When Did India De-Socialize?

0:00Mises identified two types of socialism, so he called one the Soviet Union post-office style of socialism where all enterprises are, you know, bureau-nationalized and bureaucratized. The other second version or second type of socialism he called the Nazi or the German command economy style of socialism. So to quote Mises, in this second type of socialism, nominally and seemingly, this type Episocialism nominally and seemingly preserves private ownership of the means of production and keeps the appearance of ordinary markets, prices, wages and interest rates. There are however no longer entrepreneurs but only shop managers. These shop managers are seemingly instrumental in the conduct of the enterprises entrusted to them.

0:48They buy and sell, hire and discharge workers and remunerate their services, etc. But in all their activities they are bound to obey unconditionally the orders issued by the government's supreme office of production management. And Mises also went on to say that in this kind of system, and he's referring to the second Nazi or German command economy style, market exchange, though it seemingly appears as this kind of exchange, is a sham. Now empirically it can be difficult to differentiate the second kind of socialism from the system of interventionism. The key difference, I believe, is the absence or presence of the capitalist entrepreneur. That's where you draw the line. In an interventionist system, capitalist entrepreneurs are still present on the demand side of all transactions in the factor markets.

1:38And again, to quote Mises about the system of interventionism, he says, the system of interventionism differs from the German pattern of socialism by the very fact that it is still a market economy. The authority interferes with the operation of the market economy but does not want to to eliminate the market altogether. It wants production and consumption to develop along lines different from those prescribed by the unhampered market, and it wants to achieve its aim by injecting into the working of the market order commands and prohibitions. Thus, in a sense, interventionism, you can think of it, and I think this is how Mises defines it in his first work on interventionism, as a system where private property in the means of production exists, but is abridged. On the other hand, the Nazi or the German kind of socialism is one where seemingly entrepreneurs exist, but they are just managers.

2:26So in the sense that there is no true private ownership in the means of production because the key characteristic of entrepreneurs in the market economy, that is the allocation of capital across different lines is taken over by the state. Now how does this all apply to India? This is what I'm coming to next. Now post-independence, that's around 1947, India adopted this policy of economic nationalism. That is, you could call it achieving or trying to achieve economic growth through increased self-sufficiency. So it was like India would try to recreate entire capital structures within the national boundaries. So for example, if India was largely an importer of capital and other industrial intermediate Goods Prior to Independence.

3:18So for example, if you take steel, so the thinking was that look, we can't import steel, we need to produce steel at home. But not only do we need to just produce steel at home, we also need to produce the machines that produce steel at home, and then the machines that produce those machines, etc. And so create this entire capital structure for all higher order goods, which are being produced right now in the world economy. And of course, the state was the means to achieve these ends, because the thinking was Because of course the market left to itself is not going to do it, and so the state was perceived as the agency to allocate capital and resources to achieve these objectives. But the interesting thing about Indian socialism is how did the state establish control over resources. Now in the Soviet Union it's very simple, because the Bolsheviks came in, they nationalized is all industry, and so you know straight away that all commands are being provided by

4:16the government, and all the managers in these various enterprises are just following orders issued from above. In India, it wasn't so clear-cut. There was a public sector, and it grew over time, so it did slowly monopolize more and more sectors of the economy. It began and with the railways and telecommunications, but then it went on to control the entire financial structure, to control all mining activities, coal, etc., and also produce a large chunk of certain capital goods, such as, for example, steel. But at the same time, there was a sizeable private sector, and there were many private producers, both industrial and agricultural. And there was also a plan, so every five years the Indian Planning Commission would get together and set out a five-year plan where you'd have quantitative targets for various, you know, these goods which they wanted to produce in India.

5:15Now the question is, how did the state make private producers conform to these plan priorities? I mean, after all, they are private producers and their natural tendency is to produce, you know, to follow profit-loss signals, to impute prices backwards from, you know, as they see it from consumer goods, et cetera, consumer goods markets and to follow their and Natural Tendencies. So how did the state make them deviate from this natural tendency and produce according to plan priorities? Now, here is where India established this elaborate system of industrial licensing. So under the Industrial Development Regulatory Act of 1951, all basically, and this covered all capital goods industries, I mean the entire capital structure, to start a new firm, to change location of a firm, To change, you know, to expand existing capacity, to change what good you're producing.

6:08So, for example, if you want to switch from producing plastic toys to plastic buckets, et cetera, things like that, even these kind of decisions, you need to get a license from the government. And what is the procedure for an entrepreneur, I mean, for a private property owner to get this license? So, and I quote from the work of economist Gunjan Sharma. 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. So it was kind of like an inter-ministerial decision. 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.

6:56It'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. For example, even today in the US you need to get health licenses, even licenses to start a business, etc. These licenses were different. Why? Because of the kind of calculations which went in before they gave these licenses out. So, again, I'm quoting Sharma. She says, conversations with officials who were on the licensing committee during the 1980s revealed that the most important concern for the licensing committee while debating a particular case was the demand supply situation of the good. The government maintained highly detailed records of the exact production of the good that was already taking place. That is, all registered stroke license units were required to submit detailed monthly production reports and so had information on the supply of the good.

