Raghuram G. Rajan Says Capitalism’s Future Lies in Stronger Communities

You have a new book out called The Third Pillar. What is the third pillar?

It is the community. Around the world, there is widespread economic anxiety, domestic political tension, strife between countries, and now talk of a cold war reemerging between the United States and China. Why? I argue that every time there’s a big technological revolution, it upsets the balance in society between three pillars: the political structure—that is, government or the state; the economic structure—that is, markets and firms; and the sociological, human structure—that is, communities. When that balance is upset, we see anxiety and conflict, a signal that we’re striving for a new balance.

To really understand capitalism’s success, one has to understand the important role of the community. As it voices its concerns through democracy, the community is critical to maintaining the balance between the state and markets. When the community is appropriately motivated and engaged, it enables liberal market societies to flourish.

Recently, some communities have been weakened significantly while others have sped ahead. Technological change is creating a new meritocracy, but one that is turning out to be largely hereditary, denying opportunities to many. The many, in economically disadvantaged and thus socially dysfunctional communities, could turn their backs on markets. The consequent imbalances could undermine liberal democratic society.

Put differently, even if opportunity seems open to all (and unfortunately it is not), people don’t enter on the same footing. We ought to give people the capabilities they need to participate in markets. And for that, we need strong communities—to focus on good schools, a safe environment, an informal safety net over the formal safety net, and so on. I also think communities can work well in distributing political and economic power, creating the competition that democracy and capitalism both need. That is, to some extent, the new liberalism we have to discover.

For that, we need to refashion communities for tomorrow. The book emphasizes “inclusive localism,” which involves empowering communities and bringing economic activity back to them. However, instead of following the traditional idea of the community as self-contained, parochial, narrowly focused, and suspicious of outsiders, we need to use the state and markets to make communities more inclusive. In short, we need confident, open places that are protected, if at all, by tiny walls that can be easily traversed.

In the US, you can find a number of areas reinventing themselves in a modern way. In my book, I talk about one in Chicago, Pilsen, which is largely Mexican American but has seen an increasing number of non-Hispanics move in. The area was once devastated by crime and drugs but now is a place where more and more people want to live. Pilsen has revived largely as a result of community effort. It offers a glimpse of the future of our societies.

In such a society, some communities may be largely ethnic, such as Mexican American, and others more mixed. Yet, with the right engagement, everybody there can have a sense of common identity. The communities will exist within a larger nation. They offer the possibility of having unity with diversity. Somehow we seem to think that’s not possible any longer, that diversity is problematic. I see this identification with the local community as an antidote to populist nationalism, where the nation is the primary source of identity. Populist nationalism can be very disruptive if it turns in the wrong direction.

Raghuram G. Rajan is Katherine Dusak Miller Distinguished Service Professor of Finance at Chicago Booth.