Thoughts on economics and liberty

A discussion with Jayant Bhandari regarding the underlying causes of India’s misery

We know that Jayant supports capitalism and has broadly very similar to mine. However, he differs in an important detail – whereas I am hopeful that India can change should its governance system incentives be changed, he is not.

He believes the causes of India’s misery are much deeper – cultural. So we are having a discussion.

There are significant implications of the outcomes of this discussion.

If Jayant is right then I should not be wasting my time in trying to set up a liberal party to reform India’s governance and policies because India’s culture must be changed first.

On the other hand, if I am right and Jayant is wrong, then there are implications for Jayant’s future work.

I’ve taken permission from Jayant to put this discussion out in public. From here on, Jayant can either choose to respond via comments here or via email.

I was attracted to one of your comments:

Economists and analysts who think that corruption and chaos can be removed in India through regulatory means or firm leadership (if at all someone rational can somehow get to the top job) are utterly wrong. They completely fail to understand how very deeply entrenched and entangled these are in the habits and culture of India.

I wonder whether you’ve had a chance to read BFN ( In my view (and extensive experience of working in India) the issue is purely of the incentives in the governance system. And these are entirely influenced by Nehru’s socialist ideas which are 100 per cent pervasive in India. Yes, culture is important, but incentives are far more important.


Incentives in my view are proximal causes. Why certain incentives exist is a product of the culture. It is easy to blame Nehru (who was a mere proximal cause), but socialism has been the culture of India for time immemorial. I recall reading books of Mulkraj Anand, which portray the poverty and desperation of people of India during pre-independence. He writes a lot about the caste system etc.

Indians will always elect a totalitarian, statist to rule.

How can you get a good leaders in India? If you interact and communicate with Indians, who are at best confused and cloudy in their thinking, you realize that a change in governance is virtually impossible in India.

Tagore in my view understood the situation well. He was against spending too much time and energy on fighting with the British. He preferred to awaken Indians. He preferred to work with the British, as his mentors in Bengal Renaissance movement did earlier. Tagore movement came to an abrupt end with the politicization of cultural renaissance. In my view what India needs is a revival of the cultural renaissance.

Hayek put this well… He said that our institutions are a reflection of our underlying culture. You cannot change our institutions without changing the culture. This is where I like to put all my efforts.


Jayant, your argument is underpinned by the belief that “socialism has been the culture of India for time immemorial. Indians will always elect a totalitarian, statist to rule.”

This takes us into analysis of Indian history – analysis at a level that’s well beyond my capacity. I might just make a few observations, first to support you and then to refute you.

In support of your thesis:

  • There is no doubt that the cultural rebellion against authority was the root cause of the rise of the West. We see that in the Magna Carta and 1689 Bill of Rights. We see that more clearly in the American Declaration of Independence. Deirdre McCloskey goes even deeper and shows how the Dutch began to value the bourgeoise (a kind of Weberian Protestant ethic argument but much richer and nuanced).
  • India has not seen such a cultural rebellion against authority. It is unheard of for a senior officer in India to take their junior staff (such as junior clerk) out for a discussion over coffee. India’s hierarchical set up is extraordinary – and is found in every part of the culture, i.e. religion (caste) and business.
  • Japan has a somewhat similar system of hierarchy. The Burakumin are similar to the Dalits in some ways and are treated badly inside Japan. However, when they migrate to the USA, they are accepted as equals by society and are able to flourish.

Against your thesis:

  • Indian kings were paternalistic but did not directly engage in business (for the most part; although they did operate a few “public sector” undertakings). There was also a flourishing private sector school system (see The Beautiful Tree by Tooley for pathbreaking research on this issue). Arthashastra has much in it about supporting business and trade (particularly imports).
  • The extreme poverty you cite (Mulk Raj Anand) was largely limited to the lower castes. However, India as a whole was more capitalist than socialist, and average per capita income remained among the highest in the world for most of the past 2000 years (cf. Angus Madison).

Hayek put this well… He said that our institutions are a reflection of our underlying culture.

Actually there is a bit of nuance in Hayek’s worldview, given he was such an astute student of history. At the end he said: “My emphasis is on the positive task of improving our institutions”. He believed that institutions are capable of being improved. It would be foolish to suggest otherwise. One of his great “heros” was Macaulay, and we know that Macaulay played a key role in the 1832 Reform Act, which played a significant role in reforming the incentives in British democracy. He knew the role played by Burke, by Mill, by many others.

