A panel of “experts” appointed by the Government has recommended raising fuel prices.  The panel, headed by Kirit Parikh,  recommended a hike in domestic LPG by Rs 100 a cylinder and PDS Kerosene by Rs 6 a litre. It is not certain that what the panel called for will be implemented. Rangarajan Committee and the Chaturvedi Committee reports in the past went unimplemented.  Many newspapers reported that the panel is for deregulating fuel prices. It is not at all evident that a Government orchestrated hike in prices would be a genuine deregulation. If these goods are underpriced, certainly, the hike would be a welcome move. A hike in prices will certainly reduce fuel subsidy burden.

The findings of the panel, it is said, will be unpalatable to the government battling inflation. An increase in fuel prices, however, can’t cause a general rise in prices. Only an increase in money supply would lead to “price inflation”. If fuel prices rise, people will cut down consumption of fuel or other goods. There will not be an increase in aggregate demand. There will be no “cascading effect on food prices”. When subsidies to maintain low fuel prices are removed, the prices of other goods might come down. It will also reduce the fiscal deficit. (A subsidy of over Rs 71,000 crores was given in 2008-2009, at the expense of the innocent, long-suffering tax payer.) Price controls, needless to mention, are not a solution to price rise. Government enforced price controls to deal with price rise, as several economists have noted, is like “trying to hold down expanding pressure in a boiler by manipulating the needle in the boiler’s pressure gauge”.

Unfortunately, in India, the prices of fuels and fertilizers are administered by the Government. It should be obvious that no bureaucrat has the necessary information to set the prices of these goods. Lacking profit-loss signals, the prices set by the government would only be arbitrary. It is true that sometimes the market sets the price higher or lower than necessary to clear the market, but no one has the wisdom to correct these discrepancies. The market, left to itself will set this right. If fuel prices are higher than justified, it will send out the signal that it is profitable to produce fuel. More people will enter the market. The supply of fuel will rise. This will bring down the prices. If fuel is priced lower, producers will get the signal that it is not profitable to produce it. Some producers will leave the market. Soon prices will move towards a level which will clear the market. The market is self regulating.

It is important to recognize how the profit mechanism coordinates the market if we are to understand the harmful effects of price controls. Usually, price controls are thought of as a way to curb excess profits. But, in the market there is a tendency towards equalization of profits in all sectors. No sector can be more profitable than any other in the long run. If a sector is more profitable, there will be excess investment in two forms. One, more people will invest I the sector. At the same time, people already involved in the sector will plough back the “excessive” profits.

Government price fixing has harmful, unintended consequences. If the government sets the prices below the market level, there will be chronic shortage. Such a policy fails to take in account why prices are higher. Prices can be high only when there is an increase in money supply or a decrease in supply of goods. Price controls do nothing to cure inflation, which is purely a monetary phenomenon. When prices are set low, less people will produce the goods and the shortage becomes more problematic. The product disappears from the market, and there will be immense pressure on the Government to raise prices, if it is to cure the shortage. If the Government sets the price above the market level, it would lead to unsaleable surplus.

It is true that if the Government gets out of the price fixing business, there would be a sudden rise in prices. It might be painful to most people. But such short term pain is much better than the chaos price controls create. Shortages and unsaleable surpluses are just two such consequence of price fixing. There are several other consequences. Price controls create black markets. Customers become a menace to sellers. The quality of service comes down tremendously. People will have to resort to means of production which are expensive. There will be hoarding and delays in production. People will waste time standing in queues and searching for products. Price controls lead to further controls, and may ultimately lead to socialism, which will entirely wreck the economy. In short, Government price fixing creates chaos.

Read more on it “Reason of Price Rise and Consequences of Price Control“

In absence of central planning and governmental interventions, the production remains in the hands of independent, self-interested, profit-seeking individuals.
In absence of forced laws and regulations, the independent self-interested producers follow the natural laws of market that brings the uniformity and systematically accelerated progress in the free society where the wastage of resources reaches to minimum and overall production tends to reach to maximum and hence the common ills of collectivism such as extreme poverty, unemployment, class differences etc gets the proper remedies in the individualistic, free-society systems.
Whenever government intervenes in such a society by means of central planning and interventionism, the chain of progress breaks and the retardation takes place that brings the common ills of collectivism back to the frame.

Uniformity of Profit

Naturally, every body works to gain profits, everybody lives to sustain and comfort his life, profit is the only motive for a free individual to put up his endeavours in production and prosperity. Yet, the laws of natural anarchy also ride profits and that is the Uniformity of Profit principle. The principle suggests the natural tendency of a free-society towards establishing a uniform rate of profit on capital invested in all the different branches of production, be it steel production, grains production, oil industry, the shoe business or whatever. Profit, obviously is the difference between the sales revenues and cost of production.

