Raghuram Rajan on what makes a successful capitalist society
Raghuram Rajan of the University of Chicago Booth School of Business is #26 on Foreign Policy’s list of the 100 Top Global Thinkers of 2010. His big idea is: “capitalist economies work well when everybody has access to the basic conditions they need to compete: access to education, access to health care, and access to finance.” In the absence of these conditions, Rajan argues that a capitalist society will be beset by income inequality, political frictions, and rent-seeking behaviors that subvert healthy competition. Capitalism is at its best when it creates equal opportunity:
If we all started off at age 21, 22, somewhere there, with all the education we needed, all the access to finance we wanted, and reasonable health, and we were told, ‘Here’s a level playing field. Go out and compete.’ And 25 years later some did very well, some did not so well, I think we would all be reasonably satisfied with that outcome. And that’s really the ideal of capitalism. But we’re very far from that ideal. Where you’re born matters a lot. Of course, what you make of it also matters, but to the extent that you can reduce the impact of where you’re born, what conditions you’re born under, and what kind of impediments that creates, I think capitalism is better for it.
Rajan’s recent book, Fault Lines — the most recommended book on FP’s survey of the Global Thinkers — looks at the recent financial crisis through this lens. In the lead-up to the crisis, many citizens of the United Stated lacked access to higher education, a prerequisite for many of today’s jobs. Median wages stagnated as a result, and the government faced pressure to do something about it. Washington responded with the short-term fix of expanding cheap credit, notably through Fannie Mae and Freddie Mac, which temporarily masked the rise in income inequality but ultimately did nothing to address the structural issues of the U.S. economy.
For his next big idea, Rajan looks to examine the evolution of corporate responsibilities and objectives. In the earliest days of the corporation 400 years ago, Rajan observes that there was a sense that profits were dirty and that people shouldn’t earn more than a certain, predetermined level. Contrast that with the sense in some boardrooms today that a corporation’s guiding principle should be maximizing shareholder value. Rajan wants to find a happy medium between the two which is “less fuzzy than corporate social responsibility but is something which reflects the sense that corporations do have some responsibilities in some areas.”
Foreign Policy anointed Rajan a Global Thinker jointly with Paul Krugman for “their spirited debate over the roots of the global financial meltdown”:
In invariably stinging tones, Nobel laureate Paul Krugman uses his influential New York Times column to place himself at the center of international debates. In the United States, he has held the banner for unabashed deficit spending, ripping Barack Obama’s administration for not pushing for a bigger stimulus package, while excoriating Republicans for demanding austerity. His advice may be predictable, but it never lacks a certain power — or a certain provocation for economists who think differently.
Chief among them at the moment is Raghuram Rajan, former IMF chief economist and now a finance professor at the University of Chicago’s Booth School of Business. This year Krugman and Rajan have fought a running battle across the pages of a half-dozen publications over the causes of the financial crisis.
Rajan … argues that Krugman understates the role mortgage giants Fannie Mae and Freddie Mac played in the crisis because their culpability is inconvenient for Krugman’s big-government liberalism. “U.S. policies encouraged over-consumption and over-borrowing,” he wrote on ForeignPolicy.com, “and unless we understand where these policies came from, we have no hope of addressing the causes of this crisis.” Krugman disses Rajan’s thesis as “a structure built on foundations of sand” and places the brunt of the blame on imbalances in the global economy. Pass the popcorn.
Foreign Policy has Rajan’s recommended reading list and more.
Posted by Peter Rudegeair.