How Capitalism Must Adapt

Madhav Rajan:

This series brings together economic experts from Booth and beyond to discuss the ways in which our economic systems are evolving as expectations about the role of business in society keep changing. So, the series will explore the evolution of capitalism, from the perspective of investors, academics, entrepreneurs, professionals and just thought leaders in We have an amazing program today, and I'll introduce the panelist in just a bit. I just want to thank them in advance. Our esteemed panelist we have Chicago Booth Professor Raghuram Rajan, economist Minouche Shafik. I want to thank them for being here to share their insights, and my thanks of course to Deputy Dean Randy Kroszner for moderating the panel today.

So, we're thrilled to be celebrating the spectacular Chicago Booth campus in London via our Leading in London open house programming, which is going to include in-person and virtual opening events plus hybrid events such as this one. Booth's new campus, which is located in the heart of the city of London is a place where students, alumni, local business leaders, innovative thinkers and organizations from across EMEA, can come together to share ideas and collaborate on thought leadership.

I encourage you to visit our website, chicagobooth.edu to learn more about our Leading in London events. I also wanted you to save the date of October 27th for our next Future of Capitalism virtual event. That's going to focus on ESG and climate change. We'll have Deputy Dean Randy Kroszner along with Nobel Laureate and Chicago Booth faculty member Lars Peter Hansen. So, be on the lookout for more details and information about registration coming soon.

So, today we look forward to a great discussion on the Future of Capitalism. It's really my great pleasure to introduce our panelists. Raghuram Rajan is the Katherine Dusak Miller Distinguished Service Professor of Finance at Chicago Booth. Raghu served as the 23rd governor of the Reserve Bank of India from 2013 to 2016.

Between 2003 and 2006, Raghu was the Chief Economist and Director of Research at the International Monetary Fund. Raghuram has written on a wide, wide variety of topics. Primarily he's interested in banking, corporate finance and the role that finance particularly plays in economic development. He is currently a member of “The Group of 30.”

Minouche Shafik is Director of the London School of Economics and Political Science. And her career has straddled public policy and academia, and by the age of 36, she had become the youngest ever vice president at the World Bank. She has taught at Georgetown University and the Wharton School. She later served as Permanent Secretary of the Department for International Development, Deputy Managing Director of the International Monetary Fund and Deputy Governor of the Bank of England. Thank you Minouche.

Finally, our moderator, Randy Kroszner, is Deputy Dean for Executive Programs at Chicago Booth, and the Norman Bobins Professor of Economics. Randy served as the Governor of the Federal Reserve System from 2006 until 2009. He chaired the committee on Supervision and Regulation of Banking Institutions and the committee on consumer and community affairs. Randy took a leading role in developing responses to the financial crisis and undertook many initiatives to improve consumer protection and disclosure. Once again, I'm just thrilled to have so many of you here and with that, let me hand it off to Randy.

Randall Kroszner:

Thanks so much Madhav. This is really, really particularly thrilling for me because I have been in London since the fall of 2019. I was expecting to launch this series and welcome you all to this spectacular building in March of last year. The building arrived on time under budget, but it was also the same week that I gave the work from home notice. And so for much of the last 18 months, it's been 40,000 square feet and me in this building, and now it's not just me, it's all of you.

We've had a few sets of students through for the new executive MBA students, as well as the continuing executive MBA students. We've had the non-degree executive education programs that have now started. We've had faculty members through, so many visitors, alums, and others from the community. I couldn't be more thrilled. As the staff here know, I've been just smiling from ear to ear since the month began and I look forward to Leading in London opening for the whole of the fall.

There'll be events as Madhav had mentioned, we have another Future of Capitalism event coming up, but we also have lots of other events that are coming up. So, I look forward to seeing you, those of you who are here and those of you who are in on Zoom to the extent that you can get to London, we can't wait to have you in, I was going to say have you in class. I like that too, but also have you in the building.

Last year, this month, we had, we celebrated the 50th anniversary of Milton Friedman's famous essay on corporate social responsibility., and in great University of Chicago fashion, he posed the question really sharply, gave a very sharp answer that many people I think today around the world might disagree with, including many people at the University of Chicago. But that's what Chicago is about. Stating the clear question and making it as much as possible timeless.

50 years on, we're still debating these issues, and whether you agree or disagree with Friedman, I think he really helped to ignite a debate and that's what we really want to do here at the university. And that's what we do with, this is really what the Future of Capitalism, to kind of get to these sorts of fundamentals.

So I don't want to get too much into that before we get to Minouche and Raghu, but I do want to mention that we've had thousands of people register for this, which is wonderful. We've already had hundreds of questions come in. You can still send in your question through the chat function, sorry, through the Q&A function on Zoom, or here if you're in the room through the QR codes. Obviously I'm not going to be able to get to many of those questions only a fraction of them.

But it's really interesting to see what people are interested in. So please do send those in because I want to try to make this as engaging and lively as possible. And now I want to turn to Minouche and Raghu who I couldn't be more thrilled to have with us. Raghu has been a co-author and good friend for I have to dare say now 30 years, three decades. And Minouche is also an old friend from central banking days. But also, well in addition to being a director of the LSE. But something that's very, very important that's recently changed is Minouche has become a parent of a University of Chicago undergraduate.

Minouche Shafik:

That's true.

