The Third Pillar: How Markets and the State Leave the Community Behind

421 Pages·2019·2.69 MB·English

by  Raghuram G. Rajan

ALSO BY RAGHURAM RAJAN
I Do What I Do
Fault Lines
Saving Capitalism from the Capitalists
(with Luigi Zingales)

PENGUIN PRESS
An imprint of Penguin Random House LLC
penguinrandomhouse.com
Copyright © 2019 by Raghuram Rajan
Penguin supports copyright. Copyright fuels creativity, encourages diverse voices, promotes free speech,
and creates a vibrant culture. Thank you for buying an authorized edition of this book and for complying
with copyright laws by not reproducing, scanning, or distributing any part of it in any form without
permission. You are supporting writers and allowing Penguin to continue to publish books for every reader.
Library of Congress Cataloging-in-Publication Data Names: Rajan, Raghuram, author.
Title: The third pillar : how markets and the state leave the community behind / Raghuram Rajan.
Description: New York : Penguin Press, [2019] | Includes bibliographical references and index.
Identifiers: LCCN 2018054881 (print) | LCCN 2018058588 (ebook) | ISBN 9780525558323 (ebook) |
ISBN 9780525558316 (hardcover) Subjects: LCSH: Economic development--Social aspects. | Economics--
Sociological aspects. | Capitalism. | Democracy--Economic aspects. | Communities.
Classification: LCC HD75 (ebook) | LCC HD75 .R3435 2019 (print) | DDC 306.3--dc23
LC record available at https://lccn.loc.gov/2018054881
Version_1
To Radhika
CONTENTS
Also by Raghuram Rajan
Title Page
Copyright
Dedication
Preface
Introduction: The Third Pillar
PART I
HOW THE PILLARS EMERGED
1. Tolerating Avarice
2. The Rise of the Strong but Limited State
3. Freeing the Market . . . Then Defending It
4. The Community in the Balance
PART II
IMBALANCE
5. The Pressure to Promise
6. The ICT Revolution Cometh
7. The Reemergence of Populism in the Industrial West
8. The Other Half of the World
PART III
RESTORING THE BALANCE
9. Society and Inclusive Localism
10. Rebalancing the State and the Community
11. Reinvigorating the Third Pillar
12. Responsible Sovereignty
13. Reforming Markets
Epilogue
Acknowledgments
Notes
Index
About the Author
PREFACE
W
e are surrounded by plenty. Humanity has never been richer as
technologies of production have improved steadily over the last two
hundred fifty years. It is not just the developed countries that have
grown wealthier; billions across the developing world have moved from stressful
poverty to a comfortable middle-class existence in the span of a generation.
Income is more evenly spread across the world than at any other time in our
lives. For the first time in history, we have it in our power to eradicate hunger
and starvation everywhere.
Yet even though the world has achieved economic success that would have
been unimaginable even a few decades ago, some of the seemingly most
privileged workers in developed countries are literally worried to death. Half a
million more middle-aged non-Hispanic white American males died between
1999 and 2013 than if their death rates had followed the trend of other ethnic
groups.1 The additional deaths were concentrated among those with a high
school degree or less, and largely due to drugs, alcohol, and suicide. To put these
deaths in perspective, it is as if ten Vietnam wars were simultaneously taking
place, not in some faraway land, but in homes in small-town and rural America.
In an era of seeming plenty, a group that once epitomized the American dream
seems to have lost hope.
The anxieties of the moderately educated middle-aged white male in the
United States are mirrored in other rich developed countries in the West, though
perhaps with less tragic effects. The primary source of worry seems to be that
moderately educated workers are rapidly losing, or are at risk of losing, good
“middle-class” employment, and this has grievous effects on them, their
families, and the communities they live in. It is widely understood that job losses
stem from both global trade and the technological automation of old jobs. Less
well understood is that technological progress has been the more important
cause. Nevertheless, as public anxiety turns to anger, radical politicians see more
value in attacking imports and immigrants. They propose to protect
manufacturing jobs by overturning the liberal rules-based postwar economic
order, the system that has facilitated the flow of goods, capital, and people across
borders.
There is both promise and peril in our future. The promise comes from new
technologies that can help us solve our most worrisome problems like poverty
and climate change. Fulfilling it requires keeping borders open so that these
innovations can be taken to the most underdeveloped parts of the world, even
