*The Clash of Economic Ideas*

by on March 26, 2012 at 2:27 am in Books, Economics, History, Uncategorized | Permalink

In 1958, on his first visit to India, the Hungarian-British development economist Peter Bauer was eager to meet the Indian economist B.R. Shenoy.  Bauer knew the name from a “Note of Dissent on the Memorandum of the Economists’ Panel,” which Shenoy had written criticizing India’s Second five-Year Plan.  In 1955 the Indian government had recruited twenty-one senior Indian economists for the Panel of Economists, chaired by the minister of finance, to review the plan.  Twenty of the economists had signed a memorandum endorsing the plan.  Professor Shenoy was the lone dissenter  Shenoy’s “Note of Dissent” was an annoyance to members of the Indian Planning Commission; to Prime Minister Nehru, who had initiated the planning effort; to Nehru’s adviser P.C. Mahalanobis, who had drafted the plan; and even to international aid officials, who overwhelmingly supported the planning effort.  Shenoy had become persona non grata in official economic policy-making circles.

Yet Shenoy turned out largely to be right.

That is from the forthcoming excellent book by Lawrence H. White, Amazon link here.  The book is not mostly about India, but it is about the role of economic ideas in shaping economic outcomes.  The chapter on India is my favorite, however, and it is perhaps the very best place to start to understand the failures of India’s planning period.

White also points our attention to Milton Friedman’s 1955 Memorandum to the Indian Government, which is I believe not well known, not even among Friedman fans.

1 Paul Johnson March 26, 2012 at 2:58 am

With typos corrected the 1955 memorandum’s conclusion: “the fundamental problem for India is the improvement of the physical and technical quality of her people, the awakening of a sense of hope, the weakening of rigid social and economic arrangements, the introduction of flexibility of institutions and mobility of people, the opening tip (?) of the social and economic ladder to people of all kinds and classes.” Not exactly rabid free-market fundamentalism.

2 david March 26, 2012 at 3:41 am

The Shenoy dissent seems almost oddly out of a modern free-market tract, however.

Then again, it does espouse protomonetarism, and doing as much in 1955 would have marked you as heterodox. Imagine a post-Keynesian somehow being accidentally invited to comment on a Federal Reserve statement today and you can imagine pretty much the same response. In the old Keynesian worldview the inflation Shenoy claims would only occur if real growth failed to be as high as predicted and the dissent omits an argument as such; it would have been seen as both ideological dissent for its own sake and, worse, missing the point. Observe that Friedman’s memo does not make quite the same manner of argument, even as it expresses similar concerns.

(and: before we snark too much about foolish post-colonial socialists, remember there was another leader at the time operating out of the same Fabian playbook, namely Lee Kuan Yew, whose new government similarly went on to engage in the same aggressive nationalization, industrialization, Five Year Plans, etc – to much greater success. In retrospect the Indian plans probably put too much stock in the prevailing wisdom of economists, which happened to be wrong for key Indian issues – who saw the Green Revolution coming? If they had, would they have planned agriculture the way they did? – and failed to put enough weight on political self-sustainability. Even so the second FYP which Shenoy dissented from was still arguably acceptably successful; it was only by the third FYP onward when the wheels clearly fell off the cart)

3 the spam robots are getting better and better March 26, 2012 at 5:39 am

South Korean state directed industrialization was also relatively successful. Although both SK and Singapore are less than a fly speck compared to India so who knows. At least South Koreans were just as poor as the Indians in 1955.

4 Rahul March 26, 2012 at 10:01 am

Were SKoreans really as poor as Indians on a per capita basis in 1955?

5 Douglas Knight March 26, 2012 at 12:47 pm

Koreans were 50% richer. In 1945, they were equally poor, but that’s probably due to the occupation and not a good comparison. (Interesting that the Korean War doesn’t seem to have been so bad from a GDP perspective.)

6 Paul Johnson March 26, 2012 at 7:08 pm

It is very hard to compare. Singapore maintained free trade, which comprised a huge share of its national economic activity. And it agressively courted multinationals. Other sectors (like housing) were managed by the government, to be sure.

7 doctorpat March 26, 2012 at 9:19 pm

Meanwhile India doesn’t even have free trade between different parts of India.

8 david March 26, 2012 at 3:56 am

A question for T.C.: does the book attempt to remain ideologically neutral or at least present historical disputants in as sympathetic a light as possible, or does it seek to explain how the evolution of ideas vindicates (presumably) a given modern perspective – possibly Lawrence White’s?

Both approaches would be valuable, of course, albeit for different reasons. Sometimes one wants to understand why they did what they did, sometimes one wants to know where a modern idea stands in the history of thought.

9 Rahul March 26, 2012 at 4:21 am

Ironically India still has a quite influential central Planning Commission.

10 david March 26, 2012 at 4:31 am

All countries with established civil services and the intent to make multi-decade plans tend to have at least one such bureaucracy. Singapore has one, for instance.

Observe that “liberalize X over the next twenty years or so” is as much a plan as “nationalize X over the next twenty years or so” is.

11 Daniel March 26, 2012 at 4:59 am

Was the cover designed in the 70’s?

12 J March 26, 2012 at 8:40 am


13 TmC March 26, 2012 at 9:09 am

“Shenoy had become persona non grata in official economic policy-making circles.

Yet Shenoy turned out largely to be right.”

He couldn’t have been right. There was a concensus.

14 doctorpat March 26, 2012 at 9:21 pm

It was wrong, therefore it wasn’t really a consensus.

15 Anshu March 26, 2012 at 8:41 pm

$40!!! .. why are these books so expensive? If the book cost $15 then I would buy it. I guess I’m gonna wait for some library to stock it. Do publishers simply look at all the other books in the genre to come up with a price or does anybody seriously estimate some demand curve and consider a different price point?

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