Adam Smith's Dharma

In January this year, President Sarkozy of France, former Prime Minister Tony Blair of England, and the German Chancellor, Angela Merkel, kicked off a debate in Paris on the nature and the future of capitalism. It was in response to the global economic crisis. This article--my inaugural column for the Times on Saturday--is a contribution to this debate.

The idea that an ancient Indian epic might offer insight into capitalism’s nature, on the face of it, appears bizarre. The truth is that the Mahabharata’s world of moral haziness is far closer to our experience as ordinary human beings than the narrow and rigid positions that define debate in these fundamentalist times. Capitalism is also about ordinary persons--buying and selling goods in the market place.

The Mahabharata believes that human beings are flawed and these flaws make our world ‘uneven’, vishama--making us vulnerable to nasty surprises. Duryodhana is one of the chief causes of ‘uneveness’ in the epic. Others too have their flaws--Yudhishthira’s weakness for gambling, Karna’s status anxiety, Ashwatthama’s revengeful nature, Dhritarashtra’s excessive love for his eldest son, and so on. These defects are dangerous and they drive the epic towards calamity. Investment bankers on Wall Street and rating agencies suffered from similar infirmities. And they have brought the global capitalist system to its knees.

John Maynard Keynes, the great economist, had a comparable insight about our ‘uneven’ world. He lived during the Great Depression when there were also many calls to end capitalism. The unevenness of the world is caused by what Keynes called, ‘animal spirits’, which drive businessmen to take risks, often in the face of insufficient knowledge. John Nash, the Nobel Prize winning hero of the movie, A Beautiful Mind, traced this to ‘asymmetries of information’. And this leads to crises--such as the dotcom bubble, in which many sensible persons quit their jobs in order to make a fortune. It burst in 2000 but was soon replaced by another mania of the ‘smart flippers of securitized mortgages of sub-prime properties’, which sent the world into a recession in 2007. Keynes believed that a capitalist economy left to itself is unstable, and needs state regulation.

Standard economic theory makes the mistake in ignoring the role of human passions and animal spirits. Ever since Adam Smith, classical economics has assumed that capitalism is inherently stable. People buy and sell rationally, and this results in equilibrium. Classical economics ignores vishama--that people get into manias and even paan-wallas start buying shares on the basis of rumours. When manias take over there are bubbles and when bubbles are pricked confidence falls sharply and the whole economy collapses. Hence, we need regulation to ensure people are not falsely lured into buy bad assets. This regulation, however, must not kill the ‘animal spirits’ of entrepreneurs, which is what happened in India during the ugly days of the License Raj…and we almost lost two generations.

If Keynes thinks the answer lies in regulation, the Mahabharata seeks to ‘even’ out the world through dharma. Dharma is a complex word—it means virtue, duty, law, religion depending on the context, but it is chiefly concerned with doing the right thing. The Mahabharata recognizes that it is in man's nature to want more. Dharma seeks to give coherence to our desires by containing them within an ethical life. No amount of regulation will catch all the Duryodhanas and the Ramalingam Rajus of the world. What is needed is self-restraint on the part of each actor in the market place in order to build trust within society. The sunny world of Adam Smith may have been a tad optimistic, but Smith understood the importance of trust which underlies each transaction in the marketplace. This trust is the ‘dharma of capitalism’.

Regulators and central bankers around the world are wrestling with how to reform their financial systems. They are expending huge energy in debates between the political Left and the Right when the greater divide is between conduct in accordance with dharma and adharma. It is not enough to punish Ramalingam Raju. Institutions must also develop a culture of self-restraint and reward an act of goodness--one of the very few things of genuine worth in this world.
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The writer is the author of the book, ‘The Difficulty of Being Good: On the Subtle Art of Dharma’, which examines the ambiguous moral life of India under the lens of the Mahabharata. It is being launched next week.