Shri. Atanu Dey covers the following points in his #SrijanTalk:
● India’s Path to Economic Prosperity: A Brief Overview.
● The Big Arc of History of Economic Growth. The story of humanity is a story of ever increasing prosperity. The pace of improvement has been accelerating at an ever-increasing rate.
● The Source of Economic Growth. The simple term “technology” is the source of all economic growth. What is technology and why does it matter for economic growth? Why is the pace of technological change accelerating?
● The Rules of the Game. The world is getting better but not all regions equally. Some were relatively more successful than others. What distinguishes the various regions of the world is the set of rules that they follow. Why do the rules matter?
● The Role of the Government. The various varieties of governments have differential impact on economic prosperity. What does the evidence reveal about which types succeed?
● The Constitution. The constitution is the foundational institution that sets the stage upon which the great economic game is played. What’s a good constitution?
● India. India’s economic history. What are its strengths and weaknesses?
● What are the barriers to India’s growth and how can they be overcome?
About Speaker: –
Shri. Atanu Dey is a development economist. His emphasis is on the impact of the twin factors of technology and government on economic performance. Atanu received his Ph.D. in economics at the University of California, View More…
The Constitution is the thing that protects the citizens, from the tyranny of a government, the Constitution is the sovereign. It’s important to recognize the Constitution is a sovereign, not the government. The government is just an instrument that the people have created, for their own benefit. The Indian Constitution is the largest constitution in the world, written constitution of a nation, hundred fifty thousand words and it’s written in legalize, it’s not written in English. So if you were to try to read it, you cannot understand it, unless you are legally trained, you have to get a lawyer to set exactly, what does this page mean and then a lawyer will explain what it means is this. It limits economic and civic freedoms and it encodes within it religious and caste discrimination. It says depending on what religion you are, you will be treated differently by the government. It is one of the most odious, most disturbing feature of Indian Constitution that it discriminates against people. It will be of little avail to the people that the laws are made by men of their own choice, if the laws be so voluminous that they cannot be read or so incoherent that they cannot be understood. This is a description of the Indian Constitution.
I would like to talk about India’s path to prosperity and I know that it’s a kind of a very grand title, for some proposition that is going to be rather modest. So you will have to forgive me for making a bold claim that this is the path to India’s prosperity. So prosperity is a really modern concept, it is something that did not exist for all of human existence, it was existence before this very brief recent period. It was Hobbesian, it was nasty, brutish, poor, short and mean and at some point, we human beings started becoming prosperous; there was material prosperity and the reason that we have to be, we care about material prosperity is not to disparage any other kind of prosperity, whether it is spiritual or are the other worldly prosperity. I am talking about material prosperity because it is, we are material beings and it’s a necessary condition for all-round development of the human being.
How recent is human prosperity? Think about it this way, that human beings have existed approximately, the modern anatomically modern human being has existed for about two hundred forty thousand years. Now if you consider the two hundred forty thousand years and you present it as a 24 hour day, then prosperity began just a minute and a half before the end of the day. So it’s very, very recent in the last two hundred fifty years, we have had human prosperity and that poses a question that what does, what did it lead to.
Now just think in terms of human population. It took, took all of human history for the human population to come towards 1 billion people and that happened in just a little over two hundred years ago. So it’s very recent that we got so many billion people and it took 700 years for the population to double from 250 million people to half a billion people. So you can see that it was a very slow rate of population growth, the reason that it was so slow was, we lived in what is now called in Malthusian age, where the population the birth rate and death rate were kind of equal and therefore population didn’t really increase fast. Then, after 1800, in just 124 years, we added an additional billion people and you can see that the rate at which you are adding billions of people kept on in getting faster and faster. So we have 33 years for the next billion, 15 years for the next one, then 12 and then you can see how quickly we came to 7 billion people. Right now, we are 7.7 billion people.
So if you look at the graph of human population for the last 12,000 years, you see that it is flat for most of its existence and then it sharply takes off and this thing is a remarkable, extraordinary fact that we have to keep in mind as to why this happened, why did humans began flourishing sufficiently that the population could expand. This is another remarkable fact that most of the world’s population is Asian, that is, since historical times the majority of the people of the world lived in Asia, which is India, China and the countries around it. So, before the year 1800, Asia share of the world GDP was therefore equivalently very high because the population lived here and since people were equally poor around the world, it is not surprising that India and China accounted for nearly 50% of the world share of the GDP.
