OUR CREDULITY AND THEIR CREDIBILITY

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OUR CREDULITY  AND  THEIR CREDIBILITY!

Dependence on Institutions

The common man has to depend on some public institutions and arrangements in day to day life. The govt and its administrative machinery, the educational system, the judiciary, the medical set-up (can we really call it health care?) are some of these. We can add others, like the newspapers, the religious arrangements and organisations etc. But these latter are not indispensable, nor are they without alternatives. But the former categories are indispensable, and we have simply no alternatives, in the normal course. 

In regard to the govt and its direct machinery, we know and experience how inefficient, indifferent and corrupt they are; we have not only no alternative,but there is an element of compulsion or force in them- indeed, a large element of hidden violence. For instance, the Income Tax dispensation now insists on on line filing of returns and providing your mobile phone number. Is it their job to collect taxes or tell us how we must file our returns or what kind of phone we must have? What is the logical connection between income tax and mobile phone? What if someone doesn't choose to have a mobile phone or on line connection? But the Income Tax dept is sarkar within sarkar and few people will dare to take them on. 

Banking - is it bunkum?

Banking is one such modern arrangement  for which most of us have no alternative. We put our savings (if any) in the banks. Yet, how safe are the banks? How safe is our money there?

There is one easy way in which the banks cheat us. The banks give us interest on our deposits. But this interest is lower than the rate of inflation. So that while we get a nominal interest, our principal is losing its value. This can be easily corrected by indexation- directly relating both the value of our deposits and the rate of interest to the rate of inflation, so that the depositor may always get his whole real deposit, and  a 'positive' rate of return ie something above the inflation, as an incentive for saving which is a sacrifice- voluntarily foregoing present consumption and material satisfaction. But our finance ministers and their babu advisers are no more than clerks- petty or glorified - and they do not think of benefiting the savers. And they are ready to slap tax on the nominal interest income too! Are not our finance ministers the biggest robbers in the country? They neatly cut your pocket- the best pickpockets ever! One former Chancellor of the Exchequer said in England that his job in taxation was to 'pluck the quills of the goose making it squeal the least'. But the modern finance ministers know better- they are smarter. They keep smiling and let the inflation do the job! As our poet Majrooh Sultanpuri sang somewhere:

Khud kaate gale subke 
Isse kehtein  business.

We may add;

In maha choron ka hain
Vittha mantri yahan naam!

This is one way our money in banks is not safe.

Taken from: www.caac-iitd/blog/wp.

Banks are inherently unsound!


But there is an even more serious problem, which few people realise- even the educated ones.

Banking activity in India starts with deposits. Deposits are a liability for the banks, on which there is interest burden. They have to be repaid on a definite date or on demand. Banks can pay interest and repay the deposit only if they earn. They earn by lending or investing- ie by creating assets. But these assets are always unsafe and uncertain! The loans cannot be recalled at will, or are not repaid on time,always, sometimes not fully,or not at all. The investments cannot be encashed at will, or at full value, sometimes not at all. The banks publish their balance sheets once a year in audited form. But that is a picture, like a still photograph as on a particular day, and is subject to heavy manipulation. One simple way is this: if on that accounting day, a big loan is not repaid,  the bank will 'reschedule' the loan, or give a new loan to enable the borrower to repay an instalment of the old loan, so that it escapes the label of 'default'. If strict standards are applied, the assets of no bank will fully match its deposit liabilities on any day, leave alone the day of the balance sheet.  If a bank is assessed as a 'gone concern', no balance sheet will stand scrutiny! The balance sheet is really no more than bull shit.

We should understand that banking is inherently unsound.

There are some good, simple souls who ask: will it not be better for the govts to own all the banks, so that there is no possibility of failure? The point is: ownership by govt. will not change the nature of banking! The tiger will be a tiger, in a private circus or a govt zoo! Govt,ownership will not change its stripes.The private circus can at least be held accountable, but no one can force accountability on the govt.

Please understand: I am not blaming any particular finance Minister or govt. I am pointing out some basic features of the system, which are normally obscured by jargon and not understood.  On paper, govt ownership of banks may appear to make the system safer, but it renders the problem worse. And it makes even more victims. The very fact of govt ownership dilutes professional standards and sound management, and leaves the field open for political interference and misdirection. There is lot of back-seat driving, The big govt is always the unseen "boss". No finance minister, or his bureaucratic minions, has been sensible enough to distance ownership from management. Those who extract honey cannot help licking their own hands! No chief executive of a public sector bank in India has had the courage to stand up to even a deputy secretary in the govt.( But they do wait upon  him, ready to please him, for their very appointment is dependent upon the minion's pleasure!)

Just consider what happens in the Indian public sector banking. These banks incur loss. Periodically, govt rescues them by infusing more money. But this is not the money of the Finance Minister or his grandfather. This is money from the tax payers! That is, the govt is using innocent tax payers' money to rescue loss-making banks and their inefficient managements!

Banking- any  banking- is inherently unsound, totally unbalanced ab initio. Let an expert speak:

.....banks, as presently set up, are always technically insolvent. They are technically insolvent from the day they open.Why? Because they accept deposits many of which must be paid back on demand, but then lend money without usually having a comparable right to get it back on demand. The result: on any given day, depositors can "break" the bank by demanding all their money back at once.