Randall Kroszner:

So that's very important. But I want to start with you Minouche. You've just published an excellent book on What We Owe Each Other. You talk a lot about the social contract, and I think that's an important aspect of thinking about the future of capitalism. Because often when people think about the future of capitalism they kind of say well, there's sort of the capitalist part, there's the economy part, then there's this other part that's over in some other, somewhere else.

I don't really think that makes sense and clearly you don't think that makes sense. You talk a lot about the role of the social contract in capitalism and in society. So maybe you could kind of define what you mean by that and what are we trying to achieve with this? What's the objective of having a social contract, why would we want to have one?

Minouche Shafik:

So I think the social contract is an essential underpinning to capitalism, and it is the mechanism to which we provide collective goods. Those collective goods can be provided by family, by the community, by the state or by the private sector. And  I’ll just sketch out for you the 20th century social contract, and then I'll tell you why I think it's broken.

For most of the 20th century the social contract looked like this. You had a predominant—a male bread winner in most households. Women were available to care for the young and the old for free. Most people got an education from the age of about 6 to their, let's say 20. That lasted them enough for their entire working life. They would work for two or three employers over the course of their life. When they retired, they would live just a couple of years. And during those years if they needed care, that would be provided by their family and then they die. That was the basic model.

Now as I've described that to you, you're probably sitting there thinking, that doesn't resemble my world. We live in a world in which more women go to university than men around the world today. Women are no longer available to provide free care services to the young and the old. And the opportunity cost of them doing that is very high now given that more of them are university educated.

Our relationship with our employers is fundamentally different. People now don't work for two or three employers in a lifetime, they might well do that in a week. The expectation that the social insurance that you need for life health insurance, pension, unemployment is provided by your employer is no longer the case as more of these flexible jobs don't include any benefits.

In the advance economies, people expect to spend a third of their adult life in retirement. And yet the number of years they're working is nowhere near enough to support a third of their life in retirement. And of course, when they get very old, the need for care becomes a huge problem because their daughters and daughters-in-law are busy working and not available to care for them.

So, the social contract that we currently have, is still responding to that 20th century model, and yet we need something that's very different to respond to really the fundamental changes brought about the changing role of women and the changes in technology, which have changed work and education and what we want from education fundamentally.

Randall Kroszner:

Great I think that's really important, sort of putting capitalism into this broader context. Raghu, a couple of years ago, you wrote a book ‘The Third Pillar’ that also tried to put capitalism into this broader context of the third pillar that was often somewhat forgotten of community. So, I don't know if you might have some remarks on both on your view and Minouche's view of the social contract as well as the context that you see is important in thinking about the issues on the future of capitalism.

Raghuram Rajan:

Sure, well, first, I think the social contract is obviously very important. I think that as Minouche says, earlier on, a lot of it was provided by the family, by the community, by the locality you grew up in, and it prepared you for a world of capitalism. And capitalism didn't emerge sort of, you didn't get into capitalism as a baby, you grew up, and at some point you became an adult and you could participate in markets at that point.

But something looked after you over that period. The question is, who or what prepared you for capitalism? And I think this is where through the 20th century, we had an increasing role of the state in doing some of this. Some of it was brought about simply because the family or the community was unable to cope. So, think about theGreat Depression and the social security expansion that happened then at various points.

We didn't get healthcare in the United States, but we certainly got sort of a provision for the elderly. And that happened because communities were overwhelmed. Earlier, it used to be each community looked after its frail and its weak. And as Minouche says, it wasn't for a very long time because people sort of stopped working and then a little later, and you had the Dickensian view that to separate the able-bodied from the lazy, we have to make some of this really the workhouses really terrible places. So you go only if you had no option, and the able bodied would still stay at work.

But what happened during the Great Depression is that there was a sense that this has to be made much more arm's length, much more governmental in nature. This had happened earlier, of course, in the UK. What I think it also did was frayed some of the existing types. Jim Poterba has this study which shows that the elderly stopped caring so much about education in their district. Because that was a quid pro quo.

The young get their education, paid for by the elderly in the district, and they look after the elderly in their old age. Well that broke down once you had social security, because the elderly were independent. Essentially all these arm's length contracts as they expand, they've reduced the need for relationships. And so to some extent we have to constantly think as we expand the size of the markets, which are again largely arm's lengths contracts, as we expand the size of government and both go together, it's not one against the other. They typically feed on each other.

What do we do about the gaps? We've seen in the pandemic, a whole bunch of gaps spring up where neither the government is present nor the markets. Who looks after the elderly and gets the groceries for them? When they don't know how to sign onto the internet, they don't know how to use all these services? It's the young who sort of stepped up and started doing it. Who looks after the migrants in India as they find that they have no social security in the big cities? Voluntary organizations step up and do it.

So, in a sense, I think we're both agreed that society has to step up every time the formal structure breaks down and I think fill the holes. And that has to constantly evolve because the holes constantly evolve. And sometimes the growth of markets and governments crowds out the ability of society to do this because it shrinks the places and society has to find new places where it can come back.

Randall Kroszner:

So how do we do that? What are the ways and from an economics perspective we always think in terms of incentives. So, how do we try to get the balance right, to make sure that we have the three pillars of government the typical the standard private sector, business part, as well as the social part, more broadly on the social contract. How do we make sure that we get the right institutions and the right incentives so that we get the right things being done for what we owe each other?