So around 250 years ago there’s a first Industrial Revolution took place in Great Britain and that started a different era of human existence and the growth of population was a consequence of the fact that there was an enrichment 250 years ago and the enrichment also in a circular causation. Then started increasing the wealth of the of the world. So it was both population, both a cause and a consequence of the wealth generation or the great enrichment. So you can see that this is a graph of all the estimated world GDP over the last 200 years and you see that they are the population graph that we had seen previously. It mirrors the population, the population graph.
So the world has been getting better consistently since then and these are some of the good numbers that you can imagine like life expectancy has increased from 56 years to 72 years and that too in just a relatively small short time is just in 50 years things have changed. Infant mortality dropped from 113 to 32. So that’s a remarkable statistic, that 75 percent lowering of infant mortality, can imagine the amount of misery that people had to go through and half their children wouldn’t survive. The average income of the world rose from 3700 to 17500. These are numbers which have been normalized to 2011 international dollars. Food supply increased and extreme poverty was almost eliminated during this period. In the past, most of the people lived in extreme poverty, extreme poverty means that you just have barely enough to eat, that’s about it and your life was fairly short and this is around the year 1800, 1820. 90% of the world’s population lived in extreme poverty and now it is below 10%. So you can see the great enrichment that happened, so amazing transformation that happened in the world and we have to ask as to why this happened now and what exactly caused it to happen.
So the causes of change can be summarized in one word and that is technology, especially energy technology. Now what is energy technology? the story of human civilization is the story of how humans have been able to use energy. Before in the first instance, you only had human power and animal power and then you could use say wind and water and then you had other sources of energy, like wood and coal and then a little a few hundred years ago, about a hundred and fifty little over two hundred years ago, petroleum was discovered. So therefore energy technology, the energy becomes more and more available. You will find that humans start flourishing more.
So the story of civilization is the story of energy and in the future we are going to get another breakthrough in energy technology and that is fusion, when you have fusion energy then it becomes extremely energy, becomes extremely cheap and the cost of anything at all, is the cost of the energy that goes into the production of that thing, everything that you pay for, you are ultimately paying for energy in the past, you use per human energy, human muscle power and now you have a lot more energy available and that’s why the world is richer. But what exactly is technology because we use the word technology very often and so we need to have a good definition of the word technology, understand what it precisely means.
So technology, to give you a very precise and a concise definition of technology, it is how to do something, it’s “know how”. Technology is recipes, everything is a recipe, how to do something like how to mine iron ore and you take the iron ore, how to refine it into iron and how to make out of that iron, you can make steel, in different kinds of steel. Then the technology of how to take that steel and make things out of it. So, everything is a set of recipes. So, when you know how to do something, you have the technology it could be as simple as see, if I know how to make sambar, it means I know the recipe for making sambar. I have to take this much of this item and that much of that item, combine them in such a way etcetera. So you might have the ingredients, but if you don’t have the technology you are not going to be able to do it.
So technology has these features, one of them that technology is cumulative, that when you discover something, you have some amount of technology or recipes and then when you add somebody else discovers, you get more. So it just keeps on adding, it doesn’t kind of disappear. The second thing about technology is non-rival because once you know how to make something, then you can, other people can also use, the same recipe, the amount of recipes doesn’t go down. So it’s nonrival. If I have a cookie, I eat half of it only, half of it is available to anybody else for consumption. But technology itself is non-rival, it is cumulative and technology is a function of the stock of Technology. If you have a large amount of technology, then the enough amount of technology, that you will get next goes up because then you can combine things and discover more things and how to get things done. So it’s cumulative, the flow is a function of the stockand the flow is also a function of the population. If there are only five people in the whole world, you can discover these things, but if they are five million people and those many of those billion people are trying to discover new recipes, new technologies. So the amount of technology being in invented, created is very high these days and that means… OK.
