Arthshastra and The Wealth of Nations
By Dr R Balashankar
Deepavali, the festival of lights, is annually celebrated by worshipping the Goddess of wealth Mahalakshmi. Traditionally, Indian financial year is accounted from Deepavali to Deepavali. It is significant that Deepavali, the exuberant display of fortune, pomp and gaiety comes after Vidyarambham, when we worship the Goddess of learning and Durgapooja, when we worship the Goddess of strength. Ancient Indians certainly knew, one of the ultimate goals in a person’s active working years was to acquire wealth. To make money, one has to first attain knowledge. And strength. Without the two, creating wealth and securing it is impossible.
India till the end of eighteenth century was the golden bird, one of the richest in the world. Our prosperity attracted invaders—as we forgot the lessons of our ancestors—we lost our wisdom, our army, freedom and splendour. The nation that created Arthshastra, perhaps two centuries before the Christian era, blended politics with economics. Our modern day statesmen forgot their moorings. It took the battle of Plassey (1757)—almost two millennia after Arthshastra was written, for the West to usher in industrial revolution and publish The Wealth of Nations (1776), the first western treatise on economics. But the West knew how to put the money looted in colonisation to best use. They had the brains, what they lacked was cash. But for the colonisation and plunder of India, the West may not have seen industrial revolution. But for the spoils of World War II, America may not have come out of the great depression of the 1930s.
Today, the West is again cash starved and India is cash rich. And the economic order, propounded at the Washington Consensus by the capitalist countries after the collapse of communism, which dreamt of subjugating the world and exploiting for western splurge is in a shambles. America is today the biggest proponent of protectionism at home, while it promotes globalism abroad. See the deadlock at the WTO and G-20. This Deepavali is a golden opportunity for India to step aside, reevaluate and reclaim its global mission.
Can we make this Deepavali a turning point in our history? Revive the native economic understanding, a realisation of our self, a recognition that the boisterous exchange of gifts and competitive, noisy fireworks, become sensible only if we care to remember that the meaning of this boast of happiness and exhaustion is the promise of a new profitable beginning.
The world is reeling under a crisis of economics. From Washington to Tokyo, capitalism is under siege. Two decades after the fall of communism, capitalism, which always touted to have an inbuilt renewal mechanism, is being challenged by its own votaries.
Dozens of well researched volumes have appeared on the shelf declaiming capitalism. They have been produced by eminent economic thinkers trying to analyse and fix the malaise afflicting the capitalist world. So far, by general consensus they all point to one major trend, the failure of capitalism as an economic model, the decline of the West and the rise of the Rest.
Former World Bank economist Dambisa Moyo, examining the fifty years of economic folly and the strategic choices ahead, predicts a socialist America in the next few decades. “United States will be a bona fide socialist welfare state by the latter part of this century,” she explains. The ‘Occupy Wall Street movement’ spreading across the western world, which thrives on the humongous income disparity, the massive influence of money on political decision making, suggest a likely scenario. The unprecedented bailout of the corporate by the state with taxpayers’ money cannot but result in this retribution.
But is the choice limited to failed socialism and failing capitalism? Economic thinkers of late, have come to gravitate around a third way, a more serene, sane and humane approach to growth, wealth creation, profit sharing and income distribution—loosely put the Asian way, more specifically, the Indian way of finding harmony—the best antidote for greed—contentment. Worshipping Lakshmi, making riches in abundance we live a life of lofty, self-denial—creating wealth for the larger benefit of humanity, where wisdom, restraint and reticence are inbuilt in our world view.
Money after all is the measure of human prosperity. The West was able to sustain its economic superiority, its monopoly on technology, attribute all this on the efficacy of capitalist ideal because of the spoils of World War II. The problem with the West now is that it is desperately strapped for cash. It cannot prolong its elitist lifestyle. As long as the West retained its liquidity supremacy it lectured and talked down to the rest of the world. Its corporate controlled markets and raw materials. Their shift from technology, manufacturing, agriculture and innovation to innovative financial instruments which acted as money multiplier without really creating wealth cooked its goose. Briefly they mistook Wall Street as Main Street. Stock market spiv was anointed the new messiahs and wizards of leviathan.
