Liberalism. Sanjeev Sabhlok's backup blog

This backups my posts at

Hacked today 8 Nov 11

Went to sleep after midnight. Website OK. By the time I get up and log in (7 am) the site has been hacked.

phpadmin – changed back to self as user. Activated whitehouse = they had switched to the default WP theme and messed it up. I hope that them will be repaired when the next version of WP is loaded.

Getting the biggest bang for the buck

Here's the entire range of responses from people who face misgovernance in India. The responses are listed in order of the response with the feeblest impact to strongest impact. This list excludes joining the corrupt governance system or working as a clerk to the corrupt leaders of India.

  • Do nothing, say that this is 'fate', or 'this is India'.
  • Join an internet group (e.g. Facebook) – basically a useless activity unless you do something well beyond it.

Focus on specific case

  • Whinge and talk/ write about it to a friend e.g. on email/Facebook.
  • Whinge and write about it to a newspaper (e.g. my letter to editor, Time – and I published perhaps about 200 letters to newspapers 30 years ago, mostly non-specific, i.e. on general issues)
  • File an RTI application 
  • Help trap a particular corrupt person (e.g. video him/her) (I trapped some corrupt people during my work in the IAS)

Moving from specific case to the broader issues:

As you will note, I have spent most of my time – particularly as I have grown older – focusing on actions which will yield the largest impact: after realising that trying to change small things (or individual cases) simply won't help: it is like removing one piece of rubbish from a dirty nullah while others are pumping in huge amounts of rubbish from behind! You have to stop the INFLOWS of rubbish, not the individual rubbish.

Unfortunately, the vast majority of Indians still insist on the most ineffective use of their time: by doing useless tinkering around the edges. 

Let it be clear to all Indians that tinkering around the edges will NOT make the slightest dent to the system. I suggest that they think more broadly and strategically. I suggest that it is vital for us to get the biggest bang for the buck from one's time. 

Let me repeat: There is NO long-term value in focusing on tiny issues – even things like RTI. The governance system in India can be easily reformed, once the people's mandate exists, to ensure that RTI type things becomes irrelevant.

All we need is sufficient number of good leaders to defeat the bad leaders that rule India. Why not just do that and finish this whole rigmarole or jhamela? Why suffer poverty and misgovernance for even one minute longer? Why tinker at the edges?

Let's just fix the whole thing! That would be much easier! And a far better use of our limited time.

Can't force a horse to drink!

A friend wrote to me suggesting, among other things, that "if we want to become super power, we shall have to create things that are unique, and not restrict ourselevs to what is already used or implemented. Copying something already done we can not become leaders.. to become leaders we will have create something of our own.."

That set me off. I thought that's information worth publishing on my blog. I have had very similar debates with so many others. It seems Indians have a mania to try to prove that they are different from others. I totally disagree.,

Because all humans are exactly the same, within, my proposals all require very minor change from current systems in India to achieve wonderful results. In particular, I always recommend that a detailed understanding of human incentives should inform the design of governance structures. To the extent that we can incorporate natural human tendencies (desire to avoid accountability, lack of effort, arrogance, not consulting others, etc.), we'd have created something of interest. We basically need to ensure that bad people don't hijack such structures? Failure to do that dooms all 'systems' to failure. 

And yes, everything that works in the West can (and indeed has!) worked beautifully in India. Indians have the same DNA as any other human being. That proves the point. That is why they perform so beautifully in the West – because it rewards excellence and punishes bad performance. In India we do the opposite. That is not a creative 'solution'  but destruction. 

I don't believe that to reach the moon you have to reinvent physics within India. That would be an outrageous waste of time. So also for social performance and economic prosperity. I am 100% committed to world-best practice reforms, and don't care for where a good thing is invented. My books are my message. I distill the best from the world and offer these ideas to India. That's my goal. Whether Indians take it or use it is not my business. That's their problem! I can't force a horse to drink.

A list of good Indian economists

Since I vigorously advocate a dramatic increase in economics education in India, I am perhaps obliged to list out a few Indian economists (past and present) whose work can form the basis of an expanded program in economics eduction in India. Of course, India would need to take into account good thinkers from the entire world, particularly Hayek. But building a list of good Indian economists could prove useful to those looking to frame a reading list for undergraduates in colleges across India. Note that this list is not restricted to qualified economists alone; sometimes those not highly qualified in economics may have value to add. Also, I do not necessarily support all the work of these economists, but most disputes I have with them are on the fringe, not detracting from the intrinsic value of their work.

This list is likely to be incomplete, since I read more political philosophy than economics these days, so I'm happy to add to it based on your recommendations (provided you exclude those with leftist inclinations – of which there are just too many in India!). Send your recommendations through the comments section.

The list is in alphabetical order of first name. Not all these economists are living today but the works of those who have passed away (or in due course will certainly pass away!) can be used as a basis for designing good educational material for high school and first year University students across India. Everyone in India (and the world) must be economics literate. Else the country is basically doomed to repeat its mistakes again, and again. 

Professional Economists (i.e. with PhD in Economics and/or extensive teaching experience in economics)

  • Ashok Desai
  • Avinash Dixit
  • Bellikoth Shenoy
  • Bibek Debroy
  • Deepak Lal
  • Jagdish Bhagwati
  • Kaushik Basu
  • Nirvikar Singh
  • Parth Shah
  • Pranab Bardhan
  • Subroto Roy
  • T. N. Srinivasan

Good economic thinkers

  • Atanu Dey (PhD Eco)
  • Barun Mitra
  • Gurcharan Das
  • Sauvik Chakraverti
  • Sharad Joshi
  • Swaminathan S. Anklesaria Aiyar

Islamic economics finds that Adam Smith was right

An internet friend from Iran who is fighting for liberties both economic and political, sent me the following article from the New Yorker that was published on 2 February 2009. The article is long but a good read and provides extremely important insights not only into Iran but into freedom more generally. Highly commended (read it below).

Btw, I've also been made aware of which spreads information on the benefits of freedom in Iran. Mr Tabibian, the economist cited in this article, contributes actively to the Rastak website. 

The possible impacts of Tabibian's work on a more free world

I do hope some people will translate his works into English – we might be missing out the works of a great writer on liberty if these works remain in Persian. There are MANY possible impacts of Tabibian's work, including on reforming Islam which has gone into a zone of fundamentalism in the past past few decades. Should Islam begin to value freedom, through free markets, then the world will become an ENORMOUSLY better place, with the fall of the last major bastion of resistance to freedom.

[Addendum: This last comment of mine has received some flak from the friend who sent me this article, so I'm posting her comment here: I have read your blog and pleased though I am that you are making Mr Tabibian's views more widely known, I fear I have to take issue with you over your remarks about market economics leading to greater freedom in Islam. Most Iranians prefer private enterprise and free-ish markets to state control and it has nothing to do with their religious belief.  Islam from  day one was a religion of laws about trade and how to exclude or include others in power. In Iran over the last 150 years, a kind of free market has operated (the Bazaar) which has had no impact on their traditional, closed beliefs nor has it led to Bazaaris asking for more freedom except for themselves – see the Bazaar strikes of the last three weeks. The "free markets" during the Shah's period were distorted by the role of the Court: you had to have connections to be able to invest in new business. Little has changed in this respect. Now the Revolutionary Guards play the role previously performed by the Shah's friends. The Iranian economy is not merely dominated by the state sector, it is in the hands of a Mafia which shares out state-run industries. The problem is essentially one of political control of all aspects of Iranian life.  [Iran is very similar to Putin's Russia in the way it uses the market].

The work of the Rastak pioneers is important in educating a future elite.  The legacy of the 1979 revolution has been one of half-baked Marxist ideas dressed up in a so-called Islamic veneer. ( Moussavi and his  group were in this camp and they have yet to come out with a clear programme on the economy ).  The Mojahedin Khalq, who opposed the Shah's regime and now that of the Islamic Republic of Iran, combine Marxist economics with Islamic ideology. 
What is remarkable about people like Tabibian is that they come from traditional religious families and in rejecting the economics of the revolution are themselves bringing about a much more important change in the way Iranian intellectuals look at the world. – MY COMMENT:  I stand corrected! Well argued riposte! It is gratifying to note that there is nothing fundamentally within Islam that prevents the world from becoming  a freer place.] 
This has great implications for India as well.   

This is a long (7,000 word!) article but well worth a read. The advantage of reading it on this blog is that I've highlighted key passages. The article presents an enthralling story of stupidity (leftist madness) vs. sense (rational economics). Very similar to the story about India that I've outlined in BFN. But let me make a short comment on economic literacy, first.

Economics literacy a mandatory requirement for freedom

Ultimately, there is no option for mankind but to become literate in economics (see this blog post of mine which shows why countries like Australia prosper: because they value economists equally, or more than doctors and engineers). After being a top science scholar of India (National Science Talent scholarship holder), and good enough in mathematics  to get into the extremely competitive IAS, I find that among all the disciplines I have studied in my life so far, political economy is king: it the hardest of all to understand, the most counter-intuitive. Indeed, most economists themselves have no clue about economics, being swayed by false assumptions. It is so hard a discipline that Adam Smith took such a fat book to explain it, and yet so few have ever understood what he said. 

Physical sciences, in comparison, are trivially easy, particularly if one chooses to be a technician like doctor or engineer. Unfortunately, during the Nehruvian era (the past 60 years), India lost its best brains to the physical sciences or the petty plumbing arts (engineering/medicine). In my mind a doctor is a mere plumber of the body [and often makes so many mistakes that I don't trust ANY doctor at all now, preferring to understand the issue on my own], an engineer a mere toy builder. The economist, on the other hand, is the plumber of the entire society: a job entirely on a different plane! The day India will start valuing economics, it will become free.


The Rationalist: A dissident economist’s attempts to reform the revolution, by Laura Secor

Not long ago, I visited the office of a financial consulting firm on a quiet dead-end street just north of the commercial center of Tehran. Several flights up, amid bare but light-filled rooms with worn nineteen-fifties-era office furniture, I met Mohammad Tabibian, Iran’s foremost free-market economist and—though he is virtually unknown in the West—one of the country’s most important reformers.

