Gandhi set the stage for decades of Indian poverty
Socialism, not the legacy of colonialism, largely caused India’s post-World War II economic misery
Indians viewed their central planners as similar to their former colonial masters
The most extreme forms of socialism have usually been implemented by political movements describing themselves as “communist.” And though socialism was a fundamental part of the ideology of Adolf Hitler’s government—Nazi, it is essential to remember, is an abbreviation of national socialist—the particularities of the Third Reich’s ideology, with its eliminationist anti-Semitism, its racial romanticism, and its delusional imperial ambitions, make it an imperfect example. My colleague Jonah Goldberg is absolutely correct to argue, as he does in Liberal Fascism, that the twin totalitarianisms of the twentieth century are variations on the same phenomenon rather than philosophically opposed phenomena, but for our purposes here we will disaggregate the two, though our doing so should offer no comfort to the modern-day apologists for socialism; Stalin was no less a monster than Hitler, Lenin no less a monster than Stalin, and Trotsky not much less a monster than Lenin or Che Guevara.
“But that’s communism!” the modern-day socialist will object. “We’re talking about socialism! Decent, humane, democratic socialism! We’re talking about Swedish socialism, not Soviet communism.”
What, precisely, is the difference between socialism and communism? Socialists invariably maintain, in essence, that all the bad stuff done in the name of socialism is communism, and all the good stuff is socialism. Free healthcare? That’s socialism. Political repression? That’s communism. Public pensions? Socialism. Gulag? Communism. But this is obviously facile and dishonest. It is also a gross oversimplification. Whether one describes a particular arrangement as socialist or communist, one is talking about different expressions of a single phenomenon: Marxism. The great communist leaders regularly describe themselves, their work, and their philosophy as socialist.
Still, today’s socialists and central planners, from Europe to the Obama administration, argue that it is unfair to locate them in the same camp as Lenin or Ho Chi Minh. That objection will not wash, for many reasons. One is that we must deal with the world as it is, not as the philosophers wish it were. Another is that the relationship between democratic socialism and the authoritarian nightmares enacted under such dictators as Stalin and Mao is not so distant as the socialists in the West would have us believe.
We have their own word for that. The contrarian Marxist Christopher Hitchens, who spent much of his lifetime as a foot soldier and influential thinker in various socialist factions, is forthright in admitting that even the anti-Stalinists of the democratic-socialist Left were eager to extend the influence of their forthrightly communist colleagues in the Eastern Bloc. “Where it was easy to do so,” he writes, “we supported causes—the National Liberation Front in Vietnam in particular—whose objects were to extend Soviet power.”1 His brother Peter, a fellow veteran of the International Socialists who eventually broke entirely with their utopian aims, tells a similar story: “The [other socialists] were more honest than we were. Ours was the extreme version of pretending that the U.S.S.R. was not the fault of socialists, or even of Bolsheviks (which we wished to be). Of course it was their fault, the fault of people exactly like us, but we closed our minds to this with a web of excuses. We pretended not to be who we were, and that the U.S.S.R. was not what it was.”2
We also have the benefit of being able to turn to the words of our own leading socialist thinkers to get a better appreciation for the relationship between democratic socialism and authoritarian communism. The leading socialist journal in the United States is called Monthly Review. It was founded by the late Harvard economist Paul Sweezy, whom the New York Times described as “the nation’s leading Marxist intellectual.”3 The journal is quite prestigious—its first issue contained an article written by Albert Einstein titled “Why Socialism?” Professor Sweezy and his colleague Leo Huberman published an instructive collection of epigrams relating socialism to communism. In their own words:
What is the difference between socialism and communism?
Socialism and communism are alike in that both are systems of production for use based on public ownership of the means of production and centralized planning. Socialism grows directly out of capitalism; it is the first form of the new society. Communism is a further development or “higher stage” of socialism.
. . . Socialism is . . . the necessary transition stage from capitalism to communism.
