Paper for the Conference on Markets & Morals, New Delhi, 4-5 January 2014

Some nations seem to possess a code word which, like a key, unlocks the secrets of the country. That word is ‘liberty’ in America’s case; égalité, ‘equality’, in the case of France; for India it is ‘dharma’. Some of the best and the worst deeds in these nations can only be understood when seen through the lens of its code word.

Dharma provides the underlying norms of a society. It creates obligations for citizens and rulers and brings a degree of coherence to our everyday life. Dharma's approach is not to seek moral perfection, which leads inevitably to theocracy or dictatorship. It is pragmatic and hence eminently suited to comprehend exchanges in the market place and public policy. Dharma’s world of moral haziness and uncertainty is far closer to our experience as ordinary human beings than the narrow and rigid positions that define debate in these post-9/11 fundamentalist times.

The idea that an ancient Indian concept might offer insight into the nature of markets is, on the face of it, bizarre. But this is precisely what I intend to show in this essay. The word ‘dharma’ is employed sixty-four times in the first text on the Indian subcontinent, the Rig Veda, created around 1500 BCE, and I believe it is capable of deepening our understanding of the market system, especially its relationship to morality. While focusing on this relationship I shall also provide the context—both historical and contemporary—to the place of markets on the Indian subcontinent.

What is Dharma?

Dharma is a frustrating, almost untranslatable word. Duty, goodness, justice, and law have something to do with it, but they all fall short. Dharma is chiefly concerned with doing the right thing both in the private and the public life. It derives from the Sanskrit root dhṛ, meaning to 'sustain’ or ‘hold up’ like a foundation. It is the moral law that sustains an individual, a society and the cosmos (a bit like maat in ancient Egypt). From this root, dharma carries the connotations of balance, trust and harmony. At an individual level, it means ‘moral well being’, and was elevated to one of the four goals of the good life in classical India, along with artha, ‘material well-being’, kama, ‘sexual well being’, and moksha, ‘spiritual well-being.’

When individuals behave with dharma they create trust in society and harmony in the cosmic order. ‘The god Indra then showers sweet rain and the seasons follow; harvests are bountiful, and the people thrive.’ (Mahabharata 1.58.14). The ideal that continues to exist in the Indian imagination is that of a ruler guided by dharma. Hence, the outraged reaction of the Indian people to the corruption scandals during the Congress led government between 2011 to 2014 was: ‘Dharma has been wounded.’

Just as America’s founding fathers were obsessed with liberty, so were many of India’s founders attached to dharma, so much so that they placed the dharmachakra, ‘the wheel of dharma’ in the centre of the nation’s flag and the great scholar P.V. Kane, referred to the Constitution as a ‘dharma text’. For these men and women, nation-building project was a profoundly moral project. Dharmais pragmatic, viewing men and women as sociable but imperfect with strong passions that need to be restrained.

Where Does Dharma Come From?

Unlike the Abrahamic religions, morality did not originate with God in Hinduism. Atharva-veda says that dharma began in ‘the old customary order’ [18.3.1], a view that is not dissimilar to Plato’s belief that morality originated in custom. In the classical dharma texts, no one looks to God as an authority on dharma. If God is not an authority, then who is? In his influential law book from the 2^nd c AD, Manu cited plural authorities: ‘The root of dharma is the entire Veda, the tradition and customs of those who know the Vedas, the conduct of virtuous people, and what is satisfactory to oneself.[ 2.6]

But the epic, Mahabharata, in its typically sceptical way, challenges Manu and questions if the Vedas can be arbiters of true dharma: ‘In the opinion of the world the words of the Vedas are contradictory. How can there be scriptural authority over whether something is a true conclusion or not when such contradiction exists?’ [12.34,10] The epic also wonders if the wise can be relied upon to be authorities on dharma: ‘intelligence appears differently in different men. They all take delight in their own different understanding of things. [X.3.3]

If God is not the arbiter of dharma, and if the Vedas are contradictory, and if wise persons cannot agree about right and wrong, where does it leave the ordinary individual? Kulluka, who wrote a commentary in the 15^th century on Manu’s verse quoted above, declares that the ‘satisfaction of the mind is the only authority in cases of conflicting alternatives’.The classical poet, Kalidasa, who lived in the 5^th c. ACE, was of the same view: ‘In matters where doubt intervenes, the [natural] inclination of the heart of the good person becomes the ‘authority’ or the decisive factor.’[I.22] In this view, dharma seems to depend more on reason rather than on blind faith. This is why it is sometimes difficult to judge right and wrong actions as the world is not black and white and comes in many shades.

