The Third Pillar

Within that broad inclusive framework, people should have the freedom to congregate in communities with others like themselves. The community, rather than the nation, becomes the vehicle for those who cherish the bonds of ethnicity and want some cultural continuity. Of course, communities should be open so that people can move in and out if they wish. Some will, no doubt, prefer to live in ethnically mixed communities while others will choose to live with people of their own ethnicity. They all should have the freedom to do so. Freedom of association, with active discrimination prohibited by law, has to be the future of large diverse countries. We will eventually learn to cherish the other, but till then let us live peaceably, side by side if not together.

Markets too must become more inclusive. Large corporations dominate too many markets, increasingly fortified by privileged possession of data, ownership of networks, and intellectual property rights. Credentialed licensed professionals dominate too many services, preventing competition from those who do not have the requisite licenses (one reason friendly neighbors cannot help rebuild a house today). In every situation, we must locate barriers to competition and entry and remove them so that opportunity is available to all. Thus, as we strive for an inclusive state and inclusive markets, which embed the empowered community, we will achieve an inclusive localism. This will enable community revival and a desirable rebalancing of the pillars.

What of truly distressed communities? Is revival even possible? Consider the community of Pilsen on the southwest side of Chicago, a few miles from my home. This once terribly damaged community is now turning a corner.

A Real Community Pulling Itself Up

Pilsen used to be populated by Eastern European immigrants, working in manufacturing establishments around Chicago. Since the middle of the last century, Hispanic immigrants and African Americans moved in steadily, and the Eastern Europeans moved out.6 In 2010, Hispanics or Latinos made up 82 percent of the population, and African Americans 3.1 percent. Non-Hispanic whites composed 12.4 percent of the population in 2010, up from 7.9 percent in 2000.

Pilsen is poor, with median household income averaged over 2010–2014 at $35,100, about half that of metropolitan Chicago as a whole. It has an unemployment rate of nearly 30 percent averaged over 2010–2014. Over 35 percent of individuals over twenty-five have not graduated from high school. Only 21.4 percent of individuals over twenty-five have a bachelor’s degree, less than half the comparable ratio in the overall US population. Nearly half of renters or homeowners have housing costs that account for more than 30 percent of their income. Keeping people in their homes is essential for community stability, and Pilsen has a hard time of it.

Low education, low incomes, and high unemployment are a recipe for drugs, alcohol, and crime. Pilsen was truly a war zone. At its peak in 1979, there were 67.4 murders per 100,000 residents in Pilsen, over double the wider city rate. In comparison, Western Europe averages a murder rate of about 1 per 100,000 per year. As recently as 1988, a Chicago Tribune reporter counted twenty-one different gangs along a two-mile stretch on the main 18th Street thoroughfare.

Yet Pilsen is a community that is trying to pull itself up. One sign it is succeeding is that the murder rate has been significantly below the overall Chicago rate for a number of years since the early 2000s, exceeding it slightly only every few years. As we will see, communities typically do not pick themselves up spontaneously—leaders emerge to coordinate the revival. Among those driving Pilsen’s revival is Raul Raymundo, the CEO of the Resurrection Project, a nongovernmental organization whose motto is “Building relationships, creating healthy communities.” Raul came to the United States from Mexico as a seven-year-old immigrant, went to Benito Juarez High School in Pilsen, attended college (including some time in graduate school at the University of Chicago), and started helping out in the community. He found his vocation after the murder of a young man just outside his church, when his pastor asked the congregation what the community was going to do about it. Answering the call, Raul and a few others started the Resurrection Project, with $5,000 each from six local churches. When the candidate they found to head the project declined to take the job, Raul stepped in, and he is still there, after twenty-seven years. Today, the Resurrection Project has funneled over $500 million in investment into the community.

As with other revival projects, the community first undertook an inventory of its assets to figure out what it could build around. It had its churches that would provide moral, vocal, and financial support for any revival, it had decent schools, it had a strong Mexican-American community with tightly knit families, and it was in Chicago, a city that goes through ups and downs but is still one of America’s great cities.

The first order of action was to engage the community to make it more livable, which meant keeping the locality clean, ridding the streets of crime, and strengthening the schools. Residents were organized to hound the city sanitation department to do their job—clean the streets and collect garbage. People were urged to form block clubs and ad hoc groups against crime. They would walk out of their houses when they saw suspicious activity so as to crowd the criminals out, or jointly call the police so that the criminals would not know who to blame. The community campaigned successfully for a moratorium on city liquor licenses in Pilsen, got some especially problematic bars closed down, and worked with police, churches, and absentee landlords to target and close down known gang houses.7 Remedial education, after-school extracurricular programs, and job-training programs increased, enabling young people to get more from their schoolwork, and giving them a ladder to jobs. Parents were urged to get involved in the schools, and they did. New school programs started—one example is the Cristo Rey Catholic School, which aims to give its students a quality education, while keeping it affordable. Cristo Rey got local businesses to pay the school fees of students. As partial repayment, each student worked one day a week for their sponsoring business. The student attended school the other four days, getting both a good education and work experience each week.