It must not be assumed, from the distinction between socialism and communism, that the political parties all over the world which call themselves Socialist advocate socialism, while those which call themselves Communist advocate communism. That is not the case. Since the immediate successor to capitalism can only be socialism, the Communist parties, like the Socialist parties, have as their goal the establishment of socialism.4
Socialism, then, in the words of its leading exponents, is a stage in the development of communism—the chrysalis from which the full-blown Marxist insect will emerge. The differences between the two, as Sweezy and Huberman argue, are largely tactical and technical:
The Communists believe that as soon as the working class and its allies are in a position to do so they must make a basic change in the character of the state; they must replace capitalist dictatorship over the working class with workers’ dictatorship over the capitalist class as the first step in the process by which the existence of capitalists as a class (but not as individuals) is ended and a classless society is eventually ushered in. Socialism cannot be built merely by taking over and using the old capitalist machinery of government; the workers must destroy the old and set up their own new state apparatus. The workers’ state must give the old ruling class no opportunity to organize a counter-revolution; it must use its armed strength to crush capitalist resistance when it arises.
The Socialists, on the other hand, believe that it is possible to make the transition from capitalism to socialism without a basic change in the character of the state. They hold this view because they do not think of the capitalist state as essentially an institution for the dictatorship of the capitalist class, but rather as a perfectly good piece of machinery which can be used in the interest of whichever class gets command of it. No need, then, for the working class in power to smash the old capitalist state apparatus and set up its own—the march to socialism can be made step by step within the framework of the democratic forms of the capitalist state.
The attitude of both parties toward the Soviet Union grows directly out of their approach to this problem. Generally speaking, Communist parties praise the Soviet Union; Socialist parties denounce it in varying degrees. For the Communists, the Soviet Union merits the applause of all true believers in socialism because it has transformed the socialist dream into a reality; for the Socialists, the Soviet Union deserves only condemnation because it has not built socialism at all—at least not the socialism they dreamed of.5
Not the socialism they dreamed of! That is the essence of modern socialist apologetics: never mind the socialism we have, the socialism that the world has experienced—judge us by the socialism we dream of. (Do they judge capitalists by the capitalism they dream of? The capitalism in which competitive, market-driven innovation means that inner-city schools improve as quickly, in terms of both quality and price, as the iPhones in the pockets of the schools’ students? That capitalism?)
Interestingly, Sweezy and Huberman echo Hayek and Mises in emphasizing the difference between consumer goods (your personal groceries, your household possessions) and capital goods (the means of production: factories, mines, industrial facilities, and the like). The Austrians understood the misallocation of capital goods (they call it “malinvestment”) to be the principal challenge to the socialist economy. For Sweezy and Huberman, the different attitudes toward capital goods and consumer goods define the difference between socialism and communism.
“A major source of objection to a free economy is precisely that it gives people what they want instead of what a particular group thinks they ought to want. Underlying most arguments against the free market is a lack of belief in freedom itself.”
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Milton Friedman, Capitalism and Freedom, 1962
Under socialism, they argue, consumer goods can remain private property. In fact, they predict that the intelligent application of central planning will produce a superabundance of consumer goods, a state of plenitude enabling the radically egalitarian reconstruction of society they seek. Under communism, they argue, consumer goods must be abolished with other forms of private property:
There are two kinds of private property. There is property which is personal in nature, consumers’ goods, used for private enjoyment. Then there is the kind of private property which is not personal in nature, property in the means of production. This kind of property is not used for private enjoyment, but to produce the consumer’s goods which are. Socialism does not mean taking away the first kind of private property, e.g., your suit of clothes; it does mean taking away the second kind of private property, e.g. your factory for making suits of clothes.6
In other words, when it comes to the deep structural issues in the economy—investment, infrastructure, large-scale property rights, capital markets, trade, etc.—socialism and communism are, in the analysis of America’s leading socialist thinkers, identical. Other than the theoretical legal status of personal consumer goods, communist economics and socialist economics must then be substantially the same. The authors minimize questions of political organization, although there is a telling bit of self-awareness in their contention that “capitalists as a class (but not as individuals)” are to be eradicated; obviously, the murderous history of socialism-in-arms is not entirely lost on its American apologists.
But as Hayek ably demonstrates, the political arrangements of socialism are in no small part a response to the economic contradictions inherent in the system. That is to say, if socialist and communist economics are substantially the same, then we should expect socialist and communist political arrangements to be substantially the same. This does not necessarily mean we should expect Sweden to be as repressive and backward as the Soviet Union was; it means we should expect Sweden under socialism to very much resemble Sweden under communism.
