Did Mahadev Govind Ranade really reject classical economic ideas for India?
Mahadev Govind Ranade was one of the prominent Indian political economists and social thinkers and scholars in the nineteenth century. He was a judge at the Bombay high court and was one of the founding members of the Indian National Congress party.
In his Essays on Indian Economics, he wrote that the Indian educators were blindly teaching classical economic ideas of free trade and free market laissez faire economics from the British textbooks. Even as he concurred that these ideas were successful for British economy at the time, he objected to the notion that these ideas could also be considered relevant and applicable to the Indian economic situation as if political economics is a science of general and universal truths like Physics. He found it strange that the educators would agree that customs, history and laws matter in political and social sciences but not in political economics.
Ranade argued that the axiomatic assumptions such as the free movement of capital and labor, and elastic demand and supply are necessary preconditions for classical economic theory. These assumptions were largely valid in the case of British economy but not in a constrained Indian economy with diseases and famines controlling population growth and with high uncertainty of supply in the dominant agriculture base.
He argued that even for Britain’s own domestic economy, the British Prime Minister wanted to restrict free trade with only those partner countries that also observed and reciprocated the principles of free trade. Therefore, the free trade principles pursued by the British PM were not as radical as those advocated by the free trade ideologues. He believed that other countries such as those in Europe, Ireland, the US were also not following the free trade ideas.
In articulating difficulties in applying classical economic ideas in India’s case, Mr Ranade brought to bear the arguments put forth by a long list of western economic thinkers. Thus Adam Smith explained the natural instinct of man to better his own conditions and through it, led by an invisible hand to promote general social good. But then Smith stated that human institutions in the society interfere with man’s natural tendencies. John Stuart Mill differentiated between the laws of economic production and those of distribution. The former ones may hold principles of universality but the latter are necessarily human institutions. Irish economist (John Elliott) Cairns rejected the notion that economic laws can be asserted or refuted purely by statistical or documentary evidence. While other classical economists like Malthus and Ricardo further emphasized these human natural tendencies, without making any allowance for the countervailing social forces. (Nassau William) Senior, an English lawyer and economist believed that the laws of economics are similar to Newtonian laws of motion in the physical world. English political economist Robert Torrens and Scottish economist John McCulloch also held similar dogmatic views.
On the other hand, British economic journalist and essayist Walter Bagehot (who was editor in chief of The Economist magazine) and English utilitarian philosopher and economist Henry Sidgwick, both Ranade’s contemporaries, Thomas Cliffe Leslie, an Irish jurist and economist, and William Stanley Jevons, English economist and logician, all characterized classical economic ideas as too hypothetical and impractical for their universal applicability. Their doubts about the classical economic ideas were influenced by philosophers from the European continent. These include Auguste Comte, a French philosopher of science, Jean Charles Leonard de Sismondi, a Swiss historian and political economist, Charles Dunoyer, an economist of the French liberal school, Melchiorre Gioia, an Italian writer on philosophy and political economy, Adam Muller, a German political economist and theorist of the state, and Friedrich List, forefather of the German historical school of economics. Ranade also mentioned other German teachers like Karl Hienrich Rau, Karl Knies, Wilhelm Georg Friedrich Roscher, Bruno Hildebrand and Adolph Wanger, who continued to emphasize the German historic view of economic development in contrast to classical economic theory. Finally, Alexander Hamilton, one of the founding fathers of the US and the first secretary of the US treasury (equivalent to a finance minister), and Henry Charles Carey, an economist of the American school of capitalism and chief economic advisor to US President Abraham Lincoln also rejected the laissez faire approach. Indeed, Ranade’s depth and breadth of knowledge in the field of economic thought shown in employing ideas of these prominent western economists for making his own case for the intervention in Indian economic situation is a tour de force.
