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Community and Civil Society over State

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Raghuram Rajan has written a surprising book. Now teaching finance at the University of Chicago, he is an international bureaucrat in good standing, and not a minor one at that; he was chief economist of the International Monetary Fund. Yet far from calling for an increase in “global governance,” as one might expect from someone ...

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Raghuram Rajan has written a surprising book. Now teaching finance at the University of Chicago, he is an international bureaucrat in good standing, and not a minor one at that; he was chief economist of the International Monetary Fund. Yet far from calling for an increase in “global governance,” as one might expect from someone with his background, he wants to strengthen the local, “proximate,” community.

“If more powers are delegated from the state to the local community level,” he tells us, “a community can shape its own future better, and will have more control over it. Some communities will have a specific ethnic concentration, and community culture will gravitate toward that ethnic group’s culture…. A strong local community could satisfy people’s need to live in a cohesive social structure with others of the same culture or religion…. None of this implies exclusion [but]—having monocultures that satisfy the tastes of those who want monocultures is as important as having multicultures.”

The problem with “populist nationalism,” then, is not that its advocates prefer national sovereignty to control by internationally minded elites. They are right to do so, given human nature as it is, and the leaders of the European Union neglected this truth to their cost. “The problem was that no one asked their people how much more Europe they wanted, and how much sovereignty they were willing to give up…. The process of integration was, therefore, profoundly undemocratic…. Ultimately, though, integration succeeds only when there is deep social empathy between people.” But if national sovereignty is better than rule by technocrats, still better is the local community.

Rajan’s defense of the local community is part of the ambitious theory of history suggested by his book’s subtitle. As he sees it, there must be a balance among the market, the state, and the local community. Each is dangerous if unchecked by the other two. In fact, though, the alleged dangers of the market stem largely, if not entirely, from “crony capitalism,” the partnership of the state and business interests to exploit consumers. Why not drastically limit the power of the state to block this unholy alliance rather than trust a strong state to limit the market?

The author’s failure to support the free market fully stems from an assumption that emerges in his history of capitalism in Europe and America. That account is well worth studying, and Rajan’s discussions of the end of feudalism and the rise of the gentry are especially good, though our confidence is a bit shaken by his calling Henri Pirenne, the greatest of all Belgian historians, French.

But matters take a turn for the worse when he reaches the rise of capitalism itself, and here, I regret to say, he has taken on board a controversial Marxist dogma. He rejects Marxist economics, which he calls “mostly wrong,” but he calls Marx “one of the greatest social thinkers of modern times.” It is a particular dogma that he has taken over from Marx and also, in his telling, from Adam Smith, that leads him to advocate a state strong enough to rein in the market. “The inexorable political tendency of a free, unfettered, unregulated market was for the producers, after experiencing the rigors of competition, to attempt cartelization.” He cites as an example John D. Rockefeller’s control of oil refining in the United States through his Standard Oil Company and deems justified the suit against the company under the Sherman Anti-Trust Act, but he omits any discussion of the revisionist scholarship that indicates Rockefeller often got the worst of battles with competing refineries and that the lawsuit was not a measure to promote competition but rather an attempt to advance the interests of J.P. Morgan and his associates against their rivals. Of this, interested readers will find a full account in Murray Rothbard’s The Progressive Era. It would seem the better part of wisdom not to rely on the state to fight alleged monopolies on grounds of efficiency but instead to curtail the power of the state so that “crony capitalism” cannot gain a foothold.

Despite his wrong path on this issue, though, the book on the whole is excellent and Rajan makes many useful points. We hear much today about the danger that automation will drive massive numbers of people out of work. Rajan is appropriately skeptical. Automation, like past innovations, can bring some jobs to an end, but this frees up labor to go elsewhere. “Routine jobs have been automated out of existence for decades now, regardless of whether the jobs required skills or not. Banks had hundreds of thousands of cashiers taking in and paying out cash, as well as counting it at the end of the day…. Automated teller machines (ATMs) and cash-counting machines displaced them…. Yet, if anything, employment in banking has gone up as more, cheaper, bank branches are opened, and tellers morph into relationship managers advising retail customers on their loan options and their investment portfolios.”

Some of those most fearful of automation, and others as well, have proposed a universal basic income (UBI) that would free people of the need to work by grants of sufficient money to live a life of leisure. Rajan raises against this proposal a devastating objection: “UBI is an all-or-nothing scheme, and as such, suffers from the traditional difficulties associated with such a scheme. UBI essentially assumes that most people will not have a job, and there will be no point in them searching for one or attempting to retrain themselves since no new jobs will be possible. It is a counsel of despair not just for job seekers but also for job creators, because after UBI is implemented, any new job will have to be more attractive in pay and responsibilities than paid leisure, a difficult line to cross.”

Another important discussion in the book returns us to the local community. Some have objected on egalitarian grounds to programs that stress community control. Given the commanding importance for one’s future income and social status of going to the “right” university, with the Ivy League schools at the top, won’t people who are fairly well off but who cannot afford the top private schools move to neighborhoods with “good” public schools? By doing so, it is claimed, they give their children an unfair advantage over children from poor families, because these families cannot afford housing in the expensive neighborhoods.

Rajan, who is not without egalitarian sympathies, for the most part takes this to be a genuine problem that he is at pains to mitigate. But in one place, he challenges directly one of the key myths of our time. University education is vastly overrated, and many children would do better with less compulsory schooling: “Companies seem to be rating jobs as requiring higher credentials simply because schools are not teaching basic skills well…. International assessments seem to verify the low average quality of US schooling…. The harm done is worse than simply too much time spent by students who do not need degrees acquiring them at great expense, firms over-paying for qualifications they do not need, and a higher-education system that consumes enormous resources. It causes professions to inflate their own minimum credential requirements as they try to gain in prestige….”

Rajan does not pursue the full implications of this challenge, but that he mentions the issue at all is a testament to the wisdom of his book.

David Gordon
David Gordon (born 1948) is an American libertarian philosopher and intellectual historian influenced by Rothbardian views of economics. Peter J. Boettke, in his Reason Foundation "Reason Papers," Issue No. 19, Fall 1994, describes Gordon as "a philosopher and intellectual historian who is deeply influenced by the Rothbardian strand of economics." He is a senior fellow at the Ludwig von Mises Institute and editor of The Mises Review.

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