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

by Raghuram G. Rajan

A critical function the community plays in modern market democracies is to serve as a training ground for aspiring politicians – recall that Barack Obama was a community organiser – with the community itself constituting a ready-made structure for political mobilisation. Furthermore, it is community- based movements against corruption and cronyism that time and again prevent the leviathan of the state from getting too comfortable with the behemoth of big business. Indeed, as we will see in the book, healthy communities are essential for sustaining vibrant market democracies. This is perhaps why authoritarian movements like fascism and communism try to replace community consciousness with nationalist or proletarian consciousness. In sum, the proximate community is still relevant today, even in cosmopolitan cities where ties of kinship and ethnicity are limited, and even in individualistic societies like those of the United States and Western Europe. Once we understand that the community matters, then it becomes clear why it is not enough for a country to experience strong economic growth – the professional economist’s favourite measure of economic performance. How that growth is distributed across communities in the country also matters immensely. People who value staying in their community are not very mobile. Since they cannot move to work where growth occurs, they need economic growth in their own community. If we care about the community, we need to care about the geogr...

Community organizing, politics & economics

Society suffers when any of the pillars weakens or strengthens overly relative to the others. Too weak the markets and society becomes unproductive, too weak a community and society tends toward crony capitalism, too weak the state and society turns fearful and apathetic. Conversely, too much market and society becomes inequitable, too much community and society becomes static, and too much state and society becomes authoritarian. A balance is essential!

Balance of three pillars

economic decline fuels social decline, which fuels further economic decline…. The consequences are devastating. Alienated individuals, bereft of the hope that comes from being grounded in a healthy community, become prey to demagogues on both the extreme Right and Left, who cater to their worst prejudices. Populist politicians strike a receptive chord when they blame the upper-middle-class elite and establishment parties. When the proximate community is dysfunctional, alienated individuals need some other way to channel their need to belong.4 Populist nationalism offers one such appealing vision of a larger purposeful imagined community – whether it is white majoritarianism in Europe and the United States, the Islamic Turkish nationalism of Turkey’s Justice and Development Party, or the Hindu nationalism of India’s Rashtriya Swayamsevak Sangh.5 It is populist in that it blames the corrupt elite for the condition of the people. It is nationalist (more precisely, ethnic nationalist, but I will leave the nitpicking for later)

Unemplyment & rise of demagogues

first order of action was to make the community more livable, which meant keeping it clean, ridding the streets of crime, and strengthening the schools. Residents were organised to hound the city sanitation department to do their job – clean the streets and collect garbage. People were urged to form block clubs and ad hoc groups against crime. They would walk out of their houses when they saw suspicious activity so as to crowd the criminals out, or jointly call the police so that the criminals would not know who to blame. The community campaigned successfully for a moratorium on city liquor licenses in Pilsen, got some especially problematic bars closed down, and worked with police, churches, and absentee landlords to target and close down known gang houses.8 Remedial education, after-school extracurricular programmes, and job-training programmes increased, enabling young people to get more from their schoolwork, and giving them a ladder to jobs. Parents were urged to get involved in the schools, and they did. New school programmes started – one example is the Cristo Rey Catholic School, which aims to give its students a quality education like that obtainable at St. Ignatius, one of Chicago’s premier Catholic schools, while keeping it affordable. Cristo Rey raised funds from local businesses, in return for which students work one day a week for their sponsoring business. The student attends school the other four days, getting both a good education and work experience each ...

Resurrection of pilsen local community

There are varieties of communities, some more tightly bound than others. A community could be a group of people who are linked together by blood (as a family or clan) or who share current or past physical proximity (as people in, or having emigrated from, a village). A community could be those who have a common view on how to live a good life (as in a religious sect), share a common profession (as in the movie industry), or frequent the same website or chat groups (as in my college alumni group, where everyone seems to have a different opinion on everything that they absolutely must express). Each one of us has multiple identities, based on the groups we belong to.1 Moreover, some of us have virtual identities in addition to real ones. As communication has improved, and transportations costs have come down, more distant communities have gained importance. For some of us, these communities may be much more important than our neighbourhood. Indeed, a central concern in this book is about the passions that are unleashed when an imagined community like the nation fulfills the need for belonging that the neighbourhood can no longer meet. Nevertheless, we will focus on the proximate community for much of the book for a variety of reasons. Through most of history when distances really mattered, it was the only kind of community that had a serious influence on most people’s lives. Even today, it is where much economic activity is centered. For most of us, the neighbourhood is stil...

Types of communities & how proximity helps

Not only did the ordeal prevent those who did not have the requisite tolerance for pain, or desire for greater power and responsibility in the tribe, from achieving full manhood, but those who did survive it also would likely be even more committed to the tribe. Modern communities like fraternities at colleges, law firms, research universities, or the military have their own rites of passage, differing only in the degree of physical or mental pain from tribal initiation ceremonies.

