All Commentary
Tuesday, May 1, 1962

Statism and The Free Market

Miss Shenoy is a student of St. Xavier’s Col­lege (Gujarat University), Ahmedabad, India.

Economic problems loom large in the minds of many people today. Scholar and man in the street alike feel themselves deeply in­volved in questions having to do with the production and distribu­tion of worldly goods. But despite the intense interest in the sub­ject, much of today’s economic dis­cussion is vitiated by a lack of regard for the fundamental cri­teria of the free market economy. Statism is the antithesis of the free market, but the blind spot afflicting many people is such that the effects of statism, historical and contemporary, are often deb­ited to capitalism. This would be like blaming the evil consequences of slavery on freedom!

Thus, when American and other “liberals” (statists) criti­cize something labeled “free enter­prise,” they imagine they are criticizing the free market. But what these people consider to be the natural corollaries of the free market are riot integral parts of it at all. They are distortions pro­duced in its working by misguided interventionism—the attempts of the state to do the duty of other parts of society, while neglecting its own duties. This causes imbal­ances and distortions in the mar­ket, and these are usually taken by the statists to be its normal and essential features.

For optimum functioning, the market needs a suitable, politico-legal framework. It presupposes the performance of a number of essential functions by the state aimed at establishing and main­taining the Rule of Law. Unfor­tunately, it is impossible to take for granted that the state (i.e., the politicians and bureaucrats) will adequately perform its essential functions. More than likely, the state will neglect the duties which it alone can perform—or else give them step motherly treatment—while attempting to do things be­yond its scope.

The resulting distortions in the market will be pounced upon by the statists and held up to view as the normal phenomena of the mar­ket. The politicians will then pro­ceed further with the identical policies that caused the imbalance in the first place—or with worse policies—all to the accompaniment of humanitarian slogans, and with the encouragement of these so-called “liberals.” This is a vicious circle, and the essential duties of the state will probably be for­gotten or neglected.

Most people regard the USA as the examplar of the free market. This is a mistake; the USA is a prime example of the “muddled” variety of the statist economy. The communist countries repre­sent one end of the spectrum—the totalitarian economy. Some West European countries—although still riddled with welfarism—ap­pear to be moving toward the other end—the free market econ­omy. Countries like the USA and India lie somewhere between the two—they are the muddled econ­omies, combining perhaps the worst features of both systems. The statism of East Europe is called communism, the statism of India is called “the socialistic pat­tern of society,” and the statism of the USA is called “American free enterprise.”

The Failure of Planning

Statism, wherever tried, defeats its announced ends—as we may see from the example of India. While the aims of India’s Five-Year Plans are laudable—to raise the standard of living of the peo­ple, develop the economy, reduce unemployment, and obtain social justice—the plans have, in fact, achieved the opposite.

Since “planning” was intensi­fied, per capita daily food grains consumption has stagnated around 15.4 ounces (the nutritional norm is 18 ounces). Annual cloth con­sumption has declined from 14.63 to 14.36 meters per person. Ninety per cent of the houses in the coun­try are one-roomed hovels, with no facilities whatsoever.

This is because under “plan­ning,” the bulk of the country’s resources are forcibly drawn into the sector with the lowest returns, the public sector. This would be true of any country where “plan­ning” is tried. About 4 per cent of India‘s national income is pro­vided by employment in the pub­lic (government) sector. But gov­ernment absorbed 60 per cent of total resources in the Second Plan; and the Third Plan proposes to raise this figure to about 70 per cent. Practically the entire public sector expenditure is on uneco­nomic, low-return, heavy indus­tries and on giant river-valley proj­ects—imitation TVA’s. The high return agricultural and light in­dustries sector provides more than 80 per cent of the national income, but under “planning,” it is starved of essential capital.

The natural and inevitable re­sult of this statist misallocation of resources is retarded economic de­velopment. An additional invest­ment of $100 in iron and steel in­creases output by an estimated $14; and in textiles, by $26. The same investment in agriculture, on the other hand, would increase output by $50 to $70! In other words, statism holds down India‘s economic growth, to the present meager (per capita) rate of 1.6 per cent annually—in place of a much higher potential growth.

Statist planning is also respon­sible for India‘s growing unem­ployment. Two million dollars of investment provides jobs for only 500 persons in heavy industries; whereas the same amount would provide 1,150 jobs in consumer in-dustries, and[ 4,000 jobs in agri­culture.

The gap between the poor and the rich has widened in the last decade. Incomes have been trans­ferred from the lower classes and fixed income groups, to business­men, industrialists, and corrupt functionaries of the state. This has ensued partly through inflationary plan finance, but mainly as a re­sult of statist “controls” (permits, licenses, quotas, concessions, and so on) which centralize economic power in the hands of officials, and create numerous monopolies or semi monopolies in the private sector. Public contracts also play a very significant role. This anti­social income-shift is estimated to be of the order of $1.6 billion a year. In short, the real benefi­ciaries of statism in India are un­scrupulous bureaucrats, and the state-established, state-protected monopolists in the private sector.

India is thus a classic case of statist muddle, but statism is guaranteed to produce the same re­sults wherever tried.



Scope for the Unusual

Any healthy society must provide scope for the unusual idea, for the uncommon individual, for the man who is in some way “different.” It would be a dull world in which everyone conformed to a common pattern of behavior and no one ever got out of step with his neighbors.       

From Facts, October-November 1961, Institute of Public Affairs, Victoria, Australia

  • Sudha Shenoy, PhD (1943–2008) was an economist and economic historian. From 1986 to 2004, she worked as a lecturer in economics at the University of Newcastle in Australia. She was an Honorary Associate in Economic History at the School of Policy and an adjunct scholar at the Ludwig von Mises Institute. Shenoy’s father was Professor Bellikoth Raghunath Shenoy, an eminent Indian economist who studied under Friedrich Hayek at the London School of Economics.