Speaker Introduction:
Raghuram Rajan, a prominent economist, delivered a speech at the Hutchins Center on Fiscal and Monetary Policy. Rajan highlighted his belief that financial development can increase global risk. His 2010 book, Fault Lines, explored the political support for excessive borrowing as a compensation for stagnant income growth.

The Third Pillar Book:
Rajan’s new book, The Third Pillar, delves into the history of the world economy, tracing changes from ancient times. It argues that populism has risen due to the failure of markets and states to support communities. Rajan advocates for improving capitalism rather than overthrowing it.

Speech Structure:
Rajan will present his ideas, followed by questions from David Wessel. The audience will then have an opportunity to ask questions. In case of significant news, such as Trump’s impeachment, an update will be provided during the event.

Importance of Community in Capitalism:
Capitalism traditionally focuses on free comparative markets and government involvement. However, the success of capitalism also relies on the community, which provides direct and indirect support. Communities foster identity, values, security, justice, education, and safety nets. Communities work on relationships and fill in the gaps that markets and the state cannot.

Technological Change and Social Impact:
Social change is often driven by calamity or technological change. Current technological advancements have adversely affected certain communities. Capitalism is facing criticism from both the right and the left. Anti-rich, anti-trade, and anti-immigration sentiments are rising.

Inclusive Localism as a Solution:
Many problems cannot be solved at the national level due to varied community issues. Inclusive localism involves fortifying communities at the local level. This approach addresses the challenges faced by adversely affected communities. It also helps communities adapt to technological changes.

Definitions of Markets, State, and Community:
Markets include goods, labor, and capital markets, as well as firms and the private sector. Markets enhance productivity and expand choices for people. The state consists of the executive, judiciary, and legislature at the federal level. The state provides security, justice, pre-market support, and post-market support. Community refers to the proximate community, including neighborhood, village, municipality, local government, and institutions.

Roles of Community Today:
Community remains a source of identity and values. It complements the state in providing security, justice, education, and safety nets. Community works on relationships, not explicit contracts, and fills in the holes that markets and the state cannot.

The Importance of Real-World Communities:
Local communities are important for building trust, longer-term engagement, and deeper social connections. Virtual communities can facilitate light engagement with many people but lack the depth and commitment of real-world relationships. The internet can actually strengthen social ties by enabling people to connect across physical barriers.

Netville Experiment:
The study of a Toronto development called Netville found that the half of the community with internet access built stronger social ties than the half without. The internet was used to cross physical barriers, arrange community events, and find lost pets. This suggests that virtual communities can complement and enhance real-world communities rather than replacing them.

Benefits of Virtual Communities:
Virtual communities allow people to stay in touch with friends and family who live far away. They can also facilitate the formation of new friendships and relationships based on shared interests. Virtual communities can be a source of support and information, especially for people who are struggling with personal or health challenges.

Focus on Real Proximate Communities:
The author emphasizes the importance of real proximate communities because they provide a sense of place, belonging, and identity. These communities are essential for social cohesion and well-being. They also play a role in supporting local businesses and institutions.

Connections Between State, Markets, and Community:
The state provides legislation, regulation, antitrust, and property rights to regulate markets and communities. Markets provide productivity and choice. The community influences markets by providing values and norms. Markets, when competitive, constrain the state, acting as a check and balance. Democracy prevents crony capitalism by pushing for open access and separating the private sector from the state.

Technological Revolution’s Impact on Markets:
Facilitated trade and global supply chains, shifting manufacturing from industrial countries. Automation has caused job losses in the middle, creating more low-skilled and high-skilled jobs. Rise of superstar firms with scale economies and increased span of control. Increased protection of intellectual property. Rise of superstar jobs with much higher earnings compared to the past.

Changing Markets:
ICT revolution has transformed markets, creating superstar professions with significantly higher incomes. Rising incentives to acquire skills that lead to these high-income professions. Examples include artists, lawyers, and doctors.

State’s Role:
Markets and the state have a symbiotic relationship, growing together as markets expand and integrate. State provides security, allowing markets to flourish within that environment. As markets grow larger, the state must grow to absorb volatility and provide governance.

Evolution of Bank Capital Regulation:
Bank capital regulation initially determined at the city level, based on population. Over time, regulation moved to the state and then national levels. Today, bank capital is largely determined internationally, reflecting the global nature of banking markets.

Disruption of Community:
Effects of trade and technology have been unevenly distributed, leading to disparities. Rural and semi-urban areas often experience negative impacts, contributing to social unrest and movements like the Gilets Jaunes in France.