The reason for such tendency of natural uniformity is the profit seeking nature of the free-individual. Investors prefer to earn higher rates of profits on their investment rather than the lower rates. That is natural, rational behaviour of man to seek maximum possible profits. Thus, other things being equal, wherever the rates of profits are higher, investors tends to invest their additional wealth, and wherever the profits are lower, they tend to withdraw their previously invested capital from those production sectors. The additional investment that thus reaches to any high profits providing production sector tends to reduce the rate of profits in that sector.
This happens because the additional investment increases the production and hence supply and availability of the products and that brings down the selling prices of the product. As selling prices reaches closer to cost of production, profit rates comes down. On the other hand, the production sector that initially was providing lower profit rates suffers lack of investment and hence lack of production and supply, which throws the prices of the products of that sector higher. As the selling prices increases, the profit rates of that sector also increases and hence, that production sector again becomes the higher profit providing sector. This rolling up and down of investments in various production sectors tends to bring equilibrium where the rates of profit in various production sectors tends to be uniform.

Benefits of Natural Anarchy

In a free-society, as the profit rates tend to be uniform, every sector gains enough investors. As every investor is driven by his profit seeking nature, he remains alert about consumers demand and that reduces the chances of malinvestment and hence over-production or under-production. The natural anarchy thus provides a balance between the production of all the essential products for our life and progress. Anarchy not only prevents but also remedies the mistakes of over-production or under-production if committed. If at the threshold of a high profit-rates providing sector, investors commits mistake of over-investment, it tends to over-production that decreases the rates of profit and hence further investment reduces resulting in lesser production and hence providing the necessary cure to the mistake.
Because of individual freedom and uniformity of rates of profit, each sector not only gains enough investors, it also gains enough human resources in form of workers, specialists, managers, entrepreneurs and inventors and that leads to over-all increase in rate of production leading to reduce poverty and scarcity at all fronts.
As natural anarchy tends to bring the uniform rates of profit for investors, it tends to bring uniform rates of earnings, wages and increments to the producers, workers and innovators involved in various sectors of production and services and hence establish a developed division of labour. Since, the free-society tends to bring uniformity of profits and earnings, the ills of economic inequality tends to reduce to minimal¹
because of which, class clashes, casteism, racism, and other sorts of irrational discriminations are reduced and that brings the environment of natural freedom for each individual being free to use his talents and endeavour to pursue happiness by earning it honestly and freely. Thus in a free-society, natural anarchy tends to bring happiness and progressive increase in production of each individual.

Ills of Interventionism and Central Planning

The government by means of central planning or interventionism often dislocates the harmony of free-market and hence breaks the chain of progress bringing chaos to the society. In presence of government interventions in forms of subsidies, taxation, prohibitions, licensing etc, the profit motive looses its essence, and instead of learning and leading the way of natural profit seeking tendency, investors are forced to invest based on government’s dictatorial interventions. This dependence reduces the investors’ incentive to invest and hence causes lack of investment. In absence of profit motive, neither the government, nor the investors by themselves get any chance to check the threshold of investment and production and that causes loss by means of malinvestment resulting in over-production in some sectors and under-production in different. Also, by means of subsidies, stimulus packages and forced production, government creates bubbles of boom that tends to burst ultimately causing malinvestment that results in loss of production, lack of investment, depression, scarcity, wastage of resources, corruption and unemployment. As the government interventions destroy the division of labour, society suffers lack of freedom, extreme differences between classes, casteism, discriminations and overall underproduction that bring in problems of poverty.
Conclusion: In a free-society, market follows the laws of natural anarchy and that provides freedom, progress, prosperity and increase in the productivity and profits of the free-individuals tending to solve out the social ills if present along with preventing and curing the economical mistakes by means of profit motive that works as a thermostat or the invisible hand to guide the society towards cumulative production and provide the individuals means to pursue their happiness honestly and freely. Government interventions prove to be fatal, destroying the profit motive that is the only possible means of checking the malinvestment, over-production and under-production. This results in economic chaos, making the birth bed for various social-ills by destroying the division of labour.²

1. Economic inequality based on freedom of individuals to exploit their own intelligence and talent is significantly less visible than the economic inequality that results because of forced planning or government coercion. The fact is greater freedom results in greater prosperity of whole society and less extreme width of economic inequalities, Freedom Versus Egalitarianism [↩]
2. Division of labour is the essential aspect of a free, prosperous and ever improving progressive society, Division of Labour [↩]

If you are a loyal reader of this blog you know that two of the major contributor of this blog greatly disagree with each other over the issue of legitimacy of Intellectual property rights.¹² I for one am against intellectual property rights, and I have tried my share to convince my co-author towards my viewpoint. I believe that upto some extent I have managed to convince her, except for I guess patent laws for innovation in Pharmaceutical industry³. But this article is not about whether copyrights are justified or not, in this article I want to convince the readers to utilize the innovation supporting framework of Creative Commons licensing which exists within copyright framework, and release their works under this licensing.

Copyrights Model

Under the copyrights model you release a work of your labor under the Copyright license as defined by your government. Most of the copyrights licenses over the world are similar to each other, and they grant the author/creator exclusive rights to use and sell that work. If a non-copyright holder wants to utilize the the copyrighted work, for commercial or personal uses then he must take the permission from the copyright holder to use that product. For personal usage, this permission is usually granted through the sale of the individual copies of the work. For example when you buy a book you are given the right of reading that book for personal use by the author. If you want to print that book and sell it, then you will need special permissions from the author. If you want to translate that book into another language, if you want to create a movie on that book, if you want to use the characters of that book, you will need special permissions from the author.