Merchants, Markets, and Kings

That India is rising in the twenty-first century on the back of free markets is not surprising. It has a long tradition of encouraging and promoting markets. Since ancient times the merchant was a respected member of society, one of the ‘twice born’, a high caste in the social hierarchy. Merchants and bazaars, however, emerged even earlier as centres of exchange in the towns of the Indus Valley (3300–1500 BCE) or even in the Neolithic age, soon after Indians first engaged in agriculture and there was a surplus.

India historically had a weak state but a strong society, unlike China, which had a strong state and a weak society. India’s history has been that of warring kingdoms and China’s is that of empires. Early on dharma placed limits on the power of rulers. Unlike the Chinese emperor who was the source and the interpreter of the law, dharma in India existed prior to the Raja or king, who was expected to ‘uphold dharma for the benefit of the people’; the Brahmin, not the Raja was the interpreter of dharma; thus a ‘liberal’ division of powers was created early in Indian history which placed a check on state power, and weakened the power of the state. Oppression did not generally come from the state but from society (particularly from the Brahmins). And the answer to that oppression was a guru, like the Buddha, who came along periodically to deliver the people from the Brahmins.

Because the state was weak, regulation in India was generally light. An exception to this was the heavily regulated state in the political economy text, the Arthashastra. The king’s dharma, we are told in the Mahabharata, was to nurture the productive forces in society, including the market: ‘The king, O Bharata, should always act in such a way towards the vaishyas [merchants, commoners] so that their productive powers may be enhanced. Vaishyas increase the strength of a kingdom, improve its agriculture, and develop its trade. A wise king levies mild taxes upon them’ (Mahabharata,XII.87). Practical advice indeed—for otherwise, the epic goes on to suggest, vaishyas will shift to neighbouring kingdoms and the king will lose his tax base.

There was purpose to economic activity and the ancients were acutely aware of it when they posited artha, ‘material well-being’, as one of the goals of life. They believed that the pursuit of money was proper because it created the material conditions for the pursuit of other goals. That good life also had other goals, in particular, dharma, ‘moral well-being’, which was higher than artha. This meant that there was a right and a wrong way to pursue wealth. Moreover, the pursuit of artha was meant to make the world a better place. In today’s language we might interpret this to mean that business has a purpose—to lead a society from poverty to prosperity.

The merchant was generally well thought of. He is often the hero in the animal and human stories of the Panchatantra, Hitopadesha and the Kathasaritsagara, which travelled to the West via the Arabs, some of them becoming part of Aesop’s Fables. In them the merchant is often a figure of sympathy and other times of fun.The Mahabharata speaks of Tuladhara, a respected trader of spices and juices in Varanasi, who surprisingly instructs an arrogant, high Brahmin about dharma and on how to live. Speaking modestly, he compares his life as a merchant to a ‘twig borne along in a stream that randomly joins up with some other pieces of wood, and from here and there, with straw, wood and refuse, from time to time’. The analogy of the twig brings to mind the picture of a real-life trader in a competitive market who has multiple suppliers and buyers, and whose gains and losses, prices are not under his control but depend on the impersonal forces of the market.

There is an irony here--a petty trader is teaching a high caste Brahmin how to live. The worldly merchant, who presumably ought to covet wealth, is being held up as a model of behaviour for a forest dwelling ascetic. Tuladhara is happy to go with the flow like a twig, suggesting in this case that a person who is distrustful of worldly achievement is less likely to step on the toes of others and be less violent.

Ancient India seems to present a world quite different world from that of ‘Oriental despotism’, a term that the ancient Greeks used contemptuously to refer to the states of Asia and the Middle East, and particularly their enemy, the Persian Empire, where ‘the king owned all and everyone was his slave’. By characterizing Asians in this manner, the Greeks were flattering themselves--they were contrasting their own status as free citizens versus slavish Asian states. Marx took up the idea of Oriental despotism, calling it the ‘Asiatic mode of production’ to explain why ‘Asia fell asleep in history’. The Asiatic mode referred in particular to the agrarian empires of ancient Egypt and China, where an absolute ruler often farmed out the right to collect tribute from peasants to a hierarchy of petty officials, and where extorting tribute from village communities became the mode of enrichment for the ruling nobility.

