Adam Smith : American & Indian Experience

Introduction

The year 1776 was the year in which  was a book published in London. It said that nations grow rich through free exchange and fair rules.

The book was An Inquiry into the Nature and Causes of the Wealth of Nations. Its author was Adam Smith. He was a Scottish moral philosopher. He was also a careful student of trade and law and human motive.

Two societies were deeply tied to that year. One was the thirteen American colonies. The other was Bengal and the wider Indian lands. Bengal had come under the rule of a British trading company only a few years earlier. Both places became testing grounds for ideas about empire and markets and justice. Both were watched by the same imperial power.

Their paths split. America rose to become the largest economy on earth. India fell from a very high place in world output to a very low one. After 1947 India tried a new path of state planning. That path also brought slow growth for decades. Today the two nations sit far apart in income.

This article asks why. It tests one claim. The claim is that America was treated fairly enough by the rules of economic liberty. It also says India suffered first under colonial manipulation and then under a planning system that deprived the masses of growth. Colonial India was not a case of Smith applied. It was a case of Smith ignored. America was not a case of pure free trade. It was a case of self rule joined with sensible state action. Nehruvian planning was a real attempt at justice. It still gave poor results for ordinary people in its long middle years.

Adam Smith was born in 1723 in Kirkcaldy in Scotland. He studied at Glasgow and at Oxford. He later became a professor of moral philosophy at Glasgow. He was part of the Scottish Enlightenment. His friend David Hume was a close companion in thought.

Smith lived in an age of mercantilism. Mercantilism was the common economic doctrine of European states. It held that national wealth meant stocks of gold and silver. It held that a nation grew rich by exporting more than it imported. It favoured tariffs and monopolies and colonies. It treated trade as a struggle where one side must lose.

Smith thought this was wrong. He thought wealth lay in the yearly produce of a nation. It lay in food and cloth and tools and services. It grew when labour became more skilled and more productive. It did not grow by hoarding metal.

He also worried about who benefits from rules. He saw that merchants and manufacturers often shape laws to protect themselves. He wrote that people of the same trade seldom meet without plotting against the public. This was a sharp remark about business power. It shows that Smith was no simple friend of the rich. He was a friend of open competition. He distrusted any group that used the state to gain private advantage.

This point matters for the rest of the essay. People often paint Smith as a champion of greed. That picture is false. Smith wanted markets to serve the public. He wanted fair courts and honest officials. He wanted rules that stop the strong from crushing the weak.

The Wealth of Nations in Brief

The book opens with a famous example. Smith describes a small pin factory. One worker alone might make very few pins in a day. When the task is split into many steps the same workers make thousands. This is the division of labour. It is the first source of rising wealth.

The division of labour grows with the size of the market. A larger market lets people specialize more. Trade therefore widens the market. This is why Smith favoured open exchange. It lets each place focus on what it does best.

Smith then explains how prices guide decisions. When goods are scarce prices rise. Producers move toward those goods. When goods are plentiful prices fall. Producers move away. No central planner directs this. People follow their own interest and the result is order. Smith used the image of an invisible hand for this effect. He used the phrase only a few times in all his writing. It was a light metaphor. It was not a creed.

Smith named a system he called natural liberty. In it each person may pursue their own interest in their own way. The rule is that they must respect justice. The state has three duties in this system. It must defend the nation. It must protect people from injustice and oppression by others. It must build and maintain certain public works and institutions that private firms would not supply.

These duties are not small. Justice requires courts and police and contract law. Defence requires an army. Public works include roads and bridges and harbours. Smith also favoured public support for basic education. He feared that dull repeated work could stunt the minds of workers. He wanted the state to guard against that harm.

So the system of natural liberty is not a night watchman state in the thinnest sense. It is a state with limited aims but real duties. Its chief aim is a level field.

Smith also cared about wages. He argued that a society cannot be happy when most of its members are poor. He held that high wages are a sign of a thriving economy. He also held that masters have an edge in bargaining with workers because they can wait longer and combine more easily. These views make him more humane than many of his later admirers admit.

Moral Sentiments and the Question of Mercy

Smith's moral thought is found in The Theory of Moral Sentiments. He published it in 1759. It rests on sympathy. Smith says we judge our own acts by imagining how an impartial spectator would see them. This inner witness guides conscience.

In that book Smith discusses justice and punishment. He argues that justice is the pillar that holds up society. Without it the whole structure falls. He says that mercy has a place but not when it harms the innocent. This is the source of the saying that mercy to the guilty is cruelty to the innocent. The idea is plain. If a wrongdoer is forgiven without cost then the victims and the honest bear the cost.

This idea links the moral book to the economic one. Markets work only when wrongs are punished and contracts are kept. A thief who goes free makes every honest trader poorer. A ruler who protects favoured merchants from the law makes every other merchant weaker.

Now apply the idea to empire. When a powerful company breaks the law of fair dealing and the state shields it then mercy to the guilty becomes cruelty to the innocent. In Bengal the innocent were weavers and farmers. They had no voice in London. The guilty were those who used force and monopoly to take what they wanted. Smith's own rule of justice condemns that arrangement.

