Raghuram Rajan (University of Chicago Professor) – UCLouvain Research Institute (Nov 2019)
Chapters
00:00:06 The Evolution of Capitalism: From Markets to Communities
Background: Professor Raghuram Rajan is an Indian economist and Distinguished Service Professor at Chicago Booth School of Business. He has held various positions, including Research Director at the International Monetary Fund and Governor of the Federal Reserve Bank of India. Rajan has authored several books on capitalism and the global system.
Presentation Overview: Rajan’s book, “The Third Pillar: How the Market and State Left the Communities Behind,” explores the decline of communities in the capitalist system. Rajan’s presentation will cover the following topics: A one-hour presentation of the book’s key themes. A panel discussion. A question-and-answer session with the audience.
Rajan’s Views on Capitalism: Rajan believes that capitalism is more than just markets; it is a package deal that includes other trappings that make people prefer markets. He argues that the capture of rents and monopolization of the system are threats to capitalism, and that markets bring their own risks that need to be addressed. Rajan emphasizes the importance of keeping markets open and promoting competition.
Rajan’s Analysis of the Global Financial Crisis: Rajan’s book, “Fault Lines,” examines the global financial crisis and its causes. He identifies a deterioration in incentives in financial markets and a desire for easy credit as contributing factors to the crisis. Rajan suggests that easy credit allowed people to finance consumption and avoid addressing income inequality.
Rajan’s Concerns About the Future of Capitalism: Rajan is concerned that inequality of opportunities in the capitalist system may lead to attacks on markets, trade, and marginalized groups. He believes that the capitalist system is not providing as much hope as it did in the past. Rajan’s book, “The Third Pillar,” seeks to explore the reasons behind this decline and propose solutions.
00:07:12 Community Breakdown and Capitalism's Challenges
The Significance of Community in Capitalism: Raghuram Rajan introduces a model that includes community as a third element alongside markets and government, highlighting its importance in post-World War II equilibrium. The breakdown of community is seen as the weak link and the root cause of capitalism’s growing inequality.
Capitalism and Social Support: Capitalism, if viewed as market-oriented and comparative, provides equal opportunities for success. However, in today’s world, due to the breakdown of community, basic requirements like education, nutrition, and healthcare vary widely, leading to an uneven playing field.
Capitalism as a Meritocracy: Increased global competition is turning capitalism into a meritocracy, but it is becoming hereditary rather than equalizing opportunities. This is causing resentment and support for alternatives like populism and socialism.
Tackling the Problems of Capitalism: To address the problems of capitalism, Rajan emphasizes starting with the community and repairing its issues. By doing so, capitalism will gain greater support and reduce the appeal of opposing ideologies.
The Role of Community in Pre-Market Support: Rajan argues that political economy should be called socio-political economy due to the crucial role of community. The community provides pre-market support, such as early education, nutrition, values, and work ethics, which are essential for success in capitalism.
00:13:15 Social Safety Nets and Educational Equity
Early Childhood Education: Early childhood education is crucial for an individual’s success later in life. Studies have shown that children who receive strong early education tend to perform better academically and have better life outcomes. The “marshmallow test” demonstrates the importance of self-control and patience in children, which can be influenced by family dynamics and socioeconomic factors.
Nurture vs. Nature in Early Development: Some studies suggest that self-control and patience may be influenced by nurture, particularly the family environment and experiences. Children from families with limited resources may be more likely to consume resources quickly due to a sense of scarcity, while children from wealthier families may be more patient due to a sense of security.
Importance of Trust in the System: Trust in the system plays a crucial role in shaping individuals’ behavior. Children who experience broken promises or unfair treatment may develop a distrust in the system, leading to impulsive behavior such as consuming resources quickly. Conversely, children who experience consistent and fair treatment may develop trust in the system, leading to more patient behavior.
Pre-Market Support and Equal Opportunity: Pre-market support, including early childhood education and safety nets, is essential for creating equal opportunities for all individuals in a capitalist society. Unequal opportunities can lead to distrust, dislike, and resentment towards capitalism.
Safety Nets in Capitalism: Safety nets are important in capitalism to protect individuals from market-wide distress and bad luck. Safety nets can complement education by providing a cushion for those who fall on hard times. Historically, the US had a strong education system that reduced the need for a strong safety net.
00:18:14 Capitalism, Safety Nets, Education, and Democracy
Balance of Capitalism: Supports for capitalism include safety nets, education, and democratic oversight. Europe, with a more homogeneous society, had stronger safety nets but a weaker education system, balancing these elements.