It was Megasthenes (ca. 350 – 290 BCE), the Greek ambassador to the Maurya court in India, who created the confusion, suggesting that Indian kings owned the entire land of the country. But Megasthenes was not a reliable reporter, and some of what he wrote was fantastic nonsense, including an account of gold digging ants in India that were the size of foxes. When the British came to India they continued the historical mistake, believing that India too was under ‘Oriental despotism’, and this guided their thinking about land tenure with some terrible consequences. The recent work of historians suggests that property rights to land were generally more secure in India and the major Eurasian agrarian societies--China, Japan, Ottoman Empire, and Europe—than was once believed.

Dharma and Morality of the Market

The notion of dharma, as it emerges from the normative dharma texts,seems to provide the underlying values and norms of society. Because it is shared, dharma gives people the confidence to cooperate with strangers. It acts like invisible glue between transacting persons in the marketplace, allowing them to trust each other. The same glue also holds society together, bringing a degree of coherence and predictability to the uncertain lives of human beings.

Although the Sanskrit word ‘dharma’ sometimes appears to be synonymous with the English word ‘moral’—and up to a point, this is true—but dharma, in fact, carries a lot of rich connotations that go beyond the English word. It contains the notions of ‘trust’, ‘harmony’, ‘balance‘, restraint’, ‘justice’, 'sustain’—all of which can hopefully help in deepening our understanding of the moral aspects of the market. For example, the idea of ‘glue’ above derives from the connotation of ‘trust’. Of course, dharma in Sanskrit goes beyond its moral connotations to mean other things, for example, the idea of ‘the unique property’: thus, ‘the dharma of fire is to burn’. But this is not relevant here and it should not detain us.

At the heart of the market system is the idea of exchange between ordinary, self-interested human beings, who seek to advance their interests peacefully in the marketplace. Dharma places restraints on buyers and sellers. Because you are a person of dharma, I readily accept a check from you. In the same way a taxi driver stops and takes me in as a passenger because he knows that the restraint of dharma will ensure that he will get paid at the journey’s end. Thus, millions of transactions in the global economy are conducted daily based on this shared belief.

I trust the woman who sells fruit to me regularly in the market near my house in Delhi. She claimed one day that she had received exceptionally good mangoes but they were expensive because of their higher quality. I reluctantly bought the mangoes but unfortunately they turned out to be bad. I promptly punished her by shifting my allegiance to her competitor. Not only did she lose my custom but I also told half a dozen friends and neighbours. All of us shared similar stories of her behaviour. As word of mouth spread, she came to be known as a person of low dharma, and lost market share. Thus, the market corrected bad behaviour.

Every purchase manager has the temptation to squeeze his supplier. If he does not treat the supplier with dharma and gives him a fair price, his own company will suffer when the supplier delivers sub-standard components. On the other hand, the market rewards good behaviour on the part of a company that treats its employees well. The best will want to join such a firm, and with the influx of talent it will be rewarded with high performance and market share. A person or a firm of high dharma will be rewarded with a good reputation. Smart businessmen know this and work incessantly to improve their reputation. Thus, markets are not only efficient but they also reinforce good behaviour.

The market system depends ultimately not on laws but on the self-restraint of individuals. Dharma provides that restraint in order for people to behave with tolerance and respect. However, there are limits. Bhishma instructs Yudhishthira in the Mahabharata about the importance of danda, the ‘rod’of the state to punish those of low dharma. Even the most peaceful, dharmic ruler must then exercise force. The epic says that when dharma is low in a society, the dependence on danda or intrusive regulation rises. A society where dharma is weak suffers from pervasive corruption of public officials and ineffective public administration.

Such a situation is painfully obvious in contemporary India where public institutions of governance—the bureaucracy, the police and the judiciary—continue to fail to enforce the law. Why should it take fifteen years to get justice in the courts? This is because people of low dharma find ways to manipulate the courts and the police. The reform of these institutions is a key unfinished agenda of reform is contemporary India today.

Too many tend to blame the market for the pervasive corruption, especially in high places, calling it ‘crony capitalism’. The opposite, in fact, is the case. Corruption exists only in the unreformed sectors of the economy where public officials still have discretionary authority over economic decisions. This too is part of incomplete reform program.