Yes, he noted that “Not all these non-rational factors underlying our action are always conducive to success. Some may be retained long after they have outlived their usefulness and even when they have become more an obstacle than a help.” And further that “”Though freedom is not a state of nature but an artifact of civilization, it did not arise from design. The institutions of freedom, like everything freedom has created, were not established because people foresaw the benefits they would bring. But, once its advantages were recognized, men began to perfect and extend the reign of freedom and, for that purpose, to inquire how a free society worked. This development of a theory of liberty took place mainly in the eighteenth century. It began in two countries, England and France. The first of these knew liberty; the second did not.”

He was a liberal, not conservative. He believed that change is possible.

Now coming to some key arguments to refute your thesis about culture predicting everything (or almost everything).

a) In many ways the culture of the Protestant Europeans is very similar (excluding South Europe). But we know the difference between East Germany and West Germany. How do you explain that the same culture could yield such dramatically different outcomes?

b) How do you explain South and North Korea?

c) How do you explain that a change in incentives (governance system) in Singapore took it from penury to the richest nation on earth?

d) How do you explain that Indians who migrate to the West adjust readily and achieve excellent outcomes?

e) How do you explain that standard economic analysis of the incentives that operate in the Indian government system (see BFN) precisely predicts the outcomes we observe? In your view, it wouldn’t matter what policies or governance incentives India adopts since Indians would behave the same, regardless.

f) How do you explain that when capitalist policies were adopted (e.g. liberalisation), India responded with a great increase in productivity and innovation?

In brief, your cultural hypothesis is important, and can probably explain around 10 per cent of the variation in a society’s performance. However, 90 per cent of a society’s performance is directly and clearly explained by its governance system and the incentives created by its policies. Therefore, it is essential for India to have a liberal party that creates such incentives.

The message of Hayek was of hope and he himself was instrumental in educating the world about the consequences of the incentives of freedom. He did so in the belief that institutions can change. And quite quickly.

Friedman spent many years of his life studying Hong Kong and showing why freedom can rapidly transform any nation.

Dierdre McCloskey is engaged in a similar project.

I don’t understand why you wish to try to change India’s culture when all you need to change are the incentives that people face.

Sanjeev Sabhlok

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12 thoughts on “A discussion with Jayant Bhandari regarding the underlying causes of India’s misery
  1. Joyson Fernandes

    I disagree with this permise:

    “Average per capita income remained among the highest in the world for most of the past 2000 years.”

    That’s false! The income of every European nation was higher than India. Ireland which was the poorest of all European nations had an income just slightly higher than that of India. It is always the European nations whose per-capita incomes ranked among the world’s highest. I wish I could provide figures and cite an article, but I’m just writing from memory.

  2. almostaristotle

    sanjeev has spent most of his time out of india now, and he mostly interacts with the best of indians when he does, so i understand he does not get it how stupid and just plain arrogant indians can be.

    and that same principle is at work when you talk about indians abroad. They are the best of the breed. They will probably be the ones to support and donate to SBP but they are not going to come down to vote for you.

    and having said that, I see a lot of young ayn rand fans growing up in india now. With the internet and all i’m sure SBP will make an impact in the urban areas.

    guys like jayant should definitely come out and support, join and write about SBP.

    and kudos to sanjeev for always reaching out and finding such guys and having a conversation.

  3. Joyson Fernandes

    I’m aware of Angus Madison. I think I’m citing him, but am narrating from memory. If only I could find the article. This is old memory.

    India had the largest economy in the world until the Early Middle Ages (circa 1500), when it was overtaken by China. But per-capita wise we were always poorer than the Europeans. The poorest European country was Ireland whose average income was slightly higher than India’s. The richest initially was Roman empire, and their level of wealth would not be reached until Netherlands in the 17th century. Italy remained among the richest countries in the world anyway. China’s per-capita GDP was akin to the lower levels of European nations.

  4. Sanjeev Sabhlok

    You’re right – but note that the difference was very small; marginal. See this:

    Based on the following analysis, there is no reason to say that India was not one of the most prosperous nations of the world for most of the past 2000 years.
    In 1 AD, India’s GDP per capita was $450, as was China’s. But Italy under the Roman Empire had a per capita income of $809. In 1000 AD, India’s per capita income was $450 and China’s $466. But the average of the West Asian countries, such as Turkey and Iraq, was much higher at $621. In terms of general prosperity, therefore, it was the Arab world that was doing well a millennium ago. The Caliphate in Baghdad was a centre of power at the time and both science and culture flourished.
    By 1500, though, new centres of prosperity had emerged. India’s per capita income was $550 and China’s $600 in 1500. The Arab world had declined. But standards of living in Western Europe at that time had already gone far ahead. Italy topped the table, with a per capita income of $1,100, the Netherlands following with a per capita income of $761. This was the Italy of the Renaissance, the Italy of Michelangelo and Leonardo da Vinci, of Raphael and Titian. The UK was not far behind, with a per capita income of $714.
    By 1600, the centre of Europe had shifted nor

  5. Jayant Bhandari

    Yes, it is indeed true that I see absolutely no hope for India unless Indians change culturally. India is a society where honesty and integrity has virtually no value.