It is difficult to disaggregate such factors as Russian nationalism, Russian peasant culture, the political legacy of tsarism, and Russian war experiences from the political character of the Soviet Union. But it is possible to extract from the various experience of very different countries and cultures, with very different kinds of socialism, commonalities that tell us something about the characteristics of socialism itself.
For better and for worse, history has provided us with a pretty good case study for how socialism works within a single culture, and how kinds of socialism work in similar cultures. In fact, we have an experiment conducted at the crossroads of two of the world’s great civilizations at one of the most dynamic and fraught moments in human history: China and India at the close of World War II.
At the time of its winning its independence in 1947, India was many years ahead of China, better off in almost every conceivable way. India had escaped the ravages of World War II, whereas China had been torn apart by civil war and a brutal Japanese invasion. In India, British colonial rule came to a largely peaceful end thanks to the efforts of Mohandas K. Gandhi, and the departing English left behind a well-developed economic infrastructure and such critical social and economic institutions as a highly disciplined professional civil service and independent courts. Perhaps most important, they left behind a legal code based on English Common Law, arguably the greatest political institution developed by mankind, and one that left India well positioned to integrate easily into the global network of trade that would thrive in the emerging postwar order, catapulting the United States, Japan, and a reformed Germany to undreamt-of heights of prosperity.
In the Sinosphere, things were different. British colonial rule had left a much less productive legacy to the Chinese, whose proud and ancient culture was less flexible than India’s and less syncretic. Whereas India had a long history of incorporating influences from cultures as different as Portugal and the Mughal Empire into its social and economic practices, China, styling itself the Middle Kingdom and the center of the world, had always stood apart.
As World War II came to a close, the Japanese withdrew from China and the British began to withdraw from India. China’s civil war ended in a modus vivendi that saw the mainland under the rule of the communist forces of Mao Zedong, the nationalists establishing a single-party dictatorship in Taiwan, and Hong Kong reverting to British rule after the exit of the Japanese. The final distribution of power and sovereignties produced one of the great experiments in socialism in world history, a fascinating case study—and a tragic one, resulting in the deaths of millions of Chinese and the impoverishment of generations of Indians.
A Soviet agricultural commissar visits a collective farm and demands to know how the potato harvest is proceeding. “Marvelously!” replies the head of the farm. “We have so many potatoes that if we put them all in one pile, it would reach the foot of God!” The commissar turns grim and thunders, “This is the Soviet Union! There is no God!” To which the farmer replies, “That’s alright, there are no potatoes, either.”
In mainland China, there was utter socialism under Mao, but the same Chinese people would soon find their way to nearly unbridled capitalism in Hong Kong. And while much lip-service would be given to the Hindocentric doctrines of swaraj (self-rule) and Gandhi’s satyagraha philosophy, India would in fact look to the West and its former colonial master, embracing a democratic form of Cambridge-Fabian socialism under the leadership of Jawaharlal Nehru. Meanwhile, on the outlying edges of the Sinosphere, a formerly obscure possession of the Sultanate of Johor, Singapore, would find itself on the road to independence, which it achieved in 1965—and, more important, on the road to becoming one of the most capitalistic, globalized nations in the world.
In many senses, each of these societies was rebuilding itself anew, and only India had been spared the storm of fire and steel that was the Second World War. Chinese people starting from the ashes of a double war attempted to build a socialist utopia in mainland China, while their estranged compatriots—sharing a culture, a language, and a history—eschewed socialism, first in Hong Kong, and later in Taiwan. Meanwhile, the enormously diverse but heavily Chinese enclave of Singapore would find its own way ahead. Within a few decades, the world would have a vivid example illustrating the practical differences among totalitarian socialism in China, democratic socialism in India, and capitalism in Hong Kong. The results of that experiment should have been the dispositive case against socialism, but socialism’s apologists remain curiously immune to evidence.
India defies generalities. Its people are wildly diverse. It has a topsy-turvy history and helter-skelter politics. The bewildering welter of its cities and villages contains practically every aspect of the human experience, the sublime and the horrible never far apart. Alexander the Great, Islam, Buddhism, the British Empire, the Mughal Empire, the Portuguese Empire—all have come pouring into and out of the Indus valley, and all of them have been transformed by the encounter with its culture.