Rites of passage in a tribal community are physically & mentally tough

The community shapes the views of its members about one another, so as to encourage mutual support. The elderly are a store of knowledge and have experiences and wisdom that can be very important in guiding the community. Nevertheless, in environments where reproductive capabilities matter enormously or much of the work is physically taxing, the elderly may be a dispensable burden. To give the elderly an incentive to share their wisdom, even while protecting their position, the socialisation process often inculcates respect for age. In modern South Indian Brahmin marriages and coming-of- age ceremonies, the elderly have an important position as they guide the young on the specific rituals to be followed. The young signal their acceptance of the natural order by repeatedly prostrating themselves before anyone older, asking for their blessings. Rank or position in the outside world is immaterial in determining who prostrates themselves before whom – all that matters is age. More generally, communities may allocate authority and power in ways that have nothing to do with economic capability, but help keep the community together.

Role of elderly hierarchy

American anthropologist Laura Bohannan spent years working with the Tiv people of Northern Nigeria. When she arrived to study the community, she was inundated with gifts by the very poor villagers – a common experience for guests in traditional societies. Not wanting to appear rude, she accepted them but was eventually taught the appropriate etiquette by the headman’s wife, who told her to ‘stop wandering aimlessly about the countryside and start calling to return the gifts’ she had received. Bohannon concluded:

Start calling to return the gifts

Finally, an important modern function of communities is to give the individual in large countries some political influence over the way they are governed, and thus a sense of control over their lives, as well as a sense of public responsibility. Well- structured countries decentralise a lot of decisions to local community government. To the extent that individuals can organise collective political action within the community more easily, it affords them a vehicle to affect issues on a national stage. The community then magnifies the power of the individual. We will return to the political role of the community later in the book.

Political role of local community

inability of the villagers to act together for their common good’.12 Anyone who has been to dysfunctional communities around the world will recognise some of Montegrano in those communities.

Dysfunctional communities & lack of common good

This inward focus may actually do public harm. A common example of what Banfield calls ‘amoral familism’ is visible in many developing countries, where people keep their houses spotlessly clean, but unceremoniously dump the garbage collected inside on the street outside. The ultimately self-defeating effects of having unclean and unhygienic public spaces surrounding clean homes can only be explained by extreme public apathy, a fundamental characteristic of dysfunctional communities. The state, despite being recognisably apathetic, distant, and nonfunctional itself, nevertheless dampened initiative in Montegrano. The faint hope that the government will dig a latrine, pave a road, or discipline school teachers can prevent the local population from organising to do so. In frontier towns in the United States, the community raised a barn or built a road itself, knowing there was no one else who would do it. In dysfunctional communities where the government is closer, the misplaced expectation that the ghost of the inefficient government will eventually appear and do the job crowds out what little private initiative there is.

Apathy in developing countries

Apart from the costs of foregone growth, information sharing has its downsides. The community can be very intrusive and cloying, poking its nose in members’ private affairs. Gossip can be helpful in straightening out aberrant behavior, but it can also be mean, hurtful, and intolerant of deviance from age-old traditions. Transparency can highlight budding problems, but those in the community fishbowl, naked to the view of all, may be civil in public while hiding seething resentment. By comparison, the anonymity of the city can be liberating, even though it distances us from social relationships.

Fishbowl vs anonymity

This is where religion came in. Knowing that God saw what the tribal authorities might overlook, in an age when the fate of the soul was more important than earthly existence, the fear of retribution in afterlife played an effective role in ensuring the usury prohibition was respected in letter and spirit. The prohibition on charging interest thus helped strengthen communal bonds and mutual support in small poor communities where anyone could be hit by adversity, and the identities of those in need fluctuated almost randomly over time. To be your brother’s keeper, to practice a kind of communism, made sense. The prohibition was also a form of early consumer protection vis- à-vis outside lenders. With the poor borrower not knowing how to read, having a very rudimentary understanding of interest, and also often being in a position of deep distress, the possibility that dispassionate lenders from outside the community could take advantage of him was substantial. Better, socially conscious thinkers would have argued, to force the community to take responsibility for the poor than to deliver them into the clutches of the moneylender. Indeed, all these reasons also played out in the Church’s attack on usury in Europe in the Middle Ages.

Debt & religion

Despite their low and highly variable incomes, death by starvation was surprisingly rare among the peasantry. The reason was simple: informal community support within the manor for those who still belonged to one, and formal charitable institutions run by the Church, such as almshouses, leper houses, pilgrim centers, educational institutions, and monastic hospitals, for those outside the manor, constituted a social safety net. Harder times for the poor explain why the Church became more aggressive in its fight against usury.14

Nobody died of hunger in feudl times

For money was intended to be used in exchange, but not to increase at interest.’17 St Augustine, a guiding light of the early Church, similarly warned about the three sins of fallen men: the lust for power, sexual lust, and the lust for money. Of these, he was most ambivalent about the lust for power, which if accompanied by a sense of civic duty and honour, could protect the community against external attack.18 He also discussed in his startlingly frank Confessions how his private desires such as sex – as a young man, he was sexually active, and later, he lived with a mistress who bore him a son – came in the way of his relationship with God. Here too he seemed to be ambiguous, if not understanding. About the lust for money, though, he was clear in his condemnation.

