Thoughts on economics and liberty

Tag: Benefits of freedom

An obstacle theory of development

I am preparing for a talk entitled, “Can India Catch Up? Can Australia Do Better?” – which, once I've delivered it and refined it a bit, I'll extract/summarise on this blog.

In this process, I've come to realise that development is all about removing obstacles to the technical frontier. The following diagram illustrates what I have in mind:
What I'm trying to say here is very simple. 
 
Recall that I've proposed here that 
 
Growth = f(policy(F), governance(F), opportunity(F)) = f(F), where F = freedom.
 
"Opportunity" in the above equation reflects the distance to the technical frontier. For instance, India is very far from this frontier, the West is at the frontier; that is why India is so poor. The opportunity to reach the technical frontier always exists with the poorer nations. They simply need to copy what the leading nation is doing. No effort required to re-invent the wheel. However, they need the right policy and governance to achieve this opportunity.
 
So now the story becomes clear, as outlined below.
 
Each time someone (ANYONE, anywhere) innovates or invents something new, the HUMAN technical fronter is pushed outward.  For instance, the moment Edison invents something, or Einstein creates a new model of the world, the HUMAN technical frontier moves outward.
 
That, in effect, marks  the limit of human progress at a given moment.
 
If information and knowledge could transmit instantly, then all of us would always be at this technical frontier. Convergence would be instant. 
 
But that does not happen. So what prevents a someone living deep inside a village in India from reaching this frontier?
 
That answer is (a) Government obstacles and (b) Social obstacles. The diagram above is self-explanatory.
 
However, it is worthwhile to note that humans are rationally lazy and avoid thinking, and therefore they tend to believe, not investigate.  I experience this daily on this blog where people keep insisting that their outdated beliefs are 'right'.  People would much rather believe in myths and stories (that are romantic and interesting) than put in the effort to master the hard science behind our existence. It is much easier to believe that God made us [zero thinking required] than to keep asking questions where we came from! And so on. 
 
But laziness never gets anyone anywhere far. It is a recipe for mediocrity.
 
What is a government's job in this case? Good governance settings (policy and institutions) REMOVE Government obstacles. In general, this does not happen easily. Hence bad policy and bad governance are typically found, and since these have a lot of inertia, they are hard to change.
 
In addition, social reformers should be left free (no role for the government in this!) to remove religious/social obstacles. 

Removing obstacles is the key

By removing obstacles,  people can be quickly released from bondage and can march up to the technical frontier. The key to development, therefore, is:
 
a) GET OUT OF THE WAY!

b) TEACH PEOPLE TO THINK.
 
In India's case, the game changed long ago, but many Indians keep harping and wasting time on outdated world-views (e.g. cow slaughter or some such thing), instead of putting in the hard work to learn more science and economics. Both the Indian government and Indians, generally, REFUSE to change.
 
Sorry, people, the world has moved on. We don't live in the medieval era now. Time to wake up!
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The great follies of Karl Marx and the socialists

Capitalism or the overall mechanism of freedom, which comprises free markets and democracy, is infinitely better than what Karl Marx (1818–83) portrayed in his 1848 Communist Manifesto. I would like to digress for a moment here and explore this rather interesting and earth-shaking discovery!

In political philosophy, the age of thirty at which Marx wrote his Manifesto is considered very young. Marx was a baby philosopher then; quite immature and unable to plumb the depths of the ambitions for freedom of the human spirit that philosophers who preceded him had first articulated. It can be stated with some confidence that political philosophers should try to gain life experience at that age, not pen inflammatory pieces that over-emphasize their ignorance. Unfortunately, through sheer repetition of the wild claims made by Marx in the Manifesto it appears that his deadly ideology of communism persuaded many people to stop investigating the truth about capitalism. Given the vigour of the Manifesto’s expression, Marxism became the new Gospel for many people, particularly its later avatars of Fabian socialism in India. And so Marx’s followers diligently killed or made poor millions of people for 150 years while at the same time claiming that capitalism was to blame for these deaths and poverty.
 
