Indian Economy, 5th edition (3 page)

1. Capitalistic Economy

The capitalistic form of economy has its origin in the famous work of Adam Smith—
Wealth of Nations
(1776). Adam Smith (1723–1790), the Scottish philosopher-economist professor at Glasgow University whose writings formed the basis of classical economics had stressed certain fine ideas which were to take fancy among some of the western countries and finally capitalism took birth. He raised his voice against the heavy-handed government regulation of commerce and industry of the time which did not allow the economy to tap its full economic worth and reach the level of well-being. Stressing ‘division of labour’, an environment of ‘laissez faire’ (non-interference by the government) he proposed that the ‘invisible hand’ of the ‘market forces’ (price mechanism) will bring a state of equilibrium to the economy and a general well-being to the countrymen. For such an economy to function for public well-being, he has acknowledged the need of
competition
in the
market
.

Once the USA attained Independence the ideas of Adam Smith were made part of its public policy – just one year after
Wealth of Nations
was published. From here the idea spread to other parts of Euro-America—by 1800 the economic system ‘capitalism’ was established which was later known by different names—Private Enterprise System, Free Enterprise System, Market Economy.

The decisions of what to produce, how much to produce and at what price to sell are taken by the market, by the private enterprises in this system, with the state having no economic role.

2. State Economy

Rooted in the ideas of historical change proposed by the German philosopher
K
arl Marx (1818–1883) more specifically, this kind of economic system first came up in the erstwhile USSR after the Bolshevik Revolution (1917) and got its ideal shape in the People’s Republic of China (1949). This form of economic system also spread to other countries in Eastern Europe. Here we see two versions of the state economy—in erstwhile USSR known as the
socialist economy
and in pre-1985 China as the
communist economy
. While socialistic economy emphasised the collective ownership of the means of production (property and assets) and it also ascribed a large role to the state in running the economy, communist economy advocated state ownership of all properties including even labour and absolute power to state in running the economy. Though for Marx,
s
ocialism was a transitional stage to Communism, it never did happen in reality.

Basically, this form of economy came in reaction to the prevalent popular economic system of capitalism and proposed just the opposite. The decisions related to production, supply and prices were all suggested to be taken by the state only. Such economies were also known as Centralised Economy, Centrally Planned Economy, Non-market Economy.

The socialist and communist economies used to criticise capitalistic economics of being based on exploitation. In response, the capitalist economies called them the practioners of ‘state capitalism’ where the states were the sole exploitators! The communist and anti-communist propagandas resulted in serious intellectual discussions almost upto mid-1980s.

3. Mixed Economy

The belief in the self-correcting quality of the market and the ‘invisible hand’ of Adam Smith got a major setback in early 20
th
century during the Great Depression (1929). The impact of the depression spread from the USA to the other economies of western Europe escalating large scale unemployment, downfall in demand and economic activities and lockouts in industrial enterprises. The prevailing Smithonian macro ideas failed to check the crisis. A new approach was needed which came in the famous work,
The General Theory of Employment, Interest and Money
(1936) by the English economist at
C
ambridge University, John Maynard Keynes (1883–1946).

Keynes questioned the very principles of ‘laissez-faire’ and the nature of the ‘invisible hand’. He even opined that the invisible hand brings equilibirium to the economy but by ‘strangulating the poor’. He suggested that prices and wages of the labour are not flexible enough to provide employment to all. It means there will be some people unemployed when the economy will be at its full potential. Ultimately, a fall in demand will be imminent resulting in recession and if unchecked, in depression which happened in 1929. Questioning the limitations of the market mechanism, Keynes suggested
strong government intervention
in the economy. To get the economy out of the depression, he suggested and increase in the government expenditures, discretionary fiscal policy (fiscal deficit, lower interest rates, cheap money supply, etc.) to boost the demand of goods and services as this was the reason behind the depression. As Keynesian policies were followed, the concerned economies were successfully pulled out of the Great Depression.

While Keynes was inquiring into the causes and cures of the Great Depression he questioned the capitalist economic system being practised throughout Euro-America. He suggested the capitalistic order to assimilate the goals of the socialistic economy (economic ideals of the socialists i.e. the ex-USSR). In the capitalist economies of the time, all the basic goods and services were part of the market mechanism i.e. being produced and supplied by the private sector. It meant that almost everything the people required was supplied by the private enterprises via the market which was ultimately an undimensional movement of money and wealth (from the mass of people to the few who controlled the production and supply chain) and the masses were going through the process of pauperisation every day, thereby weakening their purchasing power. In the end, it affected overall demand and culminated in the Great Depression.

As a follow up to the
k
eynesian advices, many trendsetting economic policies were initiated throughout the capitalist economies. One very important initiative which came out was the government’s active role in the economy. The governments started producing and supplying some basic goods and services which are known as ‘public goods’. These goods basically intended to guarantee minimum level of nutrition to all, healthcare, sanitation, education, social security, etc. The expenditure on the public goods were incurred on the public exchequer even if it required deficit financing. Starting from 1930s upto 1950s, almost 50 per cent of the GDP in the Euro-America was spent by the governments on the public goods which also become popular as the
social sector.
The essential goods and services which were till date being purchased by the people as ‘private goods’ were soon made available by the state ‘free-of-cost’ giving people more spare money to create demand for the goods and services which were part of the market.

The above instance has been cited here to just show the process as to how capitalism redefined itself by including some useful traits of the non-market economy i.e. the state economy. The
mixed economy
arrived in this way and the classical capitalistic economy was challenged by it.