Challenges to Balance: Diversity can make it harder to create safety nets due to concerns about undeserving beneficiaries. Immigration is often associated with laziness, making safety nets difficult to implement. The post-World War II era saw broad peace, capitalist success, and liberal market democracies thriving, leading to beliefs in capitalism’s triumph. However, the 21st century has seen the breakdown of this balance, leading to challenges to capitalism.
00:20:22 Markets, State, and Community: Interactions and Influence
The Roles of the State, Markets, and Community: 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 Green Arrows: The community provides values and norms to the market, which can change over time. In medieval times, excessive profit was seen as unnatural and sinful, while today, profit maximization is glorified. The Business Roundtable has recently shifted its focus from shareholder value maximization to stakeholder value maximization.
The Markets as a Countervailing Power: 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. When the division of power shifts, an industrial country can become more like an emerging market.
00:24:55 Independent Power of Market Players for Open and Competitive Societies
Power Dynamics in Market Societies: Raghuram Rajan emphasizes the significance of independent market players and democratic oversight in preventing cronyism and maintaining a competitive and open society.
State Power in Emerging Markets: In many emerging markets, the state holds excessive power over the private sector, granting and revoking permissions, setting tariffs, and distributing credit.
Private Sector Dependence: This dependence of the private sector on the state compromises its independence, leading to a lack of criticism and subservience to government policies.
Independent Media as a Counterbalance: In contrast, developed countries like the US have independent media outlets such as the Washington Post and the New York Times that can freely criticize the government without fear of retaliation.
Competitive Markets and Political Competition: Rajan observes that competitive markets and political competition tend to coexist, promoting economic and political freedoms.
Adam Smith’s Concern: Adam Smith’s main concern was not the state itself but cronyism and the protection of special interests through mercantilism and cartelization.
Democracy as a Check on Cronyism: Democracy serves as an essential check on cronyism as the dispersed and less influential public demands a level playing field and open competition.
Populist Movements and Reform: Populist movements in history have aimed to challenge monopolies, cronyism, and government favoritism, leading to changes in antitrust laws and government structures.
Equilibrium in a Liberal Market Society: Rajan concludes that a balance between independent market players, democratic oversight, and government regulation is crucial for a liberal market society to function effectively.
00:29:53 The Role of Community in Nurturing and Preparing Children for Success
The Significance of Community: Despite government and safety nets, communities remain vital in filling gaps and fostering identity and values. 70% of individuals in the UK still identify with a village or town, demonstrating the prevalence of community even in large cities.
Community’s Role in Identity and Values: 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 can positively impact a child’s life trajectory.
Community’s Contribution to Education and School Success: Strong communities often have better schools due to parental involvement and a shared commitment to education. Parents in these communities work harder to ensure schools function effectively.
Community as a Safety Net: During economic downturns, communities provide support by offering shelter and assistance to individuals who have lost jobs or savings. Communities serve as a form of political organization, facilitating local activism and advocacy.
Types of Communities: Various forms of communities exist, including church groups, professional communities, and virtual communities. The local community remains significant, with ongoing debates about the impact of virtual communities on local relationships.
Virtual Communities and Their Impact: Virtual communities offer alternative sources of attraction and interaction. Studies have shown that virtual communities can complement local communities and enhance relationships. An example in Toronto demonstrated that virtual connections fostered stronger relationships and social engagement.
Conclusion: Communities play a crucial role in providing identity, values, education, safety nets, and political organization. Virtual communities can complement local communities and enhance relationships. Understanding the significance of community is essential for fostering strong and resilient societies.
00:36:35 Globalization, Technological Change, and Income Inequality
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 led to 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, leading to 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 the comparison between 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.
Shift in Governance: As markets have become integrated, the exercise of governance has moved from the community level to national and international levels. An example is bank capital requirements, which are now determined at the international level, highlighting the increasing interconnectedness and complexity of global governance.
00:46:09 The Changing Role of the Community in a Globalized World
The Changing Role of Governance: Governance has shifted from local to national and international levels due to the integration of markets and the rise of international banks. This shift has led to less local decision-making and more uniformity in regulations and policies.
The Weakening of Communities: The technological revolution has changed markets, the state, and communities. Communities have weakened due to economic forces, market integration, and the upward movement of governance policies. The disempowerment of communities has led to a decline in the quality of schools and facilities, causing skilled individuals to leave.
The Rise of Populism and Nationalism: The weakening of communities has led to widespread populist anger and a search for scapegoats. Politicians exploit this anger by blaming corrupt elites, minorities, or immigrants. Nationalism, especially ethnic nationalism, offers a sense of belonging to a larger community, often at the expense of local communities.
