Fund Schooling, Not Schools

From India Uncut Blog published by Amit Varma

20 September, 2007

Fund Schooling, Not Schools

This is the 32nd installment of my weekly column for Mint, Thinking it Through.

I read a news report a couple of days back that amazed me. It was about a small village named Maji in the Yunnan province of China. The nearest school lies across the Nujiang river. There is no bridge, though a steel cable runs across.

How do the 500 children of this village get to school? The report states, "They fasten themselves to the cable with a metal carabiner and a rope and slide across the 200-metre wide canyon." The youngest child, A Qia, is four years old, and makes the crossing by herself. A five-year-old named A Pu has been quoted as saying, "I used to dream of having a bridge, but then I learned that my dream was too expensive."

My column today is not about bridges—not the kind that go across rivers anyway. It is about education. I never had to cross a canyon using a rope and a metal carabiner to get to school, and if the prospect had come up in my privileged home when I was a kid, I would probably have asked my dad if the metal carabiner was chauffeur-driven. I always took education for granted, the same way I took food for granted, and did not have to worry about where my next meal would come from. Much of India is not so lucky.

Poor people want education for their kids desperately and viscerally. They want their children to have a better life than they did, and they know education is the ticket. And for 60 years they have been cheated. The state has promised them quality education, has collected taxes for that purpose, and has failed.

Studies on the state of education in this country confirm what we see around us. A 2005 study of government schools by Pratham, an NGO, found that 35% of schoolkids surveyed between the ages of seven and 14 failed a reading test involving a simple paragraph, and 41% of them could not subtract or divide. A 2006 study found that half the children who enrol in the first standard drop out before reaching the eighth. A 1999 government report stated that just 53% of the accredited public schools in rural North India were engaged in teaching during surprise visits on school days.

The problem here is not one of funding. The government has thrown enormous amounts of money into education, and continues to do so. The problem here is of choice. Most poor parents across the country have no option but to send their kids to government schools, which, because of the way the incentives are aligned, are often dysfunctional.

The way out of this is to put parents in charge of the money that is supposedly being spent on their children's education. Parents have much more at stake than the state, and are better equipped to take the right decisions for their children. Milton Friedman first proposed a method of enabling this: education vouchers. Under this system, the state does not directly fund schools, but gives school vouchers to parents. Parents use the vouchers to send their kids to a school of their choice, and the school exchanges vouchers in return for cash from the government. As in any other sector, competition then ensures that schools lift their standards and minimize wastage.

This will give optimum results if competition is allowed to flourish. Right now, it isn't. A 2001 study by the Centre for Civil Society (CCS) found that it takes 14 licences from four authorities to open a private school in Delhi, a process that can either take years or much under-the-table money. Schools must conform to a number of unnecessary parameters such as government-trained teachers and playgrounds of a specified size. Also, bizarrely, private schools are not allowed to operate for a profit—while many work around this by setting up trusts and suchlike, others are simply scared away.

But won't private schools be expensive? That's what I would have thought, given the posh urban schools where my friends and I were educated, but the reality is different. Entrepreneurs in the poorest parts of India, in slums and villages, have started cheap schools with bare bones facilities to fulfil what is obviously a raging demand. And studies have shown that, with survival at stake, these schools use money twice as efficiently as government ones.

In 2005, James Tooley and Pauline Dixon did a study that found that 65% of schoolchildren in Hyderabad's slums attended private schools instead of free government ones. And last year, CCS conducted a study (pdf link) that revealed that 14% of households in Delhi earning less than Rs5,000 per month chose to send their kids to a private school. Their studies showed that even the poorest of the poor, from maids to autorickshaw-drivers to peons, expressed their preferences clearly, even when they could barely afford it.

There is one clear reason for the miserable state of education in this country: the state has funded schools, not schooling. For India's sake, that must change.

* * *

I had covered much of this territory in my January Op-Ed in the Wall Street Journal Asia, Why India needs school vouchers. For more on school choice, check out Andrew Coulson's paper, How Markets Affect Quality (pdf link).

Also, my thanks to Shrek for pointing me via email to the China story. I've also received many insights about school choice from chatting with Raj Cherubal of CCS and my friend Gautam Bastian. I hope to continue those conversations.

* * *

DEFICIT FINANCING ; Rajaji in Swarajya 1960

DEFICIT FINANCING ; Rajaji in Swarajya 1960

PROF. B. R. Shenoy is bringing out for lay readers a
booklet on inflation in India, in which he deals with
the causes of the evil and the remedy. I have had the
privilege of reading the manuscript and this is what I
have gathered from what the Professor sets out with
clarity and with figures. I have no doubt the booklet,
when published, will help people to understand the
gravity of the situation. In all low income countries,
expansion of money put in circulation results quickly
in price rises. Inflation is the word used when we
look at the cause and discuss the situation in terms
of money. Price rise is the phrase used when we speak
from the point of view of commodities. If the
expansion of money, whatever be the motive or reason
for such expansion, outpaces the physical volume of
output of commodities, we have a state of inflation
and prices rise as a result.

The Ministry of Commerce publishes the average of
wholesale prices. From the hand-outs of the Reserve
Bank of India we can obtain information about money
supply. There has been a continual rise in the general
index of prices. We see also that money supply has
considerably expanded, faster than the output of
national products.

With 1938-39 as base, the general index of prices in
August 1960 was 478, a rise of nearly five times. The
present changeover of the base from 1938-39 to 1952-53
obscures the enormous magnitude of the price rise.

Government collects funds from the people by taxation,
loan issues, small savings and profits of public
sector undertakings.

From these funds disbursements are made for
administrative expenditure, repayment of past loans,
and Plan investment outlay. When these and other items
of disbursements exceed the total receipts, what is
called budget deficit arises. These deficits are
covered by notes printed at the Government Security
Press at Nasik. This is called deficit financing.

This expansion of money is followed by what is called
secondary expansion through credits given by
commercial banks. For every Rs.100 crores of
additional Nasik money, there is usually another
Rs.100 crores of credit creation.