In the strange, tumultuous story of Iran’s thirty-year-old Islamic Republic, the battle over free speech has captured the world’s imagination, but the debate over free markets goes just as deep. Since the revolution, most industries in Iran have been owned either by the state or by enormous Islamic foundations that are connected to the ruling oligarchy and exempt from government oversight and taxation. While the Iranian government points to rapid economic growth, inefficiencies are rampant, and the traffic in exports, other than petroleum products, is anemic. Even traditional Iranian products like carpets have done poorly on the international market in recent years. (Between 1979 and 2003, the value of Iranian carpet exports dropped by more than half.) Iran’s economy is sustained almost entirely by oil, which accounts for eighty-five per cent of all government revenues, and in the past five years this money has kept the country afloat as the price of crude reached record highs. Now that oil prices have fallen steeply, a crisis looms.

Since the early eighties, Tabibian and other trained economists have advised the government to dismantle trade barriers, drop price controls, and force companies such as Iran Khodro—the troubled state-backed automaker—to compete or perish. But the government, in its various incarnations, has not listened. The current President, Mahmoud Ahmadinejad, who was elected in 2005 on a promise to distribute Iran’s oil wealth downward, has shrugged off expert economic advice in favor of grandiose gestures toward the poor. Upon taking office, he promiscuously handed out grants and subsidies; when these were not approved by the state budget office, he simply ordered the banks to issue more currency. He injected billions in oil revenues directly into the economy, dipping into the country’s savings to do so. Liquidity increased by nearly forty per cent in the space of a year. Iranians, lacking incentives for investment, used this cash to buy imports, which buried local industries and sent prices soaring. Already on the rise worldwide, inflation in Iran skyrocketed. Within a year of Ahmadinejad’s election, the inflation rate was the fourth highest in the world, after Zimbabwe, Uzbekistan, and Burma; by the summer of 2008, it topped twenty-eight per cent. Meanwhile, Ahmadinejad slashed interest rates, a move that encouraged lending, pushed the country’s fragile banking sector to the edge of ruin, and contributed to a surreal housing bubble in Iran’s cities. For each of the past two years in Tehran, real-estate prices have more than doubled.

Tabibian, who was trained at Duke University, has little patience for economic policies driven by demagogy. “You can’t find the things we are doing in Iran anywhere in the world,” Tabibian said. In 2006, he says, he became the first professor to be purged by the regime from Iran’s educational system. Other academics have been fired for demanding democracy or human rights; Tabibian was “retired” for supporting free enterprise. Critics have argued that his proposals undermine Iran’s revolutionary principles, but Tabibian remains steadfast in his belief that a free market can co-exist with social ideals.

A solidly built man of sixty, with a round face and a trim gray mustache, Tabibian speaks fluent English with a lucidity and a directness that is startling in a culture marked by allusiveness and elaborate courtesy. In Iran the spectrum of economic thought, Tabibian joked, “runs from left to left.” The economic populism of so-called conservatives, like Ahmadinejad, is not fundamentally different from that of reform-minded leftists: both factions talk of redistributing Iran’s wealth, not of restructuring its economy. “The right elsewhere normally has to have a deep commitment to orthodox market principles,” Tabibian explained. “That’s not true here. Conservatives in Iran want the government to interfere in economics, to give them certain privileges in importing, exporting, banking, credit, government contracts, purchases. They are not free-market people at all. They are more like mercantilists.” Tabibian’s own thinking lies off this map entirely: he believes that markets are more trustworthy than the governments that try to control them and that the liberalization of Iran’s economy is a necessary precondition for political freedom.

Free-market ideas—anathema at the time of the revolution—are finally becoming mainstream in Iran, Tabibian says, as the Islamic regime has repeatedly failed to find workable alternatives. This is happening, of course, at a time when the rest of the world is in retreat from the excesses of the unregulated market. Tabibian told me that he was not bothered by the negative example unfolding in the West. “We are on two different sides of the spectrum,” he said. “You need more regulation and government intervention in financial markets to avoid moral hazard; we need less regulation and less government intervention to avoid moral hazard. You need, maybe, to increase public spending; we need to reduce public spending. You need to reduce the rate of interest; we need to increase it.”

Tabibian, who was born in 1948, grew up in an impoverished town outside Isfahan, in central Iran. At that time, under Shah Mohammad Reza Pahlavi, Tabibian recalls, “poverty was a rule, well-being an exception.” Tabibian and his family were among the exceptions: they owned considerable property. His parents were schoolteachers, who died in a car accident when Tabibian was sixteen.

“I had the chance to look at our surroundings without the preoccupation of day-to-day livelihood and the obscure view that comes with the pain and suffering of being poor,” Tabibian said. “Some of my classmates died of ordinary disease, and many vividly suffered from malnutrition. The quality of housing in most neighborhoods was disastrous. This always preoccupied my mind. The common morality then in that town was that if the rich give part of their wealth to the poor, then the poor will be helped out. Many days and nights, in my imagination and daydreaming, I distributed the wealth of my family to the poor in the neighborhood. Always my calculation came to the same conclusion: that such an imaginary scheme, even if it happens, makes us poor and the neighborhood not much better off.”

One day, on his way to school, Tabibian noticed in a bookstore window a thick new book for sale titled “Economics.” It was a word he had never heard before. Tabibian asked his literature teacher what it meant. “He said it meant using your money wisely,” Tabibian told me. “I thought the phrase he expressed was more often true by default. Everybody knows how to use their money wisely if they’ve got some.” When he went home that night, Tabibian put the question to his father, who said he wasn’t sure but he thought that economics had something to do with the creation of wealth.

The next day, Tabibian went to the bookstore and pulled the book from the shelf. “It was full of graphs, tables, formulas, and lengthy arguments,” he said. “I noticed that the subject of creation and distribution of wealth is no simple matter. I thought, That is what I need to learn.”

Tabibian later realized that the book was a translation of the 1948 introductory-economics textbook by the American neoclassical economist Paul Samuelson. By then, Tabibian was majoring in the subject at Shiraz University. He went into the field, he told me, “hoping that someday I would help find solutions for the misery and deprivation of many around me.”

Tabibian shared this ambition with the generation of Iranian intellectuals, students, and other revolutionaries who toppled the Shah, in 1979. At that time, Tabibian was studying for his Ph.D. in economics at Duke. He was a devout Muslim and a member of the Islamic Students Association, which united Iranian expatriates across Europe and North America. The revolution was a powerful tug: expatriate scholars were pulled back into Iran, which they found in a heady state of utopian promise and practical disorder. “All projects were stopped,” Tabibian recalls. “The factories were closed. The ministries were in chaos. The systems in the old administration were not there anymore. Everybody was engaged in revolutionary activities, slogans, and shouting.”

Someone had to keep the economy and the basic structures of the state from collapsing, and that job fell to the students returning from abroad. Iranian students from M.I.T. took over the Ministry of Science; those from Stanford and the University of California system ran the Central Bank; those from North Carolina took over the Planning and Budget Organization, or P.B.O. “It was based on previous relationships,” Tabibian told me. “You collected other friends who knew each other from abroad.” For Tabibian, the key connection was to Mohammad Taghi Banki—a graduate of North Carolina State University and the head of the P.B.O. Banki hired Tabibian as the director of the agency’s Macro Economy Bureau in 1981, at a moment when the P.B.O. was charged with the awesome task of drawing up an economic agenda for the world’s first revolutionary Islamic state.

Founded in 1948, in the first years of the Shah Mohammad Reza Pahlavi’s rule, the P.B.O.—a brain trust of technocrats—was a branch of the government that the government never fully trusted. The Shah came to find it politically unreliable and unresponsive to top-down control. Under the Islamic Republic, the same uneasiness was compounded by a structural problem: it was the P.B.O.’s job to convert idealistic talk of building an earthly paradise into revenues and expenditures, budgets and five-year plans. One of the agency’s recent directors, Farhad Rahbar, put it this way: “The duty of the budget office is to allocate limited resources to unlimited demands. That is why nobody is satisfied with it.”

Post-revolutionary Iran was infused with leftist ideology, in particular the work of a radical egalitarian Islamist thinker, Ali Shariati, without whose Marxist-Leninist reading of Shiite theology the revolution might never have taken place. (“Shariati was a confused person,” Tabibian said bluntly. “His were an emotional type of arguments, provocative and revolutionary. But he had no clear idea about economics or politics. Unintentionally, he did a lot of disservice to this country.”) Ayatollah Ruhollah Khomeini, the revolution’s charismatic leader, was far from a leftist, but, breathing the same air, he arrived at a religious populism that made frequent reference to the righteous struggle of the oppressed against the ruling class. Although Islamists elsewhere had begun to develop a field of “Islamic economics,” no comparable literature existed in Iran.

In 1982, Tabibian and a colleague travelled to East Germany, in search of ideas. “I went with an open mind,” Tabibian told me. “It was mostly an academic trip, to see how things worked in Communist countries, neither to condemn nor to sympathize. Naturally, if I found something useful, I’d be happy to learn about it.”

In East Germany, the Iranians took a two-month course in economic planning, and they visited factories and farms. What they saw, Tabibian told me, was shocking in its dysfunction—a foreshadowing of the system’s imminent collapse. “Iran had good relations with the Soviet bloc, because we were in a revolutionary situation, and we could scrutinize their systems a bit more clearly, without much censorship,” Tabibian says. “Even American economists had no clear idea at that time that it was so lousy. Nothing was working.” Upon his return, Tabibian wrote a report for the Iranian government concluding that a command economy could not lead to growth, because it offered no incentive for innovation.

The new Iranian constitution, however, outlined an economy controlled largely by the state, partly by coöperatives owned by the public, and marginally by a private sector that would include the traditional merchant class of the bazaar. It was a fractured vision, and each of these power centers fought for control. Much of the country’s wealth and industry ended up in the hands of a few giant, semi-private foundations that were opaque to the public and controlled by powerful clerics. Tabibian recalls, “There was a mix of rational and revolutionary attitudes and emotions—pushing, pulling, disputing, arguing.”

Nothing illustrated this disconnect, Tabibian says, as clearly as the Islamic Republic’s attitude toward prostitution. What should the state do about the “special ladies” who, under the Shah, populated the red-light districts of Iranian cities? He recalled that in Tehran the authorities resolved to pay salaries to the prostitutes so that they would cease their work and reform their lives. “And, at the same time, you’d hear in the news about women being stoned!” Tabibian marvelled. “The revolutionary court said to execute prostitutes. Nobody talked about the hundreds who were suddenly on the government payroll, doing nothing.”