The Need for Redistributing Opportunity: 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.
Aging Populations and Immigration: Many industrialized countries face aging populations and unfunded entitlements, raising concerns about who will do the work in the future. Immigration can be considered as a potential solution to supplement shrinking populations and address labor shortages. However, the Japanese experience with robots suggests that technology alone may not be sufficient to address these challenges.
Population Aging and the Need for Inclusive Localism: Population aging is a significant issue, contributing to anti-globalization sentiments and challenging solutions to economic growth. Inclusive localism promotes community empowerment with 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.
00:58:20 Bottom-Up Community Development for Inclusive Capitalism
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.
01:01:37 Family as the Fourth Pillar in Addressing Inequality
Raghuram Rajan’s Synthesis of 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. Similar to the Commerce Clause in the US Constitution, communities should be allowed to regulate production but not discriminate against goods from other communities.
Francois Maniquet’s Main Question:
What about the fourth pillar of the community: the family?
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.
Declining Inequality: Inequality between spouses, parents and children, and boys and girls has declined. Estimating inequality at the individual level is complex and challenging.
Community and Family: The relationship between community and family can vary. A distinction between community with family and community without family should be considered.
Impact of Low Growth: In low-growth economies like Europe and the US, inequality may increase due to some people losing while others gain. The focus should be on addressing the losses rather than solely on inequality.
Community vs. National Level Response: If inequality is within communities, the shocks are also towards the communities, and focusing on 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.
Changing Behavior of the Rich: The composition of the rich population has changed from traditional elites to entrepreneurs and others. The behavior of the super-rich, such as lack of local investment, conspicuous consumption, and fiscal evasion, poses a threat to social cohesion. The question arises whether the rich can be re-socialized or their social responsibility increased.
Local vs. Global Community: The issue of community can be viewed from a local perspective, focusing on community space and responsibility. Alternatively, it can be seen as a call for greater global integration and internationalization, making the world itself a community.
Family, Markets, and State: The family has also changed, and state and markets have played a role in equalizing intra-family inequality. Markets and the state can help limit the negative aspects of community, such as tradition and hierarchy, while preserving the positive aspects that are not based on contracts or explicit agreements.
01:18:12 Promoting Inclusive Communities in a Changing World
Community Redistribution: Rajan argues that redistribution should aim to enhance capabilities rather than provide universal basic income, as jobs offer satisfaction and dignity. He suggests that communities falling behind should receive more money to create economic opportunities rather than relying on welfare.
Rich Exit: Rajan emphasizes that the wealthy often leave communities when they deteriorate, seeking better schools and living conditions. He proposes tax preferences or school incentives to encourage the wealthy to stay and contribute to improving their local communities.
Globalization: Rajan cautions against imposing globalization before people are ready, as it can lead to resentment and disintegration. He advocates fostering a sense of community at the local level before expanding to a global sense of community.
Raghuram Rajan’s Contributions: Rajan is recognized as an exceptional economist with a forward-looking perspective. His 2005 Jackson Hole intervention challenged conventional wisdom and accurately predicted the subprime crisis, as discussed in his book “Fault Lines.”
Importance of the Book: The book highlights the significance of understanding the impact of globalization and the need for a balanced approach to redistribution.
01:23:56 Addressing Inequality and Populism: Challenges and Policy Responses in Europe
Raghu’s Book: Raghu’s book explores the role of communities in mitigating inequality in the modern globalized world, complementing policies on taxation, public goods, redistribution, and competition.
Global Inequality: Inequality has increased significantly since the 1980s due to factors such as technology, trade, tax policies, attacks on unions, shareholder value revolution, and lagging educational achievement.
US Inequality: The US has experienced a significant increase in income inequality, as evidenced by the effective income tax rate of the top 400 families falling below that of the bottom 50%.
Policy Changes: Progressive taxes, higher minimum wages, universal healthcare, free college, and universal basic income are proposed as potential solutions to address inequality.
European Paradox: Despite having progressive policies, Western European countries still face extreme left and right populism due to unfair tax systems, excessive tax competition, and immigration sentiment.
Community Role: Communities can play a role in addressing inequality by helping with education, intergenerational solidarity, and providing a sense of belonging.
Pillars in Belgium: Belgium’s socialist and Christian pillars, consisting of parties, unions, and mutuals, have declined in influence, raising questions about their potential role as mediators between individuals, the market, and the state.
Policy Suggestions: Free and mandatory kindergarten, positive discrimination on school funding in low-income neighborhoods, and high school integration programs are proposed as potential policies to promote equality.
