Raghuram Rajan's new book: An economist tells us why it is critical to preserve communities left behind by markets and State

The book, The Third Pillar: How Markets and State Leave the Community Behind, written by former Reserve Bank of India (RBI) governor Raghuram G Rajan is based on his paper with Luigi Zingales--Saving Capitalism from Capitalists.

As the title suggests, this book talks about the third pillar which is indeed not given much importance in the global economic discourse, i.e. community. The larger issue Rajan is trying to discuss is the exclusion of community from the market. It seems that he is having some hesitation in using the term ‘exclusion’ which perhaps he feels is political.

A critical focus of Rajan's book is populist nationalism. According to him, “populist nationalism will undermine the liberal market democratic system that brought developed countries the prosperity they enjoy”. For Rajan, populist nationalism is an impediment to market freedom and hence limits the economic prosperity of developing countries. He defines the market as an agent to social and economic change and says all other agents are irrelevant.

Rajan is not explaining what kind of market brings good prospects to developing countries; he also ignores the government interventions in developed countries for economic prosperity. He emphasises that “community can be fragile even without becoming dysfunctional. They tend to work best when they are small and have little competition”. He further argues that “in a small community, therefore, everyone has a stake in everyone else’s well-being. We are spoiled for choice as the community grows which could hurt the community”.

A small community, according to Rajan, is an informal economic unit active in the market. It is a liberal market-centric analysis of the state of affairs of poor well-being of millions across the world. But, this is far from reality. As an economist who has worked in several institutions, including the RBI, Rajan should have given a valid developmental explanation of poor well-being rather than blame the absence of a market. Such analysis favours market forces and also gives undue importance to them.

 Raghuram Rajans new book: An economist tells us why it is critical to preserve communities left behind by markets and State

A file photo of Raghuram Rajan, former RBI governor. File photo. PTI

It is proved that the market does not bring well-being to disadvantaged as many development economists repeatedly suggest, access to commodities are important, which markets seldom ensure. His analysis is very much restricted to what World Bank defined as user groups.

According to the World Bank, large groups are unable to participate in the market, so an active small group can be effective. The World Bank proposes this method in their rural cost recovery, drinking water supply projects where people have to make community groups to ensure smooth functioning of cost recovery projects. Here, the author completely ignores the fact that macro level rather than micro level movement is critical for the developmental mobility of poor masses.

Limited interpretation of community displaces all other arguments in the book. For Rajan, a community is the victim of monopoly capitalism. Monopoly capitalism is the product of monopoly state, and hence against the community. Also, an interesting point he has not yet elaborated much is the private property-community-state relationship.

He says, "while independent private property owners could coordinate through Parliament or Congress to influence the state, the peasant and increasingly the worker in manufacturing establishments, dislodged from their traditional communities, had no explicit rights and no say in their own governance”. In fact, this argument itself suspends his own definition of community. Here, small or big is not the issue; the concern is how monopoly capitalism defines the boundaries of a community. Freedom and choices of the community are restricted by monopoly and market.

Community seldom questioned the market. Unfortunately, Rajan does not pay attention to this critical relationship between community and capitalism. He argues that peasants and the poor would be dislodged from the state and this is to be seen in a country like India. Such relationships, according to him disrupt the market competition.

Rajan is of the opinion that “democratically empowered community was not against the market or private property. It was perfectly happy to respect them when there was a sense that respecting these rights broadly benefited the community”. He tries to redefine democracy as market freedom. So according to him, “Politically engaged largely self-governing communities were a natural unit of organisation and facilitated organised protest”.  Here the idea of politics is given a liberal, yet limited interpretation. However, such overemphasis on the market is an injustice to millions of poor.

Everybody welcomes market in commodity sales since its competitive pricing has helped the needy. However, in practice, the market does control competition and prices. So, giving undue importance to the market never represents social reality.

This book is largely addressing the western readers especially Americans. Such an intention is very much reflected in chapters where Rajan compares the populism in India and China.

It is evident from his analysis of left-wing populism where he says, “at the risk of caricature, left-wing populists tend to see everyone other than the dominant elite as the oppressed. Their aims are not to overturn the system, but to get a reorientation of the systems, with the government typically doing more and the market less.”

The third pillar

Rajan focuses on the left wing politics in advanced capitalist countries and developing counties like India. He compares India and China in terms of decision-making. In China, Rajan says, the Communist party is an agent bringing market and private capital to China. He says, “many party bosses showed a keen interest in such investment ( private capital) because economic growth in their region was an important consideration for their promotion up the party hierarchy”.

For him, right-wing politics displaces the liberal tradition of the past and also makes the market irrelevant. He says, “democracy as we will see in India’s case, makes it harder for the state to act in some cases. However, it also makes inaction easier. The party in power does not have to take responsibility for everything, and it does not have to maintain a pretence of infallibility since it derives its legitimacy from election, not perfection”.

This is true that in India every political party is focused on the election and promote populism as an engine for collecting votes. Interestingly, Rajan attempts to connect this structural challenge as a failure of the market. “Market endanger themselves when they stop working for the broader citizenry, because it may rise up to shut them down”.

This book is released when India prepares for the next Lok Sabha election. So some of his observations indirectly question the populism in the country. His observation on the market and populism is not compatible with the Indian reality at present. Here, the market is still an impediment to social choices.

The Third Pillar: How Markets and the State Leave the Community Behind

Raghuram Rajan 

464 pages 

HarperCollins India

(The writer is Assistant Professor, Jamsetji Tata School of Disaster Studies, Tata Institute of Social Sciences)

Updated Date: Mar 07, 2019 17:53:23 IST