It is no surprise, then, that two of the twentieth century’s towering figures found their way onto history’s stage in India. Ironically, both of these historical giants were physically diminutive: Mother Teresa, the Albanian nun who provided an example of modern sainthood, and Mohandas Karamchand Gandhi, known as the “Mahatma” or “great soul,” a similarly saintly figure who made his career in a very spiritualized form of politics.
In the West, Gandhi is uniformly admired. If anything, he is even more revered than is Mother Teresa; it is hard to imagine a book about Gandhi like Christopher Hitchens’ The Missionary Position, a brutal and malicious assault on Mother Teresa, being published in the United States. It might find more of a market in India, where Gandhi’s legacy is much more hotly contested, despite his being rightly regarded as the father of his country.
Indians are of two minds about Gandhi for many reasons, the main one being his consent to India’s partition, which resulted in the Muslim-leaning west being broken off into a separate country, Pakistan. But there is also a quiet reassessment under way of Gandhi’s political and economic ideas, and they are an odd, mixed bag.
Gandhi, like most socialists, was at heart a moral thinker, not an economic thinker. Unlike most Western socialists, he was reasonably forthright in admitting he would rather see Indians poor under his system than rich under another. He advocated a kind of radical self-reliance that calls to mind Thomas Jefferson more than it does Marx or his epigones. He described his thinking in a letter to Leo Tolstoy:
Independence begins at the bottom. . . . A society must be built in which every village has to be self sustained and capable of managing its own affairs. . . . It will be trained and prepared to perish in the attempt to defend itself against any onslaught from without. . . . This does not exclude dependence on and willing help from neighbours or from the world. It will be a free and voluntary play of mutual forces. . . . In this structure composed of innumerable villages, there will be ever widening, never ascending circles. Life will not be a pyramid with the apex sustained by the bottom, but it will be an oceanic circle whose center will be the individual. Therefore the outermost circumference will not wield power to crush the inner circle but will give strength to all within and derive its own strength from it.7
This system of self-sufficient but interlinked villages was known as gram swaraj, and it bears the unique stamp of Gandhi’s moral and aesthetic imagination. It also bears the stamp of his naivety, which was willful, and led him to reject trade, investment, and technology, creating a moral and political culture that left his people ripe for impoverishment and extraordinarily vulnerable to the normal economic vicissitudes that more sophisticated economic cultures weather with relative ease. He was especially hostile to industrial and technological investment, falling victim to the make-work fallacy that conflates the value of employment with the value of the products that employed people produce. “Don’t rush into technologically oriented development,” he advised. “First make sure what impact it will have on employment, and through this on the well-being of the poor people.”8
Here we have Gandhi articulating something akin to Marx’s Labor Theory of Value, inasmuch as he misunderstands the problem of valuing labor. He did not understand that performing labor is not inherently valuable, that the value of labor comes from the value of the things labor produces. You can have full national employment by paying people to dig holes in the morning and fill them up in the afternoon, but your society will be none the richer for it. Gandhi’s concern for the poorest among us was every bit as admirable as Mother Teresa’s. Unlike Mother Teresa, however, he had a hand in creating a disastrous system of politics and economics that was especially devastating to the poor.
In much the same way that Gandhi was hostile to technological development, which could have multiplied the value of the labor of India’s poor many times over, greatly enriching them and their country, he was hostile to trade, both domestic and foreign. Much of this was no doubt a reaction to India’s historical colonization by big trading powers—particularly the Portuguese and the British—and the fact that India’s vast peasantry, subsisting on low-level agriculture and crafts, had long been exploited by the local potentates who were themselves enriched by India’s trade or in league with the trading powers.
Swadeshi, Gandhi’s philosophy of self-sufficiency, eschews trade in goods and capital, by implication rejecting such fundamental economic ideas as the division of labor and comparative advantage. As was his wont, Gandhi gave little thought to the practical economic consequences of his philosophy, concentrating instead on the moral aspects of the argument: “Swadeshi is that spirit in us which requires us to serve our immediate neighbours before others,” he wrote, “and to use things produced in our neighbourhood in preference to those more remote. So doing, we serve humanity to the best of our capacity. We cannot serve humanity by neglecting our neighbours.”9
Classical economic thinking holds that if we are really good at growing rice and our neighbors are really good at catching fish, then we specialize in rice, they specialize in fish, and both sides trade, resulting in more rice and fish for everybody. By having multiple parties each specialize in the area where they perform best, the overall productivity of the economy rises, and all enjoy a higher standard of living. Classical economists call this gains from trade—but Gandhi was having none of it. He simply rejected the concept out of hand on moral grounds. Rather than helping his people to grow prosperous the same way the great trading powers had enriched themselves in India, he encouraged everybody to adopt precisely the same model of subsistence economics—a little bit of farming, a little bit of weaving homespun fabric—that had left Indians vulnerable to colonial exploitation in the first place.