    Indians have to find anchor of reason and morality before there is any hope.
    Without Indians becoming rational, India will stay a tribal and superstitious society. It will fail to generate inner capabilities to differentiate between right and wrong, and will stay adrift by the forces of expediency.

    In an irrational society even if you install a perfect institutional structure, it will get eaten away and destroyed from within exactly the way termites destroy a physical structure. As it stands today, Indian institutions that the British left now stand almost completely destroyed and eaten away by Indian culture. Only the facade is left.

    In an immoral society it is impossible to get a good person elected as a leader. An immoral society would not only fail to appreciate a leader it will also actively destroy good people.

    Do the above mean that I hold your political party in contempt? Not at all. I appreciate and hugely respect what you are doing. It is a courageous endeavour. Enlightening a society or people is the highest endeavour.

    It is often difficult to differentiate between a social organization and a political organization. What is important to remember is that politics (which is about forcing top-down an institutional structure on a society) is by definition a violent, statist, and collectivist approach. From where India stands today—an extremely backward, poor and intellectually wretched place—I am not against trying all possible approaches to make Indians see reason and understand the concept of liberty.

    We all use different tools and methods. Even rough tools might work right now.

    Our institutions are indeed capable of improving. I did not say that they cannot be improved. But they can in my view only be improved from bottom-up.

    Top-down “improvements” do not work. They are certainly no sustainable. If India by some magic got a great Prime Minister tomorrow, Indians will revolt. No one will listen. In India, I cannot get five subordinates to do what I want them to do. How can you ever hope of changing 1.35 billion from top-down?

    Indians need to start thinking. Critical thinking is conspicuous by its absence in India. To start off, the so-called educated Middle Class should become rational.

    I am not disputing that you cannot plant reason in the society through what you might call a political party. But the concept of reason must be implanted somehow in India before there is any hope. That will be the re-start of cultural renaissance that was nipped in the bud with the passing away of Tagore.

    Sanjeev… You and I no longer live in the mainstream society. We have got distanced from their psyche. I like to get my hands dirty once in a while and I keep reaching the same conclusion: that Indians fail to comprehend the concept of freedom and actively fight against it. Because they lack reason they consistently fail to understand that freedom leads to a better and peaceful life. A respondent above says it perfectly, “Sanjeev has spent most of his time out of India now, and he mostly interacts with the best of Indians when he does, so I understand he does not get it how stupid and just plain arrogant Indians can be.” [Typos corrected]

    Look at what is happening in UP. Couples are being brought out of their homes and taken to the police station by a goon-group called Yuv Vahini. This is repulsive behaviour. But ask the guy on the streets and he gives his approval. He needs to change his mind. He needs to understand that if he wants India to be a free society, he has to stop imposing his ways of life on other people. Now, the Indian constitution does not allow for any of this to happen but these things happen for institutions don’t matter, culture does.

    As time has passed, I have increasingly become cynical about the possibility of the concept of reason taking hold in India. That does not mean that I will ever stop trying to make a difference. It merely means that I am no longer anxious when Indians keep doing more of exactly that has made India one of poorest and most wretched places in the world.

    Let me address some of your specific points now:

    a) East Germany was under the control of USSR. So, even with all its goodness it had not escape.

    b) North Korea again is caught up between two forces: China and the USA. Despite a population no more than that of Delhi, North Korea is still a formidable force. They have technology that major countries do not have. Linked here are my expanded views on the subject.

    c) Singapore: Virtually all the top positions in Singapore are populated by westerners. Singapore has consistently struggled with trying to develop creativity in its society. They have so far had little success.

    All the above three societies have deep rooted cultural element of group discipline. Group discipline can take the society either way. They can work towards progress or destroy themselves.

    Now, India has zero group discipline—discipline does not exist in India culture, the reason why India is always a chaos. Its culture pre-empts Indians from forming organizations. Indians fail to follow instructions. India is a chaos, which means that it has no direction or capability to become either North Korea or East Germany—but this is for wrong reasons.

