The Third Pillar

by Raghuram Rajan

  Just as corporations have tried to protect themselves against competition by merging, professionals, especially the more skilled ones, have tried to protect themselves against competition by licensing entry strictly into their professions. One reason we get so much occupational licensing is because every local jurisdiction has its own licensing authority. They have to justify their existence by claiming local professional needs are special, hence the need for a separate local license to practice. In addition, the licensing authority are often practicing professionals. Giving them the power of determining licensing requirements is much like putting the fox in charge of chicken coop security. Both features of occupational licensing must change.

  For most professions, except the ones where local requirements are actually different, there should only be a national license. In the spirit of allowing local decision making, communities could be free to set local licensing norms, but those norms should not be stricter than national norms. In other words, a locality, intent on increasing employment, could allow manicurists with less training than the national norm to practice locally, but the locality should not be able to set the norm for training at a stricter level than the national norm so as to keep out manicurists from elsewhere. This is in the spirit of keeping internal borders open to trade in goods and services that we discussed earlier. Finally, if there are significant local differences in conditions that require local licensing, these should be addressed through a supplementary local license that only tests for the ability to handle the additional local issues. Furthermore, it would be best that national licensing norms are set by panels of laypersons who are advised by the professional experts, much as any kind of legislation is written. That would place some public oversight over the licensing process, and ensure it is not set by the professionals for the professionals.

  ALLOWING THE MARKET AND COMMUNITY TO ADJUST

  Not every aberration or distortion needs policy action. Sometimes the market itself creates the incentives for correction. For instance, the wage differential between the skilled and the moderately skilled has stopped growing, as we noted earlier. The high wages of doctors attract more youngsters to become doctors (supplementing any natural inclination toward medicine). It also creates strong monetary incentives for tech firms to create artificial-intelligence medical diagnostic systems, where ordinary doctors could be replaced by nurse practitioner interviewers with far less training. The competitive market targets those who benefit the most from it since the profits these entities make are most worth disrupting. Therefore, even as the quality and quantity of health care expands significantly, and even as countries grow older and richer, the need for doctors could moderate, normalizing their wages and reducing income inequality.

  Similarly, the abundance of machine-made or foreign goods, and the fall in local wages, could also prompt a shift in taste toward goods with more human and local content. We already see some of this. The more accurate but cheap quartz or digital watch has been displaced by painstakingly handcrafted and intricate mechanical watches at the high end of the luxury scale. Local farmers markets pop up like mushrooms in rich suburbs or cities in the United States, as customers abandon the supermarket for local produce. Consumer tastes could shift. Jobs that require working with one’s hands rather than with one’s mind or that require local work could reemerge, once again reducing the wage premium to education.

  MARKETS OR COMMUNITY?

  That said, some of the adjustment will also come from communities adjusting the reach of the market and limiting where the market will go. Consider a situation that Harvard philosopher Michael Sandel describes: Some companies in the United States pay the unemployed to stand in line for free public tickets to congressional hearings.17 They then sell the tickets to lobbyists and corporate lawyers who have a business interest in the hearing but are too busy to stand in line. Public hearings are an important element of participatory democracy. All citizens should have equal access. So selling access seems a perversion of democratic principles, which is why Sandel criticizes it. How should we see his example in the light of this book?

  First, let us be clear what is at stake. The fundamental problem is scarcity. We cannot accommodate everyone who might have an interest in a particularly important hearing in the room. Therefore, we have to ration entry. We can either allow people to use their time (as they stand in line) to bid for seats, or we can auction seats for money. The former seems fairer, because all citizens seemingly start with equal endowments of time—we all start with twenty-four hours in a day. However, is a single mother with a high-pressure job and three young children as equally endowed with spare time as a student on summer vacation? Is society better off if she, the chief legal counsel in a large corporation, spends much of her time standing in line for hearings?

  Whether it is better to sell entry tickets for time or for money thus depends on what we hope to achieve. If we want to increase society’s productive efficiency—the realm of the market—people’s willingness to pay with money is a reasonable indicator of how much they will gain if they have access to the hearing. Auctioning seats for money makes sense—the lawyer contributes more to society by preparing briefs than standing in line. On the other hand, if it is important that young impressionable citizens see how their democracy works, if it is important that we build social solidarity by making corporate executives stand in line with jobless teenagers—in short, if we want to build a sense of community—perhaps we should make entry tickets nontransferable and make people bid with their time by standing in line. If we think that both objectives should play some role, perhaps we should turn a blind eye to some operators hiring those with spare time to stay in line in lieu of busy lawyers, so long as they do not corner all the seats.

  The appropriate answer, therefore, depends on the conditions in society. In an environment where we worry about the overly strong association between incomes and capabilities, and the unequal access to acquiring capabilities, it is probably wise to emphasize community relative to markets. There are undoubtedly times and places where the reverse may be true, something Sandel does not emphasize.