while attracting people from foreign lands to support aging rich country
populations. The peril lies not just in influential communities not being able to
adapt and instead impeding progress but also in the kind of society that might
emerge if our values and institutions do not change as technology
disproportionately empowers and enriches some.
DISRUPTIVE TECHNOLOGICAL CHANGE
Every past technological revolution has been disruptive, prompted a societal
reaction, and eventually resulted in societal change that helped us get the best
out of the technology. Since the early 1970s, we have experienced the
Information and Communications Technology (ICT) revolution. It built on the
spread of mass computing made possible by the microprocessor and the personal
computer, and now includes technologies ranging from artificial intelligence to
quantum computing, touching and improving areas as diverse as international
trade and gene therapy. The effects of the ICT revolution have been transmitted
across the world by increasingly integrated markets for goods, services, capital,
and people. Every country has experienced disruption, punctuated by dramatic
episodes like the Global Financial Crisis in 2007–2008 and the accompanying
Great Recession. We are now seeing the reaction in populist movements of the
extreme Left and Right. What has not happened yet is the necessary societal
change, which is why so many despair of the future. We are at a critical moment
in human history, when wrong choices could derail human economic progress.
This book is about the three pillars that support society and how we get to the
right balance between them so that society prospers. Two of the pillars I focus
on are the usual suspects, the state and markets. Many forests have been
consumed by books on the relationship between the two, some favoring the state
and others markets. It is the neglected third pillar, the community—the social
aspects of society—that I want to reintroduce into the debate. When any of the
three pillars weakens or strengthens significantly, typically as a result of rapid
technological progress or terrible economic adversity like a depression, the
technological progress or terrible economic adversity like a depression, the
balance is upset and society has to find a new equilibrium. The period of
transition can be traumatic, but society has succeeded repeatedly in the past. The
central question in this book is how we restore the balance between the pillars in
the face of the ongoing disruptive technological and social change.
I will argue that many of the economic and political concerns today across the
world, including the rise of populist nationalism and radical movements of the
Left, can be traced to the diminution of the community. The state and markets
have expanded their powers and reach in tandem, and left the community
relatively powerless to face the full and uneven brunt of technological change.
Importantly, the solutions to many of our problems are also to be found in
bringing dysfunctional communities back to health, not in clamping down on
markets. This is how we will rebalance the pillars at a level more beneficial to
society and preserve the liberal market democracies many of us live in.
DEFINITIONS
To avoid confusion later, let us get over the tedious but necessary issue of
definitions quickly. Broadly speaking, the state in this book will refer to the
political governance structure of a country. In much of this book, it will refer to
the federal government. In addition to the executive branch, the state will also
include the legislature and the judiciary.
Markets will include all private economic structures facilitating production
and exchange in the economy. The term will encompass the entire variety of
markets, including the market for goods and services, the market for workers
(the labor market), and the market for loans, stocks, and bonds (the capital or
financial market). It will also include the main actors from the private sector,
such as businesspeople and corporations.
According to the dictionary, a community “is a social group of any size whose
members reside in a specific locality, share government, and often have a
common cultural and historical heritage.”2 This is the definition we will use,
with the neighborhood (or the village, municipality, or small town) being the
archetypal community in modern times, the manor in medieval times, and the
tribe in ancient times. Importantly, we focus on communities whose members
live in proximity—as contrasted with virtual communities or national religious
denominations. We will view local government, such as the school board, the
neighborhood council, or town mayor, as part of the community. A large country