India! I dare you to be rich

Category: Economics

Thaler, Sunstein, Kahneman and other ‘behavioural economics’ proponents: socialists in another guise

I've written sporadically on this blog and elsewhere (mainly FB) against behavioural economics. Since I have no central blog post on this issue, I'm starting this one as a placeholder in which I'll bring earlier thoughts together, and add new ones.


“Food Police here! Stop! Don’t put that in your mouth!”


Peter Boettke's FB post

​Adam Smith's invisible theorem is not handwaving as Thaler contends but along with Hume the first systematic statement of mainline economics. The defining characteristic of mainline economics is the derivation of the invisible hand theorem from the rational choice postulate via institutional analysis. It is this focus on institutional analysis and the contextual nature of humanly rational choice and the exchange relationships that develop that is missing in the contemporary debates on rational choice versus behavioral economics. This has to be corrected and the subsequent revision to behavioral economics would lead to a reset in perspective which would place humanly rational choice aka behavioral economics squarely in the mainline of economic thought. c.f., Hayek's Individualism and Economic Order, pp., 11-14 for an earlier discussion of these issues which amazingly anticipates so much of what gets discussed today.

To which Nobelist Vernon Smith responds:

In my book (2008, p 22), I cite Mullainathan and Thaler (2001, p 2) as defining behavioral econ as a candidly deliberate search for “Identifying the ways in which behavior differs from the standard model…” 

Hence, Beh Econ has been defined by Dave Grether as “searching in the tails of distributions.”

Lopez (1991) wrote an insightful paper surveying the judgment and decision literature and concluded that it was after 1970 that the search for anomalies became evident. (There is a back story about a attempts to prevent it from being published, but I do not know its details or validity)
Before 1970, there was no shortage of examples from decision theory that failed to predict, and of examples that did predict, experimental tests of theory. Ward Edwards and Sidney Siegel, truly great psychologists, published both confirmations and rejections before 1970, but theirs were hardly “searches” for particular outcomes. 

I think it is equally true that traditional economic scientists have a “search for confirmations” bias. Of course we have long known about confirmation bias—journals are strongly biased toward empirical findings that are significant at the 5% or lower levels of error. Those such as the behavioral economists who reject the standard model are of course equally guilty of searching for confirmation of their contrary hypotheses; there is both confirmation and anti-confirmation bias.. 

As noted in my 2014 GMU (Hayek) lecture I have—at least three times—expected outcomes to confirm traditional theory and it failed miserably. 
I am giving the Bohm-Bawerk lecture in Insbruck come June 23 and I want to discuss some of these issues there. 

Experimental economics grew out of concerns for the imprecision and shortcomings of economics as an empirical science; of course we were long interested in economic behavior, but many of us in that tradition have felt that it is important to make every effort to avoid as best we can, unbalanced confirmations searches whether pro or con. Andrej Svorencik has written the first History of Experimental Economics, and soon to appear is the Witness Seminar on the Emergence of Experimental Economics.


I don't object to the search for exceptions (such knowledge is helpful in the academic sense) but to the implication that there are economists or bureaucrats who – based on information regarding any such exceptions that they might get hold of – are somehow capable of making rules for society that lead to what they imagine are 'better' outcomes.

Fatal conceit comes naturally to behavioural economists. They are socialists and planners at heart, their plans being inconsistent with free society.

Unfortunately, this new fad is catching on with a lot of "progressives" who find this a convenient tool to "fine tune" our behaviour. 

I see economics as a branch of moral philosophy and liberty, and to the extent any branch of economics actively seeks to undermines liberty, it is out of order and must be called out.

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George Selgin’s brilliant summary of why central banking harms everyone, and why sound money requires free banking

Selgin is definitely one of the top 10 living economists today.

I have sporadically read his work here

But this talk he recently gave on July 2, 2014 in Las Vegas (uploaded on youtube only recently) is superlative. It helped me understand the issues far better, and gave me more reasons to back up the Sone Ki Chidiya agenda's policy on sound money. There is not one minute of this talk (and QA session) that can be missed. 

I predict that Selgin will be a lodestar for sound money in the coming decades. India should hire his services AT ONCE. His talk complements Larry White's talk that I heard in Melbourne a few years ago.

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Ranade’s suggested deviations from standard economic approaches are disproved by his own suggested Historical Method of Research

With reference to Ranade's essay on the ‘Indian Political Economy’, I make a few observations:

1) He was knowledgeable enough about the economic debates of his time. It took quite some time for any other Indian to display such knowledge of economics in the public debates. Perhaps Ambedkar comes next in line.

2) He was supportive of urbanisation. This is a remarkable insight, which very few Indians have imbibed till today.

3) He was supportive of foreign investment and opposed Swadeshi. In this he was displaying a good understanding of economic forces. In particular, his opposition to Swadeshi suggested he understood that no economy could progress by being an island in itself.

4) He had one major failure of thinking: he tried to shift economics towards ‘national’ economics. This was not a Swadeshi-type of economics, but had a flavour of Swadeshi. It was essentially the infant industry argument which allows a government to shelter nascent industries till they are ready to stand on their own feet. He called himself a kind of mercantilist.

5) He also seemed quite comfortable with an expansion of the role of the State into areas we would be very cautious about, today.

6) He was comfortable with British rule in India. He said British rule threw a "beam of light which alone illumines the prevailing darkness".

The following section from his article perhaps summarises his economic view:

Speaking roughly, the province of State Interference and Control is practically being extended so as to restore the good points of the mercantile system without its absurdities. The State is now more and more recognized as the National Organ for taking care of National needs in all matters in which individual and co-operative efforts are not likely to be so effective and economic as National effort. This is the correct view to take of the true functions of a State. To relegate them to the simple duty of maintaining peace and order, is really to deprive the Community of many of the advantages of the Social Union. Education, both Liberal and Technical, Post and Telegraphs, Railway and Canal Communications, the pioneering of new enterprize, the insurance of risky undertakings, — all these functions are usefully discharged by the State. The question is one of time, fitness, and expediency, not one of liberty and rights. In our own Country the State has similarly enlarged its functions with advantage. The very fact that the Rulers belong to a race with superior advantages imposes this duty on them of attempting things which no Native Rulers, past or present, could as well achieve, or possibly even think of. This obligation is made more peremptory by the fact that the State claims to be the sole Landlord, and is certainly the largest Capitalist in the Country. While the State in India has done much in this way in the working of Iron and Coal fields, and in the experiments made about Cotton and Tobacco, and in Tea and Coffee and Cinchona Plantations, it must be admitted that, as compared with its resources and the needs of the Country, these attempts are as nothing by the side of what has been attempted with success in France, Germany and other countries, but which, unhappily, has not been attempted in this country. Even if political considerations forbid independent action in the: matter of differential duties, the pioneering of new enterprize is a duty which the Government might more systematically undertake with advantage. In truth, there is no difference of principle between lending such support and guidance, by the free use of its Credit and superior Organisation, in pioneering Industrial Undertaking or subsidizings private Co-operative effort, and its guaranteeing minimum interest to Railway Companies. The building up of National, not merely State, Credit on broad foundations by helping people to acquire confidence in a free and largely Ramified Banking system, so advantageously worked in Europe under different forms, has also not been attempted here. There is, lastly, the duty cast on it of utilizing indigenous resources, and organizing them in a way to produce in India in State Factories all products of skill which the State Departments require in the way of Stores. These are only a few of the many directions in which, far more than Exchange and Frontier difficulties, the highest Statesmanship will have a field I all its own for consideration and action.

I admit a single essay is not good enough to evaluate anyone’s work, but I think a couple of strings of thought can be discerned.
1) He was broadly classical liberal, interested in the rule of law, freedom to trade, and such things. It appears that laissez faire was considered quite blindly by British administrators and taken to an extreme, and he was right to criticise them for it. Such blind generalisation about the role of government was, to an extent, cause for India's poor economic performance (although better than in pre-British rule).

There IS a role for government in ensuring equal opportunity, particularly after the first order functions have been well performed. Such a role was almost entirely entirely missing during British rule. The British made little or no effort to ensure that everyone achieved school education in India. And, of course, there was no social minimum, which meant significant loss of life from dire poverty.