I would like to at this point try to distinguish between science, engineering and technology. Science tells you what the world is like. It is what it answers the question what, whereas technology invents, it tells you how to do something and engineering is actually the building of something. So Engineering creates things, whether it’s a bridge or a computer, using the technology that we have. Now you might ask what comes first – science or technology. Sometimes science comes first, but many times technology comes first, you don’t know why it works that way, but you just it work. So if you know that if you take iron and you put this amount of carbon in it and you do it this way, you know you get a very strong steel, but you don’t know why it happens that way, it only later on you figure out the using metallurgical science as to why steel is harder or better than iron.
So technology actually is that thing that creates resources, there is no such thing as natural resources. This is an important point that I’d like to stress. There is no such thing as a natural resource; coal is not a natural resource, iron ore is not a natural resource, uranium is not a natural resource. They are all stuff on the face of the earth, close to the earth or so. Now what happens is nothing becomes a resource till human minds are applied and the human minds discover, what to do with it, so if you had a mountain of iron ore sitting in your backyard 200 years ago, it would not be wealth at all it is nothing no resource at all because nobody knows what to do with Iron ore or even petroleum. Until people figured out that petroleum can be refined into various products and how to use them the internal combustion engine, without the internal combustion engine technology, you would not know what to do with petrol and diesel.
So there are no natural resources and therefore we are not going to ever run out of natural resources because there are no natural resources, there are only stuff on the face of the earth and there’s a huge amount of stuff on the face of the earth. So it doesn’t matter we will figure out how to, how to use them, so we are not going to run out of petroleum for the simple reason we would have figured out what the substitutes are by the time we come to the use of this. As they say the Stone Age did not end because we ran out of stones, it ended because we figured out how to use metals instead of stones.
So technology changes the world. It is the thing that creates capital and it is the technology which creates new products and processes and these the capital and the new products and processes increase our productivity. The word productivity is very, very important one, person producing something if his productivity goes up it produces more of that something. So productivity increases as our technology increases. A person with a shovel can do more than a person with his bare hands. So the shovel is capital which has been produced and then using that shovel, the person is more productive. But if you have a backhoe and the person driving the backhoe can do a lot more, than just a person with a shovel, so that’s exactly how as time has gone by, we have become more productive. So one person produces a lot more and this increase in productivity actually brings about structural changes.
When you had an agricultural economy, 90% of the people in an agricultural economy work in producing food and if agricultural productivity goes up, labor productivity goes up, fewer people are required in agriculture. so then they can move to industries and various things like that. so therefore with technology you have structural changes in an economy and economies which are primarily agricultural are poor and economies that have moved beyond agriculture and into the manufacturing and industrial sectors, that they are the rich countries. As you can well imagine if everybody was involved in agriculture 100 percent of the people there is nobody left over to do anything else, to produce clothes, build houses, build roads, etc., would we all be very poor and that you have to remember that India’s 60 percent of India’s labor force is in agriculture and because 60 percent is in agriculture it means that the income of the people in agriculture is limited to the amount of expenditure that the people who are not in a grave agriculture have. So if people are spending so much on food, that’s the income to the agricultural people. So if there’s in the United States, in the 1800, something like 80 percent of the US population was in agriculture and so the people the farmers were poor in that time and of course the people also poor in the 1800s and then in, in the right now the percentage of US labor force in agriculture is 1%. So you can imagine that the farmers in the United States are very rich because they produce food for the remaining 99 people and therefore their income is pretty high because 99 people have to buy the food from that 1%.
So technology and change, technology produces change, when we say things are changing very rapidly, it just means that we are producing technology at a much rapid pace today. So here’s a puzzle that when I first came across it some many, many years ago, it really puzzled me and said that we don’t really produce any of the things that we consume and we don’t consume any of the things that we produce. Just think about yourself, your consumption by a basket includes food, clothing, shelter, transportation, entertainment and so many other things but you don’t produce any of those things and what you produce is not what you consume. Just let’s take a person who makes shoes, it’s not that he only consumes shoes, maybe a few. But that’s about it, it’s a very small part of how consumption basket what we produce. I don’t produce anything that I consume at all and so what is it that bridges the connection between consumption and production and that is one word exchange, we exchange stuff and this exchange allows us to bridge the gap between what we produce and what we consume.
