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

by Raghuram G. Rajan

It would not be much costlier to replace informal support with formal Beveridge-level support since it would indeed be at a basic level. For the same reason, such support would not raise significant public concerns about ‘undeserving’ others getting help. Nevertheless, it would constitute a reliable safety net, a necessity for a civilised society in the possibly volatile days ahead, especially if it has not fostered basic capabilities in all. No rich country should create uncertainty among its people about whether they will have enough to live. If there were political appetite for more support, it could be delivered through the community to those who have resided in the community for a while (and to preserve mobility, the community would bear responsibility for a while for those who move out, with any conditionality porting to the beneficiary’s new location). Community support should be relatively equal across proximate communities – else beneficiaries could swamp communities where the benefits and conditions are most favourable. Communities should bear a share of the cost of benefits so that they have skin in the game, with the share increasing in average community incomes. Who would pay the rest? Ideally it would be regional or state governments, who are close to the communities and can monitor performance. In countries where regional or state governments tend to discriminate against certain communities, the federal government would have to monitor flows or take over.

No individual should feel the fear of not having enough to live

Think, then, about some of the legacies we leave our children. Debt – that we have built up by spending more than our means, even in normal times, on grounds that growth is too slow for our taste. No saved funds to pay for our retirement and certainly none to help them with theirs. Political paralysis. Climate change, which we have done precious little to reverse. Automation, which by causing great fear of the future, has unleashed the beast in many of us . . .

Leagcies we leave for our children

When members are in close physical proximity and work together for the community, they build a stronger community. As people run into one another, as they have to work with one another for local projects, social capital – as embodied in mutual understanding, empathy, and reservoirs of goodwill – accumulates. Social capital can be useful in building community institutions, overcoming ethnic divisions, as well as in filling in the holes left by more formal structures such as market contracts or social safety nets. Friendship will be what holds the communities of the future together when the older bonds of economic necessity weaken.

Local commu ities in physical proximity

What about the downsides of community? Every community generates competition for social prestige. Such competition is not always bad – it can incentivise activities such as neighbourliness that are not rewarded by the market. Nevertheless, it can also incentivise wasteful one-upmanship – a recent study suggests that bankruptcy filings for neighbours go up if a household wins a lottery, presumably as the neighbours try to keep up with the Joneses.1 Also, a community breeds jealousies, and even hatreds. It fosters conservatism. While we cannot presume that the good outweighs the bad in every community, members of a modern community have the option of leaving it if it turns out to be too oppressive. In general, communities will have to offer enough benefits to everyone so that they want to stay. That limits how bad communities can get. In this chapter, we will start by examining why virtual communities, professional associations, religious associations, and other such structures will allow for some of these functions of the physically proximate community but not all. We need vibrant physically proximate communities, and central to their existence is the presence of viable economic activity – nothing erodes a person’s self-worth faster than a sense that they have nothing productive to contribute. Despair, combined with alcohol, drugs, or violence, can erode the social fabric significantly. Even those who continue to hope may leave rather than succumb to the melancholy that sur...

Downsides of neighborliness listed

have focused on the physically proximate community through much of the book. We have more sources of identity than just the neighbourhood we live in, and thus more communities we belong to. I am a resident of Hyde Park, a neighbourhood in Cook County in Chicago, a city in the United States. I have other affiliations also. I am a citizen of India and a professor at the University of Chicago. I am a Tamilian Hindu; I speak English, Hindi, French, and Tamil with varying degrees of fluency; and I am a member of various organisations, both professional ones like the American Finance Association and those with a policy focus like the Group of Thirty. I am a member of various chat groups, including family and college alumni groups. Not only do we have identities that come to the forefront at different times, these identities can imply varying degrees of engagement and support. Nevertheless, few groups that we identify with engage and support us in the many ways that the ideal proximate local community and its constituents – our family, friends and neighbours, kin, colleagues at work, church, etc. – do. Many of us do not live and work in an ideal local community, though. That is why we look to other communities for our sense of identity. Some find it in religion, others in nationalism, yet others in criminal gangs or extremism. For those without strong ties to a real, grounded, community, these weaker ties to imagined, virtual, or criminal communities may become important sources ...

Without ties to a strong, grounded community

CLEANING UP INDORE Indian cities are colorful, vibrant, noisy, and…. dirty. The commercial hub of the state of Madhya Pradesh, Indore, was no exception.8 People treated it as a vast public garbage dump. After eating food on paper plates bought from stalls at the famous Sarafa food market, customers simply threw their plates and any residue on the ground. People were no more careful with their domestic garbage, dumping it anywhere in the proximity of overflowing dumpsters, which were rarely emptied. Stray animals – dogs, cows, goats, and pigs – roamed freely, eating the garbage and adding their excrement to the mix. Some poor people, who did not have access to toilets, defecated in the open, in vacant fields or near public drains. All in all, it was a perfect breeding place for flies, mosquitoes, and, therefore, disease. Into this mix were thrown two abnormal individuals, Malini Gaud, who had been elected mayor of Indore on a plank of cleanliness, and Manish Singh, the municipal commissioner. There was also one dedicated NGO, Basix, which had experience in effective waste management. Basix wanted more waste for poor rag pickers, who make a living separating out metals, paper, plastic, and glass from waste, and recycling it. The reformers realised that part of the solution was to make it easier for people to dispose of their garbage. That meant placing public garbage cans at every needed place throughout the city with its location geo-tagged for easy collection, collecting d...

