What determines how much liberty people enjoy in different countries?

 An obvious answer to the question posed above is that governments determine how much liberty people enjoy. But that response may be too glib. Some argue that much restriction of liberty reflects prevailing values of people who see individual autonomy and personal choice as a threat to collective interests of groups and nations.

When I began the research which led to this article, I sought to explore the extent to which international differences in personal and economic freedom can be explained by deep-seated cultural values. My conclusion is that there is a large residual variation which is attributable to ideologies of governments that support or oppose free markets and personal liberty.

This conclusion is illustrated in the graph shown above. However, you will need more information about how the graph was constructed before you can get the picture.

• The graph shows the levels of economic and personal freedom for 85 countries using the Fraser Institute’s latest data (for 2020). There are 165 jurisdictions covered by the Fraser indexes, but relevant data on values from the latest round (2017-22) of the World Values Survey (WVS) was only available for 85.
•  The vertical axis of the graph is in reverse order – low values of personal freedom at the top, high values at the bottom. The reason stems from use of personal political compass data which is constructed in that way in an earlier article on this blog. 
• The horizontal and vertical axes are positioned at the median levels of economic and personal freedom for the 165 jurisdictions covered by the Fraser indexes. The countries not covered by the WVS tend to have lower freedom ratings than those which are covered. The median ratings for the 85 countries represented in the graph is 7.2 for economic freedom and 7.6 for personal freedom.
• I have only labelled data points that have freedom ratings that are substantially different from predictions based on deep-seated cultural values. The methods used to obtain predicted values for personal and economic freedom were explained in preceding articles on this blog (here and here). If you live in a high-income liberal democracy, that country is likely to be represented by one of the unlabelled points in the south-east quadrant - with relatively high levels of economic and personal freedom.
• The colour of the labelled points depends on whether freedom is greater than or less than predicted on the basis of values – green if greater than predicted, red if less than predicted. The size of the labelled points is larger if both personal and economic freedom are greater than or less than predicted.

 It is apparent from the graph that it is difficult to explain why countries have low personal and economic freedom ratings simply by reference to prevailing values in those countries. Most of the countries in that category have freedom ratings that are lower than predicted on the basis of values. The political ideologies followed by the governments of those countries provide an obvious explanation for their suppression of liberty.

The graph also shows that a substantial number of countries with relatively high personal and economic freedom are performing better in that regard than can readily be explained on the basis of prevailing values.

More detailed information for the countries which have freedom ratings substantially different from predicted levels is shown in the graph below.

 

Of the 34 countries with freedom ratings that are substantially different from predicted levels, Argentina is the only one to have one category of freedom greater than expected and the other category of freedom less than expected.

Questions to ponder

Are relatively high levels of human freedom less secure in countries in which freedom is greater than prevailing values seem to support? If a high proportion of the population feels that existing policy regimes are not aligned with their personal values, these regimes could be expected to be fragile, other things being equal. However, much depends on those “other things”. The growth of economic opportunities could be expected to be greater in the presence of relatively high levels of economic freedom. That could be expected to foster values that support economic freedom. The growth of economic opportunities also tends to encourage development of emancipative values which support personal freedom.

Are relatively low levels of human freedom less likely to persist where prevailing values support greater freedom? Again, policy regimes giving rise to such outcomes could be expected to be fragile, other things being equal. Unfortunately, however, the “other things” often include use of coercion to suppress opposition to existing policy regimes.

Postscript: 16 June, 2023

I have now made an effort to explore whether some of the above speculations have empirical support. This involved repeating the exercise of obtaining predictions of personal freedom - using WVS data from the 2010-14 to obtain predictions of personal freedom for 2012. It was possible to obtain matching data for only 53 countries. 

There is some evidence that personal freedom is less secure in countries in which freedom is greater than prevailing values seem to support. Of the 6 countries in which personal freedom was much greater than predicted in 2012, only one had higher personal freedom in 2020, another had unchanged personal freedom and the other 4 had lower personal freedom.

The exercise provided no support for the proposition that relatively low levels of personal freedom are less likely to persist when prevailing values support greater freedom. Of the 6 countries in which personal freedom was much less than predicted, none had higher personal freedom in 2020, and 2 experienced a further decline in personal freedom. Unfortunately, over this period none of the repressive regimes were displaced or became more responsive to prevailing values of the people.

To what extent do international differences in personal freedom reflect people's values?

 

The accompanying graph shows that personal freedom tends to be greatest in countries where people hold the most emancipative values (on average). However, it also suggests that in some countries personal freedom is much less, or much more, than might be expected on the basis of the values commonly held by the people. For example, there is less personal freedom in Belarus than might be expected, whereas there is more personal freedom in Armenia and Georgia than might be expected.

Before going further, I need to explain what emancipative values and personal freedom actually measure.

The concept of emancipate values was developed by Christian Welzel to measure the beliefs that people hold about such matters as the importance of personal autonomy, respect for the choices people make in their personal lives, having a say in community decisions, and equality of opportunity. Welzel’s research, using data from the World Values Survey, suggests that larger numbers of people have tended to adopt emancipative values in an increasing number of societies as economic development has proceeded. The strengthening of emancipative values is explained by growth of action resources (wealth, intellectual skills, and opportunities to connect with others) rather than civic entitlements such as voting rights. As emancipative values have strengthened, more people have come to recognize the value of civic entitlements and have used their growing material resources, intellectual skills, and opportunities to connect with others, to take collective action to achieve such entitlements. The process has been ongoing, with people showing greater concern for promoting more widespread opportunities—including greater opportunities for women, ethnic minorities and the disabled—as material living standards have risen and emancipative values have strengthened. (There is more information about Welzel’s research on emancipative values here.)

The personal freedom component of the Fraser Institute’s Human Freedom Index incorporates indicators of rule of law, security and safety, freedom of movement, freedom of religion, freedom of association and civil society, freedom of expression and information, and relationship freedom.

As already noted, international differences in personal freedom don’t always reflect people’s values. The reason why that is so is fairly obvious when one looks at the country labels I have shown on the outliers in the graph. What is it that Armenia, Cyprus, and Taiwan have that Egypt, Iran, China, Belarus and Vietnam do not have?   Representative government. 

Two cheers for democracy!

What is holding back the growth of economic opportunities in PNG?

 

Why should you care about the economic opportunities available to the people of Papua New Guinea?  Perhaps some readers didn’t even know the location of Papua New Guinea (PNG) before looking at the accompanying map.

There is a lot to be said for the view that the people of PNG should be left to solve their own problems for themselves. However, one of the problems the people of PNG need to solve is how to reduce their dependence on foreign aid. Another problem they need to solve is how to cope with living in a part of the world in which China and the United States are increasingly competing for influence.

Joe Biden, the president of the United States is to visit Port Moresby, the capital of PNG, on May 22 for discussions with Pacific Island Forum members, while on his way to Sydney for a Quad meeting.

