Raghuram Rajan (University of Chicago Professor) – UCLouvain Research Institute (Nov 2019)


Chapters

00:00:06 The Evolution of Capitalism: From Markets to Communities
00:07:12 Community Breakdown and Capitalism's Challenges
00:13:15 Social Safety Nets and Educational Equity
00:18:14 Capitalism, Safety Nets, Education, and Democracy
00:20:22 Markets, State, and Community: Interactions and Influence
00:24:55 Independent Power of Market Players for Open and Competitive Societies
00:29:53 The Role of Community in Nurturing and Preparing Children for Success
00:36:35 Globalization, Technological Change, and Income Inequality
00:46:09 The Changing Role of the Community in a Globalized World
00:50:57 Inclusive Localism and Community Revival
00:58:20 Bottom-Up Community Development for Inclusive Capitalism
01:01:37 Family as the Fourth Pillar in Addressing Inequality
01:11:54 Social Cohesion Amid Growing Inequality
01:18:12 Promoting Inclusive Communities in a Changing World
01:23:56 Addressing Inequality and Populism: Challenges and Policy Responses in Europe
01:37:16 Urban Policies for Reducing Inequality
01:42:46 Addressing Inequality: Challenges and Solutions
01:48:19 Inclusive Localism and Affordable Housing
01:50:47 Transformation of Community Bonds: From Religion to Social Security and Community Networks
01:52:59 Balancing Shareholder Value and Stakeholder Primacy

Abstract

Updated Article: “Rethinking Capitalism: The Role of Community, Family, and Globalization in Modern Society”

Raghuram Rajan’s book, “The Third Pillar,” delves into the critical role of community in balancing market forces and the state. He emphasizes the erosion of community leading to increased inequality and challenges to the meritocratic ideal, calling for renewed focus on community as a fundamental component of capitalism. This article draws on Rajan’s insights and additional perspectives to examine traditional capitalist structures, the changing roles of family and community, and the impact of globalization and technological change. It proposes a nuanced approach to fostering inclusive localism and mitigating inequality.

1. The Erosion of Traditional Capitalist Structures

In his book, Rajan highlights the challenges facing the post-World War II global capitalist system due to weakened communities. This breakdown has led to an era where capitalism is perceived as less meritocratic and increasingly hereditary. Rajan’s previous works provide context, analyzing issues like rent capture, monopolization, and the 2008 financial crisis. He argues that easy credit masked underlying inequalities, fueling disillusionment with the market system and attacks on vulnerable groups.

Globalization and technological advancements since the 1970s have transformed markets and societies. The outsourcing of manufacturing and services has led to job market polarization, diminishing middle-income factory jobs. This shift also facilitated a winner-take-all phenomenon in fields like entertainment. Governance has increasingly moved from the community to national and international levels, disempowering local communities and reducing their decision-making power.

The Changing Nature of Communities, Governance, and the Rise of Nationalism:

Economic forces, market integration, and upward shifts in governance policies have altered communities. Skilled individuals leaving communities due to disempowerment have led to declining schools and facilities. This has resulted in widespread populist anger, leading to scapegoating of vulnerable groups by politicians. Nationalism, especially ethnic nationalism, offers a sense of belonging to a larger community, often at the expense of local communities.

Historical Community Ties:

In the past, communities were often tied together by shared religion, ethnicity, extended family, or caste. This sense of kinship provided a sense of support and security within the community.

Urbanization and Formal Systems:

As cities grew larger and more anonymous, traditional community ties weakened. Formal systems such as Social Security and unemployment insurance were developed to provide financial support. These systems are more formal and have strict limits to prevent overuse.

The Role of the Community in Formal Systems:

Communities can still play a role in providing support within formal systems. By being sensitive to individual circumstances, communities can help protect individuals without creating moral hazards.

Importance of Connection:

Churches and other religious organizations can provide a sense of connection and support. Other groups such as unions, professional groups, and neighborhoods can also foster connection and support.

2. The Critical Role of Community in Capitalism

Raghuram Rajan introduces a novel perspective on capitalism: the significance of community. He asserts that disintegrating community values and norms have caused unequal opportunities, resentment, and challenges to capitalism’s meritocratic nature. Communities play a vital role in providing pre-market support, such as early education, nutrition, values, and work ethics, which are essential for success in the capitalist framework. Unfortunately, many children today lack these crucial interventions, resulting in long-term disadvantages.

Power Dynamics in Market Societies:

Rajan emphasizes the importance of independent market players and democratic oversight in preventing cronyism and maintaining a competitive and open society. Competitive markets and political competition tend to coexist, promoting economic and political freedoms. Adam Smith’s main concern was not the state itself but cronyism and the protection of special interests through mercantilism and cartelization.

