1. Capitalism. How to make it right?

in Crisis 2019 · Economics 2019 · EN · Europe 2019 · Finance 2019 · Nation 2019 · Skepticism 2019 110 views / 15 comments
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GEOMETR.IT  project-syndicate.org

* Behind today’s populist upheavals is a widespread recognition that the economy no longer serves the public good, or even the interests of most of its participants. To understand why, one must identify what has been lost amid so much material technological gain.

Rather suddenly, capitalism is visibly sick. The virus of socialism has reemerged and is infecting the young once more. Wiser heads, who respect capitalism’s past achievements, want to save it, and have been proposing diagnoses and remedies. But their proposals sometimes overlap with those who would tear the system down, making nonsense of traditional left-right distinctions.

Fortunately, Raghuram G. Rajan, a former governor of the Reserve Bank of India who teaches at the University of Chicago Booth School of Business, brings his unparalleled knowledge and experience to bear on the problem. In his new book,The Third Pillar: How Markets and the State Leave Community Behind, he arguesthat the cancer afflicting contemporary capitalism is the failure neither of “Leviathan” (the state) nor of “Behemoth” (the market), but of , which no longer serves as a check against either monster. Rajan thus prescribes an “inclusive localism” to rebuild communities that can furnish people with self-respect, status, and meaning.

Rajan’s book, like Oxford University economist Paul Collier’s The Future of Capitalism, is part of a rapidly growing genre of critiques by capitalism’s friends. Rajan is a proponent of capitalism who has accepted that it no longer works in the interest of the social good, and must be brought back under control.

The Third Pillar offers deep historical context to explain the current moment, but it is most successful when it retraces developments after World War II to explain why everything started unraveling around 1970. Until then, the world had been busy recovering and rebuilding, and economic growth had received an added boost from the adoption of frontier technologies through replacement investment.

But trend growth has decelerated since 1970, accounting for many of our current difficulties. Through it all, governments have had no idea how to address the slowdown, other than to promise a restoration of the lost postwar paradise. In most cases, that has meant additional borrowing. And in Europe, elites have pursued continental unification with the great aim of stopping recurrent episodes of carnage. Yet in their rush to secure the obvious benefits of integration, they forgot to bring their citizens along. They have since learned that after hubris comes nemesis.

The success of social democracy in the postwar era weakened the market’s power to act as a moderating influence on the state. According to Rajan, these weakened actors, in both Europe and America, were in no position to deal with the revolution in information and communication technology (ICT) that they were about to face, leaving ordinary people to face the threats on their own. Rather than helping their workers manage the disruption, corporations made it worse by using their employees’ vulnerability to enrich their shareholders and managers.

And how they enriched themselves! With median household incomes largely stagnant and a growing share of wealth accruing to the rich, capitalism became manifestly unfair, losing its popular support. To manage its opponents, Behemoth called on Leviathan for protection, not understanding that a right-wing populist Leviathan eats Behemoth in the end.

Two points of Rajan’s story need to be emphasized. First, declining growth is a key, albeit low-frequency, cause of today’s social and economic distress. Second, the unfortunate consequences of the ICT revolution are not inherent properties of technological change. Rather, as Rajan notes, they reflect a “failure of the state and markets to modulate markets.” Though Rajan does not emphasize it, this second point gives us cause for hope. It means that ICT need not doom us to a jobless future; enlightened policymaking still has a role to play.

Rajan’s account of corporate misbehavior is very well told, and it is all the more effective coming from a professor at a prominent business school. From the start, the near-absolutist doctrine of shareholder primacy has served to protect managers at the expense of employees, and its malign effects have been exacerbated by the practice of paying managers in stock.

The publication is not an editorial. It reflects solely the point of view and argumentation of the author. The publication is presented in the presentation. Start in the previous issue. The original is available at: project-syndicate.org



  1. Author Deaton has fallen into the trap of free lunch economic dogma.

    Free lunch economics is a dogma in opposition to Keynes. Keynes argued that capital should never be scarce.

