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

by Raghuram G. Rajan

To build the capabilities in their children that the market demands, people who have the incomes and the choice are tempted to move out of mixed or declining communities into communities of people like themselves. This is a phenomenon that can be seen in the United States, but it is also happening elsewhere. While the truly rich have always lived apart, the upper middle class has also been pushed to secede into their own enclaves. Even as job opportunities become more unequal, economic diversity within communities has fallen while diversity between communities has increased. This sorting of human capital across communities has increased the inequality in access to the capabilities necessary to compete in the market. Inequality, not just in economic outcomes but in opportunities, has therefore become an enormous problem. In the United States it shows up between residents of big cities or rich suburbs and small, economically devastated rural towns, between workers in big young successful service firms and small older struggling manufacturing ones, and between the top earners and the rest. The roots of this inequality lie not only in technological change, but also in the failure of the community and the state to balance and modulate markets.

Inequality economics