Creative Commons Model

In the Creative Commons licensing model, you first acquire the copyright of your work(as I mentioned earlier, its a framework within a framework), and then you let go of some rights on your work. For example you could allow people to use your work as long as they attribute it to you, use it for non-commercial purposes, and release the derivative work under a similar license, or you could release a work under Attribution license which means the user must attribute the usage back to you(otherwise he could do whatever he or she wants with it). A list of these rights which can be released on their own or in a combination with others are:

• Attribution (by) – Licensees may copy, distribute, display and perform the work and make derivative works based on it only if they give the author or licensor the credits in the manner specified by these.
• Noncommercial or NonCommercial (nc): Licensees may copy, distribute, display, and perform the work and make derivative works based on it only for noncommercial purposes.
• No Derivative Works or NoDerivs (nd): Licensees may copy, distribute, display and perform only verbatim copies of the work, not derivative works based on it.
• ShareAlike (sa): Licensees may distribute derivative works only under a license identical to the license that governs the original work.

For a detailed explanation please refer to the Wikipedia entry on Creative Common licenses⁴

Choose Creative Commons over Copyright

If you are a content creator, that is you write for a living, you are an architect, you are a rising or an established music artist, then all your creations are automatically covered under copyright. As a copyright holder only you can release your creation under a CC license. I am going to cover these cases of each individual content creators as examples and their reasonings on choosing CC over Copyright mode.

1. Architect: If you are an architect, then releasing your architectural designs under CC licenses benefits you more than anything. There are a very little things which change for you. Your work can be freely copied and distributed among students and other architects, and they all will bear your name underneath it. Even if you allow commercial usage of your designs, there is little in there for another architect to benefit from your design, at max he can modify your works and charge only the derivation fees from a client. Customers can freely build based on your designs, but then who really wants to create another Sears Tower in the same city, if a customer really likes your design, and wants to build his building exactly like that, chances are he will do it in a far enough city, from the original constuction and it will only spread your name, as the building will bear “Designed by: <your name>”.
   Even if you allow the least restrictive licensing of CC(that is as long as you are attributed all the usages are allowed, including commercial and derivates), no matter who uses that design to build their own, they will need to put your name over it as “Original Design: <your name>”. If you think this will enable someone from using your design and not attributing you, well then it does not prevent anyone from using your design under a copyright license either. You are free to form any commercial deals with any individual as long as you don’t grant them exclusive rights of your design.
   Warning: If you release a design under Creative Commons license, you cannot revoke it, that designs is now a part of the public domain. If you rely on selling same design to many many individuals, then don’t expect some profits which you usually would expect in a copyright model, although if you are the only Creative Commons architect in the city, then expect the city to be mapped out only in your designs. If you have never resold a design to more than one client, then this is ok.
2. Writer: If you are a budding writer, then releasing your works under Creative Commons allows the wider audience to be able to read your works. Consider this, you are not famous, but you release your work under Creative Commons license under which the general public is able to read your works. If someone decides to use your short story for their story collection(presuming you allowed commercial use of your work) then it gives you the fame, and more people are now going to know you. If someone wants to put your novel on their website they are free to do so as long as they are not selling it(if you chose it that way),this way more and more readers will come to know about your works.
   If you are already an established writer, then releasing your next major work under Creative Commons license(providing you don’t already have an agreement which prevents you from doing so), helps you reach more and more readers. I cannot comment on the amount of money you will make by releasing it under CC license, but you will be more famous than ever.
   Warning: If you release a book under Creative Commons license, you cannot revoke it, that book is now a part of the ever increasing public domain. If you are a writer to make money, then Creative Commons has nothing much to offer, but i
   f you are a writer because you love writing, then there is no better way to show your love for your readers than to release it under a CC license. There is no way of actually telling whether you will be making more money or less, but then be the first one to experiment.
3. Musician: If you are a music artist, then considering the massive monopoly a few artists have over the music industry you have a little chance of achieving any real success. If you get signed by a major recording label, you can become famous, otherwise there is little chance for you to achieve any major success. If you belong to a less famous genre(for example Goth-Metal, Reggaeton, or say Metal in India), then even a major recording labels will not come near you considering the small market for such music. If you release your music under a Creative Commons license you allow your music to be freely shared over the internet, used by podcastes, posted on the blogs, etc etc. Your chances of being heard by more and more people greatly increases. There is a great website for musicians who want to release their music under Creative Commons licences and that is Jamendo(http://www.jamendo.com/). Whether you are a music artist, or just a music lover, there is a great amount of music on that website which is freely available for download. If you would like to use any of those music for your production, there is a very easy and fast licensing process on Jamendo PRO! If you are going to create a youtube video and need a track go to Jamendo and freely download any track you like and use it freely in your personal non-commercial production.
   Nine Inch Nails(NIN) is the most famous band ever to experiment with Creative Commons licensing.⁵ They have managed to reach way more audience by their CC licensed music than they would have had they released the albums under the restrictions of Copyright.
   Warning: If you release a music piece under Creative Commons, you cannot revoke it, that music is now a part of the public domain. Other than that, if you are reading this blog post, chances are you aren’t really as famous as Metallica or Michael Jackson. If you want to stick with the Copyright model and want to be as rich as a Rock Star, go ahead, but let me warn you, the copyright model is failing miserably in the Music industry. People still go and buy paper novels because they like to hold the book in their hands, but the copyright model in music industry is on a demise. Release your music under Creative Commons on Jamendo, and post your link on the commens, and we will guarantee a few loyal listeners to you if not much.