3 sins of fallen men

In feudal Europe around the turn of the first millennium, all that it seemed to take to create a self- sufficient political entity – it would be too much to call this a state – were fortified walls and a retinue of armed men. Indeed, often the first use of the independent taxation authority a town received was to build a strong wall – a policy that still appeals to some of our politicians.23 In the fourteenth century, by some counts there were over one thousand separate political entities in Europe.24 Each entity levied its own duties, taxes, and tolls, especially on goods crossing its borders, which increased the cost of transporting goods over long distances. These were just the legal impediments to commercial traffic; entrepreneurial lords could indulge in their own banditry, while sea captains could engage in piracy. If you drive alongside the Rhine near Frankfurt today, you will see the castles of the original robber barons at regular intervals, though today they only relieve tourists of their money, and in a far more civilised way than in the past. All these impediments ensured that the size of the market any producer could safely and profitably access was quite small – often only within the borders of the little political entity he resided in. The cannon changed everything. The Chinese invented gunpowder, but it was the Europeans who fully discovered and developed its destructive potential. At the battle of Crecy in 1346, English bowmen used small bombards, which, p...

From walls to large armies

In sum, political consolidation led to economic integration. When combined with maritime technological innovation that allowed trade with more distant land, producers could now exploit economies of scale. European pro-duction of crafts and manufactured goods, centered in towns and cities, expanded. And as markets delivered all manner of goods, the manor too specialised, with some focusing on cash crops like grapes, transformed into wine, instead of the earlier emphasis on necessities like cereals – for cereals could now be bought with the money obtained from selling wine.30 The increase in production and trade played an important role in weakening the case against usury. A master craftsman or merchant wanting to borrow to finance an expansion in his business or trade was not in the sympathetic position of an illiterate peasant living at the margin of starvation. As the community turned from consumption loans to small production or trade loans, public attitudes toward usury became more favourable. After all, it seemed only fair that those who sought commercial loans to make profits should pay a share of their profit out as interest.

Political consolidation led to economic prosperity

Much as social media today has allowed politicians to reach people directly, bypassing the filters of the mainstream press, Gutenberg’s movable-type printing press allowed critics of the Church, abetted by the local prince, to gain direct access to the masses. The reduced cost of printing pamphlets, as well as the spread of literacy, especially among the growing business community, ensured that the Church could be challenged and the arguments would reach many more people than in the past. Indeed, conservatives at that time warned that ‘printed books and broadsheets would undermine religious authority, demean the work of scholars and scribes, and spread sedition and debauchery.’

Social media vs plitics as like printing press vs religion

In Weber’s view, the true capitalist is not the flamboyant gambler who risks all or the unscrupulous speculator who wheedles his way to riches, but the temperate, reliable, hardworking businessman, ‘with strictly bourgeois opinions and principles’.38 The essence of modern capitalism is the steady accumulation of wealth, not because of the pleasures it can buy or the material needs it can satisfy, but for its own sake. Indeed, far from unbridled greed and debauchery, rational capitalism combines a single-minded focus on accumulation with a frugal lifestyle. What Calvin did for capitalism, according to Weber, was to provide it a moral legitimacy in a world where avarice was a sin. Calvin emphasised the notion of calling, or predestination – that God has chosen some to be saved from damnation, and that their moral obligation is to do their duty in the world. Rather than abandoning the world, as was the Catholic monastic ideal, one had to embrace it. The practising Calvinist had to have faith that he was one of the chosen, and had to demonstrate this faith through worldly activity. Business success was a sign of being one of the elect. Therefore, the accumulation of wealth was no longer to be condemned as avarice, but instead celebrated. Indeed, it was condemned only if wealth was spent on luxuries and high living – not only did conspicuous consumption reduce the savings necessary for investment, but it was also a waste of time, detracting from man’s true calling. The Calvinis...

True capitalist

It was not just enough to produce more – the monarch had to be able to collect his share in taxes. The more he threatened to take in taxes, and the more unpredictable his behaviour in doing so, the less his people would want to invest in, or put effort into, income-generating economic activity. Instead, they would focus on hiding their income and wealth. The monarch needed a mechanism to signal that he would tax reasonably, even in times of war when he might be tempted to levy huge taxes or expropriate property in order to preserve his reign. So the king had to create institutions that would limit his own ability to be arbitrary, thus convincing people that their taxes would not be used to extort yet more from them. The Church was one such institution, but as discussed in the last chapter, its power was fading. In most European countries, monarchs therefore committed to levy new taxes or raise old ones only if approved by the representatives of the rich and propertied who, in England for instance, were seated in Parliament (and the Estates General in France and the Riksdag in Sweden). Given the difficulty of getting anyone to approve higher taxes on themselves, monarchs tried to find ways to not put the question to the representative bodies if they could find other ways of gathering revenues. The obvious alternative was to do cozy deals with the businessmen in the towns, which the emerging absolute monarchs of sixteenth- and seventeenth-century Europe proceeded to do. Euro...

