– The demands are much
higher to get good jobs but that ability to transit, there is no mediating institution because the necessary basic institutions themselves are collapsing. You need a good primary education, a good secondary education, to
be able to go to university. But if you’ve had a
lousy primary education and a lousy high school,
– That’s right. – All the scholarships in the world are not going to help you pass and if you are, you know, failing, and most people don’t get scholarships, they’re building up student debt, six years they drop out. They don’t have a chance, and that’s the sense in which
the place you start with, the family you grow up in dooms you or makes you successful. – I’m here today with Dr. Raghuram Rajan, professor of finance at Booth School at University of Chicago. We’re here to discuss his
book “The Third Pillar: “How State and Markets Have
Left Communities Behind”. Thanks for joining us. – Thank you for having me. – What spawned this book? – Well, it’s part of a
evolution in a sense. Going to the University of Chicago, appreciating markets, writing about how markets
are really valuable, seeing the crash and
seeing the consequences of market failure, and
then trying to understand why the system, which has
been so beneficial for us after World War II, is seemingly failing. But coming at it from the perspective of a natural conservative,
I want to change the system but I don’t want to blow it up, because I think we’ve tried
a lot of the alternatives that have been suggested, and they didn’t work, so if
we have a system that works, let’s figure out why it’s failing us and see if you can repair it, rather than saying, “Let’s look again.” – How did you detect it’s failing and what do you think the causes are in terms of what’s unfolded historically? – Well, a symptom of it’s failing is both the policies that add
up to the financial crisis and the crisis itself, but
I think that’s a symptom, that’s not the fundamental cause. I do believe that what happens when there’s massive
technological change is, unless society adapts, the old
systems stop working as well. And I think the promise of capitalism was equal opportunity to all. You come as Dick
Whittington did into London and you can make it to mayor. The promise of capitalism has
disappeared for many people. It’s no longer sufficient to
just grow up into the market. – And to have faith that your children will be doing better than you will do. – And the faith in progress. Unlike in the past, you’re
much more defined by where you started, who your parents were, and the community you grew up in. And that unequal promise is
what I think we need to fix. If we’re gonna get mass
support for capitalism again. Fixing it, in a sense, will
also strengthen our democracy. I think our democracy has been raising concerns
about the system. That’s what democracies
are supposed to do, early warning systems, unlike other systems which
don’t give you those warnings and suddenly explode.
– Into a war. (laughs) – Exactly. So I think we are getting those warnings and we should pay heed. As in all democracies, we
get solutions from the right, solutions from the left,
et cetera, et cetera. We get revolutionary solutions, we get solutions which are self-serving, and I think we need to pick and choose, but, in a sense, the
motivation for the book was here are the problems, and
here’s one set of solutions, I want to be constructive. For some people these
solutions are too easy on the current system. I believe they actually
tackle the problems, but, you know, by all means, if you agree with the problems, and most people do agree
with the way I frame it, give me your solution and
let’s see if it works. I do think that in your solution you have to recognize
first what kind of society do we want to live in, and if we think that
society requires democracy, and the freedoms that come with democracy, then the case I make in
the book is very, very hard to have a sustainable
democracy without free markets. The two are sympathetical, not always pushing in the same direction, but they help each other. We need to regain that equilibrium. – There has to be a
balance between the two. – Exactly, just focusing on these two leads to a dehumanization, a
sense that people don’t matter. Governments are about
rules and bureaucracy and treating everybody sort of as names without any identity. Similarly markets are about
treating people at arm’s length. The problem is they don’t
adjust for differences. In a sense, their very promise is defeated when you don’t recognize that people come from different places,
from different backgrounds, from different communities. If you don’t adjust for that, if you don’t make it possible to redress some of the ills that comes from that. – We need bespoke suit, not a off-the-rack suit.
– Exactly, exactly. – It’s custom tailored to the
traditions and other aspects of the community.
– And for people to have a sense of empowerment, that they control their fate somewhat. Not absolutely, we live
in a integrated world so levels of governance
and who decides what obviously vary with the issue at hand. – All the way at the top and centralized encompasses all of the stimulants, it isn’t sensitive to who it represents. – Absolutely.
– All the way down– – Yeah.
– is sensitive, but doesn’t have the means to control – Exactly.
– the stimulants that can do you harm or cause you fear. – And also may sometimes make it harder to work with the others. So go back to balance, that’s the central word in the book. It’s the balance between
the three pillars, we need to reestablish and how do we get there from where we are and I argue in the book that the weakest of the three
pillars now is the community. – Yes.
– And you know, when I say community, people
immediately have in mind I’m one of those old style
communitarians on the one hand, or I’m a racist in
disguise wanting to go back to segregated communities.
– To tribes, yeah. Yeah, yeah.
– To tribes. What I do think is that
it is impossible to ignore the fact that the people around you and the place you grew up in had such a huge importance
in what becomes of you and what technology has
done is has made the skills, the education, the values you have so much more necessary
to succeed in this world. Much more so than in the past. In the second industrial revolution, that transition worked well in the U.S. because you created a new
structure, the high school. – That’s right.
