By Angus Deaton
Spencer Platt/Getty Images
PRINCETON, N.J. ( Project Syndicate ) – Rather suddenly, capitalism is visibly sick.
The virus of socialism has re-emerged and is infecting the young once more. Wiser heads, who respect capitalism’s past achievements, want to save it, and have been proposing diagnoses and remedies. But their proposals sometimes overlap with those who would tear the system down, making nonsense of traditional left-right distinctions.
Fortunately, Raghuram G. Rajan, a former governor of the Reserve Bank of India who teaches at the University of Chicago Booth School of Business, brings his unparalleled knowledge and experience to bear on the problem.
Behind today’s populist upheavals is a widespread recognition that the economy no longer serves the public good, or even the interests of most of its participants. To understand why, one must identify what has been lost amid so much material technological gain.
In his new book, “The Third Pillar: How Markets and the State Leave Community Behind,” he argues that the cancer afflicting contemporary capitalism is the failure neither of “Leviathan” (the state) nor of “Behemoth” (the market), but of community, which no longer serves as a check against either monster.
Rajan thus prescribes an “inclusive localism” to rebuild communities that can furnish people with self-respect, status, and meaning.
Rajan’s book, like Oxford University economist Paul Collier’s “The Future of Capitalism,” is part of a rapidly growing genre of critiques by capitalism’s friends. Rajan is a proponent of capitalism who has accepted that it no longer works in the interest of the social good, and must be brought back under control.
“The Third Pillar” offers deep historical context to explain the current moment, but it is most successful when it retraces developments after World War II to explain why everything started unraveling around 1970. Until then, the world had been busy recovering and rebuilding, and economic growth had received an added boost from the adoption of frontier technologies through replacement investment.
But trend growth has decelerated since 1970, accounting for many of our current difficulties.
Through it all, governments have had no idea how to address the slowdown, other than to promise a restoration of the lost postwar paradise. In most cases, that has meant additional borrowing.
And in Europe, elites have pursued continental unification with the great aim of stopping recurrent episodes of carnage. Yet in their rush to secure the obvious benefits of integration, they forgot to bring their citizens along. They have since learned that after hubris comes nemesis.
The success of social democracy in the postwar era weakened the market’s power to act as a moderating influence on the state.
According to Rajan, these weakened actors, in both Europe and America, were in no position to deal with the revolution in information and communication technology (ICT) that they were about to face, leaving ordinary people to face the threats on their own. Rather than helping their workers manage the disruption, corporations made it worse by using their employees’ vulnerability to enrich their shareholders and managers.