Arbit monarch & economic activity

It was not just enough to produce more – the monarch had to be able to collect his share in taxes. The more he threatened to take in taxes, and the more unpredictable his behaviour in doing so, the less his people would want to invest in, or put effort into, income-generating economic activity. Instead, they would focus on hiding their income and wealth. The monarch needed a mechanism to signal that he would tax reasonably, even in times of war when he might be tempted to levy huge taxes or expropriate property in order to preserve his reign. So the king had to create institutions that would limit his own ability to be arbitrary, thus convincing people that their taxes would not be used to extort yet more from them. The Church was one such institution, but as discussed in the last chapter, its power was fading. In most European countries, monarchs therefore committed to levy new taxes or raise old ones only if approved by the representatives of the rich and propertied who, in England for instance, were seated in Parliament (and the Estates General in France and the Riksdag in Sweden). Given the difficulty of getting anyone to approve higher taxes on themselves, monarchs tried to find ways to not put the question to the representative bodies if they could find other ways of gathering revenues. The obvious alternative was to do cozy deals with the businessmen in the towns, which the emerging absolute monarchs of sixteenth- and seventeenth-century Europe proceeded to do. Euro...

Crony capitalism

The guild was effectively a cartel trying to ensure all its members got a decent living in an environment of weak economic growth, but also seeing to it that none was so energetic or entrepreneurial so as to put the others at a disadvantage. Like the manor, it aggregated the power of its members, a necessity in times when the law was weak, and might often right. It was also a social organisation like the medieval manor, providing economic support to those in need and encouraging interactions between its members. A somewhat disapproving description of members of the merchant guild of the Dutch city of Tiel dating from 1024 comments that members ‘begin their drinking bouts at the crack of dawn, and the one who tells dirty jokes with the loudest voice, and raises laughter and induces the vulgar folk to drink, gains high praise among them’.19 Like the manor, it ensured stability and comradery, at the cost of innovation and efficiency.

Town guilds

The alliance of the town and Crown was more than just a matter of befriending the enemy of the enemy. Each offered something important to the other. For the merchant or the craftsman, the king offered protection, not just from physical attack or intrusion from manorial or canon law, but also from competition – he endorsed the anticompetitive guild and its practices through a royal charter. The resulting monopoly profits were the rents that are so necessary to sustain relationships. It kept the guild members united, creating a tight-knit association that was a powerful defense against other predatory powers of the time. The guild shared some of those profits with the king through periodic fees or loans, thus fulfilling its side of the Faustian bargain.

Rent to sustain local community

There is probably no pithier statement of mercantilist nationalism – import less, consume less, produce more!

Inport & cosume less, produce more

Even the three monopoly companies were not inconsequential in the development of the government debt market. The East India Company built a colonial empire in the East that was an important contributor to England’s fortunes. The Bank of England, with its monopoly over banking services, could issue stock easily, and the proceeds were invested in long-term government debt. It also proved reliable in funding the government’s short-term needs, which enhanced the public’s perception that the government would not run short of funds. Greater surety about the availability of funds to the government enhanced the public’s confidence that long-term government debt would be a safe investment. Over time, the Bank of England lost its banking monopoly, but it became England’s central bank and retained a monopoly over money creation. And finally, the South Sea Company, which was granted the dubious monopoly of trading with the South Seas (where there was little trade), helped in putting government finances on a sustainable track in a very fortuitous way.35 The initial issuances of government debt after the Glorious Revolution were in the form of very high interest annuities that could not be redeemed by the government. The South Sea Company offered a deal to the government: it would buy the annuities from current holders and turn them over to the government in return for lower-interest government paper (and monopoly privileges). It offered its annuity holders the choice of its own stock o...

Englands story

This point sometimes gets lost in the debate about the role of institutions in development. There is a strong correlation between the existence of ‘good’ institutions in a country and its economic growth and prosperity, so much so that one of the more influential recent papers on the subject is titled triumphantly, ‘Institutions Rule’.38 While institutions matter, they rest on a bedrock of an underlying distribution of power among the constituencies in a country, which may have its sources largely elsewhere. For instance, the independent power of the gentry came from their commercial aptitude, their wealth, and their closeness to their tenants, who looked to them for sound management and good livelihoods. Unlike the landed magnates, no member of the gentry was extremely powerful on their own, hence they needed transparent rules and law to protect them, as well as a body like the House of Commons to help them coordinate their actions. At the same time, their numbers meant they could not be expropriated with the stroke of a pen or collectively accused of treason. The mistake when institutions function well is to believe that they would function similarly well elsewhere, ignoring the possibly different underlying distribution of power. The United States Constitution, when adopted by Liberia, turned out to be just a piece of paper, with none of the effective checks and balances that fill the Federalist Papers and characterize how the United States works.39 While we know a fair...

Institutions & distribution of power

In the United States in the early nineteenth century, settlers poured into the newly surveyed and auctioned lands in the West. Land was widely owned, and those who could not make a go of it sold quickly to those who could, so it was also productively held. The exception was the South, where both corruption and climate conspired to create large, concentrated plantations run on the backs of slave labour.40 Studies show wider distribution of land, especially when also efficient, helped improve local governance. Rodney Ramcharan of the University of Southern California finds that US counties where there were large farms and concentrated land holdings (because of the kind of crops favoured by rainfall patterns) tended to have less spending on education, a key measure of the democratic responsiveness of the government to public need.41 In a joint study with him, we found that such counties had far fewer banks per capita in the early twentieth century, a measure of broad-based economic opportunity.42 We traced such differences to the nature of governance in those areas. Therefore, even within a developed large country not so long ago, land distribution affected local governance, and thence economic opportunities. As economic historians Stanley Engerman and Kenneth Sokoloff have argued, there is a more general pattern here. For example, countries in Latin America that started out with more plantation- based agriculture, and thus large concentrated land holdings, tend to have less ...