Gandhi argued that he was placing humanity and human interest at the center of his economics. Once challenged by a militant Marxist critic, who told him that his spiritualism was worthless because it did not make economic sense, Gandhi retorted that no economics was worth anything unless it made moral sense in accord with the human spirit. Someone might have asked Gandhi, “What good is your concern for the poor if your philosophy leaves them poor—if, indeed, it leaves them even worse off than they were before?”
At a 1973 lecture on Gandhian economics, E. F. Schumacher expanded on Gandhi’s view, arguing that the economic development model of the time left the poor in a hopeless situation, abandoned in a Malthusian resource deficit:
It is now widely accepted that there are limits to growth on the established pattern, so that, in all probability, the trends established over the last twenty-five years could not be continued even if everybody wished to do so. The requisite physical resources were simply not there, and living nature all around us, the ecosystem, could not stand the strain. Gandhi had always known, and rich countries are now reluctantly beginning to realise, that their affluence was based on stripping the world. The U.S.A. with 5.6 percent of the world population was consuming up to 40 percent of the world’s resources, most of them non-renewable. Such a lifestyle could not spread to the whole of mankind. In fact, the truth is now dawning that the world could not really afford the U.S.A., let alone the U.S.A. plus Europe plus Japan plus other highly industrialised countries.10
Ironically, these observations were published in Gandhi and the Contemporary World—in 1997, just as India was starting to embrace the Western-style capitalism that was anathema to Gandhi and his contemporaries. Lost on Schumacher, as it would have been on Gandhi, was that the very same U.S.A. that was consuming 40 percent of the world’s resources was also producing 40 percent of the world’s wealth. In other words, the shocking fact was not that so few people were consuming so much, but that so few people were producing so much. Gandhian economics, obsessed with the problem of unemployment, might have benefited mightily from such a realization.
Instead of looking to the capitalist model of the United States, Gandhi’s immediate political heir, Jawaharlal Nehru, looked to the managerial socialism that had been in vogue during his time as a student at Cambridge. Whereas Gandhi’s ideas were airy and philosophical, a nebulous tangle of ideals and ideology, prejudice and superstition, Nehru’s ideas were straight democratic socialism of the Fabian variety, and he set about appending a neutered version of Marxism onto the moral foundations laid by Gandhi. Whereas Gandhi talked about “soul force” and deploying moral power, Nehru would begin to build an industrialized, concrete-and-steel socialist state, enacting Soviet-style “five-year plans” that failed exactly as Hayek and Mises would have predicted—and which set India on the road to serfdom, as the bureaucratization of central planning was accompanied by the inevitable centralization of power. One generation after embracing democratic socialism, India would slide into autocracy as Nehru’s more masterfully socialist daughter, Indira Gandhi, installed herself as dictator. Economically and politically, socialism would prove a disaster for the emerging republic—one from which it would take nearly fifty years to begin to recover.
By way of contrast, consider that by the time India got around to opening its economy in the late 1990s, plucky little Hong Kong—a former pirates’ haven that had been ravaged by World War II, occupied by the Japanese, seen two-thirds of its population disappear as refugees and war casualties, menaced by Mao’s China, and governed by a foreign colonial power—had become one of the richest nations in the world in just a few decades. Whereas Gandhi’s heirs were worrying about how to create make-work jobs for India’s legions of unemployed, Hong Kong was advertising its “human capital”—the enormously productive labor force that had helped to transform its economy. And it’s no accident that “human capital” is what Hong Kong chose to rely upon; other than being geographically well-positioned to benefit from ocean trade, Hong Kong had practically no natural resources to speak of, whereas India had vast swaths of arable land, forests, minerals, warm-water ports, and the like.