But let us look at Marx’s arguments more carefully, though briefly. It may come as a surprise to some of us, but Marx pointed out a number of good things about capitalism in his Manifesto even as he painted a gloomy picture of its allegedly insurmountable shortcomings. Marx said that ‘capitalists’ – a word which to him included industrialists, landlords, shopkeepers and pawnbrokers (but which to me is much narrower, meaning those who understand freedom) – were part of ‘the modern bourgeois society that has sprouted from the ruins of feudal society’. Now, at first blush it would seem that, if nothing else, sprouting from the ruins of feudalism is a step in the right direction. Capitalism was surely on to something! Some other quotations from Marx are noted below, with my comments italicized in brackets:
‘The bourgeoisie cannot exist without constantly revolutionising the instruments of production’ [technological innovation is good]. ‘[It also has] the need of a constantly expanding market for its products’ [this is a competitive and productive endeavour that enhances the wealth of nations].
 
‘The bourgeoisie, by the rapid improvement of all instruments of production, by the immensely facilitated means of communication, draws all, even the most barbarian, nations into civilisation’ [that is a great achievement, to be a civilizing force].
 
‘The bourgeoisie has […] created enormous cities, has greatly increased the urban population as compared with the rural, and has thus rescued a considerable part of the population from the idiocy of rural life’ [here’s another important feature of capitalism, though this statement needlessly insults people who may choose, upon having considered various options, to live in rural areas].
In general, we can agree with these parts of Marx’s characterization of capitalism. If so, why did Marx go on to oppose capitalism and want to topple it? Well, what seems to have happened is that after noting its many advances, Marx began to doubt – quite wrongly as it turned out – whether a worker in a capitalist society would ever get to acquire ownership over property. He wrote, ‘we Communists have been reproached with the desire of abolishing the right of personally acquiring property as the fruit of a man’s own labour, which property is alleged to be the groundwork of all personal freedom, activity and independence […] [h]ard-won, self-acquired, self-earned property! […] [D]oes wage-labour create any property for the labourer? Not a bit’ [False!! – this being my heated exclamation of protest, obviously].
 
Marx actually went wrong by a mile here; off on a complete tangent. He was, for some unknown reason, not aware of the growing evidence of the dramatic improvements in the lot of workers even in incipient capitalist societies. For example, writing about the changes to the conditions of agricultural labourers and factory workers during the early stages of industrialization, the great economic historian, Rondo Cameron,[i] notes, ‘That factory workers received higher wages than either agricultural labourers or workers in domestic industry there can be no doubt’. England also experienced a ‘rapid rise in population during the early stages of industrialisation’. This indicates that relatively better nutrition and sanitary conditions prevailed in urban areas at that time, particularly better access to health. Public health initiatives were also starting to make a significant dent on infant mortality. For instance, in 1847–8 the British Parliament adopted a sanitary code for all of England and Wales excluding London. A few years later, Louis Pasteur of France proved beyond doubt that germs led to disease. Cameron then notes, ‘the general trend of real wages was upward’ at that time. These, then, are the high-level facts of the time of Marx which indicate that rapid scientific and economic advances were taking place exactly when young Marx was hastily jumping to wrong conclusions.
 
But 100 years of experience then available to Marx was perhaps somewhat mixed. Why don’t we look at the facts prevailing now and see what happens in capitalist societies? In 1848, the theory of freedom and its practice, namely, of democratic free markets, had barely found a foothold. Today we are able to call upon 250 years of experience. Early trends found in Marx’s time have become totally obvious. Today we are able to note unequivocally that the average worker in a capitalist society is much better off than an average worker under any alternative system. There are no two opinions about this fact of life.

In addition, there are great equality incomes at the professional levels. In a modern capitalist society, all occupations pay almost equally well at that level. For example, a good professor and a good plumber earn about the same (both earn above $100,000 in Australia today). That is due to the extremely high productivity of plumbers in these countries who are extensively trained in modern, productive technology. Morarji Desai
 made his first visit abroad in 1958, to Britain, USA and Canada. He found that capitalist societies were very equitable, more so socially. He remarked to Welles Hangen, an American journalist, after his trip, that ‘In your country the manager and the worker sit together without any embarrassment. Many times the worker’s clothes are as good as his boss’s and the car he drives to work is also as good’.[ii] Marx simply did not live long enough to see the long term impacts of capitalism; and like a bad scientist he ignored evidence of the increasing prosperity of workers in capitalist societies in his lifetime.
 
On the other hand, workers in feudal and socialist society remain pathetically poor, albeit equally.Only the corrupt are rich in such societies. Incomes in capitalist societies are highly unequal, but as we have seen, this moral inequality, in that it is based on justice and voluntary, non-coercive trade. Such inequality is superior and even, arguably, desirable. In this manner, the level of overall morality in a society is perhaps the strongest signal of capitalism. (Now that I think of it, I should have put morality as a key indicator in Chapter 2; but it is implicit in the discussion on the culture of free societies and in the high levels of corruption found in socialist societies.) The main point is that inequality in capitalist societies doesn’t remain fixed over generations as with feudal societies; an unskilled worker’s children can easily become entrepreneurs and prosper through diligence. At the same time, it is not uncommon for a wealthy person’s children to regress into penury.
 