As Tabibian and his colleagues at the P.B.O. devised the country’s first post-revolutionary development plan, Khomeini wanted the bureaucrats to discuss their ideas with the clergy in the holy city of Qom. Tabibian and his colleagues dutifully visited the seminary town, which is on the edge of a salt-marsh desert. “It was the first time I saw how the senior clergy lived, and it was very simple,” Tabibian told me. “They are scholars of divinity, stricter than the average priests in the West. And they were nice people, gentle people, very concerned about morality and things to come from the other life.” Their economic prescriptions, however, were vanishingly vague: society should be prosperous, people should not be greedy.

“We had to go back again to our textbooks, to read more deeply and more carefully,” Tabibian recalls. “There was no way out except for using the experience of the world so far: the principles of competition, property, trade with the world, openness. The core of what the P.B.O. wrote in its plans, the sources were liberal ideas.”

Yet Tabibian and like-minded technocrats found that these conclusions could not gain traction in Iran. During the nineteen-eighties, Mohsen Sazegara, who currently lives in Washington, D.C., ran Iran’s largest conglomerate of state-owned heavy industries. He recalls that the ideological pressure on industry was for self-sufficiency: Iran’s industries were not to look outside the country for parts, technology, labor, or capital. Sazegara was a committed revolutionary who had accompanied Khomeini on the plane that brought him back to Iran from his exile in Paris. But it did not take Sazegara long to conclude that a self-sufficient Iranian automobile industry, say, would harm the Iranian economy more than it would the economies of its Western rivals. “I raised this question after a while: ‘Why should we go and make a car in this country? It’s not feasible, because the market is very small with respect to designing a new car, and we are not able to export them to other countries,’ ” Sazegara recalls. “But nobody cared. We invested millions of dollars, not only in heavy industries but in other branches of industrialization, and today many of those investments are bankrupt.” By the end of his tenure, Sazegara, along with Tabibian, advocated privatization and participation in the global economy.

Djavad Salehi-Isfahani, an economist at Virginia Tech and a Brookings scholar, had returned to Iran after the revolution and worked in the Central Bank, where the regime had only one clear priority: to abolish the interest rate, which was deemed “un-Islamic.” And yet, no matter which policy the Central Bank pursued, interest quickly reappeared. A bank branch in Tehran would place a red car on its roof and announce that all depositors would be entered into a lottery for that car—a strategy that allowed the bank to pay a variable rate of return on its deposits. Bankers even found ayatollahs who would issue fatwas in support of their schemes—at least until other, more powerful ayatollahs denounced them.

At the same time that Tabibian and his colleagues were struggling to implement liberal economic policies, other scholars and officials sought Islamic or socialist solutions to the country’s problems. Parliament endlessly debated, but never approved, the P.B.O.’s development plan. The economists who argued for opening up the economy were accused of seeking to sell the revolutionary state to the capitalist West. “They called us traitors,” Tabibian said. “We had all kinds of problems.”

By 1983, Tabibian had concluded that the resistance to liberal economic ideas was overwhelming. He returned to Isfahan, where he spent the rest of the first post-revolutionary decade at a university, training young economists. Sazegara recalls that during those years he would fly to Isfahan and back in a single day, just to seek Tabibian’s counsel. “He is the best economist in Iran,” Sazegara said.

The Islamic Republic, convulsed with political violence, weathered international sanctions, diplomatic isolation, and an eight-year war with Iraq. The economy staggered into a profound recession. By 1988, the country’s gross domestic product per capita was half what it had been in 1976. “Reversals of fortune of this magnitude in such a short period are rare in modern history,” Salehi-Isfahani wrote in a recent article for the Journal of Economic Inequality. Industry and entrepreneurship withered. The ranks of self-employed service workers, like taxi-drivers and peddlers, swelled. By the war’s end, in 1988, the Tehran-based economist and political analyst Saeed Laylaz told me, “Iran was a bankrupt country. No infrastructure, empty warehouses, empty stomachs, empty refrigerators, empty houses—empty everything.”

Khomeini had promised his country social justice and “the rule of the oppressed.” But he had also dismissively proclaimed that Iran did not have a revolution in order to lower the price of melons. “We were led to believe that there was a plan,” Salehi-Isfahani says. “There wasn’t. And that’s how someone like Tabibian could enter and revolutionize their thinking.”

In 1989, Khomeini died, and the Soviet Union was on the verge of collapse. A more liberal economic plan finally seemed politically feasible. Iran’s new President, Ali Akbar Hashemi Rafsanjani, reached out to the economists and industrialists who had been stymied for the past decade, and offered them the opportunity to clean up the country’s contradictory goals and policies, scale back its inefficiencies, and lift the government’s heavy hand.

At the time of Rafsanjani’s election, Tabibian was a visiting scholar at Stanford. He got a call from another economist friend, Massoud Roghani Zanjani, who was then the head of the P.B.O. Tabibian recalls, “He said that the new President has a passion for the development of the country, and that his agenda is to adopt a more market-friendly reform program.” Tabibian returned to Iran in 1991, becoming a deputy director of the P.B.O. He helped implement a radical plan for the country’s postwar reconstruction—one that called for privatization, floating Iran’s exchange rate, and eliminating price controls and subsidies. Salehi-Isfahani told me, with a degree of awe, “It was not like one of the economic plans under Lenin that changed things maybe thirty per cent. It was a hundred-and-eighty-degree turn. They got rid of all the remaining rationing everywhere.”

The economic-reform program became the signature of Rafsanjani’s Presidency. One Iranian journalist in exile told me that Tabibian was “Rafsanjani’s brain.” Yet Tabibian’s ideas were once again undercut by politics: Rafsanjani was widely believed to be floridly corrupt, bestowing favors on friends and relatives and undermining the public trust. Moreover, revolutionary idealism still permeated Iranian politics. The watchwords of the revolution had been social justice and independence from the imperial West. Many Iranians were convinced that Tabibian’s reforms would curry favor with the West while inflicting pain upon the poor. This feeling persisted, even though the Rafsanjani administration protected key entitlements, such as subsidized food and medicine. As Salehi-Isfahani explained, “If you free up the price of bread, you hurt the poor. If you free up the price of steel, I’m not sure the poor are hurt.”

As the price of oil rose, poverty declined, and the Islamic Republic made good on many of its promises, bringing electricity, safe water, health care, and education to the hinterlands. But at the same time the rich grew richer—conspicuously so, as the opening of the market made foreign luxury goods available in Iran for the first time since the revolution. New cars from Japan, Germany, and Korea, the sort that used to belong only to diplomats, became common in north Tehran. These visible inequities, combined with Rafsanjani’s personal enrichment, made many Iranians resentful.

Tabibian had placed himself in a precarious position. For the good of his reform program, he had to make it clear to Iranians that bringing their economy into the global system had nothing to do with pressures or blandishments from the World Bank or the International Monetary Fund, which promoted similar policies throughout the developing world. As Salehi-Isfahani recalls, “The World Bank misunderstood, and thought that Tabibian had seen the light. But he said, ‘Don’t come near me.’ He did not want his program to be contaminated. He said to me, ‘They just give us a bad name in front of the people.’ ”

Tabibian had not become a politician. His manner was still tough and direct, if flecked with humor, and he remained motivated by the singular commitment of his school days. “I made it clear that I believed in a free-enterprise system, a competitive market, and private-property rights, not as a matter of taste but because it is the only form of economic organization that leads to the well-being of the people,” he told me. He took this stance in a country where claiming that inflation was the result of bad monetary and fiscal policy—rather than of the conspiracies of infidel profit-seekers—was considered anti-revolutionary. And so, he told himself, he had to patiently debunk competing hypotheses, harshly, if necessary, and without compromise, even “in the face of all ferment and revolutionary heat and passion and aversion from reason.” He made himself available to explain economic theory to parliamentarians, clergymen, political activists, bureaucrats, and journalists. “This made enemies for me,” he recalls. “But it was effective.”

Meanwhile, for Rafsanjani, the reforms were a political catastrophe. The public recoiled at short-term shocks, such as the doubling of prices for gas, phone service, and public transportation, and at the cost of reconstructing the country after the war with Iraq. In 1993, the Rafsanjani administration bungled its effort to unify Iran’s three foreignexchange rates. Tabibian had long called for a single exchange rate determined by the market, but the government chose instead to adopt an artificially low rate. As he recalls it, “The Central Bank was in no position to support and maintain this politically determined foreignexchange rate, and it did not serve the economy.” The resulting debt crisis depleted the reserves of the Central Bank in about a month. The government bailed out the borrowers, rescheduling and paying off debts it could not afford. From nearly every quarter—the students and the clerics, the left and the right—came an overwhelming backlash. Under pressure, Rafsanjani reimposed price controls and halted privatization.

Tabibian resigned from the P.B.O. It was not in his nature to protest the government, which he felt had the right to choose its own policy. But, he recalls, “as an expert, I did not agree with the twist, and I was bitter.” Iran’s most ambitious experiment with liberalization was over.

In 1997, Rafsanjani was handily defeated by a Presidential candidate from the left: Mohammad Khatami. The incoming President, who served two four-year terms, introduced a new openness in Iranian politics and culture, but in the arena of the economy his administration lacked a clear direction. He tentatively resumed the reform program Rafsanjani had abandoned, but he quickly terminated any policy that was not well received by the public. Meanwhile, higher oil prices gave the illusion of prosperity: poverty declined, inequality did not rise, and by 2005 the standard of living in Iran was the highest it had been since the mid-seventies. None of this, though, was a result of government strategy, which remained an ad-hoc affair.

The country’s unemployment epidemic made clear that the economy still had festering troubles. Iran’s population had doubled since 1979, and the revolution had made education available to more Iranians. But there was no role for these people in an economy that depended not on productive industries but on the dispensation of oil rents, which tended to create unskilled jobs. During Khatami’s two terms, unemployment among illiterate men declined from seventeen per cent to eight per cent; among men with advanced degrees, it leaped from fifteen per cent to twenty-three per cent. (Among the most educated women, it was forty-three per cent.) The unemployment problem alienated Khatami’s core constituency of educated young Iranians. Moreover, Khatami’s penchant for lofty intellectual rhetoric signalled to many unemployed Iranians that he was out of touch.

Tabibian, after resigning from the P.B.O., withdrew to an institute that he had founded in the north of Tehran. Modelled on the graduate program in economics at Stanford, the institute, set in lush surroundings, was meant to lure Iran’s finest students away from medicine and engineering and into the less prestigious field of economics. Salehi-Isfahani, who taught there one summer, recalls, “It had a gorgeous garden, trees, and it was full of very reasonable people.” During Rafsanjani’s second term, the institute received funding from the P.B.O. to analyze the national budget. But, in 2002, the left-leaning Khatami administration, uncomfortable with the institute’s free-market orientation, cut off its funding, halted its research programs, and forbade it to admit students. Many faculty members left. Tabibian stayed, though he spent less and less time there.