This is the strongest way to use the mercy line in the present argument. It does not praise colonial power. It judges it.

Smith on Empire and Colonies

Smith wrote at length about colonies in Book IV of his masterwork. He did not praise empire. He was a cold critic of it. His main claim was economic. He argued that the colonial monopoly harmed Britain as well as the colonies. By forcing colonial trade into British channels the law pushed capital out of its best uses. It gave a few merchants a gain. It cost the nation as a whole.

He argued that the cost of defending far colonies was heavy. Britain paid for wars and fleets to guard markets that it could have reached by plain trade. The profits went to a small group. The taxes fell on everyone.

He also made a bold proposal. If Britain could not make its colonies pay a fair share of imperial costs and if it could not give them seats in Parliament then it might do better to let them go. He knew this idea would never win favour. National pride would block it. Still he stated it as a rational course.

On America he was sympathetic to a fair settlement. He suggested that the colonies might be given representation in Parliament in proportion to the taxes they paid. He imagined that the seat of empire might one day move across the Atlantic if America grew larger than Britain. This was a striking thought. It showed that he took colonial rights seriously.

He praised the colonies for their quick growth. He explained it by two causes. They had abundant cheap land. They also had much freedom to manage their own affairs. He noted that settlers could rise quickly to be owners of land. High wages followed from the scarcity of labour. These facts made America a land of opportunity.

Smith was also critical of slavery. In his moral writing he said that the slave trade showed a harsh cruelty. In his economic writing he argued that slave labour was costly in the long run compared with free labour. A free worker has reason to be careful and inventive. A slave has no such reason. So he opposed slavery on both moral and practical grounds.

All this shows that Smith was no apostle of empire. If one wants to claim him for colonial rule one must ignore half the book.

The East India Company

The English East India Company was founded in 1600. It was a joint stock company with a royal monopoly on English trade to the east. For a long time it was just a trading firm. It bought cotton cloth and spices and other goods in Asia. It sold them in Europe.

In the middle of the eighteenth century it changed. The Mughal empire had weakened. Regional powers rose. The Company built armies. In 1757 it won the Battle of Plassey in Bengal. This victory made the Company a power in the region. It placed a friendly ruler on the Bengal throne. In 1765 it obtained the diwani of Bengal Bihar and Orissa. This was the right to collect land revenue. From that point a trading firm became a tax collecting state.

This was a grave shift. A company that has both guns and the right to tax has no need to compete. It can fix prices. It can force sellers to accept its terms. It can use public power for private profit.

Smith saw the danger. He wrote that a company of merchants is a poor sovereign. The merchant looks at profit. The ruler should look at the public good. When one body holds both roles the merchant side wins. The people are treated as a source of revenue.

Smith held that such a company was among the worst kinds of government for any country. I give his judgment in my own words because the point is clear without quotation. He said the interest of the governors of the Company was opposed to the interest of the governed. He did not think good rule could come from such a body.

His warning proved accurate. Company officials gathered private fortunes. Some returned to Britain as rich men known as nabobs. In Bengal the revenue demand was high. Weavers were pressed to work for Company agents on fixed terms. There were complaints of coercion. In 1770 a famine struck Bengal. It was a grim disaster. Estimates of deaths run into the millions. Many historians put it at about a third of the population of the region although exact numbers are uncertain. Heavy revenue demands and poor relief made it worse. A bad harvest was the trigger but policy shaped the scale of the damage.

Parliament did respond. The Regulating Act of 1773 and Pitt's India Act of 1784 brought the Company under more state control. The trial of Warren Hastings began in 1788. Edmund Burke led the charge for the prosecution. The trial dragged on for years and ended in acquittal. Yet it made abuses public.

Over time the Company lost its trade monopoly. The Charter Act of 1813 opened most of the India trade to private British merchants. The Charter Act of 1833 ended the Company's commercial role altogether. After the great rising of 1857 the Crown took direct rule in 1858. India became part of the British Empire under the Crown.

So the arc is clear. Smith's criticism was echoed in later reform. Yet reform did not end the basic structure. India stayed a possession whose rules were set in London for British interests.

Land Revenue and the Drain

The colonial state in India depended on land revenue. It was the largest source of income. How it was levied shaped rural life.

In Bengal Lord Cornwallis introduced the Permanent Settlement in 1793. The state fixed the revenue demand forever. It recognized zamindars as owners of land who must pay the sum. The aim was to create a class of improving landlords on the English model. The hope was that they would invest in better farming.

The results were mixed. Many zamindars did not invest. They lived on rents. The cultivators below them had weak rights. The fixed demand was high at first. Landlords who failed to pay on time lost their estates. In later years the state could not share in the rise of agricultural income because the demand was fixed. Yet the burden on the actual farmer often grew through rents and cesses.

In other regions the ryotwari system dealt directly with peasant cultivators. The mahalwari system dealt with village bodies. Each had its own faults. In all of them the demand was often heavy and rigid. A farmer who faced a bad season still had to pay or face loss of land. Debt to moneylenders grew. Land passed from cultivators to creditors in many areas.