7:48Information about capacity utilization of existing plants and Demand Projections from the Planning Commission were then used to compute the demand side of the equation. Now, the important thing to understand or to note is that both demand and supply, in a sense, are being determined by the state. So when you talk about demand supply here, it's not the demand and supply of the marketplace. So it's not that the state is standing back and private producers are engaging in production, and then you look at the existing demand and supply and then decide this is not what's going on. So the supply or the existing supply of the good has already been decided upon by prior actions of the state. 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.

8:37And 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, The main way in which licensing requirements were implemented by an even more potent force than physical inspections. This first was the fact that all essential raw materials for production, steel, cement, coal, fuel, furnace oil, railway wagon movements, licenses to import equipment and raw materials, etc., were not freely available in the market. Each and every firm was allotted a certain amount of these inputs each year based on the output limits specified on their license.

9:34Thus, it was very difficult for the entrepreneur to produce over the limit on his license since basic raw materials were allotted to him based on the licensed amount. So, for example, again, If you wanted to produce, let's say, 20,000 units of steel, you have gotten OK from the Planning Commission based on their demand supply projections. Why can't you just go ahead and produce 50,000 units? Well, the fact is that all the inputs which went into the steel production were also constrained. So on the one hand, you had the state gradually establish control over finances. So if you wanted finances, if you wanted to get finances from the Stock Market, you would have to get the permission of the Commission for Capital Issues, if you wanted, most of the banks were state-owned, etc.

10:21So, through controlling the capital structure in this way, the state controlled all production activities, because even if you don't license, for example, agricultural activities, they weren't licensed. But all the inputs were controlled by the state. Once you control the capital structure for all seeds, fertilizers, pesticides, machinery, etc. Any capitalistic production process in the consumer goods industry is automatically controlled because you control the capital structure. 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. Now, in my interpretation of Indian Socialism, I differ from, I mean, most people who've written about it. On the one hand are the leftists, especially the extreme Marxists, for whom, of course, all problems of Indian Socialism is because the bourgeois capitalist was not exterminated as a class. On the other hand, you have, and this is surprising, because On the other hand, you have many neo-liberals who have heavily supported the move towards

11:30the market taking place in India today. But they too do not, for them, they treat India as a kind of a mixed economy. Now, of course, they do recognize that there was a plan, that there was a public sector, that there was licensing. Obviously, they're not blind to They interpret India as a mixed economy. The private sector under planning in India was no different from the private sector as would have existed in a market economy. The only problem is that we had this public sector and a private sector and this private sector was heavily controlled. It's almost like they cannot conceive very similar to the market Most socialists who Mises criticized, they cannot conceive of the difference between managers and entrepreneurs. They do not see that essential difference and here I'd like to quote Mises and this is him in reply to the market socialists. Firstly, I love the first line of this paragraph and so I quote it. He says, the cardinal fallacy implied

12:35in this and all kindred proposals and he's talking about market socialists is that they look at the economic problem from the perspective of the subaltern clerk whose intellectual The financial horizon does not extend beyond subordinate tasks, I mean this is classic Mises. But then later in the paragraph, and I'm quoting here, he says, the operations of the managers, their buying and selling, are only a small segment of the totality of market operations. The market of the capitalist society also performs all those operations which allocate capital goods to the various branches of industry. He says, it is these financial transactions of promoters and speculators that direct production into those channels in which it satisfies the most urgent wants of consumers in the best possible way. These transactions constitute the market as such. If one eliminates them, one does not preserve any part of the market.

13:20What remains is the fragment that cannot exist alone and cannot function as a market. So while this might seem, I mean, my characterization of the nature of socialism, how different it is from, especially the neoliberals, it might seem mundane at some level, but it isn't because it has huge implications for how you interpret the Indian experience under planning. So for example, and I'll go through this quickly, the way they interpret when India desocialized. So according to, I mean, and this is an interpretation put forward recently, two years ago, three years ago, 2008 by Arvind Panagariya, who's a student of Professor Bhagwati, and he says that India started desocializing in the late 70s, and it continued through the 80s, and unlike what most people think, it did not begin in the early 90s, and what are his reasons?

14:12He talks about little twists or tweaks which the Indian government made in the licensing procedure. So for example, in certain selected industries, if you had already produced 80% of your capacity, you got an automatic capacity expansion. Or on the other hand, in selected industries, if you had produced a little more than what the capacity which was allotted to you, you would be granted permission, like, okay, that's fine. Or in fact, in some industries, they were even de-licensed. But of course, de-licensing in a system of licensing is a way to move resources into those areas. So they would de-license like particular industries, so in the steel industry, the steel casting industry would be de-licensed, for example. So it is a way of allocating resources to those industries which are de-licensed.

15:02So according to Panagariya, because of these processes, I mean, these changes being made to the Licensing System, India started desocializing in the late 70s. But on the other hand, if you understand the essential nature of Indian socialism as being one where these little tweaks to the licensing system cannot change the essential nature, cannot bring back entrepreneurship. And so on the other hand, if you take the traditional view, I think is right, that India did desocialize in the early 90s because it was in the early 90s that the licensing system was completely abolished and it was put as a kind of a negative system where all licenses, all industries are free except a few where you have to get licenses. And also I feel that one historical implication of this is that this is kind of an interpretation where de-socialization took place gradually takes away from the impact of how big what happened in India in the early 90s was.

16:01I mean, the state was, there were no riots in India unlike the Soviet Union, by the way. This just happened in the state internally desocialized. So I'll just leave you with that. Thank you for that. Thanks.