If we look at the history of development of free market economies it is evident that from the beginning of the 19th century the growth rate of these countries was phenomenal; both in terms of GDP as well as social development index As industrialization grew there were more and more refined industries which pushed the workers away from less skilled industries to highly skilled ones and machines replacing the low skilled workers. Social development and salaries of the workers seem to be very closely tied, as the more developed the country is socially, the more is the standard of living and the salary paid out to them.
Any naive child of economics will undoubtedly say that the sign of a healthy economy is the domestic market. If most of the goods and services manufactured within one’s own boundaries could be sold within that confine itself, lo, we have a sustainable development model. If we look at the USA of the 80s & 90s it had one of the best in house production team, good domestic market, happy people, good social development and standard of living as a whole.
The cost of development is that as the living standards of people increase, so does the average cost of production of goods and services. As the living standard of the Westerners increased, so did the cost of its products. As a result, to remain competitive in the huge American market, they had to outsource their manufacturing business. This was seen as an opportunity for the Asian tigers and China to push their cheaply manufactured goods to the American market. It turned out such that for an American industry operating at the same product base as an Asian country, to remain competitive it had to reduce the wages drastically. As the prices of goods came down, so does the wages and for the inflation adjusted measurements average American is poorer than his parents who worked during the 70s & 80s. Poor citizenry means lower domestic consumption which again gets bad for a capitalistic economy.
The Indian financial planners seem to be well aware of this situation. That’s why they seem to be keener in keeping a section of the poor manufacturing workers poorer. Only if they remain poor, goods and services can be manufactured at low cost. But the middle class sitting above these oppressed poor workers seems to be getting better at the cost of the people beneath them. Of course the middle class is needed for domestic consumption. So Indian planners are using a two pronged strategy in which the primary and secondary sector workers remain as poor as possible so as to keep the product costs low, and a middle class ripe with money power so that they can drive the domestic consumption.
As is evident from the example of the Americas, if you let loose the free market demon, it is always going to prefer the products from the poorest (as in socio-economic development & standard of living) of nations, which no doubt can manufacture at a very low cost (again the world of today is a perfect example), and reduce the real income of a nations citizens and make the country as a whole poorer.
So the lesson today is you need a mix of capitalism within the country to sell of the goods and a certain level of protectionist measures when dealing in international trade so as to facilitate a more equitable development model.
