WEBVTT NOTE When Did India De-Socialize? 1 00:00:00.000 --> 00:00:06.880 Mises identified two types of socialism, so he called one the Soviet Union post-office 2 00:00:06.880 --> 00:00:13.920 style of socialism where all enterprises are, you know, bureau-nationalized and bureaucratized. 3 00:00:13.920 --> 00:00:17.460 The other second version or second type of socialism he called the Nazi or the German 4 00:00:17.460 --> 00:00:21.200 command economy style of socialism. 5 00:00:21.200 --> 00:00:27.420 So to quote Mises, in this second type of socialism, nominally and seemingly, this type 6 00:00:27.420 --> 00:00:32.180 Episocialism nominally and seemingly preserves private ownership of the means of production 7 00:00:32.180 --> 00:00:37.100 and keeps the appearance of ordinary markets, prices, wages and interest rates. 8 00:00:37.100 --> 00:00:42.660 There are however no longer entrepreneurs but only shop managers. 9 00:00:42.660 --> 00:00:47.180 These shop managers are seemingly instrumental in the conduct of the enterprises entrusted 10 00:00:47.180 --> 00:00:48.180 to them. 11 00:00:48.180 --> 00:00:52.420 They buy and sell, hire and discharge workers and remunerate their services, etc. 12 00:00:52.420 --> 00:00:56.420 But in all their activities they are bound to obey unconditionally the orders issued 13 00:00:56.420 --> 00:01:00.420 by the government's supreme office of production management. 14 00:01:00.420 --> 00:01:03.460 And Mises also went on to say that in this kind of system, and he's referring to the 15 00:01:03.460 --> 00:01:11.580 second Nazi or German command economy style, market exchange, though it seemingly appears 16 00:01:11.580 --> 00:01:15.020 as this kind of exchange, is a sham. 17 00:01:15.020 --> 00:01:19.660 Now empirically it can be difficult to differentiate the second kind of socialism from the system 18 00:01:19.660 --> 00:01:22.660 of interventionism. 19 00:01:22.660 --> 00:01:26.980 The key difference, I believe, is the absence or presence of the capitalist entrepreneur. 20 00:01:26.980 --> 00:01:29.580 That's where you draw the line. 21 00:01:29.580 --> 00:01:35.740 In an interventionist system, capitalist entrepreneurs are still present on the demand side of all 22 00:01:35.740 --> 00:01:38.940 transactions in the factor markets. 23 00:01:38.940 --> 00:01:43.220 And again, to quote Mises about the system of interventionism, he says, the system of 24 00:01:43.220 --> 00:01:47.480 interventionism differs from the German pattern of socialism by the very fact that it is still 25 00:01:47.480 --> 00:01:49.060 a market economy. 26 00:01:49.060 --> 00:01:52.540 The authority interferes with the operation of the market economy but does not want to 27 00:01:52.540 --> 00:01:55.140 to eliminate the market altogether. 28 00:01:55.140 --> 00:01:58.940 It wants production and consumption to develop along lines different from those prescribed 29 00:01:58.940 --> 00:02:03.040 by the unhampered market, and it wants to achieve its aim by injecting into the working 30 00:02:03.040 --> 00:02:05.180 of the market order commands and prohibitions. 31 00:02:05.180 --> 00:02:09.580 Thus, in a sense, interventionism, you can think of it, and I think this is how Mises 32 00:02:09.580 --> 00:02:15.460 defines it in his first work on interventionism, as a system where private property in the 33 00:02:15.460 --> 00:02:18.380 means of production exists, but is abridged. 34 00:02:18.380 --> 00:02:23.540 On the other hand, the Nazi or the German kind of socialism is one where seemingly entrepreneurs 35 00:02:23.540 --> 00:02:26.860 exist, but they are just managers. 36 00:02:26.860 --> 00:02:32.100 So in the sense that there is no true private ownership in the means of production because 37 00:02:32.100 --> 00:02:37.940 the key characteristic of entrepreneurs in the market economy, that is the allocation 38 00:02:37.940 --> 00:02:43.300 of capital across different lines is taken over by the state. 39 00:02:43.300 --> 00:02:46.380 Now how does this all apply to India? 40 00:02:46.380 --> 00:02:48.180 This is what I'm coming to next. 41 00:02:48.180 --> 00:02:54.260 Now post-independence, that's around 1947, India adopted this policy of economic nationalism. 42 00:02:54.260 --> 00:02:59.300 That is, you could call it achieving or trying to achieve economic growth through increased 43 00:02:59.300 --> 00:03:01.980 self-sufficiency. 44 00:03:01.980 --> 00:03:09.380 So it was like India would try to recreate entire capital structures within the national 45 00:03:09.380 --> 00:03:10.380 boundaries. 