Distribution of land pattern affects local governance

As the state eliminated military challenges within its territory, and as parliamentary bodies came to be dominated by propertied individuals, the wealthy no longer felt their lives or property were under constant threat. Parliament would limit the government to legitimate activities. With the state constitutionally limited, trade- or community-based organisations that would provide members physical security and protect their business were no longer required. Nor were restraints on competition that made these organisations possible. Economic philosophers could now preach the virtue of free and unfettered markets, while political philosophers could extoll the benefits of individual liberty and minimal government, even while both sets of thinkers took the safety of life and wealth for granted. In the eighteenth and nineteenth centuries, markets were on the ascendance. Laissez-faire, first propounded by French philosophers known as the Physiocrats, sought to take the emerging relationship between the state and markets to its logical conclusion: the state should leave business alone to do what it must, letting the full forces of market competition play out. The philosophers did not explain what they would advocate if market participants tried to subvert market competition with the aid of the state – a development that Adam Smith worried about – or shut it down themselves by cartelising the market. Nevertheless, as a blunt theoretical argument with which to bludgeon the remainin...

Urban migration

He was equally scathing about mercantilism. He dismissed the notion that an accumulation of gold would make a country more powerful and able to wage war – for a country like Great Britain, any feasible accumulation of gold would be too small given the huge costs of war. What was needed to sustain a long war was greater domestic productive capacity. To give domestic producers a monopoly by levying high import tariffs or prohibiting imports was therefore either ‘useless or . . . hurtful’. If the local product could be made and sold as cheaply as the foreign product, the prohibition was useless for domestic production would be competitive on its own. If local production was not competitive, the tariff was harmful for it raised domestic prices of the product, and diverted precious domestic productive capacity toward its making. Smith wrote: ‘It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. The tailor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a tailor . . . What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.’ 5

Adam Smith on mercantilism

Thomas Robert Malthus epitomised the heartless side of liberalism, when taken to its extreme. In the various editions of his Essay on the Principles of Population published in 1798, he emphasised the tendency of man to reproduce faster than food supply. Man could restrain himself through self-imposed checks like delayed marriage or sexual abstinence, but Malthus did not believe these would work. Instead, disease, war, and famine would be the natural checks on mankind’s lack of self- control. No wonder historian Thomas Carlyle termed economics ‘the dismal science’! Malthus was wrong. Humans do not have an uncontrollable urge to reproduce. Indeed, prosperity has been a powerful contraceptive, with people becoming less willing to have children, even as they can afford more of them. Fertility rates for women are now below population replacement rates, not just in rich countries but in a number of emerging markets. Nevertheless, his views offered those who opposed even humanitarian government aid a theoretical rationale. Any relief schemes for the unemployed or the poor only encouraged them to reproduce more, and thwarted natural checks and balances. The indigent should be left free to starve, for only through a market-induced cull would succeeding generations have a better life.

Reproduction & economics

When crisis hit, the Rockefellers of the industrial world would buy up failing competitors, close them down and fire their workers, and eventually restore equilibrium between supply and demand, but with much distress for all. The collapse of capitalism was not inevitable – it might be stuck in perpetual torment. As the Russian revolutionary Leon Trotsky wrote, ‘capitalism does live by crises and booms, just as a human being lives by inhaling and exhaling. First there is a boom in industry, then a stoppage, next a crisis, followed by a stoppage in the crisis, then an improvement, another boom, another stoppage, and so on.…. The fact that capitalism continues to oscillate cyclically…. merely signifies that capitalism is not yet dead, that we are not dealing with a corpse. So long as capitalism is not overthrown by proletarian revolution, it will continue to live in cycles, swinging up and down. Crises and booms were inherent in capitalism at its very birth; they will accompany it to its grave.’19 The Marxist solution to the problem – ending competition – resembled Rockefeller’s, except Marxists wanted to replace the monopolist capitalist with the dictatorship of the proletariat. Since they argued capital was essentially accumulated profit extracted by squeezing labour (or amassed from other dishonourable activities buried in a typical family enterprise’s past like smuggling, bootlegging, usury, war profiteering and outright theft), the capitalist should be expropriated. All ...

Economic cycles of capitalism, and marxist solution

As economic historians Stanley Engerman and Ken Sokoloff argue, in frontier areas of the United States, land was plentiful, the existing population was few in number, and there was a great need to attract more settlers.32 Perhaps this was why none of the states that entered the Union after the initial thirteen had a property requirement for voters – would-be settlers usually came without property. Moreover, as states competed for people, even the original thirteen were forced to weaken their voting requirements so as to not lose people. If attracting people was so important, though, why did states continue to exclude women and minorities? One can only speculate here. Perhaps states felt that going against the prejudices of the time would attract fewer, not more of the favoured settler, white men. Perhaps they thought women would follow with their husbands or fathers and few single women would migrate anyway. Perhaps they did not believe there were sufficient free blacks to attract. Nevertheless, even though the extension of the franchise was far from universal, and did not seem to rise above the prejudices of the time, the founders of new states were willing to extend the franchise, even without an agitation by the excluded.