– And it was free for everyone.
– That’s right. – And that allowed a lot of the native-born population,
– Yep, that’s right. – To actually get jobs that
the immigrant population couldn’t do, because the
immigrant population, the Polish plumbers, and
the carpenters, and so on, they were very skilled,
but at the old style work. The new work in the factories, the auto factories,
the chemical factories, required trigonometry, chemistry, and that these kids had because they had gone through high school. – You and I talked a little bit earlier, Raj Chetty identifying the geography and then from the geography we can study the institutional structures
that foster community and build the rungs in the ladder upward. – How do you make it easier
for people to grow up with an equal chance? We can’t change the parents,
but you can do what you can in reviving declining communities. And in making it easier for people to move between communities. The easy answer’s have everybody shift to the best communities. ( man laughs)
But that’s the wrong answer because it becomes prohibitively
expensive to do that and it’s probably, you don’t want to work with everybody in San Francisco and New York and nothing in between. – I was going to say
Fred Hirsch talked about positional goods in the old days and now everybody crowding
these two coastal cities you just described is not– – It’s not gonna be an answer,
– A healthy platform. And in fact, over time,
people will want to stay away and the fact that we
can work at a distance should make it possible to
distribute people more widely and more equitably with
economic activity there. But we have to make that transition. Today, what’s happening is
the place-based activity has disappeared, those factory
jobs, they have disappeared. There are service jobs in the
many whelping service jobs in the cities, but you need
to get a good schooling. If the jobs have disappeared
in your local area, social disintegration starts setting in, marriages break down, divorce rates up, teenage pregnancy’s
up, and substance abuse and crime start moving in, and so social disintegration
accompanies economic collapse. – Yes, I’m from Detroit, I’ve got a good taste of that growing up. – You know exactly what happens. – Well, people would say,
“Well, this is an equilibrium.” I’d say, “What are you guys
assuming a happy ending?” It just felt like a cauldron, it didn’t feel like it was
heading to a happy place. – Of course, Detroit has it’s own history of leadership also during this period. So how do we revive these
places that are collapsing? And it can’t be revived from outside because the outside doesn’t
know what’s going wrong. And each community is
unhappy in it’s own way, paraphrasing Tolstoy.
(man laughs) And so how do you fix crime if crime, how do you fix substance abuse, how do you restore the
health of the local school? Because what happens is as these go down, good people leave.
– That’s right. – The people who have the ability to–
– It’s an amplifying feedback loop, that’s right.
– Exactly. – So it’s a viscous circle,
you’ve got to reverse it. That’s what we’re trying to–
– All my friends and I left Detroit in the ’70s.
– That’s right. – And we’re starting to see some revival in some places in Detroit,
but it’s a hard effort. It’s easier to break down, it’s easier to try and stop it early, but when it’s happened for a long time it’s much, much harder because then it’s very raw material to start with. – When society’s not working,
even elites are afraid, but it creates a veneer of justification and they anesthetize a healthy response by seceding to rely on
credentials and other things. Education for a public
servant is supposed to be used to make you better at representing people and furthering society’s wellbeing, not insulating yourself by saying, “I earned this, I deserve this,” and anesthetizing that sensitivity. – Absolutely, though
we’ve seen some response from the very rich,
seeing that more questions are being asked about
whether that level of wealth without giving back is justified, so the giving pledge that Bill Gates has is an attempt to say, you know, “Maybe we should find a way
to give back to society also “over and above what else we do.” We have to recognize that
markets work very well in allocating resources, but
we also have to recognize we need to protect the
people in the markets, the point you made about Scandinavia. I mean one of the things
they have lived with is they’re a small economy. They’re exposed to wide fluctuations in trade and in technology, and as a result they
have to adapt quickly, which is why the worker has
access to a bunch of resources, including the constant refrain, “You better keep up with the times”. – The people in Sweden
said if we’re not afraid, because we can be retrained
or get healthcare, we get pension, our kids get educated, we’re gonna go with that
production possibility frontier. – Exactly, so the unions
work together with the firms together with the government in making sure that there is this constant availability of resources to the work but also a constant refrain that you better sort of pick up as you go. You don’t have this phenomenon, you know, reading the book “Janesville” about the closure of the GM plant, and you read that some of the workers had really not touched computers. In this day and age, if you
haven’t touched computers, how far out of touch are you?
– Yeah. – People have to be given
the resources to keep up, but then they must take
advantage of those resources. – You’re so glad really, a biography by Jeremy Adelman
about Albert Hirschman. And what it came out from
that reminded me of you. Which is that Hirschman was
very refined intellectually, but he kept going out searching for what are the problems to apply my mind to. And the regenerative sensitivity that this book is an
example of your exploring, your time at the Reserve Bank of India was probably a tremendous
learning experience. But I’m watching you, and I’m
thinking of my young scholars as an example, you’re talking today, there’s elements of psychology, sociology, history, politics, economics, and you’re looking for a magnetic field that draws us in a positive direction. – Thank you, thank you.
– Thanks for joining us. – Thank you.