This is one of the reasons why "mark-to-market" accounting for banks makes little sense. A literal and rigorous application of it would bankrupt any bank even in normal times. When times are tough, it guarantees that the entire banking system will fail.

From: Hunter Lewis, 'Where Keynes Went Wrong', chapter 15, Axios Press, 2009.

Photo: By Hunter Lewis. CC BY-SA 3.0 creative commons via wikimedia commons.









Central Banks are the problem!


Some knowledgeable persons may honestly ask: do we not have the central banks- the Federal Reserve in the US, the Bank of England, the Reserve Bank of India? Are they not supposed to regulate and supervise the banking system? Yes on paper, no in practice. What the central banks are supposed to do is to act as 'the lender of the last resort'. They provide funds to the banks to enable them to tide over temporary difficulty.

Sealing of the Charter of the Bank of England, 1694.
Public domain via wikimedia commons.

But this should be understood carefully. The 'difficulty' may arise due to ''liquidity" or "solvency" problems. A liquidity problem may be temporary, but the solvency problem is systemic and structural.  It usually is indicative of unsound professional judgement and unsound, even dishonest management. If for instance a bank has lent money against unsound assets, or the assets have deteriorated in quality or turned unrealisable, no central bank can rescue them. No money can rescue a bank from unsound  management or professional policies or decisions or practices. What the central banks are now expected to do is to open up a tap of resources to unsound and failing banks. Because the authorities fear that a banking crisis and failure will spill over to the entire economy or society.

  This reminds us of what we see in Hindi movies. The hero at last has the villain at gun-point. The villain laughs, and coolly points out " Look". When the hero turns to look, he beholds his entire family- mother, wife or beloved, children - kidnapped and held captive by the villain's henchmen. The gun drops automatically from the hero's hands! This is what exactly happens to the banking system. The unsound banks are saved, villains in the banking system are saved, because the authorities fear that the society at large may suffer if the banks are booked. So where does the buck stop?


Alibaba and  the Forty!

 The old story's very title is instructive: "Alibaba and  Forty Thieves" - not 'Alibaba against Forty Thieves'. Alibaba is somehow part of the system.

 So, the central banks are part of the system- in fact they are part of the problem, not the solution! The central bank does not prevent a bank from lurching, especially if it is a govt. owned bank; it ensures that all banks shall lurch equally, so that everyone is in good company and no one is singled out and punished or booked! If one student misbehaves in a class, he can be booked for misbehaviour; but if the whole class misbehaves, it is not called misbehaviour at all! And it won't be surprising if the teacher is blamed for being 'too strict' and precipitating the problem!


Too big to fail? 

In the US, there is a notion- "Too big to fail". If a small bank fails, they can merge it or even let it close.But if a big one fails, it impacts so many others, so there is a blind belief that the bigger banks will not be allowed to fail. And it has happened: big American banks like the Citicorp, Bank of America,  Fannie Mae. Freddie Mac,or even Goldman Sachs have received federal funding- ie tax payers' money , in spite of all their atrocious practices.

Day 40 of Occupy Wall Street campaign, New York, 25 October,2011.
By David Shankbone (Own Work) CC BY-SA 3.0 creative commons via Wikimedia Commons.

This is typical of modern thinking; they cannot apprehend and deal with the extremists but they suspect every citizen (the potential victims) and impose restrictions on them! What must be the level of audacity and arrogance of the American authorities when an Indian Defence Minister or even a former President is subject to body search? ( Leave alone the diplomats)

In practice,it is extremely difficult, almost impossible, for a bank to recover the value of its assets, especially from the big borrowers. The legal system is such that it will take years for the case to be decided. Almost every big loan, and so called consortium loans have been problematic.

Every big bank is a rogue!

 The deposits are a definite, concrete liability. The assets are notional, their value affected by every market development, and their realisation subject to many practical difficulties.It is totally beyond any one's control or decree. The depositors' interest is secured by the quality of the assets, but this is just notional and impossible to guarantee.The so called reserve requirements are a minor safeguard but these are progressively lowered. Contrary to popular opinion, the bigger the bank, the greater the violations and misdeeds, greater their power to hide truth and defy authorities, and less the force of supervision and control over them. If strict accounting norms are applied honestly without compromise, almost every single bank will go bust! ALMOST EVERY  BIG BANK -PUBLIC OR PRIVATE- IS A ROGUE ESTABLISHMENT.

And just glance at the newspapers to see all the controversies and misdeeds about our educational set-up, the judiciary, the police dept, the Lok Ayukta, the sports bodies, the dysfunctional parliament, the big hospitals and their nexus with the drug companies, etc. Is anything clean any more in this country, including the Ganga?

Thus in the end, all the systems on which we depend prove to be undependable. It is our helplessness which sustains them. It is our credulity which lends them credibility!

NOTE:

A fair deal for the saver?