I have tried to create a utilitarian argument for individuals to release their work under a lesser restrictive licensing scheme. But to be honest, the biggest reason why I support avoiding the use of Copyright is because I believe that copyright is only possible through government coercion. A free market will never prevent an individual from using his property in any manner shape or form by creating and respecting artificial property rights. If you are a liberty loving individual, then none of the above listed pros and cons should matter to you, just go ahead and pick up the least restrictive CC license for your next work and share ideas with the whole world. One of the biggest reason why in India we had an IT revolution is because of the lack of copyright enforcement in software industry, we learned to work on the most costliest software and ideas flew freely. Our whole IT industry is a service based industry, and there is little development of commercial software in India. We will not see software development of commercial products for a long time(well as long as American government keeps on creating artificial innovation in America through the artificial monopoly of IP rights).

We have released all contents on this blog under Creative Commons license, our reason is simple, if you like the content, and want to post it somewhere else, do it, but make sure to attribute it back to our site. The more people read about rationality and liberty, the better it is for us. If you would like to print our articles and distribute them for free among other people, please feel free to do so. If you would like to work on our articles and create a better version or your own version of those articles, feel free to do it as long as you link it back to us. Personally speaking I find nothing more smug than petty bloggers putting heavy handed copyright notices in their blog posts, or worse putting “DO NOT COPY” notices on their blogs.

1. Legal or Illegal : Copyright Violations [↩]
2. Violation of Copyrights is illegal [↩]
3. Patent laws:Beneficial or Bane [↩]
4. Creative Commons Licenses, Wikipedia [↩]
5. Nine Inch Nails Ghost I-IV [↩]

In the recent illegal liquor death related tragedy in Gujarat about 136 people have been killed and about 150 more are in hospital, getting treatment. Gujarat is one of the states of India where the sale and consumption of liquor is banned. One might expect after such a tragedy that now people understand that prohibition does not benefit anyone, but it harms the same group of people it hopes to benefit, but there is no limitation of number of people coming out and supporting prohibition in Gujarat. Not only people don’t understand that prohibiting consenting adult activities never work.

American experiment with Prohibition
In 1919 after public demand, the constitution of United States was modified to ban the sale, manufacture, and transportation of alcohol for consumption as 18th Amendment¹. Women groups such as Women’s Christian Temperance Union, had been pivotal in bringing about national Prohibition in the United States of America, believing it would protect families, women and children from the effects of abuse of alcohol.

The proponents of Prohibition had believed that banning alcoholic beverages would reduce or even eliminate many social problems, particularly drunkenness, crime, mental illness, and poverty, and would eventually lead to reductions in taxes. Until 1920s the Mafia groups were only limited to illegal gambling and thievery but after the prohibition there was a massive scope of profits in the black market. So the organized crime rose in America.

The situation became so bad that the lawmakers repealed the 18th Amendment in 1933 by 21st Amendment which made alcohol and liquor legal in US again.
Organized crime lost almost all its profit of the black market when alcohol was made legal in 1933.

J D Rockafeller(American businessman) wrote at the end of the prohibition era:

When Prohibition was introduced, I hoped that it would be widely supported by public opinion and the day would soon come when the evil effects of alcohol would be recognized. I have slowly and reluctantly come to believe that this has not been the result. Instead, drinking has generally increased; the speakeasy has replaced the saloon; a vast army of lawbreakers has appeared; many of our best citizens have openly ignored Prohibition; respect for the law has been greatly lessened; and crime has increased to a level never seen before.

As it turns out that people get more drunk, and the mafia becomes more stronger. This experiment of banning a perfectly legitimate commodity fails pretty much everywhere.

1950s-80s Gold and Import restrictions in India

Bombay had the biggest underworld in India, because that’s where the import of the prohibited items came to from the rest of the world. Dawood Ibrahim, Haji Mastan, Chota Rajan, Chota Shakeel, they all were smugglers(illegal importers) in the starting. Then police started hunting them and they started acquiring more and more weapons, powers and became more and more brutal.

Mumbai underworld mostly imported gold, western watches, weapons, drugs and electronic items. The huge profit margins created by the cheap gold prices outside India, and artificially increased prices in India, helped them hire the whole Police department for themselves. They kept politicians in their pocket. Now since import restrictions are gone, the underworld has been decimated, and the police inspectors take false credit for encount killing the underworld. The truth is, if the smuggling business was still profitable(that is India was still not liberalized) then these same cops would have been on don’s salaries.

Coal Mafia of Bihar

Although not exactly an example of a commodity trading ban, it explains how govt creates lawlessness by facilitating only the lawless people do trades of some commodities. Bihar the most mineral richest state of India(by Bihar I mean current Bihar+Jharkhand), and it has India’s largest coal, but you cannot mine coal freely, you cannot own the coal mines, and all the coal mines must be owned by the government. The government then contracts it out to the various private organizations. Since there is no individual claiming the ownership of the mines, this results in private individuals and government officials digging coal and selling it in black market. Govt orders their police officers to hunt down the peaceful businessmen who would have provided the coal in a more peaceful and consistent manner to the market, soon there are only organized criminals left in the business of coal mining. Because of the manipulation of market there is a huge arbitrage opportunity, and these Coal mafia organizations acquire power to own the police and the state government.