  More generally, though, one of the community’s reactions to a meritocratic ladder few can climb is to establish other ladders that more people can climb. Reducing the range of things that money can buy can increase the space for such nonmarket activity. Engagement with the church, in community leadership and service, in government or military service, with charitable organizations, and with the family and kin, are alternative ladders that are respected in their own right. By imposing clear limits on the market—one cannot buy public office, professional accomplishments, military glory, unconditional love . . . and even seats for a congressional hearing—a community allows nonmarket pathways to self-actualization. When the community honors other achievements than the accumulation of wealth, the wealthy are envied less and imitated less, and the community is cohesive despite some wealth inequality.18 Sandel is right that economists should not be too hasty in attempting to monetize everything!

  THE ROLE OF COMMUNITY VALUES IN CHANGING THE TOLERANCE FOR MARKETS

  As we have seen through history, community values are not static, they do respond over time to take advantage of opportunities created by the market, or to offset the problems it creates. This will be part of the necessary change. In India, for example, over my lifetime a very socialist distrust of markets has given way to a grudging celebration of its benefits. In the Hindi movies I saw in my childhood, the arch villain was typically a businessman, usually found at the horse races with a glass of whisky, a cigar, and a moll clinging to his arm, even while his henchmen evicted the poor hero and his mother from their humble abode. Today, the hero is often likely to be a successful software entrepreneur, jet-setting across the world to woo his equally accomplished love interest. The move away from sham socialism in India since the early 1990s has made market success more worthy of emulation than in the past.

  In contrast,
Hollywood has typically had a somewhat suspicious attitude toward business, perhaps to offset the more celebratory views of capitalism that prevail in the mainstream United States. It is worth noting, though, that this view may be turning yet more jaundiced today, consistent with a belief that the market has overreached. Even a children’s film, The LEGO Movie, whose intent was, in part, to increase the sales of LEGO toys to small children, has “Lord Business” as its villain.19 Society is not better informed when the individualistic clean-cut entrepreneurial heroes of Ayn Rand’s novels are transmogrified into Lord Business. Both extremes are caricatures, targeted at the impressionable. Nevertheless, they do reflect, each in its own time, attempts to change social attitudes toward the market, attempts that can indeed help in restoring the balance. They are not unhealthy for society.

  In a similar vein, we have seen a shift in public attitudes toward big technology companies across the developed world. Their size and profitability, their ability to target individuals with features and feeds that hook them into staying connected, and their power to influence the political opinions of large numbers of people directly would have been alarming in the past. Nevertheless, they escaped both careful scrutiny and regulation, because people seemed entranced by their ostensibly free products, the enormous wealth of their youthful entrepreneurial bosses, their idealistic corporate vision statements, and their seeming innocence of the sordid real world. The reality that these are profit-maximizing corporations, which have been careless about the degree to which they have intruded on customer privacy, and that have let their access and trust be misused by third parties, has come as a public shock. It is prompting the usual zeal by authorities to punish and overcorrect after having been asleep at the wheel. The public suspicion of these companies now matches the broader concern about the behavior of large corporations in traditional industries. As we move back to balance, we will also undoubtedly figure out the right mix of credulity and suspicion with which to treat these companies.

  CONCLUSION

  The temptation when imbalances arise is to hack all the pillars down to the lowest height among them. This typically will bring back equilibrium, but at a much lower level for society. Far better to push a pillar down only if absolutely necessary, and instead, focus on elevating all pillars to the greatest common level. That is the only way society will progress. In this vein, the temptation today will be to constrain competitive markets to give communities a chance at recovery. That might unleash other forces such as cronyism that would be hard to reverse. Instead, it is better to improve the functioning of the market, even while also refocusing the state and strengthening the community.

  EPILOGUE

  The three pillars that support society—the state, markets, and the community—are in constant flux, buffeted by economic and technological shocks. Society perpetually strives for a new equilibrium, through a rebalancing of the pillars. The ICT revolution, accompanied by the Global Financial Crisis of 2007–2008, has once again highlighted the need for rebalancing. Recent elections across the developed world suggest people are deeply dissatisfied with the current state of affairs.

  The ICT revolution has created a meritocracy, which is close to hereditary in some developed countries. Moreover, in reaction to the competition generated by global markets, those who can, such as large corporations and professionals, have created protected enclaves for themselves, further enhancing the benefits of being part of the higher meritocracy. For the rest, outside the walled and moated enclaves, competition from man and machine from across the globe has been fierce. For the unprotected, new opportunities, preserved for the privileged by walls of credentials and licenses, have been hard to access, in part because educational ladders have been too short and rickety. In part, they also have been inaccessible because the greatest opportunities have emerged in global cities, where limited space and zoning laws have made residence unaffordable for most. As economic activity has moved away from rural and semi-urban communities, despair and social disintegration has moved in. With the establishment discredited, there is widespread desire for new answers. The demagogues of the left and right propose answers people want to hear, not what they should hear. All too often, there is someone else or something else to blame, which then imposes the burden of change elsewhere. That is comforting to their audiences but dangerously misleading. The reality is that we all are part of the problem, and we all can be part of the solution.

