Press Releases Raghuram Rajan’s latest book explores how stronger communities can save capitalist democracies

What do you mean by community? How do you define it?

My sense of the community is really going back to the historical sense, that is people around you who come together for local effort, whether it's working on creating a strong school, whether it's taking care of the unfortunate in the local area, or it's simply looking out for one another to make sure that crime is low and that kids don't go off track. It is also the basic building block of democratic engagement.

The virtual community does some of this, but there is really no substitute for the local community. I am not averse to these other varieties of communities, but I want to emphasize that the physical nature of the communities still hasn't gone away.

My argument in this book is that the central vehicle through which we transmit better policies to the people, the community, isn’t working. It's not about markets, it's not about government. We constantly debate government versus markets, lower taxes versus higher taxes, lower regulation versus higher regulation. While all these issues are certainly important, they are not the central concern of the average citizen.  It's about how we get the services and the economic activities to the places where they are disappearing. Once you think about it that way, then the solutions revolve around the community.

Can you tell us what you mean by inclusive localism?

The central proposal in this book is for what I call inclusive localism. Localism is a word for community, an empowered community. We need to push more decision making back down to the community. As markets have become more integrated, governance has also moved up. Over the years, decision making has migrated up from the community to the state level, to the national level, to the international level. It ought to go back down so that people have a greater sense of control over their lives.

I worry that communities traditionally have flourished by keeping others out, by excluding, and in this day and age, that is a very narrow view of the community. It makes the community much poorer—both economically and as a way of life—than it could be if it were more open. Hence the need for inclusive localism.

You talk about the first and second pillars, namely the political and economic pillars, becoming too strong at the expense of the third pillar, the community. What will happen if we don’t fix the imbalance?

It is quite possible if the system doesn't adapt to give people a sense that they have opportunity and that they have the capabilities to take advantage of that opportunity, they will look for new kinds of governments that will help them stand on their feet.

Now, democracy simply responds to the beliefs and desires of people. If it does not respond, the people will look for something new.  We already see the first wave of that with the populist politicians saying, "Oh, the old system doesn't work. Here's my version of snake oil that I want to sell you," and we know that this is also not going to work because what these politicians are tapping into is just plain anger without having clear solutions on what to do about it.

Why are people angry?

It’s not just because during the global financial crisis they saw that the elite looked after themselves, but also because they feel that the future is less good for their children than it was for them. This is a big change in the world. The history of the last 200 years has always been one of progress. We are now coming face to face with the possibility of regress, and that is because, again, we have not adapted to technological change.

So what can we do? Is there a solution?

We need to think deeply about what is going wrong, why the liberal market democratic system worked for 60 or 70 years and then stopped working, and how we set it back on track. That requires fundamental change. It is not about easier monetary policy or a fiscal boost here or a fiscal boost there. It is about fundamentally restructuring the social contract that we have, and this book is talking about some of the things we need to do.

One of my worries with the Populist nationalist response is that when the sense of belonging, the sense of community, disappears locally and re-emerges at the national level, then the temptation is to look outside the nation,  and within the nation for people who look different, as part of your set of enemies. When our leaders do that, because the kinds of bonds holding people together at that more imagined national level are more tenuous, they need to constantly revitalize bonds by finding new enemies. It is a recipe for greater conflict.

In your book, you talk about creating a stronger safety net with universal healthcare and perhaps free education up to the community college. Could this more liberal policy provoke another Tea Party revolt?

Historically, high school education in the U.S. was free. Even in the late part of the 19th century, it was way above the education level that most people got. At first, only a few from the middle class benefited from it, but eventually many more people did. That created a much more equal opportunity society, which I think made the Americans much more predisposed to capitalism because they were prepared for it. Even when the U.S. didn’t have strong unemployment insurance or universal healthcare, Americans were still receptive to capitalism because people were much better educated and could take those good jobs that the U.S. was creating.

Looking forward, we see that people aren't getting that good education, nor do they have the strong safety nets. We have to remedy it in a way that doesn't spoil some of the benefits of a market-oriented system.

While we should certainly focus on improving schools, I argue that it is time to think about how much more education people should have without having to pay for it. A number of states are talking about free community college. It may be that we are at the point where that is the minimum requirement for anybody to get a good job, and if that is the cost of preparing people for capitalism, we should pay it. Similarly, in this day and age, it seems to me a travesty that anybody should be without healthcare. It is a necessity to participate as a citizen. It is a necessity to participate as a worker, and every civilized society that can afford it has universal healthcare, except the United States. That does not mean a particular form of universal healthcare such as a single payer system, it just means everyone has access to healthcare, whether publicly or privately provided.

I believe we need more decentralization because we need political competition as much as we need economic competition. I think the book has a combination of proposals, some preferred by the left, some preferred by the right, but which together will create a much more viable mix going forward, a more sustainable and stable capitalism, than what we have today.

Rajan spoke about his new book on March 5 at Booth’s Gleacher Center in downtown Chicago. The event, “Raghuram Rajan on How Markets and the State Leave the Community Behind,” was sponsored by Chicago Booth’s Stigler Center for the Study of the Economy and the State. The conversation was moderated by Booth Professor Luigi Zingales.

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