Minouche Shafik:

Yeah I mean I think, it's a dilemma that Raghu has just said about the states sometimes crowding out and the community and the family. It's a real dilemma because on the other hand, part of the reason the state got into this business, was because there were very uneven outcomes. And if you were unlucky to be born into a poor family or a dysfunctional family, you didn't get any support. So, the state has been trying to fill in those gaps and even out life chances, which is a good thing.

I mean I guess what I'd say in terms of what do we do, I guess I think it's a combination of norms and regulations so I'll just give an example. We are in a world in which I don't know let's just say a quarter of workers in this country or in the US are on flexible contracts of some form or another with no benefits. And one of the things that we've done as workers have become more mobile is to provide portable pension schemes. So, as they move around they can carry their pension entitlement.

It seems to me that we're getting to a place now where workers need portable benefit schemes and less of their social insurance needs should be bound up with their employer. And frankly, we should mandate that employers provide benefits to all workers regardless of their employment contract. So even if someone works for you for two hours a week, you need to put a little bit into their pension pot and into their sick leave entitlement and so on. And so I think that's an example where you could use regulation to adapt to a different structure in society that continues to deliver a social contract in a different way that's adapted to the reality of people's lives.

Randall Kroszner:

But does that lead to some sort of crowding out as you were talking about Raghu? So, when you have the government say okay, people have to do this, then the support that might have come otherwise from family and such may not be there. Would you agree that's the right solution or?

Raghuram Rajan:

Yeah. I mean so it is true, it disincentivizes private action. But the question is, would the private action be sufficient? And in cases where it would insufficient maybe we need public action. I do think that in this environment, the issue of inequality which Minouche again brought up, is really important right? Why do we care about inequality? I mean in general we hope and believe that in a capitalist world, outcomes may be unequal, but everybody has the opportunity to participate.

And this is where it's very important to recognize you participate not as a baby, but once you've sort of grown and got the capabilities et cetera. So, it seems as part of the social contract is everybody should have acquired those capabilities. Should have access to the best ways of getting those capabilities. And if they don't, this is an unequal society and so people naturally feel aggrieved. We didn't even have a chance to get to first base. We didn't even get a chance to, you know, forget level playing field, it's unlevel all the way.

Societies especially as the demands for education have increased, they have become increasingly unleveled, right? I mean, our students are fantastic but they've come there from having a great childhood education, a great structure behind them supporting them, to get where they are. So, I think one, to make capitalism work, to make it work along with democracy, otherwise they get opposed, you need a certain level of equity within society.

And that doesn't mean socialism. It does mean that when you're thinking about capabilities, you have to have more equity in generating those capabilities. Both, whether you're talking about schooling and healthcare or about safety nets in case you do fall off the track, and how do you do that? I think that's where we have to be much more sort of clever in design.

So, Minouche and I were talking before the panel, but we always have this view that, okay, if it's government it has to come from on top and dump stuff on, here is the program you have to take and give, and that is the natural tendency of the centralized bureaucracy. You have ... If I'm giving you money, you do it my way, right? The bureaucracies don't want to give people money without having control over how it's spent.

Randall Kroszner:

Sure.

Raghuram Rajan:

Ideally I would say, what we need to do and to Minouche's point about inequality between communities, is maybe a certain amount of funding is also required, but it could be done in a way that the ideas come from bottom up with a lot more sort of light-handed monitoring that is not misused, but not too much second guessing on how it's used. Communities often figure out and empowering them by giving them greater resources could be a way of equalizing opportunity.

Randall Kroszner:

Please-

Minouche Shafik:

Can I just react to something?  I mean I very much agree with what Raghu has said, and in your book you talk a lot about the failures of education, the educational system in the US in particular for social mobility. One of the interesting piece of research I cited in my book is done a colleague at the LSE with colleagues at Harvard is called “Lost Einsteins.” They look at children in fourth grade in the US who have exactly equivalent math and science skills.

And then combine that with data on patents and income taxes, to look at how many of those kids go on to become inventors and have patents. The same skills to start. What it shows is that if you happen to be born in a rich family, you're 10 times more likely to have a patent. If you happen to be born in Silicon Valley you're 10 times more likely to have a technology patent. If you happen to be born in Minnesota you're 10 times more likely to have a medical patent.

So the family you're born into and where you're born have huge consequences even though from a skill point of view, you start at the same places. And if we could even out the life chances of those lost Einsteins, we could quadruple the rate of innovation and productivity in our economy. So, one of the I think distinctive things in my book was, I don't talk a lot about redistribution, I talk a lot about what economist call pre-distribution, which Raghu is calling capability. How do you invest in those people early on and give them equal life chances so that capitalism's promise of opportunity is actually realized?

Randall Kroszner:

I think that's excellent and actually one of the questions that we got in advance, was on exactly this issue, and I think you've done a great job of answering it. Can democracies that support capitalism survive without addressing growing disparities and increment wealth. Sort of getting at this and I think it's a very ... The easy solution is we'll just take from one and give to another and make everyone equal.

We know that's actually very difficult to do in practice and doesn't necessarily have the best incentives, but giving people the right opportunities so thinking early on in their careers. I mean James Heckman from the economics department, one of our Nobel Prize winners has done a lot of work on this also to show how important it is to invest in people early and that's how you make sure that you get ahead.

It gets also to Raghu's point about how did you get from being a baby to being a full grown worker? Well there's a lot in between and that early investment is very, very important. There's a brief mention ... We have a lot of questions that were related to sort of capitalism and sort of socialism. And so I think because of lot of people think, well, the future of capitalism - well, the alternative is socialism. So, how do you ... When people say, okay, should we have a socialist future or a capitalist future, how do you respond to something like that?

