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

by Raghuram G. Rajan

The competitive markets provide people innovative products and abundant choice.

Competition ensures that those who succeed in it are efficient and produce the maximum output with the resources available.

Communities get trapped in vicious cycles where economic decline fuels social decline, which fuels further economic decline

Communities can also distort decisions in the opposite direction, reducing excessively the incentives for individuals to move, change, or adapt.

his low productivity hurt his household’s production, but did not jeopardize his right to farm land.

three sins of fallen men: the lust for power, sexual lust, and the lust for money.

ownership of property was the source of all power, and the group that had the most property dominated government.

regulations become a tool with which to protect the powerful and stifle competition.

The fight for suffrage was, in many ways, a fight by the community for some of its lost power, the power to influence the state, and thereby markets. The democratically empowered community was positioned to help restore the balance.

both to satisfy voters that the anti-corruption campaign is alive and to provide a cautionary example to the wealthy about the dangers of stepping out of line.

If state capacity is weak, the people may not see any value to pressing for reforms. Instead, they may not care,

Far from rewarding honesty, the system favors the corrupt politician because he is not just richer but, being adept at the game of favors, is better at making the wheels of the bureaucracy creak in favor of his constituents. Such a system is self-sustaining. An idealist who is unwilling to work the system can promise to reform it, but the voters know there is little one person can do. Moreover, who will provide the patronage, the jobs and the wedding gifts, while the idealist is fighting the system? So why not stay with the known fixer even if it means the idealist is defeated? Thus the circle is complete. The poor and the underprivileged need the politician to help them get jobs and public services. The crooked politician needs the businessman to provide the funds that allow him to supply patronage to the poor and fight elections. The corrupt businessman needs the crooked politician to get monopoly rights, public resources, and contracts cheaply. The politician needs the votes of the poor and the underprivileged. Every constituency is tied to the other in a cycle of dependence.

Overall economic growth is, approximately, the sum of the growth in output per person working and the growth in number of people working.

inefficient management practices and overstaffing began to limit what could be supplied at a price people would pay. More demand stimulus under such conditions would just result in more inflation, not more growth.

What will be harder to replace are human creativity, customization, and human empathy.

There is wisdom in crowds, but it has to be distilled carefully.

Strong communities create virtuous circles that strengthen them further.

early childhood environment, structured by the family and community, is essential for further learning and a successful career, he also somewhat ironically describes “the biggest market failure of all” is that of picking the “wrong” parents.

Every large state-owned enterprise had a party cell, with the party boss often a more powerful figure than the company CEO.13 The party decided overall strategy and senior appointments in the company. This ensured the party had firm control of the state-owned enterprises, and their enormous funds. Of course, this also enabled party members to do favors for one another, including appointing one another’s children to cozy jobs.

The strength of markets is their ability to deal with mistakes and failure. The desire of the party to stay in control could undermine that strength.

People innovate when they are confident that they can question, when they are free to make radical changes, and when they do not fear reprisal for it.

Did democracy not make a difference? Unfortunately not! India held elections every five years or so, but this did not mean that democracy gave a significant voice to the people. The Congress Party had led the fight for independence and people trusted it for a while, so the party dominated elections in most states. The lack of competition proved problematic.

“Spend the least time on the thickest files. They are issues going nowhere, which circulate back and forth across desks, with everyone wasting each other’s time by adding yet more comments. That is why they are so thick. Devote all your time to the thin files. Those are fresh issues where a cogent opinion may actually make things happen.”

The state can do more by trying to do less.

native Singaporean parents complained, “These kids come in knowing no English and are at the bottom of the class in the first year, in a couple of years they have learned English and have caught up with many of our children, and when they graduate from school, they are at the top. Is this fair?” After hearing them out, he responded, “Look, these kids are undoubtedly phenomenal, but they also now have our values—they are Singaporeans. Ten years from now, would you like to have them working on your side, or competing against you?” The complaints died down . . .

for minorities who have been in the country for centuries, and for the children of immigrants, for whom the country has been the only one they have known, there is nothing to return to. The extremists do not care, and do not see that their legitimacy as citizens is no stronger than that of these minority citizens whom they want to push out—for, after all, everyone’s ancestors came as an immigrant, ultimately from Africa.

this twenty-first century, where the civilized norm is that every citizen in a country has the right to determine their destiny and they have equal political rights, people will fight for the norm.

At the national level, we therefore need a concept of nationality that does not exclude anyone based on ethnicity or religion but is based on shared values with broad appeal.

If, however, an organization does not succeed over time in improving diversity at the top, it has to ask itself whether its systems and processes create blind spots that make it harder for it to nurture or recognize capabilities in others. Otherwise, it is all too easy for monocultures to maintain themselves

as China’s earlier experience suggests, the longer a country remains isolated, the further it falls behind the rest of the world and the greater the pain it faces on reconnecting.

the larger and fewer the firms in an economy, the easier it is for them to do deals with the state to protect their position.

“The arc of the moral universe is long but it bends towards justice.”