As far as I can see, this is NOT what Adam Smith and Locke stood for. The British themselves started putting effort into school education only in the 1880s, to increase equal opportunity. Japan's focus on school education after the Meiji revolution is, of course, exemplary.

That India began to focus somewhat on equal opportunity (even though very badly, through its miserable socialist policies) after independence was the key reason for its faster economic growth.


2) He recognised the role of culture in the economic performance of countries, something that is being discovered by Deirdre McCloskey today. This is a fertile area for analysis, although I’d argue that there is significant innate Indian entrepreneurship, that is merely waiting for the right conditions to be unleashed.

3) His key failure as an economist was a public choice failure, a failure to understand government failure, and how his support for temporary protectionism could very easily degenerate into permanent crony capitalism.
In this regard, his own preferred method of analysis (Historical method, or empirical method) would disprove his suggestion to allow temporary protectionism.

Protectionism led to crony capitalism in India. And centralisation by the state has almost universally failed (except perhaps with Singapore where extreme emphasis appears to be paid to internal incentive structures within the bureaucracy).

I am sure that if he had access to the data of the past 120 years that we have today, he would have reverted to the more conservative, cautious position regarding government intervention that Hayek, for instance, advocates. Unfortunately, except for Shenoy, who directly studied under Hayek, there is no one in the Indian economic tradition – till relatively recently – who understood the basic principles BOTH of economics and governance. Chanakya, of course, seems to have significanlty understood both aspects; but he can hardly be called Hayekian.

4) I disagree with Ranade's characterisation of British rule. There had to be a plan to get rid of the British. Gokhale at least had such a plan. But their plans were weak, and that's one reason the 'moderates' were over-ruled by the more activist independence fighters.

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Mahadev Govind Ranade’s 1892 lecture on ‘Indian Political Economy’

I've converted Ranade's Essays on Indian Economics into Word (download here). This is the seminal lecture he gave at Deccan College. I'll review and comment on it separately. [See this (later) comment: Ranade’s suggested deviations from standard economic approaches are disproved by his own suggested Historical Method of Research]


In the beginning of this year before a similar gathering in Bombay, a master-hand sketched the outlines of the influence of Nature on literature and Politics, and in a few bold touches showed how, from time to time, the aberrations and evil tendencies observable in English thought and action were counteracted and corrected by an appeal to, and a diligent Study of, the standard of Nature — the Final Source of all True Knowledge, and the only Guide to wise conduct. The same master-hand drew also the moral to be learned from such a Study, — the moral being that our growth could only be in strict correspondence to our aptitudes and surroundings, and that we should be on our guard against precipitation and hot-house culture, which can never lead to permanently beneficial results. There can be no doubt that the Historical line of Thought so developed is to some extent the chief characteristic feature of the latter half of the present Century. It occurred to me at the time that if the Law of Relativity and Correspondence holds good in Politics and Social Science generally, it ought to hold good equally in all kindred subjects, including, among others, the Science of National Wealth, or, as it is more popularly described, Political Economy. As a matter of fact, however, what do we see about us? The same Teachers and Statesmen, who warn us against, certain tendencies in our Political aspirations, forget this salutary caution when the question at issue is one of Indian Economics. They seem to hold that the Truths of Economic Science, as they have been expounded in our most popular English Text-books, are absolutely and demonstrably true, and must be accepted as guides of conduct for all time and place whatever might be the stage of National advance. Ethnical, Social, Juristic, Ethical, or Economical differences in the environments are not regarded as having any influence in modifying the practical application of these Truths. If Free Trade is good for England, it must be equally beneficial to all Countries, and, prohibitive or Protective Duties, Bounties and Subsidies, Restrictions and Regulative Control, are absolute Evils, and no thought need be given to the relative differences in Civilization, or the possession of natural advantages, or disadvantages in matters of situation, climate, soil, National aptitudes and wants. If Factory Legislation is good in one country, it must be equally needed to protect Labourers everywhere. If Laws in restraint of Usury are out of place in Centres of Commercial and manufacturing activity, they must be equally pernicious in backward, antiquated, and agricultural Communities. If the State finds no occasion to help Credit Institutions in England, the demand for such help in Countries where the spirit of private enterprise is feeble is also held to be preposterous. If the Government of advanced Countries do not undertake certain functions with a view to direct Industry and help enterprise, the Government out here is equally precluded from taking any new line of departure in these matters. If direct Taxes suit English conditions of life and property, they must be equally suitable to Indian conditions, and Octroi and Transit Duties must be kept down rigorously as sources of our Local or Municipal Income.

I might multiply these instances without number, but those given above will, I hope, serve to illustrate my present purpose. Even if Statesmen had stopped here, there would have been some extenuation for the line of conduct adopted by them. The absolute Truths of Political Economy, however, are appealed to as a justification for a curious change of front. Men, who come from a country where private property in land is most absolute, develop on their arrival here a taste for Socialistic Doctrines. The State aspires to relegate all Private Property in land into mere superior and inferior Holdings. A love for Capitalists farming on a large scale gives way to a taste for petit culture by poor Tenants. In England the Landlords as such pay no special Tax to the State, but here Land is taxed on the ground that there is an unearned increment based on the Theory of Economical Rent, and that this unearned increment belongs of special right to the State. While the Nationalization of land is but a Socialist dream in England and Europe, it is in full swing here, and furnishes a scientific justification for periodical Revisions and Enhancements. Status and privilege form still the very cornerstone of English Social arrangements, but here every member of Society is only a mobile atom, without any differences marking him off from others, so far as the State is concerned. The Middle Class is the backbone of English Supremacy, but here there is no room for a Middle Class between the State and the poor Tax- payers. This change of front is a curious study by itself. For my present purposes, it is not necessary to cite more instances. Of course, if Political Economy is a Science of general and absolute Truths, like Physics or Astronomy, the tendency noted above to push its principles to their logical conclusions in all times and places, even when English Statesmen halt midway in their practical application of these principles, is intelligible, and may be even wise. There can be no doubt that those who thus give effect to these principles honestly believe in the scientific and absolute character of these Economical conclusions. But it is certainly a fair subject for consideration whether this belief is well-founded. If in Politics and Social Science, time and place and circumstances, the endowments and aptitudes of men, their habits and customs, their Laws and Institutions, and their previous History, have to be taken into account, it must be strange, indeed, that in the economical aspect of our life, one set of general principles should hold good everywhere for all time and place, and for all stages of Civilization. This conflict was one of the reasons which induced me to take up this subject for consideration on the present occasion.

Another reason which also influenced me in the choice of this subject was the fact that, at this time, when an appeal is being made to the popular will in two great communities to declare itself, the questions at issue are more Economical than Political in their character. The dreams of Cobden and Bright, of Ricardo and Mill, that the civilized world would, in a few years, with one accord embrace their principles, have not been realized. In America the issues are solely economical. One party favours free trade, the other favours protection. One party favours Silver Legislation, the other denounces it. In England also, as you are aware, the present Prime Minister has declared himself in favour of what is called Fair Trade, which is a modification dictated by Political and Economical considerations of the extreme doctrine of Free Trade, with a view to restrict the freedom to those who reciprocate it, and the Liberals have denounced this lapse from orthodoxy as unpardonable heresy. Even in Ireland, the Political issue is really at its base an Economical Dispute, which centres round the question of the extent of the rights of Private Property and Free Contract as between the Landlords and the Tenants. Similarly, here in our own Country, the Currency Association is also running a tilt against Economical Theorists, and boldly denies the universality of the equation of Supply and Demand as the best and only regulator of the exchange values of the precious Metals. On the Continent of Europe, and in the English Colonies, the same protest is being practically urged against the extreme rigour of the current theories of orthodox Political Economy. The Americans dispute the rights of the Chinese to settle in their Country, the Australians fear the same scare, and even in England, legislation was contemplated against the immigration of alien Jews, on the ground that they were likely to underbid the indigenous labourer. The Trades-Union and Strikes, and the Knights of Labour, of which we have heard so much recently, furnish another form of this same general protest. This conflict of practice with theory, not in one, but in all points, not in one place or country, but all over the world, which distinguishes Contemporary History, furnishes another reason which appeared to me to justify a reconsideration of the question on broader lines than those you will find enunciated in the ordinary Text books.