Minouche Shafik:

Well I say there are many flavors of capitalism. Capitalism in Denmark looks very different than capitalism in the United States. The beauty of capitalism is that it's evolved. We used to have child labor, now that's considered unacceptable. So, I think there are many flavors of capitalism, and I think we're at a moment when capitalism has to evolve dramatically in order to sustain public support.

Randall Kroszner:

Raghu?

Raghuram Rajan:

Yeah no, I agree. I mean, it seems to me that when capitalism ceases to offer opportunities, obviously there is more of a demand for redistribution as opposed to pre distribution, right? So, when people find they can't get jobs then there's talk of well why don't we go a universal basic income? It sounds a lot like the old sort of Nirvana of the socialist, right? Everybody gets money regardless of whether they work or not.

One of the new rationales—supposedly new rationales—is technology. Technology has dealt all of us out of a job. It turns out that the first mention I could find of the demand for universal basic income was in the 1960s. President Johnson had a commission—maybe it's earlier than that. But we said that, look robots are going to take over, none of us are going to have jobs, let's go to universal basic income. When I look around they still haven't taken over. That said, I think that-

Randall Kroszner:

[inaudible 00:25:45]

Raghuram Rajan:

I think that we have to be clever about how we think about jobs. I mean certainly it seems to me even today, man plus machine or woman plus machine is much better than machine alone or human alone. So we need to figure out how sort of aid humans in doing better jobs.

It doesn't mean every human has to be a PhD, but we need to figure out work processes so that they can work better and work more effective. So, that's number one. And when people say there are no jobs to be, there's nothing to do, I mean there's so much in terms of unfulfilled demand. I mean try getting a medical appointment in Chicago, it takes three months to get to see a doctor. That means that there is an unfulfilled demand there right?

But we need to think cleverly about how to fulfill that demand. How much do we do telemedicine? So why should I necessarily wait to see a doctor locally, may be something that somebody in Philippines can tell me. But that doctor in Philippines hasn't got a license to practice in the US. How do we sort of filter only those demands?

There's a lot we can think about reorganizing work. That said, I think even with the best of efforts, there will be some people who simply don't fit in. I mean the fact that we have had so many people leaving the labor force. The participation rates certainly in the United States has fallen, suggest some people feel that they simply cannot cut it where they are. Now that said, I think again there's hope that with all the distance work that even people in remote areas can work, but there may be some people who have absolutely no skills in the current environment.

I think rather than see them as collateral damage, we have to figure out, how do we bring them back into the workforce so that ... I mean work has become such a big part of having meaning in life. So it seems to me that just saying this there will be some people who we can't do anything about, we have to think about that. That's where I think we need to look again at unmet needs and see if we can do them better.

Now one example which I was talking to a CEO the other day and we were on the same panel. We talked about maybe the need for elderly care is a place we could use a lot more people. It's relatively unskilled. However, it's not bereft of, you need attributes, you need to have empathy. So, can a 50-year-old worker who's been laid off from a manufacturing plant, sort of be retrained into that? I think it's possible. The CEO said no, no way, no chance, it's not going to happen, forget about it. Well we'll have to try. We'll have to try different things.

Minouche Shafik:

Yeah.

Randall Kroszner:

Yeah and because you've talked a lot about especially women's changing role in the labor force. So how do you think of that role evolving particularly post-pandemic because obviously, there's going to be reorganization of work and reorganization of women's role in that.

Minouche Shafik:

Yeah I mean just to build on what Raghu said I mean I'm also not a fan of universal basic income. Both because it's economically inefficient to churn all this money through the state to redistribute it to people who don't need it. Now you're going to tax it 20% of GDP and it's very inefficient. But I think more fundamentally in every society in the world, part of the social contract is that if you're an able bodied adult, you're expect to contribute in exchange for being cared when you're young and you're old.

I think universal basic income undermines that basic principle. I would much rather if someone has very low skills and earns a very low wage, I would much rather give them an earned income tax credit, top up their wages so they have decent minimum standard of living than say taking universal basic income. Much better for people to feel that they're contributing to society.

Randall Kroszner:

Something that Milton Friedman had very much advocated.

Minouche Shafik:

Yes, that's right. I mean in terms of women, you know the fundamental issue for women being able to contribute in the labor market is child care. When you look at what happens to all these women who now go to university, they actually tend to do a little bit better in terms of grades, I hate to tell you that. At least at the LSE, we see women on average do better, the men the distribution is wider.

So the men either get first or third and the women on average. But anyway they do equally well at university let's say. They earn the same as soon as they get out. As soon the first child is born, incomes diverge. Because the women shift to part time flexible working and that means they have less experience, they get promoted more slowly and that is the explanation for the pay gap.

That child penalty can vary between 20 to 50% depending on the country. So, the key is providing decent child care. When you think about it, I haven't really ever thought about it so systematically where the model of childcare is so socially determined. If you offer maternity leave you're saying to women, stay home and take care of your child. If you offer a voucher for private child care or you provide publicly funded high quality child care, you're saying to the family, society is going to help you take care of your child. Those models tend to result in much higher levels of female labor force anticipation.

