LONDON (Reuters Breakingviews) - Why don’t more unemployed people move to other cities to find work? How do schools contribute to inequality? Or why do some depressed areas recover, while others languish? These questions, which have plagued and puzzled economists for decades, have acquired new urgency. Raghuram Rajan, a former Indian central bank governor who is in the running to replace Bank of England chief Mark Carney, thinks the answers will be clearer if they are studied through a new lens.
States and markets are the major actors in economic analysis. The forces of supply and demand interact within boundaries set by governments. This binary view has always been overly simplistic. For one, most supposedly free markets depend on an intricate framework of conventions and institutions.
Rajan, a University of Chicago professor and former International Monetary Fund chief economist, argues that the framework neglects a more fundamental factor: local communities. His latest book, “The Third Pillar: The Revival of Community in a Polarised World”, sets out to restore the balance, both in theory and practice.
Capitalism, Rajan argues, can be viewed as an edifice balanced on these three sources of support. When states, markets and communities are in equilibrium, people prosper. When one pillar becomes too powerful or another too weak, things tend to go wrong.
In less skilled hands, such a sweeping analysis could quickly tip into banality. Yet Rajan underpins his argument by taking a local perspective. He examines urban regeneration in the Chicago neighbourhood of Pilsen, and cleaning up garbage in the Indian city of Indore. A discussion of the U.S. education system explains how local communities funded early schools, and how economic forces have since pulled many capable students and their families into self-perpetuating islands of privilege, creating what Rajan memorably calls a “hereditary meritocracy”.
He alternates close-up perspectives with a broad overview of the evolution of capitalism. Technological upheavals like the steam engine and electricity unleashed market excesses. Industrialists responded by forming monopolies. But democracy fought back, with more people winning the right to vote. Rajan sees the American populists of the late 1800s, and the trust busting progressives who succeeded them at the beginning of the 20th century, as the product of local communities taking power back from untrammelled markets.
The parallels with today’s global economy are inescapable. Another wave of technological change has brought both prosperity and upheaval. The oil, steel and rail monopolies of the late 19th century have been replaced by technology giants like Amazon, Apple and Alphabet. Income and wealth are unequally distributed. And opportunistic politicians are tapping into that dissatisfaction. “In my adult life I have never been more concerned about the direction our leaders are taking us than I am today,” Rajan writes.
How might local communities restore the balance again? As the author admits, economists understand relatively little about why one region bounces back from a nasty economic shock, while another continues to deteriorate. He advocates decentralised decision-making, with financial aid disbursed at the local level rather than by central governments. Emerging monopolies should be broken up or regulated. Individuals should be given more power over private data currently in the hands of big companies.
More controversially, Rajan sees more powerful local communities as a way to channel tensions over immigration that the likes of U.S. President Donald Trump have exploited. “The community rather than the nation will become a possible vehicle for ethnic cohesiveness and cultural continuity,” he writes. In other words: it may be better to tolerate bigots at the local level – within the constraints of national anti-discrimination laws – to keep them from blowing up the central government.
This kind of analysis is inevitably fuzzy. Divorced from local context, the concept of “community” can quickly lose its meaning. There is also an element of economists rediscovering truths that political scientists and sociologists have understood for decades: economic forces tear at long-established social bonds; political power shapes and distorts regional markets.
Moreover, a local perspective will do little to help tackle some of the biggest problems of the age, as Rajan freely admits. Migration, climate change, technological standards, and spillovers from economic policy require coordination between countries and economic blocs.
Nevertheless, the community is a neglected economic actor. That’s abundantly clear from the difficulties economists and politicians had in recognising or understanding the despair and anger of areas of the West that have been left behind by rising prosperity elsewhere. “We are at a critical moment in human history, when wrong choices could derail human economic progress,” Rajan warns. Taking a local perspective could begin an overdue rebalancing.
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