Free market economies stimulate greater economic growth, whereas state-directed economies stifle growth. In a free market economy, the law of supply and demand, as determined by consumer preferences, is the most efficient means to allocate resources. If consumers demand for a good or service declines, then the firm which produces it will have to invest in alternatives or perish. Free markets also allow for private ownership of goods, services and property. Individuals will always attempt to maximize their utility because they know that in a free market system they will be rewarded for it.
Planned economies are inefficient because goods and services are produced without regard to whether there is a demand for such goods. They will also produce goods that are lower in quality because market competition does not exist to provide incentives to market better products. Finally, command and control economies are organized for the collective good which stifles the pursuit of individual utility that free market systems are predicated on.
A democratic political system is an essential condition for sustained economic progress. Free market economic systems value the pursuit of individual utility. Similarly, democratic political systems value the liberty of the individual over that of the collective or the state. It is a thus a prerequisite for successful economic systems to be complemented by political systems that allow representative and participatory political systems. Authoritarian or collective regimes value state control over individual prerogatives.
What is the relationship between corruption in a country and economic growth? Is corruption always bad? Corruption stifles legitimate competition because interests looking to expand their own utility will pay off government officials to get lucrative contracts. The use of competition is a plus in both political and economic spheres since it rewards those individuals who are the most talented and innovative. But this is absent in systems where corruption is rampant because it discourages potentially talented individuals from a participating in a rigged game. Corruption is always bad because it stifles competition and leads to the production of goods and services that are generally not of worthwhile quality.
The Nobel Prize-winning economist Amartya Sen argues that the concept of development should be broadened to include more than just economic development. What other factors might be included? How might adoption of Sen’s views influence government policy? Do you think Sen is correct that development is about more than just economic development? Sen argues that many different measures should be included to accurately measure the total systemic health of a nation. These measures would include political systems that are democratic, have a free press, and a civil society that functions without fear of reprisal. States with authoritarian regimes have a track record of neglecting the basic needs of their citizens. For Sen economic development needs political development to succeed. Also major impediments to political, civil, social and media freedom should be removed in order for real economic development to occur.
Sen’s arguments have influenced international policy makers at the United Nations who introduced the now widely used Human Development Index (HDI) to rate and rank nation-states on a wide range of economic data. The HDI uses the following three measures to determine the quality of human life in different nations: life expectancy at birth (indicates how good health care is), educational funding and attainment (based on the adult literacy rate and enrollment in primary, secondary and tertiary schools), and where per capita incomes are sufficient to meet the basic needs of life as measured by Purchasing Power Parity (PPP) relevant to that particular country.
His views would influence government policy by broadening the measures that are used to evaluate the total systemic health of their nation. This could then motivate them to a take a comprehensive approach to dealing with their nation’s problems, such as investing in health care for children and education for women.
Sen is correct, although I would argue that what he refers to as development should be considered growth. Many nations experience economic growth without any development, economic or otherwise. This creates a type of paradox where gross domestic product and personal income per capita are reportedly rising, but actual daily experience indicates a very different reality. Indeed a range of social, political and economic conditions should be measured by policy makers when evaluating the total health of their nation. These measures can include poverty, disease, illiteracy, malnutrition, and unemployment as a sort of misery index.
What kind of economic system did India operate under during 1947-1990? What kind of system is it moving toward today? What are the impediments to completing that transformation? India operated under a socialist economic system during that period with a state directed planned economy. India is increasingly loosening up its bureaucracy and creating a more fully functioning free market economic system free from excessive state control and planning. The impediments to that transformation are opposition from labor, political and business interests who fear that opening up India too much would result in lower living standards for domestic workers and businesses. They fear a totally free market would open India up to cheap Chinese made goods. Finally, there are still legal and bureaucratic legacies from the era of tight state control and planning that can still block many initiatives such as lower tariffs and privatization.
How does public ownership of production impact efficiency of businesses, new business formation and India’s growth rate during 1947-1990. Private businesses could only expand with government permission. Obtaining a permit to diversify into a new area could take years. Heavy industry was reserved for state owned interests. Production quotas and high tariffs prevented foreign competition, which limited the growth of a healthy private sector. Protections for labor made it difficult to fire workers. By the early 1990s it was obvious that these policies led to the very weak economic progress and grossly underdeveloped human and material infrastructures.
India has pockets of growth in key areas. Why is India developing strength in these areas? How might success in these areas help generate economic growth in other sectors? India is developing strength in certain sectors due to the dismantling of the industrial licensing system, allowing investment by foreign enterprises, allowing raw materials to be freely imported, and lowering taxes on individuals and corporations. However these policies have much further to go before they can produce similar outcomes in other economic sectors.
Is India an attractive target for foreign multinationals selling consumer goods? Yes. The size of the Indian middle-class has grown to 100 million. This number is larger than the total populations of most countries and represents a potentially lucrative consumer market.