The other piece of the story in terms of women's contribution in unpaid work. So, on average globally women do about two hours more unpaid work per day than men. That varies from about 20% more in Norway to over 1000% more in Pakistan. So, dealing with the problem of unpaid work is another key element of equalizing and tapping into the talent of all these women in the labor market.

Of course, the COVID pandemic brought this home to roost for many people because of course who ended up doing the home schooling and that sort of thing was often the women. Some people are now calling it, the “she recession.” But home working does provide opportunities but I'm a little worried that if women end up doing all the flexible working and men all go to the office that, that will cut them off from networks and opportunities that will result in an even exacerbated gender gap.

Randall Kroszner:

We had a question come in another aspect of the job market and the labor market on how best to respond to international competition. So, of course some countries towards protection and said, getting back to some of what both of you were discussing with all the changes that come in. People don't necessarily have the skillsets and so some of the traditional jobs are moving offshore.

So, a natural response is, well, let's prevent, or let's do some sort of protection, to protect your jobs at home. There has been some economic research done in the US, suggesting that some of the competition with China has had a very big impact on the labor market. But I'd love to get your perspective on what's the best way to respond to that? Is sort of trying to provide some form of protection the best approach or are there other approaches?

Raghuram Rajan:

So I think emerging markets in developing countries have benefited hugely from trade. They've been able to grow with limited domestic demand, catering to demand across the world. Certainly this has benefited developed countries also, much cheaper goods than they would other have access to. So, the question is how can we continue this? It's going to be become more important post-pandemic.

The emerging markets aside from China, Taiwan, South Korea have had a terrible pandemic. I mean the pandemic has been terrible for every country but more so in the emerging markets in developing countries where you haven't had much government support. You've had immense scarring of households, many households have dropped from the lower middle class into poverty. You actually have hunger now in a number of countries.

You have children who have been out of school for a year and a half and that doesn't mean that they're a year and a half behind, because they also forget they're actually three years behind. Think of these kids, I mean are they going to go back to school? No. Because at some point the parents are going to say not worth sending them to school, and the drop out rate is going to be tremendous.

So you've got scarring, you've got very little support, and you've got a lot of damage. Many small and medium firms have gone out of business because they haven't been able to survive. The stock markets are doing fantastically because they price the largest firms. The largest firms now have more space to operate; they’ve raised resources. If the lower middle class, are unhappy and are unemployed, that leads to social conflict.

So, I would predict the level of political conflict in many emerging markets in developing countries is going to increase tremendously as we have the opportunity to protest on the streets once more, once the pandemic wanes. This is going to be more fraught and fragile than we thought. So, I think it's in the interest of the developed world to keep its borders open to give, I mean the biggest source of demand of these countries going forward, incremental demand will be exports.

We've seen a recovery based on exports in a number of countries, but it will be even more so going forward. So, rather than thinking of closing down, we have to think what more can we open up if we want reasonable work. It's in the interest of developed countries, not just because of demand there and people there demanding developed countries, which they do. I mean they do buy a lot also and will buy more.

But it's also, what's the consequence if you don't allow that? Well there are big differentials between countries, people move to equalize those differentials, it's called immigration, it's called illegal immigration, because you don't want so many people coming. I mean think of what happened in Europe in 2015, 2016, it was a reaction to the droughts in Sub Saharan Africa, which pushed a lot of people to look for a home here.

I can assure you if we don't have growth back in those countries, they will look for a better future in the developed world. If you don't create growth there, they will look for growth here. So, I think it is in, I mean I'm an immigrant myself, so I don't want to dump on immigrants. I think they're doing what comes naturally looking for a better life and often they actually contribute.

But I think it's going to be hard to manage that level of immigration for economic reasons as a result of the pandemic as well as the effects of climate change which again are going to push in the same direction. They're going to make agriculture unviable in many of these countries, push people out of agriculture and then there aren't any jobs and services or an industry they're going to look for a new home.

So, going forward, I think protectionism is just a, you know we've always said this, but particularly at this time we're shooting ourselves in the foot, in the developed world. I would think that it's better to think about how do we keep the levels of trade going? What do more for people who have been hurt by the China trade and so on. At the same time how do we expand sort of our ability to create win-win situations across the world.

You know, I think there are ways of doing it. I mean we've always as economists had a hard time explaining why trade is good and beneficial. But we need to make that case again and much more strongly because I think it is going to be our salvation.

Randall Kroszner:

Minouche what's your perspective on this? On both the immigration issue that's opening, you can open borders to people as well open borders to goods and services?

Minouche Shafik:

Yeah so, I do agree that economists have kind of failed to cover themselves in glory. Because our argument has always been well trade is good, open economy is good and we can compensate the losers with the benefits and A, we never really compensated the losers, and B, who wants to be a loser? So, we kind of failed to grapple with that reality. I do think that we can do better.

It's interesting to note that the most open economies in the world, tend to have bigger welfare state cushions, because if you're going to subject to shocks, you have to be able to cushion your population. If you look at say the United States, when the US signed NAFTA and they knew that there would be a shock to say the automobile industry in Detroit, they had something called the Trade Adjustment Act.

Which you read it and it looks perfect. It says, if you are unemployed as a result of the impact of the signing this free trade agreement, you will get re-skilling, you'll get relocation grants, you'll get wage subsidies, all the ingredients a good economist would have designed. But the truth is, Congress never really put any real money behind it. You can point to the same thing here in the UK. There was something called the Migration Impact Fund. Which wassupposed to support communities that had big inflows of migrants. Again the government never resourced it properly.