My personal interest in the economic opportunities available to people in PNG stems from having worked there as a consultant on economic policy, having visited as a tourist on several occasions, and not least, from having relatives who live there. I maintain an interest in economic and social development in PNG and have written about it on this blog in the past (here, here, here, and here).

In this article I suggest that opportunities for human flourishing in PNG are less promising than recent macroeconomic indicators might suggest. After considering some macro-economic indicators, I briefly discuss population statistics, corruption and profligacy, the law and order problem, poor opportunities for young people, and lack of economic freedom.

Macro-economic indicators

The World Bank’s latest Economic Update paints a fairly rosy picture, with economic growth of 4.5 percent for 2022. Government revenue from mining and petroleum taxes surged (reflecting the impact of Russia’s invasion of Ukraine on natural gas prices). The increased revenue led to a reduction in the fiscal deficit. The magnitude of public debt remains a problem, with interest payments exceeding public spending on both health and education.

Inflation at around 6 percent per annum is not unduly high by comparison with other countries, but rising food prices have made life increasingly difficult for many people in urban areas. Foreign exchange rationing, associated with pegging of the Kina against the USD, has been a hindrance to business.

Population statistics

I mention population statistics mainly because questions that have recently been raised about the reliability of official estimates of the population illustrate the existence of deep-seated problems in public administration. The official estimate of population for 2022 is between 9 and 11 million. However, a leaked UN report has suggested that the population could be as high as 17 million. In this instance, the official estimate seems more likely to be correct. However, the last credible census took place 20 years ago, so no-one really knows the size of the PNG population.

It is widely accepted that the population of PNG has been growing rapidly and that the majority of people are relatively young, probably under 25 years old.

Corruption and profligacy

Corruption is still a major problem in PNG, although there seems to have been some reduction over the last decade. Of the 180 countries included in the Corruption Perceptions Index, only 50 were rated as more corrupt than PNG in 2022.

Profligacy in spending of public money by some government ministers is legendary. For example, in 2018, when PNG hosted the APEC summit, Justin Tkatchenko attracted controversy by purchasing 40 custom-made Maserati luxury cars. He claimed that they would sell like hot cakes after the event. Unfortunately, that didn’t happen. More recently, the same minister again attracted criticism for taking an overly large contingent of people with him, at public expense, to the coronation of King Charles III. It was his intemperate response, labelling critics as “primitive animals”, which eventually led to his resignation from the position of Foreign Minister.

The law-and-order problem

There has been a law-and-order problem is PNG for many years. In 2015 I wrote:

“It is unsafe for tourists to walk around most parts of Port Moresby alone except within the boundaries of major hotels, modern shopping malls and other locations where security is provided. The same applies to local residents. Tourists are more fortunate than most of the locals because they can afford to be transported safely from one secure area to another.”

It is particularly unsafe for women and girls to be in public places. A recent article on DEVPOLICYBLOG by Sharon Banuk, a university student, describes the nature of the problem that she has faced in staying safe.

PNG is ranked second, behind Venezuela, as the country with the highest number of reported crimes per 100,000 people. The ranking of PNG seems to have remained the same since 2017, having risen from 16^th place in 2015.

Poor economic opportunities for young people

The law-and-order problem has been linked to the increasing problem of youth unemployment in an article by Ms. Julian Melpa for the National Research Institute. A recent study found 68 per cent of people aged between 14 to 35 in Port Moresby were unemployed. Even people with tertiary qualifications often find it difficult to obtain employment.

The difficulty of finding employment is illustrated the accompanying photo of job seekers, published with a report in The National newspaper on Feb 6, 2023. The crowd were competing for a few advertised vacancies at a hotel in Port Moresby.

Lack of economic freedom

International agencies tend to label the main deficiencies in economic freedom in countries like PNG as governance problems. That labelling may make their advice more palatable to politicians who have ideological hangups about free markets but it obscures the adverse impact of lack of economic freedom on incentives to invest, innovate and create greater opportunities for human flourishing.

Only 36 of the 176 countries included in the Heritage Foundation’s index of economic freedom have a lower ranking than PNG. A similar picture emerges from the Fraser Institute’s economic freedom ratings. Only 43 of the 165 countries included in the Fraser index have a lower economic freedom rating than PNG.

PNG has particularly low ratings for rule of law (covering property rights, judicial effectiveness, and government integrity) business freedom, and investment freedom.

PNG governments have obviously been having major problems in performing the core functions of government in protecting natural rights of individuals to be safe and have opportunities to flourish. Governments face a formidable challenge in protecting economic freedom in PNG, with most of the population living in village communities and having little contact with the market economy.

However, similar challenges face governments in some other countries. Some African countries which face similar challenges now seem to be performing better than PNG in facilitating growth of economic opportunities.

Postscript

Readers who are interested in a more comprehensive picture of the well-being of people in PNG should visit the relevant country site of The Legatum Prosperity Index. For the purpose of the Legatum index, prosperity is defined broadly as occurring "when all people have the opportunity to thrive by fulfilling their unique potential and playing their part in strengthening their communities and nations".

My article mentions a visit to PNG by Joe Biden, which was scheduled for May 22. Unfortunately, this  visit will not occur as planned because he has given higher priority to political negotiations over the U.S. government debt ceiling.  

Can cottage industries exist in a machine age?

 J C Kumarappa posed that question his book, Economy of Permanence, which was first published in 1945. He argued that in the final analysis “values and valuation” would determine the direction to be taken. He viewed the choice between cottage industry and large-scale production as an ethical choice as to which type of economy would be preferable. He associated cottage industry with “permanence and non-violence”, and large-scale production with “transience and violence”.

Kumarappa has been described as an ecological economist. He was a follower of Mahatma Gandhi, who wrote a foreword to his book.

Some of Kumarappa’s views seem to have been largely a product of the context in which he lived, but others resonate more broadly. Similar views have been taken up by many affluent consumers in high-income countries. In what follows, I will discuss first why Kumarappa associated large-scale production with violence before considering why he associated it with transience.

Violence

Kumarappa recognizes the potential for specialization and market transactions to be mutually beneficial for the people involved. On that basis, readers might expect him to view wealth accumulation via specialization, trade, and market competition to be a peaceful process.

However, Kumarappa argues that large-scale production prompted industrialized countries to hold other countries in political subjection to obtain materials. He also suggests that large-scale production “is the root cause of wars”. He claims that machines must make full use of productive capacity, rather meet market demand. That results in surplus production. Wars are started to capture markets.

I see several problems with that line of reasoning, but I will only focus on the most obvious one here. Kumarappa seems to assume that manufacturers have control of armies that can be used to ensure access to raw materials and markets. That seems to me to be a strange assumption to make, but I can understand why an Indian economist might see things differently in the light of the history of British colonial rule.

