In Service of Neoliberalism – The Art and Science of Perpetuating the ‘State versus Market’ Dichotomy

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How should one assess a book on economic policy that takes a dim view of the state and redistribution in a country that is home to multiple and intersecting inequalities? Economic inequality and the role of the state in tackling inequality emerged as a major talking point in the last decade and it is likely that it will continue to animate academic and policy debates in the following decade too. Therefore, it would not be unreasonable to evaluate any book on economic policy based on the seriousness with which it engages with inequality and how it imagines state intervention in the economy. This review seeks to do precisely that by unpacking the conventional wisdom about the nature and role of the state presented in the book In Service of the Republic: The Art and Science of Economic Policy by Vijay Kelkar and Ajay Shah.

The book takes upon itself the task of pressing economic policy into service to build the (Indian) republic. What lies at the heart of the book is the age-old ‘state versus market’ debate. Lucidly written, the book makes an elaborate case for enhancing the role of ‘self-organizing’ systems (read markets) and warranting state intervention only when there is ample evidence of a market failure. Why should we limit the role of the state and cede more space for markets? Because the state coerces private persons, while the market allows individuals to discover order by themselves, in the view of the authors. Such a view stridently argues against ‘paternalistic’ redistribution, state-led industrial policy and social engineering. In sum, the state is coercive, developmental and paternalistic, it does not know enough about individual preferences to make decisions on their behalf and does not have enough capacity to correct market failures.

Let us take the subject of industrial policy and the state picking winners. The authors emphatically state: “Industrial policy works badly. The most advanced economies do the least industrial policy. Government should not pick winners.” We are told that governments do not have the necessary information and expertise to make informed business decisions and ‘pick winners’ through industrial policy. If anything, governments are likely to pick up some spectacular losers, given that they are driven by power rather than profits. In other words, business should not be the business of the government, it is said. Even a cursory look into the history of capitalism should be sufficient to contest this argument on solid empirical grounds.

In her book The Entrepreneurial State, Mariana Mazzucato has convincingly demonstrated that since World War II, a number of national governments have donned the role of a risk-taking entrepreneur, solidly supporting private sector initiatives, including the development of key technologies that make a smart phone ‘smart’, in direct and indirect ways with remarkable success. So the state can be entrepreneurial, pick winners and it can do that task reasonably well. Also, it is now an open secret that well-crafted industrial and trade policies were instrumental in the economic progress of the so-called “most advanced” economies of today. Even the East Asian Miracle owes its success in large measure to an industrial policy that encompassed import-substitution, subsidies and investments by state-owned enterprises, among other things. Industrial policy matters.

There is a large body of scholarly work that has itemized the numerous ways in which the state has created, supported, sustained and salvaged markets throughout the history of capitalism. The book could have offered a more nuanced account of state intervention in the economy that went beyond characterizing the state as coercive and incapacitated.
On the question of social engineering, the authors posit the following argument that is of a normative nature: “Social engineering is inappropriate – social engineering, even if for ostensibly noble goals, should not be attempted. Large-scale schemes of social engineering have a long track record of failure.” While some interesting examples of failed attempts and unintended consequences of social engineering can be found in the book, it would be worthwhile to survey the cases of successful social engineering in India that have been documented in history. The state of Tamil Nadu is a case in point.

The Dravida Munnetra Kazhagam (DMK), which came to power in 1967 in the state, showed great ideological commitment to the ideal of social justice and significantly expanded efforts in that direction. As a result of carefully designed affirmative action policies, there was a perceptible change in the caste composition of bureaucracy in Tamil Nadu. “Data from the Tamil Nadu Public Service Commission indicates that, between 1960 and 1980, the caste composition of those entering into government service changes considerably, with substantially a greater proportion coming from the backward classes”, writes Dr. S. Narayan, a Tamil Nadu cadre IAS officer who spent nearly two decades in the state.

The establishment of Tamil Nadu Civil Supplies Corporation in the early 1970s and the expansion of the Public Distribution System (PDS) to rural areas were instrumental in breaking the back of feudalism in rural Tamil Nadu. Coupled with a well-networked public transport system, those initiatives made it feasible for landless agricultural workers slaving as attached farm labour to migrate to urban centers in search of decent and dignified jobs. The strengthening of the PDS over the years has meant that the reach of subsidised foodgrain among the households in the lowest expenditure deciles, according to NSSO data, is the highest in the country. Providing mid-day meals for children in government-run schools was a pioneering effort that has become a celebrated model emulated in many parts of the world.

