Tuesday, April 28, 2009

Why India lacks capital despite abundant human capital?

Capital is surplus money or wealth that is available for investment. Countries like India lacks capital and hence needed to import capital in the form of foreign investments. For decades India resisted foreign capital, for political reasons, and suffered through slow growth, unemployment etc. The underlying idea behind that policy, or at least the national explanation given on public policy on such matters, was self reliance; in terms of production, employment, capital etc. The history of colonialism provided a platform for staging this idea and running the society based on that idea. Of course, quite obviously that did not work.
A decade and half of liberalization and foreign investments have boosted many sectors and made its mark. A lot many things worked in India and now there is more than good enough reason to question the failed old chimerical vision of India’s “lost decades.” However there still remains a valid question. Why don’t we have the capital? If India has the Human resources, why can’t we create everything else? In India, other factors of production do not seem to be the bottleneck. No one shied away from building an industrial firm because he cannot find the land. Though every resource is limited, one cannot see a particular factor fundamentally limiting the growth. Labor, entrepreneurial culture, education, institutions all exist but not enough capital. Therefore we imported capital and the economy took off in a path of growth.
Why don’t we have the capital? And why the western nations have capital? Capital is surplus money or savings. One cannot say that Indian people do not save. They do, they are thrifty and careful with their money. Still why there is no capital? The simple answer to the question is that India is not a capitalist society. The western nations are. They are wealthy, India is not. If America needs to build an 18 lane freeway, they can, for they have capital. India cannot even create basic infrastructure, for we do not have capital.
The problem with this type of analysis is, apart from the fact that it is nothing but stating the social situation with the common terminology, that it ignores the process of wealth creation as a human endeavor. All that is needed is the energy and the industry of the people. Why can’t India put people into building roads? If building roads need concrete or other material, why not put people into making that? Obviously it is not that simple. It did not work that way. So what do we need to do to do to make that happen? 
The current economic crisis of the world gives several pointers to this vexed problem. When the crisis began in the last few months of 2008 in America, the unemployment was not very high. There was no shortage of anything. If the gasoline prices were high, they quickly fell. There was no huge inflation or deflation to speak off. The interest rates were very low. The crisis began when people noticed that the commercial paper market (short term business lending) was dwindling down. The primary problem was that no one was lending. There seemed to be an imminent systemic meltdown. The capital have dried up.

Capital is surplus money. It is the money that people save for future. It is the money that someone does not need at that point and hence can lend. It is the money in the mutual funds and in the pension funds. It is the money of the investor. It is the money of the teachers, accountants, professionals and it is the money of the wealthy and of not so wealthy. For the money to become capital it needs to be collected by various firms such as funds, banks etc from its owners into mutually beneficial schemes. The investors expect returns and can tolerate a reasonable risk. This is a system of trust supported by a just society and government through various means including legal protections and institutions that work. Through laws that work and institutions that uphold it. Should that trust break, capital disappear.
For America the problem is that the system of trust is breaking down for a variety of reasons that include mishaps in economic oversight, greed of the industry, spending habits of people etc. Some reasons are benign, not all bad. In India that system of trust, be it sensible laws that work, legal protections, enforcement of laws without government corruption and institutions etc, was never created. Its creation is, evidently the answer to the vexed capital problem.

Monday, April 20, 2009

Open Source. Will it change the world ?

One of the terms that came into being with the open source software movement was copyleft. Free to modify (open source) as opposed to copyrighted(so restricted or protected) software, hence copyleft.This movement derived its motivation from anti Microsoft, the big corporate, sentiments but went beyond the initial rather narrow ambitions and eventually matured to be a successful model in its own right. Today this movement can be called anything from a serious model to a wildly successful one.

There are a few variations to this model of software development but essentially it is free software made available for download over internet along with the source code. The source code can be modified, enhanced and redistributed by any one. Free in Free Open Source could just mean free to modify the source code and does not have to be free of charge. However with free source code available to compile and build , the open source software can be had for free.

Be it an operating system like Linux or a web server like Apache, this is the case. The developers who create the software may make money in other ways such as support, donations, books etc or they may not. If someone download an open source web server or database and use it, he would not be paying any one anything. So nobody is getting paid in this transaction. When a technology group in a major corporation downloads an open source software, say an Application Server or wiki software, and use it for free, it may raise some questions in your mind.

Why would people donate their time to create software for free distribution? If an entrepreneurial organization create open source software and make their money by support and consultancy that is understandable. It is just a different business model. However if individual software programmers donate or volunteer their time but eventually do not make any money, that is not a win-win situation. What I mean is that the many individual contributors are not able to monetize their time and effort for one reason or other. In such a case, well, is this a good deal? Only to the users who get the software for free!

Now I am not griping on the individual programmers. After all, they are ‘free’ to volunteer or do whatever they deem fit with their time. Plus, they might be gaining experience, networking opportunities and other emotional benefits such as recognition. This is not to say that these benefits are not attainable when they are fully paid for the work they do when they work for a business firm. They are attainable that way. Therefore is this, open sourcing, not essentially a low value generating proposition for the industry in general and the software professionals in particular? The income of individual professionals goes down and the long term viability of software corporations itself weakens as a result.

People on the other side of this debate would argue that this is a free market phenomenon and benefits the consumer. That is true. They would further argue that this movement would help innovation since making source code available will make it possible for someone else to create a derivative or enhance the original. Thereby promoting and accelerating innovation. So there are social benefits in this movement. Lower cost of software would increase its adoption and will benefit society. This is not just a hypothesis, all these benefits are already observed over the last decade.

Leaving those social concerns aside, if you look at this as a business model, it can be observed that, software is moving from a license model towards a service model. The way you make money in software is, therefore, by providing support or consultancy and not by way of profit margins like a corporation that sells licensed software would do. In stead of a few software majors , you now have thousands of smaller firms. Small businesses or just individual contributors earning a living from the software that they help to create.

Here is my question. As a system capitalism favors growth, innovation and wealth creation. Capitalists can tolerate the concentration of wealth but not a government that take the freedom of the people. The freedom to do business, create products and innovate and get benefited from it. The socialist types favor equitable wealth distribution even if that comes at the cost of growth, poverty and even the tyranny of a big government that control the economic life of its people. Because they do not like the concentration of wealth and the big corporations that result from it.

So will the open source movement achieve a system that achieves both? In software industry and perhaps in many other industries that could use open source methodologies?

Will the term copyleft eventually achieve its true ambition?