Us states were competing for people

While the nomenclatures vary, at the heart of such regimes is a pact between the cartelised market and the state, leaving little room for economic or political competition, or the community. Such arrangements are examples of what political economists Douglass North, John Wallis, and Barry Weingast call limited- access societies.35 In contrast, the liberal market democracies in developed countries are what they call open- access societies, combining free and open markets with vibrant democratic control over the government. Implicit in the work of a number of political scientists is the belief that open- access societies are the desirable pinnacle of social development, and they will not regress back to limited-access societies because of the strong institutions that protect them. They are probably right in believing that open- access societies are the best we can do for now, but they are mistaken in thinking that open-access societies cannot regress. To prevent regression, it is critical that the balance be maintained. As we will see now, communities of citizens, expressing their interests through democracy, played an important role in the United States in preventing a corrupt compact between the state and the markets.

Limited access vs open access to societies

Politically engaged largely self- governing communities were a natural unit of organisation, and facilitated organized protest. Common economic causes could then bring them together in a movement across the United States, as with the Populists and Progressives. The sense that the system had worked earlier gave the movements confidence that they could reform it and therefore did not need a revolution. Chance also helped. The tragic assassination of the pro-business president William McKinley and his replacement by a reform- oriented Theodore Roosevelt conspired to empower the anti-monopoly movement in a timely way.47 These democratic movements pushed back against the system’s natural drift toward cronyism. In the next chapter, we will see that the reverse is also true. By creating a healthy competitive private sector, competitive markets also help keep the state’s authoritarian tendencies in check, and democracy vibrant. Thus, markets and democracy could be mutually supportive. I emphasise ‘could’ because there are circumstances where the voting public is apathetic to public policy, and others where it might actively turn against private wealth and competitive markets. This is why democratic protest works best when it is timely, before people believe the system is beyond reform.

Markets & democrcy r self serving

An independent private sector is therefore important in a democracy, for it lies outside the state apparatus and embodies tremendous potential power. It is an essential source of funding, both for the parties in government and the political opposition as well as for nongovernmental organisations. Its intent may not solely be to lobby for regulations that enhance its profits, it may also be more public spirited – we will discuss later in the book whose views it might represent. The private sector also provides platforms for, and sometimes orchestrates, public opinion. Recall it was the muckraking press that was instrumental in breaking up Standard Oil as well as bringing regulation to the meatpacking industry. The Washington Post, a family-owned newspaper, effectively led the investigation that resulted in President Nixon’s resignation after the Watergate break-in. The private sector can also take positions with its business activities that have a political or social slant, and attempt to nudge reforms.

An independent private sector

We ended the last chapter describing two democratic movements in the United States that contained the overly strong markets pillar and its corrupt collusion with the state, and created a balance, even if temporarily. In this chapter, we will start by describing three situations when the community does not push for competitive markets – when market players or practices are deemed illegitimate and the strong state offers an alternative, when the state is weak and the community is bribed easily to stay apathetic, and when neither the state nor the community offer people the capabilities and the support they need to participate in volatile, changing markets. That will take us to how mechanisms to provide people capabilities and support evolved, and complete our discussion of the elements of the balance needed to sustain a liberal market democracy.

3 situations when community does not push for competitive markets

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. Furthermore, there is little incentive for anyone to improve public administration and public services, because it is by filling the gaps left by the incompetent public administration that the corrupt politician maintains his vital role. Indeed, he is responsible for some of the incompetence of the administration, since it is he who overfills its positions with unqualified but loyal supporters.

Corrupt politics in india due to civil servants neither being civil or servant to poors

TECHNOLOGICAL CHANGE AND FINANCIAL CRISIS Episodes of innovation have often been punctuated by financial crises and severe economic downturns. The Panic of 1873 in the United States followed speculation in railway stocks, the Crash of 1929 followed a boom in industrial stocks, including utilities, and the Dot-Com Bust in 2000–2001 can be traced to the euphoria surrounding advances in internet technology and commerce. Such a combination of technological innovation followed by financial crisis has been regular enough that economic historian Carlotta Perez argues the two are related – the tendency of financial markets to become overoptimistic about the possibilities for new technologies invariably leads to a financial frenzy followed by a crash, way before the technology delivers on its promise.16 Eventually the new technology does deliver stronger productivity, growth, and well- being if the market system survives, but this invariably means that society has to deal with the public’s fears about the future at a time when the market system does not seem to be working, and when countries have limited resources to help people cope or adjust. The market system, and indeed democracy itself, is extremely vulnerable at such times.