Unemployment and inflation continued to dog the Iranian economy, and Khatami, embattled on other fronts, showed little will or aptitude for addressing Iran’s systemic ills. In 2005, he was swept from power by the radical populist Mahmoud Ahmadinejad, who campaigned on the promise to end corruption and to deliver oil money to kitchen tables. His base saw him as the last hope for reclaiming the revolution for its foot soldiers: veterans of the war with Iraq; the armed young men of the Revolutionary Guards and the Basij militia, who felt snubbed by Rafsanjani’s technocrats and Khatami’s intellectuals; and the rural underclass, which survived on government subsidies and felt a kinship with Ahmadinejad, whose family migrated to Tehran from the village of Aradan. 

Ahmadinejad didn’t just campaign as a populist; he governed as one, doling out billions of dollars on his tours of the provinces. He was assisted immeasurably by the continuing oil boom; in 2006, revenues were almost fifty billion dollars. But Ahmadinejad’s policy of funnelling this cash directly to his constituents backfired. The ensuing rise in inflation made food and housing—the two things nobody can do without—particularly expensive. The analyst Saeed Laylaz said of Iranians who rent their homes, “One night they slept, and they awoke in the morning and they realized that they were under the poverty line.” Nearly seven hundred thousand urban Iranians fell into poverty in 2006. Inequality had worsened for the first time since the Rafsanjani reforms.

The economic frustration that Ahmadinejad tapped into with his 2005 campaign had turned strongly against him by 2008. In a parliamentary election last March, even Ahmadinejad’s political allies could not run from his economic program fast enough. More than one member of the outgoing parliament, which had largely been controlled by Ahmadinejad’s faction, told me that the job of the new parliament would be to force the President into accepting more sensible economic legislation.

In January, 2008, more than half of Iran’s two hundred and ninety parliamentarians had signed a letter blaming Ahmadinejad’s policies for rising unemployment and inflation. Mohammad Khoshchehreh, an economist at the University of Tehran, who was once a close political ally of Ahmadinejad, told me that the emerging consensus among scholars was that Iran should adopt a free-market economy with generous provisions for social security. “The government role should decrease, and part of it should be given to the private sector,” he said. But, under Ahmadinejad, “the government takes control of everything.” Hamid Reza Katuzian, a conservative member of parliament and another early supporter of Ahmadinejad’s economic policies, said that the parliament should never have authorized the infusion of oil money directly into the economy. To resolve the unemployment and inflation problems, Katuzian said, Iran needed to renew its industrial base. It also needed an educational system that better matched its job market. “The problem is real—we cannot hide it,” Katuzian told me. “We can all see it. Everyone is trying to solve it.”

Everyone, perhaps, except Ahmadinejad. As criticism mounted, he became obdurate. In 2005, he appointed Farhad Rahbar—a hard-liner whose background was in intelligence—to head the P.B.O., which had been renamed the Management and Planning Organization, or M.P.O. One of Rahbar’s first acts was to “retire” Tabibian from the institute he had founded. According to Tabibian, Ahmadinejad told Rahbar that the M.P.O. was filled with economic liberals who would “spray” him with their color, gradually seducing him with their heresies. These elements had to be resisted and purged, Rahbar was told.

Rahbar followed orders, forcing many experienced economists into retirement. But, like his predecessors, he faced a budget whose shortfalls could not be addressed with ideology alone. Rahbar started pressing Ahmadinejad to rein in the liquidity and embrace privatization. In due course, Rahbar, too, was fired. Through a mutual acquaintance, Tabibian sent him a message. “I told him, ‘It’s not the people who spray—it’s the building.’ ”

In December, 2006, Ahmadinejad announced that he would disband the M.P.O.—the one government agency dedicated to solving Iran’s economic problems. Bijan Khajehpour, an economist who runs a business-consulting firm in Tehran, told me that Ahmadinejad was looking for a symbolic gesture that would tell the people he planned to stand up to the rich and powerful. “But he chose the wrong institution, because this was one of the longest-lasting establishments in Iran with at least some degree of study and planning,” Khajehpour said. “When you look at the department that replaced the M.P.O., it’s called the Vice-Presidential Department for Strategic Planning and Control. That word—‘control’—shows you what Ahmadinejad is about.”

During the Rafsanjani era, many left-leaning student activists had bitterly protested the reforms that Tabibian pushed through. Yet, in 2006, when pro-democracy students demonstrated against Ahmadinejad, one of them waved a placard that read “Bring Back Tabibian.”

Tehran’s streets are dusty, dotted with buildings that are half built or half demolished, clanging with the wheelbarrows of work crews. The joubs—deep roadside gutters for the runoff from the Alborz Mountains, to the north—are murky and littered. But under the Islamic Republic, Iran has become a modern country with few visible signs of squalor. All over the capital, commerce is brisk, from the upscale shopping malls in the north to the clogged passageways of the Grand Bazaar and the modest curbside shops of low-income quarters.

Even so, many Iranians are enraged by the state of their economy. Not only do they complain about high unemployment and income inequality; they are angered by the pervasive cronyism and political corruption that reward the ideological faithful. Three decades of populism have won the Islamic Republic the fealty of the rural underclass, but at the cost of rendering the educated middle class ineffective, unmoored, and nearly irrelevant to the country’s economy.

A retired police commander told me that officers who, like him, had been trained in police academies under the Shah had been displaced and passed over for promotions in favor of ideologues who showed more zeal for enforcing moral strictures and dress codes. One night, a young carpet dealer whom I had met in the Grand Bazaar—in theory, an ideological stronghold of the regime—traversed most of the sprawling, traffic-choked city to sit with me on a low retaining wall by the Tajrish River, a place where he felt he would not be overheard describing the repression and corruption of his workplace.

“There are people in the bazaar who also work with the government,” he said. “They are carpet sellers, but they pay no tax—they can export for free. The other group, which does not agree with the government, has a lot of problems.” After elections, he claimed, police came around to check bazaaris’ identity documents for the stamp confirming that they’d voted. “If you did not vote, they decide you are in the group that disagrees, and they write down your address and everything. They can close your shop. What can we do?”

Sometimes, the carpet dealer said, people from the tax office went around the bazaar asking merchants about their contact with foreign tourists and businesspeople. “They look at information in our passport and they say, ‘Why were you not in the war?’ Then they want to know ‘Why do these foreign people come to your shop?’ ” he said. “But we have to have something to eat! You can’t sell carpets to Iranians, because they have no money.”

One Friday morning, outside a mosque in the working-class neighborhood of Narmak, where Ahmadinejad grew up, I met a young man who rented a narrow basement apartment. He had been trained as an electrical engineer with a specialty in jet engines, but he worked in a tire factory and had not been paid in five months. “Because of the wrong policies of Ahmadinejad, our factory’s door is locked,” he told me. “I have two engineering certificates, but unfortunately there is no place for technocrats in this country.” He had voted for Ahmadinejad in 2005, but he had come to believe that the President’s economic policies were “a hundred per cent wrong.” He echoed the credo of Tabibian: “Economic freedom will come together with political freedom.”

Young people in the run-down neighborhood of Naziabad, in south Tehran, told me that they saw no point in going to school. The best they could hope for, if they wanted to make money, was a life of crime. A neighborhood drug dealer said that he’d started selling methamphetamine and hashish because it was a lot more lucrative than the textile business, which he’d worked in previously; with prices rising ever higher, he needed the income. Even in Naziabad, commercial space was selling for twice as much as it had a year earlier, in 2007. A neighborhood barber, Mojtaba, told me that he’d raised his prices a hundred and thirty per cent, just to keep pace with inflation.

Tabibian told me that such stories were typical: “We have very high unemployment among educated young people. That is one of the failures of the government. And real-estate speculation has a drastic effect on income distribution. People without property are in an extremely difficult situation.”

At a cramped real-estate brokerage, whose neon sign cast a harsh light inside, a samovar steamed in one corner and two middle-aged real-estate agents sat behind green desks, with a map of Tehran tacked to the wall behind them. All over the city, the proprietor informed me, real-estate prices were twice as high as they had been a year ago. “Before Ahmadinejad, there was a steady market you could forecast,” he said. “Since Ahmadinejad, the prices have gone up two or three times.” The economy was flush with cash, and Iranians needed to find safe places to invest it; since domestic industries were imperilled by the flood of imports, the obvious alternative was real estate.

“They sell their place for a hundred thousand dollars and buy a new place for eighty thousand,” the real-estate agent explained. “We have a bad economic situation at the moment—a sick economy with poor management. Thirty per cent of the people have family money. They sell their property, buy something cheaper, and spend the difference.” And the other seventy per cent? The real-estate agent laughed. “We have a stadium over here,” he said. “They go and hang themselves.”

Last April, Ahmadinejad gave a speech in Qom addressing Iran’s economic woes. Iranians should be grateful, he proclaimed, for twenty-two-per-cent inflation. Foreign powers wanted Iran to suffer seventy-per-cent inflation, but his administration had fended off their schemes. Still, he could not deny the persistence of corruption and other economic problems. These problems, he said, were the fault of sinister elements within his own cabinet. His economic and finance minister, Davoud Danesh-Jafari, who had opposed Ahmadinejad’s slashing of interest rates and expansion of the money supply, was compelled to resign.

Danesh-Jafari was not the only target. The first governor of the Central Bank under Ahmadinejad was forced out for opposing the lowering of interest rates. The second, Tahmaseb Mazaheri, grew increasingly vocal against the President’s policies, telling foreign reporters in June that Iran was flirting with hyperinflation if it did not raise its interest rate. When Ahmadinejad still refused to listen, the Central Bank did an extraordinary thing: it simply withheld credit. For the first time since Ahmadinejad took office, inflation started to decline, falling from twenty-nine per cent in July to twenty-four per cent by October. Mazaheri was also forced out, but the credit freeze is likely to remain quietly in place until the next Presidential election, in June.

Under its most recent development plan, Iran has adopted a privatization program, but it is unlikely to unfold in a straightforward way. Iranian industries have been protected with state money for so long that no one knows what they are actually worth, and Iranian labor law makes it impossible for new owners to streamline bloated workforces. The most likely buyers of state-backed companies, analysts told me, are those favored by the government: Revolutionary Guards, Islamic foundations. Consequently, privatization will at first permit an armed and unaccountable oligarchy to amass still more wealth.