Another feature was the drain of wealth. The term was made famous by Dadabhai Naoroji. He was an Indian thinker and later a member of the British Parliament. In his book *Poverty and Un-British Rule in India* he argued that India paid a steady tribute to Britain. This took the form of salaries and pensions of British officials and interest on debt and profits sent home. He called it a drain because it flowed out without a return in goods.

Romesh Chunder Dutt echoed the idea in his Economic History of India. He was a civil servant turned historian. He showed how heavy taxation and the fall of local crafts had left the country poor.

The home charges were a key item. India paid for the India Office in London. It paid for part of the cost of British troops. It paid interest on railway loans with guaranteed returns to British investors. Many of these costs were fixed by officials who answered to London.

Modern historians argue over how large the drain was. Some give very large estimates. Others say that the figures depend on shaky assumptions and that the real net transfer was smaller. The honest view is that the transfer was real and significant. Its exact scale is still debated. What is not debated is the principle. Taxes were raised from people who had no vote and spent partly for the benefit of others.

Under Smith's rule of justice this is hard to defend. A state should tax with consent and spend for the public good. Colonial India had neither.

Trade and the Fall of Indian Industry

In the early eighteenth century India was a great manufacturing land. Its cotton cloth was sold across the world. Fine muslin from Bengal was famous. Printed calico was fashionable in Europe. Indian steel and shipbuilding had good names too.

The economic historian Angus Maddison estimated that India held about a quarter of world output around 1700. By 1950 its share was about four percent. These figures are rough and the method is debated. Yet the broad story is widely accepted. India fell sharply in relative terms.

Several forces worked at once. The Industrial Revolution gave Britain machine made cloth at low cost. That is a real change in technology. It is not only a story of policy. Any handloom industry would have faced strong pressure.

But policy made the fall harder. In the early nineteenth century Britain imposed very high duties on Indian cloth. Some rates were very large. At the same time British cloth entered India at low duty. The trade was one way. Indian rulers had no power to protect their makers. The colonial government did not wish to.

Indian exports of fine cloth fell. India became a market for British yarn and cloth. It became a supplier of raw cotton and jute and indigo and opium and later tea. Weavers lost work. Many moved back to farming. The share of the population dependent on agriculture rose over the century. This is a sign of deindustrialization.

Some scholars say that the picture is too bleak. They point out that some crafts adapted and that new factories grew in the late century. They are right. Bombay's cotton mills began in the 1850s. Jute mills grew near Calcutta. Jamsetji Tata later set up a steel works at Jamshedpur in 1907. Indian business families built enterprises despite a hostile climate.

Yet the key point stands. India was held to free trade when it suited British makers. When Indian mills grew and competed with Lancashire the response was telling. In 1896 the government imposed an excise on Indian cloth to offset a small import duty. This was a clear sign of whose interest came first.

Here is the sharp contrast with Smith. Smith opposed tariffs that protect favoured makers at public cost. He would have opposed the closed British market for Indian goods too. But free trade as he meant it is trade among equals under fair rules. What India got was something else. It got open doors for imports without the freedom to shape its own tariff. It had no vote on its own trade policy.

Fiscal autonomy came only slowly. After the First World War the Fiscal Autonomy Convention of 1919 gave India some say. A commission in 1921 recommended discriminating protection for chosen industries. Even then the control of the imperial centre was strong.

Famines and the Welfare of the Masses

A fair test of any economic system is the welfare of ordinary people. Colonial India performs badly on this test.

Famines struck again and again. There were severe ones in the 1870s and 1890s and in the early twentieth century. The worst of the late period was the Bengal famine of 1943. It killed an estimated two to three million people. Wartime policy played a role. Rice supplies from Burma were cut off after Japanese conquest. The government prioritized supplies for the military and for some cities. Exports continued from some regions. Relief was slow. Historians still debate the exact weight of each cause. Many conclude that the famine was not a mere failure of the harvest. It was a failure of policy.

Economists such as Amartya Sen have argued that famines occur not only from lack of food but from lack of entitlement to food. People who lose their income cannot buy grain even when grain exists. He also observed that India has had no major famine since independence. He credited free press and democratic accountability. This view fits well with the larger thesis. Rulers who must answer to the public act differently.

Other welfare indicators tell the same tale. At independence in 1947 life expectancy was about thirty two years. Literacy was about twelve percent by the 1951 census. Most people lived in villages with little access to health care. Growth in income per head over the colonial period was very slow. Estimates for the half century before independence show it was close to zero or about a tenth of one percent a year. Total output rose a little. Population rose too. The gain per person was tiny.

Colonial rule did leave some assets. It left railways and a civil service and a legal code and a common language of administration. It left universities in a few cities. It left a unified market in some respects. These matter. Some scholars argue that they laid foundations for later growth. Yet they were built to serve imperial aims. The railways carried raw materials to ports. Their rates and routes favoured export trade. The costs were borne by Indian taxpayers.

Spending on education and health was low. In the late colonial years the state spent far less on schools than on the army. A state that takes a quarter of a nation's output as revenue but gives little in return fails the test of justice.