Transience

Kumarappa argues that an economy based on large-scale production is built on the “quicksands” of “profit, price, purchasing power, and foreign trade”. He suggests that material standards of value and personal feelings of consumers cannot have “any degree of permanence” because people change and are perishable. For permanence to be achieved, the standard of value must be objective and controlled by ideals that have enduring qualities. He claims that civilization had endured in China and India because it was based on altruistic and objective values.

The value that Kumarappa places on permanence may require explanation because Hinduism, the dominant religion in India, shares with Buddhism the doctrine that everything is in a constant state of change. Kumarappa was a Christian, but I don’t think that explains as much as his reverence for what he describes as “the secret of nature’s permanency”.  He was referring to ecological factors which “function in close cooperation to maintain the continuity of life”.

Kumarappa was particularly concerned about the impact that the products of large-scale production were having on traditional village life. He argues:

“We are often led away by low money prices ignoring the great gashes in our economic and social organisation made by such short-sighted choice of ours.  … Money value blinds the vision to a long range social view, so that the wielder of the axe fells the branch on which he is standing”.

Kumarappa argues that moral values are attached to every article sold in the market. We should not ignore such values and say “business is business”. Accordingly, anyone who enters into a commercial transaction has a grave responsibility to ensure that she does not become party to circumstances that she would not consciously support. He believed that the consumer is only able to bring her scale of values into play when goods are made locally.

Different views of progress

Kumarappa had a very different view of economic growth than is presented in my book, Freedom, Progress, and Human Flourishing. It may be worthwhile to try to pinpoint the reasons for this.

I don’t think Kumarappa would have any problems with my definition of progress as the growth of opportunities to obtain the basic goods of a flourishing human. He would probably agree, more or less, with my list of the basic goods – wise and well-informed self-direction, health and longevity, positive relationships with others, living in harmony with nature, and psychological well-being.

Kumarappa would probably begin to object at the point where I assert that economic growth counts as progress to the extent that people aspire to have the goods that it offers. He might suggest that people who aspire to have those goods are mistaken because they could flourish to a greater extent by maintaining a simple lifestyle. The more powerful argument he would offer is the one presented above - that the products of new technology are disruptive to existing economic and social organisation.

I would respond by referring to what Deirdre McCloskey has referred to as the bourgeois deal. People in industrialised countries have been willing to accept the possibility that the introduction of new technologies might disrupt their lives because they have good reasons to expect that they, and future generations, are likely to benefit from the expansion of opportunities that it provides.

If that line of argument had been presented to J C Kumarappa in 1945 I imagine he would have viewed it as “pie in the sky”. I am less sure that he would hold the same view today.

Cottage industry

I don’t know much about the economic health of cottage industry in Inda today, but it does continue to exist. The photo shown at the top of this article was taken at Kalra’s Cottage Industry in Agra, when I visited there last year. (By the way, the service offered was excellent. The hand-knotted floor rug I purchased was delivered to my home in Australia without any problems, and in perfect condition.)

My point is that as their material standard of living rises, many people are willing to pay more for high quality products of cottage industries than for mass produced items. Many people also become increasingly concerned about such things as the levels of remuneration of workers who produce the products that they buy and potential environmental damage of production methods. People tend to pay greater attention to such concerns when they feel that they can more readily afford to do so.

How did the gold fever of the 1850s affect Australian Aborigines?

 

I began thinking about this question while reading Michael O’Rourke’s recently published book, Passages to the Northwest, The Europe they left and the Australia they discovered 1788-1858, A miscellany and scrapbook of national, regional and family history, From Ireland, Scotland, England and Germany to Liverpool Plains in colonial New South Wales, Volume II.

The full title provides an accurate picture of the nature of the book and what it is about. The history of how Michael’s family came to live on the Liverpool Plains, in the north-west of NSW, is central to the book but its focus is mainly on the context in which family members lived. I suppose Michael tells readers as much as he has been able to glean about the lives of individual family members. However, as anyone who has dabbled in family history would know, it is difficult to find much more than names and dates pertaining to ancestors unless they happen to have been rich, famous, or infamous.

Michael explains:

“I was able to pour the genealogy, almost like cream, into the dry chronicles of local history while also keeping an eye on social changes and the national political and cultural scene, especially in Australia and Ireland”.

I agree with the author’s suggestions about who might benefit from reading the book. He suggests that apart from his family and relatives, those who might benefit include people who are interested in detail about the impact of European occupation on Aboriginal people, and people who live in the north-west of NSW. Some people who are heavily involved in family history research might also find the book useful to provide context for names and dates.

Michael has provided an index of topics at the front, and a detailed index at the back, which I found helpful. I have only read those parts of the book that particularly interest me at present. I expect that is probably how the author would expect most readers to approach it. At some later stage (perhaps when I am pondering the injustices that my ancestors may have suffered) I will probably go back to read more of what Michael has written about Ireland and Scotland.  

European occupation

I was particularly interested in Michael’s discussion of the relationships between Aboriginal people and European pastoralists (sometimes referred to as squatters, settlers, or invaders) in the Liverpool plains area. By 1835, the European occupation of Aboriginal land had extended beyond Narrabri, up to 550 km from Sydney. There was violence, but as Michael describes it, the incoming settlers “so effectively swamped the locals that there were only rare clashes, peaking in 1836-38”.

Introduced disease had a devastating impact on the Aboriginal population. An epidemic (probably smallpox) killed many during 1830-31. Venereal disease became rife, as convicts - who became shepherds living in remote outstations - infected Aboriginal women.  

The pastoralists were known as squatters because they originally occupied the land without approval of the colonial government. By 1836, however, they were able to exercise sufficient political influence to have the government grant them short-term pastoral leases.

By 1850 the remaining Aboriginal population had apparently established their home bases near to the pastoral stations. Pastoralists employed Aborigines as shepherds during the 1840s but also employed Chinese in that role.

Gold fever

With the discovery of gold in 1851, many Chinese and European workers left the pastoral properties abruptly to go to the diggings, sometimes apparently leaving flocks they had been tending to the mercy of dingoes. The flocks became scattered before the owners were aware of the situation. Michael quotes from the published account of what followed according to Mary Jane Cain, a mixed-race matriarch:

 “The squatters had to go practically cap in hand to the blacks they had dispensed with, and entreat them to again assume the role of shepherds. They got the flocks together, and generally made a good save. After that the squatters steered clear of Chinese labour for a long while”.

The discovery of gold apparently led indirectly to a substantial improvement in economic conditions for aboriginal people living on the Liverpool Plains.

Michael’s account of the indirect impact of gold fever led me to look further for other information on the impact of gold discoveries on the lives of Aborigines. Some accounts view it as “a second wave of dispossession”, but also note an increase in demand for the labour of Aboriginal people on pastoral properties at that time. Aborigines became employed as police on the goldfields. They sold food and clothing to the miners and were employed as guides. They also became expert gold seekers.

Ararat

The illustration at the top of this article is a painting by Edward Roper, which depicts the gold rush at Ararat, south-west Victoria, at its peak in the late 1850s. At the centre of the scene, an Aboriginal family observes the activity around them.