In justice to some of these Writers, it must be admitted that they have taken good care to prevent many of the misapprehensions which are popularly entertained about the absolute and general character of the Economical Doctrines taught by them. Mr. John Stuart Mill, for instance, states in his preface that “for practical purposes, Political Economy is inseparably intertwined with many other branches of Social Philosophy. Except in matters of mere detail, there are perhaps no practical questions, even among those which approach nearest to the character of purely Economical questions, which admit of being decided on Economical premises alone.” You will also recollect that one characteristic feature of Mr. Mill’s work is his frank recognition of an essential difference between the Laws relating to the Production of Wealth, which he deems to be Universal and not arbitrary, and those which regulate its Distribution. The Laws of Distribution, Mr. Mill admits, are partly of human institution. Mr. Mill, and Mr. Cairns more clearly even than Mr. Mill, affirmed the hypothetical character of the Science. Mr. Mill contented himself with suggesting the necessity of verification to establish the soundness of the hypothetical demonstration, but Mr. Cairns went further, and asserted that “Economical Laws are no assertions respecting the character or sequence of phenomena, and that they can neither be established or refuted by Statistical or Documentary Evidence.” It is true this was not the position of the earlier Teachers, Adam Smith, Ricardo, Senior, James Mill, M’Culloch, and Malthus, who never doubted that in all their reasonings they were dealing with Human Beings as they actually exist. Adam Smith, for instance, believed that Nature had made provision for Social well-being by that principle of the Human Constitution which prompts every man to better his condition, and in aiming at individual good, every man is led by an invisible Hand to promote general good. Human Institutions only interfere with this tendency, and when all restraints are removed, the obvious and simple system of natural Liberty establishes itself. Ricardo and Malthus were, if possible, still more dogmatic and absolute in their assertion of these necessary tendencies, and made no allowances, or at the best gave scanty recognition to, the one-sided character of their premises. Mr. Senior seriously thought that the whole Science could, like Geometry, be reduced from four axiomatic propositions. It will be useful at this stage to note the general features of these assumptions of the earlier Economists, which they believed to be as necessarily and universally true as the First law of Mechanics, that bodies move in straight lines, or the First Law of Physics, that they attract each other directly according to their mass, and inversely according to the square of their distance. These assumptions may be thus briefly stated r — (1) that National Economy is essentially Individualistic and has no separate Collective aspect; (2) that the individual, or typical Economical man, has no desire but that of promoting his own Self-interest, or at least that this is his strongest motive power; (3) that this Self-interest is best promoted by the largest Production of Wealth, i.e., articles with value in Exchange, at the least trouble; (4) that such Pursuit of Private gain by each individual promotes best the general good; (5) that the free and unlimited Competition of individuals in the race and struggle of life is the only safe and natural regulator; (6) that all customary and State Regulation is an encroachment on natural Liberty; (7) that every Individual knows best his Interest, and has the capacity and desire of acting according to this knowledge; (8) that there is perfect Freedom and Equality in the power of contract between individuals and individuals; (9) that Capital and Labour are always free and ready to move from one employment to another, where better remuneration is expected; (10) that there is a universal tendency of Profits and Wages to seek a common level; (11) that Population tends to outstrip the means of subsistence; (12) and that Demand and Supply always tend mutually to adjust each other.

These assumptions lie at the root of all dogmatical treatment of the subject. It need not be said that they are literally true of no existing Community. To the extent that they are approximately true of any state of Society, the assumptions furnish valid explanations of its Economical Statics. Even then they furnish no suggestion as to its dynamical progress or development. As these assumptions do not absolutely hold good of even the most advanced Societies, it is obvious that in Societies like ours, they are chiefly conspicuous by their absence.  With us an Average individual man is, to a large extent, the very antipodes of the economical man. The Family and the caste are more powerful than the Individual in determining his position in life. Self-interest in the shape of the desire of Wealth is not absent, but it is not the only nor principal motor. The Pursuit of Wealth is not the only ideal aimed at. There is neither the desire nor the aptitude for free and unlimited Competition except within certain predetermined grooves or groups. Custom and State Regulation are far more powerful than Competition, and Status more decisive in its influence than Contract. Neither Capital nor labour is mobile, and enterprising and intelligent enough to shift from place to place. Wages and profit are fixed, and not elastic and responsive to change of circumstances. Population follows its own law, being cut down by disease and famine, while Production is almost stationary, the bumper harvest of one year being needed to provide against the uncertainties of alternate bad seasons. In a Society so constituted, the tendencies assumed as axiomatic, are not only inoperative, but are actually deflected from their proper direction. You might as well talk of the tendency of mountains to be washed away into the sea, or of the valleys to fill up, or of the Sun to get cold, as reasons for our practical conduct within a measurable distance of time.

This hypothetical character of the entire fabric of Doctrinal Economy has been more or less freely recognized, as stated above, by Mr. Mill, Mr. Cairns, and other Teachers of Political Economy; and in our own time, Mr. Bagehot has gone so far as to assert that the traditional system rested on assumptions which were not only not true generally, but were true only of England of the present day. He calls it the Science of Business done in large and trading Communities. It does not explain the Economic life of earlier times, or of our own times in other Nations. It is insular, and has not obtained general recognition, by reason of its being chiefly a convenient series of deductions from assumed axioms which are in many times and places not true, and are only true in England, where Capital and Labour can freely transport themselves from one employment to another. Mr. Sidgwick, another contemporary writer, has expressed the view that the abstract method is useful only for the statical study of Economy, and that its conclusions, even within this province, are only hypothetically valid. In the dynamical study of the Progress of Wealth, the value of the deductive method is almost nil. Mr. Cliff Leslie has expressed himself in stronger terms. The Economy of every Nation, according to this writer, is the result of a long growth in which there has been continuity and change, and the economic side of this change is only a particular aspect. The Laws of Social Progress in Wealth must be sought in the history of the general Social Evolution which is different in different countries. Professor Jevons was filled with such despair by the sterile character of the hypothetical system that he thought the only way to cure its defects was to fling away, once and for ever, preposterous assumptions of the Ricardian School. It will be thus seen that in the land of its birth and highest development, the claims of Political Economy, as ordinarily taught in the Text-books, have been seriously questioned, and its value as a guide to practical conduct greatly discounted.

You will naturally desire to know how this revulsion of thought has been brought about in the course of a hundred years. It becomes necessary in this connection to take a retrospective view of the progress of the Science in Western Europe during the past two or three hundred years. Such a retrospect will help us to judge for ourselves how far the development of the Scientific Theory of Political Economy can be regarded as even now complete. The ancient conception of Political Economy had regard chiefly to laying down the practical rules of prudent conduct for each private individual who desired to be rich. The conception of it as a Principle of Social Polity was more or less ignored. The general feeling in those days was that manual labour was below the dignity of a Freeman. Such work was done by slaves, or, as we would in this country describe them, by the Lower Castes. A Freeman could only devote his attention to Agriculture. Commerce and Manufactures were later developments. This circumstance also explains the interdict on Usury which was a common feature of all Ancient Institutes, excepting those of our own Country, which in this respect were more advanced than the Greek, or Mahomedan, or Christian notions on the subject. Gradually slaves became Serfs, and then Freemen, who worked for wages. These Serfs, seeking refuge in ancient coast towns and Roman Colonies, developed them into the Free commercial cities of the Middle Ages about the times of the Crusades, and later on into great manufacturing centres. The discoveries of the 15th Century gave a stimulus to trade, and later on to Colonization. The large imports of Gold and Silver helped to encourage the greater circulation of Money. The gradual rise of European Monarchies, and the decay of the Church and the Nobility, removed the pressure of Feudal ideas, and raised the status of those who were engaged in Commerce. The Republics of Italy developed Banking and Credit. It was when the national activity of Europe took such a varied form, stimulating Agriculture, Commerce, Manufactures, Banking, Currency, Exchange, Co-operation, Taxation, Colonization, and Foreign Conquests, that the ground was prepared for a systematic study of the Theory of the Laws which regulated economical arrangements, and made nations prosperous and strong, or the reverse. And the first speculative explanation attempted is known in history as the Mercantile Theory. It is too much the practice of Text-writers to cry down this Theory as one which confounded Wealth with Money and Bullion, and made the possession of precious Metals the test of National prosperity. This is, however, an utterly unfair and one-sided view of the subject. The leading feature of the system was that it set a higher value on Commerce and Manufactures than on agriculture, and on Foreign over Home Trade. It encouraged Exports, but desired to check Imports with a view not to retain money so much as to develop Home Manufactures. Lastly, it prescribed the directive control of the State in the way of stimulating domestic Manufactures and encouraging Commerce. Each State competed with the rest in Foreign Markets, and sought to secure the most advantageous terms and it sought also to extend its Colonies and Dependencies with a view to increase the sphere of open Markets for its produce. It is enough to state that men like Colbert, and Oliver Cromwell, Raleigh and Childe, could not have encouraged a system which had not some solid justification in the then circumstances of Europe. Cromwell’s Navigation Laws have admittedly been the foundation of England’s naval supremacy, and Colbert made France in his day the most prosperous State on the Continent. He had a keen perception that State protection and control were but crutches to teach the Nation to walk, and that they should be thrown away when the necessary advance had been made. It was under the influence of the same ideas that the Great East India Companies of Holland, France, and England were formed, and received the support of their respective Governments. Charters and Monopolies, Bounties and Subsidies, were freely granted under the influence of the same ideas, and State help and regulation did their work remarkably well.