The Significance of Community:

Despite government and safety nets, communities remain vital in filling gaps and fostering identity and values. Studies show that 70% of individuals in the UK still identify with a village or town, demonstrating the prevalence of community even in large cities. Communities provide a sense of belonging and identity, particularly for individuals who grew up in a particular area. Moving from a community with poor outcomes to one with better outcomes positively impacts a child’s life trajectory. Strong communities often have better schools due to parental involvement and shared commitment to education. During economic downturns, communities offer support by providing shelter and assistance to those affected. Communities also serve as a form of political organization, facilitating local activism and advocacy.

3. The Impact of Early Childhood Experiences

Studies underscore the importance of early childhood experiences, especially before age five, in shaping an individual’s future success, supporting Rajan’s viewpoint. The “marshmallow test” highlights the role of self-control and delayed gratification in achieving long-term goals. Nurture, particularly in the family environment, is crucial in shaping behavior and decision-making. Trust in the system, fostered by consistent and fair treatment, is essential for cultivating patience and cooperation.

4. Globalization, Technological Change, and Community Decline

Rajan’s analysis reveals that Europe, with a more homogeneous society, had stronger safety nets but a weaker education system, balancing these elements. However, the post-World War II era saw broad peace, capitalist success, and liberal market democracies thriving, leading to beliefs in capitalism’s triumph. The 21st century has witnessed the breakdown of this balance, leading to challenges to capitalism.

The Community, Markets, and the State:

The state provides legislation, regulation, antitrust, property rights protection, security, justice, education, and a safety net for the community. The markets provide productivity, choice, and innovation for the community. The community provides values and norms to the market, which can change over time. In medieval times, excessive profit was considered unnatural and sinful, while today, profit maximization is glorified.

Impact of Technological Change on Markets:

Technological change, particularly the information and communications technology revolution, has transformed markets by facilitating global trade and communication. Global markets have increased competition, resulting in production moving to locations with comparative advantages, often leading to job losses in manufacturing hubs. Services have also been affected, with jobs like accounting becoming more automated and accessible to lower-skilled workers, resulting in a decline in middle-income jobs.

Hollowing Out of Middle-Income Jobs:

Technological change has contributed to the hollowing out of middle-income jobs, creating a polarization of the job market with high-end and low-end jobs. This phenomenon is observed across various countries, including Europe and the United States, leading to angst despite relatively low unemployment rates. Upskilling and education are crucial for individuals to transition from disappearing middle-income jobs to higher-end positions.

Winner-Take-All Society:

The shift towards a global market has resulted in a winner-take-all dynamic, where the best performers in various fields garner disproportionately high earnings. This is exemplified by comparing Elizabeth Billington, an opera singer in 1801, and Taylor Swift, a contemporary American diva. Swift’s earnings are significantly higher than Billington’s due to the global reach and distribution of her music through platforms like YouTube.

5. Inclusive Localism and Community Revival

Raghuram Rajan advocates for “inclusive localism” to restore faith in capitalism. He cites examples like Pilsen, a community that revitalized itself by engaging residents and attracting investment. Rajan supports the principle of subsidiarity, arguing for power to be exercised at the lowest efficient level to empower communities. He emphasizes the need for infrastructure, including financial infrastructure, in community revival and advocates for bottom-up approaches that enable communities to address their unique challenges.

Independent Market Players, Democratic Oversight, and the Avoidance of Cronyism:

The state holds excessive power over the private sector in many emerging markets, granting and revoking permissions, setting tariffs, and distributing credit. This dependence of the private sector on the state compromises its independence, leading to a lack of criticism and subservience to government policies. Competitive markets and political competition tend to coexist, promoting economic and political freedoms.

6. The Family as a Fourth Pillar in Reducing Inequality

Francois Maniquet raises the issue of the family’s role in mitigating inequality. He notes factors like increased female labor force participation and decreased wage gaps, suggesting that inequality at the household level may be overestimated. Maniquet emphasizes the importance of state and market interventions in promoting gender equality.

Declining Inequality:

Inequality between spouses, parents and children, and boys and girls has declined in recent decades. Estimating inequality at the individual level is complex and challenging. The distinction between community with family and community without family should also be considered.

Impact of Low Growth:

In low-growth economies like Europe and the US, inequality may increase as some people lose while others gain. The focus should be on addressing the losses rather than solely on inequality. If inequality is within communities, community-based solutions may be effective. If inequality is between communities, redistribution from positively affected to negatively affected communities is needed, requiring national-level action.

Egalitarianism in the Family:

The family has become a more egalitarian enterprise in the past 50 years, primarily due to increased female labor force participation and decreased wage gaps. Assortative mating (marrying someone with similar socioeconomic status) has also contributed to decreased inequality within households.

Household Inequality in Belgium:

A study in Belgium found that household inequality is closely correlated with wage ratios between partners. When wage ratios are equal, consumption is shared equally between partners, indicating that household inequality is driven by external factors rather than gender. The equalization of wage ratios has been achieved through state policies (education and training for women) and market rewards for women’s marginal productivity.

Consequences of Egalitarianism in the Family:

The evolution of household inequality overestimates the increase in individual inequality. Studies that measure inequality at the household level, assuming no inequality within households, overstate the actual increase in inequality. When intra-household inequality is taken into account, inequality in countries like the UK, France, and Belgium has either remained stable or decreased.