  In the last five chapters, I have laid out a possible path to a new balance, a way to resist the seemingly inexorable diminution of the community, even while preserving the open access that markets provide us. The intent is to build the pillars up, rather than reduce them to the lowest common denominator. The essence of this new balance is inclusive localism. We can use the tools we have obtained through the ICT revolution to empower communities more, to give people more of a sense of control over their futures, in the process creating and distributing economic and political power. At the same time, I argue for a national framework that is inclusive, in that all ethnicities are seen as part of the nation, and the nation does not entrench differences in economic opportunity between ethnicities or classes. Inclusive localism breaks down gigantic walls protecting privilege, while encouraging tiny walls to preserve community character.

  The hope is that such a path helps us hold on to the best aspects of a system that has contributed to global prosperity—primarily the open access and competition stemming from global markets—while dealing with the inequality and fear generated by technological change. Specifically, for some of us, inclusive localism fulfills at the community level the natural human instinct to congregate with others similar to us. It thus heads off more divisive and artificial attempts in diverse nations to fulfill that tribal instinct at the national level through populist nationalism. Also, by enhancing the local infrastructure, the means of building capabilities, and the safety net at the community level, inclusive localism attempts to broaden and equalize opportunities. It allows each community’s members to participate in, and benefit from, global markets.

  The proposed path builds on what we have. I do not advocate dispensing with any of the pillars—I neither recommend eliminating markets and private property nor do I suggest putting everything, including governance, for sale. The state is necessary, but has to cede power to the community and can be much more effective. The community is essential for us to express our humanity, but it needs to carve out space from both markets and the state to flourish. Even if seemingly moderate, the reform path is ambitious for it eschews easy but often wrong solutions.

  We also need to recognize realities. Deep down, the vast majority of us recognize the human in one another. Yet we need to come close enough to do that, and all too often, we label at a distance. Understanding and tolerance of other cultures is not a weakness, not a sign of inadequate patriotism, not an indication that we are rootless “citizens of nowhere.” In reality, it reflects our preparation for the world of tomorrow, where we will become ever more mixed as peoples, even as we study, value, and preserve our collective cultural heritage. The world is not there yet. Therefore, we need to take smaller, easier steps, where there is room for all as we develop a better understanding of one another. The strengthening of proximate communities will not just allow a diversity of views, including the most tribal and the most cosmopolitan, to exist. It will also allow us to preserve direct social interaction, which may well be where more of the jobs of the future lie, as automation depletes jobs in sectors that produce commercial goods and services.

  It may be that the changes that are about to hit us will be more extraordinary than anything we have seen. Maybe most of us will be unemployed in a decade, rendered redundant by robots and generalized artificial superintelligence. I doubt it—ever since the 1950s, experts have been predicting that generalized artificial intelligence, that is algorithms that can replace humans fully, is less than a couple of decades away—but I also do not fear that outcome, so
long as we preserve the balance. That we are unemployed will mean that machines are doing our work more cheaply, that the cost of goods and services will fall, and their quality increase, to reflect the greater productivity of machines. As Keynes argued nearly a hundred years ago, we will be freed to contemplate the finer elements of our existence, to create and cherish great art and beauty, to value goodness rather than just commercial success.1

  Many of us fear that we will not have the incomes for such a fine life, since the machines will be owned by a few, and all income will flow to them. Yet as our excursion through history suggests, social values change. We glorified the victorious warrior, we then turned to praise merchants and bankers, today we place successful entrepreneurs on a pedestal, and we may exalt community workers tomorrow. If the distribution of wealth becomes skewed towards a very few, the few may decide their accumulation of wealth unseemly and find ways to give it back. Society will aid that process by muting its applause for the captains of industry who only accumulate, while increasing it for those who distribute wisely. Indeed, this already seems underway with the Giving Pledge, where billionaires across the world have pledged to give away at least half their wealth.

  Even if values do not change, the feared outcome of mass poverty amid productive plenty will not come to pass if we maintain our democracy, and the separation between behemoth corporations and the leviathan state. For property rights are a social construct, created and enforced only with the tolerance of the people. If incomes and wealth do get more skewed toward a few owners, democracy will turn from protecting the property of the few to preserving opportunity for the many, as it has done before. Only the coalition of the behemoth and the leviathan, subverting democracy to enforce the property rights of the few and the poverty of the many, can stand in the way. This possibility is still in the future, and we need to ensure we never get there by keeping our democracy strong and vigilant, and the realm of the market and government separate. The path I propose will help us do this.