On the margins of the developments given above, it is interesting to note the developments in the State Economies of the time. It was
Prof. Oscar Lange (1904–65),
the Polish philosopher, who in 1950s suggested the same thing for the socialist economy as
k
eynes had for the capitalist. Prof. Lange praised the state economy for many of its good things but also suggested inclusion of some of the good things of the capitalistic economy
2
. He advised the
state economies
to adopt ‘market socialism’ (the term was coined by him). His suggestions were outrightly rejected by the state economies as such compromises in socialistic economic order were blasphemous at that time (this was ultimately a suggestion towards democracy from dictatorship).

As
k
eynes has suggested the capitalist economy to move few steps towards socialistic economy, Prof. Lange was asking just the same in the case of the state economies. Democracies are flexible thus they were able to go for an experiment which paid them in coming times. But as the socialist and communist political systems had been stubborn by nature, they did not go for any experiment and thus started moving towards their economic decay.

It was the communist
c
hina under the leadership of Mao
t
se Tung where the first opinion came against the total state economic control. And the ultimate example of the state economy (i.e., China) started its preparation towards a limited market economy under the political design of dictatorship. In 1985, China announced its ‘open door policy’, the first experiment in ‘market socialism’ — Prof. Lange had the last laugh. Other state economies, though caught unprepared, followed the Chinese experiment towards market socialism. However, switch over to market socialism has not been smooth for most of the state economies. The efforts towards market socialism in the Soviet Union, fuelled by the lofty ideas of ‘glasnost’ (openness) and ‘prestroika’ (restructuring), resulted in the very
disintegration
of the nation-state. The experts consider it ‘a political fallout of an economic mismanagement’. The other state economies experienced major economic breakdowns in their transition phases to market socialism. Basically, for smooth transition to market socialism some prerequisites were required to be put in place aforehand. China was well ahead doing this homework since Mao’s time (specially since 1975 onwards) which emerged as a real winner—the ideal type example of state economy getting smoothly (!) metamorphosed into giant market economy.

These two events spanning many decades were nothing but timely and rational selections of economic traits from each other’s economic systems and experiences. The world by the late 1980s was having neither a pure example of capitalistic economy nor a pure example of state economy.

There were many states of the world that opted for mixed economy in the post
-s
econd
w
orld War periods after coming out of the colonial rule such as India, Malaysia, Indonesia, etc. to name a few. The leadership of these countries could be considered visionaries which was to be proved by mid-1990!

Though at practical levels, the world looked flat for the mixed economy, a formal opinion on the goodness, immediacy and the ultimate viability of the mixed economy was yet to emerge. The first such authoritative opinion, in this direction, came from the
w
orld Bank which accepted the goodness and the need of ‘state intervention’ in the economy
3
. This was a turning point in the world economic thinking as the World Bank (WB) and the International Monetary Fund (IMF) were the ardent votaries of the virtues of the free market economy.

The concluding consensus emerged with the publication of the World Development Report (1999) titled
Entering the 21
st
Century
in which the WB said, “Governments play a vital role in development, but there is no simple set of rules that tells them what to do.” The WB went on to suggest in this important document that every country should determine the
areas
and the
extent
of the market and the state intervention depending upon its own stage of economic development, socio-political and other historical factors.

The last WB document had basically rejected both of the historically existing economic orders namely the free-market economy and the state economy—which meant Adam Smith and Karl Marx were cancelled and rejected outrightly, that too on the basis of the historical experiences of both the worlds. Rather, the document advocates for the ‘mixture’ of both the economic orders i.e. the mixed economy. The long-standing ideological dilemma as to whether the market economy or the state economy was the better or the best way of organising the economy was solved for all time to come. The document pin-pointed good things of both the systems and concluded that they don’t have the relationship of dichotomy but that of complimentarity. The real issue is not whether to have market or the state but having both of them together makes more sense. Market economy might suit one economy while it might not suit another—due to the different socio-economic conditions of the economies in reference. Similarly, the state economy model might serve one economy but might not serve the other.

The real answer seems going for neither market or state but a judicious combination of both. As the state-market mix depends upon the socio-economic and political conditions of an economy, there can never be a mechanical prototype of the mixed economy which could be applied upon every economy universally. Every economy needs to explore its own mixture of market and state. Again, the same state might need to redefine composition of the state-market mix in the coming times according to its changed socio-eco-political scenario.

The process of economic reforms in India started in 1991. It was infact the search for a new ‘state-market mix’ while India had been a mixed economy since independence.

After independence, India opted for the mixed economy when the state-market dilemma was at its peak in the world. In the process of organising the economy, some basic and important infrastructural economic responsibilities were taken up by the
s
tate/Governments (centre and state) and rest of the economic activities were left to private enterprise i.e. the market. The kind of state-market mix for which India went was thought to be fit for the socio-economic and political conditions of the time. Once the country started the process of economic reforms in early 1990s, the prevailing state-market mix was redefined and a new form of mixed economy began to be practised. As the socioeconomic conditions had changed the state-market mix also changed. The redefined mixed economy for India had a declared favour for the market economy. Many economic roles which were under complete government monopolies were now opened for participation by the private sector. Examples are many—telecommunication, power, roads, oil and natural gas, etc. At the same time, the responsibilities which were till date being shouldered by the state alone and which could be taken up by the state only were given extra emphasis. In this category comes the whole social sector—education, healthcare, drinking water, sanitation, nutrition, social security, etc.