From Wikipedia page on Coal Mafia² :

The state-owned coal mines of Bihar (now Jharkhand after the division of Bihar state) were among the first areas in India to see the emergence of a sophisticated mafia, beginning with the mining town of Dhanbad. It is alleged that the coal industry’s trade union leadership forms the upper echelon of this particular arrangement, and employs caste allegiances to maintain its power. Pilferage and sale of coal on the black market, inflated or fictitious supply expenses, falsified worker contracts and the expropriation and leasing-out of government land have allegedly become routine. A parallel economy has also developed with a significant fraction of the local population employed by the mafia in manually transporting the stolen coal for long distances over unpaved roads to illegal mafia warehouses and points of sale.

This is a clear reason behind the failure of a mineral rich state such as Bihar.

Sandalwood smuggler Veerappan

Again we repeat the same story as in Bihar coal mines. Only the govt wants the rights to be able to cut the Sandalwood forests for its Sandalwood(which has a huge price in International Market). There is no private property rights over the sandalwood forests of Kerala, Karnataka and Tamil Naud. Because no individual owns these forests, and there being a huge profit margin for anyone who wants to cut them and sell them in the International Market, many independent illegal sandalwood smugglers and wildlife poachers sprung up. Soon the government had them arrested or killed for such activities. This lead to the rise of the most brutal bandit of those jungles, Veerappan. Veerappan earned $22 million dollars from sandalwood and $2 million from killing some 200 elephants for their ivory. He killed around 180 men in his lifetime.

Although Veerappan was very much liked among the local people, the situation could have been worse. Had these forests owned by private individuals, and if there were no restrictions on the trading of Sandalwood, Ivory and other animal products the forests wouldn’t have eroded that fast, and Veerappan would not have been born.

Drug prohibition in United States

Currently in USA there is a massive demand of drugs, but the govt puts severe restrictions on it. This demand has to be fulfilled from somewhere. Initially local drug dealers tried to fulfil the demand, but Drug Enforcement Agency(DEA) agents with their M16s and sophesticated technology hung the drug dealers, but irrespective of how much money they spend on fighting it, it just increases the profit margins of some of the most lawless people.
There is a brutal war going in Mexico right now.³
Mexican drug cartels which supply drugs to United States and Canada, these people have assault rifles, military-style semiautomatic rifles, hand grenades, and a variety of other military weapons.

This is what you give birth to when you try to restrict peaceful transactions like trading drugs, gold, watches, sandalwood.
The point I am trying to make here is, that Indian govt achieves great advantage when it keeps all the power in its hands, and blames the corruption of its components on the individuals placed on those positions.
You can keep on replacing the Train Conductors for next 1000 years but you still will not be able to have honest train conductors as long as they have the power of monopoly and free market’s competitive forces cannot touch them.
On the other hand, you eliminate the monopoly of Dept of Telecom(DoT) and you suddenly have honest linemen who refuse to accept bribes(I have tried bribing BSNL employees them they didn’t take it).

The solution for liquor deaths is not stricter punishment for those who are caught in the trade(as the Chief Minister of Gujarat Narendra Modi has suggested), but to remove all the restrictions on consensual acts between adults. There isn’t a single commodity in the the market which should be banned from trading or restricted in any way. The usual response to this suggestion is “Should we follow every policy based on the fear of the growth of Mafia?”, the answer of this is Mafia is organized criminals, they are essentially businessmen who grow based on the profits they acquired by peforming the transactions the government tries to prohibit everyone from doing. If that profit goes away, the mafia becomes weak. If that profit increases(because the government prevents more and more people from doing it thereby increaseing the profits by killing off the supply), Mafia becomes stronger and stronger.

There is no possible way to prohibit something by the use of force. The only way by which something can be prohibited successfully is to convince people to give things up voluntarily. The best example of that kind of prohibition is non-usage of beef in India and pork products in Islamic countries.

1. Eighteenth Amendment to the United States Constitution [↩]
2. Wikipedia entry on Coal mafia [↩]
3. http://en.wikipedia.org/wiki/Mexican_Drug_War [↩]

Even in the modern day India, Mahatma Gandhi and Jawaharlal Nehru are considered as “Gods”. Any attempt to criticize them is met by denial and hatred. I remember that years back, when I made a case against the socialist policies of Nehru in my college hostel, every one of them present there turned emotional. They argued that India is a poor country, and hence need intelligent planning, to which Nehru made significant contributions. Their response was similar to what you would get from sulky children when you point out that their parents could be wrong. “Breaking Free of Nehru”, by Sanjeev Sabhlok, a resigned IAS officer, flies in the face of such an attitude. Sabhlok is one of the very few Indian authors I have read who has a reasonably good understanding of Free Market Economics. He points out with extreme clarity and precision that the legacy of Nehruvian Socialism has done incalculable harm to India.