So this exchange is also called trade and exchange and trade is the core idea why we have such great prosperity and trades and exchanges happen in markets. There’s a technical word for trades in exchange happen, it’s called markets. Now it, can, need not be any physical location, it can be a abstract notion, like when I buy a piece of land or a property I don’t actually go and pick it up and bring it home like a loaf of bread. So it’s just that the title changes hands, you know the rights to use etc. So markets voluntary exchange is the most important thing that is we have to keep in mind. Now the markets are an invention and voluntary and free exchanges what creates the wealth and all the prosperity that you see around us and this I need to first stress again that it is voluntary exchange in markets which are free. So free markets voluntary exchange, so what are free markets? Free markets are markets in which there are no barriers to entry or exit, that is if I want to sell something in the market, I am allowed to sell it to somebody and what is a free market exit, mean that if I don’t want to sell to somebody, I don’t have to sell whether it’s my labor, whether it’s my goods, whatever my services, I don’t have to do it. I can exit or enter freely and what is important is to have a market, to have exchange you have to have private property. I cannot sell you something that I don’t own. I cannot buy stuff from you that you don’t own. So it has to be well-defined as to who owns what and that enables us to do the exchange and therefore it increases this free markets, increases our abilities to conserve, consume and this happens through what is called division of labor, division of labor like you make the clothes, I make the food and then I exchange clothes for food etc. So that is important that exchange part of it.
Now when you do division of labor, leads to increases in prosper in productivity. So if we had to produce everything that we consume, we would be very inefficient. So I won’t know how to make clothes or how to grow the food etc. someone else grows the food someone and makes the clothes and then I do something, I bring something in exchange that they value. If I bring something that nobody is willing to pay for, therefore there won’t be a market for it. So wealth is created through exchange division of labor and finally division of knowledge. See, you cannot have division of labor without having division of knowledge, that is, I know how to program a computer and you know how to, maybe do create grow food. So free markets create wealth.
So what right now, what I have been talking about is really the fundamentals of economics, where economic studies human behavior, economics is about trade, in them since we are talking about exchange and it’s about tradeoffs that is when you do something, you it forecloses the opportunity for you to do something else and therefore you have to decide, should I do this or should I do that? So that choice, your behavior is about making choices among alternatives that you have and this whole subject of economics, the discipline you could actually say was started, you could put a date to it and in 1776 that miraculous year, a Scottish, Scotman called, Adam Smith wrote a book, published a book called “An inquiry into the Nature and Causes of the Wealth of Nations”. Basically he was asking, why as some nations rich and why some nations of poor and this was here in the year 1776. Again let’s remember that’s not very long ago. They say 1776 is a little over 250 years approximately 200 years ago. It was the year that the 13 colonies of North America declared independence, they didn’t become independent because they declared their to fight for it for, for a while. So that great divergence happened sometime 250 years ago, the great enrichment happened 250 years ago. But the great divergence also happened, why is it that some people, some nations became rich even though they all started equally poor. So the question that was posed that Adam Smith tried to address the wealth of nations, is the question that actually propels all of economic, the discipline actually and personal note, I also started my study of economics with that question, because I am trained as a engineer and a mechanical engineer, then I studied computer science and when I ended up working in corporation in the Silicon Valley in California, Hewlett Packard, I asked myself why is California rich and India so poor and I didn’t know the answer. So then I realized that economics informs the question and that’s why I studied economics.
So here are some numbers, these only two slides where I will have numbers in 1820 U.S. GDP was 2000, China was 740 and India was 1000. Notice that India was these all estimates of course but still ahead of China, in 2016 US had multiplied its per capita GDP 25 times, China had become $12,000, India is 6,000. See China has lagged India’s per capita GDP for most of its existence, see that the red line is China, the blue line is India and on this graph on the left-hand side, it’s a log graph. So each division is ten times as much. So we have one thousand, 10 thousand, 100 thousand. So these lines are actually much deeper if you were to actually graph it on a regular graph. So recent growth stories, so the U.S. in 1953, the first figure is for 1953 and the next figure is for 2014, like 60 years.