Michael has included the illustration in his book. I thought it appropriate to have it accompany this article because some of my ancestors came to the Ararat diggings in the 1850s and later settled in that district.

Conclusion

The more I learn about the detail of the impact of European occupation of Australia on Aboriginal people, the more persuaded I become that “European settlement” is an inadequate description of what happened. Words like “conquest” and “invasion” are also inadequate because they conjure up images of warfare that have little resemblance to the sporadic resistance that some of the occupants of this country offered to the European squatters. The detail includes massacres, but disease seems to have been a much more important cause of depopulation. The best option for the indigenous people was co-existence with the new occupiers, but that required a radical change in their lifestyles.

Seen in that context, the advent of gold fever in the 1850s opened new opportunities for Aborigines to become more heavily involved in pastoral activities. I see this as an interesting example of the way disadvantaged people can respond to new opportunities. I hope there were lasting benefits for at least some of the families involved but I have no evidence of that.    

Does the "Politics of Being" support progress?

 

“Politics of Being” is title of a recently published book by Thomas Legrand. The subtitle is “Wisdom and science for a new development paradigm”. The question I ask myself is whether Legrand’s views support progress as I defined the concept in Freedom, Progress, and Human Flourishing. Would widespread adoption of Legrand’s views enhance the growth of opportunities for individuals to obtain the basic goods of flourishing humans?

Before I purchased the book, I was aware that the author had shown wisdom by including this quote from Elinor Ostrom’s Nobel Lecture:

“A core goal of public policy should be to facilitate the development of institutions that bring out the best in humans.”

That passage is actually quoted several times in the book and is sometimes accompanied by the preceding sentence in which Ostrom distances her approach from that of policy analysts who design institutions “to force (or nudge) entirely self-interested individuals to achieve better outcomes”. The passage I have quoted at the top of this article illustrates Ostrom’s optimistic view of the capacity of individuals to work together to devise solutions to collective action problems without help from governments.

The essence of Legrand’s line of argument is that the world is stuck in an obsolete development path and is in need of a new “wisdom-based approach to politics”.  I will discuss briefly what he perceives to be wrong with the current development path, before discussing some elements of the alternative path he advocates.

Perception of the problem

Legrand believes that the current development path is causing many problems. The world is on track for a climate change catastrophe. Economic development and increased life expectancy are not making people much happier in high-income countries. Many countries seem to be facing mental health crises. There has been a decline in interpersonal trust in many countries. Our current model of development is rooted in a set of values that are causing a civilization crisis. He writes:

“Our economic system not only destroys social ties and the environment but feeds on these destructions that create new market opportunities. It seeks to adapt humans to its own requirements rather than adapting itself to human needs. Based on fundamental misconceptions, this system can only perpetuate itself through ever more propaganda that feeds our disconnection from ourselves, our true needs, and ultimately, our apathy.”

I agree that all is not well with the world and share some of Legrand’s concerns. However, I am more optimistic than he is about climate change, and strongly disagree with his views on economics. Readers who are interested in my views should read Freedom, Progress, and Human Flourishing.

Being and Interbeing

Legrand argues that the new development model required is essentially spiritual. He views spiritual development as:

“the process by which we come closer to our true nature. From that connection, we naturally tend to manifest the highest qualities: wisdom, love, joy, peace etc., or simply the best or most authentic version of ourselves currently available!”

Legrand’s discussion of spiritual values includes chapters on life, happiness, love, peace, mindfulness, and light.

According to Legrand the new paradigm involves a transition from “having to being, which many believe means interbeing”. So, what is interbeing?

 “Interbeing is a term coined by Zen Master Thich Nhat Hanh, which goes beyond interconnectedness to touch on the very nature of our being. It expresses the nature of reality based on the Buddhist teachings of interdependent co-arising (“that is because this is”), non-self, and impermanence”.

I see no problem accepting that everything is interdependent. Impermanence does seem pervasive (except in respect of fundamental values, virtues, and the highest qualities). But “non-self” poses problems. As I see it, self-awareness is a fundamental characteristic of the kind of thing (entity or system) that an individual human is.  Self-respect arises from self-awareness, and motivates respect for other people, and other living things. Respect is the foundation which makes love possible. By the way, do you know who it was who said “one should not hurt others if one loves oneself”? The answer is here.

At various points in the book Legrand recognizes that people have “higher selves” and “true selves”, so he seems to acknowledge that we should aim to purify our egos – to remove the biases, distortions, and attachments that tarnish our perceptions of our individual selves - rather than eliminate self-awareness. He provides a good summary of his view of “being” and of personal development in this passage:

“As a person, there is little chance that I get closer to my authentic being by defining a vision of who I am and trying to actualize it. On the contrary, I can discover who I am by freeing myself from predefined and limiting identities, purifying my intentions, character, and behaviors, and expressing the deepest yearning of my soul. This is a conscious, evolutionary process of emergence, informed but not bounded by the understanding I have of my essence, which is necessarily limited. The same is true for nations.”

The world would be a better place if more people adopted that as their personal development model. However, I was tempted to leave off the last sentence of the quoted passage. The idea that nations have “souls” seems to me to be collectivist nonsense.

Governance

The part of the book providing an agenda for action envisages a larger role for government than I had anticipated. For example, Legrand suggests that government efforts to promote early childhood education should start during pregnancy. He also suggests that governments should actively promote a healthy diet. Even followers of Elinor Ostrom can sometimes find it difficult to remember to avoid adopting an overly pessimistic view of what people can achieve without government guidance.

I agree with Legrand that it is naïve for people to believe that “all it takes to improve our societies is to secure a majority of voters for their ideas, especially when they engender polarization”. Political leaders have no hope of implementing lasting reforms unless they can foster broad community support for them. That usually means avoiding politicization of the issues. (As an aside, one of the inconvenient truths about politics is that Al Gore’s involvement in support of U.S. action to mitigate climate change provided a focus for Republican opposition to such policies.)

The book contains interesting proposals to enact the “politics of being” in political institutions. Legrand suggests that each nation should establish a “wisdom council” to preside over discussions about the nation’s evolution with the government and parliament. The councils would consist of equal representations of four groups: randomly selected citizens, representatives of the “outer” economic, social, and environmental life of the nation, representatives of the “inner” spiritual, cultural, and psychological life of the nation, and “representatives of non-human members of the earth community”.

Legrand also suggests that the Baha’i model of governance should be adopted for lower houses of parliament. In brief, adult community members elect representatives at the local level and are urged not to discuss with others who to vote for. The local representative vote for regional representatives, who in turn vote for national representatives.

It is difficult to envisage circumstances in which politicians would enact such radical changes to existing systems of representative government. However, if the outcomes of the existing systems become increasingly unpalatable, radical alternatives will no doubt be contemplated by an increasing number of citizens. In that context, Legrand’s proposals will have stiff competition from other proposals, including the decentralist approach discussed previously on this blog.

