With the announcement of the Socialist pattern of Society as our goal, the raising of the tempo of planning and the inevitable concentration of economic power in the hands of the State, the question of the relation between Free Enterprise and Democracy has assumed great significance. Some time back, the Prime Minister at a press conference in Calcutta expressed the view that the idea of equating democracy with private enterprise was not justified. He is further reported to have observed that in the last analysis democracy and unrestricted private enterprise were incompatible.
As against this view, there is a large section of opinion in the country, which believes that the present trend towards State Capitalism, under the ostensible plea of a Welfare State, threatens as much to enslave man to the State as a totalitarian State. It is maintained by them that democracy is a political concomitant of Free Enterprise, and with every step towards a diminution of Free Enterprise, democracy is hastening towards its end. It is not a mere accident or coincidence of history that democracy has grown and flourished along with the system of free enterprise. Issues are unfortunately confused by the dogma of Marxism, identifying ends with means. The heresy of yesterday has become the orthodoxy of today. It is, therefore, essential to examine the question of Free Enterprise and Democracy afresh in their proper perspective.
It should be clear to any student of economic history that Free Enterprise in our country and elsewhere is not advocated today in terms of the outmoded doctrine of laissez faire. To talk, therefore, in terms of unbridled private enterprise at the present time is to confound the issues and lose sight of the necessary historical background and perspective. The laissez faire is dead as dodo. It is a singular triumph of the dynamic urge of democratic ideals to have developed a new awareness of social justice and equality. The sphere of the activities of the State has widened considerably.
Balancing power
In the economic field, the State wields today enormous power and is able to regulate, and even control, processes from the supply of raw materials to the quantum of production. With the apparatus of Import-Export regulations, it considerably affects both the internal and the external trade of the nation. By means of the powerful instrument of taxation, it adopts suitable monetary and fiscal measures, so as either to curtail distributed profits and/or limit dividends. The vast amount of Labour legislation regulates the relations between the employers and the employees and safeguards the rights of the workers. Again, the modern State by its entry in the sphere of basic and strategic industries and certain essential utilities and services, commands vast power of its own so as to counterbalance the free enterprise sector of the community.
In short, there has evolved a balance of a mixed economy, in which free enterprise and State enterprise each have an important and autonomous role to play, functioning alongside of each other, to meet the needs of the people. In fact, under the system, the right of ownership is limited and circumscribed in numerous ways so that ownership of the means of production no longer affords any absolute power. It is against this background that the problem of inter-relationship between socially regulated free enterprise and democracy has to be examined and considered.
Both the approaches have proved illusory in the modern world. In the Communist countries, in the pursuit of the Marxist-Leninist theories, all economic power has been transferred to the State, and instead of a ‘society of free and equal’ we have the spectacle of a totalitarian tyranny. Nor has the experiment towards common ownership in democracies like Britain created any sense of confidence. A mere change of ownership is no guarantee for ensuring that an industry would be run on Socialist lines. On the contrary, it has created problems arising out of undue concentration of economic power in the political hands and the growing bureaucratic despotism, both of which have in practice meant a serious curtailment of democracy.
A system of economy in which the public sector goes on continuously expanding its sphere of activity inevitably involves the contingency of a system of controls and regulations. There is also a process of regimentation which grows apace with this development. New vested interests develop pledged to the continuance and expansion of the system. In course of time, the system breeds a sense of intolerance amongst the members of the ruling party and the bureaucracy, which is expected to implement its programmes and policies. Once the decisions are taken by the Planners and the Government, the same are hailed as national decisions and any dissent of opinion by a minority, however effective, is likely to be viewed with widespread suspicion. Even honest criticism is likely to be dubbed as “dis-loyalty” or “an unpatriotic activity”. This denial of freedom is the very negation of democracy.
