Statism and the Free Market; S. Shenoy

STATISM FREE AND THE MARKET ECONOMIC PROBLEMS loom large in the minds of many people today. Scholar and man in the street alike feel themselves deeply involved in questions having to do with the production and distribution of worldly goods. But despite the intense interest in the subject, much of today's economic discussion is vitiated by a lack of re gard for the fundamental criteria of the free market economy. Statism is the antithesis of the free market, but the blind spot afflicting many people is such that the effects of statism, historical and contemporary, are often debited to capitalism. This would be like blaming the evil consequences of slavery on freedom! Thus, when American and other "liberals" (statists) criticize something labeled "free enterprise," they imag ine they are criticizing the free market. But what these people consider to be the natural corollaries of the free market are not integral parts of it at all. They are disMiss Shenay is a student of St. Xavier's College (Gujarat Uni versity), Ahmedabad, India.

217 218 SUDHA R. SHENOY tortions produced in its working by misguided inter ventionism-the attempts of the state to do the duty of other parts of society, while neglecting its own duties. This causes imbalances and distortions in the market, and these are usually taken by the statists to be its nor mal and essential features. For optimum functioning, the market needs a suitable, politico-legal framework. It presupposes the performance of a number of essential functions by the state aimed at establishing and maintaining the Rule of Law. U n fortunately, it is impossible to take for granted that the state (i.e., the politicians and bureaucrats) will adequately perform its essential functions. More than likely, the state will neglect the duties which it alone can perform or else give them stepmotherly treatment-while attempt ing to do things beyond its scope. The resulting distortions in the market will be pounced upon by the statists and held up to view as the normal phenomena of the market. The politicians will then proceed further with the identical policies that caused the imbalance in the first place-or with worse policies-all to the accompaniment of humanitarian slogans, and with the encouragement of these socalled "liberals." This is a vicious circle, and the essential duties of the state will probably be forgotten or neglected.

Most people regard the U. S. A. as the examplar of the free market. This is a mistake; the U.S.A. is a prime ex ample of the "muddled" variety of the statist economy. The communist countries represent one end of the specSTATISM ·AND THE FREE MARKET 219 trum-the totalitarian economy. Some West European countries-although still riddled with welfarism-appear to be moving toward the other end-the free market economy. Countries like the U. S. A. and India lie some where between the two-they are the muddled econ omies, combining perhaps the worst features of both sys tems. The statism of East Europe is called communism, the statism of India is called "the socialistic pattern of society," and the statism of the U. S. A. is called "Ameri can free enterprise." The Failure of Planning Statism, wherever tried, defeats its announced ends as we may see from the exam pIe of India. While the aims of India's Five-Year Plans are laudable-to raise the standard of living of the people, develop the econ omy, reduce the unemployment, and obtain social jus tice-the plans have, in fact, achieved the opposite.

Since "planning" was intensified, per capita daily food grains consumption has stagnated around 15.4 ounces (the nutritional norm is 18 ounces). Annual cloth con sumption has declined from 14.63 to 14.36 meters per person. Ninety per cent of the houses in the country are one-roomed hovels, with no facilities whatsoever. This is because under "planning," the bulk of the country's resources are forcibly drawn into the sector with the lowest returns, the public sector. This would be true of any country where "planning" is tried. About 4 per cent of India's national income is provided by em220 SUDHA R. SHENOY ployment in the public (government) sector. But gov ernment absorbed 60 per cent of total resources in the Second Plan; and the Third Plan proposes to raise this figure to about 70 per cent. Practically the entire public sector expenditure is on uneconomic, low-return, heavy industries and on giant river-valley projects-imitation TVA's. The high return agricultural and light industries sector provides more than 80 per cent of the national income, but under "planning," it is starved of essential capital.

The natural and inevitable result of this statist mis allocation of resources is retarded economic development. An additional investment of $100 in iron and steel in creases output by an estimated $14; and in textiles, by $26. The same investment in agriculture, on the other hand, would increase output by $50 to $701 In other words, statism holds down India's economic growth, to the present meager (per capita) rate of 1.6 per cent an nually-in place of a much higher potential growth. Statist planning is also responsible for India's grow ing unemployment. Two million dollars of investment provides jobs for only 500 persons in heavy industries; whereas the same amount would provide 1,150 jobs in consumer industries, and 4,000 jobs in agriculture. The gap between the poor and the rich has widened in the last decade. Incomes have been transferred from the lower classes and fixed income groups, to business men, industrialists, and corrupt functionaries of the state. This has ensued partly through inflationary plan finance, but mainly as a result of statist "controls" (perSTATISM AND THE FREE MARKET 221 mits, licenses, quotas, concessions, and so on) which cen tralize economic power in the hands of officials, and cre ate numerous monopolies or semimonopolies in the pri vate sector. Public contracts also playa very significant role. This antisocial income-shift is estimated to be of the order of $1.6 billion a year. In short, the real bene ficiaries of statism in India are unscrupulous bureau crats, and the state-established, state-protected monopo lists in the private sector.

India is thus a classic case of statist muddle, but stat ism is guaranteed to produce the same results wherever tried.