So, I think you have to think really hard about resourcing these things properly if you want to avoid the political backlash that we've seen in so many countries against both immigration and open and free trade.

Randall Kroszner:

That's very interesting. You mentioned China and we have a number of questions about China. So, we're thinking about the future of capitalism. Well it seems that China has been very successful in many dimensions, whether it's in pandemic response at least by some people's measure although that's controversial. Certainly in terms economic growth, a great success and bringing a lot of people out of poverty.

So, is that the model for the future of something that has more of a role of the state? We've got a number of questions that sort of raise that issue. Because obviously there have been certain success in China that we don’t want to ignore—what's your thought on that?

Minouche Shafik:

In terms of kind of kind of the Chinese model of capitalism and whether that's-

Randall Kroszner:

Yeah well do you consider that a model that has some aspects of capitalism in it, would you call that capitalism, would you call that socialism? And then when people say well isn't that a model that we should be striving towards? Shouldn't that be future of capitalism, something that's more like China? Because we certainly get a number of questions related to that.

Minouche Shafik:

Yeah. I mean I guess anyone who's watched what's happened in China over the last six months would I guess take a view that it's not what we would traditionally call capitalism. That the state has been quite interventionist. Often with a kind of social equality angle to those interventions but also kind of putting people in their place kind of angle to those interventions. So, it's a different model.

Yeah I don't think one could call it traditional capitalist model. But it does pose a kind of challenge to western liberal democracies who had thought that capitalism and democracy are kind of married to each other and compliment each other. I think China is developing a model where you do have market forces and in some areas but you don't have a democracy, you have a, someone once called it, the communist party you don't have an electorate you have a “selectorate,” A small group who selects the leaders through an internal mechanism.

I think the challenge it raises for democracies is can we make our democracies work better so that we develop a better form of capitalism? I think that's in some ways that's the crux of what we're debating today. How do we get a better form of capitalism and can democracies deliver that? And if we can't then the Chinese model looks more attractive. Because although you may not have the good of democracy, they certainly know how to grow.

Raghuram Rajan:

So, just thinking off on what Minouche said, I think democracy and capitalism are integral to each other in the liberal capitalism that we think is reasonable. I think it's useful to pay attention to what's happening in China precisely for that reason. I mean my sense of what they're trying to do is what a lot of people in the United States want to do. Cut the big tech platforms down to size, make them more responsible for content, stop young kids playing video games forever.

Minouche Shafik:

Do that with our children.

Raghuram Rajan:

Common prosperity which is the sort of goal, let's bring the billionaires down and elevate common people. I mean China didn't do that, its early part of growth was low wages and low cheap capital, cheap capital on whose back? The savers, which was the common household, got really awful returns on their deposits. That was China's [modus operandi. They want to move away from that.

It makes sense both from a broader perspective of keeping people happy, but also from the sense of geopolitically, they can't rely on demand from the US lifting them forever. In fact there's pushback, therefore they need their own people to start consuming more. As their people consume more, they also draw foreign companies in and have a form of leverage over them. You behave otherwise we cut off your access.

So, all this fits well, the problem is how do they go about it? It's some bureaucrat, some regulator who's been given license to act. And in out of the blue without any checks and balances, thou shall not do this, thou shall not do that, thou shall not do something else. Now it seems like this seems reasonable things but who determines whether kids should play video games? Shouldn't that be a broader consensus in society rather than a 45 year old bureaucrat who basically says my kids are playing too much and this is a bad thing?

Who determines whether kids can have private tutoring? Again that same bureaucrat who says my kids are getting ... I mean there are no checks and balances. That to my mind is the problem with the system. So, long as the people in authority make all the right decisions, great. But the whole point about liberal democracies, is we don't think they make all the right decisions. Every once a while they make wrong decisions and we check balances to prevent that from happening. So, if you look at what's happening in Washington today in contrast to the Chinese.

Randall Kroszner:

Don't look.

Raghuram Rajan:

Wait I actually want to make a case for Washington. You know this debate amongst the democrats and how do we get consensus on this pending bill et cetera. If there were no checks and balances, if it was the progressive wing of the democratic party, which said my way or the highway and put that in place which would have been consistent with the US' structure as to not get too much done.

But that has a value in its own right. Just because Democrats hate big tech doesn't mean you bring it up tomorrow. You have to go through the courts, you have to go through a process. That prevents you from destroying very quickly in a way that you may regret later on. I don't think that exists in China. Maybe they're making all the right decisions, maybe not.

Randall Kroszner:

I think here in the UK I think it was Winston Churchill said is "Democracy is the worst form of government except for all the others." and obviously there's a lot of challenges to it. I think that's right I think very much about the democratic processes about disagreement. It's about bringing people ... If everyone agreed that's easy in some sense, that's very easy to get things done. It's in areas where not everyone agrees.

A good political process is one in which people disagree, come together with their disagreements and then come to some sort of solution rather than one wins, one loses and that's it. So, I think that's something that's very important. Technology is something that's come up in a lot of the questions that I've gotten. Also, it relates back again to the job market and inequality issues.

So, I can summarize a few of the questions which is, just with the development of things like artificial intelligence, with the development and certainly post-pandemic, with the much greater reliance on technology in all sorts of jobs. And a further drive towards mechanization rather than having individuals and traditional workers do many jobs. What opportunities are there for people in a capitalist system to be able to be employed, to be optimistic and to be part of society rather than be disgruntled and be angry and perhaps kind of disrupt that capitalist society?