So the U.S. went from 16,000 to 52,000 in those 60 years, Japan went from 3,000 to 35,000, South Korea from 1,000 to 35,000. So there is ketchup, it was one third of Japan, then it caught up South Korea, then China went from 1,000 to 12,000 and we have seen before and India went from 900 to about 5k. These are all you just to take the magnitudes of the number you don’t have to remember, these things, but the main thing is that ketchup growth can be very fast, these are all nominal dollars, 2011 nominal dollars. They are called international dollars. There’s a way of measuring them. You account for various inflation and various other things, but you don’t account for it with a per capita, sorry purchasing power parity. Actually purchasing power parity numbers don’t really make much sense. But that’s a different story. It is better to talk about nominal. See, the main thing is you don’t really go out buy stuff, purchasing power, power parity in basis, you don’t go buy oil and go to Saudi Arabia and say instead of paying you $70 for a barrel or purchasing power parity is such you must sell it for $13. It doesn’t work that way. Everything that we buy in a globalized world, you have to play Google, global prices. So nations differ but the people don’t differ. I am from India, I have lived and born in India. I lived in the U.S. I don’t see much of a difference between Indians and Americans, not so that their, their income is 10 times us. They are not 10 times smarter, they are not 10 times hardworking etc, not 10 times more educated.
Exactly why is it that some nations are rich and some nations are poor and that brings us to a conjecture, that it is nations differ because they have different degrees of freedom, the people in that nation and what is freedom we will come to it. But the more important point here would like to make is, that the rules of the system make a difference. Now I just take for example, East Germany and West Germany. At one time they were one and the same. After the Second World War they were divided into East and West, the people were the same, the language is the same, the history was the same, their education level, culture etc everything was the same. But over time they diverged. The Western Germany became rich, East Germany became poor. The same story you can tell about say South Korea and North Korea, same people, same country, same geography, same history etc so and they divided it, one became communist and the other became capitalist, free-market, voluntary exchange etc, and then that is what created the difference.
So it tells us that there may be something in the conjecture that maybe it is the set of rules that you follow that makes a difference. So some people get economic freedom and that leads to prosperity and some people don’t and there are different kinds of freedom – one is economic freedom, political freedom and civic freedoms; but economic freedom is lexicographically prior to the other two, that is if you don’t have economic freedom, you’re unlikely to make much use of the other two freedoms that you have and this is also very easy to understand. Just think about it this way, how many people vote with their feet, to go to a place where they have economic freedom; but they don’t have any political freedom. You see all the NRI is sitting in the United States, most of them went there with no political freedom, that it couldn’t vote, they didn’t have a voice in the government. But they had economic freedom. So they vote with their feet wherever economic freedom is, there are many people who would go to Singapore today. Why? Because they will get higher income and things like that economic freedom. But they will not have, they do not have the political freedom there and maybe they even have restricted civic freedoms. So freedom is basically a choice variable, people choose how much freedom they want, demand because ultimately collective some in some sense chooses how much freedom they want and that leads to prosperity.
So the final point in my talk is, that constitutions which are the set of rules, with a the top-level set of rules as to how rules are to be made, they matter and they define the role of the government, the state or the government and they are they define the relationship between the state and the people, that relationship can be of equals, could be one a principal agent, that is one could be the principal and the other one could be the agent. So suppose the government is the principal, that is the boss and then the people are the agents, States, they are the servants. They serve the government as opposed to another kind, where the people are the principal and the government isn’t just an agent. So since the United States is most, the most powerful country in the world economically powerful and therefore of course militarily powerful, it also has a cultural hegemony. Also, here the U.S has the world’s oldest written constitution. Countries have constitution, but the U.S. has the one which is the oldest in the world. It is only in it, it’s written in English, the American Constitution is written in English. So anyone who knows how to read English, can actually read it. So it’s readable not only that it’s a very short Constitution, is 4,500 words, the entire Constitution is 4,500 words. You can read it over a cup of coffee and with the amendments that it has. It’s only about seven thousand seven hundred words long, that is the entire Constitution, with its amendments is seven thousand seven hundred words long.