Was Colonial India a Case of Smith Applied

Now we can face the main question. Was colonial India a laboratory for Smith's ideas? The answer is no in the strict sense. It was a laboratory for something he opposed. Let us list the facts.

I. Smith opposed monopoly. The Company held a legal monopoly for long years.

II. Smith opposed the union of trade and sovereignty. The Company held both.

III. Smith favoured consent and fair taxation. Indians had no say.

IV. Smith favoured open and equal exchange. India's tariffs were set by the ruler for the ruler's gain.

V. Smith called for a justice that protects the weak. Colonial justice often protected the strong.

Yet there is a partial truth in the claim. British officials in the nineteenth century often used the language of free trade and laissez faire. They used it to justify policies of non interference during famines. They argued that state relief would distort markets. They feared that aid would breed dependence. Such arguments were drawn from a hardened version of classical economics. This is sometimes labelled Smithian. It misreads him. Smith did not argue that rulers should let people starve. He thought that justice and humanity must guide the state.

Thinkers such as Thomas Malthus and David Ricardo shaped colonial thought more than Smith did. Malthus taught at the East India Company's college at Haileybury. His ideas about population influenced officials. Utilitarians such as James Mill wrote a history of British India and held a post at the Company. John Stuart Mill also worked there. Such men brought their own doctrines. They often treated Indian society as backward. They believed in reform from above.

So a fair reading is this. Colonial India was a field where a distorted free market language met raw imperial interest. The result was the worst of both. The poor had no protection from the state. The rich had state support. That is not Smith. It is a counterfeit.

If we wish to say India was a laboratory of Smith we must say it was a laboratory of his warnings. It proved his fear about companies and monopolies right.

America Before 1776

Now turn to the other laboratory. The thirteen colonies on the Atlantic coast were British too. Yet their position was different from India's in several ways.

The settlers were mostly British migrants and their descendants. They carried English law and habits of self rule. Many colonies had elected assemblies. Local elites ran local affairs. The principle that taxes need consent was part of their inheritance. The slogan about no taxation without representation grew from it.

The colonies had abundant land. Native peoples held that land by long use. Settlers took it by purchase and treaty and force. For the settlers the effect was the one Smith noted. Land was cheap. Labour was scarce. Wages were high. A free man could hope to own a farm.

The colonies also traded widely. They sold tobacco and rice and indigo and timber and fish. They bought British manufactures. The Navigation Acts forced colonial trade through British ports and ships. Some goods could only be sold to Britain. Some manufactures were banned in the colonies. These were mercantilist rules. They irritated many colonists. Yet they were not as heavy as the burden on India. Smuggling was common. Enforcement was patchy.

After the costly Seven Years' War ended in 1763 Britain sought new revenue from the colonies. It passed the Stamp Act in 1765. It passed the Townshend duties in 1767. Colonists resisted. The Boston Tea Party of 1773 was a protest against a tax and against a company monopoly. It is worth noting that the target was the East India Company. The Tea Act gave the Company a favoured position in the colonial tea trade. Colonists saw a monopoly with state backing. That was the very kind of arrangement Smith disliked.

So the revolution had an economic strand. The thirteen colonies rejected rule from a distant parliament in which they had no seats. They rejected taxes without consent. They rejected company privilege. In July 1776 they declared independence.

Smith's book appeared in March of that year. The two events were not linked by cause. Yet they were linked in spirit. Both questioned the logic of empire.

The Institutional Foundation of America

After independence America built institutions that fit the system of natural liberty well. This is a big reason for its success.

First came the Constitution of 1787. It set up a federal government with defined powers. It created a single market across the states. The commerce clause barred states from taxing trade across their borders. This gave America a vast free trade zone inside its own territory. Smith's point about the size of the market applied to the whole continent.

Second came secure property rights. The Constitution protected property and contracts. State and federal courts enforced them. Patents and copyrights were protected too. Inventors could gain from their work.

Third came a stable public finance. Alexander Hamilton was the first Treasury Secretary. He had the federal government assume state war debts in 1790. He built a national bank. He set up a system that gave lenders trust. America gained credit at low cost. Its government paid its debts. This stands in sharp contrast with states that default and lose trust.

Fourth came wide ownership of land. The government sold or gave land to settlers. The Land Ordinance of 1785 laid out a grid for survey and sale. Later the Homestead Act of 1862 gave farms to those who worked them for five years. A nation of small owners is a strong base for a market economy. It spreads wealth and gives many a stake in order.

Fifth came public education. Many states built common schools in the nineteenth century. The Morrill Act of 1862 gave federal land to fund colleges of agriculture and engineering. These became the land grant universities. They trained farmers and engineers and spread new methods. This fits Smith's belief that the state should support education.

Sixth came open politics. Voting rights widened for white men in the early decades. Local governments were close to citizens. Free speech and a free press were protected. Elections gave a way to change rulers. Corruption existed and was often severe. Yet public anger could force reform.

Seventh came immigration. America took in millions of workers and entrepreneurs from Europe. They brought skills and energy. Many became farmers and factory workers and founders of firms. Labour supply grew along with land and capital.