In his interesting book on money, John Kenneth Galbraith narrates an incident to drive home how money stocked in safe box loses value and purchasing power in an inflationary economy. He wrote, “not very long ago one of the investigations into the typically intricate affairs of the 37th President of the United States turned up a more than normally interesting transaction. Mr. Charles G. Rebozo, Mr. Nixon’s good and reticent friend, had received for the then President’s benefit, political or personal, $100,000 from the even more reticent entrepreneur, Mr. Howard Hughes. This considerable sum, it was clarified, had there after been kept in cash in a safe-deposit box for rather more than three years before being returned to Mr Hughes. This curiosity concerning this transaction was not over why anyone should return money to Mr. Hughes, which is something like returning salt tears to the ocean. Rather it was why anyone should leave so much money in storage. So left, as everyone knew, it lost radically in value—a dollar of 1967 had the purchasing power of only 91 cents in 1969, the year Mr. Rebozo resorted to storage, and of less then 80 cents when he retrieved and returned the money. (In early 1975, it was down to 64 cents). The impact of this trend could not have been lost on the two gentlemen. The partial compensation for this loss in the form of interest, dividends or, one might even hope, capital gains, which a minimally prudent man would have been expected to collect, was forgone.” (Money; Where it came, Where it went)
Indian black money stashed in foreign tax havens has become a major political issue. It is widely believed that the ruling establishment has a lot to hide and it is trying all possible tricks to keep this money a secret. According to Asymmetric Threats Contingency Alliance (ATCA), India has an estimated US$1.5 trillion residing only in Swiss banks. This amount is more than all the unaccounted money of the rest of the world put together. And this amount is ten times larger than the country’s foreign debt.
Indians are great hoarders of wealth. We hoard in gold, jewellery, and store in hard currency. All these, except gold depreciate in value and end up as wealth buried and lost. This could otherwise have gone into wealth generation, creating wider prosperity and employment. Politics and industry are the two major sources of black money. In her book, How The West Was Lost Dambisa Moyo says, “The story of the West’s rise and fall is primarily a tale of how it has viewed, stored and wasted its capital. The West’s behaviour over the last fifty years has been like that of a profligate son, squandering the family wealth garnered over the centuries—frittering it away on heady indulgences and bad investments. Left unchecked, the last half-century will also mark the start of the decline of the 500-year interlude in what previously had been 2,000 years of Asian economic pre-eminence.”
The economic database of the last 1500 years published by Angus Maddison, and includes estimates of growth, populations and breadth of infrastructure from old world Europe, to China, to India and latterly the US, provides a picture of not only how the world’s economies have fared individually, but also how they expand or shrink in relation to each other over time. One of the most fascinating sets of figures is the snapshot of the share of world GDP in 1820.
At that time China’s world share of GDP stood at 32.4 per cent—larger than any other region of the world, and greater than those of Europe (26.6 per cent), the United States (1.8 per cent) and Japan (3 per cent) combined. As an economy, the author notes, India too was surprisingly buoyant during the early 1800s. Although the Indian economy had declined from its position in 1700, when its share of world GDP matched both China’s and Europe’s (at around 23 per cent), by 1820 it still had a dominant position with a share of 16 per cent thanks to a healthy export base of tea, cotton and spices and to the rapidly expanding opium trade. India had a big export advantage on textiles too.
America’s share rises almost fourteen times to 13.8 per cent between 1820 and 1890. By 1890 the pattern of Western economic dominance that has been the norm for the past hundred years begins to assert itself. With the surge powered by the industrial revolution, Europe (principally Britain) leaps forward to take a lead position in the world share of GDP (at 40 per cent). At this time both India and China were experiencing a rapid decline, whereas America was firmly on the ascendance. Come 1950 it all seems over, and in the post-Second World War world America and Europe were booming. The decline of India as stated earlier essentially was the result of the colonial loot. India continued to suffer political loot under the Congress, stagnating its economy and starving its people. The trend of rebuilding the economy gained momentum only in the last decade of the last century. India in 1950 stood at a paltry 3.8 per cent of world GDP.