Technological Impacts on Community Structure:
Technological advancement has created a superstar economy with high rewards for certain professions and firms, increasing the significance of education and leading to the disintegration of mixed communities. Parents seek the best schooling for their children, resulting in a phenomenon called “secession of the successful,” where families move to communities offering superior education, further dividing communities into successful and not-so-successful ones.

Consequences of Community Disintegration:
Zoning laws exacerbate the divide by restricting the movement of people from relatively poor to relatively well-to-do communities, perpetuating inequalities and limiting opportunities. Left-behind communities experience a sense of powerlessness and anger, blaming the elite for cornering economic opportunities and limiting access to capability-building institutions. Populist movements emerge, advocating for anti-elite policies, redistributing opportunities, and leveling the playing field. However, these solutions fail to address the underlying issue of technological change and its impact on the workforce.

Challenges Facing Industrial Countries:
Population aging and high unfunded entitlements demand a focus on immigration to ensure a tax-paying workforce. Erecting trade barriers amidst slowing demand in industrial countries hinders access to growing markets in the rest of the world. Global problems like climate change necessitate international dialogue and cooperation.

A Cohesive Nationalism for Diverse Societies:
Rajan emphasizes the need for a nationalism that promotes integration and understanding among diverse communities, rather than causing division. He acknowledges the existence of ethnically concentrated communities and calls for their support and integration into the national fabric.

Revitalizing Failing Communities:
Rajan advocates for bottom-up economic initiatives to improve the security and safety of communities. He cites the example of Pilsen, a community in Chicago, which has successfully rebuilt its identity and political engagement.

Tradeoffs and Balancing Solutions:
Rajan recognizes that there are no perfect solutions and that tradeoffs are necessary. He rejects extreme views of isolating communities and advocates for a balance that provides broad opportunities for all in the face of technological change.

Pushing Power Back to Communities:
Rajan proposes the principle of subsidiarity, where power is pushed back from international, national, and regional levels to the community level. This empowers communities, fosters agency, and strengthens their organizations.

Responsible National Sovereignty:
Rajan calls for a responsible national sovereignty, where nations have the autonomy to make decisions while considering the broader interests of the globe. He emphasizes the importance of open national markets for integrating communities.

Localism and Engaged Communities:
Rajan advocates for localism, granting more power to communities. He envisions communities with low walls, where there is a free flow of ideas and engagement with the outside world.

Community Engagement and Empowerment:
Inclusive localism emphasizes community leadership and local powers to foster engagement. Technologies like the See, Click, Fix app in Chicago allow residents to report issues like potholes, fostering community involvement in monitoring and resolving problems. Communities can monitor local officials and engage in crime prevention efforts, such as the swarming technique used in Pilsen to combat crime.

Infrastructure, Connectivity, and Funding:
Many communities lack basic infrastructure like broadband, which limits economic opportunities and access to essential services. Decentralizing funding and giving communities the power to decide how to use those funds can lead to better community-tailored improvements.

Inclusive Localism and Trade-offs:
Inclusive localism involves a trade-off between local power and inclusion. Zoning policies that create barriers to entry can lead to exclusion and segregation, perpetuating economic and social disparities. Preferring low walls and inclusiveness over strict localism can foster a more diverse and equitable society.

Technology as a Solution:
Technology can address the problem of kids in schools having different levels of preparation. Personalized learning using technology can target each student’s needs, breaking the traditional approach of teaching to the average. Technology can also create new social structures, engagement forms, and solutions to community problems.

The Relationship Between Community Breakdown and Populism:
The breakdown of local communities and the decline of economic activity can lead to social dysfunctionality. The loss of traditional sources of identity, such as stable families and community structures, can lead to people seeking a sense of belonging in national identity and populist movements.

Economic Shock and the Formation of Inclusive Communities:
Economic shock, usually accompanied by a loss of status, is seen as the catalyst for the formation of inclusive communities. People who suffer economic hardships may feel their status diminishing, leading them to identify with a broader group to feel included.

The Role of Culture and Family in Inclusive Communities:
Culture and family play a role in preserving a sense of belonging and identity, especially when individuals experience economic difficulties. People hold onto cultural and familial traditions as a means of survival and to maintain a sense of stability amidst economic hardship.

Defining the Role of National and Community Levels:
There are certain areas where national involvement is necessary, such as keeping markets open across communities, preventing discrimination, and ensuring infrastructure and education standards. Flexibility is crucial, allowing localities to adapt education standards to their specific needs and values, while maintaining basic standards.

