The Case For Minimum Government; State Meddling Has Done Economy More Harm Than Good

In The Service of The Republic: The Art and Science of Economic Policy. Vijay Kelkar and Ajay Shah. Penguin Allen Lane. 2019. 448 Pages. Rs 551.

I learnt my economics studying Ludwig von Mises and Murray Rothbard and hence it is inevitable that I will always hold any textbook on economics or applied economics against the foundations laid out in the classics written by them.

There are not many institutions where the above authors are used as reference material, let alone as reading material. In fact, most professors of economics would not even have heard about them or their school of thought — the “Austrian School of Economics”.

But if you are looking for logical explanations in the field of economics and a coherent understanding of major economic events (Great Depression, stagflation of the seventies, monetary fiascos, etc), then you need to look no further than Rothbard.

In fact, even as I write, we are virtually at the gates of a worldwide sovereign debt crisis, and yet, very few economists outside this circle can even seem to comprehend the oncoming tsunami.

Most, including Vijay Kelkar and Ajay Shah, authors of the book In The Service of The Republic: The Art and Science of Economic Policy, still talk about tweaking fiscal and monetary policy at the margin. What is required is a complete rewiring of the entire system. I suspect the markets will force the hands of governments to do this rewiring – but it’s going to happen through a tumultuous route and in a sub-optimal manner.

Further, all the resultant calamities will be blamed on speculators or greedy capitalists or foreign mercenaries from whom the gullible citizen has to be protected by the totalitarians in power. Or so they would be told. Fox guarding the henhouse seems to be an all-weather governance model.

Coming to the book under review, a few points are indeed heartening:

Government interventions going astray. The book is indeed filled with examples and anecdotes of the unintended consequences of government interventions in market activity, both internationally as well as in the Indian context. It’s not often that one comes across a book written in India that extols the virtues of private enterprise and abhors the role of the state (albeit in a limited way) in market activity.

The only addition I would have preferred is that even in cases where government interventions seemingly worked, private enterprises would have achieved the same objectives in a cheaper, faster and more effective manner.

Distinctions between a Democratic Vs Republican form of government: Not often is this issue even discussed under economics. In fact, when I point out that democracy is indeed a very poor way to govern, most would jump to the conclusion that I would prefer to live under a dictatorship (so much for espousing the cause of libertarianism).

Very few people, even amongst the experts in this field, would be aware that Thomas Jefferson and Company never intended the US to be democracy. They intended the US to be a republic, much like Rome (before Caesar), and the Constitution was written as a restraining force on government.

Though the authors do not explicitly say so, they seem to largely understand the perils of democracy and the rather continually declining intellectual standards of the leaders it catapults to the top.

Focus on Property Rights/Judicial System: As Mises envisaged, there are only two legitimate functions to be performed by a government

1. Protection of private property from internal and external aggressors through maintaining an effective army/police force.
2. Enforcement of contracts by having an effective and speedy justice system wherein contractual disputes can be resolved without having to resort to violence.

In identifying these two areas, the authors have indeed pointed towards the correct direction for the Indian government. I suspect most economists today would talk about building infrastructure, schools, healthcare and not the above two issues. Kudos indeed to Kelkar and Shah.

• Insights on market-evolved solutions to complex problems (eg, Elinor Ostram’s insights on self-regulating communities): there are good examples of how even complex solutions had been arrived at without having to use the heavy hand of government to force these upon the populace. Of course, Adam Smith pointed this out centuries earlier, but if the authors prefer quoting Elinor Ostrom to Adam Smith for whatever reason, so be it.

Enough of the good stuff. Let me turn to where the book has gone astray.

The Four Interventionist Straw Man Causes: The authors start with four apparent market failures (market power, asymmetric information, externalities and public goods) and go onto justify the role of government in providing solutions under these conditions. It has been repeatedly shown by both Mises as well as Rothbard that these are indeed straw-man arguments used by interventionists to justify an enhanced role for governments.

As I see it, the very fundamental premise of this book is wrong. It’s not that the above inefficiencies do not exist — but just that the markets work best in resolving them and using governments to solve the above only worsens or perpetuates the condition.

Competence of policy-makers: The great advantage of devolving decisions to markets is that choices are made by market forces at the level of citizens where every person votes with his money. In removing this power from the markets and concentrating it in the hands of individuals eventually leads to disastrous consequences.

