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© 2012 Sanjeev Sabhlok's revolutionary blog
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 I experience this daily on this blog where people keep insisting that their outdated beliefs are 'right'.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!
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 any intervention 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’ more than 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!
(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].
In my view, only five common sayings or aphorisms (or precepts) are needed to construct a viable personal value system. These are:
1. Search for the Truth:
Satyameva jayate (Truth Alone Triumphs) - Mundaka Upanisad (3.1.6) of the Atharva Veda
2. Use your reason:
Do not believe something just because it has been passed along and retold for many generations. Do not believe something merely because it has become a traditional practice. Do not believe something simply because it is well-known everywhere. Do not believe something just because it is cited in a text. Do not believe something solely on the grounds of logical reasoning. Do not believe something merely because it accords with your philosophy. Do not believe something because it appeals to ‘common sense’. Do not believe something just because you like the idea. Do not believe something because the speaker seems trustworthy. Do not believe something thinking, ‘This is what our teacher says. – The Buddha
3. Follow the Golden Rule:
Do unto others what you would have them do unto you.
4. Observe the categorical imperative:
Act only on that maxim whereby thou canst at the same time will that it should become a universal law. – Immanuel Kant
5. Defend human liberty:
We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. - 1776 US Declaration of Independence
A very happy new year to you!
This is my last blog post for 2010. Will see you in the new year. Have a great new year's party!
I came across an outstanding review of a new book on Adam Smith, entitled Adam Smith: An Enlightened Life by Nicholas Phillipson.
The review, by Adam Gopnik,originally published in The New Yorker on 18 October 2010 is extremely well written and throws vital light on Adam Smith the great classical liberal.
How to read the review?
I'd like to commend the review to you, which, however, is available at New Yorker only through subscription. If you don't subscribe to the New Yorker, you can read it on Synchrospace (here). (I don't know how the copyright system works in this case!) So go ahead and read it (here).
Just a short extract to stoke your interest:
[T]he idea that people live in groups, and that a shared sense of well-being is essential to an individual’s sense of himself, is at the heart of what Smith learned from him [David Hume]. “Man, born in a family, is compelled to maintain society, from necessity, from natural inclination, and from habit,” Hume wrote. Smith pressed harder at the question of how we do live together. Policing, force, plays a role, but people mostly get along well enough even when the cops are far away. “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it,” Smith wrote.
The key leap between Hume’s thoughts on sympathy and Smith’s thoughts on money took place in the lectures on moral philosophy that Smith gave in the seventeen-fifties, and then turned into “The Theory of Moral Sentiments,” which he published in 1759. For Smith, social sympathy rests on that “principle to persuade which so much prevails in human nature.” His key concept is the idea of an impartial observer who lives within us, and whom we invent to judge our own actions. Sympathy alone, Smith makes plain, isn’t enough to make us good. If we saw our brother or our best friend being tortured on the rack, could we truly sympathize? Not unless we could imagine what it felt like ourselves; it is our own mind that makes us kind. Sympathy isn’t a reflex or a serene internal search; it’s work. Smith’s witness is the imaginary other we install inside ourselves to watch our own behavior.
It was this connection – between the work of being a social being and the work that social beings do – that began to rule Smith’s meditations on the market. For Smith, the market is imaginative sympathy on speed. “Man continually standing in need of the assistance of others, must fall upon some means to procure their help,” a student’s s lecture notes record Smith as saying. “This he does not merely by coaxing and courting; he does not expect it unless he can turn it to your advantage or make it appear to be so. Mere love is not sufficient for it, till he applies in some way to your self love. A bargain does this in the easiest manner.”
That last sentence is the really explosive one. A bargain does this in the easiest manner. Where can you find a sympathetic community, people working in uncanny harmony, each aware of the desires of the other and responding to them with grace and reciprocal charm? Forget the shepherds in Arcadia. Ignore the poets in Parnassus. Visit a mall. For Smith the plain-seeing Scot, the market may not be the most elegant instance of human sympathy, but it’s the most insistent: everybody has skin in the game. It can proceed peaceably only because of all those moral sentiments, those imaginary internal judges. That’s what keeps the mob from rushing the Victoria’s Secret and stealing knives from the Hoffritz and looting the Gap. Shopping, which for the church moralist is a straight path to sin, is for Smith a shortcut to sympathy. Money is the surest medium of exchange.
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