I have no doubt therefore that Ranade rejected the universality of classical economic ideas favoring instead the institutionalist and historical outlook in addressing India’s economic issues. In this emphasis on the importance of institutions, culture and history in economics, he was in line with the old institutional school of Veblen and J R Commons in the US and was referred to as Brahman Institutionalist in a paper titled Institutional Economics of Mahadev Ranade, published in 1971. But the question remains to be answered: “Did Ranade reject classical economic ideas for all times?” In more tangible but counter factual terms, the question to answer would be, “What would Ranade’s recommendation be in the current Indian political economy?”
As I mentioned before, Ranade concurred that the classical economic principles were beneficial for the British economy, based on the developed economy state and the commercial geographical pattern of the British economy at the time. But he argued that the British were not really practicing classical economic ideas from British textbooks, everywhere in India. He cited the British policies on agriculture land management in India as an example. Classical economic ideas work where large land holdings are possible and land ownership remains stable over a long period, as was the case in Great Britain. But land holdings in India were smaller in size and land ownership changed hands frequently. Moreover, British government in India had a monopoly on land management and was charging high taxes to farmers on their small agriculture land holdings. There was no such land tax in Britain. He thought that the British government was actually pursuing socialistic ideas in India. He also complained that the Indian policy makers were too often changing economic policies in India and contemplated that if they had really carried out the classical economic ideas to their end, it might have produced positive results.
Ranade explained the history of how the classical economic ideas of free market and free trade came about in Great Britain. He argued that in the earlier period, the British and other European governments offered protection to respective domestic industries operating not just in the domestic market but also abroad by granting monopoly rights. This led to the prosperity of these countries through their mercantilist form of commerce with foreign conquests and colonization. But it also eventually led to enormous abuses of state control and power. A negative reaction to this abuse led to development of a new theory of free market and free trade with minimal government interference. This new economic theory, superseding the earlier mercantilism, had its origin in teachings of Hobbs and Locke’s natural liberty doctrine. I therefore believe that Ranade therefore was acutely aware of the consequences of state interference in the economy, if unchecked and did not envision a prolonged state controlled planned economy.
In her doctoral thesis in 2019, Maria Bach covers Indian Economics’ contributions to development discourse during 1870 to 1905. She studied the writings of Ranade, Dadabhai Naoroji and Romesh Chunder Dutt. These three authors covered a bulk of total writings on Indian economy during this period. These scholars argued with the British government to develop domestic industry in India through credit support and temporary protection until Indian industries develop. They argued that the Indian domestic industry would then supply manufactured goods to the domestic market, substituting costly imports manufactured from raw agriculture goods exported from India. In its new developed state, Indian economy could then operate on classical economic principles.
But even beyond this argument, the Indian thinkers also postulated that India then could raise its level of economy enough to generate demand and market for luxury British goods, thus furthering a boost in British economy. It is interesting to note that the evidence based scientific analysis and justification of precisely this argument made by these Indian economists was later provided in the new trade theory developed by Nobel Prize winning economists like Ohlin and Krugman in the late twentieth century. New trade theory explains why economies of developed nations with similar capabilities and factors of production trade more among themselves and prosper.
Ranade died in 1901, long before India became independent in 1947. In its early post-independence period, India took the opportunity to implement temporary trade protection policies under the infant industry argument. It not only became fully protectionist in trade relations, but also its public sector became the dominant player managing and controlling a large portion of non-agricultural economy under Nehru’s socialist ideology. Those policies failed resulting in a stagnated economy. Unfortunately, even after the beginning of economic liberalization from early 1990s, Indian economic policy makers have continued their protectionist and heavy handed government control policies to this day, due to pressure from the entrenched stakeholder interests.
In retrospect, the temporary protection argument put forth by Ranade and other Indian economic thinkers was in the context of their time and they certainly could be excused for not anticipating such an adverse effect of its prolonged presence in the post-independence era. So to answer the question on what policies Ranade would have recommended in the current Indian political economic situation, there is no doubt in my mind that he would have leaned toward neoclassical economic ideas incorporating classical and Keynesian economics.