Most people have read in American Constitution because it’s required reading in school, when you are in the tenth grade you read the American Constitution. I have a copy of the American Constitution, the entire Constitution and it’s amendments, 27 amendments. This is it and it is written in English, it’s written in English. I will tell you what it means. I can read you the First Amendment of the American Constitution, I won’t read it because I memorized it, is the most beautiful piece of writing I have ever come across. It says “congress shall make no law”. Congress, of course, is the name for the legislative the American government. First Amendment says, it says Congress shall make no law respecting an establishment of religion or prohibiting the free exercise thereof or abridging the freedom of speech or of the press or of the people to peaceably assemble and petition the government for redress of grievances, forty-five words long and it addresses six important points.
It says government will not discriminate based on religion, it cannot promote one religion or denigrate it or make people do something against their will, religion, freedom of press, it says, freedom abridge the freedom of speech, important words. When you say Congress can make no law abridging the freedom of speech, it means that the freedom of speech pre-exists, the rights pre-exists the constitution. They do know the Constitution doesn’t grant your rights, their rights are there the Constitution protects the rights by limiting the power of the government, it says Congress cannot make laws, doing this or that of the freedom of speech or of the press and of the people to peaceably assemble. So it gives you, it guarantees you, that you can assemble you know associate with whoever you want and petition the government for redress of grievances basically means that you can take the government to court and the court will decide whether you are right or the government is right, the Constitution is the thing that protects the citizen from the tyranny of a government because the founding fathers of the United States were very clear about this point, that they were afraid of government. There were two things afraid, they were afraid of, one is they did not trust democracy and they did not trust government. So that is why they created a republic, a constitutional republic with a constitution has the power to stop the government from doing what they the people don’t want it to do.
So the Constitution is the sovereign. It’s important to recognize the Constitution is a sovereign, not the government. The government is just an instrument that the people have created for their own benefit. Number 1, the Constitution is not omnipotent. This is important to recognize the Constitution is not omnipotent because the Constitution cannot take away certain rights that the people have. They are called natural rights because you can make sure that the government does his job that’s about it, anyway. So the first 10 amendments to the American Constitution was adopted at the same time as the Constitution is called the Bill of Rights and I just recited the first of the amendments, there are 10 in total, like which are very important which protect the citizen from the government. Then in the next 200 – 230 years, they added 17 more amendments, two of which cancel each other out the 18th amendment and the 21st amendment. One was for the imposition of prohibition and the other was to the repeal of prohibition and then so there are 15 amendments to the American Constitution over a period of 230 years, which is once every 15 years or so and then, we have the Indian Constitution. let’s see… By the way, this is the hand write there, the American constitutions for handwritten pages. This is one of the first page, be the people.
The Indian Constitution is the largest Constitution in the world, written constitution of a nation, hundred fifty thousand words and it’s written in legalize, it’s not written in English. So if you were to try to read it you cannot understand it unless you are legally trained. You have to get a lawyer to set exactly what does this page mean and then the lawyer will explain what it means is this. It has four hundred forty-eight articles. Whatever, it was amended one hundred and three times. The latest was just a few months ago. It places the government as the principal, it as the boss and everybody else below as agents or servants. It limits economic and civic freedoms and it encodes within it religious and caste discrimination. It says depending on what religion you are, you will be treated differently by the government. It is one of the most odious, most disturbing feature of Indian Constitution, that it discriminates against people and it is a legacy of the British Raj because every rule that you see in the Constitution most of the rules, except the ones that are made later byNehru and his descendants, they are all made by dead Britishers. It’s a British Constitution. The Indian government, the British India Government Act of 1935 forms the core of the thing. It was passed by Britishers.
Now James Madison who was the guy, who actually wrote the American Constitution, the guy who drafted the American Constitution and a whole bunch of ten or twenty people. I think ten people, they sat down and discussed about it anyway. He said that it will be of little avail to the people, that the laws are made by men of their own choice, if the laws be so voluminous, that they cannot be read or so incoherent, that they cannot be understood.