And yet, in the long run, the program may be transformative. Even if none of the state’s oil or telecommunications companies, for instance, ever reach the private sector, the new law permits entrepreneurs to start new companies in those industries. Bijan Khajehpour, the consultant, is hopeful. “We have had a very long culture of private-sector activity in this country,” Khajehpour told me. “It’s not like those Communist states that collapsed and they didn’t have any.”

A dynamic private sector might seem like something the Iranian government would be eager to cultivate, in order to halt the deterioration of its economy. But, because the government has oil revenues, it doesn’t depend on taxes, and so it doesn’t depend on a productive class or a productive economy for its survival. Rather, the people depend on the government.

Sanctions multiply that effect, Tabibian told me. Because of the American embargo, which prohibits U.S. companies from extracting or refining Iranian oil, the capacity of Iran’s oil industry has been limited. Without the embargo, he said, “Iran could supply a lot more oil and gas to the market.” Meanwhile, Iranian middle-class experts could work for American firms, instead of emigrating or becoming employees of the state.

Iran’s middle class is something of a paradox. “People are complaining all the time,” Tabibian said. “They show you their pay stub and tell you their rent is twice as much. They don’t tell you what they actually earn. They get paid more than their salary—there are bonuses, overtime, bonuses for Eid and other national festivals. Inflation is the result of spending, so there have to be people who spend money. They overspend. Expenditures run ahead of production. There are families in very bad condition, but look at the indicators—car ownership, having modern appliances.”

Even if Iran’s middle class is finding ways to live decently, it contributes little to the economy. Khajehpour’s research has shown that many middle-class Iranians live on unsustainable and ultimately unproductive sources of income: remittances from relatives abroad, second jobs, brokering deals between third parties, selling off family property. It’s a precarious existence for the class that would normally stand at the core of a healthy economy. And that is no accident.

Salehi-Isfahani explained, “An unproductive middle class can be tamed. You don’t really need them, so you say, ‘Go to hell—if you don’t even come out of your houses, nothing happens.’ But if they’re all engineers, or exporting goods, and that’s where the government money comes from, if you tell them to go to hell, exports drop and you’re out of business.” Now that oil has plunged to below forty-five dollars a barrel, Salehi-Isfahani says, the government will be forced to rely on the part of society that has the skills and the capital to produce goods. He added, “If the middle class is productive, there is a much stronger chance it will lead to democracy, I think.”

To forestall this, it seems, the Iranian regime has repeatedly resorted to sweeping its economic experts out of government. But the ideas themselves are harder to dislodge. Even Ahmadinejad’s government has begun, for lack of any better option, to embrace reform. In a bill that was recently submitted to parliament, the administration has proposed eliminating energy subsidies—a possible first step toward eliminating other subsidies as well.

Tabibian has watched this latest swing of the pendulum with a wry and cautious optimism. “I do not know what to make of all this,” he wrote recently in an e-mail. “I guess this is a big change in their policy standing, given the populist position of the government. But will they be able to carry out such ideas? I only pray.”

Is USA still a free nation?

Is US still a beacon of liberty in the world? A lot of people believe it is no longer free (or free enough). Since this debate occurs so frequently, I'm extracting from a recent Facebook discussion and an article I recently wrote for Freedom First (to be published on 1 August), to illustrate the position I have formed regarding liberty in USA – even as I believe that India should go well beyond its levels of freedom.

Patriot Act and the 'end of liberty' in USA

A Facebook friend suggested that USA is no longer free, arguing thus: "The reason I signal out "The Patriot Act" is because of many basic violations of civil liberties and norms of democracy. It was passed within 45 days after 9/11 with not an ounce of debate. This act treats all it's citizens as suspects there by creating a new standard "Guilty until proven Innocent". Neither the opposition nor the so called liberal media dare appose it. In theory the US authorities can legally tap conversations of Journalists, Opposition Politicians and even innocent civilians. Some of the measures are so powerful that they will not pass even the Indian parliamentary system. US is no more the land of the free. It has become the land of the paranoid, the recent Arizona law requiring all immigrants to carry documents with them at all times is a good case in point."

In response I suggest that while I agree (in principle) with such concerns, the Patriot Act is nothing. Try living in India where you can be liquidated without trace by the police. 'Encounters' with 'terrorists' are rife. If perfect liberty is 10 then US is at 8 and India is at 2. That's the issue. All relative. Yes, US is not perfect, but where are we!

Note, also, that no believer in liberty can tolerate anyone from within the nation colluding with others to declare war on the nation from within. Under circumstances of war, civil liberty must always rank second. There is no obligation for the USA to give Al Qaeda activists civil liberties on par with those enjoyed by the rest of its citizens. And yes, while theoretically, while "the US authorities can legally tap conversations of Journalists, Opposition Politicians and even innocent civilians", is this law put in practice in that manner? How many innocents have been tapped or arrested? Note that whatever happens in USA is authorised by the delegated of the people under a system of laws. If the people of USA, through their law makers, chose to enact the Patriot Act, and the circumstances were such that at least a case can be made for such action, then I have no reason to dilute my belief that the USA continues to be a free nation

Flag burning

We must also take a lesson in liberty from the US which has ruled out the criminalisation of flag burning. In 2006, an amendment to the US Constitution was proposed by someone to prohibit flag burning. But the US Senate rejected this amendment. Senator Daniel K. Inouye, who lost an arm in World War II, fighting for USA, said that flag burning ‘is obscene, painful and unpatriotic’, … ‘[b]ut I believe Americans gave their lives in the many wars to make certain that all Americans have a right to express themselves – even those who harbor hateful thoughts.’ 

Such unequivocal commitment to freedom is what America teaches us. Our heart goes out to America for clarifying the standard of liberty even on such an evocative issue. Hundreds of its own soldiers die in wars to protect the American flag, but these very same soldiers insist on defending the right of their fellowmen to burn that flag. That is why they fight. For freedom. The true flag we must fight for is the flag of freedom.

Yes, liberty in USA is on the decline

There is no doubt that the USA can do better. I have myself criticised its unfair treatment of Vikram Buddhi (see my blog post on the subject). I have also criticised its financial system which is almost nationalised, statist, and badly regulated, as well as its monetary system which includes a central bank that deliberately distorts the price of money (see my blog post here).

I also see the acceleration of the decline in liberty in the USA through the political victories of Keynesians and social democrats who believe in the welfare state and protectionism. It is becoming moribund, uncompetitive, and fretful, unable to lead the world unequivocally to the higher realms of liberty. It has lost its way. Its government, armed forces, and intelligence agencies increasingly display significant incompetence. In choosing philosophies that oppose freedom, the USA is becoming its own enemy. It will, in my view, if it continues down this path and if, simultaneously, countries like India seriously raise their own level of liberty, severely decline in relative terms to the rest of the world. This is a turning point for the USA, and it is not defending liberty as it should.

It is, in consequence, no longer the people magnet it was a few decades ago. The smartest Indians were ALL (or almost all) found in the USA at one time. That rush to migrate to the USA has subsided in India, even as India has increased its own levels of freedom and increased economic opportunities within the nation. Despite all this, the USA still remains, sufficiently free in my view to rank as the largest free nation on earth. Yes, there are other countries similarly free, but none as large, complex, and difficult to govern. So let's learn from the USA and take from it what is good, rejecting the bad. 

Those who think US is not good enough are obliged to create something better

Indians who raise concerns about liberty in US can't just pat themselves on the back at the first sign of American shortcomings. They must do betterNote that the US model is NOT what I advocate for India, but a much higher standard of liberty. Read Breaking Free of Nehru. Read The Disovery of Freedom (early draft). I want India to be the world's greatest beacon of liberty, not a cesspool of corruption, misgovernance, and police killings of the innocent. 

If you are concerned about liberty then it is time for YOU to do something to increase liberty in India. Are you a Freedom Partner? If not then join up right away!  Join the Freedom Team. And write your theses on liberty and publish your books and blogs on liberty. That's the only way out for us, not bothering so much about those who may be imperfect but still remain heaps better than India.

Corruption in the Indian police

This blog post is intended to help me keep a tab on Police corruption in India. As is the case with other blog posts I've started on similar lines, I will use this as a dumping ground for raw data that I chance upon while browsing the internet.

This post is therefore is simply a data dump. No commentary at the moment (details on why corruption exists have been covered in my book BFN).

Police demand most bribes: Survey

My post re: corruption that killed my IPS batchmate: here.

My other posts on similar lines, on corruption in politics, judiciary, etc.

Hayek's 1973 Wincott Memorial lecture

This document, previously an extreme rarity, with only a few copies in print, is now available to inform and take the world to the next level in liberalism and democracy. The Wincott Foundation has published it here (PDF). Here's the full text in HTML! Enjoy. (Obviously, the copyrights vest with the appropriate authority. My job is to disseminate Hayek's work as widely as possible, particularly in India where it is hardly available.


Economic Freedo
Representative Governmen

Fourth Wincott Memorial Lecture
delivered at
The Royal Society of Arts
31 October, 1973


The Trustees of the IEA have agreed that any surplus over costs arising from the sale of this Paper should be donated to the Wincott Foundation.

Published for




First published December 1973 
Second Impression January 1976 
Third Impression December 1980 
Web Edition November 2009




All rights reserved

ISSN 0073-909x

ISBN 0-255 36052-5

Printed in Great Britain by

Set in Monotype Plantin II on 12 point


FOREWORD by Graham Hutton 4


I THE SEEDS OF DESTRUCTION 7 Post-war revival: the 'Great Prosperity' 7 Inflation: the threat to freedom 8

II THE DANGER OF UNLIMITED GOVERNMENT 9 Majority rule and special interests 9 What is law? 11

III THE FUNDAMENTAL PRINCIPLE 11 Tyranny of majorities 12 Mirage of 'social justice' 13 Compatibility of collective wants 13

IV THE SEPARATION OF POWERS 15 The concept of 'lawyer's law' 15 Limits to coercion 17 Representative government driven to serve sectional interests 18 Separate legislative assembly 18 Specific interests and permanent principles 19 Membership of legislative assembly 20



Graham Hutton

NO ONE, as the 1939-45 World War drew to its close, could possibly have foreseen the degree to which government would have led Britain down The Road to Serfdom (1944) by 1973. For that matter, no one also in the ensuing days of so-called peace could have foreseen how far along the road to Orwell's 1984 we in this country would have travelled in the same time. Professor Hayek's contributions to our understanding of the pricing and productive processes are outstanding, and have earned him his reputation as one of the world's leading economists.