We have seen that a capitalist society rewards people objectively through the balance of demand and supply for their contributions through the market. Rewards are not dependent on who one’s father was, or on the colour of one’s skin. Bill Gate’s father could have been a ‘lowly’ black cleaner, and it would have mattered not one bit to Bill Gate’s future. He would have still become the richest man in the world and equally respected. Capitalism is a fair system which gives everybody an equal chance to excel and prosper. Everyone can be rich in a free society. And happy.
 
Indeed, the classification by Marx of the society into classes such as workers and the bourgeoisie is completely unsustainable today. Capitalism has rich texture; it is not uni-dimensional like socialism.In a free society a person can become rich and poor in the same lifetime. And today, managers are a kind of worker; and knowledge workers are a kind of manager. There are no distinctions of class possible today.
 
These, then, are some of the true facts regarding capitalist societies. Unfortunately, based on his serious misinterpretations, or misrepresentations of the truth, Marx asked workers of the world to revolt against capitalism. He did not recommend making improvements to capitalism through peaceful, voluntary negotiations. He wanted capitalism abolished. He rallied workers: ‘Workers of the world unite; you have nothing to lose but your chains’. According to him, workers needed to divest capitalists of their wealth (through violence, of course), and take charge of productive resources. Marx did not give directions on how the management of factories would change hands. Would the managers – who are also workers, but skilled workers – have to be demoted, and those without such knowledge and ability promoted to lead factories? Was merit to be turned on its head? Whether he wanted it this way or not, that is exactly what happened at least under India’s socialist regime in our public sector undertakings.
 
Marx’s implicit recommendation was clearly to encourage plunder. Anyone with wealth was now to be game for our envious passions. When discussing this comment about socialist plunder, one of my friends asked me, ‘The rich don’t plunder?’, to which the answer in a free society should be given in the following way: ‘First, to be rich is not a crime. Indeed, profit earned through just means based on persuasion and voluntary exchange, where each party to a trade becomes better off, is philosophically just and eminently moral. It can’t be related to plunder in any way. Plunder requires coercion to be employed. Second, a free society does not assassinate the character generally of all richpersonsas a group.The issue of plunder has to be tested objectively in each individual case. Plunder is a definite crime in a free society and no one is exempt from punishment on being found guilty of plunder. Our inquiries may find that some of the rich have plundered; but perhaps not all have. We may also find that some of the poor have plundered as well; but that not all have. In brief, whoever has plundered must be tried and punished’.
 
Communists prefer to use force to obtain their objectives. According to that vile communist, Mao Zedong, ‘all political power flows out of the barrel of a gun’.[iii] Nothing could be more abhorrent and revolting, coming from a political leader. Leaders should speak the language of moderation, peace and freedom; not of violence. Such messages of hate and disrespect of life are in gross opposition to the philosophy of freedom. Freedom demands respect for life and everyone’s freedom. Violence is never a part of it. It treats life almost as a sacred thing.
 
From the time of Marx, capitalism acquired a bad odour about it. In India, Nehru led a crusade against this word. At least two generations of Indians have now been poisoned against capitalism. But we know now, at last, the real truth – that capitalism is an ethical, just and equitable system built on the foundation of freedom and equality of opportunity.
 

[This is an extract from Breaking Free of Nehru]


[i] Cameron, Rondo, A Concise Economic History of the World, Oxford University Press, New York, 1993, pp.187–9.

[ii] Cited in Hangen’s book, After Nehru, Who?, Rupert Hart-Davis, London, 1963, p.43.

[iii]Madsen, Richard, (1996). Review of David E. Apter and Tony Saich’s book Revolutionary Discourse in Mao’s Republic. Contemporary Sociology. Vol. 25(2). p.187.
 

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Laissez faire!

The key lessons about free markets and wealth generation are summarised in BFN, thus:

Recapitulating, a free society generates wealth by the simple expedient of letting markets function without undue hindrance. It creates institutional frameworks to govern markets with a view primarily to ensure justice. India should seek to build market governance institutions of this nature; these institutions must remain fully accountable to us. However, even Western societies find it hard to manage regulators who often hijack policy and start enforcing things they were not asked to. The government and citizens, together, must strongly curb such tendencies.

