To Save Capitalism, We Need to Save Communities

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Raghuram Rajan

Every past technological revolution has been disruptive, prompted a societal reaction, and eventually resulted in broader change that helped us get the best out of the technology. In the ongoing information technology revolution, however, the need for people to adapt has come rapidly, before the benefits have had time to spread. And the communities that must adapt the most are those that have experienced the greatest adversity and have the least resources to cope.

There are fundamentally three pillars that support society: the state, markets and the community. We spend a lot of time debating the first two, but it is the neglected third pillar, the community, that needs more consideration today. The state and markets have expanded their powers and their reach in tandem, and left the community relatively powerless to face the full and uneven brunt of technological change. The solutions to many of our problems are to be found in bringing dysfunctional communities back to health, for healthy communities, working through democracy, make capitalism both attractive and sustainable.

Consider what’s been happening in developed nations over the past two decades. Information technology has had a direct impact on employment by eliminating certain categories of jobs. It also has had an indirect effect via trade, allowing certain tasks to be outsourced.

We often think about these impacts by assuming the aggregate amount of work is fixed and whatever is displaced by automation or trade will increase local unemployment. In fact, to the extent that products become cheaper, there could be more demand for them and the overall quantum of human work could actually increase. The new work will, however, be different.

The job losses due to greater automation and computerization, for instance, have been spread across manufacturing and services, and typically have hit firms that are more likely to be located near urban areas. Instead of the whole factory or office closing, a few workers doing routine jobs that can be automated are let go periodically. The remaining workers doing non­routine work continue to be employed and typically now are more produc­tive. So, while automation has had a varied effect on the quality of jobs, the jobs lost have largely been matched by new jobs created.

When it comes to trade, on the other hand, the losers are clear: In developed countries, they are the workers with a moderate education. When manufacturing supply chains were entirely contained within those nations, their jobs were safe; the indivisibility of the production process allowed them to bargain for higher pay, lower and more pre­dictable work hours, and more safeguards at work. As the production process has fragmented, though, with each segment undertaken in the most appropriate country, they have been exposed to the full force of competition from cheaper, more flexible, and equally competent labor elsewhere.

Well-paying unionized jobs in low-tech manufac­turing industries have been most adversely affected. Such jobs have typically been located near smaller towns and rural areas in the interior of countries, where the cost of living and thus of labor has been low. The incomes these jobs provided also helped keep local hairdressers, laundries and shops in business.

Moderately educated workers whose firms close because of trade competi­tion typically have few palatable alternatives. With few new jobs near the small towns or semirural areas where they live, and most such jobs to be found in companies beset by the same competitive woes, workers have bleak prospects if they stay put. Yet, according to one U.S. study, that’s exactly what they do.

Why? Retraining is hardly easy, espe­cially for manufacturing workers who went to work after high school many years ago and who really have not used computers at work or at home. Cities offer service jobs but also demand higher rents. For many, not moving and hoping old jobs return seems the best bet; after all, there are still friends and family nearby.

Rooted communities such as these that are suddenly hit by economic adversity are especially prone to popu­list nationalist appeals. A populist nationalist leader recognizes that people fear that their prox­imate communities are disintegrating. She knows they are disoriented by the dizzying pace of technological change, even as they struggle to cope with the effects of global integration. She understands why they are resentful, as fam­ilies and communities, already stressed by economic forces and slipping in social status, are also shamed for not accepting the liberal values of the elite.

She plays up their fears about weakening social solidarity, as a more open multicultural society brings in outsiders who do not share a common under­standing of past cultural legacies. The alternative she proposes is meant to restore respect to her followers. She will anchor her people in an imagined national virtual community of ethnically or culturally homogenous natives, inheriting the warm, sepia-tinged, monochromatic glories of the past. She will filter out the alarming colors, languages and prayers that make today’s society so confusing.

In contrast to the weak, fractured, and equivocal elite estab­lishment, her leadership will be strong and muscular, emphasizing popular beliefs as obvious truths. Importantly, the justifications minimize the need for the majority group it­self to adapt: Once the un-level playing field is righted, group members will recover their natural place in the social order, or so they are led to believe. The prospect is particularly at­tractive to those who are looking for a sense of identity, a sense of belonging, because their own proximate communities are in disarray.

These are dangerous times. If people have lost faith in the state and their ability to compete in markets, if their communities continue to decline, if they feel that the elite have appropriated all opportunities for themselves, popular resentment can turn to rage. When they are distressed and they have lost trust, the aggrieved masses are fertile ground for radicals. Reviving their communities is absolutely vital if the market democracies are to address the challenges of the future.


This is the first of three essays adapted from “The Third Pillar: How Markets and the State Leave the Community Behind,” published today by Penguin Press.

Raghuram Rajan is professor of finance at the University of Chicago Booth School of Business. He was previously governor of the Reserve Bank of India.

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