Inflation that now prevails in India began in 1955-56.
Budget deficits rose from 97 crores in 54-55 to 225
crores in 55-56. In 57-58 the Plan outlay was so great
that, with additional defence expenditure, the budget
deficit that year reached a peak of 495 crores. These
yearly deficits have a cumulative action.

The rise in prices due to inflation reduces the value
of money and life becomes unhappy for people living on
wages and fixed incomes. Their real income is reduced,
and some of them would have to draw on past savings
for current expenditure.

The rise in price corrodes all savings. This leads in
the case of the better placed classes to the transfer
of their savings to urban property, to gold and to
concealed exports of capital. Speculative transactions
acquire additional attraction. Hoarding of goods is
encouraged, eating into savings. For a time production
may be deceptively stimulated on account of higher
prices, but soon it gets retarded on account of
increased costs. Foreign purchasers of our goods will
move to other markets. Imported goods rise in price
giving windfall profits to importers and smugglers.

As a result of inflation, income shifts from the
masses to upper income groups. The middle classes are
most hit. The strike of the Union Government employees
was a symptom of this suffering. Industrialists and
their labour force, who are able to extract a share in
the receipts, do not suffer much but the condition of
the vastly larger number of farm lands is worsened.

Inflation must be followed by price controls and
import restrictions. These produce a great deal of
economic and social disorder and injustice. The
controls over steel, coal, cement, sugar, rubber,
fertilizers and food-grains have cast a gloom over the
life of the people.

Far from equalizing incomes, the policy of controls
makes the rich richer. The stagnant percapita
consumption of cloth and of food-grains is the best
evidence of the condition of the people, and this has
resulted from the misguided policies of the present
administration. In the case of all imported goods
including gold, there is a great gap between landed
cost and market price, ranging from 30 per cent to 500
per cent, depending on the nature of the commodity.
The difference between the landed cost of gold and the
market price is seventy rupees per tola. The import
markets are illegal and the gap between cost and
market price is officially ignored but this does not
nullify the reality. The benefit of all the gaps in
cost of imports and market price goes to importers and
smugglers. Excluding government imports where the
difference may be treated as a concealed tax,
according to a reliable estimate, the ill-gotten gains
on imports during two years would be of the order of
Rs.1,000 crores. This amount has several co-sharers -
corrupt officials who handle the issue of licences,
the recipients of the licences, including both those
who just sell them in the black market and real
importers. The accounts of cost are falsified by
inter-sales and the like, so as to bring the declared
cost to near the market price, and so as also to
replenish the importers for their payments for the
purchase of the licences and for corrupt transactions
with officials and go-betweens. All these incomes are
tax-free, being illicit in nature. It is these
earnings that enable some people to give large
political donations to the ruling party and also to
other groups for purchasing peace. The beneficiaries
of the illegal gain, on account of import controls,
are the upper income groups and the money is obtained
from those who consume the imported commodities or
articles into the production of which such imported
materials go. The total anti-social money that goes
thus from consumers' pockets to upper income groups
has been estimated as being of the order of Rs.300
crores per year. Inflation, import restrictions and
other controls have affected the moral standards of
the nation, and have led to the emergence of a new
undesirable profession engaged in touting for
obtaining licences, permits and contracts, in illicit
trafficking in import licences, and in smuggling gold,
diamonds, watches, cigarettes, fountain pens, razor
blades, photographic accessories, etc. The talent for
enterprise tends to gravitate around officialdom and
to practices to become rich quickly without spending
energy.

In the absence of inflation and controls, the talent
and resources would be actively engaged in adding to
national wealth under the free play of competition,
the normal road to progress. Inflation and controls
discourage efficiency and progress and honesty.

Easy money being available to some under controls and
inflation, they favour continued 'planning' which to
them means continued inflation and controls which
provide them opportunities to amass money. Political
parties in power also favour controls, as these give
an opportunity for the exercise of power and for
acquiring personal and political gains. Conscience
pricks are quelled by the thought that it is all done
in the national interests and the gains are only an
incidental by-product.

Never were the interests of the anti-social elements
so well looked after as under the present
administration. These controls must go or the
Government should change, if the country is to be
extricated from the morass it has got stuck in. It is
not true, as is argued sometimes, that rising prices
and controls and import restrictions and exchange
controls are inherent in a developing economy. The
experience of other countries-Canada, Belgium, West
Germany, Mexico, Japan, Italy and France-have
demonstrated the untruth of this plea.

It is not true, as is sometimes stated, that prices
all over the world have risen. West German national
income rose in real terms at 13 per cent per year in
each year of the period 1951 to 1958. But prices rose
there by less than one per cent per year, 5 per cent
only in all seven years. And West Germany was in the
forefront to remove restrictions on imports and on
payments abroad. In ever so many countries price
stability and surplus in balance of payments, and
abolition of restrictions on imports and payments,
have gone together with rapid economic growth.

Since 1955, Indian price-rise stands out almost alone.
Prices in May 1960 in India were 33 per cent higher
than in 1954. In France and Italy prices declined
during that period. In Germany, Belgium and Japan and
other countries the annual price rise was 1 per cent
or at most 2 per cent.

There is a notion that curtailing bank credit will
reduce inflation. Bank credit is so closely related to
deficit financing that keeping the latter going and
reducing inflation by control over credit is a
futility. It only adds to the confusion. To restrict
credit against food-grains and certain other
commodities would raise the cost of banking services
generally, and in particular the cost of credit to the
trade in those commodities, which are essential for
the economic life of the community. Naturally, such
policies encourage advances against assets outside the
banned list and drive the business of credit from
scheduled banks to others which are not under control.
The policy of credit controls has demonstrably failed.
Tampering with the credit- machinery will not achieve
anything as long as deficit financing is continuing.

The fact is that the attempt to 'invest' non-available
resources - which is what deficit financing amounts
to—is a wrong and futile policy. No plan can be larger
than the resources available for investment, be it
internal or that obtained from generous outsiders.
Even as water is no substitute for milk, inflation is
no real resource. The fallacy produces high prices and
distress. A plan based on inflation will retard
progress instead of accelerating it.