    India had a hope of becoming Singapore or HK, but for that they should have begged the British to stay on, or bring a lot of Europeans to indirectly run the society as Singapore has done.

    Also, you can suppress a society with a good culture (and there are some great things about Korean, Singaporean and German cultures), but you have no dough to play with in the bad culture of India. The concept of reason is simply absent.

    d) About Indians who emigrated: These were the entrepreneurial ones. These were the smart ones. About 30 million Indians are believed to be living outside India. This is equivalent to 0.025% of Indian population. This is statistically insignificant to form any opinion from. (Note, however, that Indians outside India predominantly vote for the left, something I explored in details in the linked article. Once their vote starts having an influence, the society they emigrated to would rapidly start to mirror India).

    e) Yes, when capitalism policies are adopted, India sees hugely increased benefits. But Indians then rapidly fritter them away. Today, all over the country, parents are asking the government to get involved and interfere in running private schools. They cannot understand that if they really want the government to run schools they should send their kids to government schools. So we do improve institutions and then we regress all the way back. In fact, with what is happening in India currently—Cow-vigilantes and anti-Romeo squads—India might be taking two steps backward for everyone it took forward in the past. Institutional changes are not sustainable unless Indians understand the concept to reason, and hence fundamentally change their culture.

    Without the concept of reason, you cannot accumulate intellectual or financial capital.

    I see no hope that Indians will vote for a classical liberal party. My guess is that you cannot even find a handful of good people to run for office. But that is no reason to feel bad. You add supreme value to the society by talking with them about liberty and reason. You add huge value by promoting the idea of liberalism, rationality and liberty.

  6. Sandeep Datir

    Excellent discussion. Thanks, sanjeev and jayant for putting your views.
    I agree with general theme that culture or rational behaviour is a function of the surroundings, which itself is a function of institutions and incentives in which it exists. To change these institutions and incentives to promote freedom and liberty, a top down approach seems to be the effective option. However in democracy, such change will happen only when liberty minded party is in charge, for which people will need to understand liberty and freedom to elect such party to the office.
    Is it more like a catch 22 situation?. I think it will have to be a simultaneous, combined political and cultural level effort to make any change.

  7. Raj

    The culture changes first, then politics.

    The day, that very day, that the people of India choose liberalism to rule — they’ve radically changed who they are as people. That’s change in culture, immediately succeeded by the rule of a liberal actor.

    Why is it so hard to understand? The only way to be FREE, is to change the cursed laws, for which we will *need* to enter politics and take control. It’s really as clean as 1+1 is 2.

  8. Jayant Bhandari

    Sandeep: This is indeed a bit of Catach22. But if the culture is not right, good institutions will fall apart eventually. In my view, every institution that the British left has been destroyed by Indians. Once destroyed Indians have no capacity to rebuild them. So, most of the engine of change is the culture.

    Consider the current situation (and look at the guy on the street to make sure you think realistically)… How would you get Indians to vote for liberty? They are not interested. They need free stuff. They need the guy from their caste to win. They are tribal. Until they have integrity not to ask or expect free stuff and an interest in meritocracy, they will vote for the junkies they have voted into power so far.

    So, I see two possible options… Either a cultural change (something that Christian Missionaries did do a good job in) must happen, which could take a thousand years, or a benign rational dictatorship (of, say, Singaporean kind) to come to exist. The latter is what the British were in my view. This is why Tagore supported the British.

    Unfortunately, it is no longer possible to beg the British to return. (Now, some of us who left India must accept that we eventually preferred the rule of the West).

    Where we stand today and the utter mess Modi and his ruffians are creating, I see no hope of either of the two above. Indians are in love with Modi, which tells me that so-called educated Indians have become more propagandized than they were earlier. India will enter a phase of dictatorship eventually. Some army guy will takeover? Very likely. But this will not be a rational dictatorship.

    So, my view is that having a political process is maybe not such a problem if used as a platform to “educate”, but the focus should be on cultural change, and development of critical thinking among Indians.

  9. Sanjeev Sabhlok

    Had a quick look at his last para. It is obvious that Jayant won’t change. He’s created a strong rationalisation for his lack of initiative to even try to change things in India and the Third World.

    I have seen continuing growth in the ideas of reason and economic thinking that India needs – our party is populated by superb leaders and though they might be few, they are influential and growing in their impact. I’m also far more positive about India’s ancient traditions (e.g. Shubh Labh, and Arthashastra is a brilliant treatise in economics). This is all about leadership, in the end. Nations are moulded by leaders.


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