Matthias’ Insights: Affirmative action policies intended to integrate universities and increase minority representation may have inadvertently led to integration at the high school level, as students who might struggle in demanding schools found alternative options. Social housing policies, including gradual purchase by occupants as they become financially stable, can help preserve social mix and maintain affordability. Increasing private housing supply, such as converting industrial sites into apartment buildings, can boost the city’s competitiveness by keeping rents and house prices lower. The “happiness paradox” stems from the fact that people’s happiness is not solely determined by factors like money and health but also by social connections and community belonging.
Raghuram’s Perspective: He acknowledges his gratitude to Matthias for his teachings in contract theory, which sparked his interest in various fields. He agrees with many of Matthias’ points, but adds that attacks on unions have not only been limited to the private sector but have also been prevalent in the public sector. He acknowledges the need to address both inequality and happiness.
Enhancing Communities and Addressing the Happiness Paradox: To address the happiness paradox, it is essential to recognize the importance of communities and social connections. Encouraging community engagement and fostering supportive social environments can contribute to overall well-being. Communities can provide individuals with a sense of belonging, purpose, and social support, positively impacting their happiness.
Multidisciplinary Collaboration: To effectively address the challenges of inequality and happiness, economics should collaborate with other social sciences. Interdisciplinary research and perspectives can offer a more comprehensive understanding of these complex issues and lead to more effective solutions.
01:42:46 Addressing Inequality: Challenges and Solutions
Unions and Skill Development: Global competition has led to the decline of unionized jobs, particularly in manufacturing. Unions in the US have focused less on skill improvement compared to unions in countries like Scandinavia. As a result, workers in unionized factories often lack the skills needed for alternative jobs.
Educational Attainment and Community: Early childhood experiences and access to quality schools play a significant role in educational attainment. Many students entering college in the US are poorly prepared, leading to high dropout rates and student loan debt. Universal healthcare and quasi-free college are potential solutions, but they need to be targeted to those who need it most.
Measuring Inequality: Piketty and Saez’s work on inequality may not fully capture wealth held in family firms, particularly in Europe. This hidden wealth may lead to an underestimation of inequality in Europe.
Role of Churches and Trade Unions: Churches and trade unions can play an important role in promoting equality and social justice. Equalizing opportunities at the school level is more effective than at the college level.
Estevan Reference: The speaker mentions the Estevan reference, which suggests that equalizing opportunities at the school level may not be as effective as expected. The speaker expresses interest in further exploring this reference.
01:48:19 Inclusive Localism and Affordable Housing
The Need for Affordable Housing in Cities: The expert emphasizes the importance of creating more affordable housing in cities to address the issue of housing affordability.
Reducing Zoning Laws: The expert suggests reducing zoning laws as a means to promote affordable housing.
Localism vs. Inclusion: The expert distinguishes between localism and inclusion in the context of zoning laws. Localism allows local communities to determine zoning laws, but this can lead to exclusive zoning practices that prevent low-income families from living in certain areas. Inclusive localism, on the other hand, aims to create zoning laws that allow for more access and affordable housing.
Zoning Laws that Discriminate Against Low-Income Families: The expert points out that some neighborhoods have zoning laws that prohibit multi-family homes, which typically house low-income families. Such zoning laws are exclusive and go against the principles of inclusive localism.
Affordable Housing Mandates: The expert highlights the differences in laws across cities regarding affordable housing mandates. Some cities, like Chicago, require set-asides for affordable housing, while others, like Texas, have laws that prevent cities from implementing such mandates.
Basal Level Essential Income and Social Security: The expert acknowledges the importance of basal level essential income and social security, even in the absence of government and global markets. The expert cites the example of Copenhagen, where the commune provides social security benefits to individuals who lose their jobs, allowing them to survive and maintain a sense of community.
01:50:47 Transformation of Community Bonds: From Religion to Social Security and Community Networks
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.
01:52:59 Balancing Shareholder Value and Stakeholder Primacy
Key Points: Shareholder value maximization was a response to corporations’ involvement in issues beyond their expertise, such as controlling inflation. 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. Rajan uses the example of employee training to illustrate how investing in stakeholders can enhance the value of the firm. Rajan criticizes the Business Roundtable’s statement on stakeholder primacy for being too vague and not addressing the trade-offs between different stakeholder groups. Rajan emphasizes the importance of protecting the interests of those who have invested in the firm and suggests that a statement to that effect would be more valuable than a bland and amorphous statement about considering all stakeholders.
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.
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