Hindu Capitalism #13: Anantdeep Singh and Timur Kuran

Finally, before I leave off for tonight, I’ve located some excellent material that could throw light on Hindu capitalism.

1) A PhD dissertation from my own University (USC), nearly 10 years after my (different!) work: “The divergence of the economic fortunes of Hindus and Muslims in British India: a comparative institutional analysis”, by Anantdeep Singh [PDF]

2) A paper

Economic Modernization in Late British India: Hindu-Muslim Differences by Timur Kuran and Anantdeep Singh, December 2010 [PDF]

Why do most writers believe Hinduism and capitalism are incompatible?

EXTRACT

Writers who are not sympathetic to the “classical thesis” have written on causes inherent within India including the caste system, the value system embodied by Hinduism, and the political conditions in pre-British India.  For clarity, the explanations of India’s underdevelopment will be placed into the following categories: (i) Classical Thesis; (ii) Marxist Thesis; (iii) Incompatibility of Hinduism and Capitalism Thesis; (iv) Endemic Conditions of India Thesis and (v) Hindu Equilibrium Thesis.  While an extensive critique of these explanations is beyond the scope of this chapter, a brief survey of these explanations follows.

The “Classical Thesis” and Its Proponents

The “classical thesis” was first espoused by the historian Alexander Dow in the early 1770s and it was given a theoretical form in 1783 by Edmund Burke. The first Indian writer to address this issue was Ram Mohan Roy in 1830.  Much of Roy’s analysis focused on the transfer of capital from India to the West by Europeans who temporarily resided in India.  Roy’s solution was a relatively simple one: invite the Europeans to settle permanently in the country.  Indian periodicals of the mid nineteenth century such as Sambad Prabhakar and Somprakas also devoted arguments to British exploitation of the Indian economy.  Articles discussed how British policies hindered the development of industry in India.  They also claimed that the wages of European employees were remitted abroad (Roy 1987, 42-44).  

Dadabhai Naoroji’s Poverty of India, published in 1876, shifted the focus from the remittances earned by British officials in India and instead used statistical analysis to show how India’s export surplus was a source of impoverishment.  Naoroji defined the concept of drain as an export surplus for which there was no corresponding entry on the debit side in the form of import of merchandise or securities. Rather than benefiting from an export surplus, India was impoverished every year throughout the nineteenth century.  India’s export surplus was cancelled out by four sources: (i) payment of interest on foreign borrowings; (ii) service charges such as freight and banking; (iii) remittances of British nationals living in India; and (iv) foreign obligations of the government of India (Chaudhuri 1968, 39).  The amount drained out of India from 1835 to 1872 was estimated to be approximately 0.5 billion English pounds (Roy 1987, 45).

A work in the periodical Samajik Prabhandha written by Bhudev Mukhopahay in 1892 argued that while British rule in India had positive effects in areas such as agriculture, the national per capita income failed to increase because Indian industry suffered from foreign competition and from the drain of wealth to Britain. Mukhopahay estimated that approximately one-fourth the revenue collected by British authorities was submitted back to Britain, along with the salaries of some 80,000 European soldiers and professionals.  The amount of drain varied but for 1892 it was estimated to be Rs. 300 million (Roy 1987, 45).    

R.C. Dutt in Economic History of India alleged that the Indian debt from 1862 to 1901 stood at 200 million pounds and remittances were in the amount of 16 million pounds per annum.  The salaries of European officers were 10 million pounds. About one-half of the revenue collected by the British in India, or 22 million pounds, was sent to Britain.  Also, the British East India Company sent a total of 32 million pounds to its shareholders in England from 1793 to 1838 (Roy 1987, 45).

Among the most vociferous critics of British rule in India was Jawaharlal Nehru. Before the arrival of the British, India was “as advanced industrially, commercially, and financially as any country” (Nehru [1946] 1991, 284) and well on its path to industrialization.  Nehru viewed British rule as having multiple effects: the impoverishment of India through looting, the industrialization of Britain via loot acquired in India, and that India “became progressively ruralized” (Nehru [1946] 1991, 284) as a result of its arrested industrialization.  Going further, Nehru asserts that British wealth and industrialization stemmed directly from the British plunder of India, especially the rapacious plunder of Bengal: “the Bengal plunder began to arrive in London, and the effect appears to have been instantaneous, for all authorities believe that the ‘industrial revolution began with the year 1770…’ ” (Nehru [1946] 1991, 297-298). Indian manufacturers were crushed via various policies and taxes while Britain slammed shut its doors on finished Indian goods.  The Indian artisan class was led to mass poverty while the economy was transformed into an agrarian one (Nehru [1946] 1991, 298-302).

