india and the free market

Does the free market work? Here's an interesting incident from Clive Crook's Atlantic essay on capitalism:

In the late 1980s, as Mikhail Gorbachev embarked on his perestroika program of economic reform, Soviet officials were sent abroad to see how things were done in the West. One visited London’s main vegetable market. He asked how the market was organized, and how prices were set. He was told that the individual traders bought whatever quantities they wished, and set their own prices, and that these fluctuated throughout the day as the balance of supply and demand changed. At this, the Soviet visitor laughed. He said he understood that this was the official line—but, please, how did the market really set prices?

It is one thing to believe that effective governance consists in being able to balance the demands of social justice (and I mean "social equality" as opposed to just "income equality") with the demands of the free market. But sometimes in mindlessly trumpeting the free market, it seems to me that the folks at TCS haven't done their fact-checking that well.

First there is this statement:

For 70 years, Mohandas Gandhi's myopic vision of backward-looking socialism as a template for national advancement was accepted as revealed wisdom by a string of Indian prime ministers, starting with his acolyte, Nehru.

And then this:

Despite a plenitude of cotton, Gandhi didn't think India should create a cotton industry, believing instead that every family should own a spinning wheel and spin its own. He didn't believe India should develop a manufacturing base, which not only caused the dead hand of "import substitution" to smother native initiative, but the failure to develop factories meant there was also a failure to develop infrastructure like roads and ports to take goods to market.

I should admit that, more or less, the last statement captures Gandhiji's vision correctly. And yet, while the vision of a small self-sufficient village, where everyone lived simply, might have made sense to "authentic" Gandhians like Acharya Vinoba Bhave, it was never the Congress's idea of an independent India at all. As far back as the Nehru Report of 1930, the Congress was clear where it wanted India to go: India would be a secular democracy while paying particular attention to equality, social justice and the rule of law. Above all, the Congress (led by Pandit Nehru, "Gandhiji's acolyte") recognized that a modern India would have to be industrial and compete with the rest of the world. Perhaps, inspired by the success of the Soviet five-year plans, industrialization was to be driven (initially at least) by planned government initiatives a.k.a Planning.

The alliance between the INC and Gandhiji arose from a mixture of idealism and pragmatism. The Congress recognized that Gandhiji's methods his unique moral force were unique, a foundation on which a new India could be built. But at no point did the Congress ever adopt Gandhiji's own economic vision. On his side, Gandhiji recognized this implicit bargain. He was the undisputed leader of the movement for India's independence and the Congress' foremost representative but never its architect for India's future. Think about it, at no point in all his negotiations with the British, did Gandhiji ask for simple self-sufficient villages. When Gandhiji negotiated with the British, the essential vision of India in these negotiations was always the same: a free India, with an industrialised economy, driven by a strong public sector, with an emphasis on social justice.

Whether this vision, with its emphasis on a strong public sector, is still the best one for India, is arguable -- planning and the public sector, led to the development of an entrenched and utterly inefficient burreaucracy which choked any kind of growth. But the fact remains, India-- with its surplus of engineers and the easy availabilty of English-speaking persons -- was in a unique position to take advantage of the turn in the post-industrial global economy, particularly the service-sector, because of the decisions made during our "socialist" days.

Of course, the question really is: what next? How do we negotiate the demands of capitalism with the requirements of social justice? Where does the public sector figure in this? Or does it?