The Third Pillar

by Raghuram Rajan

  CREATING BINDING SOCIAL RELATIONSHIPS

  In close-knit communities, few transactions are explicit exchanges of broadly equal values. A mother nurses her child with no thought of sending a bill for services rendered, while we ply dinner guests with food and wine with no concern of when they will reciprocate. As ties get weaker in the community, more reciprocity is expected, but usually in such a way that the original gesture is never fully reciprocated so as to “close the account.”

  American anthropologist Laura Bohannan spent years working with the Tiv people of Northern Nigeria. When she arrived to study the community, she was inundated with gifts by the very poor villagers—a common experience for guests in traditional societies. Not wanting to appear rude, she accepted them but was eventually taught the appropriate etiquette by the headman’s wife, who told her to “stop wandering aimlessly about the countryside and start calling to return the gifts” she had received. Bohannon concluded:

  “What had been given must be returned, and at the appropriate time—in most cases, within two market weeks. For more valuable gifts, like livestock, one should wait until the giver is in sudden need and then offer financial aid. In the absence of banks, large presents of this sort are one way of saving. . . . I couldn’t remember [who gave what]; I didn’t think anyone could. But they did, and I watched with amazed admiration as Udama [the headman’s wife] dispensed handfuls of okra, the odd tenth-penny and other bits in an endless circle of gifts in which no one ever handed over the precise value of the object last received but in which, over months, the total exchange was never more than a penny in anyone’s favor.”6

  Gifts among the Tiv, as in most societies, serve to strengthen social bonds. That a gift is not returned in exact and equal measure prevents gift exchange from becoming a market transaction. Indeed, the very point is that nothing is demanded in return by the giver—social ties are built only when the giver seemingly forgets the gift as soon as it is given. Yet someone who only receives and never gives is quickly ostracized, hence the advice to return the gifts. Relationships are built not just by offering gifts but also by offering services. As Bohannan sat with neighbors assisting a woman’s childbirth, she reflected:

  “I also remembered that my great-grandmother had her first child alone with her husband on the frontier; in her diary, she had longed for another woman then. . . . More generally, though, I could see that where we multiplied specialists and services, these people multiplied personal relationship . . .”

  In small communities where there are few specialists to provide services, neighbors fill in the gaps. For example, in Amish communities in rural Pennsylvania, everyone comes together in “barn raisings” to build a barn for someone in the community. It is as much a community celebration as collective work. Such actions broaden the areas of interaction and help deepen relationships within the community. Indeed, every transaction within a community, whether economic or not, is just the most recent link in a set of cross-linked block chains which stretch back into the past, and likely will well into the future.

  The ties within a community enable it to act as a support of last resort. When all is lost, we can always return to our family or village, where we will be helped because of who we are rather than what we can pay or what we have accomplished. A study finds that 20 percent of households within a caste group in India in 1999 sent or received transfers of money.7 The transfers amounted to between 20 and 40 percent of the receiving household’s annual income. Each sending household sent between 5 to 7 percent of its annual income, implying a number of them combined to help a household that had major contingencies like illness or marriage. Even with modern sources of social insurance such as unemployment benefits and pensions, the community is critical in filling holes that are left by the formal government and market systems.

  FACILITATING TRANSACTIONS

  Communities facilitate internal trading by monitoring behavior and ostracizing defaulters, cutting them off from further transactions and community support.8 Some embed differential treatment of insiders and outsiders into their norms. Anthropologist Douglas Oliver observed that to the Siuai of Solomon Islands, mankind consists of relatives and strangers. “Transactions with relatives ought to be carried out in a spirit devoid of commerciality.” With few exceptions, however, “persons who live far away are not relatives and can only be enemies . . . One interacts with them only to buy and sell—utilizing hard bargaining and deceit to make as much profit from such transactions as possible.”9 With such an attitude, it would take a particularly confident outsider to contemplate trading with the Siuai, ensuring outside trades would be few and far between. But that may be the point! Parochial as the attitude may seem, it fortifies the community by strengthening within-community trade and limiting opportunities for members to stray outside.

  ENCOURAGING FAVORS AND RESOLVING CONFLICTS

  Bonds between members are obviously stronger if they grow up together, undergo common socialization processes and rites of passage, and share common values and traditions. However, bonds can also build between members of a community in a more modern setting where they come together only in adulthood. Indeed, despite having access to a modern legal system, neighbors may rely on community norms to resolve potential conflict because it is cheaper.