The role played by the British in India’s deindustrialization during the nineteenth century continued to receive attention after India’s independence.  Some studies by Indian scholars have attempted to assess the impact British policies on the entire Indian subcontinent (Bagchi 1976a; 1976c; 1982; Dutt 1992, 146-150; Eswaran and Kotwal 1994). Other studies discussed the impact of colonialism on specific areas or groups within India. Bagchi (1976b) describes in great detail how British economic policies were conducive to the deindustrialization of Bihar in northeastern India, while Ram (1972) and Specker (1987) discuss the negative impact of British economic policies on the economic development of southern India.  Guha (1976) links the growth of the opium industry with the underdevelopment of Assam.

Scholars who are sympathetic the “classical thesis” have also utilized variants of dependency theory to assert that India’s incorporation into the global capitalist economy helped bring about its underdevelopment (Baran 1978, 277-283; Frank 1975, 22; Robinson 1979, 104). Athar Ali (1975, 386-388) asserts that the Mughal, Ottoman, and Safavid empires suffered simultaneous declines because European demand for Asian goods led to inflation and constrained the financial capacities of the ruling elites of these empires. [Athar Ali is unclear as to why producers of the Mughal, Safavid, and Ottoman empires could not have matched European demand for their goods by increasing production.]

Perlin (1983) asserts that capitalism in pre-British India was well developed and suggests that the British underdeveloped the country. [Perlin (1983) is not alone in suggesting that pre-British India was at least a par with the Western world in its level of economic development. Bayly (1989) and Prakash (1998) also suggest that pre-British India was at a high level of economic development.]

Wallerstein (1986) suggests that before 1750, India was outside the framework of the European-dominated capitalist world economy.  The period 1750-1850 saw both the incorporation of India into the world capitalist system and its subsequent dependence upon the Western world. 

Recent works continue to assess the impact of the British on India’s economy.  Harnetty (1991) discusses the decline of the Indian handloom industry in the face of British competition. Shah Mohammed and Williamson (2004) argue that improvements in transportation technology in the nineteenth century decreased the price of British products vis-à-vis Indian products and this furthered India’s deindustrialization. Pardesi (2007, 216-217) suggests that Mughal India was not only self-sufficient but also the ultimate destination for much of the New World’s gold and silver. India’s decline can only be properly understood in light of the rise of British and American power.  Nayyar (2006) has suggested that globalization occurred during two periods: 1870-1914 and after 1950.  Both periods of globalization hindered economic growth in the underdeveloped world and may be responsible for much of the economic gap between the developed and underdeveloped regions of the planet.

Some recent material has also been devoted to determining when India became underdeveloped vis-à-vis the Western world by examining differences in wages between the two regions. Parthasarathi (1998) argues that gap in Indian and British living standards is a recent phenomenon.  Real wages in South India and southern England were more or less equal: they began to diverge only in the late eighteenth century. Allen (2001) estimates real wages of workers in the Mughal capital Agra in 1595 and compares them to real wages in 1960.  He suggests that real wages fell by 23.3 percent during this period. In another work, Allen (2007) argues that while pre-industrial Asia and Europe may not have had dramatically different standards of living, by the beginning of the nineteenth century a clear difference between the two regions had emerged.  Broadberry and Gupta (2006) suggest that differences between India and the Western world (especially Britain) began to emerge as early as the seventeenth century.
 
India’s History Is No History: The Marxist View of Indian Economic History
Amongst the most famous proponents of the notion that India displayed little ability to develop on its own is Karl Marx. [Hegel viewed India’s history as a long episode of stagnation and felt that Hinduism had a stifling affect on the development of human freedom.  Marx’s view of India was shaped by Hegel’s assessments (Habib 1995, 16-18).] According to Marx the absence of property ownership in India prevented the formation of classes.  Therefore class conflict, which was the engine of history in Europe, did not exist in India.  Pre-British India had a stagnant social order characterized by the following characteristics: (i) a stable equilibrium that showed little movement through the centuries (external events such as invasions served only to undermine this equilibrium temporarily); (ii) the absence of class struggle in India stratified the classes into permanent positions, which prevented the development of social revolution and technological innovation; and (iii) unlike Europe, where the urban centers played revolutionary roles, Indian cities did not do so (Naqvi 1972).  The numerous invasions, falls of dynasties, wars, famines, and other traumatic events in Indian history are not relevant because “Indian society has no history at all” (Marx 1959, 81) until the arrival of the British, who destroyed Indian civilization by “leveling all that was great and elevated in the native society” (Marx 1959, 81).  This social revolution was brought about by the introduction of new relations between the classes and particularly the introduction of property rights (Naqvi 1972, 383).  By destroying the traditional industries and self-supporting villages of the Indian subcontinent, the British were able to introduce a technological and social revolution whose scale was unprecedented in previous Indian history.  