Financial crisis & tech revolution

The expanding market and its demands hit at community control. Small communities had the resources to fund and staff the common school. The high school was a different matter. In order to teach the wide variety of subjects in the depth and width required, the high school needed many teachers, an administrative staff, large buildings, a library, scientific laboratories, a gymnasium, and so on. With the large minimum scale required to provide education of the requisite quality, any new high school had to draw a large number of students to be economically viable. This had a number of implications. First, communities, especially the smaller and the more remote rural ones, often had to come together to found high schools. This immediately meant a weakening in each community’s sense of ownership and responsibility for the school. Second, the greater complexity and professionalisation of high school administration created the possibility that parental control might not be adequate to the task of monitoring the school, which gave education professionals an excuse to distance parents from school governance whenever possible. Third, the greater resources needed by even rudimentary high schools, coupled with the historic emphasis on local funding, meant that high school quality depended to a much greater extent on local wealth. Students in different areas had vastly different life opportunities because the quality of high schools varied so much. Poorer and rural communities were obvi...

Schools & local community

Today, in any given grade in schools across France, the curriculum is the same. Nevertheless, the French too have not achieved their goal of uniform access to school education. As is common in centralised systems, the teachers who are assigned to schools in the most difficult neighbourhoods are often the ones who have the least power to wangle preferred assignments from the bureaucratic establishment. They are typically the most junior and least experienced. The quality of such schools is lower – in large part because of differences in early childhood learning among the student body and in community support – increasing the desire of any good teacher who is assigned to them to escape as soon as possible. So while the school system in the United States evolved from one that was totally decentralised, and had substantial community involvement in design, to one that has significantly more central direction in parts than at the outset, the French system has had central control for the last two hundred years. The advantage of a decentralised system is the community can shape it toward its needs; the advantage of a centralised system is that it offers more uniform instruction across the populace. Each system has its problems and fails to prepare people in a variety of communities for the market.

American vs french centralised education system

We have been discussing what might be deemed pre-market support, that is, help in preparing the individual to enter the market as a worker or a producer. Let us now turn to what could be labeled post-market support – help to those who are hit by adverse economic conditions, or who, because of disability, misfortune, aging, or technological change, are incapable of earning a living. In a sense, both pre-market support and post-market support could be thought of as substitutes. The more people have the capabilities to participate in and benefit from the market, the less need there is of a safety net, and vice versa. Indeed, the historical US embrace of markets despite the holes in its safety net, may well be due in large measure to its high-quality and widely accessible schooling system. Today, its schooling system is no longer adequate, hence more weight falls on post-market support, which the United States is ill structured to provide, for reasons we will come to shortly. Worker lives in the early years of industrialisation were very difficult. They were, on average, much poorer than today. Wages were barely enough to put food on the table and secure shelter for the family in a noxious urban slum, let alone build a buffer of savings. Indeed, informal workers in many developing countries face similar conditions today; sickness means a loss of pay and skipped meals; and the death of the main wage earner may leave the family destitute, with few alternatives to begging or pros...

Pre and post market safety net

As goods markets and the market for labour grew to span many communities within a country, such community-based solutions came under pressure. One problem had to do with those who moved from one community to another in search of work. Internal migration picked up as nation-states emerged and security improved, and as opportunities sprang up in distant parts of the country. Who was responsible for supporting the destitute migrant – the migrant-receiving community or the migrant-sending community? Even today, the European Union struggles with this question. A second problem was that the size of economic shocks transmitted through manufacturing and finance across the increasingly integrated world economy continued to increase. Such large shocks could overwhelm entire groups of communities, leaving few in a position to hold out a helping hand to the fallen.

Problems for large migrant societies

Instead, Germany passed three sets of laws in the 1880s, essentially making membership in insurance pools compulsory for specified worker groups, and adding employer taxes to the pool. The three risks insured were sickness, industrial accidents, and disability and old-age pensions for those who survived beyond seventy.39 The British Liberal government between 1906 and 1911 took the next big leap in state involvement with the passage of a number of important bills including old-age pensions (1908), the Labour Exchanges Act (1909), the Trade Boards Act (1909), which set minimum wages in a number of industries, and the Development and Road Improvement Funds Act (1909), which opened the way for public road works in times of mass unemployment. These efforts culminated with the enactment of unemployment and health insurance in 1911. The German and British reforms were indeed major steps in the creation of reliable nationwide safety nets that would buffer workers against market volatility, but they did diminish the role of the community once again.

German & brit reforms

1910, approximately ten million foreign-born immigrants and twelve million of their locally born children lived in American cities. In most large cities, the children of immigrants outnumbered the children of the native- born. Furthermore, blacks had been migrating away from farms, first into the Southern cities, and then into the Northern cities.43 Unlike Europe, therefore, the United States, especially in the hard-hit cities in the 1890s, was not an ethnically homogenous population. Empathy, the psychological basis of the safety net, was much harder to generate under these circumstances, and it was far easier for native- born whites to believe that immigrants or minorities were unlikely to have a strong work ethic, and would likely become welfare cheats.