In the next Century the natural progress of events made Nations alive to the abuses of the old system, and men began to feel the necessity of freedom in the Economical as well as in the Political field. This work of destructive and negative criticism began in England with the teachings of Hobbes and Locke, but was more earnestly taken up in France previous to the Revolution. The enormous abuses of State control and direction, of monopolies and restrictions, led to a reaction in favour of a theory which was founded on the idea of Natural liberty. In this negative Philosophy individual man was, moreover, conceived as being solely guided by Private Interest, which it was supposed he understood better for himself than others could do for him, and the removal of all restrictions and prohibitions became the watchword of this School. The previous preponderance of State support in favour of Commerce and Manufactures was condemned and a preference for Agriculture as the only true source of all Wealth was developed into a mania. In grasping the conception that money alone was not Wealth, and that all Wealth is created by human Labour applied to Natural Agents, people ran to the other extreme of classifying Commerce and Manufactures along with service and professions under the head of Unproductive Labour. In protesting against Protection and prohibition, the extreme view went so far as to hold that Government itself was only a necessary evil, and that the State had no concern with Industry, and must confine itself to its sole function of keeping the public Peace. This conception of the domain of Natural Liberty in Economics was but a part and parcel of the great movement of Freedom which culminated in the French Revolution. Quesnay, Guorney, and the great Statesman Turgot, were the advocates of this New School of Thought which is known as the School of the Physiocrats.

Next in order of time we have Adam Smith, who was the direct product of the French negative School of Quesnay, but he improved upon his model and exposed the weakness of that School in two important respects. He established the fact that Agriculture was not the only source of wealth, and that Manufactures and Commerce were equally efficient in this respect, and that Nature helped man equally in all the three departments. While accepting the laissez faire doctrine of Free Trade as a general principle, Mr. Smith was alive to the fact that restrictive Navigation Laws had helped greatly to ensure English Commercial Supremacy, and he justified these laws on the express ground that defence was of more importance than opulence, and he advocated what are known as Fair Trade views, i.e., views which permit retaliation by way of Differential Duties against non-reciprocating Countries on condition that such retaliation produces its desired consequences. He also approved of temporary concessions by way of Monopolies to Chartered Companies in enterprizes which involved risk and expense. Adam Smith never separated Economical from Social considerations, and thus occupied a position of advantage, which his Successors gave up by their too absolute assertion of his doctrines. I have already spoken of the rigid character of the system of Ricardo, Malthus, Senior, James Mill, Torrens, McCulloch and others, and shown how this dogmatic feature provoked a reaction in England, at first faintly represented in the protests of John Stuart Mill and Mr. Cairns, bat more decidedly formulated by Bagehot, Leslie and Jevons. This strong reaction of feeling among English writers was due to the influence of the great French and German Teachers. August Comte was the first who denied the name of Science to the doctrines taught by the Deductive School, and he elaborated his own system of the Historical Method of Research, and these hints were taken up by the German and English Thinkers of our day. Sismondi was the first economical writer who gave expression to the dissatisfaction felt in France at the conclusions of the English Economists. He charged the Individualistic School with tendencies by which the rich became richer, and the poor were made poorer. He protested against the abuses of the laissez faire Policy, and invoked Government intervention for protecting the masses against the classes, and the weaker races against the pressure of the stronger and more advanced Nations under the regime of competition. Sismondi declared that the State was not merely an agency for keeping peace, but that it was an organization for securing the progress of the people as widely as possible, and for extending the benefits of the Social Union to all. Another French writer, Dunoyer, defined Liberty not as a mere negation of restraint, but a positive effort to increase efficiency of Labour in all its grades.

Two American Thinkers, Hamilton and Carey, sounded the same note of difference in more distinct terms. Hamilton was one of the Fathers of the American Constitution, and he stated that the English doctrine of Absolute Freedom was practicable only if all Nations accepted Free Trade views simultaneously, and he suggested a scheme of Protective Duties which were later on adopted as the leading feature of American State Tariffs. The Haileybury Professor Jones had before Carey attacked the Ricardian Theory of Rent as being true only of Farmers’ rents, and as wholly inapplicable to the Indian Ryots’ rent or the Metayer or Cottier rents. Carey went farther, and denied that there was any Economic Rent proper, and contended that Rent was only a remuneration, in the same way as profits, of past invested Capital or Labour. Carey justified Protection to domestic Agriculture on the ground that the waste products of land must return to the soil to restore its powers, and this restoration was not possible where Raw Products were exported to, and consumed by distant Countries. Tike the French Sismondi, Carey regarded the State as a co-ordinating power in Society, which checked the tendency of individuals to seek immediate gain at the sacrifice of permanent National interests, and he asserted that Protection was justified as being the only means by which the obstacles, thrown in the way of younger and less advanced Communities by more advanced Nations, could be removed. The immediate loss to the Nation was like the sum spent on the Education of youth by individuals, which more than repays itself in the long run.

Like the French and American writers, the Italian Economists of the modern period, Gioga and Ludovico also advocated State Regulation of Industry, and asserted the Doctrine of Relativity as being an essential factor of all true Economic Theory. The work of positive exposition was, however, most successfully taken up by the German professors. Muller first suggested that Adam Smith’s system, as elaborated by his more dogmatic disciples, was essentially English and insular. It succeeded in England, because the national life of England was preserved intact by its favoured situation and past history and conservative instincts, while it was unsuitable to the Continental Countries, because, with them the preservation of the National existence was a subject of greater importance than mere individual prosperity. It was the writings of List, which gave the fullest expression to this rebellion against the orthodox creed. He urged that the permanent interests of Nations were not always in harmony with the present benefit of individuals. National well-being does not consist only in the creation of the highest quantity of wealth measured in exchange value, independently of all variety of quality in that wealth, but in the full and many-sided development of all productive powers. The Nation’s Economic education is of far more importance than the present gain of its individual members, as represented by the quantity of wealth measured by its value in exchange. In a sound and normal condition, all the three departments of national activity must be fully developed. Commerce and Manufactures are, if possible, more vital in their bearing on the education of the intelligence and skill and enterprize of the Nation than Agriculture. In a purely Agricultural Country there is a tendency to stagnation and absence of enterprize and the retention of antiquated prejudices. The function of the State is to help those influences, which tend to secure National Progress through the several stages of growth, and adopt Free Trade or Protection as circumstances may require. In this view Free Trade may be good for a Country like England, but not for America and Germany.

