 Lecture today is on development economics and what is the contribution of the Austrian school to that Subject or that field of inquiry. I'd like to start the lecture with a little story So, you know Nathan Rothschild was Very big and famous banker businessman financier So in 1836 and this is what you know, he's one of the richest men in the world at this point in time So in 1836 he travels from London to Frankfurt for the wedding, you know for his son's wedding and When he before he leaves he has a little boil or an abscess, you know, and then slower back He says, you know what? It's not a big deal. So this is June of 1836. He goes to learn he goes to Frankfurt celebrates the wedding has you know, and in the meantime this at this boil is just getting worse and He has many doctors come to take a look at it very famous doctors the leading experts in the field of the day and so on And by the end of July of 1836, he's dead, right? Now it we know now that basically he died of a very common sort of bacterial infection which today Anybody would could go to a doctor or pharmacy and just take a Medicine over the counter and you know, you'd be fine and this is the richest man in the world one of the richest men in the world, right? That sort of summarizes what development economics tries to study. All right This is what development economists are trying to analyze, which is how do we get from there to here? How is it that the average? Person today in many parts of the world Enjoys a standard of living that is higher than the Rothschilds or Medici Or, you know, the Louis Louis the 16th Or the richest, you know, the mill the millionaires in Rome, right? How is how did this happen, right? How did we get from there to here and also the other the sort of flip side of that question is also Why didn't it happen in so many parts of the world, right? So today you could take you could go into parts of India parts of Africa Parts of Latin America and it's like going into a time machine, right? It's going through a time machine. You're looking at how people lived, you know, three four hundred years ago And so the question is why didn't it happen to them? So what's what's what's the problem and and that sort of summarizes what the subject is broadly about and You know development economists talk a lot about Indicators all sorts of figures you look at per capita income You know all sorts of mortality figures Health indicators all of this stuff, but really that those are all symptoms, right? We're looking for the deeper causes, right? And this is a this is a question. That's That all the great minds and economics is sort of thought about because how can you not think about this? The classical economists had a lot to say about it and you know Basically their main conclusion which I which can be summed up in this quote quotation from Adam Smith From his very famous chapter on the division of labor right at the beginning of the world of nations Is that look? Growth or development Economic improvements in living standards, etc Is largely the result of an extension in the division of labor, right? So the more You have specialization the more you have the division of labor, right? The great multiplication of the productions of all the different arts in Consequence of the division of labor which occasions in a well-governed society that universal Opulence which extends itself to the lowest ranks of the people this largely was the story or this The sort of answer that you know Adam Smith gave and with him any classical economists Gave as well. So what really is the Austrian? Contribution to the story. I think it can be summarized in this quotation from Karl Manger In from his principles of economics now Manger actually Criticizes Smith in the first chapter of the principles. Oh, well objects to certain You know aspects of Smith's treatment of the extension of the division of labor And he says look before, you know, this the excerpt from here in the same section He says look, I mean, let's imagine you have a tribe somewhere Isolated and you know, you have more division of labor More, you know, so you specialize in gathering berries you specialize in, you know fishing you specialize in These different sorts of activities that you had been engaging in before of course, you would see an improvement in Standards of living you'd see improvements in productivity and all of those things that Adam Smith spoke about But you would not imagine that that you know that that those that set of people is going to develop into a Modern, you know developed economy, right? So something is missing here And this is what he says is missing in that treatment of Adam Smith and he says look What actually happens and what is really the primary sort of driving force behind growth growth and development Easy what you can call a vertical division of labor. So yes, you have to have division of labor But that that division of labor and specialization has to extend Vertically not just horizontally if you will right you have to basically specialize in More and more what we would call higher order goods, right? Capital goods the production the goods that are not used directly in producing consumer goods But which are themselves used in producing other right factors of production And it's through that process of this vertical extension of the division of labor as you have longer and longer Production processes that are employed. You have a more capital intensive Economy that's how you have growth. That's the main engine or the main driver Really of growth and in this long sort of court. That's really what he's saying. He's saying look So he says assume a people which extends its attention to goods of third fourth and higher orders instead of confining its activity merely to the tasks of a primitive primitive collecting Economy we shall see the hunter who initially pursues game with the club turning to hunting with bow and hunting net To stop stock farming of the simplest kind and in sequence to ever more intensive forms of stock farming We shall see men living initially on wild plants turning to ever more intensive forms of agriculture We shall see the rise of manufacturers and their improvement by means of tools and machines And in the closest connection with these developments, we shall see the welfare of this people