Since then he has added further reputations as a social philosopher and a political scientist. It is fitting that his wide experience and learning should be marshalled in honour of Harold Wincott, who always admired him; especially at so crucial a juncture in our British social and economic development.

Two Latin tags are apt for our present time of troubles. The first is apt because there is a widespread belief that one nostrum alone will suffice to solve our problems. Symmachus, pleading for the retention of the altar to Victory in Constantinian Rome in the first victorious flush of Christianity, said 'Uno itinere non potest pervenire ad tam grande secretum' – 'It is not possible to attain to so great a secret by one way only'. Indeed the virtues of competition, as free markets as possible, and business open to all talents, are precisely that they offer differing ways at varying costs to the same ends.

The other tag is the bitter complaint by Sidonius Apollinaris of Auvergne, Bishop of Clermont Ferrand, who had fought against the Visigoths for enfeebled Rome, which then came to an agreement with them behind Sidonius's back yielding them all his territory:'Facta est pretium suae pacis nostra servitudo' – 'The price of their peace has been made our servitude'. Many today must feel that the peace of politicians, or bureaucracies, or huge vested interests, has been bought by thrusting the rank-and-file of ordinary men and women into increasing servitude with ever-diminishing range of choice.

Professor Hayek has not only emphasised the dangers to democracies, currently in trying to suppress inflation by 'incomes policies', but has also indicated roads that might avoid them. And in raising the question, asked by Joseph Schumpeter 30 years ago, whether a free economy was practicable in a system of representative government susceptible to pressures from majorities and liable to acquiesce in the pressure for concessions and subventions to vested interests of capital or labour, he has directed attention to the central and perennial dilemma of parliamentary democracy.

The Author

FRIEDRICH AUGUST HAYEK, Dr Jur, Dr Sc Po1 (Vienna), DSc (Econ) (London), Visiting Professor at the University of Salzburg, Austna, 1970-74. Educated at the University of Vienna, he was Director of the Austrian Institute for Economic Research, 1927-31, and Lecturer in Economics at University of Vienna, 1929-31. 1931-50 Tooke Professor of Economic Science and Statistics University of London. 1950-62 Professor of Social and Moral Science, University of Chicago. Professor of Economics, University of Freiburg i.Brg., West Germany, 1962-68. He was awarded the Alfred Nobel Memorial Prize in Economic Sciences in 1974. Professor Hayek's most important publications include Monetary Theory and the Trade Cycle (1933), The Pure Theory of Capital (1941), The Road to Serfdom (1944), Individualism and Economic Order (1948), The Counter-Revolution of Science (1952), and The Constitution of Liberty (1960). His latest works are collections of his writings under the titles Studies in Philosophy, Politics and Economics (1967) and Law, Legislation and Liberty (Vol. I, 1973; Vol. ll, 1976; Vol. Ill, 1979). He has also edited several books and he has published articles in the Economic Journal, Economica and other journals.

Economic Freedom and
Representative Government




THIRTY YEARS AGO I wrote a book1 which, in a manner which many regarded as unduly alarmist, described the dangers that the then visible collectivist tendencies created for personal freedom. I am glad that these fears so far have not materialised, but I do not think this has proved me wrong. In the first instance I did not, as many misunderstood me, contend that if government interfered at all with economic affairs it was bound to go the whole way to a totalitarian system. I was trying to argue rather what in more homely terms is expressed by saying 'if you don't mend your principles you will go to the devil'.

Post-war revival: the 'Great Prosperity'

In the event developments since the war, in Britain as well as in the rest of the Western world, have gone much less in the direction which the prevalent collectivist doctrines seemed to suggest was likely. Indeed, the first 20 years after the war saw a revival of a free market economy much stronger than even its most enthusiastic supporters could have hoped. Although I like to think that those who worked for this consummation in the intellectual sphere, such as Harold Wincott, to whose memory this lecture is dedicated, have contributed to it, I do not overrate what intellectual debate can achieve. At least as important were probably the experiences of Germany, relying on a market economy, rapidly becoming the strongest economic power of Europe – and to some extent the practical efforts for a removal of the obstacles to international trade, such as GATT and perhaps in some measure the intentions if not the practice of the EEC.

The Road to Serfdom, Routledge, 1944.

The result was the Great Prosperity of the last 20 to 25 years which, I fear, will in the future appear as an event as unique as the Great Depression of the 1930s now appears to us. To me at least it seems clear that, until six or eight years ago, this prosperity was due entirely to the freeing of the spontaneous forces of the economic system and not, as in the later years, to inflation. Since this is today often forgotten I may perhaps remind you that, in the most remarkable burst of prosperity of this period, that of the German Federal Republic, the average annual rise of prices remained below 2 per cent until 1966.

I believe that even this modest rate of inflation would not have been necessary to secure the prosperity, and indeed that we should all today have better prospects of continuing prosperity if we had been content with what was achieved without inflation and had not attempted to stimulate it further by an expansionist credit policy. Instead such a policy has created a situation in which it is thought necessary to impose controls which will destroy the main foundations of the prosperity, namely the functioning market. Indeed the measures supposedly necessary to combat inflation – as if inflation were something which attacks us and not something which we create -threaten to destroy the free economy in the near future.

Inflation: the threat to freedom

We find ourselves in the paradoxical situation that, after a period during which the market economy has been more successful than ever before in rapidly raising living standards in the Western world, the prospects of its continuance even for the next few years must appear slight. I have indeed never felt so pessimistic about the chances of preserving a functioning market economy as I do at this, moment – and this means also of the prospects of preserving a free political order. Although the threat to free institutions now comes from a source different from that with which I was concerned 30 years ago; it has become even more acute than it was then.

That a systematically pursued incomes policy means the suspension of the price mechanism and. before long the replacement of the market by a centrally-directed economy seems to me beyond doubt. I cannot here discuss the ways in which we may still avoid this course, or the chances that we may still do so. Although I regard it as at this time the chief duty of every economist to fight inflation – and to explain why a repressed inflation is even worse than an open inflation – I devote this lecture to another task. As I see it, inflation has merely speeded up the process of the destruction of the market economy which has been going on for other reasons, and brought much nearer the moment when, seeing the economic, political and moral consequences of a centrally-directed economy, we shall have to think how we can re-establish a market economy on a firmer and more durable basis.



FOR SOME TIME I have been convinced that it is not only the deliberate attempts of the various kinds of collectivists to replace the market economy by a planned system, nor the consequences of the new monetary policies, which threaten to destroy the market economy: the political institutions prevailing in the Western world necessarily produce a drift in this direction which can be halted or prevented only by changing these institutions. I have belatedly come to agree with Joseph Schumpeter who 30 years ago argued2 that there was an irreconcilable conflict between democracy and capitalism – except that it is not democracy as such but the particular forms of democratic organisation, now regarded as the only possible forms of democracy, which will produce a progressive expansion of governmental control of economic life even if the majority of the people wish to preserve a market economy.

Majority rule and special interests

The reason is that it is now generally taken for granted that in a democracy the powers of the majority must be unlimited, and that a government with unlimited powers will be forced, to secure the continued support of a majority, to use its unlimited powers in the

Capitalism, Socialism and Democracy, Allen and Unwin, 1943.

service of special interests – such groups as particular traders, 'the inhabitants of particular regions, etc. We shall see this most clearly if we consider the situation in a community in which the mass of the people are in favour of a market order and against government direction, but, as will normally happen, most of the groups wish an exception to be made in their favour. In such conditions a political party hoping to achieve and maintain power will have little choice but to use its powers to buy the support of particular groups. They will do so not because the majority is interventionist, but because the ruling party would not retain a majority if it did not buy the support of particular groups by the promise of special advantages. This means in practice that even a statesman wholly devoted to the common interest of all the citizens will be under the constant necessity of satisfying special interests, because only thus will he be able to retain the support of a majority which he needs to achieve what is really important to him.

The root of the evil is thus the unlimited power of the legislature in modern democracies, a power which the majority will be constantly forced to use in a manner that most of its members may not desire. What we call the will of the majority is thus really an artefact of the existing institutions, and particularly of the omiupotence of the sovereign legislature, which by the mechanics of the political process will be driven to do things that most of its members do not really want, simply because there are no formal limits to its powers.

It is widely believed that this omnipotence of the representative legislature is a necessary attribute of democracy because the will of the representative assembly could be limited only by placing another will above it. Legal positivism, the most influential current theory of jurisprudence, particularly represents this sovereignty of the legislature as logically necessary. This, however, was by no means the view of the classical theorists of representative government. John Locke made it very clear that in a free state even the power of the legislative body should be limited in a definite manner, namely to the passing of laws in the specific sense of general rules of just conduct equally applicable to all citizens. That all coercion would be legitimate only if it meant the application of general rules of law in this sense became the basic principle of liberalism. For Locke, and for the later theorists of Whiggism and the separation of powers, it was not so much the source from which the laws originated as their character of general rules of just conduct equally applicable to all which justified their coercive application.

What is law?

This older liberal conception of the necessary limitation of all power by requiring the legislature to commit itself to general rules has, in the course of the last century, been replaced gradually and almost imperceptibly by the altogether different though not incompatible conception that it was the approval of the majority which was the only and sufficient restraint on legislation. And the older conception was not only forgotten but no longer even understood. It was thought that any substantive limitation of the legislative power was unnecessary once this power was placed in the hands of the majority, because approval by it was regarded as an adequate test of justice. In practice this majority opinion usually represents no more than the result of bargaining rather than a genuine agreement on principles. Even the concept of the arbitrariness which democratic government was supposed to prevent changed its content: its opposite was no longer the general rules equally applicable to all but the approval of a command by the majority – as if a majority might not treat a minority arbitrarily.



TODAY IT IS rarely understood that the limitation of all coercion to the enforcement of general rules of just conduct was the fundamental principle of classical liberalism, or, I would almost say, its definition of liberty. This is largely a consequence of the fact that the substantive (or 'material') conception of law (as distinguished from a purely formal one) which underlies it, and which alone gives a clear meaning to such ideas as that of the sep- aration of powers, of the rule of law or of a government under the law, had been rarely stated explicitly but merely tacitly presupposed by most of the classical writers. There are few passages in their 17th- and 18th-century writings in which they explicitly say what they mean by 'law'. Many uses of the term, however, make sense only if it is interpreted to mean exclusively general rules of just conduct and not every expression of the will of the duly authorised representative body.