Sukhamoy Chakravarty.
Picture from The Telegraph. July 1, 2013

In the  mid-eighties, before the reforms were initiated, the Sukhamoy Chakravarty Committee (appointed by Reserve Bank) on Monetary System noted the importance of linking interest rates with inflation, and ensuring that savers got a 'positive' rate of return on their savings. Throughout the 60s and 70s Indian savers were hit both by savage rates of taxation, and rates of interest consistently below the rates of inflation. The Reserve Bank too made appropriate noises. But it is a toothless tiger even on paper, and a mere vassal of the finance ministry. The govt only manipulates the figures of inflation and does not approach the issue of interest rates openly, honestly , fairly or even intelligently. The savers are in the lurch, as ever, helped neither by the Reserve Bank, nor by its boss, the finance ministry. What does the finance ministry and its bureaucrats know about how people suffer due to inflation? Their salaries and perks are insulated against inflation. 

Goody-goody fellows are good for nothing!

There is some further irony here. The Sukhamoy Chakravarty committee was appointed when Man Mohan Singh was the Governor of the Reserve Bank. The committee appointed by the RBI cut no ice with the govt or its bureaucrats, who are a law unto themselves. Later, Man Mohan Singh became the Finance Minister. Still later, he became the Prime Minister. But he did nothing- absolutely nothing! This is the regard these people have for the public.

Malum kya kisiko, dard e nihal hamara?- Sahir Ludhianvi.


POSTSCRIPT: 1 August, 2015.

Please read the section above, on 'Banks are inherently unsound'.

The above was posted on 25 July. We have the news today 1 August, that the govt is planning to infuse Rs. 70,000 cr. to recapitalise the public sector banks over the next four years. (Times of India, Bangalore edition, p.21) The Finance Minister says that the govt in the past  were "talking" and that he is now implementing! The previous govt  had a different disposition, but  this FM  from a different political outfit merely continues those old policies. So, whichever party comes to power, some old habits will continue! Because, it is the same old bureaucrats who rule!

 Previously, the dog barked; now it is biting- but it is biting the wrong people! He is taking tax-payers' money to rescue habitually loss-making govt owned banks! Throwing good money after bad money, and on bad managements! No one in this country is questioning the ethics of this arrangement.

The reason given by the FM shows how silly reasoning can get! He says that the banks are grappling with mounting bad debt and so are going slow on sanctioning loans. He is helping them out. This is the classic  liquidity- solvency problem and what can one say about the wisdom of the ministers and bureaucrats who cannot handle this, except by doling out the tax-payers' money!

 The more honest and sensible arrangement to rescue the banks would be to let the banks seek funds through the market, from the public direct. That will show how "public" these govt banks are! And if the public do not come forward to rescue the 'public' sector banks, why should the govt pour tax-payers' money into this bottomless pit? For whose sake is the govt continuing to own these loss-making banks?

The report also says that Governor of the Reserve Bank told reporters that "it is a good beginning". I said above that Central Banks are part of the problem! It seems that we now have two Ali Babas to rescue the Forty. There is none to take care of the interests of the lakhs of tax payers.

KARMA OF ECONOMICS OR KARMANOMICS !

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KARMA OF ECONOMICS or KARMANOMICS!

Karma- three types

Theory of Karma is basic to all Indian religions which share the idea of Dharma too- Hinduism, Buddhism, Jainism. At one level it simply means that what we sow, we reap: as they say in Hindi, 'jo hai karta, wohi bharta'. So we create our own destiny. And karma here includes thoughts, words and actions.

Birth is due to Karma. It is Karma which accounts for all the differences  we observe in the world. That one is born in a particular place, time, society and culture, religion and language, and to particular parents, is no accident. 

Karma is classified into three types. Over many births- indeed countless births- we have accumulated lot of karma, good and bad. They are like the mountain. This is called "Sanchita" karma.

 The good and the bad do not cancel each other out, but have to be faced separately!  No one can exhaust all of it in one or even in a few births. So, God  kindly assigns a small portion of both the good and the bad ones  to each birth, such that it can be borne in a lifetime. So, we have a mix of pleasure and pain, joys and sorrows, highs and lows. As the celluloid poet Rajendra Krishan wrote: " Wah re Malik, sukh aur dukh ki khub banayi  jodi". What we bring in each lifetime, what we work out in each lifetime, what causes each birth is termed "Prarabdha". It is likened to a released arrow- once released, its direction cannot be changed!

But in the course of life, in the very process of living, we are performing and creating more karma! The situations we face are due to karma,but how we face and meet them, how we react to them determine our future karma!  When we return violence for violence, we are creating karma! That is why the great Buddha said: hatred ceases only by love, not by hatred! This is the eternal law! So the karma we are creating now is called "Aagaami".

So the eternal wheel of karma runs! And there is no respite from  the cycles of birth and death, till the  stock of karma is exhausted.

Karmanomics!

A little thought will show that the same principle applies to economics! Each country, and  geographic region within each is endowed with some natural features, which can be taken as both its strengths and weaknesses or limitations. An island, a mountainous region, a country with large arid or desert regions- each faces a sort of limitation. But over millennia, people have learned to live with and overcome all sorts of limitations. And some converted the limitations into opportunities - as when England, a small island became a naval power and created the largest world empire, or when Japan, another group of volcanic islands became a world economic power. Compared to these, the US is nothing but a big joke!  As an economic power, It is a product of two world wars and the Cold War.