    Capital is always the product of labor, unlike land. Thus as long as workers are willing to build capital for the wages the long term returns of the capital can afford, capital will never be scarce. If capital is not scarce, it will never earn more than workers are paid to build capital.

    Milton Friedman, in a counter arrgument, called for capital scarcity, for it to be like land, earning high rents by not paying workers to build capital, but charging workers rents.

  2. How does capitalism become unfair. Capitalism is based on the idea capital can be built by paying workers with the limit being only the willingness of workers to build more capital. Capital is distinct from land which is fixed, can not be increased, and earns higher and higher rents the great the demand, thus increasing scarcity of land.

  3. Angus Deaton explains why capitalism has failed. Based on Raghuram Rajan’s book, “The Third Pillar: How Markets and the State Leave Community Behind,” and Paul Collier’s “The Future of Capitalism,” he highlights the long-term tensions between capitalism and democracy, and the ever widening gap between urban elites and rural “left-behinds”.

  4. I am puzzled by this essay. Trump is a Capitalist. Brexit was funded by Capitalists. Macron worked for Rothschild & Cie Banque. Salvini says that it is the populist right which truly represents the old Left and thus represents the post War consensus (which Brits call ‘Butskellite).

  5. Capitalism is founded on the following pillars:

    private property, which allows people to own tangible assets such as land and houses and intangible assets such as stocks and bonds;
    self-interest, through which people act in pursuit of their own good, without regard for sociopolitical pressure. Nonetheless, these uncoordinated individuals end up benefiting society as if, in the words of Smith’s 1776 Wealth of Nations, they were guided by an invisible hand;
    competition, through firms’ freedom to enter and exit markets, maximizes social welfare, that is, the joint welfare of both producers and consumers;
    a market mechanism that determines prices in a decentralized manner through interactions between buyers and sellers—prices, in return, allocate resources, which naturally seek the highest reward, not only for goods and services but for wages as well;
    freedom to choose with respect to consumption, production, and investment—dissatisfied customers can buy different products, investors can pursue more lucrative ventures, workers can leave their jobs for better pay; and
    limited role of government, to protect the rights of private citizens and maintain an orderly environment that facilitates proper functioning of markets

  6. Man has always waged war . ” ; “Man is fundamentally selfish. ”;”Capitalism has always existed and always will exist “;”Despite its defects, the capitalist system is the lesser evil “;”Capitalism is the only model which has proven itself.

  7. We are also living in a world which is experiencing a global, planetary crisis, unprecedented in the history of humanity. By pushing us towards apathy and fatalism, these statements prevent us from becoming responsible citizens, from using our energy and intelligence and work towards an emancipatory project. If we want to be better fight against social injustice we must deconstruct, combat and look beyond these statements, which are nothing but untruths and preconceived ideas.

  8. How many wars and crimes against humanity have been perpetrated, how many humanitarian and environmental disasters have been caused so as to achieve this “progress”?

  9. Creating another model in which we share everything is not only unthinkable but would also automatically lead to disaster. One just needs to look at Russia, with the 100s of millions of deaths as proof of this.”

  10. Given the global crisis of the capitalist system, we need to implement anti-capitalist, socialist and revolutionary policies which must include a feminist, ecological, internationalist, anti-racist dimension.

  11. This model which we want will remain an incomplete process, filled with contradictions, failures, but also filled with joy and victories. But the path is as important as the ideal which is to be achieved.

  12. We need to establish a real democracy. A political democracy of course, where citizens concretely participate in the major choices which determine the nature and way our societies function.

  13. Mankind needs utopian ideals and, rather than being an obstacle to progress, it should be the driving force behind it and it will enable us to break with the fatalistic perspective and propose concrete measures here and now, whilst providing interesting perspectives for humanity as a whole.

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