Tyranny of majorities

Though the older conception of law survives in limited connections, it is certainly no longer generally understood, and in consequence has ceased to be an effective limit on legislation. While in the theoretical concept of the separation of powers the legislature derived its authority from the circumstance that it committed itself to general rules and was supposed to impose only general rules, there are now no limits on what a legislature may command and so claim to be 'law'. While its power was thus once supposed to be limited not by a superior will but by a generally recognised principle, there are now no limits whatever. There is therefore also no reason why the coalitions of organised interests on which the governing majorities rest should not discriminate against any widely-disliked group. Differences in wealth, education, tradition, religion, language or race may today become the cause of differential treatment on the pretext of a pretended principle of social justice or of public necessity. Once such discrimination is recognised as legitimate, all the safeguards of individual freedom of the liberal tradition are gone. If it is assumed that whatever the majority decides is just, even if what it lays down is not a general rule, but aims at affecting particular people, it would be expecting too much to believe that a sense of justice will restrain the caprice of the majority: in any group it is soon believed that what is desired by the group is just. And since the theoreticians of democracy have for over a hundred years taught the majorities that whatever they desire is just, we must not be surprised if the majorities no longer even ask whether what they decide is just. Legal positivism has powerfully contributed to this development by its contention that law is not dependent on justice but determines what is just.

Mirage of 'social justice'

Unfortunately, we have not only failed to impose upon legislatures the limitations inherent in the necessity of committing themselves to general rules. We have also charged them with tasks which they can perform only if they are not thus limited but are free to use coercion in the discriminatory manner that is required to assure benefits to particular people or groups. This they are constantly asked to do in the name of what is called social or distributive justice, a conception which has largely taken the place of the justice of individual action. It requires that not the individuals but 'society' be just in determining the share of individuals in the social product; and in order to realise any particular distribution of the social product regarded as just it is necessary that government directs individuals in what they must do.

Indeed, in a market economy in which no single person or group determines who gets what, and the shares of individuals always depend on many circumstances which nobody could have foreseen, the whole conception of social or distributive justice is empty and meaningless; and there will therefore never exist agreement on what is just in this sense. I am not sure that the concept has a definite meaning even in a centrally-directed economy, or that in such a system people would ever agree on what distribution is just. I am certain, however, that nothing has done so much to destroy the juridical safeguards of individual freedom as the striving after this mirage of social justice. An adequate treatment of the topic of this lecture would indeed presuppose a careful dissection of this ideal which almost everybody seems to believe to have a definite meaning but which proves more completely devoid of such meaning the more one thinks about it. But the main subject of this lecture is what we have to do, if we ever again get a chance, to stop those tendencies inherent in the existing political systems which drive us towards a totalitarian order.

Compatibility of collective wants

Before I turn to this main problem, I should correct a widespread misunderstanding. The basic principle of the liberal tradition, that all the coercive action of government must be limited to the enforcement of general rules of just conduct, does not preclude government from rendering many other services for which, except for raising the necessary finance, it need not rely on coercion. It is true that in the 19th century a deep and not wholly unjustified distrust of government often made liberals wish to restrain government much more narrowly. But even then, of course, certain collective wants were recognised which only an agency possessing the power of taxation could satisfy. I am the last person to deny that increased wealth and the increased density of population have enlarged the number of collective needs which government can and should satisfy. Such government services are entirely compatible with liberal principles so long as,

firstly, government does not claim a monopoly and new methods of rendering services through the market (e.g. in some now covered by social insurance) are not prevented; secondly, the means are raised by taxation on uniform principles and taxation is not used as an instrument for the redistribution of income; and, thirdly, the wants satisfied are collective wants of the community as a whole and not merely collective wants of particular groups.

Not every collective want deserves to be satisfied: the desire of the small bootmakers to be protected against the competition of the factories is also a collective need of the bootmakers, but clearly not one which in a liberal economic system could be satisfied. Nineteenth-century liberalism in general attempted to keep the growth of these service activities of government in check by entrusting them to local rather than central government in the hope that competition between the local authorities would control their extent. I cannot consider here how far this principle had to be abandoned and mention it only as another part of the traditional liberal doctrine whose rationale is no longer understood. I had to consider these points to make it clear that those checks on government activity with which for the rest of this lecture I shall be exclusively concerned refer only to its powers of coercion but not to the necessary services we today expect government to render to the citizens.

I hope that what I have said so far has made it clear that the task we shall have to perform if we are to re-establish and preserve a free society is in the first instance an intellectual task: it presupposes that we not only recover conceptions which we have largely lost and which must once again become generally understood, but also that we design new institutional safeguards which will prevent a repetition of the process of gradual erosion of the safeguards which the theory of liberal constitutionalism had meant to provide.



THE DEVICE to which the theorists of liberal constitutionalism had looked to guarantee individual liberty and the prevention of all arbitrariness was the separation of powers. If the legislature laid down only general rules equally applicable to all and the executive could use coercion only to enforce obedience to these general rules, personal liberty would indeed be secure. This presupposes, however, that the legislature is confined to laying down such general rules. But, instead of confining parliament to making laws in this sense, we have given it unlimited power simply by calling 'law' everything which it proclaims: a legislature is now not a body that makes laws; a law is whatever is resolved by a legislature. This state of affairs was brought about by the loss of the old meaning of 'law' and by the desire to make government democratic by placing the direction and control of government in the hands of the legislatures, which are in consequence constantly called upon to order all sorts of specific actions – to issue commands which are called laws, although in character they are wholly different from those laws to the production of which the theory of the separation of powers had intended to confine the legislatures.

The concept of 'lawyer's law'

Although the task of designing and establishing new institutions must appear difficult and almost hopeless, the task of reviving and making once more generally understood a lost concept for which we no longer have even an unambiguous name is perhaps even more difficult. It is a task which in this case has to be achieved in the face of the contrary teaching of the dominant school of jurisprudence. I will try briefly to state the essential characteristics of laws in this specific narrow sense of the term before I turn to the institutional arrangements which would secure that the task of making such laws be really separated from the tasks of governing.

A good way is to consider the peculiar properties which judge-made law possesses of necessity, while they belong to the products of legislatures in general only in so far as these have endeavoured to emulate judge-made law. It is no accident that this concept of law has been preserved much longer in the common law countries whereas it was rarely understood in countries which relied wholly on statute law.

This law consists essentially of what used to be known as 'lawyer's law' -which is and can be applied by courts of justice and to which the agencies of government are as much subject as are private persons. Since this judge-made law arises out of the settlement of disputes, it relates solely to the relations of acting persons towards one another and does not control an individual's actions which do not affect others. It defines the protected domains of each person with which others are prohibited from interfering. The aim is to prevent conflicts between people who do not act under central direction but on their own initiative, pursuing their own ends on the basis of their own knowledge. These rules must thus apply in circumstances which nobody can foresee and must therefore be designed to cover a maximum number of future instances. This determines what is commonly but not very helpfully described as their 'abstract' character, by which is meant that they are intended to apply in the same manner to all situations in which certain generic factors are present and not only to particular designated persons, groups, places, times, etc. They do not prescribe to the individuals specific tasks or ends of their actions, but aim at making it possible for them so mutually to adjust their plans that each will have a good chance of achieving his aims. The delimitation of the personal domains which achieve this purpose is of course determined chiefly by the law of property, contract, and torts, and the penal laws which protect 'life, liberty and property'.

Limits to coercion

An individual who is bound to obey only such rules of just conduct as I have called these rules of law in this narrow sense is free in the sense that he is not legally subject to anybody's commands, that within known limits he can choose the means and ends of his activities. But where everybody is free in this sense each is thrown into a process which nobody controls and the outcome of which for each is in large measure unpredictable. Freedom and risk are thus inseparable. Nor can it be claimed that the magnitude of each individual's share of the national income, dependent on so many circumstances which nobody knows, will be just. But nor can these shares meaningfully be described as unjust. We must be content if we can prevent them from being affected by unjust actions. We can of course in a free society provide a floor below which nobody need fall, by providing outside the market for all some insurance against misfortune. There is indeed much we can do to improve the framework within which the market will operate beneficially. But we cannot in such' a society make the distribution of incomes correspond to some standard of social or distributive justice, and attempts to do so are likely to destroy the market order.

But if, to preserve individual freedom, we must confine coercion to the enforcement of general rules of just conduct, how can we prevent legislatures from authorising coercion to secure particular benefits for particular groups – especially a legislature organised on party lines where the governing majority frequently will be a majority only because it promises such special benefits to some groups? The truth is of course that the so-called legislatures have never been confined to making laws in this narrow sense, although the theory of the separation of powers tacitly assumed that they were. And since it has come to be accepted that not only legislation but also the direction of current government activities should be in the hands of the representatives of the majority, the direction of government has become the chief task of the legislatures. This has had the effect not only of entirely obliterating the distinction between laws in the sense of general rules of just conduct and laws in the sense of specific commands, but also of organising the legislatures not in the manner most suitable for making laws in the classical sense but in the manner required for efficient government, that is above all on party lines.

Representative government driven to serve sectional interests

Now, I believe we are right in wanting both legislation in the old sense and current government to be conducted democratically. But it seems to me it was a fatal error, though historically probably inevitable, to entrust these two distinct tasks to the same representative assembly. This makes the distinction between legislation and government, and thereby also the observance of the principles of the rule of law and of a government under the law, practically impossible. Though it may secure that every act of government has the approval of the representative assembly, it does not protect the citizens against discretionary coercion. Indeed, a representative assembly organised in the manner necessary for efficient government, and not restrained by some general laws it cannot alter, is bound to be driven to use its powers to satisfy the demands of sectional interests.

It is no accident that most of the classical theorists of representative government and of the separation of powers disliked the party system and hoped that a division of the legislature on party lines could be avoided. They did so because they conceived of the legislatures as concerned with the making of laws in the narrow sense, and believed that there could exist on the rules of just conduct a prevalent common opinion independent of particular interests. But it cannot be denied that democratic government requires the support of an organised body of representatives, which we call parties, committed to a programme of action, and a similarly organised opposition which offers an alternative government.

