More than a decade into the Great Depression and a mere month before Japanese planes bombed Pearl Harbour, Fortune magazine polled US business executives about how the economic structure of their country would change after the end of the world war. Nine out of 10 executives said they “expected some kind of radical restructuring of the nation’s economy that would decrease their expected returns from investing in their businesses. Certainly that is a plausible explanation for why they had been investing so little during the Depression,” say economists George A. Akerlof and Robert J. Shiller in a new book, Animal Spirits.
The current economic crisis—for all the glum comparisons with that of the 1930s—is barely two years old. But the damage that it has caused has been extensive enough for some thinkers to start speculating about the future structure of the economy, even as policymakers struggle to control the spreading bush fire. “Ideas about changing the organization of society in the long run are clearly needed, quite apart from strategies for dealing with an immediate crisis,” writes Amartya Sen in a recent New York Review of Books essay on capitalism beyond the crisis.
There have been two clean breaks with the past in the previous century. The mid-1940s saw the rise of interventionist governments, welfare states and the grand system of free trade and fixed exchange rates put together after the Bretton Woods conference in 1944. This system unravelled in the early 1970s, and after a painful decade the original Bretton Woods arrangement was replaced by the era of globalization. What’s next?
It is too early to tell, though I hope the world does not throw the baby out with the bathwater. Free markets and trade in goods and services have served the world well over the past quarter century, despite the increasing frequency of financial crises. A slide back to overbearing statism and protectionism will hopefully be avoided.
While there is likely to be a grand global plan to restructure the rules of the game, individual countries will have to do their own soul searching as well. The national elections should ideally have been a spark to light the debate, but our politicians are more likely to stick to form, going up and down the country making promises they cannot keep.
The current deafening silence on what India’s economic strategy in the post-crisis world should be is rarely broken. But when it is, and some leader or the other speaks out, what one hears is not is not very reassuring. Consider two examples.
“If you allow me the liberty of showing what is to you the proverbial ‘red rag to the bull’... Let me take you back to Indira Gandhi’s much-reviled bank nationalization of 40 years ago... Every passing day bears out the wisdom of that decision,” said Sonia Gandhi at the HT Leadership Summit in November.
During a speech given at the annual general meeting of the Federation of Indian Chambers of Commerce and Industry (Ficci), L.K. Advani said “there is an urgent need in India to do course-correction”. And: “We believe that the new as well as the entrenched developmental challenges before India cannot be met by carrying the influence of either free-for-all capitalism or freedom-killing communism.”
Advani’s defence of swadeshi was more nuanced than the more simplistic notions of the more aggressive swadeshi campaigners. But the overall thrust of a speech by the man who is in the running to be the country’s next prime minister was disappointing—full of the old assumptions of Gandhian socialism.
At the obvious danger of oversimplifying the debate, it seems that the two most powerful persons in the only truly national parties in India are offering us the old choice between Nehruvian socialism and Gandhian socialism. That’s not very encouraging in the first decade of the 21st century, when Indian needs a strong economy to raise living standards and also generate the tax revenues needed to provide for welfare schemes and national security.
One last point: In the last part of the quote from the book by Akerlof and Shiller used earlier in this column, the two economists say that the businessmen polled by Fortune in 1941 expected “some kind of radical restructuring of the nation’s economy that would decrease their expected returns from investing in their businesses. Certainly that is a plausible explanation for why they had been investing so little during the Depression.”
Loose talk about the benefits of bank nationalization or economic nationalism is not costless when it comes from the national leadership. It can weigh on the minds of Indian businessmen who want to invest in projects that generate returns over many years, perhaps many decades. The animal spirits that John Maynard Keynes identified as a key psychological factor behind the decisions of entrepreneurs to invest could be damaged as economies are restructured and economic strategy is rethought.
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