increase so really the main what I would Argue the main contribution that ocean the Austrian school of thought can make Do this whole subject of development is really everything to do with the capital structure Extending the capital structure, right? What does that entail? What are the conditions that are needed for this to occur? What manger is describing here, right? What are the preconditions that are needed for this to take place? right when when will it happen, right? When will it not happen and this really is the for going to be the focus of my talk today, right? Now just to get some basic concepts at hand. I'm sure Many of you have probably already encountered these in earlier lectures, but you know we can perform a thought experiment and and look at Robinson Crusoe or if you wish you could think of Tom Hanks and cast away I wouldn't but that's up to you Not a great movie So you have this guy stranded on an island he can produce two goods right fish and berries As of now, he's adopting very primitive rudimentary methods So he just wades into the ocean to catch the fish and he just climbs trees or he jumps up and down together the berries His productivity is low, right? He acquires a very small bundle of goods for the time that he devotes to production So the question is well, how can he acquire a larger bundle of these consumer goods? How can he grow his little economy right and you can talk about it with just you know using the simple Diagram of the production possibilities frontier, right? You have basically Amounts of one good on the y-axis amounts of the other good on the x-axis and what you're really saying is look a point Like point n on the in the box on the left. There is something that is unattainable, right for Robinson Right now so given his sort of techniques that he's adopting given the amount of time He's spending right he can only acquire if he you know He can only acquire goods that are on the line or inside the frontier How do you get to that point outside the frontier? That's really the question that we're asking Now of course one way for him to do this would just be to work harder, right? So use the same rudimentary techniques and keep working harder and harder But obviously there's a limit to how much right his little economy can grow doing this Well This would mean that he's not really becoming more productive right the amount of goods produced per hour worked would still be the same He's adopting the same techniques, but he's just working longer ours in doing that But he could also do push his PPF out and get at those points that were earlier unattainable, right? By actually boosting his productivity, all right, and the first thing that he needs is of course ideas He needs to know right he needs to know of another technique another production technique That can sort of get him to those to that can boost his productivity, right? So if he doesn't know of any other way of gathering fish except waiting into his into the ocean gathering it with his bare hands Well, then he stuck he can't really do anything right and the same for berries, right? He needs to know that there are these other techniques available, okay? So let's say he knows that well, all right I can build a raft in a net and I can go and catch fish which lie, you know Probably in a part of the ocean that is deeper The fish come there because they like it whatever and I'm my net using my net I can gather a lot of a lot more fish per hour, right work, right? I can really boost my productivity, right and the same thing he can probably use a stick Build a stick and then you know shake off berries in a more productive fashion right this way He's again growing his economy, but he's doing it by boosting his productivity But just having better ideas is not enough for him to actually do that, right? So here you can see we're really talking about what Mengar is talking about right was talking about which is your You're going to devote some of your time not just to producing consumer goods But you're going to take some of that time and produce these capital goods like the raft in the net and the stick and then use those to produce the consumer goods, all right, so if you have to move from this shorter process, which is the more rudimentary process to a Longer process which involves more steps more stages, but also more time, right? So the moment at which you begin producing right your fish with the raft in the net is going the fish lies further away In the future as compared to when you can just go in into the ocean, wade and gather the fish, all right So it's not just enough for him to have this better idea and then begin He can't just simply embark on this longer process, right? There is some other cost involved, which is basically an inter temporal choice, right? He's basically has to choose between consumption in the present versus consumption in the future, all right Now he essentially has to choose between two processes, one of which will give him fish in the nearer future Which is wading into the ocean The other one is going to give him fish in the further, you know Further way into the future But the second one the one that's going to give him fish further away into the future is more productive, right? And so when it's more productive, right? He can basically get more stuff Improve his well-being, but it lies further away. So it's an inter temporal choice. All right And so really the only way he can embark on these longer processes is if he gives up The consumption in the present, all right So the first precondition really to embarking on these longer more productive processes that are more capital intensive is really to give up Present consumption right also reduce present consumption below the maximum level that it could otherwise attain all right So in other words, he would have to save and invest that's what Saving involves giving up the present consumption investing means reallocating those resources away to Embarking on these longer processes is investing his labor time in the production of the raft and the net and the berries instead of Using it to produce consumer goods directly. All right So that is his trade-off along with having better technology You also need to save and invest in order to grow your capital structure and to boost your productivity In this