Separate legislative assembly

It would seem the obvious solution of this difficulty to have two distinct representative assemblies with different tasks, one a true legislative body and the other concerned with government proper, i.e., everything except the making of laws in the narrow sense. And it is at least not inconceivable that such a system might have developed in Britain if at the time when the House of Commons with the exclusive power over money bills achieved in effect sole control of government, the House of Lords, as the supreme court of justice, had obtained the sole right to develop the law in the narrow sense. But such a development was of course not possible.

so long as the House of Lords represented not the people at large but a class.

On reflection, however, one realises that little would be gained by merely having two representative assemblies instead of one if they were elected and organised on the same principles and therefore also had the same composition. They would be driven by the same circumstances which govern the decisions of modern parliaments and acting in collusion would probably produce the same sort of authorisation for whatever the government of the day wished to do. Even if we assume that the legislative chamber (as distinguished from the governmental one) were restricted by the constitution to passing laws in the narrow sense of general rules of just conduct, and this restriction were made effective through the control by a constitutional court, little would probably be achieved so long as the legislative assembly were under the same necessity of satisfying the demands of particular groups which force the hands of the governing majorities in today's parliaments.

Specific interests and permanent principles

'While for the governmental assemblies we should want something more or less of the same kind as the existing parliaments, whose organisation and manner of proceeding have indeed been shaped by the needs of governing rather than the making of laws, something very different would be needed for the legislative assembly. We should want an assembly not concerned with the particular needs of particular groups but rather with the general permanent principles on which the activities of the community were to be ordered. Its members and its resolutions should represent not specific groups and their particular desires but the prevailing opinion on what kind of conduct was just and what kind was not. In laying down rules to be valid for long periods ahead this assembly should be 'representative of', or reproduce a sort of cross-section of, the prevailing opinions on right and wrong; its members should not be the spokesmen of particular interests, or express the 'will' of any particular section of the population on any specific measure of government. They should be men and women trusted and respected for the traits of character they had shown in the ordinary business of life, and not dependent on the approval by particular groups of electors. And they should be wholly exempt from the party discipline necessary to keep a governing team together, but evidently undesirable in the body which lays down the rules that limit the powers of government.

Membership of legislative assembly Such a legislative assembly could be achieved if, first, its members were elected for long periods,secondly, they were not eligible for re-election after the end of the period, and, thirdly, to secure a continuous renewal of the body in accord with gradually changing opinions among the electorate, its members were not all elected at the same time but a constant fraction of their number replaced every year as their mandate expired; or, in other words, if they were elected, for instance, for fifteen years and one-fifteenth of their number replaced every year. It would further seem to me expedient to provide that at each election the representatives should be chosen by and from only one age-group so that every citizen would vote only once in his life, say in his fortieth year, for a representative chosen from his age-group.

The result would be an assembly composed of persons between their fortieth and their fifty-fifth year, elected after they had opportunity to prove their ability in ordinary life (and, incidentally, of an average age somewhat below that of contemporary parliaments). It would probably be desirable to disqualify those who had occupied positions in the governmental assembly or other political or party organisations and it would also be necessary to assure to those elected for the period after their retirement some dignified, paid and pensionable position, such as lay-judge or the like.

The advantage of an election by age-groups, and at an age at which the individuals could have proved themselves in ordinary life, would be that in general a person's contemporaries are the best judges of his character and ability; and that among the relatively small numbers participating in each election the candidates would be more likely to be personally known to the voters and chosen according to the personal esteem in which they were held by the voters – especially if, as would seem likely and deserve encouragement, the anticipation of this common task led to the formation of clubs of the age-groups for the discussion of public affairs.



THE PURPOSE of all this would of course be to create a legislature which was not subservient to government and did not produce whatever laws government wanted for the achievement of its momentary purposes, but rather which with the law laid down the permanent limits to the coercive powers of government limits within which government had to move and which even the democratically-elected governmental assembly could not overstep. While the latter assembly would be entirely free in determining the organisation of government, the use to be made of the means placed at the disposal of government and the character of the services to be rendered by government, it would itself possess no coercive powers over the individual citizens. Such powers, including the power to raise by taxation the means for financing the services rendered by government, would extend only to the enforcement of the rules of just conduct laid down by the legislative assembly. Against any overstepping of these limits by government (or the governmental assembly) there would be open an appeal to a constitutional court which would be competent in the case of conflict between the legislature proper and the governmental bodies.

A further desirable effect of such an arrangement would be that the legislature would for once have enough time for its proper task. This is important because in modern times legislatures frequently have left the regulation of matters which might have been effected by general rules of law to administrative orders and even administrative discretion simply because they were so busy with their governmental tasks that they had neither time for nor interest in making law proper. It is also a task which requires expert knowledge which a long-serving representative might acquire but is not likely to be possessed by a busy politician anxious for results which he can show his constituents before the next election. It is a curious consequence of giving the representative assembly unlimited power that it has largely ceased to be the chief determining agent in shaping the law proper, but has left this task more and more to the bureaucracy.

I must however not make you impatient by pursuing further the details of this utopia – though I must confess that I have found fascinating and instructive the exploration of the new opportunities offered by contemplating the possibility of separating the truly legislative assembly from the governmental body. You will rightly ask what the purpose of such a utopian construction can be if by calling it thus I admit that I do not believe it can be realised in the foreseeable future. I can answer in the words of David Hume in his essay on 'The Idea of a Perfect Commonwealth', that 'in all cases, it must be advantageous to know what is the most perfect in the kind, that we may be able to bring any real constitution or form of government as near it as possible, by such gentle alterations and innovations as may not give too great a disturbance to society'.


The Road to Serfdom with The Intellectuals and Socialism:

Choice in Currency: A Way to Stop Inflation:

Denationalisation of Money:

A Tiger by the Tail: The Keynesian Legacy of Inflation:

My notes on Taleb's books

While on the subject of books, I thought it would be a good idea to also publish my comments made 2 1/2 years ago re: Taleb's books on FTI's internal communications.

Fooled by Randomness (by Nassim Nicholas Taleb)

Posted by me on FTI Google Group 12 February 2008: I think the book is relevant to FTI in many ways (also Black Swan). He doesn't preach the philosophy of freedom directly but points out the gaps in current economic thinking which is often centralist or does not distinguish centralised solutions sufficiently from free market solutions. His analysis of human nature is very similar to the basis on which classical liberalism is founded (e.g. much of the stuff he writes about finds a mention already in the first chapter of my manuscript: "Discovery of Freedom").

The concept of black swan applies both to downside risks and upside risks (a sand castle suddenly falls with the last additional sand particle; a book or movie or other product such as FTI suddenly gains momentum after its word of mouth reaches critical mass). The thing is to anticipate both the black swans. FTI's black swan tipping point (ie. point of rapid growth) should come, in my view, once we have 100 serious leaders committed to freedom.

Finally, his book, Black Swan analysed the weaknesses of the centralised US financial system well before most others. The only comparable analyses were from the Austrian school of thought (, which I believe is on the money in terms of its analysis. Taleb favourably talks of Hayek and of course, Hayek is the most influential thinker (so far) from the Austrian school.

Check out this page (Taleb's home page)

"The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deemed these events "unlikely".


and (this one is great stuff from the UK Time)

The key thing we learn from this book (along with Hayek) is that centralised planners of all sorts are living in a fools paradise. No one can have access to all the local information which influences real life events. Even the best brains make frequent mistakes of statistical inference and we are all fooled by rare events. That is great background reading for people who believe in minimal regulation and justice without needless interference by pompous bureaucrats and politicians who pretend to know everything about the world.

The Black Swan

A few months later I had read The Black Swan and found that it pretty much refers to the same issues that Fooled by Randomness does. Despite Taleb's conceited (but fast reading) writing style, both books are well worth a read, if only to provide real-life evidence of the folly of macro-economic policy makers who have ABSOLUTELY no clue about the price system and human incentives (and weaknesses). Keynesians and 'central planners' such as the central bankers imagine they understand human nature. They don't. That's the key message here. If they did understand human nature they would understand their own limitations first.

Good books I've come across in the past few years

I'm listing here some of the good books I've come across in the last two to three years, including those I've re-read recently. I'm providing hyperlinks to those that I've reviewed or otherwise commented on. The list is in no particular order within the relevant category. (And I might update this in due course or create an entirely new list if time permits.)

[Note: This list is not restricted only to recently published books. I've excluded perhaps a hundred others that I've bought and/or read in the past 2-3 years but which don't qualify for the 'good book' category. I'm also excluding books I bought or read more than two to three years ago unless they were so good that I pulled them out of the bookshelf and re-read them recently.] 

Books by FTI Speakers Panelists

Pavan Choudary: When You Are Sinking Become a Submarine (and Success Sutras for the 21st century: A Trilogy of Wisdom)
On India
Nandan Nilekani: Imagining  India
(I shouldn't forget to list my own book! Breaking Free of Nehru –  the clearest step-by-step book on reforms needed in India that I've come across)
Economics and Politics
F.A. Hayek: The Constitution of Liberty and Law, Legislation and Liberty and The Fatal Conceit
Isaiah Berlin: Freedom and its betrayal: six enemies of human liberty
Jim Powell: The Triumph of Liberty
Ayn Rand: Capitalism: The Unknown Ideal
Milton Friedman: Capitalism and Freedom
Ian Adams and R.W. Dyson: Fifty major political thinkers
Tim Hartford: The Undercover Economist  (and The Logic of Life)
Malcolm Gladwell: Tipping Point  (and Outliers)
Jason Zweig: Your Money and Your Brain
Steven Levitt: Freakonomics (and Superfreakonomics)
Steven Pinker: How the Mind Works
Steven Landsburg: More Sex is Safer Sex
Gerd Gigerenzer: Gut Feelings
Terence Kealey: Sex, Science and Profits
Robert H.Frank: The Economic Naturalist (and Return of the Economic Naturalist
Nassim Nicholas Taleb: The Black Swan (and Fooled by Randomness)

Physics and the pure sciences
Lee Smolin: The Trouble With Physics
Stephen Hawking: A Brief History of Time
Ian Plimer:  Heaven and Earth
John D. Barrow: The Anthropic Cosmological Principle
Leadership, strategy, and team building
Jim Collins: From Good to Great
Charles Pellerin: How NASA Builds Teams
James Kouses and Barry Posner: Leadership Challenge
 Ashok Garde: Chanakya on Management 
Saul Alinsky: Rules for Radicals  
Rangarajan: Arthasastra

How to write better
William Strunk and E.B. White: The Elements of Style

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