Cleaning up indore has just been a 3 year journey

The population fell steadily from the 1950s until an enterprising mayor in the 1980s, Frank Einsweiler, decided to emphasise its tourist attractions. The boarded-up old houses on Main Street were refurbished – and a seedy downtown became a charming nineteenth-century vintage attraction virtually overnight. Soon a variety of restaurants and retailers of handicrafts, as well as purveyors of luxury goods, opened on and around Main Street, adding to tourist interest and local jobs. The town also emphasised its links with the famous Union Civil War general and United States president Ulysses S. Grant, who worked in his family tannery and leather-goods shop in Galena before leaving for the war. On his victorious return in 1865, he was presented a brick house, which is now an important historical attraction in Galena. An annual county craft fair started bringing in thousands of visitors, and in 2010 a Vision 2020 campaign began implementing new ideas for the future vitality of the town. Many Chicagoans now own second homes in Galena, and in 2011, TripAdvisor listed Galena among its top-ten ‘Charming Small Towns’. Even though a number of venerable downtown pharmacies and grocery stores have closed, Galena’s population has stabilised. Many residents now have jobs in the tourist industry. Galena’s example is worth noting because many examples of revival center around new technologies. Galena’s does not. Indeed, in every developing country I visit, some ministry is putting together a...

Galena is such a good case study

Many towns across the developed world have charming streets that, with a little sprucing up, become ‘olde towns’ full of luxury shops and pricy restaurants selling a collective experience to tourists. Other communities have ‘hard’ assets such as power stations producing cheap power without much demand, plentiful cheap land, old industrial buildings that can be repurposed as space for start-ups or loft residences, biking and hiking trails for the health-conscious, and so on. Sometimes the assets are human. The community may have rich entrepreneurs or philanthropists who might be looking for ways to give back to the community that made them. Underutilised well-educated or highly skilled workers might already exist, or might like to return to the community if they see opportunity. With the right vision, even young unskilled workers, capable of being trained and willing to start with moderate wages, are assets. Often the assets are organisations such as a government or defense establishment, a large locally headquartered firm, a hospital, good schools, a community college, or a university – after all, Daniel Patrick Moynihan once quipped, ‘If you want to build a great city, create a great university and wait 200 years.’11 When strong organisations exist in the proximity of declining communities, they typically are shielded off from it – else the community would typically not be declining. One of the tasks for the team engaged in revival is to find ways to bring down the shields.

Ide ntifying community assets

Change is particularly visible and motivating if it happens around important public spaces where the community congregates, such as the public library or schools. Indeed, in their book, Our Towns: A 100,000-Mile Journey into the Heart of America, James Fallows and Deborah Fallows declare that in the library, they ‘could discover the spirit of a town, get a feel for the people’s needs and wants, and gauge their energy and mettle’.13 And later, ‘. . . we would ask what was the most distinctive school to visit at the K–12 level. The question served a similar function to asking who in town made things run. If four or five answers came quickly to mind, that was a good sign. If not, the reverse.’

Community revival & public spaces

It seems paradoxical that as technology is bringing the whole world to us, the proposed solution to some of our problems is to embrace what is near – the community – rather than what is far. What is near anchors us, a necessity as our experiences become more virtual. Reviving what is near is therefore essential to ensuring our continuing humanity. As we work to improve the troubled world, that has to be our lodestar.

Revivinv what is in near proximity

Dani Rodrik from Harvard University has argued that globalisation, democracy, and national sovereignty constitute a trilemma that are impossible to reconcile. Countries can have two but not all three. As with all supposed trilemmas, though, the difficulties of reconciling different objectives simply means that we cannot find doctrinaire or esthetically pleasing solutions. Most policies will have trade-offs, and countries will have to find ways of muddling through.

Trilemma of globlization, democracy & national sovereignity

The firm value maximising management would train, because it would see the higher wages going to long-term employees not as a cost, but merely a transfer from one set of firm investors (shareholders) to another (long-term employees). It would see the positive increase in revenue net of training costs as the total benefit to the firm. The shift to firm value maximisation is not just good for society (in that a value-enhancing investment takes place, regardless of how the fruits are shared), it is good for employees (since their wages go up), and it is even good for shareholders. This may seem strange since shareholders suffer a direct loss in profits from training the employees. This is where the words ‘specific investment’ and ‘long-term’ come in. If employees are expected to make substantial specific investments in the hotel’s culture over time, they know they are tied to it because they would be reluctant to leave the hotel’s employment and lose the additional wages that come from their specialisation. Conversely, hotel management

Theory of firm value maximisation

law in some countries already urges management to behave in this way. In the United Kingdom, for example, the Companies Act requires the consideration of interests other than shareholders, including employees, customers, and suppliers provided it ultimately ‘promotes the success of the company’.2 Nevertheless, uncertainty over what exactly management will do in various situations can prevent the firm from benefiting fully from a clearly articulated objective. If the proposed objective is mandated in board policy and filters into managerial compensation structures, stock market investors will be able to predict management actions. They will bid up firm value appropriately. Equally, such commitment will enhance the legitimacy of corporate activity in the eyes of the public.