The main problem I see with Legrand’s governance proposals is their potential to infringe individual liberty. Most of the members of the proposed governing council would be likely to advance the interests that they represent by advocating further restriction of individual liberty. The Baha’i model is presumably more responsive to community members than religious and political governance systems in which the hierarchy is self-perpetuating, but people who are indirectly elected to peak positions still have less incentive to have regard for the wishes of members at the grassroots level than if they were directly elected, or selected randomly.

Facilitating progress?

Legrand describes his book as “a drop in the ocean”. I think it may have potential to be more than that. The part of the book dealing with spiritual development has potential to be influential if it finds its way into the hands of sufficient numbers of people who are currently rudderless and yearning for inspiration.

I think contemplation of Legrand’s views on spiritual development has potential to enhance progress, viewed as the growth of opportunities for individuals to obtain the basic goods of flourishing humans. After reading the book, some people might be more inclined to wise and well-informed self-direction, healthy living, improved inter-personal relations, living in harmony with nature, and adoption of behaviors that enhance psychological well-being.

However, Legrand’s attack on “the current development path” invites further restrictions on economic freedom which would impact negatively on growth of productivity and hence on growth of opportunities for human flourishing. As outlined in the following paragraph in Freedom, Progress, and Human Flourishing, I see declining rates of productivity growth as a major threat to growth of opportunities for human flourishing:

“This chapter has focused on the threats posed by climate change, declining productivity growth, and problems with democracy. I do not dismiss the longer-term threat posed by climate change, but in my view, there are stronger reasons for concern about the more immediate threat posed by declining productivity growth. Individuals, firms, and governments are taking action to mitigate climate change, and their efforts seems likely to accelerate before adaptation becomes excessively costly. There are fewer grounds for optimism that governments will deal with emerging economic problems (of their own making) in time to avert the widespread misery that is likely to follow from looming economic crises.”

As explained in my book, my optimism about action to mitigate climate change rests on signs that the polycentric approach, proposed by Elinor Ostrom in 2009, is now being adopted successfully.

I am not greatly troubled by the thought that some readers of Thomas Legrand’s book may be persuaded to adopt economic and political views that are inimical to productivity growth. There is an ocean full of views on public policy that are similar to those which he advocates, so I don’t think his additional drop will have a significant direct impact on policies adopted. Hopefully, his book’s endorsement of Elinor Ostrom’s approach will encourage some readers to explore her views in greater detail.

My bottom line: The net impact of “The Politics of Being” will be to support the growth of opportunities for human flourishing.

What happened to creative capitalism?

 

The question I have posed above strikes me as being delightfully ambiguous. It could be asking what happened to bring to an end the era in which creative capitalism brought about high rates of productivity growth. Alternatively, it could be asking what happened to the concept of “creative capitalism” that Bill Gates presented to the World Economic Forum (WEF) in 2008.

My focus here is on the second interpretation, but I will end up discussing what has happened to the creativity of capitalism in the more traditional sense.

Why am I interested in the particular form of corporate social responsibility (CSR) that Bill Gates referred to as “creative capitalism”? I don’t hear the Gates concept being much talked about these days, but I think that variants of this form of CSR have become more common over the last decade or so. It is worth considering whether Gates’ approach to CSR is changing corporate sectors in ways that may directly hamper the traditional creativity of capitalism, or indirectly hamper it via impacts on economic policies pursued by governments.

That is why I decided that the time had come to read Creative Capitalism, a book edited by Michael Kinsley, which was published in 2008. The book consists mainly of comments by eminent economists on the “creative capitalism” concept that Bill Gates presented to the WEF. I should confess at this point that deciding to read the book didn’t require me to judge that it might be worth buying. A copy was given to me last year by a friend who was downsizing his library. The book was sitting in my “unread” pile for many months waiting for me to show some interest. I am now glad I read it!

In the next section I will outline Gates’ concept and briefly discuss the different reactions of economists writing 14 years ago. That will be followed by consideration of possible consequences of changes in the nature of capitalism that seem to stem from Gates’ concept and similar ideas.

Gates’ concept

Bill Gates advocated a new approach to capitalism in which businesses would give more attention to recognition and reputation. As he put it:

“Recognition enhances a company’s reputation and appeals to customers; above all it attracts good people to the organisation. As such, recognition triggers a market-based reward for good behavior.”

Gates advanced this view in the context of considering how self-interest could be harnessed to provide more rapid improvement in the well-being of poor people. However, pursuit of recognition seems to have become a strong motivator for the environmental and social objectives that are increasingly espoused by corporates. Gates does not mention the potential for pursuit of recognition for good behavior to have a positive influence on investors, but that also seems to have emerged as an important factor in recent years.

My review of the contributions of commentators is highly selective. I just focus here on what I see as the main points that were raised.

Some of the commentators suggested that entrepreneurs with philanthropic objectives might do better to do what Gates did, rather than to follow the approach he advocated in his speech to the WEF. Like some others before him, Gates pursued profits until he become extraordinarily wealthy and then established a foundation to pursue philanthropic objectives. An argument in support of that approach is that the pursuit of multiple “bottom lines” by companies adds to the difficulty of measuring their performance to ensure that executives can be held accountable for outcomes. 

Several of the commentators referred to Milton Friedman’s view, in Capitalism and Freedom, that CSR is a “fundamentally subversive doctrine” because, in a free society, “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud” (p 133).

However, others pointed out that Gates’ proposal is consistent with a free society because he was suggesting that corporates can obtain a market-based reward for choosing to pursue non-pecuniary objectives of employees and consumers. Similarly, it is consistent with a free society for companies to seek to pursue non-pecuniary objectives of the shareholders who own them.

Consequences

It is likely that an increasing tendency for corporates to pursue non-pecuniary objectives would have a negative impact on measured productivity growth. However, that may be largely a problem in the measurement of productivity. Measures of productivity growth are biased to the extent that output indicators do not incorporate non-pecuniary goods that contribute human flourishing. If corporates are efficient vehicles for the pursuit of the non-pecuniary objectives of their shareholders, employees, and customers, it seems reasonable to suppose that pursuit of those objectives would contribute to the flourishing of the people concerned.

“The unknown ideal”

What happens if a company is not an efficient vehicle for the pursuit of the non-pecuniary objectives of its shareholders, employees, and customers?

In considering this question it is important to recognize that corporate sectors consist of large numbers of individual firms which compete for labor, capital, and customers. Individual firms are free to give different weight to different objectives. Some may see their only role as profit maximization, and may even seek recognition by asserting that they see that as a social responsibility. Others may seek a reputation for social responsibility by undertaking marketing exercises, without changing their practices. At the other extreme, some companies may devote themselves largely to pursuit of one or more non-pecuniary objectives, providing only minimal financial returns to shareholders.

