S. Balakrishnan

THE thing about free markets, according to its votaries, is that each man and woman works for his or her own self-interest and hey presto, society achieves economic nirvana.

By the same token, Government intervention will upset the applecart and interfere in nature's solution to the economic problem.

Originally propounded by Adam Smith in his "Wealth of Nations", this has continued to dominate economic theory, teaching and policy the world over through the last century.

Not without dissent, though. Within the free market camp itself, John Maynard Keynes questioned the belief that economies and markets would right themselves on their own if left alone.

If there was a mismatch between business' desire to invest and savers' desire to save, an economy could conceivably slip into recession. In this situation, even a central bank can do little. Only Government can use the fiscal lever to provide the stimulus for full employment. Keynes seemed to offer the band-aid that capitalist economies were looking for at a time when socialism was capturing the imagination of the world.

Marx had an entirely different take. But, shorn of his provocative theories of class distinctions and stripped to essentials, Marx was not saying something very different from Keynes. However, his answer, in contrast, was to abolish private ownership and make Government run the economy in its entirety.

Unfortunately, that icon of a Communist economy, the former Soviet Union, could not get down to making enough of even soap and toothpaste for its people. In hindsight, the collapse of Communism was inevitable because it seems to run counter to basic human nature and instincts.

Times have changed and changed rapidly. Industrial capital has given way to financial capital. No longer does a country's wealth depend on an industrious population maximising savings and investment for a better future, as classical economics and economists envisaged. (The richest country in the world, the US, is also the world's biggest dissaver).

Financial markets have taken over. You are worth what they tell you. In this topsy-turvy situation, a pauper of a country could turn wealthy overnight if global fund managers decide it is the right place to be in for the future.

Go forward a little with this line of thinking. Imagine a transformation of India's cities is in the works. India's slum dwellers could be sitting on potentially the most valuable real estate!

Is "marketisation" then the Holy Grail to lift the poor out of their poverty in the shortest span of time without having to design and bother about a plethora of anti-poverty programmes?

(This article was published in the Business Line print edition dated July 20, 2005)
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