way now to sort of better classify or better understand this process Manger came up with his classification of goods of various orders Something again, which I'm sure you're familiar with so he called the consumer goods the goods of the first order or first order Goods right producer goods are higher order goods But those goods don't can can be classified into various subgroups right based on how far they are Temporally from consumption. Okay, so you have the producer goods can themselves be divided into second order third order fourth order goods Etc. Now a second order producer good would be a good that is used in the production of the consumer goods So in our example the raft and the net would be a second order good, right? And the same with the the the stick that is that you use to shake the berries off the tree That would be a second order good along with the labor that is used to produce the consumer good fish or berries But the labor that is used to produce the raft and the net Along with whatever other materials you might use our third order goods and so on right depending on how complex your production structure happens to be and so we can Basically, we can say that growing this capital structure growing this production structure vertically or engaging in a in the extension of a Vertical division of labor involves devoting time towards the production of goods that are of higher and higher orders All right, so basically a more developed economy in This Robinson crucial words, so you know imagine that you are the producers of one of those shows I was at lost or survivor So you place two guys and two islands and then you're looking from the helicopter right and looking at how they how they're doing well One of the guys you find spends a large part of his labor time Not devoted directly towards the production of consumer goods right instead What does he do he spends part of his day sort of building or after net part of his day Maybe constructing a house part of his you know Maybe building a robo and arrow etc. And the other guy is just goes wades into the ocean and then you know He gazes at the stars or you know dances around a fire or talks to a volleyball or whatever, right? so we would call the the the person the Robinson who is engaging in these longer Production processes who's devoting his time more towards the production of higher order goods as the more developed Has having the more developed economy is having engaged in a greater extension of this vertical Right division of labor and remember that it's not a one-shot process, right? Capital goods depreciate. That's the other distinguishing characteristics of capital goods So the raft in the net once produced is not going to keep you know giving forth the higher productivity forever at some point It's going to be useless. So not only does This Robinson who is more developed who is you know engage who engages in these more productive production processes Not only would he have to produce these capital goods once he's probably going to have to keep producing them to replace them Right, so as the raft in the net Depreciates he's going to have to devote some time towards building a new raft in the net Right and the same thing with a stick and the same thing with this with the bow and arrow that maybe he uses to catch Hunt meat or a game or whatever, right? And so really It's how you allocate their labor time across these different orders of goods that distinguishes whether you have a more capital intensive or Or a greater vertical division of labor or not And in fact if you think about it in a modern developed economy like the one we live in the vast majority of labor Labor time for example is used not in producing consumer goods directly, right? Most people are engaged in the production of Consumer goods or in production processes that will only give consumer goods or give forth consumer goods many many years into the future Right think for example about people and thinking about or sort of researching into nanotechnology now What's that production process look like 20 years right 25 years? We don't even know right and there are so many others not just in the US But literally now because we live in an international right economy where most of the goods are the goods We're consuming today are being produced in China You know in in Vietnam, etc. One of my favorite pastimes when I go shopping with my wife She'll know I was gonna say don't tell her I say this but you know she'll know is there Is it actually going around looking at like you go to Target and just go around look at all where the stuff is made And you'll be fascinated, you know a lot of it is from China Yes, and that gets boring after some time, but you have Philippines you have Vietnam you have Bangladesh you have countries all over the world and The point being that it's it's this vertical division of labor has now become an international phenomenon so not just our people in The US spending you know the large proportion of labor time in the US is being spent in these long production processes, but All over the world right someone in China now is probably or someone in Egypt now It's probably growing cotton, which will become a shirt For five years from now right someone in China is doing is working on a production process that will yield you a Smartphone I don't know two years from now right so that's really what we're talking about here right so that's you know, so This is I think the benefit of the Robinson Crusoe Thought construct is it sort of helps you focus your mind on and you know Not worry about many of the inessential details and sort of convey the basic message. So, you know if It's the same thing you're talking about two Robinsons right you'll find one guy using his time very differently But also having a much higher standard of living In in terms of the actual goods that can be consumed right the other guy might very well have You know spending more leisure time But but the you know the bundle of the richer Robinson will have a much greater flow of fish of gay of meat You know he'll have live in a better house, etc. Right and that's really in a sense What we're talking about when we talk about a developed or you know better developed economy in a less well developed economy now this is an example of The production of