Perhaps, the greatest example of a people creating history overcoming their natural limitations is ancient Greece.Greece was not one nation in the modern sense of the term- it was a group of islands and cities  on the coast spread out over a vast area- there was never a big kingdom or empire for long, as in the case of Rome. As a modern scholar writes in a recent book:

the ancient Greeks spanning two thousand years from about 1600 BC to AD 400. They lived in thousands of different villages, towns, and cities, from Spain to India, from the freezing river Don in the northern corner of the Black Sea to remote upland tributaries of the Nile. They were culturally elastic, for they  often freely intermarried with other people; they had no sense of an ethnic inequality that was biologically determined, since the concept of distinct "races" had not been invented. They tolerated and even imported foreign gods. What united them was never geopolitics,either. With the arguable exception of the short-lived  Macedonian Empire in the later fourth century BC, there never was a recognizable state run by independent Greek speakers, centered in and including what we now know as Greece, until after the Greek War of Independence in the early nineteenth century. What the ancient Greeks shared was their polysyllabic and flexible language, which still survives today, in similar form, despite centuries of serial occupations of Greek-speaking regions by Romans, Ottomans, Venetians, and others. The stamina of this language, by the mid-eighth century BC, was underpinned by the universal Greek familiarity with certain poems composed in it, especially those of Homer and Hesiod. The major gods celebrated in these poems were taken by the ancient Greeks wherever they settled, and worshipped in sanctuaries with sacrifices.

  Edith Hall,  Introducing the Ancient Greeks (preface) . The Bodley Head, London, 2015. 

So, nations create their karma in the ways they organise their economy, though initially it might be a "given".

Live within means, and exchange sensibly

Most countries of the world lived within their means, with all given limitations but used trade and exchange to buy their essentials with  their surpluses. But when greed overcame strict need, and countries started trading for profit, all trouble arose.  Countries could reap profits in the short term, but over long periods, this is bound to result in disaster.

Japan is an example of a country without much of natural endowments by way of minerals, yet Japan advanced industrially by importing its requirements and developing its technology. But since the domestic market was not adequate to sustain these operations for long, they had to seek foreign markets for exports. Fortunately, the development of their consumer electronic  industry resulted in some innovations like the 2-in 1 radio-tape recorder, or the CD and they enjoyed a virtual monopoly for a time. But further technology has rendered them obsolete. The oil-price shock of the 70s gave them the chance to develop  the 'fuel-efficient' automobile and again they enjoyed a lead. But here too other nations have caught up. But the cost of such prosperity has been very high: high incomes have pushed up the cost of living, and even rented accommodation is unaffordable for many Japanese youngsters, who have to delay their marriages because accommodation is not available! And what can Japan do with all their current income, which they cannot invest at home? So, their industries seek to locate outside Japan. Korea, Vietnam and others are more or less similarly placed- with rather small domestic populations (ie limited local markets) and their industries can be sustained only by exports!  China is huge, but modern technology is such that it cannot employ all the available labour if it is to meet only its domestic requirements, and  China too survives by exports. But now,both Japan and China are slowing down.The lesson is, most economic advantages derived out of international trade conducted for the sake of mere profit are transitory. The only basis and true justification for enduring international trade is genuine need. We have to obtain what we lack by exchanging what we have or can make in excess of our own requirements. All else will end up hurting some one, including ourselves. And it certainly damages the environment.

When a country alters its basic economic structure, it is creating a future which is unpredictable. The US was a huge agricultural economy till about the first decade of the 20th Century. The two world wars changed its complexion; it became an industrial economy; the Cold War propelled it further into a  military power. Just one piece of statistics is revealing: In 1870, 70-80% of the population was employed in agriculture. In 2008, less than 2% of the people were directly employed in agriculture! But due to fast changing developments  in technology , employment in industry is falling! Look at these figures:

(Two largest sources of employment in the US are wholesale and retail trade).

For a contrast , look at India:

By Tracy Hunter (Own Work) CC BY-SA 4.0 creativecommons via wikimedia commons.
 But if you look at the figures of contribution to GDP, this is what it is:

Source: www,slideshare.net/ammardalvi

The percentage of population employed in agriculture is not even mentioned in the case of US, in the statistics provided by the Bureau of Labour Statistics! It is because, it employs less than 2%, even though agricultural produce is a major US export! American agriculture is almost totally mechanised. And the farms are huge in size- the  mean size is about 400 acres. Contrast this with India, where 53% of the people depend on agriculture for employment, and most of them are small and marginal. What would happen here if our agriculture too is mechanised, as many modernisers want!

Countries are different

To go merely by the figures of contribution to GDP is totally misleading, when we have to deal with the big issue of employment, in a country with a seething population of 120 crores, and still growing. 

A  random selection of 10 countries on the basis of GDP-PPP
By Aeroid (Own work) CC BY-SA 4.0 creativecommons via wikimediacommons.