The subsequent German Teachers further elaborated this historical view, and under the stimulus of the success of the comparative method in Philology and Jurisprudence, proposed to reconstruct Economy by the help of the new method. Raw, Knieys, Roscher, Hildebrand, Wagner and others worked on these lines. Their influence made itself felt on English thought, and Leslie and Jevons were directly influenced by these teachings. They advocated that Economy was only one branch of Sociology, and like all Social Sciences, it must be studied both in its statical and dynamical conditions, and that the basis of a hypothetical economic man, guided solely by one motive of Self-Interest, must be given up, and man as he is, both selfish and altruistic, possessing rights as well as being bound by duties, must be studied in History, both Ancient and Modem. In brief, this German School regards that Universalism and Perpetualism in Economic Doctrine are both unscientific and untrue.

This resume of the past and contemporary history of the growth of economic Sciences in England, France, Germany, Italy, and America will satisfy the student that modern European thought does not at all countenance the view of the English writers of the Ricardian School, that the Principles of the Science, as they have enunciated them in their Text Books, are universally and necessarily true for all times and places, and for all stages of Advancement. Modern Thought is veering to the conclusion that the Individual and his Interests are not the centre round which the Theory should revolve, that the true centre is the Body Politic of which that Individual is a Member, and that Collective Defence and Well-being, Social Education and Discipline, and the Duties, and not merely the Interests, of men, must be taken into account, if the Theory is not to be merely Utopian. The Method to be followed is not the Deductive but the Historical Method, which takes account of the past in its forecast of the future; and Relativity, and not Absoluteness, characterizes the conclusions of Economical Science. There are those who seek to get over this difficulty by differentiating the Science from what they are disposed to call the Art of Economy. This divorce of Theory and Practice is, however, a mischievous error, which relegates the Science to the sterility of an ideal dream or a puzzle, and condemns the Art to the position of a rule of the thumb. Theory is only enlarged Practice. Practice is Theory studied in its relation to proximate Causes. The Practice is predetermined by the Theory which tests its truth, and adapts it to different conditions by reason of its grasp of the deep-seated, permanent, and varied basal truths. I hope thus to have shown that the nature of the subject itself as a branch of Social Science, which is best studied historically and not deductively, the actual Practice of the most Civilized Nations and the history of the growth of its Theory given above, alike establish the doctrine of relativity, and the predominant claim of Collective Welfare over Individual Interests, as the principal features in which the highest minds of the present day chiefly differ from the Economical Writers of the Old School, with their a priori conclusions based on individual self-interest and unrestricted competition.

We have next to consider the bearings of this enlarged view of the science in its Indian aspects. The characteristics of our Social Life are the prevalence of Status over Contract, of Combination over Competition. Our habits of mind are conservative to a fault. The  aptitudes of climate and soil facilitate the production of raw materials. Labour is cheap and plentiful, but unsteady, Unthrifty, and unskilled. Capital is scarce, immobile, and unenterprising. Co-operation on a large scale of either Capital or Labour is unknown. Agriculture is the chief support of nearly the whole population, and this Agriculture is carried on under conditions of uncertain rainfall. Commerce and Manufactures on a large scale are but recent importations, and all industry is carried on, on the system of petty farming, retail dealing, and job; working by poor people on borrowed capital. There is an almost complete absence of a landed gentry or wealthy middle class. The land is a monopoly of the State. The desire for accumulation is very weak, peace and security having been almost unknown over large areas for any length of time till within the last Century. Our Laws and Institutions favour a low standard of life, and encourage sub-division and not concentration of Wealth. The religious ideals of life condemn the ardent pursuit of wealth as a mistake to be avoided as far as possible. These are old legacies and inherited weaknesses. Stagnation and dependence, depression and poverty — these are written in broad characters on the face of the land and its people. To these must be added the economical drain of wealth and talents, which Foreign subjection has entailed on the country. As a compensation against all these depressing influences, we have to set off the advantage of a free contact with a race which has opened the Country to the Commerce of the world, and by its superior skill and resources has developed communications in a way previously unknown. If we wish to realize our situation fully, we may not overlook this factor, because, it represents the beam of light which alone illumines the prevailing darkness. It cannot well be a mere accident that the destinies of this Country have been entrusted to the guidance of a Nation whose characteristic strength is opposed to all our weaknesses, whose enterprize, chiefly in Commerce and Manufactures, knows no bounds, whose Capital overflows the world, among whom Contract has largely superseded Status, and Competition and Co-operation play a predominant part, whose view of life is full of hope, and whose powers of organization have never been surpassed.

The first point which illustrates the divergence between the orthodox English doctrine and the enlarged views I have attempted to set forth, as characterizing the more developed modern European thought on the subject, relates to the so-called system of the territorial Division of Labour by which the orthodox economists assign to the backward Torrid Zone Regions of Asia the duty of producing Raw Materials, and claim for the advanced European Temperate Zone Countries, the work of transport and manufactures, as a division of labour in production which is fraught with the highest advantage to all, and is almost a Providential dispensation, against which it would be foolish to rebel. Of course, as far as the natural advantages of climate and situation force our hands, economically backward races must submit to such an arrangement, but it is fairly open to question whether there is any such inevitable necessity which justifies a line of separation, which has a tendency to accentuate natural deficiencies, and make them a source of permanent weakness.  (1) In the first place, the Torrid Zone people may fairly appeal to past history, when their skilled products found a ready market in temperate kingdoms, and excited such jealousy as to dictate prohibitive sumptuary laws both in ancient Rome and in modern England. (2) They may also urge that the natural fitness of things requires that the manufactures should spring up where the raw materials grow, and where, besides, there is demand for the manufactured produce, rather than that bulky goods should be transported many thousands of miles over land and sea, and re-consigned the same way back. (3) The differences in favour, of temperate regions are all modern growths due to the employment of Steam Machinery, and the abundance of cheap Iron and Coal. This is a real advantage, and has to be faced, but if it can be faced, there is no natural incongruity in an arrangement by which Industry would return to its ancient home with a double saving in time and cost (4) Neither Mr. Adam Smith, nor even Mr. John Stuart Mill, recommend absolute freedom in such matters. Adam Smith was a Fair Trader, and Mr. Mill distinctly recognizes an exception to the general rule of Free Trade, where time is required to see whether new industries are or are not adapted to the natural resources of new countries. The late controversy between Mr. Blaine and Mr. Gladstone chiefly turned upon this point, Mr. Blaine contending that, with a large Continental Country like America, with all shades of climate and soil and position, the conditions of the problem were different from those of an isolated small territory like England. The Australian Colonies also justify their departure from the orthodox policy on this same ground. India may fairly claim the benefit of the experience and practice of these, self-governing communities, and demand breathing time. (5) It is further to be noted that such a division of Production, if permanently stereotyped, consigns Asia to an Industry which is under the bane of the Law of Diminishing Returns; while the west of Europe appropriates to itself those forms, of Industry which are not subject to any such law. The orthodox view thus condemns the poor to grow still poorer, and helps the rich to become richer— ‘it giveth much to him that hath, and taketh away from him that hath not the little that he hath’ (6) Lastly, people forget that the Agricultural Industry in the Torrid Regions has to work under the disadvantage of an uncertain rainfall, and suffer from famine visitations, which, when they come, paralyze Production, and condemn millions to violent or slow death. A due co-ordination of the three-fold forms of industrial activity, even if it be not immediately most advantageous to individuals in any one period, is a. permanent i National Insurance against recurrent dangers, and as such is economically the most beneficial course in the interests of the Community.

(2) The point noticed above has reference chiefly to Foreign Trade. In domestic interchange also, the same law operates, and every Nation which desires economical advance has to take care that its urban population bear an increasing ratio to its rural masses with every advance it seeks to make. Mr. John Stuart Mill has expressly laid down that no Agriculture can be really productive which is divorced from a neighbouring non-agricultural market represented by Thriving Towns and Cities. Under Native Rulers there was a sort of rude adjustment made in this direction, when the Courts of the Petty Sovereigns afforded so many centres of urban activity in industries patronized by the Court and its dependents. Mr. Mill suggests that in the absence of such near markets, the next available substitute is a large export trade to Foreign Countries. This substitute cannot, however, be accepted as really answering the purpose in view. The progress of ruralization in modern India means its rustication, i.e. a loss of power, and intelligence, and self-dependence, and is a distinctly retrograde move. The growth of the Seaports and of the few Military and Railway Stations is not enough to counterbalance the enormous loss that has been inflicted by this retrograde movement. Every class of artisans, the Spinners, Weavers and the Dyers, the Oilsmen, the Paper-makers, the Silk and Sugar and Metal workers, etc., who are unable to bear up against Western competition, resort to the land, leave the Towns and go into the Country, and are lost in the mass of helpless people who are unable to bear up against scarcity and famine.