Not for reasons mentioned by the authors, but we have had some extraordinarily incompetent men masquerading as experts. There’s no better place to start than monetary policy. We have had Reserve Bank governors such as Y V Reddy being paraded on national television as being among the best central bankers in the world when he espoused price controls as a way to manage inflation (he did this live on CNBC TV-18).

Whenever Reddy, B Jalan or D Subbarao give an interview on any serious topic even these days, I usually find it more humorous than a Jim Hacker interview (of Yes Minister fame). Of course, both Raghuram Rajan and Urjit Patel were a welcome change to this position (notwithstanding that, I wouldn’t even rate them as good).

A “Jim Grant” would be a good central bank governor. But as we saw, eventually even a modicum of independence is dealt with by the iron hand of the state.

So what are the consequences?

Starting with parity to the US dollar at the time of independence we are now in the seventies in terms of the exchange ratio. Not that the US Fed in itself has been a paragon of virtue and the dollar has fallen as much vis-a-vis gold since 1971 as the rupee has fallen vis-a-vis the dollar.

Of course, we are staring at another much steeper decline in the years ahead. Sure enough it’s fiscal profligacy that is a large contributor, but never forget that loose monetary policy is the primary enabler of fiscal recklessness.

I don’t know how having a single person deciding monetary policy or having a monetary policy committee (as Kelkar and Shah suggest) would have altered these outcomes.

I would rather say that we have competing currencies in the market alongside the rupee with gold and Bitcoin. Let the citizens choose what the best form of money/currency they prefer. And the probability that a Monetary Policy Committee will vote in favour of competing currencies is “zero”.

Style Vs Substance: Kelkar and Shah seem to suggest that the process of implementation is almost as important as the reforms themselves. Though I am not an expert in this space, this somewhat looks like a self-serving argument.

Let’s look at the biggest reform we have had since Independence — ie, liberalisation and deregulation of the 1990s. There was hardly any bureaucratic groundwork or preparation and this was pretty much pushed through the system.

Whether the bureaucracy/political class accepted these wasn’t just relevant as the markets welcomed these initiatives. My point is that when the policy is correct, people see the benefits in very short order and adjust voluntarily to the new market conditions. All of this preparatory selling is just a ruse for implementing flawed policies that promises something but delivers very little.

At the risk of deviation and to correct a major omission, almost the entire credit for the greatest reforms undertaken since independence should be placed at the doorsteps of just two gentlemen — PV Narasimha Rao and Subramanian Swamy.

Rao, for showing the political acumen to push through these reforms, and Swamy for conceptualising them. Given that Kelkar and Shah have been part of the system for ages, it would be surprising if they are not aware of the same.

Giving credit to Manmohan Singh for these reforms is just plainly ridiculous. Nothing of what Singh did prior to the nineties or subsequent to these reforms are intellectually consistent with these liberalisation steps. He just happens to be dyed-in-the-wool Keynesian and Rao just used him as an innocuous front-end to push these reforms through the political system.

Mistaken examples of government interventions that worked: Not a whole lot, but still a list that is just wrong in a very obvious way. For example, why did the government invest heavily in the public sector early on? The assumption is that capital allocation is a government function early in the lifecycle of a country — a claim that has no logic or merit.

Then there is the forced unbundling of companies (markets do this all the time on their own), medical malpractices needing government supervision (again just a shaky reason for intervention, for the markets do a much better job of weeding out the wheat from the chaff than what the governments can ever hope to do).

Let me use an example from the book itself to make my concluding remark. In one part, they discuss road accidents and how the incidence of road accidents is much higher in India.

The solution at first glance would be to build more hospitals along these highways. But as Kelkar and Shah point out, “systems thinking” would tell you that a more appropriate solution would be to make better roads that would reduce the accident rates. Fair enough.

But some more thinking should lead to the next set of questions. Why should the quality of roads be so pathetic in India? After all, it’s virtually the very same contractors who build excellent roads outside India.

In looking for answers, you will see the very “visible hand” of government that is working overtime to reduce the efficiencies and excellence that markets are always in search for.

It is for the same reasons you find bootleggers operating medical colleges and why greater bureaucracy is always seen as a solution for a poorly functioning justice system.

If either Kelkar or Shah had read and understood either Human Action (by Mises) or Man, Economy and State (by Rothbard), then I suspect they would have written a very different book with the same title.