Irfan Habib (1969) uses the Marxist framework to explain why capitalism did not develop in pre-British India. According to Habib, capitalism is only possible with the accumulation of sufficient capital; if per capita income is too low then it is not possible to accumulate sufficient capital and capitalism cannot emerge (Habib 1969, 34). Much of Habib’s argument is devoted to illustrating how the Mughal landholding system in India siphoned off revenue away from the countryside and into the hands of the aristocracy.  The aristocracy, instead of using this capital for investment purposes, was inclined to use the revenue collected from villages for the purposes of conspicuous consumption, and as a result sufficient capital accumulation could not occur (Habib 1969, 32-79).
 
Hinduism and Capitalism: Incompatible?
The proposition that Hinduism stymied industrialization in the subcontinent has attracted considerable attention.  A commonly held view is that Indian values are by nature “spiritual” while Western values are “material” (Goheen et al. 1958, 1).  India’s “spiritual” values place greater emphasis on reducing desires rather than bettering one’s lot (Goheen et al. 1958, 3).  The impact of Hinduism on economic development can be seen in from two angles: attitudinal and institutional (Misra 1962, 42). The former focuses more on specific beliefs and attitudes imbibed in Hinduism, while the latter focuses more on the specific institutions of Hindu society.  A significant portion of this literature focuses on the beliefs of reincarnation and karma.  The institutional analysis of Hinduism has been largely limited to discussions of the caste system.       

 Amongst the earliest and most influential proponents of the view that the caste system hindered India’s industrialization has been Max Weber.  Weber believed that South Asia was in its early history at par with Europe in terms of intellectual development, productivity, and means of social organization (Morris 1967, 589). Weber characterizes the effect of the caste system as “essentially negative” (Weber 1958, 111). The caste system hindered the development of capitalism on the following counts: (i) it engendered extreme traditionalism and hostility to innovation; and (ii) it secluded castes from each other and prevented the rational organization of labor that is characteristic of capitalism (Weber 1958, 113).[Weber has been criticized for neglecting the heterogeneity of Hinduism.  Rao (1969) and Uppal (2001) have both suggested that Hindu scriptures and reform movements within Hinduism need to be accounted for in order to assess its impact on economic growth.]

Weber’s approach to differs from that of many modern economists in that it neglects the impact of the caste system on lowering work incentives.  K. William Kapp voices the argument in lines more acceptable to neo-classical economists when he suggests that the caste system lowers incentive to be productive because “it works against the emergence of a relationship between individual aptitude, performance and earnings” (Kapp 1963, 46-47). Status in Hindu society was traditionally linked with one’s place in the caste hierarchy and a person’s earnings were more likely to reflect his socioeconomic status than aptitude or performance. 

Vikas Misra also argues that the caste system lowered incentives, albeit in different ways for lower and higher castes. Lower caste Hindus had little incentive to obtain wealth because they would still be looked down upon by upper caste Hindus even if the latter were poor.  On the other hand, upper castes were generally forbidden from taking the occupations of the lower castes and this prevented them from participating in lucrative fields such as trade and commerce.  Finally, the joint family system limited spatial and occupational mobility while further strengthening the caste system (Misra 1962, 53-56).  

Conditions Endemic to India Led to Underdevelopment
Morris D. Morris (1968) traces India’s lack of development to historical conditions existing in pre-British India.  Unlike the Marxist arguments examined earlier, Morris does not see a causal link between India’s underdevelopment and class relations. He also rejects the notion that Hinduism and its attitudinal and institutional factors suppressed growth.  Instead, Morris points to a plethora of geographical, political, and social circumstances as culprits.  India was always fragmented into numerous political units and this led to greater political instability than in Ancient Rome or China.[The opposite of this argument has also been suggested by scholars who argue that Mughal Empire stunted India’s economic growth by siphoning away surplus capital for consumption and failing to develop basic infrastructure (Jones [1981] 2003, 194-198; 1988, 134-135; Landes 1999, 156-158).]  This fragmentation also prevented Indian markets from effectively integrating into larger markets.  Accordingly, it obviated the emergence of economies of scale.  Geographical conditions prevented the growth of internal trade, led to lower agricultural yields, and made it difficult to obtain the necessary raw materials for industrialization.  Morris stresses that pre-British India probably had a low per capita income and British rule provided the country with political stability, standardization, and greater administrative efficiency (Morris 1968, 3-22).