(3) The highest statesmanship may well feel aghast at this rapid change, and I know, as a matter of fact, that this subject weighs heavily on the conscience of the British Administrators in India. They, however, feel powerless to act under the influence of the all-pervading doctrine that these matters lie outside the province of Government. A regular system of Immigration from thickly populated poor Agricultural tracts to sparsely peopled new and virgin districts is a desideratum. The halting efforts made in this direction produce no good, for the concessions are not liberal enough, and there is no prescience about it. The Ancient Rulers who settled waste districts, and founded towns with flourishing and extensive Industries, made no difficulty about granting the most liberal concessions. Anticipating Mr. Wakefield’s colonization proposals, whole Village Communities with their varied elements of life were encouraged to move en masse, and were made comfortable in their new places. Powerful Guilds of Traders and Artisans from distant places were similarly induced to settle in new Towns by free gifts of lands and houses and privileges. Stray settlers attracted by a few years’ leases can never accomplish the end the Rulers have in view, and such attempts are bound to fail. A Colbert or a Peter the Great is wanted to give effect to such a scheme, and the ordinary doctrines of laissez faire must be set aside in view of the great interests at stake.

(4) Conquest, consolidation, and conciliation have had their heroes in British History. Systematic colonization and the promotion of varied culture are the next stages of development; and it may be hoped that, before long, with Africa and Australia and the East and West Indies literally starving for Indian labour, and Burma at our door opened up, the ravages of periodical famines, carrying away our thousands and millions for want of work when Agriculture fails, will become impossible as soon as the policy of let-alone is given up, and an active effort made in all directions to stimulate productions both of raw and manufactured products. If the State can legitimately under- take from borrowed funds the construction or subsidization of Railroads and Canals, if it can afford to sell the Fee Simple of waste lands at nominal rates to European settlers on the hills, the road is certainly open for a further development of this same industrial effort on new lines. The Dutch Netherlands Government have shown the way in Java, and with less selfish motives the same method might well be tried in regard, at least, to the Industries allied with Agriculture, Sugar- Refining, Oil-Pressing, Tobacco-Curing, Silk-Rearing, etc., all of which can certainly be made to thrive in this torrid land under skilled supervision.

Proceeding next to the department of Distribution, the enlarged view of Political Economy stated above does not accept the position of the unearned increment as a leading feature of the Law of Rent in India. The Unearned Increment Theory fits in only where landed property continues for generations in the possession of the same family. If the land changes hands, the incoming purchaser buys it at its market value, and he enjoys no unearned advantage, and the so-called rent is but a return by way of fair profits on his investment. The English conditions of Landlordism, where the land under a complicated system of entails and settlements and primogeniture, continues in the same family for generations, allow free play to the law of the Unearned Increment. Here, in this country, lands and houses are not so tied up, and they change hands frequently and largely. In the twenty years the Registration Returns show that the value of sales comes up to the total value of landed property. In one generation, property thus changes hands, and when new men come in as purchasers for value, they do not enjoy any unearned increment of the past, but have to pay full value for the differential advantages of superior productiveness and vicinity. In the same way the Ricardian Theory that Economic Rent does not enter as an element of price, admittedly does not apply when all occupied land has to pay Monopoly Rent to the State Landlord. There is no competition among Landlords in this country, for there is only one true Landlord, and the so-called Land Tax is not a tax on Rents proper, but frequently encroaches upon the Profits and Wages of the poor Peasant, who has to submit perforce to a loss of Status and accommodate himself to a lower standard of life as pressure increases, lastly, the Advanced Theory expounded by the Modern School fully justifies the attempts made by the Government here and in England to check the abuse of Competition among poor tenants by conferring Fixity of Tenure, by adjusting rents judicially for a term of years, and imposing limitations on its increase. In this matter the Tenants of Government claim the same consideration as those of private Zemindars. The justification for this active interference is as valid in regard to Agricultural Labourers and Tenants, as it is in the case of Factory Labourers and Miners in Europe, These people are unable to combine for self-protection, or at least their combination is not so effective as, that of the employers of labour, and when their efforts fail to obtain regular redress, disorder and misery result as consequences, and threaten public peace and general well-being. In the same spirit, the regulation of the Freedom of Contract in regard to the fixing of rates of interest in transactions between the poor disunited indebted classes and the money-lenders, and the protection of immoveable property from being sold away for . improvident debts, not secured on the same, are all legitimate forms of protection of the weak against the > strong, and do not affect the real freedom of Distribution. The Advanced Theory concedes freedom where the parties are equally matched in intelligence and resources; when this is not the case, all talk of equality and freedom adds insult to the injury. It is in this spirit that the Distribution of Produce among the needy many and the powerful few has to be arranged, i.e., in a spirit of equity and fair-play, and the orthodox Views of Finality in such matters must be re- considered in all the relations of life.

Lastly comes the great department of Governmental interference. The meddlesomeness of the mercantile system provoked a reaction against State Control and Guidance towards the end of the last century in favour of Natural liberty. The Doctrines of this Negative School have now in their turn been abused by a too logical extension of its principles. There is a decided reaction in Europe against the laissez faire system. Even in England, the recent Factory Legislation, the qualified recognition by law of Trades-Unionism, the poor law system, and the Irish Land Settlement, are all instances which indicate the same change of view. Speaking roughly, the province of State Interference and Control is practically being extended so as to restore the good points of the mercantile system without its absurdities. The State is now more and more recognized as the National Organ for taking care of National needs in all matters in which individual and co-operative efforts are not likely to be so effective and economic as National effort. This is the correct view to take of the true functions of a State. To relegate them to the simple duty of maintaining peace and order, is really to deprive the Community of many of the advantages of the Social Union. Education, both Liberal and Technical, Post and Telegraphs, Railway and Canal Communications, the pioneering of new enterprize, the insurance of risky undertakings, — all these functions are usefully discharged by the State. The question is one of time, fitness, and expediency, not one of liberty and rights. In our own Country the State has similarly enlarged its functions with advantage. The very fact that the Rulers belong to a race with superior advantages imposes this duty on them of attempting things which no Native Rulers, past or present, could as well achieve, or possibly even think of. This obligation is made more peremptory by the fact that the State claims to be the sole Landlord, and is certainly the largest Capitalist in the Country. While the State in India has done much in this way in the working of Iron and Coal fields, and in the experiments made about Cotton and Tobacco, and in Tea and Coffee and Cinchona Plantations, it must be admitted that, as compared with its resources and the needs of the Country, these attempts are as nothing by the side of what has been attempted with success in France, Germany and other countries, but which, unhappily, has not been attempted in this country. Even if political considerations forbid independent action in the: matter of differential duties, the pioneering of new enterprize is a duty which the Government might more systematically undertake with advantage. In truth, there is no difference of principle between lending such support and guidance, by the free use of its Credit and superior Organisation, in pioneering Industrial Undertaking or subsidizings private Co-operative effort, and its guaranteeing minimum interest to Railway Companies. The building up of National, not merely State, Credit on broad foundations by helping people to acquire confidence in a free and largely Ramified Banking system, so advantageously worked in Europe under different forms, has also not been attempted here. There is, lastly, the duty cast on it of utilizing indigenous resources, and organizing them in a way to produce in India in State Factories all products of skill which the State Departments require in the way of Stores. These are only a few of the many directions in which, far more than Exchange and Frontier difficulties, the highest Statesmanship will have a field I all its own for consideration and action. They will, no doubt, receive such consideration if only the minds of the Rulers were once thoroughly freed from the fear of offending the so-called maxims of rigid Economical Science. It is time that a new departure should take place in this connection, and it is with a view to drawing public attention to this necessity that I have ventured to place before you the results of modem economic Thought. In this, as in other matters, the conditions of Indian life are more faithfully reproduced in some of the Continental Countries and in America than in happy England, proud of its position, strong in its insularity, and the home of the richest and busiest Community in the modern industrial World. If the attempt I have made leads to a healthy and full discussion of the change of policy I advocate, I shall regard myself amply repaid for my trouble.