bread right in the developed countries in the 20th century as you can see here a Lot of goods of various orders go into producing bread something very mundane Simple something we take for granted right and so like for example the seventh order here Would consist of agricultural machinery fertilizers chemical plants right used in this process And you know you have a sixth order fifth order, etc. All of it Flowing and sort of interlocking one with the other until you have your the flow of your final consumer good Which is which is bread and if you compare? the production of bread in rural North India in the mid 20th century you can see Sort of You still have seven orders of goods, but you if you look at the sort of the quality and the kind of goods and the the number of goods in this capital structure against this you can see that this is far more rudimentary, right and Obviously the the final product is also going to differ in quality as compared to the developed country example now these Examples or these these charts of these orders are I took from a book by Suda Shanoi It's available on Mises.org. I believe it's called an outline for international economic history and the whole book is basically develops and Looks to apply, you know, this notion of a vertical division of labor and analyze You know different growth Episodes especially that of England and this is another example. This is late 20th century Cotton garments in developed countries again You can see so the final product is cotton garments, but you can see how many different orders and Sort of different capital goods sort of go into creating that final product Which is available when you just walk into the store, right? And you can see here also I don't know all of you can read it, but you know some of these things are made in you in the UK some in the US some in Germany Some in Japan so some in China, right? So it's like it's an international process going on here, right so The this is one of so to boil it down along with the so one of the main preconditions of Engaging in you know this extending this division of labor vertically that Manger spoke about is saving, right? And so it's not just enough to know To have better technology have better ideas, but you also need to actually have savings available This is a point in which on which the Austrian school differs From what you what you'd call neoclassical or mainstream growth theory which emphasizes more the technological aspect Of growth now, of course the technological aspect is important. You also need a growth of ideas. You need better and better ideas You know about how to improve your productivity how to engage in different production processes that is important But that's not sufficient right that if you wish that would be a necessary condition But a sufficient condition has to be the actual availability of savings and Rothbard in a quote from an economy state Says look what is lacking in these developing countries is not knowledge of Western technological methods Know how that is learned easily enough the service of imparting knowledge in person or in book form can be paid for readily What is lacking is a supply of saved capital needed to put the advanced methods into effect The African peasant will gain little from looking at pictures of American tractors What he lacks is the saved capital needed to purchase them. That is the important limit on his investment and on his Production right so what Rothbard is saying here is I think an important point Which is he's saying look if you look at a developing country or parts of the world that are less developed Ideas are out there right they can learn about the more advanced Production technology that is being adopted right now in more developed parts of the world But what they lack is the capital right what they lack is a saving So just changes differences in the in the knowledge of technology is not enough to explain why We've had improved growth in certain parts of the world, but not in other parts of the world Right we have to talk about savings and the need to save and invest All right, so the second sort of aspect of or the second precondition so we need savings, but the second precondition is really Goes to the heart of look. How do you put together such a complex structure? In a non chaotic fashion right so again going back to some of those These examples here look at the number of goods right firstly the is bewildering Look at how geographically dispersed their production is all right Look at how many different orders there are how does this thing mesh right? How how does this how does this not lead to chaos? How is it that producers who are geographically and temporally so dispersed from the final Consumer good that's available. How do they all know what to produce right? How does how does the system work right? For example, I mean you walk into the store right so this is clothing you walk into store You have a shirt you want a shirt. It's there How did you tell the guy growing the cotton that you wanted the shirt? Well, you didn't like he's not your Facebook friend or anything right? You didn't like give him a call and say well five years from now or right now I want a shirt Well, anyway, it's not going to happen because the production process takes time But you didn't you don't like call up somebody and say well five years from now. I'm going to want a shirt This is my size right. This is the color. I want make it doesn't work like that right. So how does this system work? What are the preconditions needed to make this this what you can call an investment chain right? Which is sort of I think a word that Ludwig Lachman used to describe these complex production processes involving many different orders of goods How does this investment chain that finally yields consumer goods? How does it mesh? How does it dovetail? How how does do these different parts fit together? All right, what are the main or the essential precondition for that to occur and here we have to dig into the whole argument about economic calculation all right now When it when you're talking about a simple production process or a simple Economy like Robinson Crusoe's economy, but he when he's making decisions about which good to produce Whether to use a shorter or a longer process, right? He doesn't really need prices