“According to the latest figures I have, per capita income in Hong Kong is almost identical with that in the United States. That is close to incredible. Here we are—a country of 260 million people that stretches from sea to shining sea, with enormous resources, and a two-hundred-year background of more or less steady growth, supposedly the strongest and richest country in the world, and yet six million people living on a tiny spit of land with negligible resources manage to produce as high a per capita income. How come?”
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Milton Friedman, The Hong Kong Experiment, 1998
Hong Kong’s per capita GDP grew 8,700 percent from 1961 to 1997, its ports rivaling the world’s giants in New York and Rotterdam, its shipping companies rising to challenge the longstanding dominance of the Greeks. And Hong Kong’s ascent was not just a rich man’s boom; as measured by the Gini Coefficient, the territory’s population became more economically equal as Hong Kong became richer.
India meanwhile remained a highly stratified society. Instead of turning outward to trade, India turned inward, guided by the romantic ideas of socialism and self-sufficiency. The result was poverty. “India discovered that tiny Hong Kong could earn more from its exports than the whole of India,” writes Indian economist Gurcharan Das. “India’s share of world trade declined from 2.2 percent in 1947 to 0.5 percent in 1990.”11 That is to say, after forty-three years of independence and self-rule, India lost 77 percent of its share of world trade.
India’s road to serfdom began with Gandhi’s spiritualized politics, but it was Nehru, inspired by the British socialist Harold Laski, who built the socialist state under which India would sweat and founder for decades. Nehru’s brand of socialism was democratic, but it should come as no surprise to the student of socialism that he identified closely with the two great undemocratic socialist states of his time—the Soviet Union and Mao’s China—and looked to them for guidance. Though he would have drawn a different conclusion from the fact than do modern critics of socialism, Nehru seemed to understand that the political organization of socialist states, while an issue of real consequence, is secondary to and subordinate to the economic organization of those states. Socialism in democratic India very much resembled socialism in the undemocratic USSR.
Nehru, like most of his fellow Fabians, was deeply romantic in his view of socialism, a fact that blinded him to the military threat posed by his socialist neighbor to the east. Operating under the socialist slogan Hindi-Chini bhai bhai—“Indians and Chinese are brothers”—Nehru took no precautions against the festering predations of Mao Zedong. Socialists were all self-declared partisans of peace, and that fact seems to have been enough for Nehru, who was caught entirely off guard when China’s Red Army invaded his country in 1962 and annexed the disputed territory of Aksai Chin near the Tibetan border while the rest of the world was distracted by the Cuban Missile Crisis, another curious case of socialist pacifism.
Even though Nehru had been one of the first world leaders to recognize Communist China and had defended its aggression in Korea, an armed invasion was enough to sour even a socialist romantic like him on China. But Nehru remained enamored with the Soviet Union, and in particular with its narrow model of central economic management, the piatiletka, or five-year plan.
The Indian version of the five-year plan was a cornerstone of Nehru’s approach to economic development, and its development and implementation suggests that Nehru’s version of socialism was somewhat looser and less ideological than the versions being executed in Moscow and Beijing, though that is a fairly low bar to clear. Rather than direct state management of all aspects of economic life, Nehru preferred a mixed system, with the government nationalizing industries in the commanding heights of the economy, such as steel and major manufacturing, while using a system of licenses, subsidies, regulation, and cartelization to achieve socialistic economic and political goals throughout both the public and private sector. Nehru was open to a level of entrepreneurship, but he wanted the state to be the main entrepreneur in society.
To aid him in achieving this vision, Nehru (like FDR before him, and like socialists of all parties ever since) turned to the best and brightest central-planning talent available to him, and found his instrument in the person of P. C. Mahalanobis, a gifted mathematician and statistician. Milton Friedman, one of the twentieth century’s greatest economists and no friend of central planning, was acquainted with Mahalanobis, and offered some insightful observations in private, which were published years later: “Mahalanobis began as a mathematician and is a very able one. Able mathematicians are usually recognized for their ability at a relatively early age. Realizing their own ability as they do and working in a field of absolutes, tends, in my opinion, to make them dangerous when they apply themselves to economic planning. They produce specific and detailed plans in which they have confidence, without perhaps realizing that economic planning is not the absolute science that mathematics is.”12
Indeed it is not, and central planning of the Indian economy turned out to be every bit as disastrous as central planning of the Russian and Chinese economies, even though it was not accompanied by the near-genocidal political violence that was unleashed in those two bastions of socialist purity. There are libraries’ worth of statistics documenting the miserable performance of the Indian economy during this period, but those numbers do not capture the consequent stagnation of Indian society and the enormous squandering of human lives that this needless impoverishment produced.
