Suggestions for a new role for India’s Planning Commission #1

Harsh Shrivastava gave a talk yesterday, entitled, “Does India really need a Planning Commission?“

I won’t go into details of this talk. The general sense I get is that the Planning Commission is now a place where free market ideas are not just tolerated, but welcomed. That’s a good thing.

However, the very idea of Planning Commission is wrong. It is also incompatible with basic principles of accountability.

Let me first recap writings from BFN on this subject.

Extract from the MAIN book, BFN

The timelines and deliverables for Phase 1 are outlined below. The month in the sub-headings refers to the time when an activity will be completed:

• Month 1: The Planning Commission will be shut down from day one. Its policy analysis functions will be transferred either to existing departments or to the IPO. All commitments made under the Five-Year or other Plans will be scrapped. All previously committed funding will be up for review at the time of renewal or extension of funding on a case-by-case basis. Files of the Planning Commission will be sent to the National Archives for recording and open access to researchers.

EXTRACTS FROM BFN Online Notes

If you’ve read BFN you’ll know that a significant amount of material is online, not in the main book. The reason is that the publisher asked me to splice off nearly one-third of the book at the last minute. Being busy, I slashed and burned (condensing is hugely expensive in terms of time), and put out the slashed portions online as “Online Notes“. It is my hope one day, when I find time (and a publisher who is interested), to bring BFN together into one piece again. But that’s not the topic for now. Let me extract the discussion on planning that should have formed part of the main book, BFN.

Unplanned planning

One of the implications of the way free markets work is that planning for the future of an entire nation is not only futile, but badly counter-productive. We can plan our own little projects and even chart the uncertain course of our lives. And yet we know that we mould our future only to the extent we control it: there are too many factors outside our control. But shaping the future of a country is a different kettle of fish. It is impossible, and is best left to the freely adjusting forces of markets to create. A free society’s government leaves its citizens entirely free to do whatever they think is best for them. It doesn’t tell them what to produce or how to use their money. Given that free markets are perfectly capable of handling the most unanticipated changes and are beautifully ‘designed’ for change, why would anyone want to plan an entire country’s economy, anyway?

We must learn to let well enough alone. A free society can put in place a good regulatory regime. A free society can even try to forecast what could happen in the future (see box below). But for a government to actually start doing something on the basis of such forecasts is dangerous; particularly if it intends to invest our money into government operated business. Wanting to plan a country’s economic activity and to direct resources based on abstract planning models can condemn resources to destruction. As well, by damaging incentives in the markets, these misplaced resources and actions can drastically impoverish an entire nation.

Box 8 Forecasting and planning models The best possible forecasts made by the most intelligent and capable human minds in the history of mankind have almost always been off-target by huge margins. And yet, tens of economists, like Don Quixotes, keep on forecasting business cycles, interest rates, inflation, and so on. When they are wrong, they write off their forecast as having suffered from an ‘external shock’—a thing not anticipated in the equations of the forecaster. It is the fate of such folks to get surprised by ‘the East Asian Miracle’ one day and the ‘East Asian debacle’ the next; by the ‘great success of Russian planning’ one day and ‘the sudden collapse of the USSR’ the next. I am a qualified economist, or at least my degree says so, but—or rather therefore!—I wouldn’t wager two paisa on my ability to predict the future except at the broadest, and in a sense, intuitive, level. Similarly, while computable general equilibrium (CGE) models are commendable works of economic logic which all economists should tinker with and use as an aid to macro-economic forecasting, they are not designed to throw useful light on a society’s investment decisions. A good CGE model tracks what has already happened and even forecasts reasonably well for a year or two. But real economies diverge rapidly from there on. The unseen currents of change and innovation that rush about in a million directions below the surface of aggregated statistical indicators used in these models shift the model parameters in unpredictable ways. Social and political changes taking place outside of the economies being observed shock the models as well. No CGE model of 1990 could have predicted the impacts from the internet. Similarly, a CGE model of 1995 could not have predicted India’s dominance in business process outsourcing, a dominance which arose from the failure of corrupt Indian officials’ to block the export of value-added electrons. And to even dream that these models could have told us that Bangalore would become the hub of this Indian industry is an impossibility not worth considering, leave alone the possibility of these models predicting the dramatic events of September 11, 2001. Human models cannot predict the future. Period. The problem is that not only past data, but even previous production ‘functions’, quickly become irrelevant. CGE models can supplement the in-depth knowledge of highly competent policy makers. These can assist in infrastructure decisions, for instance. But the blind use of such models to intervene in general investment will waste public resources. God probably has a set of a billion simultaneous, conditional equations in n dimensions with a million variables each, into which trillions of angels continuously feed data about what each of us is thinking about or dreaming. And so God is perhaps well-equipped to plan an economy. But we don’t have access to God’s model or data sources. So let us stop acting God.