  Robert Ellikson, a legal scholar at Yale University, studied ranchers in Shasta County in Northern California and found that their community had developed a variety of unwritten norms to deal with various frictions. For example, cattle from one ranch might trespass onto another rancher’s land. If that rancher discovered an animal wearing someone else’s brand, he would inform the owner. The owner, though, might take weeks to pick up his animal in a collective roundup—it is too costly to go fetch each animal as it strays. In the meantime, the rancher would incur costs of hundreds of dollars for feeding the trespassing cattle. Nevertheless, he typically did not charge the owner for this.

  Ellikson conjectures this is because in the thinly populated rural areas of the county, neighbors expect to interact with one another on multiple dimensions such as fence repair, water supply, and staffing the volunteer fire station, and these interactions will extend far into the future. Any “trespass dispute with a neighbor is almost certain to be but one thread in the rich fabric of a continuing relationship.” Therefore, most residents expect giving and receiving to balance out in the long run—a shortfall in the trespass account will be offset by a surplus in the fence repair account.

  Accounts need not balance over time. When a transfer is necessary to square unbalanced accounts, neighbors in Shasta County prefer using in-kind payments, not money, for the latter is thought “unneighborly”: If one’s goat eats a neighbor’s plants, the neighborly thing to do would be to replant them, not offer money. Indeed, when one of the ranchers paid to settle a trespass dispute, others rebuked him for setting an unfortunate precedent.10 The point is that neighbors prefer to keep an ongoing cooperative relationship rather than end it through “cold hard cash,” which can signal an arm’s-length dealing and poison the atmosphere. It is the web of credit and debit accounts within Shasta County ranchers, settled with favors rather than with money so that no one quite knows what the balance is, that seems to tie the community together.

  In every such community, there will be potential deviants, who are happy to take but will not give. Ellikson describes a rising set of penalties for defaulters, starting with adverse gossip within the close community. A besmirched reputation is enough to stop the flow of favors, so most ranchers are very careful not just about adhering to the norms but about being seen to be adhering to the norms. If the deviant does not really care about his good name, aggrieved ranchers may take sterner action like killing the trespassing animals after giving the owner due warning, or reporting the owner to county authorities. While disputes are resolved under the shadow of the law, legal remedies are rarely invoked, and even then, typically against outsiders. As one rancher put it, “
Being good neighbors means no lawsuits.”11 More generally, as we will see, communities can be diminished by the intrusion of the state, and it is not surprising that Shasta County tries to avoid relying on it.

  THE VALUE OF COMMUNITY

  It is easy to see why the community is so appealing. Apart from contributing to our sense of who we are, a richer range of transactions can be undertaken within the community than would be possible if everything had to be contractual and strictly enforced by the law. The record of what one does for the community continues to be visible in the community, and it does not vanish into an anonymous marketplace. This leads to greater pride, ownership, and responsibility. The community comes together to raise its young and to support its weak, elderly, and unlucky. Because of its proximity, and the degree of information it receives, the community can tailor help to the specific needs of the situation. It also recognizes freeloaders far better than any distant government could and can shut down their benefits. As a result, given any quantity of available resources, it can offer a far-higher level of benefits to the truly needy. Communities therefore aid the individual, preventing them from drifting—untaught, unaided, and unanchored—in life.

  The work of economic theorists like Oliver Hart, who won the Nobel Prize in Economics in 2016, offers a related explanation for the economic value of communities. The real world is plagued by the problem of incomplete contracts. We cannot fully anticipate what will happen in the future, and even if we can, we do not have the ability to prove who did what, and when, to the satisfaction of a court of law. We cannot thus write the full range of arm’s-length contracts that would be necessary to deal with all the problems that might arise in real life. For instance, to deal with the problem of stray cattle with explicit arm’s-length contracts, every rancher would have to contract with every other rancher on what ought to be done if his cattle strays, as well as on the necessary payments for services rendered. With little ability to verify when the cattle wondered off the ranch, or what the quality of their treatment was in the hands of the rancher who found them, lawsuits could proliferate. The system of implicit community responsibility and enforcement might be far more effective in protecting cattle and minimizing transactions costs than using explicit contracts and the legal system. Communities thus can be more than the sum of individuals who compose them.

  Finally, an important modern function of communities is to give the individual in large countries some political influence over the way they are governed, and thus a sense of control over their lives, as well as a sense of public responsibility. Well-structured countries decentralize a lot of decisions to local community government. To the extent that individuals can organize collective political action within the community more easily, it affords them a vehicle to affect issues on a national stage. The community then magnifies the power of the individual. We will return to the political role of the community later in the book.

  DYSFUNCTIONAL COMMUNITIES

  We have seen what functional communities do. Consider now a classic picture of a dysfunctional community and what it does not do. Dysfunctional communities in developed countries can be virtual war zones, with widespread drug addiction, crime, failing schools, and broken families. Who would expect significant public engagement if even leaving home is dangerous? This is why the Pilsen community we discussed in the Preface set about tackling crime as the first step in community revival. However, dysfunctional communities are present in even fairly safe areas around the world.

