Wednesday, September 20, 2006

An Appreciation of Smithian Economics from India

A ‘strange’ article in News Today (India), not because it includes ideas I disagree with, but because it is not clear what the point is in publishing it. You need to know who Narasimha Rao was to reads it:

Narasimha Rao (
June 28, 1921December 23, 2004) was the ninth Prime Minister of the Republic of India, and led possibly the most critically important administration in national history. A polyglot, Rao could read and write in 17 languages.He could speak and write Urdu, Marathi, Hindi, Telugu and English like a native. He learnt European languages like French and Spanish too. He translated Jnanpith Award winner Viswanatha Satyanarayana's Telugu novel Veyi Padagalu (literally Thousand Hoods) into Hindi as "Sahasr Phan". Rao studied at Osmania University and the Universities of Mumbai and Nagpur, acquiring Bachelor's and Master's degrees in law.Rao was an active young freedom-fighter, and after independence, joined politics full time. Rao served brief stints in the cabinet (1962 - 1971) and chief ministries (1971 - 1973) for the state of Andhra Pradesh. When the Indian National Congress split in 1969, he remained loyal to Prime Minister Indira Gandhi, and stayed so during the national emergency (1974-1977). He then rose to the national level in 1972 by serving in several ministries, most significantly home, defence and foreign affairs (1980 - 1984), in the cabinets of Indira Gandhi and Rajiv Gandhi. He was the first PM from South India and Andhra Pradesh.After the assassination of Rajiv Gandhi and the general elections of 1991, Rao was chosen to lead the Congress party, and when Congress won a plurality in parliament later that year Rao was invited to head a minority government. He was the first person outside the Nehru-Gandhi dynasty to serve as Prime Minister for five continuous years. He was also the first prime minister to lead a minority government for a full term (five years). This is a singular achievement in the stormy, corrupt and torn world of Indian politics.”

Obviously an important person in the dramatic changes in India society who steered through the reforms to set markets free of State management and regulation that have led to massive social changes in India. Tens of millions have been lifted out of abject poverty, no mean task given from whence India began, post-independence. State socialism failed in India as it did elsewhere in Russia, China and Eastern Europe (and Cuba!).

Here is what the author says about Adam Smith in News Today (India 20 Sept 06) where V Sundaram writes:

'The Wealth of Nations' introduces readers to the world of philosophy, politics and business with the sharp, sceptical, yet ultimately optimistic Adam Smith as a guide. Just when the Industrial Revolution explodes in England, Smith confidently points to every player, from farmer to friar to merchant to shipper, masterfully making sense of the social upheaval. Furthermore, Smith approaches economic policy without a biased brief for a particular party or class. No one could accuse him of sycophancy or insincerity. Though he finally endorses the rise of the bourgeois, he warns society not to naively succumb to bourgeois blandishments. In a way, the 1776 publication of 'The Wealth of Nations' brought forth a declaration of independence for economists.
Adam Smith is the father of free market economics. He brilliantly states that individual ambition, effort and choice are guided by an 'invisible hand' ? a term employed by him in his earlier 'Theory of Moral Sentiments' (1759) and mentioned only once in 'The Wealth of Nations' ? to create the highest social benefit: that in order to encourage individuals, government ought not to interfere in economic matters; that efficiency in production will be increased by division of labour (his classic example was a pin factory in which worker specialisation boosts output); that value and price are distinct aspects of economic transactions; that prices and wages are best determined competitively and that 'balance -of-trade' justifications for high tariff walls and other mercantilist protections are hogwash.
The important natural drives or 'propensities' Smith discovers in human nature form the basis of his analysis in 'The Wealth of Nations' and the foundation of classical economics. All humans want to live better than they do. Smith finds 'a desire of bettering our condition, a desire which, though generally calm and dispassionate, comes with us from the womb and never leaves us till we go to the grave ... Between the womb and the grave, there is scarce perhaps a single instant in which any man is so perfectly and completely satisfied with his situation, as to be without any wish of alteration or improvement of any kind'. Second, Adam Smith points to 'a certain propensity in human nature to truck, barter, and exchange one thing for another. It is common to all men'. Adam Smith called these urges as the invisible hand of enlightened self-interests.
To increase the wealth of a nation, Smith argues that society should exploit these natural drives. Government should not repress self-interested people, for self-interest is a rich natural resource. People would be fools and nations would be impoverished if they depended on charity and altruism. A healthy society cannot rest its future on the noblest motives, but must use the strongest motives in the best possible way.

I am not going to dissect these passages, being pleased to see some articulation of the policies behind the Indian break away from the dead-hand of the state – which has still some way to go. Governments that try to ‘manage’ economies usually make them worse. I shows a very Smithian message, without him dropping into the errors of libertarian extremes.


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