This is a description of the Indian Constitution, I have asked 10,000 people, have you read the Indian Constitution and nobody till date has ever admitted that they have actually read the Indian Constitution, unless they are the people who actually just read for professional reasons. Nobody else has read it. So why is not India prosperous? well there could be, maybe there are barriers to India’s prosperity and what are the external barriers that you can imagine. Here it, here are some possible barriers. For example it could be that our history is kind of shallow, our culture is kind of worthless, their geography is so bad that there are no natural resources, we don’t have good navigable rivers, no coastline, so it’s hard to do trade, natural disasters come every now and then reduce everything that we have built into rubble every now and then there are tsunamis, and earthquakes to destroy the whole country, maybe there are civil wars going in for decades, so therefore we can’t actually have peace and prosperity maybe foreign wars, there the people are invading us, bombing us all the time. None of these things are true.
Well… exactly what’s with Indians, if we are Indian stupid people. I don’t think so because Indians do very well wherever they will, wherever they go. So that’s also not true. So I submit to you that, maybe it’s the government, it’s the government and the rules of the game that the government imposes on us and nations, like I said, differ in the rules that they follow. So people behave differently under different institutional settings and institutional economics is a very important part of our job and basically we study how different people behave differently and the outcomes are different. So the government control of the economy is what is given into the Constitution. The Constitution allows the government to interfere in the economy and when the government interferes in the economy, it politicizes the economy, the decisions are made based on political reasons, not for rational economic reasons and the politicization of the economics leads to the corruption of politics and the corruption of policies leads to bad policies because the policymakers are not there to make good policies. They don’t know what good policy is, they are there to line their own pockets and that leads to the Immiseration of the people.
So that, in short, is the simple answer to why is India poor and India is poor and they are told India to Indians, are told, India became free, India has democracy but the freedom and democracy are very, very weakly linked. Firstly, democracy doesn’t mean freedom and the India became independent in 1947. But it never became free because the same rules existed during the British Raj existed afterwards. So if Indians became free post 1947, then there you have to ask why don’t you think Indians were free pre 1947.
So democracy and freedom are the independent variables you can choose. Democracy or not use, democracy could have authoritarian rule and you could have freedom or no freedom. The authoritarian person can say, everybody go ahead and do whatever you want to do, I am the authority. My word is law and I say everybody do whatever you want to do that’s freedom, whereas you could also have which is like Hong Kong. Hong Kong, you serve a very poor country once upon a time means nation state, it was very, very cool poor country. The British ruled it, the people had no political freedom at all. But one guy called coppetrate 42.53 who’s a British administrator, he said everybody do whatever you want buy, sell, trade, make whatever all. I have to look after, make sure that there is no theft, fraud and force involved. So I am going to enforce the laws but you can do whatever you want and then Hong Kong which used to be one-third as rich per capita and third as rich as the British became one-third richer than the British, in just a generation.
So free and freedom are two different concepts. Also you can make a faustian bargain that ‘okay you will be given everything free’. So people will be getting stuff for free, but the only thing they won’t be is, they won’t be free themselves. So the people will be imprisoned, think about it this way. If you are in a prison, in one of these rich countries, that they provide you health care, free health care, free housing, free everything, education and so on. He says that they are not free. So the ability to vote for your leaders doesn’t make you free in any sense. Suppose I had go to a prison and allow the prisoners to vote on who’s going to be the prison warden, they are not free people even though they get to freely choose their leader. A state that is large enough to give everything is powerful enough, to take everything from you.
So, the three types of states you can think of the state as, a protective state or a minimal or a night watchman state. A state which makes sure that there is no force, fraud and theft, but everything else is not the state’s job, you do whatever you want, it doesn’t provide you with anything, it does not say ‘okay I am going to help the poor or take the from the rich’, nothing like that.
The productive state is which produces goods and services; not just the usual protective part of it and then you have the ‘redistributed state’, which says ‘what, there are poor people, we have to take care of the poor people and therefore we have to give them whatever by taking from some somebody else because remember state does not actually produce anything; so it has to take from someone else to give to somebody else’. This is the distributive state.