Balancing Decentralization and Openness:
Decentralization and the freedom to choose where to live come with the risk of segregated communities based on race, origin, and culture. To prevent this, laws should emphasize the openness of communities to the flow of people, goods, and ideas, while respecting the choices of individuals. Common decency and shared celebrations can help bridge the gaps between different communities over time.

Examples of Inclusive Communities in Practice:
Neighborhoods like Pilsen in Chicago, where different ethnic groups live side by side and celebrate common festivals, demonstrate the potential for inclusive communities. Over time, as communities become more prosperous, gentrification may occur, leading to a more diverse population while still maintaining its cultural identity.

Local Empowerment:
Raghuram Rajan suggests empowering local neighborhoods by giving them more control over local matters such as schools and funding. Decentralized school systems in the U.S. vary in their ability to intervene and improve education, with poorer communities facing more restrictions. Rajan emphasizes the need to push down decision-making authority to local communities to address issues like school funding and improvement.

Zoning and Segregation:
Rajan highlights the role of zoning laws in maintaining segregation and preventing the construction of multifamily homes in certain communities. He argues that allowing more multifamily homes would facilitate movement of people and reduce inequality. Rajan emphasizes the importance of balancing individual freedom with the need to address segregation and ensure equal access to opportunities.

Tradeoffs and Reality:
Rajan acknowledges that real-world decision-making involves tradeoffs and complexities. He criticizes the notion of purity and pristine solutions, emphasizing the need to manage tradeoffs effectively.

Corporate Responsibility:
Rajan suggests that many large corporations are already practicing value maximization, but they often don’t communicate it effectively. He encourages Fortune 500 CEOs to focus on value maximization, which involves considering the interests of all stakeholders, including employees, customers, and the community.

Milton Friedman’s View:
Milton Friedman believed that the only job of a corporation is to maximize profits. He argued that corporate social responsibility was being proposed by activists as a backdoor way to achieve their goals. He believed that maximizing shareholder value is the same as maximizing the value for society.

Rajan’s Critique:
Rajan argues that shareholders are not the only residual claimants. Workers who have strong skills and are not easily replaceable become stakeholders in the firm. Managers should consider the interests of long-term workers when making decisions. Maximizing the value for the whole, including workers, also maximizes shareholder value.

Rajan’s Advice:
Rajan would advise corporations to think more broadly about their stakeholders and consider the interests of long-term workers. He believes that this approach would ultimately benefit shareholders as well.

Cooperation and Stakeholder Interests:
Focus on cooperation’s purpose: efficiency and choice. Broaden perspective to consider all stakeholders, including workers, whose investments are just as important as shareholders. Occasionally firing workers may be necessary for the overall benefit of the company.

State and Community Roles:
Corporations should focus on efficiency, leaving governance and social responsibilities to the state. Communities can address local needs, but should avoid erecting barriers to trade and goods from other regions.

Principle of Community Inclusion:
Communities should be included in the country, preventing barriers that exclude others. Non-tariff barriers, such as specific manufacturing conditions, are a way of excluding others.

Brexit and Community Reassertion:
Brexit is a mix of community reassertion and ugly nationalism. Communities want control over immigration and local decision-making. Excessive central rulemaking can lead to disrepute and resentment.

Immigration Control and Country Rights:
Countries have the right to control immigration. Openness is desirable, but complete openness can be challenging. Walls and barriers within a country are not acceptable, but border control is reasonable.

India and China’s State Development:
India has an underdeveloped state, hindering infrastructure development and growth. China has an overdeveloped state, effective for middle-income growth but facing challenges in transitioning to developed status. Legitimacy concerns in authoritarian systems can limit their ability to adapt and innovate.

India’s Advantages and Challenges for Growth:
Raghuram Rajan believes India has a great system for transitioning from middle income to first world status. India needs to address its challenges in acquiring land and infrastructure development due to democratic protests and a strong NIMBY movement. The country’s democratic system prevents a harder transition once it reaches middle income, but it also slows progress in reaching that stage.

China’s Education System and Political System:
Rajan believes China’s education system is fantastic and could aid in its transition to success. However, he suggests that China may need to alter its political system as it approaches the next stage of growth.

Central Bank Independence and Populism:
Rajan believes in independent, politically independent central banks and made changes in India to align with this belief. There was hesitation and resistance to these changes in India, leading to Rajan’s non-reappointment and the firing of his successor. This reflects a broader trend of populism and a desire for the government to have more say, reducing checks and balances.