46 00:03:10.380 --> 00:03:16.280 So for example, if India was largely an importer of capital and other industrial intermediate 47 00:03:16.280 --> 00:03:18.200 Goods Prior to Independence. 48 00:03:18.200 --> 00:03:23.160 So for example, if you take steel, so the thinking was that look, we can't import steel, 49 00:03:23.160 --> 00:03:25.200 we need to produce steel at home. 50 00:03:25.200 --> 00:03:28.560 But not only do we need to just produce steel at home, we also need to produce the machines 51 00:03:28.560 --> 00:03:32.360 that produce steel at home, and then the machines that produce those machines, etc. 52 00:03:32.360 --> 00:03:38.040 And so create this entire capital structure for all higher order goods, which are being 53 00:03:38.040 --> 00:03:39.840 produced right now in the world economy. 54 00:03:39.840 --> 00:03:44.800 And of course, the state was the means to achieve these ends, because the thinking was 55 00:03:44.800 --> 00:03:49.760 Because of course the market left to itself is not going to do it, and so the state was 56 00:03:49.760 --> 00:03:55.760 perceived as the agency to allocate capital and resources to achieve these objectives. 57 00:03:55.760 --> 00:04:01.600 But the interesting thing about Indian socialism is how did the state establish control over 58 00:04:01.600 --> 00:04:02.600 resources. 59 00:04:02.600 --> 00:04:10.520 Now in the Soviet Union it's very simple, because the Bolsheviks came in, they nationalized 60 00:04:10.520 --> 00:04:16.640 is all industry, and so you know straight away that all commands are being provided by 61 00:04:16.640 --> 00:04:23.120 the government, and all the managers in these various enterprises are just following orders 62 00:04:23.120 --> 00:04:29.640 issued from above. In India, it wasn't so clear-cut. There was a public sector, and 63 00:04:29.640 --> 00:04:36.640 it grew over time, so it did slowly monopolize more and more sectors of the economy. It began 64 00:04:36.640 --> 00:04:42.840 and with the railways and telecommunications, but then it went on to control the entire financial structure, 65 00:04:42.840 --> 00:04:51.440 to control all mining activities, coal, etc., and also produce a large chunk of certain capital goods, such as, for example, steel. 66 00:04:51.440 --> 00:04:59.840 But at the same time, there was a sizeable private sector, and there were many private producers, both industrial and agricultural. 67 00:04:59.840 --> 00:05:06.240 And there was also a plan, so every five years the Indian Planning Commission would get together 68 00:05:06.240 --> 00:05:12.120 and set out a five-year plan where you'd have quantitative targets for various, you know, 69 00:05:12.120 --> 00:05:15.720 these goods which they wanted to produce in India. 70 00:05:15.720 --> 00:05:20.680 Now the question is, how did the state make private producers conform to these plan priorities? 71 00:05:20.680 --> 00:05:25.440 I mean, after all, they are private producers and their natural tendency is to produce, 72 00:05:25.440 --> 00:05:29.360 you know, to follow profit-loss signals, to impute prices backwards from, you know, as 73 00:05:29.360 --> 00:05:34.960 they see it from consumer goods, et cetera, consumer goods markets and to follow their 74 00:05:34.960 --> 00:05:36.480 and Natural Tendencies. 75 00:05:36.480 --> 00:05:39.160 So how did the state make them deviate 76 00:05:39.160 --> 00:05:41.400 from this natural tendency and produce 77 00:05:41.400 --> 00:05:43.360 according to plan priorities? 78 00:05:43.360 --> 00:05:45.120 Now, here is where India established 79 00:05:45.120 --> 00:05:47.800 this elaborate system of industrial licensing. 80 00:05:47.800 --> 00:05:49.920 So under the Industrial Development Regulatory Act 81 00:05:49.920 --> 00:05:54.880 of 1951, all basically, and this covered all capital goods 82 00:05:54.880 --> 00:05:59.920 industries, I mean the entire capital structure, 83 00:05:59.920 --> 00:06:02.640 to start a new firm, to change location of a firm, 84 00:06:02.640 --> 00:06:08.320 To change, you know, to expand existing capacity, to change what good you're producing. 85 00:06:08.320 --> 00:06:13.080 So, for example, if you want to switch from producing plastic toys to plastic buckets, et cetera, things like that, 86 00:06:13.080 --> 00:06:17.560 even these kind of decisions, you need to get a license from the government. 87 00:06:18.760 --> 00:06:28.320 And what is the procedure for an entrepreneur, I mean, for a private property owner to get this license? 