These institutions did not come from a plan drawn by one mind. They arose from debate and compromise and conflict. Yet taken together they gave America what Smith thought a nation needs. They gave peace and fair courts and moderate taxes and wide freedom to try new things.

America and Protection

Here we meet a complication. America grew rich not under pure free trade. For much of the nineteenth century its tariffs on manufactured goods were among the highest in the world.

Hamilton argued in his 1791 Report on Manufactures that a young nation should protect its infant industries. He proposed duties and bounties. He thought that without help American factories could not compete with British makers who had a head start. Congress adopted some of his ideas in part.

Tariffs rose after the War of 1812. The Tariff of 1816 set protective rates. The Tariff of 1828 was so high that opponents called it the Tariff of Abominations. The southern states resented it because they exported cotton and imported manufactures. South Carolina threatened to nullify it in the crisis of 1832. A compromise lowered rates for a time.

Henry Clay championed what he called the American System. It joined protective tariffs with public roads and canals and a national bank. The German economist Friedrich List later argued in a similar way that late developers need shelter for their industries. He had lived in America and drawn ideas from it.

After the Civil War Republicans kept high tariffs. The Morrill Tariff of 1861 had begun a rise. For decades the average duty on dutiable imports stood near forty to fifty percent. America grew fast behind this wall. By the late nineteenth century it had passed Britain in manufacturing output.

How should we judge this record? Two views are common.

One view says tariffs helped. They nurtured industries such as textiles and steel until they were strong. The economist Ha Joon Chang has argued that rich nations used protection while they were poor and then urged free trade on others after they had grown. He called it kicking away the ladder.

The other view says America grew fast despite tariffs and not because of them. It had huge natural resources and a large free internal market. It had fast population growth. Tariffs may have raised costs and slowed some sectors. Some economists find that the effect was small either way.

For our argument the point is this. America had the power to choose. It set its own tariff. It could raise or lower it by its own politics. That is the core of the difference with India. American protection was a decision of an independent legislature. Indian free trade was a decision of an outside ruler.

So the contrast is not free trade versus protection. It is self rule versus imposed rule. Smith said that nations prosper under liberty and justice. A people who govern themselves can correct their errors. A people who are governed from afar cannot.

The Dark Side of the American Record

It would be unfair to praise America without noting its crimes. The word fair in the user's thesis needs care.

Slavery was the deepest wrong. In 1776 about half a million enslaved Africans lived in the colonies. By 1860 there were about four million. They built much of the wealth of the southern states. Cotton grown by enslaved labour was America's largest export in the decades before the Civil War. The economy of the North was tied to it through finance and shipping and textile mills.

Smith had argued that slavery was both cruel and inefficient. America showed that it could be profitable for owners for a long time. This was a harsh lesson. It shows that markets do not by themselves end injustice. Law and politics must do it. The system of natural liberty needs justice as a condition. Where the law protects slaveholders the market serves cruelty.

The Civil War ended slavery in 1865. The Thirteenth Amendment abolished it. Reconstruction gave black citizens hope for a time. It was then undone in the South by violence and by laws of segregation. These laws lasted until the civil rights era of the 1960s. For a century black Americans faced barriers to land and schooling and fair pay.

The treatment of Native peoples was also brutal. Treaties were broken. Lands were taken. Removal policies such as the forced march of the Cherokee in the 1830s caused great loss of life. Wars on the plains continued into the 1890s. The expansion that gave settlers cheap land came at a heavy cost to others.

Labour also faced harsh conditions in the Gilded Age. There were child workers and long hours and violent strikes. Monopolies and trusts grew in oil and steel and railways. Public anger led to reform. The Sherman Antitrust Act of 1890 was an early response. The Progressive Era brought rules on food and railways and finance. Later the New Deal built a social safety net after the crash of 1929.

So America was not fair in any simple sense. It was a society with deep wrongs that also had a path to repair. Its institutions allowed protest and reform. Slaves and their descendants and workers and women used law and speech and vote to push for change. The repair was slow and incomplete. Yet it was possible.

A more careful version of the thesis is this. America was not innocent. But it had the freedom to rule itself and to fix its mistakes. India under colonial rule lacked this. The best comparison is not between virtue and vice. It is between a nation that held the levers of its own policy and one that did not.

India in 1947

India became independent on 15 August 1947. The moment was marked by joy and by tragedy. The country was divided. Partition brought mass killing and the movement of millions of refugees. The new state faced huge tasks.

The economic inheritance was poor. Output per person was low. The mass of people worked in farming with old methods. Industry was small. Literacy was low. Health was poor. Foreign trade was tilted toward a few raw goods. Large sterling balances had built up in London during the war. They were a form of credit that India held against Britain. They were released only in part over time.

The leaders had to choose a path. They were tired people of freedom movement. Jawaharlal Nehru became prime minister. Sardar Vallabhbhai Patel handled the integration of the princely states. B. R. Ambedkar led the drafting of the Constitution. The Constitution came into force in January 1950. It set up a democratic republic with universal adult suffrage. This was a bold step in a poor land with low literacy. It gave every adult a vote from the start.