Fixing Holes in the Social Safety Net:
Raghuram Rajan advocates for targeted fixes to societal issues rather than implementing sweeping policies like universal basic income. He suggests addressing specific problems like homelessness by providing basic support and community involvement. Rajan emphasizes the importance of engaging the community in supporting the disadvantaged to foster unity.

Universal Basic Income (UBI) as a Long-Term Solution:
Rajan expresses skepticism about UBI as a complete replacement for jobs due to the uncertainty of job automation. He cautions against setting UBI levels too high, as it could discourage people from re-entering the workforce when new opportunities arise.

Community Involvement in Policy Implementation:
Aman Thakkar raises the issue of community empowerment in implementing policies like UBI. Rajan acknowledges the need for community involvement and suggests using local resources to provide additional support beyond basic government assistance.

India’s Economic Growth and Global Standing:
Palak asks about India’s economic progress since Rajan’s tenure as governor. Rajan observes that India’s status as a global economic leader has diminished due to the emergence of other countries.

The Role of Religion in Community Building:
John Murdock brings up the importance of religion in fostering community, as discussed in Tim Carney’s book “Alienated America.” Rajan acknowledges the significance of religion but does not elaborate on its role in his own policy proposals.

Singapore’s Training Voucher System:
Rajan commends Singapore’s policy of providing lifelong training vouchers to its citizens. He views this as a positive approach to addressing the changing job landscape and ensuring individuals have access to relevant skills.

Education:
Rajan argues that we should be careful about over-educating the population, as this can lead to degree inflation. He believes that the level of education should be based on the current circumstances and the needs of the job market.

Religion:
Rajan respects religion as a source of organization and bonding within communities. He thinks that religion can play a positive role in society and does not endorse policies that would restrict or regulate it.

Immigration:
Rajan believes that immigration has been broadly beneficial for countries. He acknowledges that illegal immigration can be a concern, but he also points out that the perception of the extent of illegal immigration is often exaggerated. Rajan supports the right of countries to control immigration, but he believes that this should be done in a democratic and managed way.

Community:
Rajan emphasizes the importance of community and believes that schools are a key component in building strong communities. He expresses concern about the growth of the homeschooling movement in the United States and its potential impact on community-building efforts.

Broadband in Rural Areas:
Rajan recognizes the challenge of providing broadband access in rural areas and acknowledges that subsidies may be necessary to achieve this goal. He acknowledges that subsidizing broadband in rural areas may not be economically efficient, but he believes it is necessary to address the digital divide and promote economic development in rural communities.

The Importance of Broadband Access:
Raghuram Rajan emphasizes the necessity of broadband access in today’s world, likening it to having a road for accessing the broader world. Rajan believes that communities without broadband are locked in and unable to fully participate in modern society. Finding ways to provide broadband to underserved communities is crucial for their progress and development.

The Role of Asian Democracies in Community Building:
A question is posed about the potential contribution of Asian democracies to the third pillar of community. The focus is on whether Asian cultural or lifestyle factors can contribute more proactively to community building compared to Western democracies.

Reinvigorating Unions and Non-Monetary Incentives for Superstars:
A concern is raised about the diminished power of unions in recent decades and the need to address this issue. The question is posed on how to incentivize people to become superstars and maintain their motivation without solely relying on monetary rewards.

Cultural Influences on Community Building:
Rajan does not believe that cultural factors are the primary determinant of a society’s ability to strengthen its community pillar. He suggests that the sense of community, local government, and getting together is present in most societies, regardless of cultural differences.

Unions:
Rajan believes unions can be a countervailing force and a source of community. He acknowledges the importance of unions in the gig economy and the challenges of protecting workers’ rights. Rajan suggests that the decline of unions may have contributed to the decline of the labor share. However, he also argues that the rise of specialized workers and the service economy has reduced the need for unions.

Superstars:
Rajan believes the creation of superstars is a reflection of technological change and should not be discouraged. He acknowledges that some superstars may be successful due to cheating or rule-breaking. Rajan suggests that society can debate whether to incentivize superstars or tax them to redistribute wealth. He also suggests that societal values can change over time, leading to less admiration for concentrated wealth.

Societal Change:
Rajan believes society reacts to economic changes, such as the rise of superstars and concentrated wealth. He cites the Giving Pledge as an example of wealthy individuals reacting to social pressures. Rajan suggests that society may eventually change its values and place less emphasis on wealth accumulation.