Minouche Shafik:

I mean I think, I'm a strong believer that jobs won't disappear, jobs will change and the key is to help people through those changes. Most countries in the world underinvest terribly in skills development. If you look at the kind of OECD data on spending on what I call active labor market policies which help workers transition from one job to another. The stand out country is Denmark. They spend not .7% of GDP, all the other countries in the world, it's kind of like not .0 and then there's nothing on it. The number is so low that it kind of doesn't even show up on the table. It is absolutely key in an era when there will be massive disruption in the job market that we make that happen.

What's interesting is that people often think, this is like state regulated, control that. Actually the labor markets in many of these Nordic countries are super flexible. There's no notice period. You don't get severance, they have the highest rates of labor turnover in Europe. People get fired all the time, employers have huge amounts of flexibility, but they have to pay more tax and that tax pays for generous unemployment insurance and generous reskilling.

You get a year and if you don't find a job, you get put in one. They have the highest rates of employment in the world. So, they have figured out a model which is flexible but doesn't generate the insecurity that we have seen in so many countries and the political consequences of that insecurity. So, I think that's a big part of the model. I also think that because employers and employees are less attached in these more flexible labor markets, employers underinvest in skills because they worry that they're going to lose people.

So, from a social point of view, the investment and skills is lower than what it should be. So, I think if the space ... But we know the best training happens in the workplace not at some training center. So, we need to find a way to incentivize employers to invest beyond their own interest. Be it human capital tax credits or subsidies to employers, to overtrain their workforce beyond their own means. I think that too is part of any social contract.

Randall Kroszner:

Raghu?

Raghuram Rajan:

I think that while we are in a lovefest about Scandinavia though, my colleague Bob Topel has a lot, would set the balance here if we could hear him. But I think what perturbed me, there’s this book ‘Janesville’ for example about the GM plant closing down. She talks about GM workers not knowing how to use a computer. In this day and age, people don’t know how to use a computer? That means you really haven't kept up.

Now in Denmark or Sweden, what they do is they keep assessing your skills. What if you were fired tomorrow where could you go? So in this idealized situation you have a career counselor you meet with every so often. And the career counselor says look, maybe you should do this course or maybe you should do that course so that you keep up. And then if there is a layoff, they come in, and these are not government servants these are often private sort of contractors who come in and then talk with you about what else you need to do to go to the next job.

It's not that you need to learn about computers because you've kept up. It's more, take this course and that will help you get a job there. So there's a lot of active labor market, it's really about supporting workers. But also not letting them get complacent in their current job. One of the things that helps in the Scandinavian countries, is the volatility right? As Minouche said.

I mean because you're a small country, you're the classic small open economy, and therefore you're buffeted by every trade flow that comes and you have to figure out what to do in response. So, these workers, they are really nimble. Now, can every country become that way? It requires a fair amount of investment. But we need to move in that direction. I'll also say that we dump a lot on technology. Technology can also be a source of many of our solutions. So we need to [inaudible 00:53:34]

Randall Kroszner:

People seem to have a very, at least from the tenor of the question that are coming in. It's much more negative about technology rather than positive. I think there are definitely some positives. I mean look at the innovation that we've had in healthcare over the last year—it’s just amazing [inaudible 00:53:49] what’s happened.

Raghuram Rajan:

No, so certainly and I think what we need to do is obviously figure out how to make it more accessible and that will require technology. So, for example: education. I mean, we now have, I am currently visiting Harvard Business School, they tell me they can run cases online without human intervention. So, people actually can… they've structured the case. Such that you can have a case discussion without the faculty involved.

I mean it seems to me that we can make a lot of progress on education and skilling through technology. It's not that old, what's it? MOOC course which you take and then you do two lectures. We have found ways to combine human interaction along with the ... So, we can teach a lot of people but we can have enough pressure on the students to actually finish, to learn and finish.

I think we can do a lot more. I mean think of the classroom, it’s the same old prof sitting up there giving a lecture to the same students, this has been going on for 5,000 years. A lot of schools now are thinking of flipping it over, right which is lectures at home, you see the best teachers in the world to give you their lecture, and then you go into the classroom and do your homework. Because then you have actual physical support of your teacher who comes and customizes her or his advice to you: here is what you need to do, here is how to do it.

There's so much we can do. I'm a techno optimist, I think we can do so much with technology. But we have to guide it, we have to work with it. It won't happen naturally. There maybe some investments governments have to make also.

Randall Kroszner:

Do you have some particular thoughts on how we could make those investments to sort of move technology in the right direction to get most positive out of it?

Minouche Shafik:

Yeah, I mean first of all we have to think of these as investments in human capital that are going to make technology more effective. So often I find people's attitude is this is extra cost, we can't afford this and it's like well this isn't ... These will have very high returns in terms of increasing our productivity of our teachers, of our doctors. You mentioned health, it is extraordinary the huge leap that telemedicine has taken in this COVID year. I'm not sure if any of you have tried it, but it's incredibly efficient.

Also, creates the possibility of tapping into medical experts around the world at much lower cost. So, yeah so I think these things will improve our quality of life. But they have to be, just as we've invested in developing these great technologies, we need to invest in the people. I think Raghu has said, you have human and machine is the best combination, where other people have said it's high tech and high touch. You need to invest in the people bit not just in the technology bit, so that you get the best outcome.

