By: Mann Sharma
In 1920, Ludwig Von Mises, in his book “Economic Calculation in the Socialist Commonwealth,” predicted what would happen when a state uses bureaucratic administration instead of the price mechanism. In much of the second half of the twentieth century, India attempted to use bureaucratic planning instead of prices. In this article, we will connect theory with practice and show how Mises’ warning haunts Delhi.
Mises argued that without private ownership of capital goods, no market exists for them, and without a market, no genuine prices exist. Without real prices, individuals cannot compare the relative scarcity of steel, cement, or foreign exchange across competing uses. People have no common unit to compare whether a ton of steel should go to a bridge or to a bicycle factory. When people plan production without prices, they are, in Mises’s phrase, “calculating blind”.
Hayek formalised and developed this idea into what he called the knowledge problem. The relevant facts about where a resource is most urgently needed are scattered across millions of minds and change hour to hour, in a form no ministry could collect and process.
Prices are, thus, an economy-wide communication and coordination mechanism. From 1951 onward, India’s Planning Commission set investment targets, output quotas, and industrial licenses through the Mahalanobis model rather than through market bidding. Under the License Raj, a firm needed government permission to expand capacity, change its product mix, or import inputs, permission granted not by price signals but by administrative discretion. C. Rajagopalachari, who coined the term in the 1950s, predicted that this system would breed corruption and inefficiency rather than the rational allocation its architects promised (1).
The macroeconomic record bears this out. From the 1950s through the 1980s, India’s Gross Domestic Product (GDP) grew at an average of 3.5% a year, with per-capita income growth of barely 1%. Economist Raj Krishna dubbed it the “Hindu rate of growth” in 1978, insisting that no matter what policymakers did, the trend would stay near 3.5%(2).
In 1947, India’s average income was roughly comparable to South Korea’s and Taiwan’s; by 1999, after decades of planning, India’s per capita income of $1,818 trailed South Korea’s $13,317 and Taiwan’s $15,720 by an order of magnitude (3). Both South Korea and Taiwan, whatever their own state involvement, retained functioning capital markets and price-guided investment far more than India did.
When the License Raj was dismantled in 1991, prices and calculation were restored to industry, and growth accelerated markedly in the years that followed, just as the theory predicts.
The limited growth under planning is not because of malice or incompetence among Indian planners and officials. Mises’s point was that no planner, however capable or well-intentioned, can plan without market prices for the means of production. India’s partial liberalisation since 1991 offers a natural test of the thesis within a single country and culture: growth accelerated precisely where prices, and hence calculation, was restored.
Citations
India in the Age of Ideas: Select Writings, 2006–2018 (on C. Rajagopalachari’s coining of “License Raj”).
Business Standard, “Hindu rate of growth: Where does the term come from and what it means” (Mar. 2023)
Meghnad Desai, “India and China: An Essay in Comparative Political Economy,” paper presented at the IMF/NCAER Conference, New Delhi (Nov. 2003), available via IMF.org.
Business Standard, “Is India’s economy really ‘dangerously close’ to Hindu rate of growth?” (Mar. 2023); ISAS Brief, “The Indian Budget: A Failure to Confront the Challenges” (Jul. 2009).