The Third Plan is tremendously inflationary. The overt
deficit financing of this Plan is Rs.550 crores. This
is misleading. Without totalitarian and physical
suppression of consumption, in order to mop up
people's money by reducing consumption, the amount of
supposed availability of savings estimated at Rs.7,200
crores is an over-estimate. The over-estimate is at
least of the order of Rs.1,300 crores.

Thus what the Plan requires by way of foreign aid,
(over and above the amount required for repayments
due) is not Rs.2,790 crores but Rs.5,350 crores. The
deficit financing therefore will not be only Rs.550
crores as planned but six times that figure. If the
foreign aid does not arrive according to the time
table, whatever the causes may be, the gap will be
much greater. And there are good reasons for
apprehending this.

We know that deficit financing to the extent of Rs.367
crores during the five years ending 59-60 led to a
price rise of 32 per cent. The deficit financing
inherent in the Third Plan will certainly involve
'runaway inflation', like the one that swept over
Germany after the first World War. During the five
months ending August 1960, prices have been rising at
a rate computed at 14.2 per cent per annum. This is an
indication to take note of Deficit financing has
already gone too far. Foreign aid and drafts on
currency reserves, cannot go on indefinitely. Holding
the price line, which is continually promised, would
be just King Canute's command to the waves of the sea.

It is pathetically argued that inflation will be
stopped by increase in production. Inflation retards
production. It drives up costs and the commodities
manufactured must be sold at higher prices. Prices and
costs rise simultaneously with inflation, and will
continue to rise with continuing inflation. Inflation
is the disease and the prices only indicate the
temperature. There is no good attempting to reduce the
symptom while keeping the disease going. Fair price
shops of any kind or number cannot achieve control of
prices. Even if buffer stocks released for sale
depress food prices artificially, this will shift
agriculture to other than food-crops, and render the
food position worse. Any commodity distribution at
arbitrary prices will fail, because the stocks will be
bought up as soon as they are put on the market, and
go to feed the black market. The cost of any remedy
put in action by way of subsidies will ultimately fall
on the shoulders of the tax-payers. The net result, so
far as the price level is concerned will be nil. The
price problem resulting from inflation cannot be
corrected by a change in the machinery of
distribution. The diagnosis must be kept in mind when
treatments are attempted The money let loose being the
cause, remedies other than reducing the money flow
will not avail.

The favourite notion that prices result from traders'
conspiracies is stupid. Such conspiracies are
impossible. The prevailing price rise is not the
outcome of either monopolies or impossible
conspiracies but of deficit financing. Prices have
risen despite bumper crops and heavy annual import of
food-grains of three million tons for four years.

To stop prices from rising, we must restore the
balance between the flow of production and the flow of
money. Inflation and excessive State interference are
the two evils of the Indian economy of today. If and
only when these two evils are removed, can we expect
to be saved from rising prices. If not, it is a case
of the ground being prepared for communists to take
totalitarian charge.

September 24, 1960 Swarajya



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A question about economic polices in India in 1984, for probabale cause of the Bhopal disaster

To : Union Carbide Ltd

Dear Sirs,

I am a Indian entrepreneur based in Chennai,India
and very much intersted in economic polices
and free enterprise system.

Until 1991 India was in the vice like grip of
socialistic economic polices intiated by
Congress party from 1952. Free enterprise was
throttled and excessive goverment controls and
regulations strangeled our economy and corrupted
our system.

There was (and still is) no proper exit policy
for loss making and failed industries. And labour
laws are still rigid.

I am trying to research about such aspects.
There is very little data available about the
business profits and losses of Union Carbide India
Ltd and its Bhopal plant. Declining sales and
profits were reported. Was the plant under
utilised ? Suppose if exit and labour policy
in India were similar to USA in 1984, could the
tragedy been prevented ? Was UCIL unable to close
or sell its assets or wind up its unviable
operations in India due to legal and economic
polices followed in 1980s ?

Was the Bhopal plant making losses and unviable,
but forced to operate due to polices of government ?
Was UCIL prevented from closing or liquaditing
or selling its assets by socialistic polices of
govt of India at that time (before 1984) ?

Fertiliser policy is still a muddle and has resulted
in making many govt and private units sick.

Can you please send a detailed answer to my above
queries ?