The author begins by clearly stating that this is not a book about blaming Nehru. He doesn’t question the allegedly “good” motives of Nehru, and is of the opinion that he was an honorable man. It is not the ends Nehru had in mind he questions, but the means he used to achieve them. He takes for granted that not many would argue against helping the poor. Using violent coercive means to achieve this end, however, produces the exact opposite result. This should be obvious. Nothing good was ever done through coercive means.

Sabhlok, who served the Indian Government for eighteen years, knows from his own experience that such policies breed corruption, poverty and inefficiency. He remembers an IAS officer who joined with him in 1982 saying that his “sole objective in joining the service was to make money”. He was once asked by a young man whether he moved to the Assam cadre from Haryana cadre as more money is to be made in Assam. In all the years he served the Indian Government, he didn’t come across a single officer who even compares with the public officials he met in Australia, where he works now. I don’t have to quote extensively from his work. Everyone knows these facts.

I find it really sad that Sabhlok’s attempt to set up a liberal political party in India didn’t succeed. India badly needs politicians who have studied political economy from a Classical and Austrian point of view. India, needless to mention, has never known the concept of liberty. Even when our freedom fighters and other politicians used words like “freedom”, they never clearly understood what it really means. A hampered market economy was the intellectual default. This wouldn’t have happened if people who know better had spoken up for the cause of Individual liberty. And that precisely is what books like “Breaking Free of Nehru” do.

I have, however, several differences with the book. I would like to mention it here. I don’t think Nehru’s motives were good. I think we should be really careful when branding the motives of a person as good, when the end result is chaos. Good-By what standard? We should remember the words of Ayn Rand-“Do not ever say that desire to do good by force is a good motive. Neither stupidity, nor power lust is a good motive”.

The author says that, in India, there was forceful expropriation of property and land in the manner of Robin Hood. Several thinkers, including Ayn Rand and her followers, have made this mistake. Robin Hood, in my opinion, was actually a good guy. I shall quote the philosopher Tibor Machan: “Often it is Robin Hood who is held up as the role model for justifying taxation: Didn’t he “steal” from the rich to “give” to the poor? Well, not, not really. In the original version of the legend, Robin Hood did just the opposite: He stole from those who stole from the poor and returned the loot to the rightful owners. In those days the upper classes, from the king to all his cronies, routinely engaged in extortion. They disguised this, however, with the phony claim that everything belongs to the king and his cronies. Yes, monarchs and those who rationalized monarchy spun this fantasy and managed to sell it to the people that they where the rightful owners “of the realm,” that they had a “divine right” to rule us. This way when the bulk of the country went to work on the farm or wherever, they had to pay “rent” to the monarch and his cronies.”

Like the author, I don’t think that progressive taxation is compatible with Capitalism. It is true that marginal utility of money decreases with increase in wealth, and a rich person cares far less for a thousand Rupees than a poor person. However, this doesn’t contradict my position. There is a limitless need for wealth. The total utility of the wealth a person has should go on increasing so long as wealth has any positive marginal utility to him. There is a need for more wealth so long as additional wealth has any marginal utility. Progressive taxation would only undermine savings and capital accumulation. Taxation is completely incompatible with Capitalism. There is also the Inherent immorality of taxing Peter to pay Paul.

There are some statements in the book, which libertarians like me can’t agree with. Freedom, the author says, is good, and anarchy is bad. I can’t disagree more. Anarchy is the logical end result of total freedom. Anarchy and Capitalism are fully compatible. There is no justification for a bunch of robbers to take money forcefully from you and providing you services, forbidding that you buy from others. All services, including defense and security services could be provided by private individuals. Government is in fact a criminal organization which robs murders and drafts the citizens in a particular geographical area.

The author makes a case for Government regulations quoting an example of a coal miner working under dangerous conditions. However, it is not at all evident that there is a need for a Government to ensure safety for the worker. In case a worker dies in a free society, the Insurance Company of the employer would have to compensate the employee’s family. Insurance companies, hence, would have a policy to make sure that its customers ensure safe working conditions, as their profits would depend on it.

Another point where I disagree with Sabhlok is on social security and public funded education. We libertarians don’t want the poor to starve or children to go without education. Quite the contrary! We believe that the society would deal with these issues in a better manner in the absence of Government coercion. Under Capitalism, people who deserve such aid would not be many and could easily be taken care of by private organizations and voluntary charity.

All said, I highly recommend this book to anyone who wants to understand Individual liberty in an Indian context. Also visit his Freedom Team Of India website, and consider joining the Freedom team.

Lets say if you somehow had the psychic ability to be able to predict the future demand and supply of wheat, say up to 6 months to 1 year in future. How do you think you would be able to use this ability to do good in the world? You could go to all the wheat farmers and tell them how much the future supply and demand of wheat would be, so the farmers will now be able to produce wheat more in accordance to how things are going to be at the end of the wheat season.

If the supply is going to go down considerably(say because in Southern India its going to rain a bit too much thus destroying the wheat crop), the wheat farmers will be geared up to produce more wheat that season to compensate for the fall in supply thereby fulfilling the demand of the market. Thereby benefitting both the consumer and the farmer.

Similarly if its going to rain pretty well and it will result in sufficient harvest, the farmers will produce less, put less money on the crop and it will create a bountiful harvest.

Wouldn’t this foresight into the future going to help the poor farmers. Unfortunately we face two problems in realization of this scenario.