It is customary for economists to assert that the market is capable of weeding out firms that are following inefficient strategies. Applying the usual market test, it appears reasonable to suppose that if individual companies pursuing the non-pecuniary objectives of workers, consumers, and shareholders are able to survive, the strategies they are following must pass the market’s efficiency test.

The Hayek quote at the top of this article is followed by his assertion that the argument for liberty rests on “the belief that it will, on balance, release more forces for the good than for the bad” (Constitution of Liberty, p 31). In considering how best to describe the spontaneous order of a free society, Hayek later suggested that capitalism “is an appropriate name at most for the partial realization of such a system in a certain historical phase, but always misleading because it suggests a system which mainly benefits the capitalists, while in fact it is a system which imposes upon enterprise a discipline under which the managers chafe and which each endeavours to escape” (“Law, Legislation, and Liberty”, V1, p 62)

The corporatist quagmire

Unfortunately, in the real world at present, the ability of the market to weed out inefficient firms and the strategies they adopt is greatly hindered by government intervention and expectations of future government intervention. If firms believe that pursuit of certain goals will be rewarded by governments, they have an incentive to establish reputations for pursuing those goals. Firms also have an incentive to seek government assistance as a reward for good behavior. The increasing prevalence of such interactions has led to the development of corporatist, rent-seeking cultures that have contributed to a long-term decline in rates of productivity growth in high-income countries.

It is also important to note that, in the realm of politics, what some people view as good behavior is often viewed in a different light by others. For example, political opinions differ on whether or not it is good for pension funds to take account of environmental policies in their allocation of funds. Investors are often uncertain about which view will prevail in the political arena. Such economic policy uncertainty adds to the normal commercial risks of investment. An example which comes readily to mind is the impact of policy uncertainty on future investment in gas-fired electricity generation in industrialized countries. Normal commercial considerations might suggest that is likely to be a profitable investment to meet demand for electricity when the wind is not blowing and the sun is not shining, but investors have to contend with the possibility that further regulatory interventions to discourage use of fossil fuels will render such investment unprofitable. It is reasonable to predict that blackouts will be more common in jurisdictions where such policy uncertainty prevails.

Political ideologies of governments also seem to be changing in ways that make it more difficult for markets to weed out firms adopting inefficient strategies. Over the last decade or so, the progressive side of politics has encouraged corporates to establish reputations for “woke progressivism”. That seems to have induced political conservatives to become increasingly disenchanted with corporates. That disenchantment has added to the antagonism associated with the increased tendency of many conservatives to espouse economic nationalism and populist views opposed to the corporate sector’s interest in free trade, international capital mobility, and technological progress.

As politics comes to play an increasing role in the investment decisions of businesses, economic growth rates of industrialized countries are likely to decline. Since governments find it difficult to disappoint the expectations of voters, government spending is unlikely to be constrained to a correspond extent. Major economic crises seem likely to become more common. (I have discussed these issues more fully in Chapter 6 of Freedom, Progress, and Human Flourishing.)  

The obvious solution

Immediately after the passage in which Milton Friedman suggested that the social responsibility of business was to serve the interests of stockholders, he suggested that the social responsibility of union leaders is to serve the interests of their members. He then went on to write:

“It is the responsibility of the rest of us to establish a framework of law such that an individual in pursuing his own interest is, to quote Adam Smith … “led by an invisible hand to promote an end which was no part of his intention. …” (Capitalism and Freedom, p 133).

Unfortunately, it seems likely that major economic crises will need to be endured before governments of industrialized countries once again see merit in confining themselves to core responsibilities in the manner that Adam Smith suggested.

Conclusion

Companies are increasingly choosing to adopt strategies to improve their reputations with employees, customers, and investors who have interests in social and environmental issues. That would not pose a problem in the context of the spontaneous order of a free society. Pursuit of multiple objectives may add to problems in holding executives accountable for an individual firm’s performance, but free markets are capable of weeding out firms that follow inefficient strategies.

Unfortunately, however, industrialized countries are now corporatist quagmires in which the ability of markets to weed out firms that adopt inefficient strategies is greatly hindered by government intervention and expectations of future government intervention. The obvious solution is to reduce government intervention in markets, but major economic crises will probably need to be endured before that happens.

How should Bill Carmichael's transparency project be pursued now?

 

Unfortunately, few readers of this blog will know anything about Bill Carmichael or his transparency project. My main purpose here is therefore to explain who he was and why the question I have posed above is worth considering.

W.B. (Bill) Carmichael died recently at the age of 93. In his obituary,  Gary Banks, former chair of the Australian Productivity Commission, described Bill aptly as “an unsung hero” of the Australian Public Service (APS).

In my experience, most members of the APS who are working on economic policy like to claim that they are contributing to the well-being of the public at large. However, I find it difficult to accept such claims unless the people concerned can demonstrate that they are actively seeking to either undo mistakes that governments have made, or to discourage governments from making more mistakes.

Bill Carmichael made a huge contribution in helping to undo mistakes that Australian governments made over many decades in insulating much of the economy from international competition. His efforts in support of trade liberalization have helped Australians to enjoy greater benefits from trade and greater productivity growth than would otherwise have been possible.

Alf Rattigan’s right-hand man

Bill’s contribution to trade liberalization was largely behind the scenes, helping Alf Rattigan, the former chairman of the Tariff Board, to pursue his reform efforts. Rattigan argued successfully that tariff reform was required because industries that had been given high levels of government assistance to compete with imports were inherently less efficient users of resources than those requiring lower levels of assistance or none at all.

As Gary Banks’ obituary indicates, Bill played an important role in developing strategies, writing the key speeches that Alf Rattigan delivered, dealing with difficult bureaucrats, and engaging with economic journalists who were highly influential in informing politicians and the public about the costs of protection and the benefits of international competition. Bill’s contribution reached its pinnacle in the early 1970s when the Industries Assistance Commission (IAC) was established with an economy-wide mandate to ensure greater transparency to processes for provision of government assistance to all industries.

Bill eventually became chairman of the IAC. However, in my view, his most important contribution was made in helping to establish the organisation and ensure that it had access to the professional economic expertise it required to undertake research and produce quality reports.

Bill’s transparency project

Bill Carmichael’s interest in the transparency of trade policy did not end after he retired from the IAC in 1988. My reference to Bill’s transparency project relates specifically to the efforts he made during his retirement to bring greater transparency to trade negotiations. These efforts were made in collaboration with Greg Cutbush, Malcolm Bosworth, and other economists. The best way to describe that project is to quote some passages from an article in which Bill suggested that Australians are being misled about our trade negotiations and agreements. The article, entitled ‘Trade Policy Lessons from Australia’,  was published by East Asia Forum in 2016.

Bill wrote:

“The goal of trade policy is not limited to increasing export opportunities. Nor is it just about improving trade balances. Rather trade policy is about taking opportunities to improve the economy’s productive base. When assessing a nation’s experience with bilateral trade agreements, this is the test that should be applied.