What is the remedy against such a danger? A concept of mixed economy, as enunciated above, alone provides the necessary balance of power between the State and Free Enterprise, and amongst the components which compose Free Enterprise. It is necessary that the State and Free Enterprise should function simultaneously in the economy, balancing each other in the interest of the achievement of the common objective. It is equally necessary that the system of Free Enterprise should be allowed to function, searching for new horizons and opening up ever-widening range of outlets for self-expression and service. Within the over-all regulations provided by the democratic State, the system of Free Enterprise provides the necessary and essential balance of power between the contending forces. In a free economy, the producer, the worker, the consumer and the investor present a system of checks and balances, ensuring harmonious functioning of the economy. The power wielded by the sellers is matched by the power of the buyers, the power of creditors by the power of borrowers, and the power of employers by that of Trade Unions. No single factor can ever hope to dominate a given situation for a long time, unless an agreement is reached safeguarding the interests of all the constituent units.
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Democracy depends on free enterprise
The system of free market economy presents a close to the system of political democracy. “A free market economy is the most perfect possible example of rule by the will of the people. Political democracy has nothing to approximate it. In a political democracy, the people vote periodically or occasionally for and against a few candidates or issues at a time. In a free market economy, they vote constantly for and against thousands of competing goods and services. Their votes, instead of being merely affirmative or negative, express minute gradations and preference, and these gradations shift not only daily, but hourly.” It is true that sometimes developments in the shape of monopoly and cartels tend to distort the functioning of the system. In fact, many of the evils attributed to Free Enterprise and profit making are largely the results of existence of monopoly and consequent wide disparities in the distribution of wealth and income. Those who advocate the system of free market economy like the newly-established organisation, the Forum of Free Enterprise, have made their position unequivocally clear on the question of monopoly. As stated in its Manifesto, “Monopoly of any kind, whether State or private, is undesirable. Should any single organisation arrogate to itself the right to do everything, it would upset the delicate mechanism of a free and democratic social order”.
As against this unhealthy trend developing in the State Sector, the development of Joint Stock Enterprise truly represents a picture of co-operative endeavour on the part of the people. Having regard to the magnitude of the modern industrial operations, no single firm can get together all the resources to start any such enterprise. Unless such entrepreneurs by virtue of their credit-worthiness and their record of achievements are able to mobilise the savings of hundreds and thousands of small investors in a free and voluntary manner, no industrial progress would be possible.
Further, what is called the private sector is neither small nor private, but comprises, as the Planning Commission rightly point out, “millions of small producers, scattered all over the country”. It is such small people who constitute in themselves the composite roles of the entrepreneur, investor, manager, technical man, salesman and the owner. With these should be grouped millions and millions of small shop-keepers, tradesmen, craftsmen and artisans, skilled workers and peasant proprietors, who all form an integral part of the system of Free Enterprise, and the backbone of our democratic system. It is in this sense that Free Enterprise and Democracy are closely dependent on each other.
If the essence of democracy is to vest the ultimate political sovereignty in the hands of the people, it should also vest economic power in the hands of the people at large. Any attempt at extending the public sector in a manner so as to dominate the entire economy will only result in undermining the freedom and autonomy of individuals and groups, which are essential for the full and unfettered growth of democracy. In an economy which seeks to reduce a large number of its citizens to the status of employees of a State Corporation or the agent of its Trading Corporation, the individual can venture to express his political opinion only at the peril of his own economic existence. Whether he is a peasant, working in a co-operative farm, a worker belonging to a trade union of a State-owned industry, or an employee of a State-run service, he must forfeit his political freedom.
A time has come for all those who talk in the name of democracy and recognise the value of individual freedom, to accept Free Enterprise as indispensable to a democratic way of life. It cannot then be hamstrung by a whole network of legislative and administrative restrictions, throttling its very existence. It is their duty to ensure that freedom is, in fact, maintained and not crushed out of existence. Free Enterprise is not to be accepted merely on sufferance, to be tolerated on grounds of political expediency, with the sword of Democles hanging over it in perpetual threat. It has a legitimate and a vital function to perform in democratic planning. If historical experience has any meaning, we have to see that the new India of our dreams, which we are building up, derives its strength from the solid foundations of democracy and freedom and not from the top-heavy buttresses of regimentation and concentration of power in a few hands.
This essay is part of a series from the Indian Liberals archive, a project of the Centre for Civil Society. This essay is excerpted from a booklet (Free Enterprise And Democracy) published by the Forum of Free Enterprise, based on an article by AD Shroff, published in February 1956. The original version can be accessed here.