As Modi begins the campaign for next year's general election, he would do well to learn from the great minds of Hayek and Smith, and attempt reforms that are not top-down plans like his predecessors opted for
Prime Minister Narendra Modi has the same malady that has plagued most of India’s leaders. He, like some of his most famous predecessors, believes that society and the economy can be engineered, and the government and its army of bureaucrats is equipped to do so. Their toolkit contains good intentions, political capital, excellent rhetoric, the power to tax and expropriate, and to summon the resources of the entire country for their cause.
Jawaharlal Nehru’s greatest hubris was central planning—in particular, the second five-year plan—and his belief that a complex economy can be directed. Picking out Indira Gandhi’s greatest mistake is trickier. After all, we must choose between the many planned horrors like nationalization, forced sterilization and suppressing dissent for the plan. Modi is cut from the same cloth—only, in his case, he literally wears his name all over it. While our prime minister has often disavowed socialism and criticizes the Congress’ socialism on an almost daily basis, he is the most ambitious planner of them all.
The title of this article is borrowed from Nobel Laureate Friedrich Hayek’s final book, The Fatal Conceit, warning us of the perils of a planned economy. The fatal conceit is the belief that the world can be shaped according to our human desires and that planners can engage in rational constructivism to design a state of affairs that is superior to the order that emerge from the decentralized interactions in an economy. And thus, “the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design".
This great hubris has taken many forms for the Modi government, but demonetization is at the very top of the list. At the time of demonetization, over 98% of all transactions were conducted in cash, and the invalidated notes comprised 86% of the currency in circulation. About 600 million Indians did not have bank accounts and 300 million Indians lacked any kind of formal identification required to open a new bank account.
The first colossal error was to assume that the state machinery had the capacity to swiftly reissue new notes. Even a month after the announcement, only half the new notes were in circulation, causing a tremendous shortage of currency, and consequently long lines at ATMs, as well as a complete disruption of the supply chains and the informal sector.
The goal, at least initially, was to impose a 100% tax on black money in the form of unreturned notes. This clearly did not go according to plan. In August 2017, the Reserve Bank of India reported that 98.96% of all demonetized notes were returned. As the goalposts for demonetization kept shifting, there was the attempt to push Indians toward using digital substitutes for cash. While Indians embraced digital transactions in the short term because of the botched replacement of notes, they went back to their trusted cash, and digital transactions and ATM withdrawals went back to pre-demonetization levels, once the currency shortage was resolved.
And herein lies the fatal conceit: the belief that Indians could just be directed into whatever action the prime minister intended, and that the results from this top-down intervention would be successful and improve upon the existing order. Even when the many different problems and failures were revealed, Modi remained attached to his flawed idea, never accepted defeat, and proclaimed this disaster a success. The conceit proved fatal for the Indian economy.
The idea precedes Hayek. In Theory Of Moral Sentiments, Adam Smith could have been describing our prime minister: “The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board."
Modi is frequently defended by his supporters, for being action oriented, gutsy in his decision-making, quick in his execution, almost general-like in his interactions with the bureaucracy and, most importantly, ambitious. The problem here, however, is not the ambition, but the hubris—the flawed belief that directing people in a way that is inconsistent with their preferences and plans leads to superior results. His actions betray a man who does not view society as a complex order, but as a human chess board, with pawns to be moved and sacrificed for what he believes is the greater good.
The good news is that it is only a matter of time before the failures are revealed. History will not be kind to these command-and-control decisions on currency, taxation, beef ban, agricultural prices, etc. The bad news is that these actions lead to very problematic and disturbing intended and unintended consequences. The costs are human lives, livelihood, and well being, and by the time the flaws of these conceited actions are established, it is often too late.
As Modi begins the campaign for next year’s general election, he would do well to learn from the great minds of Hayek and Smith, and attempt reforms that are not top-down plans like his predecessors opted for, but ones transferring power back to individuals and their emergent institutions. Only then can he ever hope to be on the right side of history.
Shruti Rajagopalan is an assistant professor of economics at Purchase College, State University of New York, and a fellow at the Classical Liberal Institute, New York University School of Law.