These examples from the state of Tamil Nadu sufficiently demonstrate that done right, social engineering can bring about progressive social change in the society. The political leaders who thought up the aforementioned social policies did not have the tools to examine whether there was a ‘market failure’; bred as social and political activists they had a crystal-clear understanding of social reality and a vision to change it for the better.

There is now a large and growing body of literature in economics which has established that in a variety of circumstances, people are guided by ‘moral sentiments’ and not by self-love alone. And in the case of Tamil Nadu, these moral sentiments have resulted in public action by the people where they have demanded public goods and services not as self-interested individuals but as a collective, to which the officialdom has responded positively with programmes that are broad-based, thereby ensuring equitable access. The field investigations of social scientists such as Prerna Singh and Vivek Srinivasan testify to this recent history of purposive collective action from below.

To claim that state failure can be more dangerous than market failure is to deny citizens the political agency to hold the state to account. The book could have explored the constructive possibilities of politics to appreciate the fact that the state could be held accountable and made to deliver a wide range of goods and services effectively through active citizen politics. Rolling back the state is not the only way to achieve the noble goal of disciplining the state. Good politics has the potential to imagine democratic policy solutions that may be far superior to the ones based on purely market-based thinking.

The book mostly deals with the challenge of doing public policy in India and in the last chapter of the book, the authors briefly discuss the trajectory of the evolution of Indian economy since independence. Sample these statements from the chapter: “The reforms that unfolded from 1977 onward yielded a great outburst of growth during 1991-2011. These two decades stand out as the best growth experience in India’s history. For the first time, the growth pessimists were proven wrong and India got strong growth. This impacted upon all quartiles of the income distribution. There was an optimism in this period of a kind that was perhaps last seen immediately after Independence.”

The two decades during which we enjoyed “the best growth experience in India’s history” also saw a quarter of a million farmers commit suicide, driven by state policy on agriculture that was guided by the free trade rules of the WTO. It is all well to claim that the “headcount of the poor shrank” but a sense of policy ethics demands that we reflect on how we have defined poverty in this country for decades now. The critics of high and rising inequality are generally pooh-poohed that it is only natural that inequality rises when the economy grows and after a point there will be an automatic decline in inequality – an invocation of the inverted U-shaped Kuznets Curve. So, instead of worrying about inequality, India should focus on “growing the pie”, so that it doesn’t fall into the “middle-income trap”. Forget Thomas Piketty, it would be instructive to learn that even the IMF, the champion of free market capitalism, puts out staff papers that suggest that growing inequality might be an impediment to faster growth.

While none of us know when to stop growing the pie and start the repair works of redistribution, the period during which rising inequality accompanies high economic growth can translate into concentration of income and wealth, thus exacerbating the exisiting power asymmetry in economy and society. Economic power can decisively influence not just economic outcomes but electoral outcomes, and this is a serious concern in a democracy. If, as the authors of the book argue, the most urgent task is to build a “republic”, it has to be done by respecting the founding ideals of the republic, not by violating those in the process of framing public policy.

There is a reason why the period that generated “optimism” to some people, including the authors of this book, is characterised by its critics as the period of “neoliberal” growth. As Adam Tooze writes in his review of Quinn Slobodian’s meticulously researched and compellingly argued book Globalists: The End of Empire and the Birth of Neoliberalism, “since its inception, neoliberalism has sought not to demolish the state, but to create an international order strong enough to override democracy in the service of private property.” Liberalization of capital flows at the global level in the 1970s was, therefore, a genuine neoliberal project. Lifting of the capital controls unleashed forces of indiscipline in the form of unregulated inflows and outflows of capital, forcing nation-states to respond to the mood swings of globalized finance. Capital flight has repeatedly set-off large-scale currency and debt crises in both developed and emerging economies. Instead of rolling back the liberalization of capital flows, governments have been exhorted (and sometimes coerced) to adhere to fiscal discipline. This has severely constricted the policy space available to democratically elected national governments. Not just the state, capital has coercive tendencies too.

What has been presented as distilled wisdom in the book has to be subjected to closer scrutiny and historically informed debate. In conclusion, it has to be emphasized that if the state is institutionalized form of power, so is the market, and the invisible hand of the market has never hesitated to enlist the services of the visible fist of the state to remove obstacles to capitalist accumulation. That has been the history of capitalism, both modern and pre-modern.

Raghunath Nageswaran has an M.A. in economics from the University of Madras, India. His principal area of research interest is the political economy and economic history of post-independence India. He is a freelance writer and can be contacted at raghind@gmail.com. You can follow him on Twitter at @raghunageswaran.

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