88 00:06:28.320 --> 00:06:31.800 So, and I quote from the work of economist Gunjan Sharma. 89 00:06:31.800 --> 00:06:44.800 All applications for licenses were debated upon by a licensing committee which consisted of officers from the concerned ministry and the Planning Commission and representatives of other government departments. 90 00:06:44.800 --> 00:06:47.800 So it was kind of like an inter-ministerial decision. 91 00:06:47.800 --> 00:06:56.800 So you would, for example, if you wanted to apply to produce 20,000 units of steel, you would have to submit a license and then these people would look at it, debate upon it and then tell you yes or no. 92 00:06:56.800 --> 00:07:05.800 It's important here to realize that these licenses are not like the licenses which you get in a market-based economy, even in an interventionist economy. 93 00:07:05.800 --> 00:07:12.800 For example, even today in the US you need to get health licenses, even licenses to start a business, etc. 94 00:07:12.800 --> 00:07:21.800 These licenses were different. Why? Because of the kind of calculations which went in before they gave these licenses out. 95 00:07:21.800 --> 00:07:24.360 So, again, I'm quoting Sharma. 96 00:07:24.360 --> 00:07:26.360 She says, conversations with officials 97 00:07:26.360 --> 00:07:28.520 who were on the licensing committee during the 1980s 98 00:07:28.520 --> 00:07:30.080 revealed that the most important concern 99 00:07:30.080 --> 00:07:33.040 for the licensing committee while debating a particular case 100 00:07:33.040 --> 00:07:35.720 was the demand supply situation of the good. 101 00:07:35.720 --> 00:07:37.560 The government maintained highly detailed records 102 00:07:37.560 --> 00:07:38.840 of the exact production of the good 103 00:07:38.840 --> 00:07:40.240 that was already taking place. 104 00:07:40.240 --> 00:07:42.760 That is, all registered stroke license units 105 00:07:42.760 --> 00:07:46.440 were required to submit detailed monthly production reports 106 00:07:46.440 --> 00:07:48.760 and so had information on the supply of the good. 107 00:07:48.760 --> 00:07:51.760 Information about capacity utilization of existing plants 108 00:07:51.760 --> 00:07:53.720 and Demand Projections from the Planning Commission 109 00:07:53.720 --> 00:07:57.280 were then used to compute the demand side of the equation. 110 00:07:57.280 --> 00:08:01.360 Now, the important thing to understand or to note 111 00:08:01.360 --> 00:08:04.120 is that both demand and supply, in a sense, 112 00:08:04.120 --> 00:08:05.880 are being determined by the state. 113 00:08:05.880 --> 00:08:08.040 So when you talk about demand supply here, 114 00:08:08.040 --> 00:08:10.400 it's not the demand and supply of the marketplace. 115 00:08:10.400 --> 00:08:12.160 So it's not that the state is standing back 116 00:08:12.160 --> 00:08:15.040 and private producers are engaging in production, 117 00:08:15.040 --> 00:08:17.720 and then you look at the existing demand and supply 118 00:08:17.720 --> 00:08:20.240 and then decide this is not what's going on. 119 00:08:20.240 --> 00:08:26.240 So the supply or the existing supply of the good has already been decided upon by prior actions of the state. 120 00:08:26.240 --> 00:08:37.240 And the perceived demand for this good, for which you're applying a license, is also being decided on the basis of projects which have been started by the state. 121 00:08:37.240 --> 00:08:47.240 And in fact, this goes back to, I think Matt Maher wrote an article, I think 2007, the QJE, where he talks about how in a socialist society, 122 00:08:47.240 --> 00:09:14.520 The main way in which licensing requirements were implemented by an even more potent force 123 00:09:14.520 --> 00:09:16.360 than physical inspections. 124 00:09:16.360 --> 00:09:20.560 This first was the fact that all essential raw materials for production, steel, cement, 125 00:09:20.560 --> 00:09:25.280 coal, fuel, furnace oil, railway wagon movements, licenses to import equipment and raw materials, 126 00:09:25.280 --> 00:09:30.440 etc., were not freely available in the market. Each and every firm was allotted a certain 127 00:09:30.440 --> 00:09:34.200 amount of these inputs each year based on the output limits specified on their license. 