For the economy the leaders held a shared view. Colonial rule had left India poor. Free trade and private capital under foreign control had failed to build industry. They believed that the state must lead. This belief drew on several sources. One was the experience of the Great Depression which shook faith in markets. Another was the Soviet Union's rapid industrial growth in the 1930s. Another was the Fabian socialism that Nehru had met in Britain. Another was the long nationalist critique of the drain.

Even business leaders agreed that the state must play a large role. In 1944 a group of leading industrialists including J. R. D. Tata and G. D. Birla published the Bombay Plan. It called for a big public role in heavy industry and infrastructure. They thought private capital was too thin to build such things alone. So the decision for planning was not only the work of socialists. It had wide support.

This is important for fairness. The planners were not villains. They saw real needs. They wanted to end poverty and build national strength. They wished to avoid dependence on the old ruler. Their motives were sound. The question is whether their method worked.

The Nehruvian Vision

Nehru's vision mixed several strands. He wished for a modern and scientific India. He spoke of dams as the temples of modern India. He believed in heavy industry as the base of self reliance. He cared deeply about equality. He feared that unchecked private power would repeat the old pattern of privilege. He was also a committed democrat who disliked the harsh methods of communist states.

He chose what was called a mixed economy. The state would own and run key industries. The private sector would work in other areas under state guidance. Planning would set priorities.

The Planning Commission was set up in 1950. The First Five Year Plan ran from 1951 to 1956. It stressed farming and irrigation. It was modest and sensible. It benefited from good rains. Output grew faster than planned.

The Second Five Year Plan began in 1956. It marked a sharp turn. It was shaped by the statistician P. C. Mahalanobis. It stressed heavy industry. The idea was to build capital goods first. Steel and machines and power would form the base. Consumer goods would follow later. The plan assumed that foreign trade could not be relied on. It gave a leading place to the public sector.

The Industrial Policy Resolution of 1956 reserved key industries for the state. These included arms and atomic energy and heavy machinery and mining and steel and air and rail transport and power. Another set of industries would be open to both state and private firms but with the state taking the lead in new units. The rest were left to private enterprise subject to licences.

The Industries Development and Regulation Act of 1951 required licences for setting up or expanding factories. Over time a thick web of controls grew. Firms needed licences to start and to grow and to change their products. Imports needed licences. Foreign exchange was rationed. Prices of key goods were fixed.

Behind this was a view of trade. Nehru and the planners distrusted exports as an engine of growth. They feared that world prices for primary goods would fall. They thought that India's market was large enough to support domestic industry. So they chose import substitution. The aim was to make at home what had been imported. High tariffs and quotas shielded local firms.

The vision had a moral core. It sought to use the state for the masses. It aimed to give jobs and to spread wealth. It wished to build a self reliant nation that could not be coerced from outside. The vision was honest.

Planning and the Licence Permit Raj

Over time the system of controls grew heavy. By the 1960s and 1970s it had become known as the licence permit raj. The name came from the web of permits that firms needed. Several features hurt performance.

I. Entry was blocked. A new firm needed a licence. Officials decided who got one. This created delay and corruption. It protected existing firms from new rivals.

II. Capacity was capped. A licence set how much a firm could produce. Efficient firms could not expand. Poor firms stayed alive.

III. Imports were restricted. Firms lacked access to modern machinery and parts. Technology fell behind world levels. Consumers faced shortages and poor quality. Waiting lists for scooters and telephones and cars were common.

IV. Small scale reservation. Many goods were reserved for small firms. Large firms could not make them. Labour intensive sectors such as garments and toys could not grow to scale. India missed the chance that East Asian economies used to build export industries.

V. Public sector weakness. State firms often had poor management and political interference. Many ran at a loss. Jobs were hard to cut. Prices were set for social ends not for returns.

VI. Labour rules. The Industrial Disputes Act of 1947 made it hard for firms above a size to dismiss workers. This discouraged hiring in formal firms. Many businesses stayed small to avoid the rules.

Later steps made things tighter. After Nehru's death in 1964 his daughter Indira Gandhi took power in 1966. In 1969 fourteen major banks were nationalized. In 1969 the Monopolies and Restrictive Trade Practices Act limited big firms. In 1973 the Foreign Exchange Regulation Act squeezed foreign firms. Some foreign firms such as Coca Cola and IBM left India in 1977. In 1980 more banks were nationalized. Top marginal tax rates on income reached very high levels in the early 1970s. The combined rate with surcharge was above ninety seven percent in 1973 and 1974. Such rates invited evasion and black money.

Agriculture saw mixed results. Zamindari abolition ended the old landlord class in many states. This was a major social change. Yet land ceilings were evaded and tenant protection was weak in many places. Food shortages in the mid 1960s forced India to rely on American grain aid under Public Law 480. Two bad monsoons deepened the crisis. This humbling led to the Green Revolution. High yielding wheat seeds and fertilizer and irrigation raised output in Punjab and Haryana and western Uttar Pradesh. M. S. Swaminathan and C. Subramaniam were among those who drove it. By the 1970s India was nearly self sufficient in grain. It was a great success. Yet it was a policy shift that gave farmers price support and inputs. It was less a triumph of planning than of practical correction.