India was bound to bounce back. The towering heights of the West propelled by the war booty could have been sustained had it not fallen to the trap of living on debt and borrowing from future, just the opposite of what Indians do. We save a little, for a rainy day. We save for our future generation. Our religion and our culture teach us to save for the coming generation, invest on our future. That is why India still has one of the highest saving rates in the world. The West still, amidst all its financial agonies has not come to terms with their unsatiable consumerism, shopaholism and entitlement syndrome. This has landed the capitalist economy on a cliffhanger.
The capitalist dilemma is akin to a story of a Buddhist monk narrated in City of Thieves, by Cyrus Moore, on the finance market manipulations! A teenager monk spent most of his youth in a Buddhist temple. The older monks taught him as much as they could about life. When he became a man, he was told to leave the temple and to seek adventure, to experience freedom and to learn from his mistakes. After ten years he was to return to the temple to pass on what he had learnt. That way the junior monks would be prepared for life outside, just as he had been made ready by those before him. One day the monk was crossing a mountainous, rugged terrain. A hungry tiger suddenly leapt out from behind a bush. The monk fled for his life.But he ran out of luck. The ground beneath him fell away and he slid off a precipice. He grabbed at whatever he could, and eventually managed to cling to a piece of rock. When he had caught his breath he assessed his position. Below him lay a two-hundred-foot drop on to a bed of solid rock. Above him sat the tiger, waiting, and hungry.
The monk got himself into a situation where he loses no matter what he does. A situation like the one the capitalist world is confronting at present. Sometimes – no matter what you do, no matter how hard you try you are the loser.
This condition is best explained in one of the most authentic books so far written on the economic worries of the West. The book, This Time is Different, is a gripping study of Eight Centuries of Financial Folly of the capitalist economies by Carmen M. Reinhart and Kenneth S. Rogoff. It says “Although private debt certainly plays a key role in many crises, government debt is far more often the unifying problem across the wide range of financial crises … the fact that basic data on domestic debt are so opaque and difficult to obtain is proof that governments will go to great lengths to hide their books when things are going wrong, just as financial institutions have done in the contemporary financial crisis. We see a major role for international policy-making organizations, such as the International Monetary Fund, in providing government debt accounts that are more transparent than those available today.”
The authors conclude that the most commonly repeated and the most expensive investment advice ever given in the boom just before a financial crisis stems from the perception that “this time is different.” That advice, that the old rules of valuation no longer apply, is usually followed up with vigour. “Financial professionals and, all too often, government leaders explain that we are doing things better than before, we are smarter, and we have learnt from past mistakes. Each time, society convinces itself that the current boom, unlike the many booms that preceded catastrophic collapses in the past, is built on sound fundamentals, structural reforms, technological innovation, and good policy.What one does see, again and again, in the history of financial crises is that when an accident is waiting to happen, it eventually does. When countries become too deeply indebted, they are headed for trouble. When debt-fueled asset price explosions seem too good to be true, they probably are. But the exact timing can be very difficult to guess, and a crisis that seems imminent can sometimes take years to ignite. Such was certainly the case of the United States in the late 2000s. All the red lights were blinking in the run-up to the crisis”, the authors say. But until the “accident,” many financial leaders in the United States—and indeed many academics—were still arguing that “this time is different.”
The story is similar everywhere. Financial professionals and governments always paint a rosy picture. Governments fudge, don’t tell the real story. Even international financial institutions like IMF and World Bank don’t inform us what the governments don’t want us know. Almost all economic history experts’ analysis are West centric. The BRIC countries have come in the radar only in the last decade. Following faithfully on the footsteps of the US, India today is saddled with a double digit inflation, backbreaking EMIs, ever widening income gaps, unacceptable high life of a small per cent of the population amidst heart wrenching poverty and a government that spends as if there is no tomorrow.Take the collective misleading statements of Planning Commission chairman Montek Singh Ahluwalia, Finance Minister Pranab Mukherjee and Prime Minister Manmohan Singh—this time is different, they seem to tell us. Because they are following the same policies that brought the West to its knees.
Rightfully, Indians would disagree with Galbraith. Stored money looks brighter and safer. A friend rues, he invested Rs 10 lakh in blue chip stocks four years ago. His stock now is worth only Rs.6.40 lakh. This is the story of millions of Indians who believed in the pep talks of politicians. Instead of repeating “this time is different,” if India is able to act differently, we have a future. The celebrations are worth it, only then.