In each bilateral agreement Australia has completed to date, projections of the potential gains for Australia, based on unimpeded access to all markets of the other country involved, were released prior to negotiations. These studies did not, and could not, project what was actually achieved in the ensuing negotiations. The quite modest outcomes for Australia from those negotiations meant the projected gains conveyed nothing about what was eventually achieved. Yet the projections were still quoted to support the agreements after they were signed, as though they reflected actual outcomes.

This approach to accounting for the outcome of trade agreements has meant that Australia has missed opportunities for productivity gains. So how, given Australia’s recent experiences, can trade policy and negotiations be better conducted in future?

Australia cannot change how it negotiated its agreements with the United States, Japan, South Korea and China. But policymakers can refine their approach to future negotiations. Australia’s trade policy should be guided by a model based on its conduct in the Uruguay Round of trade negotiations. The Uruguay Round confirmed that the domestic decisions needed to secure gains from unilateral liberalisation and those required to secure the full gains available from negotiations have converged.

The negotiations in the Uruguay Round took place at a time when former prime ministers Bob Hawke and Paul Keating were reducing Australia’s barriers to trade unilaterally. Their productivity-enhancing reforms were subsequently offered and accepted in the Uruguay negotiations as Australia’s contribution to global trade reform. Consequently, Australia secured all the gains available from trade negotiations: the major gains in productivity from reducing the barriers protecting less competitive industries, as well as securing greater access to external markets.

This was the kind of win–win outcome negotiators should seek from all trade agreements. It made a substantial contribution to the prosperity Australia has since enjoyed.  …

In future trade negotiations, the Productivity Commission — Australia’s independent policy review institution — could provide a basis for market-opening offers by conducting a public inquiry and reporting to government before negotiations get underway.”

In a subsequent paper, publicly endorsed by a group of trade economists, Bill argued:

“If we are to close the gap between trade diplomacy and economic reality, we need to respect three lessons from experience: first, a major part of our gains from trade agreements depends on what we take to the negotiating table, not what we hope to take away from it ; second, liberalising through trade negotiations cannot be pursued simply as an extension of foreign policy ; and third, … future bilateral agreements should be subject to cost-benefit analysis before ratification.”

How should Bill’s project be pursued?

I raise this question without much optimism that greater transparency of trade policy can be achieved in the short term. There is no more reason to be optimistic that the Department of Foreign Affairs and Trade will suddenly become receptive to ideas that challenge its claims about the benefits of trade agreements it has negotiated than there was to be optimistic that its predecessor, the Department of Trade and Industry, would be receptive in the 1960s to the ideas of Rattigan and Carmichael which challenged the protectionist orthodoxy of that department. Added to this, it is difficult to ignore signs that protectionist sentiment is on the rise again in Australia in the wake of the Covid 19 pandemic and fears that a further deterioration in international relations could lead to disruption of international shipping.

Nevertheless, as Bill might say, none of that should stop us from pursuing longer-term goals.  I hope that some people reading this will feel motivated to think constructively about how Bill Carmichael’s transparency project could be pursued as a longer-term exercise in institutional reform.

How did a trading company come to rule India?

 

Spencer went on to suggest that trade would have been more successful in the absence of the privileges that the British government had conferred on the East India Company (EIC):

“Insane longing for empire would never have burdened the Company with the enormous debt which at present paralyzes it. The energy that has been expended in aggressive wars would have been employed in developing the resources of the country. Unenervated by monopolies, trade would have been much more successful.”  

Prior to my recent visit to India I was aware that classical liberals like Herbert Spencer were critical of the East India Company. Since my visit I have become an expert on all matters pertaining to Indian history. Just joking!

I can only claim to be able to sketch the outlines of the story of how the EIC ended up ruling India. I think the story is worth telling as a case study of the unintended consequences of government intervention in international trade.

Spencer was correct in identifying the importance of the EIC’s links to the British government as an important determinant of its behavior, but the context in which it operated also needs to be taken into account.  The most important element of context seems to me to the rivalry between European powers to obtain advantage in trade with India.

Portugal came first.

Perhaps you can recall from school history lessons that Vasco da Gama sailed to India around the Cape of Good Hope in 1498. This was the culmination of voyages of discovery by Portuguese sailors, including the important contribution of Bartolomeu Diaz, who had rounded the Cape some years earlier.

The Portuguese government was heavily involved in this exploration, and in what followed. In his book, The Portuguese in India, M.N. Pearson relates how the king, D. Manuel, invited da Gama to command the expedition when the latter happened to wander through the council chamber where the king was reading documents.

After da Gama’s voyage, the Portuguese court debated whether they should use force to seek a monopoly in the Indian Ocean or be peaceful traders. They chose force. Their aim was to try to monopolize the supply of spices to Europe and to control and tax other Asian trade. There was, of course, a great deal of trade in the Indian Ocean prior to Portuguese intervention, much of it controlled by Muslims (from India as well as the Middle East).

The Portuguese built forts in India to protect their trading activities. Some local rulers saw advantage in giving the Portuguese permission to establish forts, but they often used force. Goa was conquered in 1510. The Portuguese obtained permission to build a fort at Diu in 1535 (and had ceded to them the islands that today form Mumbai) because the sultan of Gujarat, Bahadur Shar, wanted Portuguese help after being defeated by the Mughal emperor, Humayon. The Portuguese obtained Daman from the sultan in 1559 and immediately began construction of the fort at Moti Daman. Building of St Jerome fort (my photo below) commenced in 1614, but was not completed until 1672.

The Dutch eclipsed the Portuguese early in the 17^th century.

The Portuguese were unable to prevent competition from the Dutch because the latter were “better financed, better armed, and more numerous”. The Dutch blockaded Goa from 1638 to 1644 and again from 1656 to 1663.

The Dutch East India Company was founded by the Dutch government in 1602, not long after the English formed the EIC. Both organisations were granted trade monopolies, and combined private investment and the powers of the state in a similar manner.

In the early 18^th century there was fierce rivalry between the Dutch and English over the spice trade in Indonesia. That ended with the English quietly withdrawing from most of their interests in Indonesia to focus elsewhere, including India.

The transformation of British activities in India

In the 17^th century, the EIC established trading posts in Surat, Madras, Bombay and Calcutta with permission from local authorities. The French India Company offered increasing competition during the latter half of the 17^th century and into the 18^th century.

The initial objectives of both the EIC and the French were commercial, but their conflicts in Europe spilled over into India. The British sought to fortify Fort William in Calcutta against potential attack from the French. In 1756, the French encouraged the nawab of Bengal to attack Fort William. After the fall of Fort William, the surviving British soldiers and Indian sepoys were imprisoned overnight in a dungeon where many died from suffocation and heat exhaustion. The prison became known as the Black Hole of Calcutta. The number of fatalities is disputed, but the incident seems to have provided impetus for the EIC to seek to wield greater political power in India to protect its commercial interests.

My photo of the Black Hole monument in the grounds of St John’s church in Kolkata.