The following extracts will show that the views embodied in the foregoing paper are not confined to the Native Community only, but that Anglo-Indian Thinkers of note are also becoming every day more and more alive to the evils of the present laissez faire policy of the Government of India The first extract is taken from “A Modern Zoroastrian,” by S. Laing, some time Financial Minister to the Government of India. The second extract is taken from “A Study in Indian Administration,” by Sir William Wilson Hunter, and it represents the views entertained by the late Sir Maxwell Melvill on Indian Political Economy. Extract from Mr. Laing’s “A Modern Zoroastrian”


“When Sir Robert Peel some forty years ago, announced his conversion by the unadorned eloquence of Richard Cobden, and Free Trade was inaugurated, with results which were attended with the most brilliant success, every one expected that the conversion of the rest of the Civilised World was only a question of time, and that a short time. Few would have been found bold enough to predict that, forty years later, England would stand almost alone in the world in adherence to Free Trade principles, and that the Protectionist heresy would not only be strengthened and confirmed among Continental Nations such as France and Germany, but actually adopted by large and increasing majorities in the United States, Canada, Australia, and other English-speaking Communities. Yet such is the actual fact at the present day. In spite of the Cobden Club and of arguments which to the average English mind appear irresistible, Free Trade has been steadily losing ground for the last twenty years, and Nation after Nation, Colony after Colony, sees its Protectionist majority increasing and its Free Trade minority dwindling.

“It is evident there must be some real cause for such a universal phenomenon. In Countries like France and Russia we may attribute it to Economical ignorance and the influence of cliques of manufacturers and selfish interests; but the people of Germany, and still more of the United States, Canada, and Australia, are as intelligent as ourselves, and quite as shrewd in seeing where their interests really lie. They are fettered by no traditional prejudices, and their Political instincts rather lie towards Freedom and against the creation of anything like an Aristocracy of wealthy Manufacturers. And yet, after years of free discussion, they have become more and more hardened in their Protectionist heresies.

“What does this prove? That there are two sides to the Shield, and not, as we fancied in our English insularity, only one.

“Free Trade is undoubtedly the best, or rather the only possible, policy for a Country like England, with thirty millions of inhabitants, producing food for less than half the number, and depending on Foreign Trade for the supplies necessary to keep the other half alive. It is the best policy also for a Country which, owing to its Mineral resources, its accessibility by sea to Markets, its accumulated Capital, and the inherited qualities, physical and moral, of its working population, has unrivalled advantages for cheap production. Nor can any dispassionate observer dispute that in England, which is such a Country, Free Trade has worked well. It has not worked miracles, it has not introduced an industrial Millennium, the poor are still with us, and it has not saved us from our share of commercial depressions. But, on the whole, National Wealth has greatly increased, and, what is more important, nation- al well-being has increased with it, the mass of the population, and especially the Working Classes, get better wages, work shorter hours, and are better fed, better clothed, and better educated than they were forty years ago.

“This is one side of the Shield, and it is really a golden and not an illusory one. But look at the other side. Take the case of a Country where totally opposite conditions prevail: where there is no surplus population, unlimited land, limited capital, labour scarce and dear, and no possibility of competing in the foreign or even in the home Market with the manufactures which, with Free Trade, would be poured in by countries like England, in prior possession of all the elements of cheap Production. It is by no means so clear that Protection, to enable Native Industries to take root and grow, may not in such cases be the wisest policy.”

“Take, as a simple illustration, the case of an Australian Colony, imposing an Import Duty on Foreign boots and shoes. There is no doubt that this is practically taxing the immense majority of Colonists who wear and do not make these articles. But, on the other hand, it makes the Colony a possible field for Emigration for all Shoe-makers of Europe, and shoe-making a trade to which any Australian with a large family can bring up one of his sons. Looking at it from the strict point of view of the most rigid Political Economist, the maximum Production of Wealth, which is the better policy? The production of Wealth, we must recollect, depends on Labour, and productive labour depends on the Labourer finding his tools — that is, employment at which he can work. A labourer who cannot find work at living wages is worse than a zero; he is a negative quantity as far as the accumulation of wealth is concerned. On the other hand, every workman who finds work, even if it may not be of the ideally best description, is a wealth-producing machine. What he spends on himself and his family gives employment to other workmen, and the work must be poor, indeed, if the produce of a year’s labour is not more than the cost of a year’s subsistence. The surplus adds to the National Capital and thus Capital and Population go on increasing in Geometrical Progression. The first problem, therefore, for a new or backward Country, is to find ‘a fair day’s wages for a fair day’s work,’ for as many hands as possible. The problem of making that employment the most productive possible is a secondary one, which will solve itself in each case rather by actual Practice than by abstract Theory.

“This much, however, is pretty clear, that in order to secure the maximum of employment, it must be varied. All are not fit for agricultural work, and, even if they were, if the conditions of soil and climate favour large Estates and Sheep or Cattle Runs rather than small Farms, a large amount of capital may pro- vide work for only a small number of labourers. On social and moral grounds, also, apart from dry considerations of Political Economy, progress, intelligence, and a higher standard of life are more likely to be found with large Cities, Manufactures, and a variety of industrial Occupations than with a dead level of a few Millionaires and a few Shepherds, or of a few Landlords and a dense population of poor Peasants. If Protection is the price which must be paid to render such a larger life possible, it may be sound policy to pay it, and the result seems to show that neither it nor Free Trade is inconsistent with rapid progress, while, on the other hand, neither of them affords an absolute immunity from the evils that dog the footsteps of Progress, and from the periods of reaction and depression which accompany vicissitudes of Trade.

Extract from Sir W. W. Hunter’s “Study in Indian Administration.”

“But Sir Maxwell Melvill, or Max Melvill as he was affectionately called throughout his career, was an important personality and a living influence quite apart from his official work. In Economics he did not shrink from declaring himself a Protectionist of the American type, that is to say, an advocate for Protection not for a single isolated Country, but for a great Continent like America or India made up of a number of States, possessing within them the resources for almost every kind of Production, indeed, for almost every form of human Industry, and capable of a self-sufficing economic development. One of those who knew him best believes that it was this consciousness of holding views not in accordance with the prevailing doctrines of the Government of India, which influenced him in declining the seat in the Viceroy’s Council.”

[1] Lecture delivered in the Deccan College, Poona, in 1892.





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Gokhale’s 1912 speech against fake “Government rupees” and in favour of gold rupees and the gold standard


[Source] [On Friday, the 21nd March i912, Lord Hardinge, Me Viceroy, presiding, Sir Vithaldas Thackersey moved a Resolution in the Imperial Legislative Council recommending the throwing open of Indian mints to the free coinage of gold. Gokhale, in supporting Me Resolution, spoke as follows:]

My Lord, I beg to support this Resolution, My Hon’ble friend Sir Vithaldas Thackersoy has referred to certain remarks which I had made on this subject in this Council a few years ago, and he has invited me today to develop my view still further. I do not know that there is much to develop, but I will briefly state what I think of one aspect—an important aspect—of the matter. In dealing with the question of high prices in 1908-1909, I had to give some thought to this question of the coinage of rupees and this was how I expressed my views on the occasion:

It seems to me that the only way now out of our difficulties is to follow the example of France and the United States, and while admitting the rupee to unlimited tender, stop the coinage of new rupees and coin gold pieces instead. Of course I express this opinion with great diffidence, for there are serious considerations on the other side and the whole subject is enveloped in great obscurity. But I fear that the present half-way house will not do, and unless we place our currency on an automatic and self-adjusting basis, the clouds that are already overhead will thicken and not roll away. 