From Global Trader to Socialist

With a five thousand mile coastline, India was historically a vigorous trading power and in some periods commanded as much as twenty five per cent share of world trade, according to Angus Maddison. If you had stood at the famous port of Muziris in Kerala two thousand years ago, you would see a ship arriving laden with gold and silver. Every day a ship from the Roman Empire landed in a South Indian port where it picked up fine Indian cottons, spices, and luxuries. But Indians did not care for what the Romans brought, and since accounts had to be settled, they were settled with gold and silver. Back home, Roman senators grumbled that their women used too many Indian luxuries, spices and fine cottons and two-thirds of Rome’s bullion was being lost to India. Pliny, the Elder, in 77 CE called India a ‘sink of the world’s precious metal’in his encyclopaedic work Naturalis Historia. One South Indian king even sent an embassy to Rome to discuss the empire’s balance of payments problems.

Fifteen hundred years later, after the Europeans rediscovered India, the Portuguese had the same complaint: their gold and silver from South America was being drained in the trade with India. The British Parliament echoed this refrain in the 17^th century. Indian textiles and spices changed culinary tastes and clothing habits around the world. Europeans began to wear underwear only in the 17^th century when they discovered soft and affordable Indian cloth brought by the East India Company. The names of luxury textiles—calico, muslin, chintz, bandana—gradually entered into European languages. Bernier's compatriot Baron de Montesquieu summed up the situation in 1748: 'Every nation, that ever traded with the Indies, has constantly carried bullion, and brought merchandises in return . . . They want, therefore, nothing but our bullion.’

India’s power has always been ‘soft’, not expressed through military conquest but in the export of goods and ideas.The Sanskrit scholar, Sheldon Pollock, reminds us in The Language of the Gods in the World of Men that between the fourth and twelfth centuries the influence of India spread across Southeast and Central Asia. Across the vast area,Sanskrit became the language of the courts, government and literature much like Latin in medieval Europe. The elitein East spoke different languages but used Sanskrit to communicate across the border. We are not sure exactly how Indian culture travelled but most likely it was through trade. Tamil literature describes seafaring merchants sailing to distant places like Java in search of gold. Their ships also carried Brahmin priests and Buddhist monks. The historian, Michael Wood, summed it up well: ‘History is full of Empires of the Sword, but India alone created an Empire of the Spirit.’

India generally had a positive balance of trade with the world until the Industrial Revolution in nineteenth century England when the mills of Lancashire made handloom textiles technologically obsolete. As India was the world’s leading exporter, Indian weavers suffered the most. Indian nationalists blamed their plight on trade, the East India Company and the British Raj. But the truth is that handmade textiles could not compete with machine made ones and handlooms died everywhere. After Independence in 1947, Indians forgot their great trading past, closed their borders in the name of a bogus idea called ‘import substitution’, and denied themselves the prosperity that emerged in the world after the Second World War.

At the same time, a dirigiste, socialist state emerged in India (as it did in much of the world). In Indian it was largely thanks to Jawaharlal Nehru and the influence of Fabian socialism, but ironically socialism was out of character with the historical temper of the country. The socialist anomaly persisted for four long decades between 1950 and 1990 as India tried to industrialize through the agency of the state by placing the public sector at the ‘commanding heights’ while stifling private enterprise with the worst controls in the world that came to be called License Raj. Not surprisingly it failed. The Indian state did not have the capacity to manage a command economy, nor was a centralized bureaucratic state in keeping with the country’s decentralized systems.

Capitalism, Indian Style

Facing bankruptcy, India made a U-turn in 1991 through a series of reforms that dismantled socialist institutions and replaced them with market oriented ones. More than two decades of capitalist growth has made India the second fastest growing economy in the world. During these years, India experienced a ‘golden decade’ of growth from 2002 to 2012 when GDP growth averaged over eight per cent a year and lifted millions out of poverty, falsifying the old prophecy of the License Raj that markets would impoverish the working class. The middle class also grew explosively after the economic reforms--from around twelve per cent of the population to around a third—and gradually it began to change the country’s rhetoric towards middle class aspirations for a better life. True to its history and its temper, India is today rising from ‘below’, almost despite the state, unlike China whose success has been scripted from ‘above’ by an amazing, technocratic state that has built extraordinary infrastructure.

