In the final session of the class we address a question that’s been leading up to this. The question is the one that motivated my professional study of economics: why is India poor in the modern world of widespread economic prosperity?
Normative and Positive Analysis
In much of the previous part of this course, we engaged in what is called positive analysis. Positive analysis seeks to understand what the world is, how it came to be that way, and how the world is likely to evolve. In contrast to positive analysis, normative analysis seeks to address the question of how the world should or ought to be. Note that the word ‘positive’ is not a value judgement; it’s neutral and does not imply good in any moral or ethical sense.
Positive analysis has to be prior to normative analysis because the former informs the latter. If you don’t know what the past has been and why, what the present is and why, then you would not know what the future could be, or should be. If what you think the world ought to be lies beyond the possible, you are guaranteed to fail. Even if it is possible for the world to be what you want the world to be, you’d still fail in bringing about that world if you don’t know how the world works.
Among the various topics we discussed to varying degrees were these positive bits. They can neither be disregarded nor wished away without consequences:
- We humans are unique. We alone among all life on earth have the capacity to reason.
- As individuals we are all unique. We have differing intellectual and physical endowments, preferences and aims.
- Individuals act purposefully to achieve their various (often conflicting) goals using the means at their disposal in ways they judge to be most economical (meaning, ways that require the least effort.)
- All ends cannot be simultaneously attained. Doing something always involves the not-doing of some other thing. There are trade-offs.
- Every action has consequences that are intended and unintended; consequences that are seen and unseen; consequences that are immediate and those in the future; consequences that are beneficial and those that are harmful.
- Wealth does not exist in nature; it is a product of human action. Individuals, acting separately and collectively, produce wealth.
- There are no “natural resources.” All resources are created by human agency and technology.
- Production of wealth is prior to consumption of wealth.
- Humans trade. Voluntary exchange is a positive-sum game.
- Markets that have no barriers to entry and exit allow greater production of wealth.
- Prices emerge in markets.
- Prices convey information that no one can possibly know. Controlling prices is inherently stupid.
- The division of labor, division of knowledge and specialization expand the production of wealth.
- The greater the population, the greater the production of wealth.
- The world used to be nearly uniformly extremely poor (by modern standards.)
- Human population has exploded following the “Agricultural” and “Industrial” revolutions 10,000 years ago and 250 years ago, respectively. Wealth and human well-being have seen remarkable, unimaginable increases.
- Technology (understood as know-how or recipes) has enabled the great enrichment of humans globally.
- At all times, and in every part of the world, humans are motivated by their self-interest (where “self” is appropriately broadly defined and does not imply selfish behavior.)
- The backdrop of institutions define how humans actually behave.
- The growth in inequality across the world, and within every region of the world, is an ineradicable feature of the world.
- Inequality among countries has grown and will continue to grow indefinitely.
- Collectives across the world are relatively the same but their economic well-being differs immensely. Somalia and Switzerland differ more remarkably than the Somalians and Swiss do.
- Countries differ, and are distinguished by, the rules that they choose to live by. Constitutions matter.
- Countries differ in their political systems — democratic republics, autocratic, authoritarian, totalitarian.
- Countries differ in their economic systems — capitalist (or free-market), socialist (centrally planned), fascist.
- Political systems and economics systems are not rigidly linked.
- A democratic country (India, for example) could choose a socialist economic system, and an autocratic country (China, for example) could choose a capitalist economic system.
- Socialism fails. Private property in the means of production is necessary for the creation of wealth.
- Socialism fails because it is not consistent with human nature.
- Free market capitalism works because it recognizes that humans are not perfectible.
- Central planning fails. The problem is that central planners cannot know what they must know to plan.
- Profits entice the production of wealth by market participants, losses discipline them, and prices provide the information and the guidance they need to make economic decisions.
- Knowledge of the core principles of economics — that incentives matter and markets work — is required among the general population for the economic prosperity of nations.
- There are only two mutually exclusive ways of acquiring wealth: through persuasion of customers in markets, or through the exercise of political power through the use of guns.
- Equity and efficiency are not opposed. The most equitable distribution of wealth is also the most efficient.
- Socialist and communist countries are inarguably poorer compared to capitalist countries.
- People who have economic freedom are better off than people who lack economic freedom.
- There is no such thing as “the public interest.” All interests are individual and private.
- People do not magically become capable of discerning what’s true, beautiful and in the “public interest” the moment they are elected or appointed to some public office. People continue to be self-seeking and self-interested as voters, bureaucrats and politicians. People are people, and they retain their capacity, their human nature-given frailties.
- Freedom matters. The more freedom an individual has, the less power the collective has to impose its will on the individual.
- The more powerful the government, the less freedom the individual has, and consequently the less prosperous the collective.
- Political, civic and economic freedoms are distinguishable. You can have different degrees of them.
- Greater economic freedom is necessary (but not sufficient) for greater economic prosperity.
- Slavery (institutionalized or concealed) is not consistent with generalize prosperity. Slavery is good for the masters (such as government officials) but not for the slaves (such as citizens of a nation committed to socialism.)
- Every kind of government involves slavery. Some governments involve more slavery and some less. It’s a matter of degree, not of kind.
- The private sector produces the bulk of the wealth of a nation.