So the three kinds of state, we have to ask them, what is it, that is wrong with state power, if the state power has part, the states tend to destroy actually and this is true thing about it this way. Have you thought of the fact that, wars are conducted by States, the average first citizen doesn’t get up and say, OK. I’m going to, just going to go and attacks this particular country, a government has to be involved in it and therefore most of the power that the state has, the more despair the state has, the more destructive it is.
Lord Acton he was a British statesman, he had made a very interesting observation and I am sure many of you must have heard about this observation. He says power tends to corrupt. Important thing to remember here is, he said power tends to corrupt, he didn’t say ‘power corrupts’. Power tends to corrupt… it depends on the person, amount of power, so on, But absolute power and States tend to destroy and absolute state power destroys absolutely, is my paraphrasing of the same thing.
Now what’s a state? A state is that institution, that has a legitimate monopoly on the use of violence within a territory. This description of the state, is concisely tells you what exactly is different between a state and everything else. What is a corporation, what is this or that. What is important about the state it has a monopoly, a legal monopoly on the use of force within a territory and this particular part, that it has a monopoly on the use of force has implications and the implications are these, that it therefore the state must be prohibited from engaging in any activity that does not intrinsically involve violence. It’s a very simple logical proposition because this guy has a gun, he should not be allowed to do anything that does not involve violence, education, charity, transportation, communications, manufacturing, agriculture religion, state services, social services, healthcare, housing, power generation, media… nothing. The state has no business to be in business.
Why, why not charity, don’t you believe in helping the poor? Yeah, of course. I believe in helping the poor if I come to you and say ‘madam will you give me ten rupees’ because I need to help the poor people around. You will happily give me ten rupees, but if I come to your door with a gun in my hand and I say madam if you do not give me that ten rupees, I need to help those people, I’m going to shoot you. That whole thing becomes officiates the whole enterprise, it’s kind of silly to force somebody to do that. So that is why because ultimately the government, every rule that the government has whether it’s taxing or anything is at the end of the day, there is a gun behind it because if you don’t pay the tax, whether the tax is used for good or bad, I don’t care, if you don’t pay the tax, the police will come. If you resist arrest they will use force until you, put you in jail. If you resist, they will shoot you everything. There is a gun and because the state has the gun it must be prohibited from so, the pay, state responsibility because they have the gun, is to maintain law, law and order, protect private property because we said private property is very important for prosperity, enforce contracts because we need to sometimes have contracts. We can’t get things done every, immediately. So we have to have constant contracts, punish forced, fraud and theft and enforce the Constitution.
The state has to enforce the Constitution and therefore why not the government because private enterprise is one side and government is the other side, one side private enterprises the co-operative sector, the other sector is coercive sector. Everything that the government does is coercion. One creates wealth, one destroys wealth. Paternalistic governments create dependencies and conflict and there are deadweight losses or end seeking. So what we have to do is limit the state power, by separating the power to legislate to tax and to spend, because right now in India, you have one entity. Usually one person who decides what the law is going to be, who decides how much is going to be taxed and what to spend it on one day, the man can get up and say ‘oh! let’s do monetize everybody, money is worthless today’. That is called the too much power and so what you have to do is separate these things and the path to prosperity therefore, is you need to have three markets you have limited government, you have economic freedom and all this is not something we are making up today from fresh cloth. It is old hat, it has been happening in various countries, there are lessons hundred years of lesson, which tells you which, what works and what doesn’t. Why India won’t do that is a different story.
So what is the only legitimate use of state power, John Stuart Mill had said, the only purpose for which power can be rightfully exercised against a member, against his will is to prevent the harm to others, his own good, either physical or moral is not a sufficient warrant that is an important thing. These are the people of enlightenment and these are the people who were read by the founders of the American for nation and that is why they are prosperous. The path forward for India is, it has to, this should be constitutional change which guarantees economic freedom and private property rights.
Today Indians don’t have a right to property, most people don’t know this, but they don’t have a fundamental right to property. The government can come and take away your property anytime it wants and I have written a constitution of India which is four pages long. Did anyone get a copy of that? Take a look at it, get back to me sometime, feel free to get in touch. My email address is this. If you want you can have a copy of the slides on request or I can put it up on Twitter or something like that. I have taken the good time.