Growth versus inflation or is it Friedman versus Keynes

Opinion


The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.

John Maynard Keynes

Most economic fallacies derive - from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another.

Milton Friedman


Growth versus inflation or is it Friedman versus Keynes?

The real reason that India is back to its interventionist ways is electoral politics-forthcoming elections in the big state of Uttar Pradesh and then looming general elections in which the destiny of the ruling alliance will be determined. So the mantra being force-chanted is - control prices at all costs (even if it entails retarding the rate of GDP growth inclusive of business, industry, exports and foreign investment).

We, the public, can all see this, even the callous and arrogant notion that business, industry, foreign investors, home and car buyer et al can stand to make sacrifices and still end up not too much the worse for wear. It is unjust punishment for good performance and confidence, high-handed and disruptive intervention that is distinctly out-of-date. We need to reclassify our self image and see an emerging nation on its way to developed nation status-a country on the move, albeit at the ponderous gait of the elephant. We have a long list of things to do after over forty years of inadequate growth till 1991. Amongst many other things like health and education facilities, we need to reform and update our regulatory and policy making institutions; learn how to use our burgeoning resources better; ingest technology and online real-time systems; bring help and succour to a weak agricultural base and get on with infrastructure development. To do this in the least possible time, we need to give rein to free market forces much as it goes against our formerly statist grain.

If however, we continue to see ourselves as a little-hoper third world country with an erstwhile 2% GDP rate, current economic policy, with its Keynesian overtones, would perhaps make better sense. But we should remember Keynes’ economics was spawned in the years spanning WWI and on through the 1920s, ‘30s and ‘40s. Even then, its basic interventionist tactic of throttling growth to control inflation never really delivered the intended results. It is, of course, anathema to the thinking of the contemporary icon of the free market Milton Friedman, who died only in 2006, and whose ideas we are meant to be leaning towards since 1991.

To be fair, on a good day, the government sees itself as a facilitator of growth and prosperity. All the more why it is sad to see it forced back into knee jerk intervention. But, since the endeavour is presumably aimed at winning elections, is this intended slowing of growth good electoral politics in 2007? Will the old style snake oil deliver winning results in today’s polity?

It is true that the “India shining” campaign did not work for the NDA alliance in the last general elections and the UPA is consequently desperate to reiterate the aam aadmi credentials that handed it its unexpected victory in 2004. But is the correct response to prompting from grassroots political organisers an all out attempt to control inflation? And is the best way a Keynesian attempt to curb money supply and make what remains more expensive to access? Will the strategy of applying so many leeches to the body economic not put it in danger of being sucked dry? The all important voting peasant may be poor but wouldn’t he rather the government helped to increase his income instead of only bringing down prices?

Nobody can fail to be concerned that agriculture is growing at around 2% and industry, services, exports, in effect everything else, is growing at robust double digits. But is the answer in price manipulation at the supply end of things or radical and massive agricultural policy reform aimed at enriching the rural poor? Massive intervention to stimulate agricultural modernisation and growth is called for and not the extremely modest and tentative initiatives taken in the recent annual budget. After all, we need agriculture to also show double digit growth levels if there is to be prosperity amongst 60% of our people. How do we bring this about? Until we figure this one out, one lot of politicians running around looking for votes looks just like the rival lot running around seeking the self same votes.

(767 words)

Tuesday, 3rd April, 2007

By Gautam Mukherjee

Also published in The Pioneer on Wednesday 4th April, 2007 on the OP-ED pagewww.dailypioneer.com