Economic comparisons between different countries  are not sensible.Each country is differently situated and does not lend to easy or meaningful comparison. The US employs less than 2% of the population in agriculture, compared to 53% in India. Does that mean the US is more efficient or better? Most Indians have a feeling that industry is superior to agriculture, just as they feel engineering is better than studying humanities or social sciences. This is a form of popular superstition, as agriculture too is an industry!

 But what is the logic adopted? Indian education is job-oriented and the prospect of immediate employment and good remuneration prompts the selection of the subject. For ten years, there was a mad rush for IT,but in the last two years the market has cooled, and in many colleges seats have remained unfilled. Lakhs of teachers' posts remained unfilled in the country and if that is taken up in earnest, humanities and social sciences will get immediate boost, because most teachers require those skills, not engineering. How the economy shapes depends on how  and how well it is managed, not only on what it is to begin with.

Our solutions to problems create more problems!

The way we tackle a problem often creates more serious problems in the future. The govt planned for the orderly growth of Bangalore in the 40s and 50s through the creation of statutory bodies. They formed new layouts, with necessary   infrastructure, water supply, sewage disposal etc. before sites were allotted. But in the late 70s, due to political greed, the system broke down. Layouts were formed in a hurry, even roads were not provided, and there was no official water supply, but sites were allotted and people were forced to take up construction. Private lay outs also proliferated, which did not get official water supply. Bore wells became the main source of water.  The whole water table has gone down, and in many areas the bore wells do not yield water or the water is polluted.  The problem is compounded by allowing high rise buildings everywhere. This is the case in almost all urban areas in India. We have only managed to intensify the problem. This is just one example. 

Both these pictures from MailOnline India.
5 March, 2013.
This is the state of India's Capital!

The urbanised, English educated Indian has his scale of values. He would rank the services, industries and agriculture as his order of importance. Today, both in his opinion and in the view of the general public, IT sector occupies the top position, always except the higher ranks of the bureaucracy. They consider the literate urban worker to be superior to the farm hand, just as they rate an English educated person as superior to one merely knowing the native languages. However, this is based on a narrow view. Writing in 1776, Adam Smith compared the urban industrial worker and the farm hand and the found the latter superior:

....branches of country labour require much more skill and experience than the greater part of mechanick trades. The man who works upon brass and iron, works with instruments and upon materials of which the temper is always the same, or very nearly the same. But the man who ploughs the ground with a team of horses or oxen works with instruments of which the health, strength, and temper are very different  upon different occasions. The condition of the materials which he works upon too is as variable as that of the instruments he works with, and both require to be managed  with much judgment and discretion. The common ploughman, though generally regarded as the pattern of stupidity and ignorance, is seldom defective in this judgment and discretion. He is less accustomed, indeed, to social intercourse than the mechanick who lives in a town. His voice and language are more uncouth and more difficult to be understood  by those who are not used to them. His understanding, however, being used to consider a greater variety of objects, is generally much superior to that of the other, whose whole attention from morning till night is commonly occupied in performing one or two very simple operations. How much the lower ranks of people in the country are really superior to those of the town, is well known to every man whom either business or curiosity has led to converse with both. In  China and Indostan  accordingly  both the rank and wages of the country labourer are said to be superior to those of the greater part of the artificers and manufacturers. They would probably be so every where, if corporation laws and the corporation spirit did not prevent it.

The Wealth of Nations, Book I,x.

The Ploughman! from: https://endlesslightandlove.files.wordpress.com

We only have to think of the modern 'techie' , instead of the old mechanick that Smith spoke of in his day! How limited is his bundle of knowledge, confined to standard packages on a standardised system of standardised equipment, procedures, products and practices! Yet the urban culture considers him to be superior! Smith says here that this superiority is due not to merit but urban manipulation (corporation laws and spirit!).  And it is revealing to know that in Smith's day- in the 18th century- the agricultural worker in India (Indostan) was ranked superior to the town worker! Yet, in the 21st century, the agriculturist is led to commit suicide by the atrocious policies of the urban dominated, urban oriented politician and bureaucracy.

Indian ploughing-as it used to be! Now, it is getting mechanised!
Picture credit: www.thevillage.website.



The above view of Smith was no isolated thought. Ten years earlier, in 1766, he had said:

There are some inconveniences, however, arsing from a commercial spirit. The first we shall mention is that it confines the views of man. Where the division of labour is brought to perfection, every man has only a simple operation to perform. To this his whole attention is confined, and few ideas pass in his mind but what have an immediate connection with it. When the mind is employed about a variety of objects it is some how expanded and enlarged, and on this account a country artist is generally acknowledged to have a range of thoughts much above a city one."

(Lectures on Jurisprudence, 328)

Nor was this an unusual view. It was shared  by the Scottish Enlightenment philosophers. Adam Ferguson wrote in his 'History of Civil Society' :

Many mechanical arts, indeed require no capacity; they succeed best under a total suppression of sentiment and reason; and ignorance is the mother of industry as well as of superstition.

Prof.Adam Ferguson, 1723-1816  Wikimedia commons.

Adam Ferguson also said:

Manufactures accordingly prosper most where the mind is least consulted, and where the workshop may, without any great effort of imagination, be considered as an engine, the parts of which are men.