Thanks & Regards

K.R.Athiyaman

Ethics, Corruption, and Economic Freedom

Ethics, Corruption, and Economic Freedom

by Ana Isabel Eiras

Heritage Lecture #813

The subject of ethics has increasingly been present in economic analysis, 1 although not without considerable debate. Some economists believe that the importance of economics is purely technical. Others believe that moral considerations in economic analysis provide a more accurate picture of possible outcomes since it takes into consideration the human aspect of economic actors--that is, people. I confess that, as an economist, it makes me nervous to insert subjective measures such as morality and ethics when I do my own analysis, both because my conclusions may be applicable only to a few cases and because morality and ethics are hard to measure. But since economics is the study of choice, human behavior cannot be ignored in economic analysis if we want to have a meaningful insight into people's economic life. I will try to explain corruption, therefore, in economic terms and show how economic freedom removes opportunities for corruption and promotes ethics not just for its moral implications, but also because of its economic value. Ethics, according to Merriam-Webster's dictionary, is "the discipline dealing with what is good and bad...." In general, we call unethical those actions for which there is a social consensus that they are a bad thing. 2 Corruption has several meanings, depending on whether it takes place in the public or private sector; however, for most people corruption is something unethical, something considered a wrongdoing. A closer look at human behavior in economic life suggests that, in some instances, corruption does not reflect so much a lack of ethics as it reflects a lack of economic freedom. Economic Freedom and Corruption To better understand the link between corruption and economic freedom, let me first describe economic freedom and then explain how its absence fosters corruption. I will examine the relationship between economic freedom and corruption both in the form of informal economic activity and in the public-sector bureaucracy. According to The Heritage Foundation/Wall Street Journal annual Index of Economic Freedom, economic freedom is "the absence of government constraint or coercion on the production, distribution, or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself." 3 The Index measures the level of economic freedom in 161 countries around the world. To measure economic freedom, it focuses the study on 10 different factors: Trade policy, Fiscal burden of government, Government intervention in the economy, Monetary policy, Banking and finance, Capital flows and foreign investment, Wages and prices, Property rights, Regulation, and Informal market. The Index provides a framework for understanding how open countries are to competition; the degree of state intervention in the economy, whether through taxation, spending or overregulation; and the strength and independence of a country's judiciary to enforce rules and protect private property. The 10 factors of the Index allow anyone to see how much or little economic freedom a country has. Some countries may have freedom in all factors; others may have freedom in just a few. One of the most important findings of the Index is that, as Frederick von Hayek foresaw more than 60 years ago, economic freedom is required in all aspects of economic life--that is, in all of the 10 factors--in order for countries to improve their economic efficiency and, consequently, the living standards of their people. The Index shows that corruption does not always reflect inherent unethical behavior. This is particularly the case for those who are forced out of the formal economy into the informal economy through burdensome regulations, taxation, and weak property rights. Economic Freedom and the Informal Economy Charts 1 and 2 illustrate the relationship between economic freedom and the size of the informal economy as a percentage of GDP in OECD [Organisation for Economic Co-operation and Development] countries and 22 transition economies. 4 Chart 1 shows a positive correlation between these two factors. As economic freedom vanishes, the informal economy takes a larger share of GDP. On average, as shown in Chart 2, the size of the informal economy in economically unfree and repressed economies is almost three times the size of the informal economy in free economies, and almost double the size of the informal economy in mostly free economies. These charts illustrate the perverse effect of economic repression on the ethics of ordinary people and on the perpetuation of their poverty conditions. For example, in most developed countries, people have a better standard of living thanks to credit access. In the United States, for example, without credit, I would not have a house, or a car, or a TV, or a vacation, or many of the products that add comfort and convenience to my life. Credit makes it possible for me, an ordinary middle-class person, to improve my standard of living in many ways. To have access to credit, however, I need to prove that I have an income or property. To prove that I have income, I need a formal job, and to prove that I have property, I need a property title. The amount of available formal jobs depends, of course, on how easy or difficult it is for people to invest, whether in a small retail shop to sell groceries or in a big factory. The friendlier the business environment, the more likely formal jobs will be available. According to the Index of Economic Freedom, however, in most low- to middle-income countries, it is extremely difficult for small and medium investors--which are the largest source of jobs--to operate, both because of the regulatory environment and because of the lack of a strong rule of law. Consider labor regulations in Argentina. In this country, an employer must grant, by law, several employee benefits, including holidays, vacations, sick leave, health insurance, paid overtime, an annual bonus, and some paid months before laying off an employee. 5 Or take France, where employers must grant, by law, at least 2.5 working days of paid vacations per month; pay over 30 percent in contributions to social security; offer a complementary pension scheme, 35 hours of work per week, and time off; and abide by a burdensome bureaucratic procedure to dismiss employees. 6 The immediate problem with this kind of legislation is that it assumes that all employees are equally good, equally responsible, and equally productive, which is not true. If the employee arrives late, treats customers poorly, and makes the employer lose money, the law grants that employee the same benefits that it grants to a good employee. Perhaps large businesses, like a multinational factory, can afford to comply with these regulations because of the size of the business and its diversification around the world. But the burden of these regulations destroys small and medium entrepreneurs, who may put their entire savings at stake in their investment. Small and medium businesses therefore choose to do business and create jobs in the informal sector, where these benefits are negotiable and tied to performance, and not forced by law. This is a clear case in which the rules of the state create perceived unethical behavior by private employers and employees when what is really in question is the ethics of such a regulatory burden in the first place. If they do not have a job, people can still get access to credit if they have a property title to use as collateral. According to Peruvian economist Hernando de Soto, many of the poor in the developing world have property but the bureaucracy they have to go through in order to get a property title is, at best, huge. 7 For example, in Perú, "to obtain legal authorization to build a house on state-owned land took six years and eleven months, requiring 207 administrative steps in 52 government offices.... To obtain a legal title for that piece of land took 728 steps." 8 It is just as bad in other countries, such as Egypt, where it takes 77 steps in 31 government offices (anywhere from six to 14 years), or the Philippines, where it takes 168 steps through 53 offices (anywhere from 13 to 25 years). The poor own many things that they could use as collateral, but it is bureaucratically impossible for them to validate their property rights. As a result, they are unable to convert what they own into capital and, therefore, raise their standard of living. Informality is a response to economic repression, not to something inherently unethical in those who circumvent legislation. What is most unethical about informality is the condition in which the government forces the poor to live. Informally employed people are condemned to a standard of living that is significantly lower than that of formally employed people, who have credit access. Also, informality creates a culture of contempt for the law and fosters corruption and bribery in the public sector as a necessary means to navigate the bureaucracy. Economic Freedom and the Rule of Law Charts 3 and 4 illustrate the relationship between economic freedom and the level of corruption in 95 countries around the world. 9 Chart 3 shows a strong correlation between these two factors. As economic freedom vanishes, corruption flourishes. On average, as shown in Chart 4, the level of perceived morality--as a contrast to corruption--in economically free countries is almost four times the level of perceived morality in the public sector in mostly unfree or repressed economies, and almost 60 percent greater than in mostly free economies. Having a weak rule of law significantly adds to the level of corruption in the public sector as well as the amount of informal activity. A weak judiciary is a "blind eye" on anything done outside the law. With a weak judiciary, corruption goes unpunished and informality flourishes. This is one of the most serious problems we find in the world today. Of 161 countries evaluated in the 2003 Index of Economic Freedom, 108 received bad scores in both regulation and property rights," undermining any effort to improve the living standards of the poorest in those 108 countries. Conclusion To be sure, there are cases of corruption that respond to the unethical nature of the corrupt individual. But for the most part, the unethical behavior stems from the environment in which individuals must interact. Convoluted regulations and weak rule of law foster a culture of corruption and informality both in the private and public sectors. In the public sector, convoluted regulations and weak rule of law provide ample opportunities for public officials to accept bribes without punishment. In the private sector, those two factors push some people to do business informally as a means to survive and others to profit far more than they would if the possibility of bribery did not exist. The result is an increasingly unequal society, in terms of the opportunity to create wealth and improve living standards. To fight corruption and informality, it is essential to understand that corruption is a symptom--of overregulation, lack of rule of law, a large public sector--not the root of the problem. The perceived problem is unethical/corrupt behavior of the private sector, which leads the government to press more on private-sector activities. The real problem is the government action/regulations causing undesired behavior of the private sector. The optimal solution would be to eliminate burdensome regulations so that unethical behavior does not occur. Countries must advance economic freedom in all possible areas of the economy, with particular emphasis on regulations affecting small and medium business, in order for corruption and informality to decrease. The Index of Economic Freedom is an excellent guide to identify what is obstructing economic activity and, therefore, perpetuating poverty. Countries must also preserve the independence and effectiveness of the judiciary to punish corrupt actions. Economic freedom with a strong rule of law will foster a culture of investment, job creation, and institutional respect--all essential factors in massively improving the living standards of ordinary people. --Ana Isabel Eiras is Senior Policy Analyst for International Economics in the Center for International Trade and Economics at The Heritage Foundation. These remarks were delivered at a conference on the "Ethical Foundations of the Economy" in Krakow, Poland. 10 1. See Daniel Hausmann and Michael McPherson, "Taking Ethics Seriously: Economics and Contemporary Moral Philosophy," Journal of Economic Literature, Vol. XXXI (June 1993), pp. 671-731. See also Leonard Silk, "Ethics in Economics," American Economic Review, Vol. 67, No. 1 (February 1977). 2. Merriam-Webster's Collegiate Dictionary, Tenth Edition (Springfield, Mass.: Merriam-Webster, 2002), p. 397. 3. Gerald P. O'Driscoll, Jr., Edwin J. Feulner, and Mary Anastasia O'Grady, 2003 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., 2003), p. 50. 4. Friedrich Schneider (see Charts 1 and 2) used the physical input (electricity) method, designed by Daniel Kaufmann and Aleksander Kaliberda. Overall (official and unofficial) economic activity and electricity consumption have been empirically observed throughout the world to move in lockstep with an electricity/GDP elasticity that is usually close to 1. By having a proxy measurement for the overall economy and subtracting it from estimates of official GDP, Kaufmann and Kaliberda derive an estimate of unofficial GDP and DYMIMIC method (dynamic multiple-indicators multiple-causes, a model that measures the link between the unobserved variables [the shadow economy] to observed indicators) to measure the size of the informal economy in transition countries in Central and Eastern Europe and in states of the former Soviet Union. For the OECD countries, either the currency demand method (first used by Phillip Cagan, who calculated a correlation of the currency demand and the tax pressure--as one cause of the shadow economy--for the United States over the period 1919 to 1955) or the DYMIMIC method is used to estimate the size of the shadow economy. 5. The Labor Market and Its Legal Context, Executive Summary, Deloitte & Touche, July 2003. 6. Country Commerce: France, Economist Intelligence Unit, June 2002. 7. Hernando de Soto. The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (New York: Basic Books, 2000). 8. Idem. 9. The TI Corruption Perceptions Index (CPI) ranks countries in terms of the degree to which corruption is perceived to exist among public officials and politicians. The CPI focuses on corruption in the public sector and defines corruption as the abuse of public office for private gain. The lower the score, the higher the level of corruption. For details about how the CPI is done, see http://www.transparency.org/. 10. The author would like to thank John Lyneis, an intern at TheHeritage Foundation, for his valuable research assistance.