Given space constraints I will not discuss how these institutions are to be created [DOF contains some more details on this issue], but we can learn much from the experience of the West and from their literature on economic reforms. While endorsing most of the standard literature of economics and economic reforms, I would like to suggest a few words of caution:

  • Our future is too important to be left to economists.We must never let economists monopolize the thinking that we need to put in as concerned citizens. The literature of economics should be used to supplement our holistic thinking; not as a primary source of policy ideas.
  • Economists are driven primarily by the goal of economic efficiency. They do not base their advice purely on the principles of freedom. They are therefore likely to propose interventions by governments on grounds of market failure, information failure, information asymmetry, ‘equity’ and so on. We should soundly reject such advice.We need to back off from anyintervention by the government unless it is proven without doubt that such intervention will improve our freedoms including our accountability. Let us follow the imperatives of freedom and we won’t go wrong.
  • Next, we should never use the pretext of ‘equity’ morethan once in society’s decision making. If poverty is being addressed by a branch of the government (say, which is implementing the negative income tax), then all other parts of government should provide whatever it is they are required to provide, without reference to equity. Let there not be a thousand policies each trying to remove poverty. That will significantly increase poverty.
  • Finally, policy makers are usually very weak in their understanding of good governance and how to implement things. Policy makers, indeed each of us, must therefore learn more about what drives bureaucrats. We must ensure that bureaucrats have the right incentives, and we must tightly control our bureaucrats.

On the whole, it is relatively easy to build free markets. All we need to do is to get out of the way. Laissez faire!

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Wealth Creation through Free Markets

(Extract from Breaking Free of Nehru)

No society can call itself free without its markets being almost entirely free. The qualification ‘almost’ is explained later in this section, but let me discuss the main premise first. When we talk of a ‘free’ press, and advocate more of it, we feel a sense of righteousness, even pride, in our ‘forward looking’ position. More of this particular ‘free’ thing is surely better, we assert confidently! Well, it turns out that the same holds for markets.
 
            It is surely reasonable to assume that an average adult is competent enough to determine what is in his or her best interest – unless he or she is seriously challenged intellectually. Such citizens of one or more nations who voluntarily[i]exchange legally permitted goods and services, produced or otherwise sourced by them, with each other, and value these goods and services through the unhindered exercise of their personal judgment, can be said to constitute a market. Markets are thus agglomerations of two or more trading peoples, including organizations of people, at a point in time. They cover a big chunk of our interactions with others.
 
            For a market to form there is no requirement that the buyer and seller should be located next to each other. If, living in Australia, I buy a book from Amazon.com which ships it to me from USA, I become part of the online market. In this online market I am interacting ultimately with some human being somewhere in USA; a person whom I don’t need to see or to know about at all. A market is thus a fairly general concept. We may also refer to markets by what is traded in them, e.g. the labour market where employees hire their labour for a wage, or a grain futures market where people can buy grain from farmers even before the crop is sown. At other times we apply this concept to the place where people assemble to interact with each other, e.g. a shopping centre, a website, or an auction centre. A market in this broader sense is any interface of voluntarily agreed commercial interaction between trading peoples.[ii]
 
            More broadly, even non-commercial interactions can form part of markets. Temples and churches are part of the market for spiritual services, where we receive spiritual services in exchange for our allegiance and monetary contributions. The concept of markets can also be applied within a family, where husbands and wives ‘trade’ services between themselves. Every sensible husband knows the consequences of not doing his part of the ‘bargain’ such as trimming the lawn or mending the leaking roof; or even bringing an occasional bunch of flowers for his excellent wife. Wives are known to keep a detailed scorecard. A reader reminded me that consequences also exist for wives who do not keep their share of the bargain! Life’s no joke! There are markets, trades and accounts everywhere!
 
            We can reasonably assume under this non-coercive and loosely defined structure called market that people agree to buy something only if they are made better off[iii] by the purchase. Similarly, they do not sell unless they are made better off by the sale, even if it is a so-called ‘distress’ sale. These assumptions are valid only for the particular instantwhen a trade is agreed upon – both the buyer and seller perceive themselves being better off at that moment. If this were not so, it would mean that one of them has deliberately chosen to make himself worse off – which doesn’t make sense. If that happens it may be because the person has been coerced, which means it is no longer part of a market. There is a ‘limiting’ case when trade is agreed to by someone who remains only as well offas before.[iv] This limiting case is only a mathematical curiosity; since why would anyone trade if there was no benefit, either tangible or intangible?
 
