The road to sustainable markets

THE IDEA THAT an ancient Indian concept, dharma, might offer insight into the nature of the competitive market is, on the face of it, bizarre. But this is precisely what I intend to show in this essay. Dharma is a difficult word to translate into English. Duty, goodness, justice, law, and religion have something to do with it, but they all fall short. For our purposes, however, think of dharma as doing the right thing, both in private and public life. The market system depends ultimately not on laws but on the self-restraint of individuals and dharma provides that restraint. It provides people with shared norms that encourage them to transact with mutual respect and thus reinforces trust between them. Many business communities in India have a word for this crucial concept of trust—Marwaris call it ‘sakh’, for example.

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 limits on buyers and sellers and this allows strangers in the marketplace to trust each other. Because of a shared notion of dharma, I readily accept a cheque from you. In the same way a taxi driver takes me in as a passenger because he knows that the curbs of dharma will ensure he will get paid at the end of the journey. Thus, millions of transactions are conducted daily based on the self-control of human beings in the global economy without written contracts or judges and policemen to enforce them. Dharma 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 our uncertain lives.

I trust the woman who sells fruit to me regularly in Khan Market near my house in Delhi. She claimed one day that she had received exceptionally good man goes 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 about her behaviour. As word-of-mouth spread, she came to be known as a person of low dharma, and lost market share. There is thus an underlying dharma that guides the marketplace, and it punished the fruit seller without the need for judges and policemen.

Every purchase manager has the temptation to squeeze his supplier. If he does not treat the supplier with dharma and give 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 that consistently behaves with dharma is rewarded in the end 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, thanks to dharma.

DHARMA DERIVES FROM the Sanskrit root dhr, meaning to ‘sustain’ or ‘hold up’ (somewhat in the way that foundations support a building). Dharma provides the underlying rules or norms of society, creating obligations between citizens and between citizens and rulers, and it thus brings a degree of coherence to our everyday life. It is the moral law that provides the foundation for the good life of an individual and of a good society.

Because dharma is pragmatic (unlike, for example, the absolute morality of the Judeo-Christian tradition), it is eminently suited to comprehend exchanges in the marketplace and public policy. Dharma’s approach is not to seek moral perfection, and its world of moral haziness is thus far closer to our experience as ordinary human beings. It is also suited far better for public policy in a democracy than the narrow and rigid moral positions in a theocracy or a dictatorship, which are based on fundamentalist notions.

The word ‘dharma’ is employed 64 times in the first text on the Indian Subcontinent, the Rig Veda, created around 1500 BCE, and its meaning has evolved though history. (I have described this historical evolution at the end of my book, The Difficulty of Being: On the Subtle Art of Dharma). Although the Sanskrit word ‘dharma’ appears at times to be synonymous with the English word ‘moral’—and up to a point, it is—dharma, in fact, carries many connotations that go beyond the English word. It contains suggestions of ‘cosmic harmony’ (a bit like maat in ancient Egypt), ‘trust’, ‘legality’, ‘balance‘, restraint’, ‘justice’ and ‘religious merit’. Some of these can help in deepening our understanding of the market. From its original Vedic root of ‘holding up’, it carries connotations of balance, harmony, and moral well-being, both for an individual and society. Hence, it 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 corruption scandals during the Congress-led UPA-II Government, which was captured in a Dainik Bhaskar headline thus: ‘Dharma has been wounded.’

However, dharma has its limits because every society has its crooks. Therefore, 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.

THAT INDIA IS rising in the 21st 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 three ‘twice-born’ higher varna in the social hierarchy. Merchants and bazaars emerged early as centres of exchange in the towns of the Indus Valley (3300–1500 BCE), possibly even earlier 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 is a story of warring kingdoms, unlike China’s, which is a history of empires. Early on dharma placed limits on the power of Indian rulers. In China, the emperor was the source and interpreter of the law; in India, dharma (meaning ‘law’ in this context) existed prior to the king, and the king 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 Brahmins). And the answer to that oppression was a guru, like the Buddha, who came along periodically to deliver the people from oppression.

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 Vaishyas (merchants and farmers) 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; otherwise, the epic goes on to suggest, Vaishyas will shift to neighbouring kingdoms and the king will lose his tax base. ‘Shat bhaga’ or one-sixth was considered by the dharma texts, as well as by the Arthashastra to be the fair share of the king for maintaining peace and infrastructure. Thus, 15 per cent was considered the optimal tax rate, which roughly is the tax rate of Singapore today. Mughal rulers were castigated for charging 40 per cent, an excessive tax in people’s eyes.

There was purpose to economic activity and the ancients were acutely aware of it when they posited artha 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. But dharma, ‘moral well-being’, was generally considered a higher goal than artha. This meant that there was a right and a wrong way to pursue wealth and the constraints of dharma were meant to guide artha. Premchand Roychand, the cotton king of Bombay, is one of many businessmen who internalised this message. He made his fortune by stepping in to supply long-staple cotton to the mills of Lancashire when the American Civil War broke out in the 1860s and their supply of raw cotton was cut off. When the war was over, Bombay’s cotton market crashed, and with it came down the Bank of Bombay that Roychand controlled. Roychand was bankrupt, but he proudly recounted many years later that he slowly paid back the loans of his depositors and investors, beginning with widows—a true act of dharma.

