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

by Raghuram G. Rajan

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