Contents

11/15/2006
Traffic Problems and Solutions

2/19/2006
Why Indians beame cynical and corrupt ?

2/01/2006
Peter Drucker : tax evesion leads to cynicism

1/30/2006
reg : creamy layer misusing reservation policy

6/29/2005
An enreupreuner's viewpoint about tax-evasion &Tax/GDP ratio

5/03/2005
Why poverty in India ?: govt deficits & inflation

5/03/2005
govt deficits & inflation

5/02/2005
On National Debt

5/02/2005
To : Communists & Socialists of India

5/02/2005
The real cost of Socialism in India

5/02/2005
MNCs & child labour

5/02/2005
What keeps India backward ?

Traffic Problems and Solutions

Traffic Problems and Solutions

Phenomenal rise in private vehicles has resulted in
traffic congestion.Due to an acute shortage of buses
(especially during peak hours),commuters tend to buy
two wheelers or cars as soon as they can afford to own
one. Until 1980 it was normal for most middle class
people to travel by buses.

Nationalisation of buses in 60s resulted in creation
of goverment monopoly and corruption in this sector.
Mis-management, pilferage and lack of transparency and
accountability of government bus transport
corporations resulted in huge losses and acute
shortage in bus services to meet the growing demand.

The argument against privatisation that the private
operators will not service remote and loss making
routes has yet to be proved. Government MTC services
in loss making areas are curtailed. For example
many routes in Nanganallur, Chennai has been
withdrawn citing lack of patronage.

The existing private bus routes are now sold in black
market for crores of rupees. Yet private buses are
better maintained and profitable. There is a vested
interest lobby of existing private bus owners (permit
holders),bureaucrats,politicians and trade unions of
govt corporations who oppose deregulation and
privatization of bus transports. Even mini-buses are
not allowed to expand service areas. Share autos are
opposed by regular auto drivers union.

If, instead of nationalization of buses, free
competition and low taxes were encouraged since
independence, then there would have been an excellent
and efficient public transport system. The culture of
owning private vehicles for commuting would not have
grown this much. A single bus can carry upto 60
commuters while lack of bus forces these 60 commuters
to own and travel by two-wheelers, there
by shrinking road space and increasing pollution.

Private bus stands and parking lots (bus stops along
main roads and highways) can be permitted and
encouraged. Two wheeler taxis can be allowed in
suburbs and remote areas.

Decentralisation and delicensing of transport sector
will result in better services and reduce traffic
congestion.

Why Indians became cynical and corrupt ?

India achieved freedom in 1947 after intense struggle
and sacrifice by a dedicated and idealistic people. We
have slowly lost the high ideals and honesty since
then.