While statistics are one useful measure, it is perhaps more telling that the two most popular terms used to characterize the Indian economy during this period were expressions of national disgust and self-abasement. The regulating-and-licensing apparatus that Nehru bequeathed to the country in order to look after the interests of the poor, of course, did no such thing and instead became, as it has in every other socialist country, a source of petty corruption. Indians therefore nicknamed that system the “License Raj”—raj being the term used to describe the hated British colonial occupiers. Indians, to whom history has bequeathed a sense of irony that surely functions as a psychological survival mechanism, understood that their socialist planners had, in the name of national liberation and national development, become precise analogues of their former colonial masters. They were in the same position as the animals at the end of Animal Farm, unable to tell the newly masterful pigs from the farmers against whom they had risen.
The second term described the paltry gains the Indian economy made from the time of its independence until major economic reforms were implemented in the 1990s, while formerly backward and impoverished peoples in South Korea and Hong Kong grew rich during the ascent of the “Asian Tigers.” No doubt recognizing that India’s economic stagnation was in no small part a legacy of Gandhi’s spiritualized politics and moralized economics, this legacy was wryly described as the “Hindu rate of growth.”
“K. N. Raj, widely respected development economist and teacher and one of the architects of the Indian Plan edifice, passed away here on Wednesday. He was 85.
“Dr. Raj—who was the economic adviser to Prime Ministers from Jawaharlal Nehru to P.V. Narasimha Rao, and set the pace of India’s economic growth story from the First Five-Year Plan—had been keeping indifferent health for some time. He was admitted to a private hospital here on Saturday with fever and breathing trouble and died following a cardiac arrest at 2:40 p.m.” [emphasis added]
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Obituary of K. N. Raj, who helped to draft India’s first five-year plan, The Hindu, 2010
The prominence of those two terms is a small but telling thing. Nations, like individuals, can suffer crises of confidence and can be self-loathing. And India’s decline under socialism, the most progressive economic doctrine of its time, an idea endorsed by the most celebrated intellectuals of the day, must surely have been inexplicable. Still more perplexing must have been the fact that those who had eschewed socialism and the rational planning of the economy, operating in resourceless enclaves in Hong Kong, Singapore, and Taiwan, had grown stupendously rich. India’s performance wasn’t only dwarfed by the meteoric rise of Hong Kong, it was a full 1.5 percentage points below the Third World’s average rate of growth from 1950 to 1980.
“History has its unforeseen ironies,” Jagdish Bhagwati wrote in India in Transition, an intelligent analysis of the country’s early economic reforms. He continued,
The post-war period, now spanning four decades through the 1980s, began with both a strong economic performance and Western empathy and approbation of India’s developmental efforts and ideas. It ended with an economy in serious difficulty and, worse, the perception that India had not merely chosen the wrong economic path but had also marginalized herself in world economic affairs in consequence. The economic realities cannot be ignored, even as India’s failures must be carefully analyzed, since they and their causes are more complex than commonly believed, while there are countervailing successes as well.13
Perceptively, he titled that chapter “The Model That Couldn’t,” and he added:
Let me first stress that countries such as South Korea and Taiwan, which have grown much faster than India in the post-war period to date, have had a substantial impact on their living standards. To see the force of the argument, that India’s poor growth performance has affected its prospects for raising living standards, it is useful to understand the force of compound interest. Had India’s GDP grown as rapidly from 1960 to 1980 as South Korea’s, it would stand at $531 billion today rather than $150 billion—surpassing that of the UK, equal to that of France, and more than twice that of China. India’s per capita income would have been $740 instead of $260; even with the benefits of growth inequitably distributed, it is not unreasonable to believe that most of the poor would have been substantially better off.14