            What about people who apparently become better off by choosing to make themselves materially worse off? Charity is a case in point. During a festival at Prayag in the seventh century AD, king Harshavardhan gave away his personal ornaments and wore an old and ordinary garment instead. The traditional definition of what makes a person better off would seem to have been turned on its head in this case. But the principle actually remains valid, for the person is now receiving psychological (in this case spiritual) benefit of equal or greater value in return. One is therefore quite safe in assuming that each trade always makes each party to the trade better off.[v] This is a major assumption, since it underpins all creation of wealth.
 
            What about transactions not deemed to be legal by a society? In my definition of markets, you’ll note that I included only the exchange of legally permitted goods and services. What about drug dealers buying and selling drugs? Is that part of the market? After all, a drug dealer and the drug addict both become ‘better off’ in their own way as a result of the trade. The same applies to prostitution, smuggling, gambling, or trading in beef, alcohol, tobacco, pornography, banned books and so on. These are areas where a government, presumably representing the views of the majority of the people, has declared some of these ‘markets’ as illegal, or otherwise restricted their operation. Without commenting on my personal view on any of these ‘markets’,[vi] let me state that illegal trades do not constitute a market for the purposes of this book because these are not recognized markets. There is no place for lawlessness in a free society. Even if we disagree with restrictions imposed in a free society, citizens cannot disobey the laws, but must work democratically to modify them.
 
            The most important thing about free markets is that they are entirely compatible with our freedom, since our individual choice is given the greatest possible consideration or regard. Even the richest man can’t force me to buy his products or to work in his company unless I choose to. I am king of myself – of my kingdom of one. Each of us participates in markets consciously and as a complete equal of all others in the independence of our decisions. This equality of status which acknowledges people’s dignity is a hallmark of markets. Free markets are truly democratic. Ludwig von Mises described market democracy thus:[vii]
 
Within the market society the working of the price mechanism makes the consumers supreme. They determine through the prices they pay and through the amount of their purchases both the quantity and quality of production. They determine directly the prices of consumers’ goods, and thereby indirectly the price of all material factors of production and the wages of all hands employed […] In that endless rotating mechanism [i.e. a market society] the entrepreneurs and capitalists are the servants of the consumers. The consumers are the masters, to whose whims the entrepreneurs and capitalists must adjust their investments and methods of production. The market chooses the entrepreneurs and the capitalists and removes them as soon as they prove failures. The market is a democracy in which every penny gives a right to vote and where voting is repeated every day.

[i] Marketing and advertising is not coercion, no matter how ‘distasteful’ it may be. Nor do the so-called ‘hard sell’ tactics of a second hand car dealer or a ‘cold call’ from people who knock on our door, or ring our telephone, amount to coercion, for we can always choose our decisions.

[ii] E.g. when I work as a bureaucrat, hired on behalf of elected political representatives of India, I am renting my time, policy knowledge and skills to the government of the day. If I don’t like what the government pays me, or the way it works, or the way it treats me, I can rent my services elsewhere, say to an Australian State Government. Of course, this particular instance is quite an extreme example, i.e. where labour moves across countries. But the voluntary nature of the employee relationship is to be clearly noted. And some labour markets are genuinely global today, for instance, the market for academic scholars. The best Indians professors always get picked up to teach in the USA, UK, or Australia. Indeed, about 80 per cent of our best economists now work abroad.

[iii] In almost all cases where a transaction is based on exchange of some service in lieu of money, we would be willing to pay a little bit more than what we usually end up paying. That extra bit that we would have paid but did not have to pay is the ‘consumer surplus’ of economics. The richer we get the greater the consumer surplus we receive, as we are asked to pay a ‘market price’ which is usually much less than what we would have been willing to pay.

[iv] This entire argument is called Pareto optimality.

[v] The Edgeworth box commonly found in elementary books of economics is a beautiful illustration of this logical analysis.

[vi] In answering this question I would hark back to fundamentals of the theory of freedom – is there sufficient factual evidence that restrictions placed on people’s freedom will, on balance, preserve or enhance life? Does the product hurt, poison, maim, or kill people? Is the restriction based on an individual’s personal ‘sense of morality’ which is not related to its direct impacts on life?

[vii] In his Omnipotent Government: The Rise of the Total State and Total War, Yale University Press, New Haven, CT, 1944. Copy available at [http://www.mises.org/etexts/mises/og.asp].

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