The cooperative dairy movement was another success. Verghese Kurien led Operation Flood from 1970. It made India the largest milk producer in the world over time.

The Record and the Defence

How did India perform under this system? The economist Raj Krishna coined the phrase Hindu rate of growth in the late 1970s. It meant a steady growth of about three and a half percent a year in total output. With population growth near two percent the gain per person was about one and a half percent. This was better than the colonial record. It was far below the pace of East Asia.

South Korea and Taiwan and later China grew at seven to ten percent a year over long spans. They started at income levels near India's in the 1950s. By the 1990s they had left India far behind. Their path joined state guidance with an outward turn. They pushed exports and used competition abroad as a discipline. India chose the opposite.

Poverty fell slowly. The share of people below the poverty line stood near half of the population in the early decades and declined only a little until the 1980s. Millions stayed without schools or clean water or health care.

The critics say that the system had a deep flaw. It put the judgment of officials above the choices of people. It gave power to those who controlled permits. It rewarded those who lobbied well and not those who produced well. It denied the poor the gains of growth. This is the root of the claim that the system worked at the cost of the masses.

The deprivation of the masses was not only a result of controls. It was also a result of neglect of the public goods that Smith himself wanted the state to provide. The state tried to run steel plants but did not make sure that every child could read.

The Turn of 1991

A series of reforms began slowly in the 1980s. Rajiv Gandhi eased some licences and cut some taxes. Growth rose to about five and a half percent a year in the decade. But it rested on foreign borrowing and fiscal deficits.

The crisis broke in 1991. The Gulf War had raised oil prices. Remittances from workers in the Gulf fell. Political turmoil shook confidence. Foreign exchange reserves dropped to a level that covered only a few weeks of imports. India pledged part of its gold to raise foreign currency. It was a national humiliation.

The new government under P. V. Narasimha Rao chose a bold course. Manmohan Singh was finance minister. In July 1991 they devalued the rupee. They scrapped industrial licensing for most industries. They cut import duties sharply over time. They opened the door to foreign investment. They reformed the tax system and the financial sector. The reforms did not come from a sudden change of belief. They came from necessity. Yet they were deep.

The result was a steady rise in growth. From the 1990s through the 2000s the economy grew at about six to nine percent a year. The software and services industries boomed. Telecoms spread to hundreds of millions of people after private entry. Poverty fell faster. The share of people living in extreme poverty dropped sharply over the following decades. A large middle class appeared.

This is the natural experiment that supports the critics. When the same people and the same land and the same institutions worked under fewer controls the economy grew faster. The jump was too sharp to be an accident. Many scholars accept that policy mattered a great deal. Others stress that the shift in attitude of the government began earlier in the 1980s. Both are right.

Yet reform remains incomplete. Land and labour markets are still hard to use. Courts are slow. A heavy backlog of cases delays contract enforcement. Manufacturing has not grown as fast as services. Many workers remain in low productivity farming or informal work. Education and health quality still lag in many states. These are the very areas where Smith wanted a capable state. So we may assume that India's reform in 1991 was a move toward Smith's system of natural liberty. It was only a move. The state still struggles with the basic duties of justice and public goods.

Two Poles in Numbers

How far apart are India and America today? The gap is huge although exact figures change each year.

Income per person in America is about eighty thousand dollars at market exchange rates. In India it is about two and a half thousand dollars. The ratio is roughly thirty to one. Measured by purchasing power the gap is smaller. India's income per head is then nearer ten percent of America's. Either way the gap is vast.

India has grown into one of the largest economies by total size. Its population is about one and a half billion. That is more than four times that of America. So total output is large even though income per head is low.

In 1700 on Maddison's estimates India held about a quarter of world output. America was tiny. In 1950 America held about a quarter or more of world output. India held about four percent. In a span of two and a half centuries the two had swapped places.

This reversal is a striking fact. It cannot be explained by geography alone. India had fertile land and a long record of trade and skill. America had rich land too but had been settled by Europeans only recently.

It cannot be explained by culture alone. Indian merchants and artisans were famed for skill. Indian business families such as the Tatas and Birlas built firms that stand today. Indian migrants abroad have done very well in America. This shows that the people are not the problem. In America Indian immigrants rank among the highest earning groups. The difference lies in the system they work within.

This last point is a strong clue. When people of the same stock work under different institutions they get very different results. Institutions matter. This is the lesson of Smith's book. Fair courts and secure property and open markets make people prosperous. Their absence keeps them poor.

Why the Paths Diverged

Let us now gather the causes. I list six.

I. Control over policy. America set its own laws from 1776. India did not until 1947. During the crucial century of industrial change India's tariffs and taxes and spending were set elsewhere. That cost the country the chance to build industry when Britain did.

II. Extractive versus inclusive institutions. Colonial India's state was built to extract revenue and goods. American institutions were built by settlers who meant to stay and to govern themselves. This difference echoes the work of economists such as Daron Acemoglu and James Robinson. They argue that nations prosper when institutions give broad groups a stake in growth. Extraction by a narrow group leads to stagnation.