The other great irony is that India once was the world’s byword for extravagant wealth. In assessing their sorry situation before their free-market reforms, Indians knew that the Mughals, the Portuguese, and the British hadn’t come to India because India was poor, but because India was rich—fabulously rich, in fact, accounting for more than one-fifth of the entire world’s economic output in the early eighteenth century. India had been a major manufacturing power at the same time, with its textiles industry the envy of the world. It had a sophisticated system of banking and finance. Additionally, while the political repression and exploitation of the colonial era should not be underestimated, it had emerged as an independent nation with the benefit of British systems and standards of law and public administration on its side—and it was the lack of such fruitful institutions, as Hernando de Soto documented in The Mystery of Capital, that had doomed so many other nations to poverty and dysfunction. “Given the enormous financial surplus, a skilled artisan class, large exports, plenty of arable land and reasonable productivity,” Das asks, “the question is: Why didn’t a modern industrial economy emerge in India? Instead, why did India become impoverished?”15
While Marxists and postcolonialist critics have attributed India’s impoverishment to the predations of the British colonial powers, there is little evidence to support such a claim. As Das notes, the economic evidence suggests that Britain’s colonial operations constituted a net economic gain for India. The problem, as Hayek and Mises would have predicted, was central economic planning. While India’s socialism was politically different from the hardcore socialism of the Soviet Union and Mao’s China, and while its economic regimentation was certainly less radical and more liberal, it was implemented through the same apparatus: the government plan, the government planner, and the government-planning authority.
While India in recent years has developed a high-growth economy by dismantling much of the license raj architecture, it is still plagued by vestiges of socialism, as shown in the following report: “Farmers in Vidarbha [India] are forced to sell their land to the socialist regime at a value much less than its market worth. Indian socialist/communist laws, which show negligible reverence for property rights of an individual, authorizes the administration to appropriate and take away an individual’s land and property, and allows the government itself to set the value for the land. The sellers, who are victimized, can’t bargain, nor can they reject [demands] to sell the land. The government will snatch it, anyway—it has authority to do so: It is the biggest mafia, and all that stealing and looting and impounding will be done legally; the victim even cannot complain against it. . . . The very continuation of such a dictatorial law is justified by its communists/socialist supporters, saying that, in view of the fact that the government will use the property for public welfare (roads, etc), it should be empowered to capture land from unruly land owners.”
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Sudha Amit, Indian commentator, Don’t Steal: The Government Hates Competition, 2007
Because of the impossibility of securing and organizing the knowledge necessary to conduct rational economic planning, India’s five-year plans were just as defective as the Soviet plans that became the object of scorn and ridicule in the Cold War years, both in the free world and behind the Iron Curtain.
Nehru’s planner, Mahalanobis, was by all accounts a brilliant man, utterly committed to the betterment of his nation. But his plan, as Das documents, was deeply and irredeemably flawed. Not only were the five-year plans unrealistic, the act of attempting central planning was itself destructive to India’s development and left its public policy deeply deformed. In accord with Gandhi’s swadeshi philosophy, it sought substitutes for import and shunned trade, in the process becoming internally focused. In accord with Nehru’s Fabian socialist prescriptions, it established a massive array of public-sector enterprises in which the state attempted to play the role of entrepreneur, a system that was not only grossly inefficient but also monopolistic, since government-run enterprises displaced private competition from the marketplace.
Likewise, the “License Raj” choked private entrepreneurship and ensured that what little capital made it into India from the outside world found few projects to nourish. The consequent distortion of private enterprise and the massive public sector together ensured that huge amounts of capital were misallocated into bad investments and unproductive, politically driven enterprises. Cut off from the outside world by hostility to trade and foreign investment, Indians lost touch with the dynamic currents of thought, especially as regards the development and use of technology.
Underlying all of this was a hostility to competition, a sentiment that still is heard today in the voices of those who oppose global trade and the opening of markets. Mahalanobis, Das writes, “assumed that competition was wasteful.”16 But competition—unlike central planning—improves productivity, making more and better goods available at lower prices. Competition necessitates innovation and investment. Competition is the reason that Hong Kong and Singapore got rich while India foundered until 1997, when it opened up its economy and began its remarkable transformation into a major world economic power. Competition is the antithesis to central planning. It’s also the reason the iPhone in your pocket is a marvel of engineering and economics but the public school on the corner stinks.