Do Market Economies imply Political Freedom?

By Rohit Sinha

“Does really a relationship between economic and political freedom exist? Maybe it is a sheer coincidence that the expansion of political freedom occurred at the same time as the development of capitalist and market institutions.”

Amartya Sen, in his seminal work on human capabilities, argues that freedom is central to the idea of economic progress. He writes, “Economic Development is the expansion of real freedoms that people have, so that they can pursue the objective that they have reason to value”. He believes that through economic progress, one can hope to achieve other cherished objectives of life, not necessarily specifying material or otherwise. This brings us to the concept of economic freedom, which can be simplified to as the level of individual freedom that a citizen enjoys.

“Economic Freedom” is the degree to which a market economy is in place, where central components are voluntary exchange, free competition and protections of persons and property. Economic freedom creates incentives for economic agents (entrepreneurs, innovators, financiers, industrialist etc) to create value in the economy. It is important to note that ‘economic freedom’ in academic literature is normally equated with a capitalist economy. In econometric analysis, economic freedom is considered to be an independent variable, however, research shows that it is significantly influenced by factors such as political freedom, wealth or democracy.

In the context of a country like India, 66 years of independence has led to varied experiments in both economic and political freedom. There has always been an intimate connection between politics and economics, both to the advantage and disadvantage to the nation at large.

Role of Institutions:

In order to map how political freedom over the 66 years has played out for economic development in India, it would be pragmatic to study the role and evolution of institutions, not just political. The incentives that I spoke about earlier, are in large part determined by the institutions in place in the economy. The actions by these institutions stimulate (positively or negatively) the actions of the economic agents. Until 1991 economic reforms, India was largely a socialist economy with little or almost zero private participation across sectors. Heavy regulation, excessive licensing, large public sector etc. gave negative signals to entrepreneurs to invest. With only one agent of production (government), economic freedom could not expand. Hence, for 4 decades India enjoyed a Hindu rate of growth (3%).

Milton Friedman in his book Capitalism and Freedom argues that there are two ways of coordinating economic activities of an economy – one is central direction involving the use of coercion and other is the voluntary cooperation of individuals (competitive capitalism). What India experienced in its early years was the belief that central planning is a more efficient way to distribute resources across all sectors. Fortunately for the 1991 crisis, economic reforms were facilitated. Institutions were reorganized, size of public sector was reduced, tax administration reforms were undertaken, and sectors were opened up for private investment – all thereby increasing economic freedom. By enabling people to cooperate voluntarily, it reduces the area over which political power is exercised. Thus institutions play a crucial part in determining the level of economic freedom.

What comes first: Economic or Political Freedom?

It is widely accepted that economic freedom is a precondition for political freedom, and not the other way round. In recorded history, there has been no instance where political freedom has been achieved without economic freedom. India too has experienced this. If we consider 1991 the year when India achieved greater economic freedom, then one would notice the rise in coalition governments in Indian politics post 1993.

The number and significance of regional political parties have risen considerably, it is widely accepted that governments cannot be formed without forming a coalition of parties – all factors implying that political freedom has risen. Economic freedom plays a dual role in the promotion of free society – economic freedom as an end itself, and the indispensable means towards the achievement of political freedom. The widening of choices have made our politics more competitive and one can say this is in large part a result of expansion of economic freedom.

A significant point to note here is whether political freedom is necessary for economic freedom? History suggests otherwise. There are enough examples – Fascist Italy, Germany & Japan before the World Wars, Czars of Russia – are all societies which would not be considered free. Yet their economic arrangement were fundamentally capitalist. Indeed, political freedom is not a prerequisite for economic freedom.

Coming back to India, it is becoming easily discernible that welfare, and not freedom, is becoming the dominant role of state function. There are numerous examples of wasteful subsidies and handouts, which cater to political constituencies for short term political gains, as opposed to expanding human capabilities for long term growth. Collectivist planning is increasingly interfering with individual freedom to exercise choices. Yet another instance where greater political freedom is not necessarily leading to greater economic freedom.

Sheer Coincidence?

In conclusion, does really a relationship between economic and political freedom exist? Maybe it is a sheer coincidence that the expansion of political freedom occurred at the same time as the development of capitalist and market institutions. One can argue that the expansion of political freedom in India during the 90s was a result of innovation in transport and communication, and not necessarily due to expansion of economic freedom.

Adam Smith very fervently argued that the market processes satisfy people’s demand spontaneously. He conceded that markets are not perfect, but believed that, they, more than any other alternative, are able to maximize wealth and welfare. Free markets have aided to disperse power from the hands of a few, especially in a country like India. It has served as an offset to whatever concentration of political power that may arise in the distribution of resources and wealth. The resultant affect has helped India achieve greater economic growth and prosperity, whereas a combination of economic and political power in the same hands is a sure recipe for abuse of power.

(The author is a student at Madras School of Economics)

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