Randall Kroszner:

So, since we're talking about technology and we have three former central bankers sitting here.

Minouche Shafik:

Yeah.

Randall Kroszner:

You know where I'm going, I’ve got a lot of question in about crypto. You know that is something that is getting a lot of attention. Central Banks are seriously thinking about introducing some bank digital currencies. Obviously China seems to be fairly far along in this. We just had a crack down on bitcoin mining and trading and holding. So, I think it is something that we'd have to deal with and we have to think very seriously about.

So, a few different questions; one general question, on how do you see bitcoin and other crypto currencies affecting the future of capitalism, and more broadly will the digital transformation change capitalism? So I don't know who wants to start first?

Minouche Shafik:

Why don't you start first, I'll follow.

Randall Kroszner:

No one wants to start first.

Raghuram Rajan:

Look I think these are interesting technologies. I think the distributed ledger behind block chain, the fact that you don't have to have a central trusted [00:58:30] authority and you can get consensus to work in a situation where nobody trusts each other. These have applications. I mean the central sort of idea behind this I don't buy. That the world is engaged in a race to the bottom in devaluing currencies.

I mean I do worry a little bit about the extent to which we have accommodative policy you've [inaudible 00:59:07] But it's not I don't think the US is out there trying very hard to run the dollar down to zero. So, I don't think that's the ... I do think these technologies could have a lot of value in certain situations where there is little trust, or it's just impossible to get that trust in a short period of time.

So cross-border transactions. We have two different, a lot of them could be accomplished and are being accomplished now through various forms of crypto, the Ripple network for example. But I think also we can do more, you know, payment versus delivery. You give me shares, I make your payment, we can do that through a smart contract without the necessity of having a variety of intermediaries substitute.

And I think there are many other possibilities [inaudible 01:00:01] one can be called. Have we found that killer app yet? Not yet. But I think it's useful to let those technologies flourish. Now, a lot, I mean I think when you view any of these crypto currencies you have to ask, what's the value right? Often the value seems to be some sort of this will take over the world and all the payments will be done.

Well payments if you have enough competition is not a very highly profitable sort of thing to do. If that's going to hold up the value of your crypto, it's not clear to me that there's much there. There are so many competing sort of forces. But are there applications coming? Yes, and lastly let me end by saying, CBDC Central Bank Digital Currencies. If we introduce them as central bankers we have to be very careful we don't snuff out the private sector.

Because the private sector has been very innovative. The problem with the Central Bank Digital Currency, it’s not well designed is it hoovers up all the data and essentially provides a competition to even traditional private sector activities. We have to be careful because when the state authority takes up all that it has an unfair advantage, but also may not do it very well, and that becomes a problem.

I mean think of you having your deposit accounts with the federal reserves, how much customer service are you going to get on that? So, it's not clear to me, I mean it's safe but you may not get a lot of redress if they make mistakes or if something happens. So, I would say you have to be very careful about displacing with the Central Bank Digital Currency and central banks have to think carefully about it.

Randall Kroszner:

Well it comes back to your earlier point about crowding out. That even if something may be well motivated it could potentially crowd out private sector innovation, private sector.

Raghuram Rajan:

Last point. I think the idea behind the Chinese CBDC is precisely to crowd out and financial and 10% at least to some extent. That's where again I think there may be a difference between how some of the democracies are thinking about CBDC.

Randall Kroszner:

That's certainly consistent with the crackdown on bitcoin.

Minouche Shafik:

Yeah.

Randall Kroszner:

Minouche. You have the last word on this.

Minouche Shafik:

I think the other thing about crowding out that I would worry about is what happens in a financial crisis and everybody flees to the central bank and you end up just disintermediating the financial system and exacerbating a financial crunch rather than ... So, central banks have talked about capping the amount of central bank digital currency you could hold to restrain the risk of that happening, but I think that is another dimension of the crowding out problem.

I mean the other thing I say is I agree on the innovations and payments and products and use cases around, everything from contract enforcement to payments. But I'm very skeptical about the store value argument. The idea that bitcoin is going to be more stable than the dollar, I mean look at the track record is all I would say. And I am concerned about the kind of the secrecy aspects and what it's being used for.

It is coincidence that all the ransomware attacks you pay your ransom in bitcoin, and do we want to be encouraging that actually? I think some of the more illegal uses of this I think it's legitimate for governments and central banks to be cracking down on it because it's just illegal.

Randall Kroszner:

Great, well we've covered a wide range of issues from family to, the role of women in the household and in the workforce to broadly China, US [01:04:00] and protectionism, technology. We haven't touched very much on climate and ESG and that's because the next in this series is going to be focusing on that as Madhav had mentioned on October 27th. We have one of our Nobel Prize winners Lars Peter Hansen who's been doing a lot of work on the challenges of trying to think about modeling climate and the challenges in general for that as well in particular for central banks. So, we'll be having that discussion with some others.

So, hopefully if we've whetted your appetite for the Future of Capitalism, we have a lot more in the future for you. And as I said the next one will be on the 27th with Lars Peter Hansen. So, thank you so much for being here, thank you so much for being on Zoom. I look forward to ultimately welcoming all of you here to this great facility, just a stone's throw away from St. Paul's Cathedral in the heart of the city of London, Chicago Booth London. I'm so delighted to be here, thank you for being with us.

 

(Applause)