1. You don’t have such a psychic ability.
2. You cannot just convince the farmers out there that what you are telling them is true

That is, there is no such psychic ability possessed by anyone who can predict the future demand and supply with accuracy. The closest to such a prediction you can come to, is to study weather, study the crop cycles, study the soil, and then make an educated prediction. Even when you are able to make such a prediction you face the problem of convincing the farmers. Why should farmers believe you who says that there will be a shortage of Wheat coming harvest season, or believe me who says that there will be an abundance of wheat this harvest season. There must be a solution to this problem.

I bet the way most Indians are educated to think will think of a centralized government solution of this problem. One possible solution which was given to me by someone really smart went something like this:

Govt should organize a national level exam(on the scale of IAS-Indian Administrative Services exam), to find out the most intelligent soil, agriculture, wheat scientists and form a group which will then issue advisories on how much wheat the farmers must produce. This committee must be kept away from the political pressures, and must be paid very highly so that we are able to attract the most intelligent IITians-Agro scientists etc etc.

The problem with the above solution is, that it simply is the worst possible solution of the problem, it is so bad that its just going to worsen the problem. As long as the “National Advisory Committee” gives good recommendations its good, but when they will screw up which will happen more often than not, its going to create disaster. Plus it is actually no different than the Central Planning we have followed from Independence till 1990s, I am sure that gave us some amazing results. Also it basically excludes 99.99% of other people who could have been right.

So what’s an alternate more efficient solution? Wouldn’t it be better if every individual can take part in this process of prediction the wheat prices in future? Not only anyone wishing to take part must be able to take part, it should work more efficiently than handing out the power to a few individuals. It must penalize the participant if their prediction turns out to be wrong, and must give more weight to the prediction of an accurate individual.

The system would basically allow the farmers to sell wheat at a fixed price on a future date. That is if a farmer is producing wheat for the harvesting of June 09, and currently it is Jan 09, then he must not worry about the uncertainty of the wheat prices in future. Someone must assure him the price he is going to get.

Ladies and Gentlemen, presenting Commodity Futures.

Let me first explain you the concept of Futures contract. In finance a futures contract is a standardized contract to buy and sell a standardized quantity of commodity at a future date at a market determined price. The price is determined by the instantaneous equilibrium between the forces of supply and demand among competing buy and sell orders on the exchange at the time of the purchase or sale of the contract.

In simple words, if I am a wheat farmer, and you are a wheat price speculator, buy the wheat from me now, which will be delivered to you on a future date when the harvest occurs. If you think in the future the wheat price is going to be $700 per quintal, then lets sign a contract where you pay me $700 per quintal, and I will deliver to you wheat on that future date. If on that future date, the price of wheat is $700 or more, you make profit, if its less than $700 then you make loss. In either case the headache from my head of worrying about the future wheat demand is gone. My work as a farmer is now to simply grow wheat, and not worrying about the trading of the wheat.

This is a much better way to discover the future prices of any commodity compared to putting the burden on the poor farmers, or to give the task to one elite intelligent group of Oxford graduates. In this way anyone in the market can take part in the price discovery of the commodities. The risk of wheat prices plummeting has been taken off from the farmer, and is handed to the guys who are more focused on the task of predicting the future prices. If they succeed they make the profit, and they will trade even more futures and become larger contributor in the price discovery. If they fail they will be penalized for making the wrong prediction.

Futures trading is not new to the world. In fact from wikipedia entry on Futures:

The origins of futures contract can be traced to Ancient Greece, in Aristotle’s writings. He tells the story of Thales, a poor philosopher from Miletus who developed a “financial device, which involves a principle of universal application.” Thales used his skill in forecasting and predicted that the olive harvest would be exceptionally good the next autumn. Confident in his prediction, he made agreements with local olive-press owners to deposit his money with them to guarantee him exclusive use of their olive presses when the harvest was ready. Thales successfully negotiated low prices because the harvest was in the future and no one knew whether the harvest would be plentiful or pathetic and because the olive-press owners were willing to hedge against the possibility of a poor yield. When the harvest-time came, and many presses were wanted all at once and of a sudden, he let them out at any rate which he pleased, and made a large quantity of money.

In the modern times, Futures trading has been around in America for over two centuries. In 1848, the Chicago Board of Trade (CBOT – the world’s first modern futures exchange) was formed. In India the futures trading has been going on with some big government support since 2002. In terms of trading volume Mumbai Stock Exchange is world’s largest stocks and futures trading exchange.

Since my article is focused for Indians and I am using Wheat as an example, let me talk a bit about two major Commodity exchanges in India(there are more than 20 overall).

1. National Commodities and Derivatives Exchange(NCDEX) – Wiki – A regulated online commodity exchange based in Mumbai.
2. Multi Commodity Exchange of India Ltd(MCX) – Wiki – An independent commodity exchange based in Mumbai with 84% of Market Share in 2008.

Lets take an example of what a Wheat futures contract specifications in India consists of.

http://www.ncdex.com/product/Agro_product.aspx?comm=WHE

Name of commodity – Wheat
Ticker Symbol – WHTSMQDELI
Unit of Trading – 10 Metric Tonnes (That is one contract deals with 10 metric tonnes of wheat)
Quotation Price – Rs per Quintal (This means that if you read the price of Wheat contract Rs 830, it means that on the delivery date market thinks the price is going to be Rs 830 per quintal).