India’s agriculture benefited greatly from British rule: political stability reduced fluctuations in land usage, leading to greater yields from the land.  The new irrigation schemes introduced by the British made allowed for farming on previously unused areas. Finally, there was a greater specialization in agriculture and a shift to crops with greater market value.  While British rule had positive impacts in agriculture, the factors causing a lag in India’s industrialization were not so easy to overcome.

One major factor in hindering India’s industrialization during British rule was the low demand for industrial goods.  India’s population had risen from 200 million around 1800 to 417 million in 1947.  This enormous growth in population, however, did not lead to an increased demand for machine production because average per capita income was too low.  India was also characterized by an unequal distribution of income. Moreover demand from the wealthier classes was limited to specialty items which could not be mass produced (Morris 1983, 554-555).  

India was hindered not only from the demand side but also from the supply side of the economy.  Skilled labor was expensive and almost all machinery had to be imported from the West.  Since unskilled labor was readily available, entrepreneurs tapped into it as a source of inputs and neglected mechanization.  Businessmen were reluctant to invest in capital-intensive industries and gave preference to labor-intensive industries instead (Morris 1983, 555). 

Indian businessmen were plagued by much greater levels of uncertainty than their Western counterparts because there was an unsatisfactory flow of information about incentive structures, alternative goods, and prices.  The mechanisms for transmitting information about cost of production and level of demand were much weaker in India than in the West.  As a consequence Indian merchants could not make long term calculations with the same level of certainty that Western merchants could. In order to buffer themselves from greater uncertainty, the Indian businessman had to have a stock of ready capital to fall back on.  India lacked the institutions for an effective capital market and much of the country’s capital was immobile. Investors were thus reluctant to invest in new areas and tended to remain in traditional ones (Morris 1983, 556).
 
Hindu Equilibrium: Deepak Lal
Deepak Lal ([1988] 2005) suggests that by the third century BC, an economic and social system had been established that placed India’s economy in a long lasting equilibrium.  Despite numerous attempts to reform it, this equilibrium has changed little since its establishment.

This equilibrium was able to persist and function within the framework of four parameters.  This first was labor scarcity.  Lal argues that until the twentieth century, India has been a labor-scarce country (Lal [1988] 2005, 383).  The caste system arose as a response to this constraint and allowed for the provision of a steady supply of labor. The specialization implicit in the caste system made it difficult for castes to migrate to other regions because a caste that migrated to another region would find itself in competition from another caste that possessed the same specialized skills.  It is important to note that social ostracism and the emphasis on ritual purity prevented castes from learning skills from one another (Lal [1988] 2005, 44).

A second parameter mentioned by Lal is political instability.  According to Lal, much of India’s political history has characterized by feuds between local rulers. This political instability resulted in the rise of autonomous village communities throughout India. Rulers received regular tribute from these communities and responded in turn by refraining from the internal affairs of these villages (Lal [1988] 2005, 384-385).

Lal also points to the climatic conditions of India as a third parameter defining the equilibrium (Lal [1988] 2005, 385).  The relative unpredictability of rainfall and monsoons resulted in considerable uncertainty in regards to production of agricultural output. Individuals with relatively large landholdings were able to secure themselves against this uncertainty because their landholdings allowed them to produce and store a surplus supply of food.  On the other hand, individuals with small or no landholdings were unable to do the same.  In order to obtain a steady supply of food, they supplied services to individuals with large landholdings.  This exchange of services for agricultural produce was known as the jajmani system (Lal [1988] 2005, 56-58).

The final parameter under which this equilibrium operated was an ideological one. Lal asserts that the general belief system of Hinduism frowns upon commerce and the pursuit of profit. This belief system influenced the attitudes of the rulers of India and played a role in hindering any attempts to move away from an agrarian economy (Lal [1988] 2005, 385). 

Three characteristics of this equilibrium are worth noting.  The first characteristic was the stability of agricultural technology.  Lal argues that Indian agricultural patterns and technology have changed little over the last two millennia.  A second characteristic was the stability of population size: until the nineteenth century, India’s population never exceeded 200 million.  A third characteristic was a stable standard of living: India’s per capita income throughout the last two millennia was approximately US $150 at 1965 prices (Lal [1988] 2005, 36-42).[This amount is equivalent to US $796.50 at 2007 prices.]

Lal asserts that this equilibrium has persisted for over two millennia because it provided Indians with a standard of living higher than that of their neighbors.  Lal believes that the equilibrium may be undermined in the near future because many of the parameters that led to creation of this equilibrium have changed (Lal [1988] 2005, 389).