Book Summary by: Abhinandan Srivastava, Research Intern, PIC, and student, Gokhale Institute of Politics and Economics.
Recent years have seen unprecedented economic growth. While nations’ wealth is growing, inequality is rising as well. Why? How can it be fixed?
This is where Dr. Raghuram Rajan, the eminent economist and former Governor, Reserve Bank of India, comes in. He argues that the economy is based not only on two pillars, namely, markets and government, but also on a third pillar, communities. For far too long, this pillar has been neglected, resulting in social issues. Through history, these three pillars have waxed and waned in strength, and society has always adapted to restore balance.
Dr. Rajan discusses the community as the third pillar in his introduction. He defines it as a social group who reside in a locality, and share a government. They may also have cultural or historical heritage.
He then takes us back to feudal manors in medieval Europe to explain the three pillars. The community pillar housed the two other pillars. The most valuable asset of the time was land, which was passed down through families rather than traded. Peasants worked on those lands and were taxed by those families. The balance was tipped with technological innovations like siege cannons.
Such weapons changed the rules of the game, and manors now had to engage in warfare to maintain control of their lands. As many European manors lacked the resources to do so, they merged their estates, and increased their resources. By the end of the fifteenth century, these merged estates had transformed into nation states. Paralelly, the gentry emerged, a business class, which used land productively and used profits to buy more.
Nation states waged costly wars to maintain or expand control. As a result, the gentry was taxed. Because the monarchs were so hungry for finance, they shifted unproductive land to the gentry from the aristocracy and the church.
The gentry, however, exacted their own toll: freedom.
To illustrate, Dr. Rajan turned to England. The gentry, which represented the market pillar, wanted competitive markets. At the time, the state pillar was represented by the Parliament, and wanted broader legitimacy and financing. It was willing to give up its powers to act arbitrarily. As a result, the market pillar became more influential, and acted as a check on the state pillar. Thus, both pillars supported each other’s growth. Public sentiment towards competitive markets was also positive.
Slowly, the market pillar became more influential at the expense of the community pillar. American industrialists like John D. Rockefeller, for example, ruthlessly eliminated competition, established monopolies, and manipulated the now-weakened state. As a result of the poor working conditions of factory workers, the community pillar pushed the state for stricter regulations, restricting the market pillar. Years of struggles paid off, and the state gave the community a better voice.
As public sentiment started shifting, competitive markets began to carry negative connotations. In 1929, the Great Depression caused immense hardships, and capitalist markets were held responsible. Once again, the state was ascendant, but strong growth would not occur until after World War II.
After the war, the world experienced unprecedented growth. As states grew rapidly, they over promised benefits (social security), which was unsustainable. As Western economies slowed in the 1960s, the state’s prior commitments started showing huge deficits.
The answer? Markets were deregulated once again, led by the US and UK. As a result, the market pillar again became dominant.
Economic growth was fueled by globalization. This also meant that disruptions in one part of the world affected everyone. The ICT revolution then became the nail on the coffin, as it adversely impacted jobs.
Once again, the pillars are unbalanced. With the ICT revolution, the market has created a ‘winner-takes-all’ environment, where only a select few are able to reap major benefits. Routine jobs are being replaced by AI, but more sophisticated ones are being created. However, these positions are not equally accessible. These jobs can only be filled by people with proper education.
As inequality increases, many populist political parties are powered by resentment against the elite.
According to Dr. Rajan, the solution is ‘inclusive localism’. Decentralizing power is the key to this solution. Community groups should have more influence on local decisions. This way, the federal government will not have to worry about catering to community-specific needs.
Lastly, national governments need to ensure a level playing field in international markets to avoid accumulating growth in one region.