Capitalism, democracy and pessimism?

On Wednesday evening I attended Professor Raghuram Rajan’s Wincott Lecture, which had the provocative title Are Capitalism and Democracy Failing Us? (He’s also written a couple of columns outlining the themes, in the FT and Project syndicate.) Professor Rajan is the author of , a terrific and thought-provoking book about the political economy origins of the sub-prime crisis – a crisis he was one of the economists to predict publicly, in 2005.¬† So clearly it’s worth paying careful attention to what he has to say.

[amazon_image id=”0691152632″ link=”true” target=”_blank” size=”medium” ]Fault Lines: How Hidden Fractures Still Threaten the World Economy (New in Paper)[/amazon_image]

The argument in the lecture was that there is an interaction between capitalism and democracy. In good times this is positive, the beneficial economic and political structures are mutually reinforcing. But the crisis is giving us technocracy in some countries, oligarchy  in others, and these political structures are depleting the sense of fairness and trust on which democracy has to rest. There is an urgent need to restore to the middle classes a sense of opportunity, he argued.

The lecture covered the hollowing out of jobs in the middle of the labour market, the division of people into those who tell computers what to do, and those who are told what to do by the computers. Prof Rajan cited Claudia Goldin and Lawrence Katz’s book on skills, , and Charles Murray’s . He tied the problem of the squeezed middle into his own book, Fault Lines, arguing that politicians had responded to the hollowing out of the income distribution by means of credit – affordable housing, loans for consumption. In Fault Lines, this was presented as the political mechanism that paved the way for the subprime crisis. Consumption inequality did not increase as much as income inequality.

The question now is whether the technocratic policy responses we are seeing, from structural reforms in Eurozone countries to all the waves of QE, will end up only violating the quasi-property rights of those on low and middle incomes? It seems so – bondholders have been more or less entirely protected, and default avoided at almost any cost, and bank bonuses are as yet barely affected, whereas the rest of us can be sure we will get some mix of higher taxes and inflation. This mix, Prof Rajan argued, would undermine the legitimacy of capitalism and democracy.

An obvious question raised by Roger Bootle in his comment on the lecture – and in his own book () which distinguishes between creative and merely distributive varieties of capitalism – is whether there is an alternative path. He agreed with much of the lecture, saying financial capitalism had become baleful in its influence. The answer, he agreed, appears to be education, although, as Professor Rajan pointed out, this is an inevitably slow response. But only an increased supply of highly skilled people can tackle the soaring skill premium and the elite society that has been shaped by the shortage of people who can tell the computers what to do.

Personally, I would add institutional and governance reform to the list – it is imperative to find policies that will have a visible impact much faster. (I talked about this in my Joseph Rowntree Foundation lecture earlier this year.) But yes, certainly education. Very few young people emerge from education systems equipped with the cognitive and non-cognitive skills they need now; indeed, a shocking number do not even have the basic skills to fill ‘low-skill’ jobs, according to employers. And its hard to be optimistic that any country has figured out for sure yet how to deliver better education. When we do, it will still take 15 or 20 years for it to affect the labour market.

So, a stimulating, but pretty depressing evening.

Professor Rajan, at the Wincott Lecture

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3 thoughts on “Capitalism, democracy and pessimism?

  1. I’m a bit late to this, but I hope you’ll consider this question:

    Where is the evidence for the skills premium/skills gap as outlined by Bootle/Rajan/diverse others?

    Two particular issues :
    1) The salaries in the realm of “telling computers what to do” outside of particular areas (in the UK, The City) do not show particular signs of the kind of premium change associated with a shortage. Immigration patterns also, outside of finance computing, don’t show much sign of a shortage.

    2) There’s really little evidence that even if there is a shortage at the margins, that the shortage is numerically significant when we consider the number of unemployed and under-employed. (British business has gone through a process of making a lot of making IT workers contractors – and there’s some evidence of under-employment – see also the pay issue in (1).) This is critical because even though there is a shortage of (for example) some specialties (genetic based info biology to take one example quoted to me recently) we’re talking 200 jobs across Europe – so it’s hard to see how education will change the macro-situation.
    (Education remains the right approach for individuals…)

    3) I seem to recall that Gordon and others (Piketty & Saez?) show that most of the distribution issues are more connected to power than skills. Now certain skills do represent power (e.g. Wayne Rooney etc.) but there’s little evidence that CEOs in general companies, or the top slice of employees in finance companies gain their bargaining power through skills so much as positional power…

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