The main culprit is the socialistic economic model
followed since 1950, coupled with population
explosion. Socialistic polices, in the name of
egalitarianism, created crony capitalism (license,
permit, quota raj), along with confiscatory tax regime
and double digit inflation.

The government printed enormous quantity of money to
finance its huge programs and investments. It resulted
in double digit inflation. Additional resources were
raised through very high taxation (upto 95 % income
tax rate). The triple attacks of inflation, license
raj and high taxation eroded our values and morals. A
bloated bureaucracy was created to administer the
economy, which was a breeding ground for corruption
and cronyism. Tight controls and regulations strangled
economic growth with high unemployment.

Industrialists and traders began to evade taxes which
were perceived to be unfair. The tax administration
became increasingly corrupt. Respect for the rule of
law slowly decreased. The cynicism spread slowly and
political parties promised the heaven for the people
and began to purchase votes. Subsidies and propaganda
of government machinery changed the values and outlook
of common man, who began to look upon the government
to for all his wants. When the voters began to sell
their votes for money and other considerations,
corruption set in. Irresponsible trade unionism
(especially of government sector employees) eroded
work ethics of the organized sector, while the
unorganized sector (who are the majority) were
helpless and squeezed.

Black economy is as large as the 'official economy'.

Individual initiative and enterprise were discouraged
and a whole generation of Indians became job-seekers
instead of job creators. There were isolated pockets
of excellence where enterprising attitude of locals
resulted in prosperity for the region. For example
textile industry grew in Coimbatore district while
trucking industry in Namakkal.

Reckless borrowing of governments, which were living
beyond their limits, resulted in a debt trap and high
inflation. All this took our nation to near bankruptcy
in 1990-91. And since liberalization began in 1991,
economic growth is high and the hidden potential of
our economy has been unleashed.

We are a living proof of the prediction of Lord
Keyenes who said '..there is no surer way of
undermining a nation's character than by undermining
her currency..'

'High taxation leads to evasion, which makes people
cynical ; and this cynicism is a slow poison which
ultimately destroys democracies' says Peter Drucker
in his book, The New Realities. (1999)

Our cynical attitude is highlighted in the way vested
interests and apathy have distorted, reservation
policy, trade unionism, subsidies and environmental
issues.Economic health can be restored, but morals of
a people, once lost, is difficult to repair. It may
take many decades for full restoration.

Peter Drucker : tax evasion leads to cynicism

Dear Sir,

While chatting you had mentioned about the connectionbetween tax evasion and cynicism. The following is from P.Drucker's 'The New Realities " (pp69-70)'....once the govt take, especially if collected thru taxes, exceeds a certain percentage of gross national productor personal incomes - the fiqure seems to be around35-40 percent or so - a silent but highly effective'tax revolt' starts. People stop working ; what is the point if the additional income is being taxed anyway ?Worse, people begin to cheat. A 'grey economy'develops. In the US there was almost no tax cheating before 1960...

'...Attempts to stamp out or even to curtail the graye conomy are ineffectual as long as tax rates remainhigh.In fact, while everyone loudly condemns the greayeconomy, most people not only participate in it but consider it morally justified and, in fact, 'clever'.But this undermines the moral cohesion of scoiety, Itproduces a dangerous political poison, cynicism.'

Seventy years ago Schumpeter warned that inflationwould destroy free society. After WW 1 , the inflations in Europe, esp in Germany amply bore out Schumpeter's warning...'

Regards
Athiyaman

reg : creamy layer misusing reservation policy

From : K.R.Athiyaman, Chennai - 96

To : Thriru.Ki.Veeramani Ayya Avargal, Chennai

Anbulla Ayya,

The creamy layer (that is, those who are
upper middle class and above) among
BC/SC/ST communities continue to enjoy
the benifits of reservation unashamedly.
(i hail from such a family).

We propose that economic criteria should
also be included as an additional qualification
for being eligible for reservation benefits.
Families whose annual income is above say,
Rs.1,80,000/- and where the parents are well
educated may be deemed as FCs. And many schools,
where annual fees are above Rs.60,000 may be
classified as FC schools.

Reservation was meant to be a short term
issue and never a permenent institution as
it has become now. And there should be a
standing committe consisting of eminent
jurists, educationalists and honest people
to perodically evaluate the effects/abuse
of reservation benefits. The whole process
should a dynamic one, not a static one, which
is now a vote bank issue and nutured by
vested interests. And there should be a
maximum limit for resrvation (and not the
present >70%), which should be gradually
brought down.

And in promotion among govt staff only
seniority, merit and efficency should be
the criteria. Only one generation of any
family must be eligible for the benefits.
Subsequent generation must be deemed FCs.

Unfair reservation benefits to numerous
well off students has created resentment
and heart burn among FCs and many fair
minded people. The caste divisions has become
more rigid and divisive (esp in govt offices).

I am sure Thandai Periyar and Ambedhkar would
endorse my above views if they are alive today.
They were basicaly honest in all issues.

DK should have functioned as a bridge between
BCs and SCs (esp in rural areas) and established
peace committes for stopping caste clashes.
The aliented SCs have formed many organisations
of their own to fight for their rights, instead
of joinning DK. Blaming brahmins alone for all
the ills of the society will not solve any thing.

Thanks & Regards

K.R.Athiyaman
Chennai

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An enreupreuner's viewpoint about tax-evasion & Tax/GDP ratio

To : Prod. Cp.P.Chandrasekar, JNU, New Delhi

Dear Sir,

I am an entreupreuner running a SSI unit (molding)
at Chennai.

We are taxed at 35 % income tax ; and sales, excise
and power tax (as indirect -cross subsidy to domestic
consumers) constitute a good chuck of our turn-over.
Our power bill comes at a whopping 35 % of our monthly
turnover.

I undertand that you are advocating rising the tax-GDP
ratio even higher. GDP is the total turnover of all
industries, enterprises, indiviuals, etc. It is the
total annaul sales turnover. Not the gross profit,
as many are misled to belive.

Now, we make some 15 % profit on our annual turnover .