to make that decision. Why why why doesn't he need prices? Well, because he the production processes are so simple that he can easily compare what he's getting and what he's giving up So he's not engaging in a whole bunch of production processes, right? He's probably you know, he went when he's thinking about well, should I build a raft in the net or not? Well, what does he forego probably fish in the present, right? Similarly, he might face a decision about well, what production process should I use to produce cloth? Well, given the simplicity of his economy, right given the short Production processes involved given how few the different, you know Production processes he's engaged in at a particular point in time He can easily compare what is the value that he's gaining, right? The value of the good that he's gaining in terms of consumer goods and what is the consumer good that he's giving up, right? So he can easily make a decision. Okay. Well, you know my and again You've probably come across the concept of time preference, but in this case we'd say well, you know once he knows Well, this is the the fish that he's gonna get from the longer process This is how much fish is gonna get from the shorter process if he has a low enough rate of time preference He will embark on the longer process But the main point is that he can easily compare Marginal benefit and opportunity cost or value obtained and value foregone without engaging in You know without needing prices now That is only going to be true, right? For a simple rudimentary economy, right? He can engage in this sort of simple Analysis of satisfaction to obtain versus satisfaction foregone any time he has to make these production Decisions, but for a complex economy, right? The situation is very different. So Think for example about somebody who is making a decision about whether or not to or how to use say a unit of coal Right in a very complex economy where you have coal can be used in thousands of different Production processes each of those production processes Alright will involve coal can be used in producing a good of a different order, right? They will all produce different consumer goods at varying points in future time, right? Now Technology can tell you well, okay, these are the options in front of you But when you are using coal and say you're comparing using coal in producing say electricity and producing steel you can't compare The value of electricity and steel these are not they don't they're higher order goods that could produce a good They don't they don't satisfy your wants, right? They are not used by you to directly satisfy your wants. They're used to produce Other consumer goods right through different so electricity itself could be used in another thousand different production processes same with steel, right so In order to be able to compare the satisfaction That you could potentially obtain from one path that you choose with that one unit of coal and Compare that to the satisfaction that you would lose with whatever it is that you're giving up, right? would involve Thinking through these extremely complex chains of production all the way through into the future before you make this decision well, it's literally impossible for For a human being to do that, right? And you would have to do that at every point whenever you make a decision with respect to any higher order good right because if your higher order good itself is producing different higher order goods You can't compare their satisfaction, right? So this is where you need prices and this is where the whole question of economic calculation comes in So you cannot engage so in other words in a complex market economy No producer no entrepreneur is sort of working his way through every production process from you know Where the good that he's producing is to consumer goods in order to sort of say well How much value am I generating for consumers if I choose this path versus that path, right? That's not what entrepreneurs do whatever goods they are producing. They think of well, what is the money? What is the revenue I can generate? Right by selling it to my potential customers, right? And at the same time, what do I have to pay the factors of production which would be his opportunity cost? Okay, so he can use money prices in order to simplify this decision Right, but at the same time these prices help are what help in dovetailing or in sort of meshing together this complex capital structure because basically the prices of these Higher order goods are all ultimately derived from the prices of the consumer goods Right, but it doesn't occur in any one through the actions of any one entrepreneur It actually it happens through the actions of thousands of entrepreneurs all operating in their own limited fields as they're making their production decisions, right, so This is another huge contribution from the Austrian of the Austrian school to development economics Which is to say well if you want you know you want to develop you know you want to grow well The main thing you need to do is to engage in this Extending this division of labor vertically Well the main one of the main preconditions for that is saving but the other main precondition is to have a working-price system Well, what do you have? How can you have a working-price system if you have certain institutional conditions in place? Which is largely the institutional conditions of private property, right and so Right so basically these entrepreneurs who are all working using prices, right in their calculations in Talking about whether you know their decision-making and using the profit loss system to finally know whether or not You know they're making the right or the wrong decision, right? All these decisions happening throughout not just any one country now But throughout the world all meshed together to ensure that you have a smooth flow of goods from all Through the various orders down into the consumer goods, right? It is this price system that helps the different entrepreneurs in all the different stages and all producing all the different orders of goods Actually dovetail their decisions one with the other right so that you have a smooth flow Of course Those institutional conditions, right must be in place, which is the institutional condition of private