128 00:09:34.200 --> 00:09:38.320 Thus, it was very difficult for the entrepreneur to produce over the limit on his license since 129 00:09:38.320 --> 00:09:42.880 basic raw materials were allotted to him based on the licensed amount. So, for example, again, 130 00:09:42.880 --> 00:09:47.000 If you wanted to produce, let's say, 20,000 units of steel, you have gotten OK from the 131 00:09:47.000 --> 00:09:51.560 Planning Commission based on their demand supply projections. Why can't you just go 132 00:09:51.560 --> 00:09:56.680 ahead and produce 50,000 units? Well, the fact is that all the inputs which went into 133 00:09:56.680 --> 00:10:04.640 the steel production were also constrained. So on the one hand, you had the state gradually 134 00:10:04.640 --> 00:10:09.300 establish control over finances. So if you wanted finances, if you wanted to get finances 135 00:10:09.300 --> 00:10:17.460 from the Stock Market, you would have to get the permission of the Commission for Capital Issues, 136 00:10:17.460 --> 00:10:21.460 if you wanted, most of the banks were state-owned, etc. 137 00:10:21.460 --> 00:10:28.060 So, through controlling the capital structure in this way, the state controlled all production activities, 138 00:10:28.060 --> 00:10:32.460 because even if you don't license, for example, agricultural activities, they weren't licensed. 139 00:10:32.460 --> 00:10:35.060 But all the inputs were controlled by the state. 140 00:10:35.060 --> 00:10:41.060 Once you control the capital structure for all seeds, fertilizers, pesticides, machinery, etc. 141 00:10:41.060 --> 00:10:48.060 Any capitalistic production process in the consumer goods industry is automatically controlled because you control the capital structure. 142 00:10:48.060 --> 00:11:00.060 So, in a sense, India falls in the pattern of Mises' second type of socialism, where there was no entrepreneurship and just shop managers, to use Mises' description. 143 00:11:00.060 --> 00:11:06.020 Now, in my interpretation of Indian Socialism, I differ from, I mean, most people who've 144 00:11:06.020 --> 00:11:12.140 written about it. On the one hand are the leftists, especially the extreme Marxists, 145 00:11:12.140 --> 00:11:16.180 for whom, of course, all problems of Indian Socialism is because the bourgeois capitalist 146 00:11:16.180 --> 00:11:21.900 was not exterminated as a class. On the other hand, you have, and this is surprising, because 147 00:11:21.900 --> 00:11:30.940 On the other hand, you have many neo-liberals who have heavily supported the move towards 148 00:11:30.940 --> 00:11:37.220 the market taking place in India today. But they too do not, for them, they treat India 149 00:11:37.220 --> 00:11:41.180 as a kind of a mixed economy. Now, of course, they do recognize that there was a plan, that 150 00:11:41.180 --> 00:11:46.340 there was a public sector, that there was licensing. Obviously, they're not blind to 151 00:11:46.340 --> 00:12:00.660 They interpret India as a mixed economy. The private sector under planning in India was 152 00:12:00.660 --> 00:12:06.020 no different from the private sector as would have existed in a market economy. The only 153 00:12:06.020 --> 00:12:09.980 problem is that we had this public sector and a private sector and this private sector 154 00:12:09.980 --> 00:12:15.900 was heavily controlled. It's almost like they cannot conceive very similar to the market 155 00:12:15.900 --> 00:12:19.140 Most socialists who Mises criticized, they cannot conceive of the difference between 156 00:12:19.140 --> 00:12:24.420 managers and entrepreneurs. They do not see that essential difference and here I'd like 157 00:12:24.420 --> 00:12:31.420 to quote Mises and this is him in reply to the market socialists. Firstly, I love the 158 00:12:31.420 --> 00:12:35.540 first line of this paragraph and so I quote it. He says, the cardinal fallacy implied 159 00:12:35.540 --> 00:12:39.260 in this and all kindred proposals and he's talking about market socialists is that they 160 00:12:39.260 --> 00:12:45.260 look at the economic problem from the perspective of the subaltern clerk whose intellectual 161 00:12:45.260 --> 00:12:49.900 The financial horizon does not extend beyond subordinate tasks, I mean this is classic Mises. 162 00:12:49.900 --> 00:12:53.580 But then later in the paragraph, and I'm quoting here, he says, the operations of the managers, 163 00:12:53.580 --> 00:12:57.620 their buying and selling, are only a small segment of the totality of market operations. 164 00:12:57.620 --> 00:13:01.460 The market of the capitalist society also performs all those operations which allocate 165 00:13:01.460 --> 00:13:05.420 capital goods to the various branches of industry. 