III. Land and ownership. America had wide ownership of farms. India had heavy debt and rents on peasants. Small owners invest. Tenants in debt cannot.

IV. Education. America had early mass schooling. India had very low literacy at independence. Skills drive growth. A nation that does not teach its children wastes its main asset.

V. Openness to competition. America had a vast home market with free internal trade and vigorous competition. India after 1947 shut its own market to outside rivals and also limited internal competition through licences. Firms had little reason to improve.

VI. Rule of law. America had courts that enforced contracts and protected property for most of its free citizens. India has had a strong written constitution but weak enforcement in practice. Long delays make contracts hard to rely on.

These six causes show why Smith's thesis fits. The factors he named as the pillars of wealth are the very ones where the two differ. Peace and justice and moderate taxes and open markets give prosperity.

Justice and the Cost of Mercy

Return now to the mercy line. How does it shed light on the story?

Smith's point was that justice cannot bend without harm to the blameless. Let us apply it to three moments.

First the colonial moment. The state failed to punish those who used monopoly and force. It showed mercy to the guilty. The innocent weavers and cultivators paid. Famine relief was withheld at times in the name of principle. The principle was misapplied. Those who most needed help were told to bear the cost of market rules. That is a cruel mercy to the strong.

Second the planning moment. The state in free India often showed leniency to inefficient public firms and to protected private firms. They were shielded from competition and from loss. Their mistakes were paid for by consumers and taxpayers. Poor buyers faced high prices and shoddy goods. Workers in the informal sector were shut out of the protected formal sector. The protected few gained at the cost of the unprotected many. Here again mercy to the guilty was cruelty to the innocent. The guilty in this case were not villains. They were firms and officials who did what the rules rewarded. Yet the effect was the same.

Third the American moment. America's own record shows the same lesson. Mercy to slaveholders and to the powerful trusts meant cruelty to the enslaved and to workers. When the law at last held the powerful to account justice improved.

The moral is that the rule of law must apply to all and especially to the strong. A system that exempts the strong is not a market system. It is a system of privilege.

This also warns against a lazy use of Smith. Some people use his name to oppose any rule on business. That is a mistake. Smith favoured strong rules against fraud and monopoly. He wanted a state that is firm toward the powerful. Free markets need good rules and honest enforcement.

Lessons for Today

What can present policy learn from this long story? Let me offer lessons in simple form.

I. Build the rule of law first. Fair and fast courts are a core public good. Faster contract enforcement would lift Indian growth. It would help small firms most.

II. Educate every child. Basic schooling and health are the best investments. They were the weak point of the planning era. They remain a task today.

III. Keep markets open and competitive. Let firms enter and exit. Let them import and export. Let prices guide choices. Where firms have power break up or restrain them.

IV. Use the state for what only it can do. Defence and justice and roads and schools and public health are real duties. A state that does them well earns trust. A state that tries to run every factory does them badly.

V. Be honest about history. Colonial wrongs were real. They explain part of the gap. But they do not excuse policy errors after independence. A nation that blames only the past cannot fix the present. A nation that ignores the past cannot understand its own scars.

VI. Mind the poor. Growth must reach them. Smith held that a nation cannot flourish if most of its people are poor. Cash support and public services can help. Such steps should be designed to keep work incentives intact.

VII. Beware of dogma. Neither pure market faith nor pure state faith has held up. The best outcomes joined open markets with a capable state and a free society.

Conclusion

In 1776 Adam Smith gave the world a book that still shapes debate. It teaches that wealth grows through specialization and trade and good rules. It warns against monopoly and against rulers who serve merchants. It rests on a deeper moral view found in his earlier work. Justice is the pillar of society. Mercy to the guilty is cruelty to the innocent.

Two laboratories of empire tested these ideas in different ways. America broke from the empire and took charge of its own rules. It built courts and markets and schools. It used tariffs and public aid in ways that suited its own interests. It did terrible wrongs to enslaved and native peoples. Yet it kept the freedom to correct itself. It grew to be the richest large nation.

India stayed under imperial rule for nearly two centuries after Plassey. Its taxes and tariffs served others. Its crafts declined. Its people faced famine and low schooling. This was not Smith applied. It was Smith betrayed. It was the very rule of company and monopoly that he feared.

After 1947 India chose a new road. The leaders sought justice and self reliance. They built fine institutions and kept democracy alive. Yet they put too much faith in permits and plans. They neglected basic schooling. For decades growth stayed low and the poor gained little. After 1991 a partial return to open markets brought faster growth and falling poverty.

Te two nations now stand at different poles of income. The gap is not fate. It arose from choices about who held power and what rules they set. It can be narrowed by better choices. India has the people and the talent and the democracy it needs. It must now build the courts and schools and open markets that Smith saw as the road to wealth.

The final lesson is moral as well as economic. A just order protects the weak from the strong. It does not shelter the guilty at the cost of the innocent. Whether the guilty are colonial monopolists or protected firms or corrupt officials the rule is the same. When justice bends the poor pay. When justice holds the nation rises.