Well, did this inspire Charlie Chaplin?

This is indeed very well said. 'Educated' Indians share many superstitions. One is that English  education somehow makes one more intelligent.  Another is that industry is superior to agriculture. A third is that GDP really measures economic well being. A fourth is that  countries can be compared on the basis of their GDP.And perhaps, the top superstition is that our economic problems can be solved by economists, or politicians  or bureaucrats, or by a combination of all of them, even with the addition of scientists. Every modern country if full of all these categories of idlers, and yet no country is free from economic problems. It is Karmanomics which prevails!

ADAM SMITH & ADAM SMITH

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ADAM SMITH & ADAM SMITH

Most of us are likely to have heard of this name 'Adam Smith'. Educated people, with the habit of reading newspapers, would have come across this name since the nineties when India is supposed to have launched on liberalisation, Both its votaries and opponents invoke his name either as the hero- author of free enterprise, advocate of laissez-faire economics, or as the villain who paved the way for capitalist exploitation. And , as usual in such cases, both are wrong; neither have read, or understood Adam Smith.

Adam Smith, the moral philosopher

Adam Smith was not an economist, in the sense that word is understood today: a professional idler, inventing airy theories which explain nothing , help no country- a set of people covering their ignorance with high jargon and even higher mathematics,so that no one would understand and call their bluff! Rightly did John Kenneth Galbraith say that economics was useful as a source of employment for economists! The more miserable the economy, the more prosperous are the economists! They multiply and flourish where the economy flounders and sinks! Half of them create the problems which the other half pretends to solve. The problems keep growing or showing up in new guises, and so does their tribe! They are so creative that where they do not understand a problem, and cannot solve it, they create new games and invent new names. Churchill once quipped that the word 'deflation' had become unpopular and so they called it 'disinflation'. When this word also became unpopular, the Chancellor of the Exchequer would call it 'nonundisinflation'. Unfortunately today, neither our equivalents of the Chancellor of the Exchequer nor his lorry-loads of economic advisers and the bureaucratic henchmen are capable of even such invention! It is nice entertainment- where the economist will propose and the babu will dispose- they don't need a god or devil for this!

Gem from Scotland.

No, Smith was not an economist at all. He was human, and sensible. He was Professor of Moral Philosophy at Glasgow.He belonged to an extraordinary band of Scottish thinkers who grappled with human problems and tried to find solutions outside the framework of religious theology, adopting empirical methods. 

David Hume and Adam Smith.
National Portraits Gallery of Scotland.
By Kim Traynor, (Own work)CC BY -SA 3.0 creativecommons via wikimedia commons.

18th century Scotland was a heady place to be in- the intellectual climate was so dazzling, with philosophers like Francis Hutcheson, David Hume, George Turnbull, Thomas Reid, Henry Home, Adam Ferguson, and Dugald Stewart stirring the mind. Adam Smith cannot be understood except in this background. Horace Walpole said in 1758: "Scotland is the most accomplished nation in Europe". And Voltaire declared: "It is to Scotland that we look for our idea of civilization".

Smith stumbled on to economics through his preoccupation with moral or social philosophy. His basic interest was how to make human life better-  " that great purpose of human life which we call bettering our condition". He did not regard man as an economic animal, as subsequent economists did, and still do.

The Theory of Moral Sentiments

He found it necessary to first understand human nature as the  key to betterment of their condition, and the economic element was an important  factor, but not the sole element. His fundamental ideas are stated in his first book "The Theory of Moral Sentiments" (1759). His name got established on this publication, seventeen years before he published the more famous " The Wealth of Nations". 'The Wealth of Nations'  is not a stand-alone, and cannot be understood except in the light of the former.

                                      Cover of the publication by Filiquarian                                              Publishing,Llc., 2007.

Smith found that human beings are endowed by Nature with certain tendencies and propensities. Most human beings have a natural sympathy for others- to be happy when others are happy, and to feel sad when others are so. This is a sort of fellow-feeling. Yet, this feeling is  not as though he is himself  having the real happiness or pain of the others. At the same time, there is also a tendency to regard the self above the others, and make its interests the main concern- this is where self-interest is converted into pure selfishness. This can lead man to hurt himself, and hurt others. Religion, morality, ethics teach man to keep self -interest within limits, so that they would not harm themselves. Justice and law are there to ensure that one's preoccupation with self does not result in harm to others. It is because man is thus endowed with some natural sympathy that social life is possible; but a strong base of law and justice is required to keep undesirable tendencies in check. As man develops his moral character, he is able to follow self- imposed discipline.A  cultured person obeys the traffic rules not because there is a policeman. Thus fundamental to a good life is the cultivation of moral character. Man seeks approval of his fellowmen, but he also realises that he has to become worthy of such approval. Says Smith:

Nature, when she formed man for society , endowed him with an original desire to please, and an original aversion to offend his brethren. She taught him to feel pleasure in their favourable, and pain in the unfavourable regard. She rendered their approbation most flattering and most agreeable to him for its own sake; and their disapprobation most mortifying and most offensive, (III.2.6.)

