Efficient Planning in a Democratic Society

Summary

Originally delivered as a talk at an international symposium in Turkey in 1964 and issued in August 1965 as a Forum of Free Enterprise booklet, Dr. F. A. Mehta’s essay confronts the central post-war development question: whether rapid economic growth can be secured, stimulated, and sustained within a framework of political democracy, individual liberty, and the rule of law. Writing for a readership of over a hundred under-developed countries, Mehta refuses both halves of the prevailing fatalism — that democracy must be sacrificed for growth, or that growth must be slowed to preserve democracy — and instead diagnoses the real source of strain: in the short run, growth itself generates rising prices, consumer-goods shortages, severe inequalities and harder working hours, all of which press on democratic stability before the gains diffuse downward.

The second and longer half of the booklet turns from the tensions of growth to the methodology of growth — the mechanics and ideology of planning. Mehta surveys the spectrum from the Communist model based on totalitarianism, through dirigiste planning grounded in physical controls, to a liberal-democratic planning that relies on the price mechanism as far as conditions permit. He argues that the price mechanism’s defects are real but its virtues — efficient allocation of scarce resources and the harnessing of individual enthusiasm, skill and effort — are so substantial that developing countries’ wholesale ideological rejection of it is “a bit pathetic, if not pathological.” Citing Hugh T. Patrick on Japan, B. F. Johnston on agricultural productivity, W. W. Rostow and Simon Kuznets on growth cycles, and pointedly the Liebermann reforms in Soviet Russia, Mehta argues that even command economies are turning back to price signals; he singles out Prof. B. R. Shenoy as the lone eminent Indian economist arguing this line, with most Indian planners and businessmen having capitulated to “the magic word” of Planning.

The closing pages lay down a quantitative liberal programme: planning must err on the side of caution rather than ambition; physical controls must carry strict “time-limits”; income tax in isolation should not exceed 60% and combined with other taxes not 45% of assessable income; inflation should be capped at 2-3% in a developing economy with growth at least 6-7%; interest rates should be high enough to encourage savings; nationalisation should be confined to areas where private enterprise has been proved unequal; and political leadership must find the “optimum” or “golden mean” by judgment, not formula. Mehta ends with the observation that economic growth, ironically, is fastest when driven by something like spiritual fervour — that monetary incentives alone do not move human beings, but neither will faith alone deliver the goods, and that an age is upon developing countries in which a system is judged by what it delivers.

Key points

• Frames the era’s central economic-political question as whether rapid development can be secured within a framework of political democracy, individual liberty, the rule of law and freely elected governments.

• Argues that in the short run economic growth raises tensions — rising prices, shortages of consumer goods, longer working hours and severe inequalities — and so endangers political stability before its gains are diffused.

• Distinguishes two separable pressures on democracy: the tensions generated by rapid growth, and the mechanics and methodology of growth — that is, planning itself.

• Defends the price mechanism as the best available instrument for combining efficiency and individual freedom, calling its blanket rejection in developing countries dogmatic and ideologically driven.

• Cites Hugh T. Patrick on Japan, B. F. Johnston on agricultural productivity, and the writings of Simon Kuznets and W. W. Rostow to show that historically rapid growth has required tolerance of inequality and disparities of outcome.

• Reads the Liebermann reforms in Soviet Russia as evidence that even command economies are returning to the price mechanism — “a system of capitalism without capitalists.”

• Singles out Prof. B. R. Shenoy as the lone eminent Indian economist consistently defending the price mechanism, against the consensus of Indian planners, businessmen and intellectuals — including Prof. M. L. Dantwala’s more equivocal acceptance.

• Concludes with a quantitative liberal programme: income tax ceilings (60% in isolation, 45% combined with wealth tax), inflation capped at 2-3% p.a., growth not below 6-7%, strict time-limits on physical controls, nationalisation confined to demonstrated failures of private enterprise, and political judgement to find the “golden mean.”