166 00:13:05.420 --> 00:13:09.540 He says, it is these financial transactions of promoters and speculators that direct production 167 00:13:09.540 --> 00:13:12.980 into those channels in which it satisfies the most urgent wants of consumers in the 168 00:13:12.980 --> 00:13:14.680 best possible way. 169 00:13:14.680 --> 00:13:17.480 These transactions constitute the market as such. 170 00:13:17.480 --> 00:13:20.920 If one eliminates them, one does not preserve any part of the market. 171 00:13:20.920 --> 00:13:26.240 What remains is the fragment that cannot exist alone and cannot function as a market. 172 00:13:26.240 --> 00:13:31.780 So while this might seem, I mean, my characterization of the nature of socialism, how different 173 00:13:31.780 --> 00:13:36.600 it is from, especially the neoliberals, it might seem mundane at some level, but it isn't 174 00:13:36.600 --> 00:13:42.480 because it has huge implications for how you interpret the Indian experience under planning. 175 00:13:42.480 --> 00:13:51.200 So for example, and I'll go through this quickly, the way they interpret when India desocialized. 176 00:13:51.200 --> 00:13:55.360 So according to, I mean, and this is an interpretation put forward recently, two years ago, three 177 00:13:55.360 --> 00:14:00.800 years ago, 2008 by Arvind Panagariya, who's a student of Professor Bhagwati, and he says 178 00:14:00.800 --> 00:14:06.680 that India started desocializing in the late 70s, and it continued through the 80s, and 179 00:14:06.680 --> 00:14:12.320 unlike what most people think, it did not begin in the early 90s, and what are his reasons? 180 00:14:12.320 --> 00:14:17.120 He talks about little twists or tweaks which the Indian government made in the licensing 181 00:14:17.120 --> 00:14:18.120 procedure. 182 00:14:18.120 --> 00:14:22.680 So for example, in certain selected industries, if you had already produced 80% of your capacity, 183 00:14:22.680 --> 00:14:26.520 you got an automatic capacity expansion. 184 00:14:26.520 --> 00:14:30.920 Or on the other hand, in selected industries, if you had produced a little more than what 185 00:14:30.920 --> 00:14:36.000 the capacity which was allotted to you, you would be granted permission, like, okay, that's 186 00:14:36.000 --> 00:14:37.000 fine. 187 00:14:37.000 --> 00:14:41.360 Or in fact, in some industries, they were even de-licensed. 188 00:14:41.360 --> 00:14:47.660 But of course, de-licensing in a system of licensing is a way to move resources into 189 00:14:47.660 --> 00:14:48.660 those areas. 190 00:14:48.660 --> 00:14:53.840 So they would de-license like particular industries, so in the steel industry, the steel casting 191 00:14:53.840 --> 00:14:56.640 industry would be de-licensed, for example. 192 00:14:56.640 --> 00:15:02.960 So it is a way of allocating resources to those industries which are de-licensed. 193 00:15:02.960 --> 00:15:07.360 So according to Panagariya, because of these processes, I mean, these changes being made 194 00:15:07.360 --> 00:15:11.640 to the Licensing System, India started desocializing in the late 70s. 195 00:15:11.640 --> 00:15:15.080 But on the other hand, if you understand the essential nature of Indian socialism as being 196 00:15:15.080 --> 00:15:23.680 one where these little tweaks to the licensing system cannot change the essential nature, 197 00:15:23.680 --> 00:15:26.240 cannot bring back entrepreneurship. 198 00:15:26.240 --> 00:15:29.720 And so on the other hand, if you take the traditional view, I think is right, that India 199 00:15:29.720 --> 00:15:35.440 did desocialize in the early 90s because it was in the early 90s that the licensing system 200 00:15:35.440 --> 00:15:41.600 was completely abolished and it was put as a kind of a negative system where all licenses, 201 00:15:41.600 --> 00:15:47.260 all industries are free except a few where you have to get licenses. 202 00:15:47.260 --> 00:15:53.960 And also I feel that one historical implication of this is that this is kind of an interpretation 203 00:15:53.960 --> 00:16:00.140 where de-socialization took place gradually takes away from the impact of how big what 204 00:16:00.140 --> 00:16:01.760 happened in India in the early 90s was. 205 00:16:01.760 --> 00:16:05.200 I mean, the state was, there were no riots in India unlike the Soviet Union, by the way. 206 00:16:05.200 --> 00:16:09.280 This just happened in the state internally desocialized. 207 00:16:09.280 --> 00:16:11.160 So I'll just leave you with that. 208 00:16:11.160 --> 00:16:12.160 Thank you for that. 209 00:16:12.160 --> 00:16:12.660 Thanks.