property, right and Once you have these a legal system or system or some other You know way in which these no private property norms are enforced But those are the sent essential institutional prerequisites for engaging in this extending extension of the vertical division of labor which basically implies that the further away you are from it and of course You know the furthest away you can get from it is a pure socialist system, right the the less the chances for development to occur and to a large extent despite the phenomenally high growth rates coming out of the Soviet Union, right? If you read about the lives of the daily person In the Soviet Union it consisted essentially of waiting in line, right and that sort of That sort of tells you something right so you have you do have a lot of investment You did have a lot of investment in the Soviet economy, right? You'd had an increased production of capital many capital goods But that didn't really trickle down into an increase in the quality and the quantity of the different consumer goods Right that is a capital structure that is broken that is disintegrated that does not fit together to do its job And the reason for that is because of the lack of a well-functioning price system Of course, even the Soviet economy was not purely socialist It could still use money prices In its calculations largely international prices, but also you had black markets, etc. All of that stuff But it was very far away from having the necessary institutional conditions that guard safeguard a private property Especially in producer goods and higher order Goods now I want to take Right, did I right so the other point which one should mention here is really that of GDP accounting, okay? So often as was the case with the Soviet Union, but also in other cases I will talk about the Indian case briefly here GDP does not give us the whole story if we want to know about Growth and development right because of the fact that you can have increased production of capital goods Which don't really give you and yield you an increased production of consumer goods, which ultimately is what we all care about right, so the increased production of the different capital goods might go in and increase the GDP numbers, but they don't necessarily increase and improve the per capita living standards in terms of the actual consumer goods that are available Right within that economy so again when your capital structure disintegrates or it does not Fit together right you can have a lot of investment in these higher order goods, but they don't all Fit together right these investment chains don't yield you what they're supposed to yield which is an increasing Variety and quality of consumer goods and quantity of consumer goods, right? All right, so the Indian case I have about 10 minutes. I think there'll be enough time to go through it quickly Now for those who don't know much about in Indian history India was independent gained independence from the British in 1947 and soon after that sort of instituted a planning commission got you know got Five-year plans that came out every five years and this was largely from about 1950 to about 1991 when the reforms kicked in now of course the five-year plans Started meaning a lot less even by the 1980s But the really the heyday of planning or the height of planning was immediately after gaining independence Which was in the 50s 60s and really the 70s Now again the Indian economy was not a purely socialist economy in the sense that it did not completely eliminate the markets for the higher order Goods in fact the Indian economy is sort of a strange case But also an interesting one because they didn't even nationalize everything. So what the Indian? So by the way, what the reason for engaging in this whole exercise was to try and produce everything within the Indian border right within India, okay? so economic nationalism or economic self-sufficiency was was the goal and the Planners believed that if you did that you would have higher rates of growth and higher and improve living standards more than if you engaged in the international division of labor, right and kept the markets open I kept the Indian markets open to international competition Etc. Now, of course if you want to produce everything within your own country, you have to socialize right because you basically have to Control the production of literally everything if you want to achieve that objective now And this is a quote from Jawaharlal Nehru who was the first Prime Minister of independent India and also a very prominent Leader of the freedom movement from the British And he says well, I believe in one of his speeches He says well I believe as a practical proposition that it is better to have a second-rate thing made in our country Then a first-rate thing that one has to import well I mean with that sort of objective and philosophy It's hardly surprising that you know, they didn't really weigh the costs and benefits of doing this That's exactly what he's saying. Anyway, that was sort of the overall Philosophy but I think this from this the gentleman here is PC Mahalanobis who was sort of the intellectual the brain behind Indian planning, especially in the early days in the 50s. He was a physicist and a statistician a sort of Polymath who also dabbled in economics, unfortunately, and and he Nehru who was the architect of You know most of all this the planning apparatus he had had high, you know, really liked this guy So he was one of his main advisors. So this is sort of him laying out and again one of his His papers, you know what why are we doing this and he says look Why do we then import machinery because we have not started factories to fabricate heavy machinery needed for the production of steel Cement etc Once we do this and establish a heavy machine building industry We shall be able to use our own iron ore and with our own hands produce steel and then use the steel to produce more machinery Our dependence on foreign supplies will be greatly reduced the main obstacle to rapid industrialization thus removed We shall be able to increase production and employment Quickly now, of course one has to keep in mind that a lot of this happened with the backdrop of colonialism. So, you know when When the Indians gained independence from the British one of the main