So, we cheat on income tax with the help of accountants and auditors.
We inflate the expenses, sell without invoices, try to
con the tax adminisntrators. We bribe them to avoid
penalisation. We feel that the present tax rates and
regime are grossly unfair and very high (incl of power
subsisdy that we foot).

The govt comes in as a 1/3 partner without putting any
capital at the end ofthe year (while never sharing our
losses or problems).

We work hard and take great pains in running the unit
profitably. It is my hard earned money and i have the
fundamental right to spend it as i deem fit. i try to
treat my workers with compassion and sensitivity.
But charity and service will be at my terms, not at
any one else's.

I propose that JNU professors and economists/authors
may be taxed at a 'progressive' rate of some
73 % of gross income. Rs.10,000 p.m may be enough for
you to live comfortably. Or i suggest that you resign
your safe govt job and enter self employement like
publishing, etc, so that you may understand our
feelings and problems.

Over taxation in the 50s and 60s at some 90 % max plus
licence raj with 20 % inflation had wrecked our
economy and morals. A whole generation of would-be
entreupreuners were made into govt-job seeking
weaklings and enterprising nature was punished as
'profit-mongers' ; Any working man (like you or me)
works for making money (be it salary or wages or
profit) ; then why is it that only capitalists alone
are blamed as 'selfish'.

We have a more objective insight into human nature
than any Marxists. Man will work hard and give his best
only when there is an incentive to gain (profit, etc).
Otherwise, in a regulated and controlled set-up, like
in govt jobs, ineffeicney and sloth plus corruption
floursihes. How is it that many pvt enterprise better
and cheaper services than govt (like in transport or
telecom).

Thanks & Regards
Athiyaman
Chennai

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govt deficits and inflation

Dear Sir,

Thnaks for your prompt reply to my mail.
the combined deficits of central and all stare govts
is more than 10% of GDP. And inflation may have fallen
in recent years ; and the current rise is due to
crude oil prices, etc.But still the basic reasons for
the 5 % inflation (that is according to govt
statistics) is too high. In reality, for the layman
and consumers, prices more than double in a decade.
And real rate of inflation is always higher than the
govt statistics.

The formula
rate of inflation = rate of growth of money suppy -
rate of growth of GDP
is always valid.

And it is obvious govt pumps in about 15% of money
into the economy. Pls elaborate and educate us all
about this fraud commited in the name of 'public
good'. and most state govts will be bankrupt soon,
even thought the economy may grow and look healthy.
Maharastra seems to top the list.

And Germany which sufferd terribly in the after math
of both the world wars experienced hyper-inlfation.
And till date the Germany's main objective is to keep
inflation below 2 % (or so). And that is why she is
today the strongest and healthiest economy in Europe.
We should learn from Germany's history.

thanks & Regards
Athiyaman
Chennai

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On National Debt

On National Debt

The idea of National Debt has become outdated. Nowadays people look upon it as some sort of benignant tumour, growing all the time, taking all the space but giving no pain; so why worry about it?

Nothing can be more dangerous to the stability of the government than the above view. History has repeatedly shown us countries and empires fail mainly because they become bankrupt. Wars, revolutionaries, epidemics, succession disputes are all only the immediate provocation for a crisis; but ultimately countries fail because they are bankrupt by the time that crisis arrives; because their taxation reaches unreasonable levels; because the people become so disgusted with the government they’d rather see it disappear.

The Government of India is a shining example of Spencer’s Law: Men will go for the rational solution, but only after exploring all other avenues. After experimenting with every possible scheme that goes against the basic tenets of economics, under the sweeping label of ‘socialism’, it has finally found that, to become rich there is no alternative to profit-making. Still, in managing its finances, it is yet to exhaust all the avenues and come to a reasonable understanding.
Let us get our basics straight: the economic laws that hold good for a household hold good for a country. A country has to earn more and spend less to make a profit; a country has to borrow if its expenditure exceeds its income; and a country can become insolvent the same way a family becomes. Anyone who tells you otherwise is either cheating himself or cheating you.

The cute little tricks that the ‘leftist’ economists tried to pull over these basic tenets are as follows: 1. A family cannot ‘create’ or manage its currency whereas a country can; hence a country can determine the level of its wealth through its currency. This ‘law’ fell flat when the currencies so created and artificially managed, like our Rupee and the Soviet Rouble, found their ‘natural’ values in the international markets, however much these governments tried. The pathetic attempts to artificially boost their currencies bled these countries very much. India had to periodically devalue Rupee since 1947. In 1942 a Dollar was worth two and a half Rupees; now it is worth forty-three Rupees. And that too when the dollar itself was sliding down all the time and the Rupee being an inherently strong currency to boot. In short, a government may create its currency, but it is the country’s economy that manages it. No country can become rich by printing currency. 2. There are other ways a country can ‘create’ wealth by redistributing it and by government spending. Some leftists even dare to quote Keynes as the authority who advised this sort of becoming rich through government spending. This method of becoming rich is exactly equal to lifting yourself up in air by pulling your shoelaces. Keynes’ advice was meant for a very special circumstance, namely the Great Depression, when the currency was strong and overvalued, the Government was rich, solvent and conservative but the majority of the people were poorer because they lost their currency. An insolvent Government cannot ‘create’ any wealth by overspending. It rather will cause more inflation and devalue the currency. And this is precisely what Lord Keynes told. So let us not fool ourselves into believing that microeconomics and macroeconomics are altogether different. They are one and the same, only the jargons differ.

Now a brief review of India’s economic history. India always had a balance of trade in its favour, i.e., it always exported more than it imported. This was true even during the height of British imperialism. And again, it always had a surplus budget, i.e., it always earned more but spent less. Again this was true all through the British history except for a few years of the Second World War. Were the British to incur a loss in running India they would have invited Bahadur Shah Zafar to take over. So, when the British handed over India to us, they gave us a solvent government. India had a public debt even then, but it was well within limits. India had a foreign exchange reserve of five billion Pounds in 1947.