Freed of the shackles of the Licence Raj Indian entrepreneurs responded, even beyond the most optimistic hopes of the reformers. By 2010, there were over 150 companies with a market capitalization of over a billion dollars; foreigners had invested in over a thousand Indian companies via the stock market over the past decade; 150 international companies had research and development centres in India—a testament to its human capital; 390 out of the Fortune 500 companies had outsourced software development or business processes to India. Twenty-five Indian companies were globally competitive, and another twenty were on their way, and a few were expected to become recognizable brands globally in the next decade.Because some sectors of the economy are unreformed, ‘robber barons’ emerged, especially in the Congress led government between 2010 and 2014.

If Indians won their political freedom in August 1947 and their economic freedom in July 1991, they attained dignity in May 2014. This was the significance of Narendra Modi's landslide victory. The hopes and dreams of an aspiring middle class were affirmed for the first time in India’s history. Modi made millions believe that their future was open, not predetermined, and could be altered by their own actions. In her book, Bourgeois Dignity, Deirdre McCloskey, explains that the same thing happened during the ‘great transformation’ in the 18^th and 19^th centuries in the West when the industrial revolution created a middle class that changed the master narrative of western societies.

That narrative is incomplete in India. Many Indians still believe that the market makes ‘the rich richer and the poor poorer’ and leads to corruption and crony capitalism. Despite the market having generated broad spread prosperity over two decades, people still distrust it and the nation continues to reform by stealth. India continues to reform furtively because no political party has bothered to explain the difference between being ‘pro-market’ and ‘pro-business’, leaving people with the impression that liberal reform mostly helps the rich. They do not understand that being pro-market is to believe in competition, which helps keep prices low, raise the quality of products, and leads to a ‘rules based capitalism’ that serves everyone. To be pro-business, on the other hand, means to allow politicians and officials to retain power over licenses, which distorts the market’s authority over economic decisions and this leads to ‘crony capitalism’. This confusion explains the timidity of reform and prevents India from performing to its potential.

The blame lies partly with the reformers who have not ‘sold’ the competitive market as Margaret Thatcher did in Britain. The job fell primarily on our chief reformer,former Prime Minister Manmohan Singh. But he did not even succeed in selling economic reforms to Sonia Gandhi and his own party, the Congress, which ruled over India with its allies from 2004 to 2014. It was able to make a false trade-off between growth and equity. After its victory in 2004, the Congress party concluded that India's free-market reforms were not helping the poor and so it changed the government’s focus to spending on welfare under a seductive slogan, ‘inclusive growth’. Instead of building roads and other infrastructure, it turned its energy to guaranteeing 100 days of employment to the poor, giving cheap energy, waiving loans to farmers, and enacting a food security law that would guarantee food to two thirds of India’s population at ten per cent of the market price. Approvals for new projects came to a virtual halt, mostly on environmental grounds. As a result, investors lost confidence; inflation rose partly because spending was not backed by production; growth plummeted, millions of lost were jobs, and hopes dashed for millions of young people.

It is puzzling that India should offer astonishing religious and political freedom but fail when it comes to economic freedom. In a country where two out of five people are self-employed, it takes 42 days to start a business and the entrepreneur is a victim of endless red tape and corrupt inspectors. No wonder, India ranked 119 on the global ‘freedom index’ and 134 on the ‘ease of doing business’ in 2013. It is unhealthy for India to be reforming by stealth after more two decades of economic reform. Fortunately, India now has in Narendra Modi an outstanding salesman of ideas who could transform the master narrative of its political economy. When he talks about making vikas, ‘development’, a jan andolan, ‘mass movement’, he should go a step further and explain how vikas happens via an ‘invisible hand’ in a free market democracy. India needs to fill the empty political space at the right of centrein Indian politics. Modi must ‘sell’ his reforms--especially to the ‘cultural right’ in his party. It might help him if he used the language of the nationalist right and appeal to India’s great trading past. Not speak about Adam Smith’s market but the famed market of Hampi. To explain the value of low tax rates, he should appeal to the Arthashastra where rajdharma dictates that the righteous share of the king is shatbhaga, ‘one-sixth’ or a fifteen per cent tax rate.

Unlike the mood of diminished expectations in the West, it is an age of rising expectations in the East. History will remember this age by the rise of China and Indiabased on the liberal economic idea of the market. But it is a work in progress. If these two countries want to truly become developed nations, China has to eventually fix its politics and India has to fix its governance. Otherwise, both will get stuck in what economists call the ‘middle income trap’. Meanwhile, the rise of a third of humanity is good news in another sense--it proves once again that free trade and multiplying connections to the global economy are pathways to lasting prosperity.