sort of conclusions that all the Intellectuals in India had come to as well. What kept us growing or what didn't grow the Indian economy was the fact that the Brits were here Right and the fact that they That these we were integrated into this international division of labor And so like like Mahalo says the main obstacle to rapid industrialization that's removed in other words Economic self-sufficiency greater economics of self-sufficiency greater nationalism Economically will lead to higher rates of growth and more rapid industrialization Well, of course as you can see and I think this lays it down pretty well If you have to do that you have to socialize or at least control in one way or the other what is being produced within the country now The way the Indian planners did it was not necessarily through nationalizing everything. There were political obstacles do that But what they did was had a very intense system of regulation and Licensing by which they more or less controlled everything that was produced in what you could call the formal economy Of course, you had this informal economy where production processes were in a low-scale Enterprises a very small scale carrying on production largely Outside the system but within what you can call the formal economy Private producers they were private in a legal sense, but not private in an economic sense really right. They were all sort of Hemmed in by these regulations. You had industrial licensing. You had foreign Exchange licensing you couldn't import inputs without going through a long process of getting different licenses, etc. Etc. That's how The the planners are to control You know production in many ways like a wartime economy, right? That's probably what happened in and it's it's interesting that lots of these controls were actually carried forward from World War two right that they just you know for all the All the crying about the fact that the bridge did such a You know pressed us so much. They just carried those controls over from World War two down into independent India, right? so What happened and I'm looking at the period between 55 and 65 now this period again has a had a Rather high rate of GDP growth It's not anything high by Soviet standards. It was about four four point two percent per annum over 1950 to what 1965 Per capita GDP growth was about two percent two point one percent by Indian standards. That's was very high So compared to pre-colonial, you know the colonial days. It was very high. All right So the planner said look, this is great GDP is growing. This is what we want. This is what we We wanted to do. This is what rapid industrialization is all about And well, you can see that how they allocated resources during these ten years, especially very little to Agriculture very little to food grain Very little to consumer goods industries a lot to capital goods and basic industry are also sort of higher order goods right so the growth rates of those industries was far higher than the growth rates of The consumer goods industries. Well, what happened was a stagnation of living standards. So basically by 1965-66 India was on the brink of famine Right and it was saved largely through loans of wheat made by America and it's funny and one of You know a commentator on the Indian economy He said look you have the world's most industrial nation helping out the world's most agrarian nation with food Right. That's what happened at the end of this 15 year period by 65-66 you can see that the actual level of per capita availability of food grain per You know per day actually declined Right and the per capita availability of cotton cloth also barely increased And even when it did you know even mostly increase was just getting back to pre-war standards So basically you didn't have any improvement in the two main goods that at that time were the biggest sort of Goods in the consumption basket of the average Indian All right, but you had a lot of increased You know investment in all these higher order goods, but when you come down to the consumer goods It's a trickle. All right, and the same thing actually continues in the 70s as well It's not like these investments are paying dividends all of a sudden in the 1970s. So again another example of when You know when you don't have a working price system how this the structure doesn't work now This is a neat way of actually putting it Putting it graphically so you see here that on the left-hand side is this is what is supposed to happen when you Invest more right in higher order goods you so you have your PPF you give up agricultural production Which usually tends to be low, you know Which are usually lower order goods closer to consumption you invest more in industrial production, especially your higher order Goods and then your PPF moves out, right? You're able to have higher standards of living in the future That's what is supposed to happen when in highly socialist or highly regulated environments. You do the same thing What happens is this on the right? This is what happened in the Soviet economy And you could say this is what happened in the Indian economy during that period or something like this Which is basically your PPF actually collapses because you basically consume your capital, right? When you invest in these higher order goods and these capital goods don't fit together And they don't yield what they're supposed to yield. It's just it's just capital consumption Right, you just engage in a lot of mass capital consumption similar to for example, what happens in war, right? Like Bob, you know, Bob Higgs is great essay on World War two where he sort of debunks the whole notion that you've had rates of high rates of growth And that's what lifted you out of the the great depression. Well, what's he saying there? He's saying look of course you had more investment more capital formation, but what were they producing? They were producing war Material that's not consumption, right? That's not consumer goods So in a sense all of those resources are consumed in a sense But not in a way that actually improves standards of living some so your PPF actually collapses inside the capacity to produce Right consumer goods actually falls when you invest in this inappropriate fashion, right? Well, yep, I think that's it. I think my time's up. So thank you