- The larger the public sector relative to the private sector, the less prosperous the economy.
- The private sector (the “for profit” sector) creates wealth and the public sector (the government “not for profit” sector) destroys wealth.
As I admitted before in our online sessions, I was quite ignorant of many of the basic truths of the world. It was only after I learned the basic principles of economics did I begin to appreciate how wrong I was in my thinking of how the world works, and consequently how wrong I was about what could, and should be done, to alleviate poverty and how.
For instance, I used to think that India was poor because it was “over populated” or because “India’s wealth was stolen by invaders.” If either were true, it would be an easy matter to fix those problems. But if they were not true, then assigning those as the reasons for India’s poverty would surely condemn India to continued poverty.
I should note that I never thought that the government was the appropriate agency for, and capable of, fixing India’s problems. I never fell into that trap. That was primarily because by my very nature, I am opposed to being a slave. I value individual freedom and would never agree to being ordered around, however beneficially motivated the giver of orders claimed to be.
Now I believe differently. I know why I was wrong about how the world works, and therefore I was wrong in my normative positions. For example, I thought that India needs to reduce its population growth rate by government diktat. Now I know better. I know that population growth — negative or positive — is beneficial provided it’s a natural consequence of good institutions.
I was not smart enough to figure out the answers all on my own but I was smart enough to learn from the writings of others (mostly dead white men like Adam Smith, James Madison, Ludwig von Mises, Friedrich von Mises, James Buchanan, Ronald Coase, Milton Friedman, Julian Simon, et al, for instance) and understand why India is poor.
Eventually I figured out what Indians need to do to not continue to be poor, just as many did before me.
But my knowing how the world works did not do any good. I am not powerful, rich or famous. And most importantly of all, the fact is I don’t care. If people wish to suffer, it’s their karma — that’s just a consequence of what they choose to do. If they really don’t want to actually improve their lot, so be it. Still I consider it my duty to help others who wish to learn how the world works. With that personal note, I will move on.
Just because that a solution to a problem is known does not mean that the solution will be implemented. In fact, economics explains why a solution to a problem even if it is known will not be implemented. It’s the same old line that “incentives matter.” The people who have the power to implement a solution don’t have an incentive to do so because if they implement the solution, it would lead them to lose their power.
It’s a fundamental paradox of the political power to do good: if you do the good that you have the political power to do, you lose the power once you do the good. The good only happens when there is an absence of political coercion. Therefore if you love having political power, you would not do the good that you have the power to do.
Various plausible reasons for the poverty of a country
The unavoidable fact is that nations differ in their levels of prosperity. Somalia and Sweden are distinctly different, and have been so for a great deal of time. India and China are distinctly different today although they were similarly abjectly poor less than half a century ago. We have to account for those differences objectively.
Here’s a list of reasons that a particular country could be poor. None of them — individually or collectively — are necessary or sufficient for the poverty of a nation.
- It’s a small nation. The population is less than a few million people. The nation is subject to outside forces beyond its control.
- It’s not endowed with “natural resources.” It has little fertile land, and has no mineral deposits.
- It’s geography is bad. It has no navigable rivers, is land-locked, mountainous, and has no or little cultivable land.
- It suffers from poor climate. It’s extremely hot and dry, or too cold and wet.
- It suffers from period natural disasters like tsunamis, earthquakes and volcanic eruptions that lay waste to all improvements.
- Its climate is unforgiving and unpredictable.
- It suffers continuous civil unrest and conflicts lasting decades.
- It is ravaged by frequent, devastating foreign invasions that rob it of its accumulated wealth.
- It lacks a deep history or has nothing approximating deep culture or civilization. It’s historically and culturally rootless.
- The people are too stupid, witless and uneducated to know how to produce wealth.
As noted before, some nations in the modern era are poor. That’s in contrast with the fact that for nearly all of human history, every nation was abjectly poor. Only some nations escaped the abject poverty that was the common lot of all humans for all of human existence.
The question therefore is: why and how did some people escape poverty, and why aren’t some others able to escape poverty? Specifically, the question for me was: why is India so desperately poor in this modern age?
Sure, India was as abjectly poor as the rest of the world in, say, 1700 CE. But why are other nations 10 or 30 times richer than India is now in the 21st century CE?
Examine the list of reasons that could explain why a country could be poor. None of them apply to India. India has a deep history and civilization, it has a culture that goes back millennia, it is blessed with a very benign climate, the Ind-Gangetic plain is as fertile as any on earth, it has not been ravaged by continual civil strife, by frequent natural disasters. Why then is it — today in the 21st century CE — so pathetically poor?
Let me repeat that. Why is India still so pathetically, abjectly poor? Why is it so poor not just relative to historically rich, developed countries like Sweden or the United States, but why is it so poor compared to a country like China — that was as pathetically poor as recently as the 1980s?
Your answer may differ. My answer is one word: Freedom.
India is poor because Indians don’t have freedom. Indians are not free in any meaningful sense of the term.
In the next bit, I will explore the following:
- Why freedom — and which kind of freedom — matters for India’s escape from abject poverty.
- Why Indians lack that freedom.
- What Indians should do to attain that freedom.
- Why Indians will refuse to do what they need to do to become free.