Tuesday, January 12, 2010

Relax, capitalism is not the problem

The epic, Mahabharata, thinks that human beings are fundamentally flawed and their faults make the world ‘uneven’ (vishama). As a result they are vulnerable to nasty surprises. Duryodhana is the chief purveyor of ‘uneveness’ in the epic, but the others also contribute to it in good measure—Yudhishthira cannot resist gambling, Karna suffers from status anxiety, Ashwatthama has a revengeful nature, Dhritarashtra is prone to excessive love for his eldest son, and so on. These human defects drive the epic towards calamity. Like the Mahabharata’s characters, investment bankers on Wall Street, rating agencies, and even regulators suffer from similar failings, and it is these dangerous infirmities that brought the global capitalist system to its knees in 2008.

A year ago the world was unravelling. People predicted that it was the end of the road for global capitalism. They forecast political collapse in many emerging markets. President Sarkozy of France, former Prime Minister Tony Blair of England, and the German Chancellor, Angela Merkel, kicked off a debate in January 2009 on the nature and the future of capitalism. Now, just a year later, the doomsayers have turned out to be wrong. The world economy is reviving, and India, China and other emerging markets are at the forefront of the recovery. Governments deserve much credit for having learned the lessons of the Great Depression of the 1930s and for expanding state support to their economies and have buffered the damage. In India some of this buffering did not happen by design, but by accident, as a result of the Congress party’s strategy of state spending via loan waivers, 6th Pay Commission, and NREGA, all the measures designed to win an election, including the raising of interest rates much before the crisis, which succeeded in slowing our growth rate.
John Maynard Keynes, the great economist, had a similar insight as the Mahabharata about our ‘uneven’ world. He lived during the Great Depression when there were many calls to end capitalism. The unevenness of the world is caused, he said, by ‘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’. 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 replaced a few years later 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 world’s vaishamya, brought about by 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. It forgets 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 do need regulation to protect people from themselves—to ensure they are not falsely lured into buying 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 thought that 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 ordered existence. 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 a 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. Self-restraint is one of the meanings of dharma and the trust that it helps to create is the ‘dharma of capitalism’.

The market is based upon trust between buyers and sellers. The buyer trusts that the product will perform and the seller trusts that the buyer’s cheque will not bounce. This moral under-pinning is what the epic calls satya, ‘truthfulness’, which helps to balance the animal spirits and bring about stability. This is the middle path of reform that Keynes also recommends, not the utopian path of socialism.

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 as well an act of goodness--one of the very few things of genuine worth in this world. A life lived according to dharma diminishes the vulnerability of human beings to the ‘unevenness’ of the world.

The idea that an ancient Indian epic might offer insight into capitalism’s nature is, on the face of it, 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. The choice for policy makers is not between free markets and central planning but in getting the right mix of regulation. No one wants state ownership of production where the absence of competition corrodes the character even more. Dharma's approach is not to seek moral perfection, which leads inevitably to theocracy or dictatorship. Human beings need a coherent world to order their existence. They want good acts to be rewarded and bad ones punished. Good regulations should not only catch crooks but also reward dharma-like behaviour and the nobility of character. The point is not to throw out capitalism but to keep reforming it.

Gurcharan Das is the author of The Difficulty of Being Good: On the Subtle Art of Dharma,

Friday, January 01, 2010

Future is Ours To Seek

Two trends, one good and one bad, have defined India’s first decade of the 21st century. The good trend is that prosperity has begun to spread, largely as a result of high economic growth. The second trend is the simultaneous rise in corruption. The lazy minded will connect the two trends, but in fact they are quite independent. High growth has been fostered by economic reforms and corruption is due to the lack of the reform of state institutions.

For the first time in history Indians are beginning to emerge from a struggle against want into an age when the large majority will soon be at ease. Like many parts of Asia, India too is slowly turning into a middle class nation. This is not happening uniformly--Gujarat is well ahead of Bihar, but even Bihar will catch up. At that point poverty will not vanish, but the poor will come down to a manageable level and the politics of the country will also change. This is the good news.

The bad news is that prosperity is spreading alongside the most appalling governance. In the midst of a booming private economy, Indians despair over the delivery of the simplest public services. It used to be the other way around. During our socialist days we despaired over economic growth but we were proud of our institutions. Today, the Indian state is in steady decline. Where it is desperately needed--in providing education, health, and drinking water--it continues to perform appallingly. Where it is not needed, it is hyperactive in tying us in miles of red tape.

When I speak of governance failure, I am not thinking only of the politician--Madhu Koda--caught with a bribe. Almost every transaction of the Indian citizen with the state is morally flawed. I have to renew my driver’s license in a few weeks and I am already worried if I will have to bribe someone. It is the poor, however, who depend most on public services and are the least capable of paying bribes. Year after year Transparency International ranks India amongst the most corrupt. In 2005, of the 11 public services it surveyed, India’s police were the most corrupt with 80% of the citizens admitting that they had to bribe someone in the police to get their work done. 40% had paid a bribe to influence the legal system. One in three parents reported bribing a government school or primary health centre. Yet it is these schools and health centres where one in four teachers is absent and where two out of five doctors do not show up. A farmer in an Indian village cannot hope to get a clear title to his land without bribing the patwari or talathi. It is only when I discovered, however, that one out of five members of the Indian parliament in 2004 had criminal charges against him did I lose hope.

What is eating away at our moral fabric is thus not the big scam which grabs the headlines—jehadi terrorism, Gujarat 2002, Naxalism. It is these quiet, everyday failures. When a school teacher is absent, he wounds the dharma of our society, which has always regarded the guru on a pedestal. He also gives his students a terrible lesson in civic virtue. Governance failure is both institutional and moral. If you punished one absentee school teacher, the others would show up. But to teach with inspiration, you need the call of dharma. Artha, material well being, and dharma, moral well being, are two out of the four aims of the sensible Indian way of life. While artha is rising, dharma has been falling during the past decade.

Hence, the reform of the Indian state is even more important today than economic reform. It is also more difficult because it is the rulers who are the oppressors and have the most to lose. We desperately need police, judicial, administrative and political reform. Many societies that we admire today, such as the UK, once suffered from poor governance. But they threw up leaders—Gladstone, Disraeli, Thatcher—who had the courage to fight vested interests and implement reforms. It is one thing to win power and another to wield it. The Congress party has learned to win elections but it has forgotten that it will be thrown out unless it improves governance.

The Mahabharata also had a problem with the self-destructive, kshatriya institutions of its time, and it had to wage a war to cleanse them. Draupadi’s call for accountability in public life in the Sabhaparvan ought to be our inspiration. She questioned the dharma of the rulers when confronted with governance failure. When there is no other recourse, citizens must be prepared to wage a Kurukshetra-like war against corrupt government institutions in order to bring accountability into public life.
Gurcharan Das is the author of the Difficulty of Being Good: on the subtle art of dharma