Why america didnt provide social safety net

The New Deal had three main objectives – relief (of the destitute unemployed and poor), recovery (of the economy from the Depression), and reform (so that these conditions were not repeated). The administration tried to accomplish these goals through a variety of programmes and legislative efforts – at some level, it appeared that the government was willing to try anything, for nothing seemed to be working. Indeed, it was only with the ramping up of production for war in 1939 and 1940 that the United States really exited the Depression. Nevertheless, government action had some effects. Enormous public works, such as the construction of the Lincoln Tunnel and what came to be known as LaGuardia Airport, gave relief through paid employment and helped prevent an even greater collapse in activity. Financial sector reforms such as the Banking Act and the Securities Act, both enacted in 1933, brought stability to financial markets.

New deal post great depression

Milton and Rose Friedman’s critique of social security was precisely that in the past, ‘. . . children helped their parents out of love or duty. They now contribute to the support of someone else’s parents out of compulsion or fear. The earlier transfers strengthened the bonds of the family; the compulsory transfers weakens them.’51 Indeed, James Poterba finds the elderly in the United States have been less supportive of education for the young in recent times than before the institutionalisation of social security, especially in diverse communities.52

Critique of social security system

China and India. After outlining the reasons for their extraordinary growth, we will see that each one has a different kind of imbalance to deal with. China has a strong state, dominated by the Communist Party. Can China’s increasingly sophisticated and complex markets grow while the state continues to be under Party control? For democratic India, the challenge is to make the state more effective, while placing stronger constitutional limits on it. This requires a more independent private sector. As these countries, especially China, play a greater role in global governance, the future is worrying. Populist nationalism in the developed countries will strengthen incipient nationalism in the emerging markets, and make divisive conflict at the international level more likely. This is yet more reason why reforms are urgent.

China & india currently

Western Europe, the first beneficiary of this new order, became much more productive. Output grew not just from new investment in machinery, but also from the increased use of motor vehicles and the spread of electrification, the resumption of the interrupted rollout of the Second Industrial Revolution. These developments created a variety of virtuous circles. For instance, as farmers started using tractors, labour left agriculture and moved to work in new factories (that were being set up to utilize the cheap labour), and to live in the growing cities. Manufacturing required more educated workers, and average education attainments improved substantially across Western Europe. An increasing number of graduates filled the huge demand for skilled workers in the industrialising economies. Growing worker incomes then led to greater demand for consumer goods, completing the virtuous circle. As one example of the tremendous growth in manufacturing, in 1951 Italian factories made just 18,500 refrigerators, two decades later they were producing over five million a year.6 The explosion in supply was absorbed by a matching increase in demand. In 1957, fewer than 2 per cent of Italian households had a fridge, in large part because few owned cars with which to shop in sufficiently large quantities to stock fridges. Indeed, Italy had just 7 cars per thousand people in the early 1950s.7 Today, such a low level of car ownership would rank it at 172 out of 191 countries, putting Italy at ...

Car & fridge ownership in western europe

In the darkest days of the Second World War, economist William Beveridge was asked to chair a committee with the somewhat tedious task of examining the existing safety net and seeing how benefits could be better coordinated – perhaps more as a make-work assignment that would keep the radical economist at a safe distance from immediate policy.11 His report in 1942 was, however, an instant bestseller, extraordinary for a work that contained 461 numbered paragraphs and appendices filled with detailed calculations. Final sales figures were over half a million, including fifty thousand in the United States. A cheap edition was even printed and circulated to troops at the front, explaining what they were fighting for. Beveridge proposed a single system of insurance against the important risks faced by a working-class family: childbirth, sickness, disability, unemployment, and old age. He outlined a contributory system where every working person paid into the system at the same rate, and anyone hit by one of these risks was helped with the same subsistence level of assistance. The idea was one contributory rate for one level of benefit for everyone, without any screens, such as whether the individual earned too much. Beveridge emphasised the principle that everyone would contribute, though employers and the state would also chip in. His aim was not to redistribute income between classes, though some redistribution was unavoidable, but to move an individual’s income ‘between times...

uk's social security system enhanced post world war 2

In 1963, from the steps of the Lincoln Memorial, Dr. Martin Luther King Jr. urged Americans to honour the promissory note the founding fathers had given that ‘all men – yes, black men as well as white men – would be guaranteed the unalienable rights of life, liberty, and the pursuit of happiness.’ When he declared, ‘We refuse to believe that the bank of justice is bankrupt. We refuse to believe that there are insufficient funds in the great vaults of opportunity of this nation. So we’ve come to cash this check, a check that will give us upon demand the riches of freedom and the security of justice,’ he was speaking both figuratively and literally.16 The Civil Rights movement undoubtedly pricked the nation’s conscience, and, when coupled with the public’s generosity buoyed by rising incomes, helped overcome America’s traditional reluctance to expand the safety net. President Lyndon Johnson, who had lived among, and worked with, the poor during his youth and through the Depression years, provided persuasive leadership. The political attractiveness of targeting the votes of blacks who had migrated from southern agricultural jobs for the industrial jobs in northern cities gave politicians the incentive to follow.17 Congress enacted a radical set of government- and community-based programmes intended to wage war on poverty and make the United States into Johnson’s Great Society. Funding was increased significantly for welfare, especially for the indigent elderly, for health car...

Martin lujther king & health+education for all program