The clouds that I specially referred to were clouds of high prices and also of certain apprehensions in connection with the adequacy or otherwise of our gold standard reserve to maintain the level of exchange. My Lord, so far as the question of prices is concerned, that is a matter which is under some sort of inquiry at present, and I do not therefore want to go into it at any length. The fact that there are no additions made during the last three years to our total silver currency has undoubtedly tended to ease the situation as regards prices. But if we are again on the eve of large additions to our silver currency, I fear the question will be further complicated and the complications might possibly grow most serious.

The view that I take of this matter is briefly this. The quantitative theory of money, as every student of political economy knows, holds good in the case of backward countries like India, much more than in the case of advanced countries which have a highly developed system of credit instruments. Now, in that view of things, prices are a function, to use a mathematical phrase, of three variables; they depend upon three factors—the volume of currency, the supply of commodities, and the demand for commodities. Any two factors being the same, they vary with the third factor, either directly or inversely, as the relation may be, For instance, they vary directly with the volume of currency; they also vary directly with the demand for commodities; and they vary inversely with the supply of commodities. Now, assuming for the moment that the demand and supply continue normal, prices will -vary according to the volume of currency. Of course it takes a fairly long period for these adjustments to take place, but I am stating only the tendency of things. Whether the total volume of currency that exists in circulation at any particular moment is adequate or otherwise depends upon a number of considerations, the demands of new industrial developments in the country, increases in production, increased facilities for exchange and various other factor of that kind. But I am not going into that just now; I am simply considering the single phenomenon of prices in relation to the volume of currency, leaving everything else out as normal.

Now, what is the difference if you have an automatic self-adjusting currency such as we may have with gold or we had with silver before the year 1893, and the kind of artificial currency that we have at present? Situated as India is, you will always require, to meet the demands of trade, the coinage of a certain number of gold or silver pieces, as the case may be, during the export season, that is for six months in the year. When the export season is brisk, money has to be sent into the interior to purchase commodities. That is a factor common to both situations whether you have an artificial automatic gold currency as now or a silver currency. But the difference is this. During the remaining six months of the slack season there is undoubtedly experienced a redundancy of currency, and under a self-adjusting automatic system there are three outlets for this redundancy to work itself off. The coins that are superfluous may either come back to the banks and to the coffers of Government; or they may be exported, or they may be melted by people for purposes of consumption for other wants.

But where you have no self-adjusting and automatic currency, where the coin is an artificial token of currency such as our rupee is at the present moment, two out of three of these outlets are stopped. You cannot export the rupee without heavy loss, you cannot melt the rupee without heavy loss, and consequently the extra coins must return to the banks and the coffers of Government, or they must be absorbed by the people. In the latter case, the situation is like that of a soil which is water-logged, which has no efficient drainage, and the moisture from which cannot be removed. In this country the facilities for banking are very inadequate, and therefore our money does not swiftly flow back to the banks or Government treasuries. Consequently the extra money that is sent into the interior often gathers here and there like pools of water, turning the whole soil into a marsh. I believe the fact cannot be gainsaid that the stopping of two outlets out of three tends to raise prices by making, the volume of currency redundant. If we had a gold currency in place of the present artificial silver currency, when there is a redundancy, the people could re-melt gold coins into bullion or export gold coins without loss; but the rupee being what it is, the people cannot melt or export it, because of the difference between its token and intrinsic values, and every rupee coined remains as a net addition to the currency.

It has been estimated that an average of about three crores of rupees used to be melted annually by the people under the old system for purposes of ornaments, etc. Where the cost of carrying bullion from the ports into the interior exceeded the slight loss that was incurred by melting rupees, people melted rupees. And the present disability will remain as long as our currency remains artificial. As a matter of fact, those who suggested that our currency should be placed on its present basis had foreseen this, and they had recommended that the present should only be a temporary arrangement. The Fowler Committee and other authorities have advocated a gold standard and gold currency, not a silver currency, as the permanent arrangement for this country.

The time has come when we should consider whether we should not enter on the next stage of our currency policy and go in for the coinage of gold pieces, admitting silver, however, for the present to unlimited legal tender. But a time must come when silver will have to be restricted in amount as legal tender, and gold will then have to be the principal coin of the country. My Lord, I support this Resolution.


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Gopal Krishna Gokhale’s vigorous opposition to the regulation of cannabis (hemp) production

This is an extract (source). [Note: hemp is cannabis].

Now. my Lord, I object to this Bill on five  grounds:— (1) The proposed legislation is wholly un- necessary; (2) even if Government wanted to legislate in the matter, absolutely no case has been made out for prohibiting or otherwise subjecting to restriction the cultivation of hemp; ….

My Lord, my next objection to this Bill is that, even if Government wanted to legislate in this matter with the object of establishing bonded warehouses and levying a quantitative duty, I submit that absolutely no case has been made out for seeking to regulate the cultivation of hemp by licenses. Even the few Bombay official witnesses who favoured fresh legislation on the subject of hemp drugs, were careful to state that they did not desire to impose any restrictions on the freedom of cultivators in growing hemp. They considered that the restrictions on the sale of hemp and the fact that the manufacture of drugs could not, owing to the very nature of the process, he carried on surreptitiously, made it unnecessary to control the cultivation in any way.

The honourable member in charge of the Bill himself expressly stated that he did not consider it necessary to restrict the cultivation of hemp, and I believe, my Lord, that with such a great authority on my side it is not necessary for me to labour this point any further. I will, however, venture to mention to the Council a few considerations which occur to me against the proposal to empower Government to restrict cultivation as they please.

I think, in the first place, that anything which tends to multiply the points of contact between the cultivators and the lower subordinates of the Revenue, Abkari and other departments deserve to be seriously deprecated. If the cultivation of hemp comes to be prohibited, except under license, innocent cultivators may be exposed, as urged by several witnesses, to the risk of having false charges brought against them by over-zealous or blackmailing subordinates of these departments in connection with the spontaneous growth of wild hemp plants. Then, again, though Government do not propose to charge a fee for licenses granted to cultivators, these latter may experience some difficulty in getting them actually, and may even have to incur expenditure, which will not bear scrutiny, before getting them.

This point was very well brought out by the Times of India in an article on this Bill in December 1898. This is what that journal wrote on that occasion:— “If it is a desirable object of legislation to multiply the points of contact between the administration and the people, this is a most admirable Bill; but not otherwise. Unless a substantial benefit is to be gained, the less the Collector and his subordinates are called on to intervene between the cultivator and the free pursuit of his calling, the better. Every additional license, every additional compulsory resort to authority for permission to do this thing or that adds to the cultivator’s worries — adds to the opportunities that the revenue subordinate enjoys for worrying him and getting money out of him.

A license looks a harmless thing — as it would be if it were a sheet of paper and nothing more. But in India there is often more in it than is written on the face of it and it costs more than is supposed to be paid for it.” The question of assessment also comes in, in this connection, though in a somewhat remote manner. I think that men who are paying a certain assessment to Government and are raising a certain kind of crop on their land, have a right to expect that their freedom to raise that crop shall not in any way be fettered by Government. Sir James Campbell, in his evidence before the Commission, observed:— “I think the producers in Ahmednagar and Satara would resent very much any restriction of cultivation. I think that the prohibition of cultivation in those districts where it is trifling, so as to confine it to the two districts above named, may cause some little dissatisfaction, but would be feasible.”

Lastly, in this connection, there is the question of growing hemp for the purposes of fibre. Dr. Witi, in his Dictionary of Economic Products, states — and the statement has been quoted by the Hemp Drugs Commission in its report — that the Indian plant from which the drugs are manufactured is but an Asiatic variety of the species from which fibre is produced in Europe; and he also contemplates the possibility of cultivating hemp “as a cold season fibre-crop on the plains of India,” and he is of opinion that “there may be some localities in India where this might be found possible and even remunerative.” I think, in view of this expression of opinion from such an authoritative quarter, the Government, instead of prohibiting cultivation, except under license, ought to encourage experiments in hemp cultivation with the object of ascertaining if the fibre-producing plant can be grown anywhere in the Presidency on a large and remunerative scale. 

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