Socialists are quite gifted at rushing in “where angels fear to tread”. The erstwhile USSR first started the madness of ‘national planning’ which lunacy then transmitted to India through Nehru. Nehru set up a Planning Commission in India almost immediately after independence, with the aim of orchestrating both public and private investment decisions. But long after USSR got out of its erroneous ways by spitting the dummy and completely collapsing as a nation, India continues to squander precious public funds into this fruitless exercise.

Planning is the visible display of socialist arrogance and megalomania. Misguided planners crunch numbers and imagine they see the future of the world in the palms of their hands! I am entitled to comment severely against such delusions of grandeur since I had these myself! In the mid-1980s I became a self-trained economist, having done an MA in Economics from Panjab University through a correspondence course. But there are serious pitfalls of being trained in economics in this manner. No mention was made of Hayek’s significant work, for instance, and I barely internalised what the price system actually does. Mine was an amazingly half-baked degree. The reason I mention this is that as a result of this qualification, I foolishly imagined for a few years that it is quite reasonable to perform uncanny mathematical calculations to plan an entire economy. Very luckily, after learning economics first-hand for five years in the USA from outstanding teachers some years later, and then reviewing that knowledge in my mind from first principles, I have been separated from my delusions—even though I now possess the relevant mathematical training to understand and prepare sophisticated planning models.

We need to hark back to Hayek’s paper at this stage. Hayek showed that anyone who tries to interfere with free markets faces a Herculean challenge. How can this person or organisation obtain even a crude approximation of the local knowledge, the detailed knowledge, of what is happening out there in the economy in each person’s head? Planning would need detailed knowledge of the “kind which by its nature cannot be entered into statistics and therefore cannot be conveyed to any central authority in statistical form” (Hayek). As Hayek further explained:

The statistics which such a central authority would have to use would have to be arrived at precisely by abstracting from minor differences between the things, by lumping together, as resources of one kind, items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific [local] decision. It follows from this that central planning based on statistical information by its nature cannot take direct account of the circumstances of time and place. [italics mine]

In other words, a central planner cannot even begin to understand what is happening in the real world at the level of detail necessary to plan. And if the planner doesn’t know all the relevant circumstances, how can the planner decide what needs to be done by each of us at each point in time? How can the planner’s decisions possibly be optimal? Instead, these decisions are guaranteed to be misallocations, thus squandering our limited resources. As such, no economist worth his salt should associate with the Planning Commission.

The only saving grace is that Mahalanobis, who strongly influenced Nehru’s Planning Commission, particularly its second Five Year Plan, was not an economist, a mere physicist and statistician. It seemed certain to him, with mathematical equations crackling like electricity inside his head, that mathematics would tell him how India should be run. Actual economists like Milton Friedman who tried to advise Nehru were completely ignored.[1] The good economist B.R. Shenoy left the Commission during its early years. The great economist Jagdish Bhagwati who warned against the centrist approaches was also ignored, and so he left India. The Commission’s secretariat then became the citadel of clairvoyant pseudo-economists and ill-trained IAS officers who have been happy to ‘manage’ its astrological functions. They go to work each day and use the services of their local parrot to pick a card from among those laid out on their desks—that is how they decide where to invest public funds.

I have two recommendations at this stage. Indian physicists should in future try to focus on physics; and India’s bureaucrats should do bureaucratic things. Neither should dabble in the seemingly obvious area of economics which is surprisingly difficult and takes a lifetime to master—being in the end a specialised art form. Gandhi, with his great intuition about right and wrong, saw through the hoax of planning very early. He wrote in a message to Amrit Kaur on 19 June 1939 on the National Planning Committee set up by Nehru in 1937, as follows: “the whole of planning is a waste of effort… It has appeared to me that much money and labour are being wasted on an effort, which will bring forth little or no fruit”.[2]

In supporting socialism and ‘planning’ our Planning Commission has significantly enhanced poverty in India and reduced our freedoms. While Indian socialists are better behaved now after almost bankrupting us in 1991, an end to socialist arrogance is nowhere in sight. I now call upon to our astrological leaders sitting in the Planning Shop in a fairly abrupt manner, thus: Ye Planners of India, shut down your silly Planning Shop and go home! You’ve done enough damage to India to last your lifetime. Go home and rest your feverish brain. [3]A free economy can undertake all the ‘planning’ it needs in the most unplanned and elegant manner through the freely available services of the Invisible Hand.

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[1] See http://www.indiapolicy.sabhlokcity.com/debate/Notes/friedcopy.html

[2] Quoted in S. Gopal (1975). Jawaharlal Nehru: A Biography, vol. I. New Delhi: Oxford University Press. p.247.

[3] I cannot understand why a person of the calibre of Montek Singh Ahluwalia has chosen to support the Planning Commission by participating as its Deputy Chairman. I am also concerned about his perspectives on India (eg, in “Understanding India’s Reform Trajectory: Past Trends and Future Challenges”. India Review. October 2004. pp. 269–277) which seem at times to be rather mechanical, not grounded in arguments of freedom.