Second Consequence:

In low-growth economies, decreases in inequality mean that some lose and some win. Men have generally lost while women have gained due to increased female labor force participation and decreased wage gaps. This can help explain why men and women often vote differently and why certain groups, such as white, blue-collar men in the US, have experienced negative outcomes in recent years.

7. Integrating Communities and Addressing Globalization’s Effects

Raghuram Rajan proposes that communities can be inclusive while enforcing rules and regulations, provided they are non-discriminatory. He suggests that balancing community interests with the challenges of globalization is key, advocating for policies that enhance capabilities, not just provide welfare. Emphasizing the importance of keeping communities integrated, Rajan suggests tax incentives for staying in struggling areas and improving local schools.

The Roles of the State, Markets, and Community:

The markets can act as a countervailing power to the state, limiting its authority and preventing it from becoming too powerful. The division of power between the state and the markets is a key factor in distinguishing industrial countries from emerging markets. Redistributing opportunity through enhancing capabilities is crucial in preparing people for the changing nature of work. Strengthening communities and improving early childhood experiences are essential for redistributing opportunity.

Population Aging and the Need for Inclusive Localism:

Population aging contributes to anti-globalization sentiments and challenges solutions to economic growth. Inclusive localism promotes community empowerment with an open flow of people, ideas, and goods, avoiding segregated communities.

Community Revival: Pilsen as an Example:

Community revival is essential for restoring faith in capitalism and addressing the challenges faced by downtrodden communities. The Resurrection Project in Pilsen, Chicago, brought about a remarkable transformation by tackling crime, engaging the community, and promoting neighborhood pride.

Community Engagement and Empowerment:

Community engagement is crucial for revival, encouraging apathy to transform into action and restoring a sense of ownership and control. Switzerland’s principle of subsidiarity, exercising power at the lowest effective level, promotes engagement and a sense of empowerment.

Balancing Harmonization and Political Differentiation:

Excessive harmonization can lead to political differentiation, hindering support for capitalism. Allowing for some degree of political differentiation can garner political support for capitalism.

Infrastructure and Funding for Community Revival:

Infrastructure development, including financial infrastructure, is vital for community revival. Access to broadband internet can expand job opportunities and community activities. Support for community revival is necessary, but should be flexible to allow for bottom-up approaches that address specific community needs.

Rethinking Community Development:

Top-down rules and centralized funding often come with constraints and favor specific activities, potentially leading to outcomes that communities may not desire.

Local Autonomy and Engagement:

Strong leadership, community engagement, and decision-making power are essential for successful community revival.

Infrastructure and Funding Support:

External support is necessary for infrastructure development and funding, but communities should retain control over how resources are utilized.

Inclusive Communities:

Integrated communities should be the goal, allowing people of different ethnic groups to live together if they choose.

Cultural Preservation:

Communities can serve as vehicles for cultural preservation, reducing the need for imposing a uniform culture at the national level.

Borderless Dialogue:

When borders between communities are kept low, dialogue and interaction can occur, leading to greater inclusion.

Community Autonomy and National Inclusivity:

Allowing communities to maintain their identity and autonomy can contribute to national inclusivity and reduce cultural conflicts.

Inclusive Communities and Community Powers:

Inclusive communities should have more powers to legislate what they want, but not powers to discriminate. This would allow communities to be inclusive while also enforcing rules and regulations.

8. A Call for Collaboration and Community-Centric Approaches

In conclusion, Raghuram Rajan’s insights and the broader discourse call for a collaborative approach that integrates communities, families, and global perspectives in addressing modern societal issues. This approach necessitates a reevaluation of traditional capitalist structures, an emphasis on early childhood development, and the fostering of inclusive localism. By empowering communities and addressing inequality through a community-centric lens, there is potential to revitalize faith in capitalism and create a more equitable and sustainable society.

Social Support Structures: The Shift from Religion to Formal Systems:

In the past, communities were often tied together by shared religion, ethnicity, extended family, or caste. As cities grew larger and more anonymous, traditional community ties weakened. Formal systems such as Social Security and unemployment insurance were developed to provide financial support, but they are more formal and have strict limits to prevent overuse. Communities can still play a role in providing support within formal systems by being sensitive to individual circumstances.

Raghuram Rajan’s Remarks on Shareholder Value Maximization and Stakeholder Primacy:

Shareholder value maximization was a response to corporations’ involvement in issues beyond their expertise. Milton Friedman argued that corporations should focus solely on maximizing shareholder value within the confines of the law. Rajan criticizes shareholder value maximization as too narrow, as it neglects other stakeholders, such as employees, suppliers, and customers. Rajan advocates for considering all stakeholders who have made investments in the firm, both financial and non-financial. Churches and other religious organizations can provide a sense of connection and support, and other groups such as unions, professional groups, and neighborhoods can also foster connection and support.


Notes by: TransistorZero