THEORETICAL PRESUPPOSITIONS 61
The trend towards increasing liberalisation, in fact, started from the early seventies and has finally culminated in the current "New Economic Policy".
^However, while the current economic policy has to be seen as pan of a process of liberalisation starting earlier, the qualitative transformation in th^ extent M liberalisation which has recently occurred cannot be glossed over. It is in this context that the whole package has to be seen as an interaction between the ideology projected by the IMF-World Bank circles and the logic of the Indian government's earlier policies.
As far as the exact theoretical basis for the alleged advantages accruing from this all-encompassing liberalisation is concerned, this is seldom explicitly spelt out. However, it could be argued that the underlying basis for liberalisation is the implicit assumption that the free and unfettered working, of the market mechanism leads not only to an efficient solution for the economy, but also growth.
Liberalisation and the Closed Economy
When we critically review the theoretical basis for liberalisation, it should be clear at the outset that we make no claims towards orginality. We merely oudine the relationship between free competition and optimality within the confines of the neo-classical framework itself. Though this is something which any undergraduate student of economics should be aware of, spurious arguments on questions of optimality, efficiency, etc., are advocated, as though there was nn critique of notions of simplistic relationships between the operation of the market mechanism and efficiency within the neo-classical framework. .
As is well known, one criterion of optimality arising from the free play of market forces is associated with Pareto. According to standard welfare economics, if free competition exists, and if every consumer maximises his utility, and if every firm maximises its profits, then Pareto optimal conditions would exist throughout the economy. That is, there would be Pareto optimal allocation of goods among consumers, productive efficiency in the allocation of inputs across different industries and optimal relative outputs.
The extensive liberalisation which is being undertaken in the Indian economy today, is ostensibly to give a freer play to the operation of the market forces, which in turn is supposed to lead to a more efficient functioning of the economy. This entire viewpoint seems to have its theoretical basis in a simplistic notion of Pareto optimality.
Firsdy, even if we accept that free competition leads to Pareto optimality, it does not automatically follow that this is also an ideal situation from the social point of view. This is because Pareto optimality completely sidesteps the question of income distribution.
Secondly, as is well known, with the existence of monopoly or decreasing cost industries, a strict acceptance of marginal optimality conditions could actually lead to losses so that an efficient solution under capitalism