 

EIC forces led by Robert Clive (Clive of India) retook Calcutta in 1757 and went on to defeat the nawab and his French supporters at Plassey. Clive’s victory was aided by a secret agreement with Bengal aristocrats which resulted in a large portion of the nawab's army being led away from the battlefield. The person responsible for this treachery, Mir Jafar, was rewarded by being installed as nawab. Clive rewarded himself and EIC forces from the Bengal Treasury.

A few years later, as governor of Bengal, Clive arranged for the EIC to collect land tax revenues in Bengal by appointing a deputy nawab for this purpose. The conquest of other parts of India was planned and directed from Calcutta. Amartya Sen has noted:

“The profits made by the East India Company from its economic operations in Bengal financed, to a great extent, the wars that the British waged across India in the period of their colonial expansion.”

Consequences and responses

The worst consequences of EIC rule became evident during the Bengal famine of 1770. The company was apparently more concerned to maintain land tax revenue than to relieve to the suffering of peasants.  Its policies contributed to the massive loss of life during the famine. Adam Smith presumably had that in mind when he suggested in Wealth of Nations:

“No other sovereigns ever were, or, from the nature of things, ever could be so perfectly indifferent about the happiness or misery of their subjects, the improvement or waste of their dominions, the glory or disgrace of their administration; as, from irresistible moral causes, the greater part of the proprietors of such a mercantile company are, and necessarily must be.” (V.i.e 26)

By reducing the agricultural labor available to generate taxable income, the famine caused the EIC to experience a subsequent loss of revenue. The British government provided financial relief to the company but arranged to supervise it. Regulation of the EIC was further increased in 1784, when British prime minister William Pitt the Younger, legislated for joint government of British India by the EIC and the government, with the government holding the ultimate authority.

The British government seems to have been engaged in an ongoing balancing act to placate both supporters of the EIC, including investors and former employees, and its critics, including prominent individuals like Edmund Burke and Adam Smith.  

Pitt’s India Act stated that to pursue schemes of conquest and extension of dominion in India are “measures repugnant to the wish, the honour and the policy of this nation”. Perhaps that was an honest statement of the British government’s policy objective, but it is doubtful that it had any impact on the extension of British dominion in India.

Fortune seekers

During the 18^th century, India was seen as offering opportunities for young British men to obtain a fortune, become well-connected, and to marry well.

Lachlan Macquarie, who (in my opinion) ultimately become one of the best of Australia’s colonial governors, expressed views, while a young army officer serving in India, that may have been fairly typical.

In his biography of Macquarie, M. H. Ellis notes that in 1788 Pitt and his followers had cramped the style of young army officers in India by reducing their allowances. Macquarie recorded in his diary: “ … our golden dreams, and the flattering prospects we had formed to ourselves in Britain, of soon making our fortunes in the East, must now all vanish into smoke; and we must content ourselves, with merely being able to exist without running into debt” (p 18).

Macquarie’s hopes for a change in fortune rested on being called to active service. He had his wish during the third Anglo-Mysore war. The war ended after the 1792 Siege of Seringapatam led to the signing of a Treaty in which Tipu Sultan surrendered half of his kingdom to the EIC and its allies. Macquarie noted that news of the cessation of hostilities “damped the spirits of every one who wished the downfall of the Tyrant and hoped to have the satisfaction in a few days more, of storming his capital”. The storming of Tipu’s capital would presumably have offered the prospect of looting, but Governor-General Cornwallis managed to maintain the morale of his troops by announcing payment of a “handsome gratuity in lieu of prize money”.   (Ellis, p 39)

India’s civil wars

Disunity within India was another important element of the context in which the EIC ended up ruling India. British colonial expansion occurred at a time when the power of the Mughal empire was declining, with much of its territory falling under the control of the Marathas. In the south of India, the rulers of Mysore and Travancore were also powerful. The EIC sided with different rulers in different locations at different times. For example, at the time of the Third Anglo-Mysore War, referred to above, the Marathas were allies of the EIC. That war occurred because Tipu, an ally of France, had invaded the nearby state of Travancore, which was a British ally.

Why did EIC rule end?

In 1813 the EIC lost its monopoly over British trade with India. The opening of access to competing traders seems to have been partly attributable to growth of the free trade lobby in Britain.  

In 1833, the EIC was reduced to the status of a managing agency for the British government of India. The government took over the company’s debts and obligations, which were to be serviced and paid from tax revenue raised in India.

EIC rule of India finally ended following the Indian Rebellion of 1857, which is now also referred to as the First War of Independence. I took this photo at an Indian airport.

 

Colonial rule was formally transferred to the Crown in the person of Queen Victoria in 1858. The British government took over the Indian possessions, administrative powers and machinery, and the armed forces of the EIC.

In my view, EIC rule ended because the company had a hopeless business model. The company was obviously successful in conducting wars in India, and some employees of the company made fortunes as a consequence. But the company’s attempts to service debts incurred by imposing taxes on the people of India were inherently problematic. Such taxes made it inevitable that the company would incur high ongoing costs to put down rebellions. The EIC’s conquest of Bengal raised expectations that colonial rule might be a profitable activity for the company, but it became incapable of surviving without government financial backing only a few years later.

Was a better option possible?

 John Stuart Mill - in his role as a spin doctor employed by the EIC rather than an eminent philosopher - opened his last ditch defence of the EIC by pointing out that at the same time as the company acquired a “magnificent empire in the East” for Britain “a succession of administrations under the control of Parliament were losing to the Crown of Great Britain another great empire on the opposite side of the Atlantic”. (Mill is quoted more fully by Richard Reeves in John Stuart Mill, Victorian Firebrand, p 258.)

Mill was obviously attempting to present a persuasive case to British politicians at a time when most of them perceived “empire” to be a desirable objective.

These days, people who want to defend the empire-building activities of the EIC in India are more likely to suggest that the institutional legacy of British rule, including a united India (if you overlook the tragedy of partition) would otherwise not have been possible. Amartya Sen has pointed out the weakness of that argument:

“Certainly, when Clive’s East India Company defeated the nawab of Bengal in 1757, there was no single power ruling over all of India. Yet it is a great leap from the proximate story of Britain imposing a single united regime on India (as did actually occur) to the huge claim that only the British could have created a united India out of a set of disparate states.

That way of looking at Indian history would go firmly against the reality of the large domestic empires that had characterised India throughout the millennia. …”

Summing up

The East India Company came to rule India as an unintended consequence of British government intervention seeking trading advantages over other European powers. This intervention occurred against the background of previous involvement in Indian trade by Portuguese and Dutch governments, and in the context of intense rivalry with the French government’s trading company.

The East India Company’s schemes of conquest and dominion were made possible by disunity within India, which provided it with opportunistic allies. However, the company’s business model of taxing subjugated Indians was not capable of generating sufficient revenue to service debts incurred in subjugating them and maintaining order. Rather than let the company fail, the British government became increasingly involved in directing its activities, and ultimately displaced it.