Law in uk is lready in place

market itself creates the incentives for correction. For instance, the wage differential between the skilled and the moderately skilled has stopped growing, as we noted earlier. The high wages of doctors attract more youngsters to become doctors (supplementing any natural inclination toward medicine). It also creates strong monetary incentives for tech firms to create artificial- intelligence medical diagnostic systems, where ordinary doctors could be replaced by nurse practitioner interviewers with far less training. The competitive market targets those who benefit the most from it since the profits these entities make are most worth disrupting. Therefore, even as the quality and quantity of health care expands significantly, and even as countries grow older and richer, the need for doctors could moderate, normalizing their wages and reducing income inequality. Similarly, the abundance of machine-made or foreign goods, and the fall in local wages, could also prompt a shift in taste toward goods with more human and local content. We already see some of this. The more accurate but cheap quartz or digital watch has been displaced by painstakingly handcrafted and intricate mechanical watches at the high end of the luxury scale. Local farmers markets pop up like mushrooms in rich suburbs or cities in the United States, as customers abandon the supermarket for local produce. Consumer tastes could shift. Jobs that require working with one’s hands rather than with one’s mind or t...

Sometimes markets create incentives for correction

More generally, though, one of the community’s reactions to a meritocratic ladder few can climb is to establish other ladders that more people can climb. Reducing the range of things that money can buy can increase the space for such nonmarket activity. Engagement with the church, in community leadership and service, in government or military service, with charitable organisations, and with the family and kin, are alternative ladders that are respected in their own right. By imposing clear limits on the market – one cannot buy public office, professional accomplishments, military glory, unconditional love…. and even seats for a congressional hearing – a community allows nonmarket pathways to self-actualisation. When the community honours other achievements than the accumulation of wealth, the wealthy are envied less and imitated less, and the community is cohesive despite some wealth inequality.18 Sandel is right that economists should not be too hasty in attempting to monetise everything!

Market vs community as path to rewards

As economic activity has moved away from rural and semi-urban communities, despair and social disintegration have moved in. With the establishment discredited, there is widespread desire for new answers. The demagogues of the left and right propose answers people want to hear, not what they should hear. All too often, there is someone else or something else to blame, which then imposes the burden of change elsewhere. That is comforting to their audiences but dangerously misleading. The reality is that we all are part of the problem, and we all can be part of the

As economic activity has moved away from rural & semi urban

inclusive localism fulfills at the community level the natural human instinct to congregate with others similar to us. It thus heads off more divisive and artificial attempts in diverse nations to fulfill that tribal instinct at the national level through populist nationalism. Also, by enhancing the local infrastructure, the means of building capabilities, and the safety net at the community level, inclusive localism attempts to broaden and equalise opportunities. It allows each community’s members to participate in, and benefit from, global markets. The proposed path builds on what we have. I do not advocate dispensing with any of the pillars – I neither recommend eliminating markets and private property nor do I suggest putting everything, including governance, for sale. The state is necessary, but has to cede power to the community and can be much more effective. The community is essential for us to express our humanity, but it needs to carve out space from both markets and the state to flourish. Even if seemingly moderate, the reform path is ambitious for it eschews easy but often wrong solutions.

inclusive localism to express our humanity

Many of us fear that we will not have the incomes for such a fine life, since the machines will be owned by a few, and all income will flow to them. Yet as our excursion through history suggests, social values change. We glorified the victorious warrior, we then turned to praise merchants and bankers, today we place successful entrepreneurs on a pedestal, and we may exalt community workers tomorrow. If the distribution of wealth becomes skewed towards a very few, the few may decide their accumulation of wealth unseemly and find ways to give it back. Society will aid that process by muting its applause for the captains of industry who only accumulate, while increasing it for those who distribute wisely. Indeed, this already seems underway with the Giving Pledge, where billionaires across the world have pledged to give away at least half their wealth.

Our heroes keep changing

Finally, the historical excursions in this book suggest hope. Our values are not static – they change. Dr. Martin Luther King Jr. said, ‘The arc of the moral universe is long but it bends towards justice.’ When seen over short stretches, it seems that history repeats, that racism and militant nationalism erupt periodically in the world to sow hatred and spawn conflict. Yet the society that experiences these movements is not the same, it trends toward being more tolerant, more respectful, and more just. Around that trend line, we do go up and down. We may be down today, and we have a long way to go, but the distance we have come should give us hope. Let us not let the future surprise us. Instead, let us shape it. There is much to do. We have to, we must, choose wisely if we want to live together well and in peace. I am confident we can.

Lets hope to keep hoping