This desire of the approbation, and this aversion to the disapprobation of his brethren, would not alone have rendered him fit for that society for which he was made. Nature, accordingly, has endowed him not only with a desire of being approved of, but with a desire of being what ought to be approved of; or what he himself approves of in other men. (III.2.7)

(The Theory of Moral Sentiments.)

Thus, as man grows in his moral being, he develops a conscience. As people develop on these lines, it results in general morality or rules of social behaviour.One may say this is what religion ultimately aims at teaching man: Do unto others what you would like others to do unto you. The systems of our law and justice seek to maintain and reinforce.such a framework.

Economic life based on deception!

One aspect of this "better life"  certainly has to do with our livelihood- the economic life. We seek to increase our possessions and material comforts. Here Smith pointed out a basic paradox: such quest for continuous increase in our material comforts was not likely to be realised, but it is this deceptive quest that keeps the economy going!

......it is well that nature imposes upon us in this manner. It is this deception which rouses and keeps in continual motion the industry of mankind. It is this which first prompted them to cultivate the ground, to build houses, to found cities and commonwealths, and to invent and prove all the sciences and arts, which  ennoble and embellish human life, which have entirely changed the whole face of the globe. (IV.1.10)

It is thus man's nature to work for his betterment. It is  here that Smith entered into the economic realm which he developed fully in 'The Wealth of Nations'.  (We will call it WN) His economics is thus an aspect of his moral or social philosophy.

An Inquiry into the Nature and Causes of
The Wealth of Nations!

WN is a BIG book, running into a thousand pages. But his basic propositions are simple. The bulk is because of his analytical skills, historical analysis, and his eagerness to explain himself clearly and fully. And then account for the language and usage of the 18th century. The result is a masterpiece of social philosophy, economic analysis, economic and social history and literary genius.

Smith found the key to human prosperity in human industry. He begins WN with this:

The annual labour of every nation is the fund  which originally supplies it with  all the necessaries and conveniences of life which it annually consumes,and which consists always  either in the immediate produce of that labour, or in what is purchased with that labour from other nations.

(Introduction and plan)

...the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather precisely the same thing  with that exchangeable value. (WN, Book IV, Chap.II)

The picture is from National Portraits Gallery, London.


These are  tremendous sentences which at once lay the foundation of a theory of value, theory of annual national accounting, international trade, etc.

Self-interest and public good

Smith found the key to productivity in the division of labour and the resulting specialisation. But human industry can flourish only when it is given freedom. Accordingly Smith advocated freedom for enterprise. Govt runs through bureaucrats and they cannot do better than what people themselves can do. When there are many players in the market, and there is competition, it will ensure that the common interest is served.

Here, Smith revealed himself as a social philosopher. He understood that man seeks his own satisfaction; but in society this is not possible unless he also contributes to the satisfaction of others! In a paragraph of great beauty, he said:

In civilised society he stands at all times in need of  the cooperation and assistance of great multitudes , while his whole life is scarce sufficient to gain the friendship of a few persons.....man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail  if he can interest their self-love in his favour.....It is not from the benevolence of the butcher, the brewer, the baker that we expect our dinner, but from their regard for their own interest. (Book I, chap.II)

Man no doubt begins with self-love, but there is something in society which somehow converts this self-love (care: not selfishness) into mutual satisfaction of desires. It is my very regard for my interests  which makes me cater to the other person,without whom my interests remain unfulfilled. Later, Smith made a more daring statement.

The Invisible Hand

As every individual....endeavours as much as he can  both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value, every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it.....he intends only his own gain, and he is in this, as in many other cases,led by an invisible hand to promote an end  which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. (Book IV, chap.II)

Many people have quoted this phrase "invisible hand" out of context, without understanding it, perhaps without having even read it. It is not as though he intended the gods to correct the greed of men; it is that in a decent society, no one can live for himself and his own good is possible only when he serves the good of others and there is indeed such a mechanism operating in nature. On the contrary we have seen how the public sector organisations start with the grand intention of contributing to welfare, and end up swallowing tax money and feeding bureaucrats and as the pocket borough of some politicians. We see here Smith asserting himself as the social philosopher that he really is, with confidence in the decency of man in civilised societies. He did not regard man as primarily a utility enhancing animal, into which  modern economists have converted him.

Leftist lies

Adam Smith is painted by the leftists as the patron saint of the die-hard capitalists. In this, the leftists are totally deranged and dishonest. Smith lived in an age of mercantilists, where a group of wealthy merchants and industry owners controlled the govt and dictated the policies. He was strongly reacting against this: he pleaded that the economy is best served by making people free, so that their natural propensity to work for their interests would result  in prosperity. He wanted a large number of small players, not a small group of influential merchants and manufactures to corner and control the economy. He unequivocally said that : 

"the oppression of the poor must establish the monopoly of the rich".; and "profit is always highest in the countries which are going fastest to ruin".

 He said that people of the same industry or trade seldom met together but the meeting always ended in a conspiracy against the public! Smith made a distinction between the profits of honest enterprise, and 'pernicious gain'. The way to control enterprises was not through more laws or regulation, but through freedom and competition.