  In the mid-1950s, social anthropologist Edward Banfield spent nearly a year studying a poor village in Southern Italy, to which he gave a fictitious name, Montegrano. The extent of underdevelopment of the village can be gauged by the fact that many of the inhabitants were illiterate and did not have toilets with running water. The village remained underdeveloped even in an Italy that was then undergoing a miraculous economic transformation, in part, as Banfield argues, because of “the inability of the villagers to act together for their common good.”12 Anyone who has been to dysfunctional communities around the world will recognize some of Montegrano in those communities.

  The main occupation in Montegrano was agriculture, but with limited untilled land and small land holdings, it was unlikely that peasant families would prosper by staying in agriculture. Even so, the main path of upward mobility for children, education, was largely blocked. Only five grades of school were taught in the village, the schools were poorly equipped, teachers poorly paid, and attendance, both by students and teachers, was irregular. Moreover, “After finishing the fifth grade some students can barely read or write or do simple sums . . . According to a Montegrano school official, one-third of the [school] graduates are illiterate several years after graduation.”13 Many children did not attend schools regularly, and some farm people sent their children to school willingly only so long as they were too young to work in the fields.

  An engineer from Northern Italy, who was shocked at the lack of professionalism among teachers in Montegrano, perhaps best captured what was wrong: He noted that during the summer vacation, a teacher from more prosperous Northern Italy might hold informal classes, take children for walks into the country and explain a bit about nature, or even go on picnics. In contrast, teachers in Montegrano spent their summers “loafing in the piazza,” and did not speak to their students when they saw them. The teachers simply did not care if their students learned anything.14

  Apathy was evident elsewhere too. There were no organized voluntary charities in the village. An order of nuns from outside the village maintained an orphanage for little girls in a crumbling monastery, but even though girls from local families were at the orphanage, “none of the many half-employed stone masons has ever given a day’s work to its repair.”15 There was not enough food for the children, “but no peasant or land proprietor ha[d] ever given a young pig to the orphanage.”16

  The nearest hospital was five hours away by car, and few villagers could afford the trip. There was no organized effort to bring a hospital nearby, despite villagers complaining for years about the lack of access to medical facilities. Stopgap measures to improve access to education and health care, such as rescheduling public bus timings to transport village children to schools elsewhere, or funding an ambulance to carry emergency cases from the area to the hospital, were simply not considered.

  A functional community would have put pressure on the local government to improve public services, failing which volunteers would have gathered to undertake the task. While Montegrano had an elected mayor and council, decisions “even to buy an ashtray” were taken by the prefect, a member of the civil service sitting in Potenza, the nearest large town.17 Similarly, the director of schools reported directly to Potenza, public works were not under the purview of local government, and the police were under the Ministry of Justice in Rome. Too few important decisions were taken locally, a problem we will discuss later in the book, but even so, villagers did not even try to influence them.

  The problem in Montegrano, as Banfield argues, was the extreme distrust between villagers, their worry about losing relative social position if they helped someone else improve their lot, and their corrosive envy of those who did succeed. Given this attitude, anyone who undertook a public-spirited action felt they incurred the full costs of acting, would probably receive only a small part of the public benefits, and would feel diminished by the public benefits that went to others. As one teacher explained, not only was there little public spirit, but many people positively wanted to prevent others from getting ahead.18 Such public apathy explains why voluntary efforts to supply public services—for example, masons repairing the monastery—simply did not emerge.

  There are a variety of reasons why these attitudes exist in communities. When economic opportunity is very limited, economic activity might be seen as zero-sum—your gain comes at the expense of mine. The problem is exacerbated when families are at risk of slipping in social status, from the barely self-
sufficient but still respectable to the “deplorable,” who are dependent on others for subsistence. With few savings and little wealth, many peasants were just one hailstorm or one pig’s unfortunate death away from a winter of deprivation or worse. While families were willing to help one another tide over temporary misfortune, more general public spirit required a degree of comfort with their economic situation that they simply did not have. Given the difficulty of staying afloat economically, villagers’ focus was on providing for their immediate family rather than maintaining a broader public spirit.

  This inward focus may actually do public harm. A common example of what Banfield calls “amoral familism” is visible in many developing countries, where people keep their houses spotlessly clean, but unceremoniously dump the garbage collected inside on the street outside. The ultimately self-defeating effects of having unclean and unhygienic public spaces surrounding clean homes can only be explained by extreme public apathy, a fundamental characteristic of dysfunctional communities.