The merchant has generally been well regarded in Indian history. 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 sometimes a figure of sympathy and other times of fun. The Mahabharata speaks of Tuladhara, a respected trader of spices and juices in Varanasi, who instructs surprisingly an arrogant, high Brahmin on dharma and 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’ (XII.253.35 ff). 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; he does not fix the price—the market determines the price; his gains and losses are not entirely 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.

OUR ANCIENTS BELIEVED that the pursuit of artha was meant to make the world a better place. The word, laabh, ‘profit’, was not a dirty word. In one of the dharma texts dealing with commercial law, Vijnaneshbara says, ‘Business is buying and selling for the sake of laabh. According to Naradashastra, ‘Profit is the desired and legitimate end of business’ (8.11). Contrast this with Jawaharlal Nehru’s statement to JRD Tata over lunch at Teen Murti in the mid 1950s. JRD had gently reminded Nehru that the public sector was also expected to make a profit. Nehru replied: “Jeh, profit is a dirty word. Let’s not spoil our lunch by thinking about it.” The point is that the socialist period between 1950 and was an aberration in Indian history. Socialists tended to confuse laabh (profit) and lobh (greed) in believing that only greed motivates business. Adam Smith clarified the distinction when he distinguished legitimate ‘self-interest’ and illegitimate ‘selfishness’. When it rains, I carry an umbrella. It is a self-interested act—nothing selfish about it. Lobh often harms another and thus it is selfish—example, a banker who bilks a debtor by keeping a loan outstanding.

The reforms after 1991 have been trying to recapture the old social contract of our society. They are grounded in the belief that artha makes a better world. Most thoughtful persons no longer believe in state ownership of the means of production and generally support the free market. They believe that the purpose of business is to lead society from poverty to prosperity. The first four decades after Independence is increasingly remembered as a dark period of India’s economic history, often labelled as ‘license, permit, inspector raj’ after the coinage of C Rajagopalchari. People increasingly think that India needs markets to bring prosperity, but they also understand that markets need to be embedded in institutional structures that make both the market and the state genuinely democratic and accountable.

It is a work in progress, however. Too many Indians still think that reforms make the rich richer and the poor poorer. They still confuse being ‘pro-market’ with being ‘pro-business’. They still conflate capitalism with ‘crony capitalism’. Hence, India continues to reform by stealth. The fault lies mainly with the reformers. No one has bothered to sell the market system. (Margaret Thatcher used to say that she spent only 20 per cent of her time doing the reforms and 80 per cent selling them.) No one has explained to Indians that a competitive market lowers costs and prices and improves the quality of products, and this tends to help everyone, not only the rich; in a reformed, competitive economy, business persons do not get special favours—that happens in socialist economies where the government retains the power to give out licences and permits. Yes, the market system has a tendency towards inequality, but at this stage in India’s development, Indians should be concerned more with opportunity than inequality. The market system combined with an outstanding education and health system will do more to create opportunities than state ownership of production.

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. (Example: the gun lobby defends itself in the name of liberty in the US; the ‘35 hour work’ law lobby defends itself in the name of equality in France; Hindu conservatives still justify caste inequality on the basis of ‘swa-dharma’.)

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 PV Kane referred to the Constitution as a ‘dharma text’. For these men and women, nation building was a profoundly moral project. The ideal that continues to exist in the Indian imagination is that of a ruler guided by dharma. The rage against the corruption scandals during the UPA-II’s tenure related to the wounding of dharma. The English-speaking elite in India has, however, forgotten the nation’s code word. Mahatma Gandhi was the last person who tried to sell the Enlightenment ideals of our Constitution—liberty and equality—in the language of sadharana dharma. Unfortunately, Gandhi died just after Independence and Nehru was too much of a Westernised liberal to connect with the people. Hence, the nation has been slow to internalise the rule of law and there is pervasive corruption. To sell the Constitution as a ‘dharma text’ remains an unfinished project. Only when the Constitution’s ideals are transformed into ‘habits of the heart’ (in the words of a wise Frenchman, Alexis de Tocqueville, who wrote the best book on democracy) will governance truly improve.

Most people think that markets are efficient but not moral. The market is neither moral nor immoral. Only human beings are. I have tried to show that there is an underlying foundation of dharma that supports both the market system and democracy. The market constitutes a school of dharma that provides the opportunity and incentive for people to cooperate with one another for the sake of mutual gain. While the market does impose its own socialising discipline to some degree, the larger theme of this essay is that dharma does not simply emerge spontaneously once the state retreats. The ability to cooperate socially is dependent on prior habits, traditions, and norms. Hence, a successful market economy, like a successful democracy, is dependent on dharma, understood as the glue of trust between people. If dharma is abundant, then both markets and democratic politics will thrive, and the market can in fact play a role as a school of dharma that reinforces both markets and the state.