Duties of the govt.

Smith was very clear that the govt (Sovereign) was not endowed with  the wisdom or knowledge  to discharge the "duty of superintending the industry of private people".

Regarding the overall objects of the economic system,he said:

Political economy, considered as a branch of  the science of a statesman or legislator, proposes two distinct objects: first, to provide a plentiful revenue  or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth  with a revenue  sufficient for the public services. It proposes to enrich both the people and the sovereign. (Introduction, Book IV)

 He clearly said that the govt had only three duties:

• the duty of protecting the society from the violence and invasion of other independent societies
• the duty of protecting every member of the society from the injustice and oppression of every other member.
• the duty of erecting and maintaining certain public utilities and public institutions, which individuals could not do.

But those who run the govt are not the best of people. About politicians (and, we may add, bureaucrats-their side-kicks), he said:

They have little modesty; are often assuming, arrogant,and presumptuous; great admirers of themselves, and great contemners of other people....how easily the multitude are imposed upon by the most extravagant  and groundless pretensions.

 But the philosopher that he is, he states::

What institution of government could tend so much to promote the happiness of mankind as the general prevalence of wisdom and virtue? All government is but an imperfect remedy for the deficiency of these.

Wisdom and virtue! These words immediately remind us of Socrates and Plato!

Philosophers: Smith and others

In a sense, Socrates and Plato were not practical. And philosophers ever since have been even less wise and less practical. Smith is merciless about them. In 'The Moral Sentiments', he said that thinkers :

reduced their doctrine into... a technical system of artificial definitions, divisions and subdivisions.

In Smith's view, this is:

"one of the  most effectual expedients, perhaps, for extinguishing whatever degree of good sense there may be in any moral or metaphysical doctrine.

Echoing these thoughts in WN, he says:

There is nothing so absurd....which has not sometimes been asserted by some philosophers.

Philosophers are apt to cultivate with a peculiar fondness, as the great means of displaying their ingenuity, the propensity to account for all appearances from as few principles as possible.

This is where Smith scores over all philosophers. Most of them build systems, are lost in their ideology, confuse their opinions for reality, and end up hopeless idealists or utter pessimists. Smith avoided all these dangers. He had his ideals, but never lost touch with reality. There are two sides to his work. On the one hand , he knew how the good economy should be; but he also knew human nature. He knew he had to work with people as they are, and did not try to mould them into an ideal. He identified their strength ( regard for self-interest, for example); instead of condemning it and  trying to eradicate it, he tried to see how it could be used to further society's interests and he did identify such a principle. He knew merchants and manufacturers had their interests first; but instead of finishing them  off as leftists claim to do, he found a way to check them: freedom and mutual competition. He knew the govt was necessary, but he laid down what it was necessary for it to do. He was for free trade, even between countries and laboured to show how it was always beneficial for both; but he did work as the commissioner of customs! He knew that people in general had a fellow-feeling,but he also knew that it was not strong enough to check wrong tendencies. Freedom, Competition and Justice- these are the three elements of his economic prescriptions.

Adam Smith, the Man

National Portraits Gallery, London.

Perhaps, the greatest aspect of Smith was as a Man- more than a philosopher and economist. He led a clean life. He began as a professor in Glasgow, and he was such a popular teacher that people came from even Russia to sit in his classes. He was highly principled. He got appointed as tutor to some Duke and had to accompany him to France. So he gave up his post. But since it was mid-term, he did not want to retain the full fees that the students had paid, He tried to refund them. But he was so highly regarded, that the students would not accept it! But he caught hold of the nearest fellow and thrust the money in his pocket!

Some incidents bring out his sterling character. He was given a life-pension by the duke for his tutoring; the duke had high regard for him. Later, the duke got him appointment as commissioner of customs- a post his father had held! Immediately, he wanted to return the pension. But the duke would not hear of it- for , he did not want to give the impression that he got him the post to save the pension! And as commissioner of customs, Smith realised that all his clothes were of smuggled fabric- including his handkerchief!- which was against customs regulations! He burned all his clothes!

Once unfulfilled in love, he remained unmarried, devoted to his mother and sister and the family. He spent most of his income on charity, which people came to know only incidentally,or later. That he gave a distant relative 200 pounds ( nine months' pension) to save him from selling his army commission to meet his upkeep, we came to know only when his letter was auctioned in 1963!

We read nice words -very nice words- uttered by philosophers; but what we learn about them is not always edifying. 

Most people who are studied in the history of philosophy are known for their ideas, not for personal contribution.( ie character or conduct.) What one knows about people like John Locke,Kant and others would not inspire any admiration. What we know of figures like Descartes, Hume, Hegel, and Russel is not always commendable.

(Richard Popkin: Spinoza, p.124 Oneworld Publication)

What a pleasant contrast it is to read about Adam Smith, besides reading his works! He is one we can admire not only for the nature of his thoughts and contribution but also for the quality of his life. We can proclaim with Shakespeare:

His life was gentle, and the elements
So mixed in him that Nature might stand up
And say to all the world, "This was a man".

(Julius Caesar)

When comes another such,
In whom qualities of head and heart match?