Tick Size – 20 paisa (that means the price of Futures contract can go up and down by 20 paisa or more.

Delivery center – Delhi (once the Futures contract expires you can take the delivery of the contracts from Delhi delivery center)

There are many other things involved with trading commodities, the details of which are out of scope of this article. The conclusion I wanna put in is that Grain futures trading can be a very powerful way to actually serve the people, to help the poor farmers by taking the risk off their hands, as well as make a living while doing that. There are tremendous risks involved with futures trading and you might lose all your capital in it. So instead of trying to become all out commodity trader, try to hedge your wealth with a real job.

Before you become any kind of trader I would suggest you to read this book by Nicholas Taub:
http://en.wikipedia.org/wiki/The_Black_Swan:_The_Impact_of_the_Highly_Improbable

Karl Marx and Fredrick Engels say in their famous work ‘The Communist Manifesto’:

“It is enough to mention the commercial crises that by their periodical return put the existence of the entire bourgeois society on its trial, each time more threateningly. In these crises, a great part not only of the existing products, but also of the previously created productive forces, are periodically destroyed. In these crises, there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity — the epidemic of over-production.”

So according to Marx and Engels, capitalist economies suffer from an inherent trait of periodic depressions. They go on to explain further:

“Because there is too much civilisation, too much means of subsistence, too much industry, too much commerce. The productive forces at the disposal of society no longer tend to further the development of the conditions of bourgeois property”

According to them, the root cause of a depression is too much prosperity. For better understanding of this subject, I would also like to cite the Marxian crises theory, which revolves around the concept of the falling tendency of the profits in capitalist economies. Marxist writers often use this in various ways to put forward their theory of Imperialism. However, I would restrain myself from explaining that here.

The basic premise of the overproduction doctrine is that a capitalist economy, as it gets more and more efficient with labor-saving machines introduced for the production of goods, moves towards a state of increased efficiency which leads to overproduction and that overproduction causes losses. Therefore the core reason behind the losses are overproduction and increased efficiency. Because of overproduction, there are no more profits in the economy, and hence the economy goes into a deep depression. So, it is the lack of profits which causes depression.

In order to debunk this Marxist proposition, we need to understand what causes profits to exist in the market. I will explain how profits never cease to exist in a non-stationary economy where consumers’ preferences and production conditions change so often. I will start of by quoting Austrian economist Ludwig Von Mises from his famous work ‘Human Action’:

“Profit is not related to or dependent on the amount of capital employed by the entrepreneur. Capital does not “beget” profit. Profit and loss are entirely determined by the success or failure of the entrepreneur to adjust production to the demand of the consumers. There is nothing “normal” in profits and there can never be an “equilibrium” with regard to them. Profit and loss are, on the contrary, always a phenomenon of a deviation from “normalcy,” of changes unforeseen by the majority, and of a “disequilibrium.”

What Mises says here is that the origin of profits (and losses) is due to the “disequilibrium” phenomenon. So how does this “disequilibrium” phenomenon actually express itself like in a real economy?

Suppose that a market is dumped with millions of tonnes of potatoes much more than the consumer’s desire to purchase. This causes the market gets cleared only when the prices decrease to a large extent. This might lead to immense losses to the farmers, but can these losses caused by the overproduction in one sector of the economy cause a recession? The answer is no.

Lets go further and ask, does this overproduction in any way lower the average rate of profit in the economy. Again no, it doesn’t. The partial overproduction in a particular sector of the economy leads to partial underproduction in some other sector of the economy. Like in our example, the overproduction of potatoes means that the equipments and labor that were used in growing potatoes could have been used better in some other sector of the economy.

How would this show up in the price levels? The prices of the commodities that are underproduced(because of employment of resources in overproduction of potatoes) will rise proportionately and lead to higher profits. The losses that are made in the sector where overproduction causes havoc is compensated by profits in the sectors where commodities are underproduced. In simple words potato farmers will be making huge losses and the wheat, rice, barley farmers will be making huge profits.

This is what Mises calls a “disequilibrium” phenomenon. The market always moves in a direction to minimize this disequilibrium, but almost never reaches equilibrium because of various factors like the change in consumers’ preferences, natural causes etc.

Having explained the basic misconception, I would also like to deal with such speculations which contemplate the possibility of an overproduction in every sector of the economy. People argue overproduction everywhere could lead to losses everywhere completely wiping out profits from the economy. But there is no need to worry, the market has answers again. An overall overproduction everywhere in the economy still doesn’t set the “disequilibrium” that exists between the preferred quantities of various goods into equilibrium. Here one needs to understand that people’s needs are humongous and can never be satisfied. The market can only try to provide the proportionate quantities of various commodities according to the consumers’ preferences. Profits (and losses) are nothing but the signals that guide producers to adopt to the consumers’ preferences, and they never would cease to exist.

Being a Socialist up till a few months ago, I spent countless hours figuring a way out to enable a central planner to somehow manage to order the exact amount of production required to satisfy the maximum demand for the maximum people, and I did reach onto some complicated unrealistic solutions, but nothing beats the simplicity and realism of the Free Markets.