Now our socialist experimenters took over. They told us we were a backward economy because we exported raw materials and imported finished goods and we exported agricultural produce but no machinery. Why should a country be backward just because it exported raw materials, they never bothered to answer. They also covered up the fact that we also had a huge labour market and the combination of the raw material and cheap labour would make us a manufacturing country, if only we let the fellows, with the money and the technology, to invest.

No, thanks, we will do it ourselves, we told the world, and set up our public sector, which is public only in making us bear its losses. We frittered away our foreign reserves in buying machinery and technology. We reduced the export of raw materials because it is a sign of backwardness. We nationalized steel, coal and power, with disastrous consequences. We created militant labour unions that were averse to all forms of work. What followed was a communist heaven: no work, full pay. But in Hindu religion, even the longest stay in heaven will end one day, however much be our punya we will eventually exhaust it and return to earth again. This happened after the 1991 foreign exchange crisis. Since then we are limping towards obeying the basics tenets of economics rather than trying to cheat them. But in the process of these socialist experiments we have incurred a huge national debt. Some noise was made about this when India was short of foreign exchange and spent 25% of its earnings to service its debts – a euphemism for the interest we were paying. But now that the foreign reserves are comfortable nobody is worrying about the national debt.

There are many reputed economists who will tell you not to worry. They will tell you that your debt to GDP ratio is still low, your taxes are only about 8% of the GDP and so you must tax more and spend huge amounts in public works for ‘development’. Let us have a look at these gems of wisdom.

Debt to GDP: this is audacious at the very least and atrocious at the most. GDP is roughly the trade turnover of all our people. Public Debt is incurred by the government, often on expenditures that people might disapprove of. The government cannot take away the entire national income as tax, it has to leave a little bit for the people, so that they can subsist and be taxed next year. So the government’s debts must be compared only to what it can collect as tax from the people, not what the people earn in total. It is meaningless to compare the National Debt to GDP. It is like comparing the debts of a profligate son with the business turnover of his patient father who has a big family: however much is his love, he cannot give up any sizeable portion of his earnings to pay off his son’s racing debts. At some point he would disown his son.

Similarly at some point in the raising taxation the people will refuse to pay the taxes. So this Debt to GDP is one of the most malicious tricks of the trade, beware.

In every taxation, people will try to wriggle away and evade as much as possible, an endeavour that our bureaucrats help very much through arcane rules. This will again reduce the tax collectible, and hence the money at government’s disposal. So far there is no authoritative study on how much of the national income can be collected as tax without risking serious riots. But an empirical and witty work of Northcote Parkinson puts this at 36% (of national income, not GDP).

But it is impossible to reach this point in India for the following reasons: the black economy will overwhelm the white economy under heavy taxation; it is easier to bribe the taxman and get away; and India simply does not have such a heavy mechanism that can track all the transactions and tax them. In India’s case, the limit is only 10% of the GDP, given the rudimentary nature of our transactions and the porous tax net. And we are fast approaching this point, as any Finance Minister will tell you that any more new taxes will not fetch much return.

Hence the second point: Taxation as a percentage of GDP is misleading.
Let us get one more thing straight: government is not a mechanism to create wealth, it is a mechanism of the society to govern itself. If we compare the whole society to a business, then the ‘government’ is its administrative expenses. How much should a company spend on administrative costs? Crudely put, you decide to give a free banquet to 10,000 people, costing 10 lakh Rupees, and you engage a fellow to do this. Some part of this money should be spent on this fellow. How much would you allow? Put this way, the answer is obvious: may be ten thousand, may be twenty, but certainly not one lakh Rupees. Put in words, administrative costs should be only one to two percent of the total turnover. Hence the ideal tax to GDP ratio is 1-2 %, not 10%, i.e., the government should take only 1-2% of GDP for all its expenditure, and again of this sum, only 1-2% should be the ‘administrative cost’- salary, etc to its servants.

Now about public spending. The lesser said the better. At present India is like a family that has both some large debts and some small assets. Supposing it decides to sell the assets and get some money; how should this money be spent? Any prudent housewife will advise you to pay off your debts so that your interest burden will come down. If she advises you to buy a plasma TV with this money, to take a trip to the Maldives, or to spend it on the groceries, then it is time you took to sanyas: once the money is thus spent yours will be a family with some large debts and no assets. Yet, here is a government that is selling away its assets in the form of PSU disinvestments, and spending it to cover day-to-day expenditures. In the esoteric language of the Government, capital receipt is being spent on revenue expenditure. Nobody seems to be bothered about it, rather some people want this money to send a satellite to moon, others to fund an outlandish Food for Work scheme.

Of late another interesting twist has been added to this farce. At present due to the vagaries of time India is enjoying an unprecedented foreign reserve. Very learned scholars are debating how to put this money to ‘serve’ the people. Put this surplus in a corpus fund, urges a noble heart, and use the interest for welfare schemes. It is taken for granted that this new found prosperity is going to last forever, without caring to understand the whimsical nature of modern money that it is supported not by any physical asset but only by the credibility of the issuing government (that is what makes Rupee an inherently strong currency: come what may, a billion Indians are accepting only Rupees, therefore anyone wanting to deal with this billion has to keep some Rupees; the day the corner paanwala prefers payment in Dollars or Euros, Rupee is well and truly gone). It occurs to nobody to pay off our huge foreign debts; the nearest suggestion is that we should exchange high-interest loans for low-interest ones. Our ‘huge’ reserves may vanish within a fortnight if we commit a small error in valuing our Rupee, as Indonesia found to its cost a few years ago. The more reasonable option is to take this opportunity to reduce our foreign debts.

Finally a word about our principles of spending. For years we were told that the government could have ‘small deficit’ in its budget to ‘stimulate’ economic growth. Huge deficits were created and debts incurred in following this principle religiously, but the growth was ridiculously small, and unjustly dubbed the ‘Hindu rate of growth’. Now that the private investment is stimulating all the growth ever needed, and the government has a huge debt burden, it is high time this pious advice was forgotten, India’s budget balanced, and the surplus thus created used for reducing our internal debts. It is high time we froze our expenditure for sometime and reduced our debts and interests. This we owe it not to ourselves but to our sons and successors. No son ever likes to take over a debt-ridden family, why should the country be any different ?