Virtuous cycles started emerging. As some older gang members turned to legitimate business, their prosperity inspired other gang members to develop skills other than the ability to inflict violence. The proliferation of youth-oriented programs at the schools gave them a way to escape their past. As crime came down, new businesses started opening, including franchises like McDonald’s, and they offered low-level entry jobs that drew youth into work. As Chicago became more of a hub for the regional distribution of goods, more jobs were created as wholesale warehouses and refrigeration centers opened in Pilsen, drawn by the still-low real estate prices and falling crime.

With the area more livable, the Resurrection Project turned to keeping the poor, some of who have very few assets and very little buffer against a sudden loss of job or illness, in their rented homes. This would stabilize the community, but it gets harder as the community strengthens because rents are increasing and buying is becoming costlier. The Resurrection Project tries to increase access to credit locally, so that people have options. Its volunteers work with community members to improve their financial understanding, to get them to build and improve their credit histories by, for example, paying their utility bills regularly and on time.

Large banks, of which a growing number have now set up in the community, are not well equipped to understand community practices. This hampers their lending. In Pilsen, a working woman’s mother will often cook for her and babysit her children, so the worker’s salary goes a much longer way because she does not pay for these services. Similarly, family members may lend each other money, making it possible for someone to keep up loan payments even if their income is volatile. Typically, such practices are hard for a loan officer from a large bank to substantiate or document, which is why he has to go primarily on the explicit record of income.8 Community-based financial institutions, where decisions are made locally based on their better understanding of the community, know the worker is more creditworthy than her salary slip might suggest. Being free from the tyranny of requiring hard documentation, they are more willing to lend locally than large banks.

Recognizing the importance of local institutions, in 2013 the Resurrection Project helped rescue a failing community bank, Second Federal. At that time, 29 percent of the bank’s mortgages were delinquent, and many local borrowers would have faced eviction if the bank had been closed or sold outside the community. Vacancies would have depressed house prices and brought back crime. Second Federal’s delinquencies are now down to 4 percent of its mortgage portfolio, because it worked with its borrowers and nursed the loans back to health. People continue to use its branch as a community center, meeting there to chat with neighbors, or bringing their mail to have it translated by tellers.

The Resurrection Project has itself built affordable housing that it rents to needy families, nudging them to move out when they can afford market rents. One of its developments, Casa Queretaro, looks sleek and welcoming, seeming more luxury housing than “affordable”—in management’s view, there is no reason why so much affordable housing should look run down.

There is much more to community revival, but the picture should be clear. Pilsen is by no means a rich or prosperous community but it now has hope. It has built on its Mexican connections—it has a National Museum of Mexican Art—though it is proudly American. Cinco de Mayo, a Mexican festival, is celebrated with great gusto, but over two hundred fifty thousand people join the Fourth of July parade in Pilsen. Raul Raymundo’s aim is to welcome people of every ethnicity into Pilsen while building on the core stability of the existing community. As he tells people when they buy a house, “You are not buying a piece of property, you are buying a piece of the community.”

final preliminaries

Who am I and why do I write this book? I am a professor at the University of Chicago, and I have spent time as the Chief Economist and head of Research at the International Monetary Fund, where we gave advice to a variety of industrial and developing countries. I also was the Governor of India’s central bank, where we undertook reforms to improve India’s financial system. I have experience working in both the international financial system and in an emerging market. In my adult life, I have never been more concerned about the direction our leaders are taking us than I am today.

In my book Fault Lines: How Hidden Fractures Still Threaten the World Economy, published in 2010, I worried about the consequences of rising inequality, arguing that easy housing credit before the Global Financial Crisis was, in part, a way for politicians to deflect people’s attention from their stagnant paychecks. I was concerned that instead of drawing the right lesson from the crisis—that we need to fix the deep fault lines in developed societies and the global order—we would search for scapegoats. I wrote:

“The first victims of a political search for scapegoats are those who are visible, easily demonized, but powerless to defend themselves. The illegal immigrant or the foreign worker do not vote, but they are essential to the economy—the former because they often do jobs no one else will touch in normal times, and the latter because they are the source of the cheap imports that have raised the standard of living for all, but especially those with low incomes. There has to be a better way . . .”9

The search for scapegoats is well and truly on. I write this book because I see an increasingly polarized world that risks turning its back on seventy years of widespread peace and prosperity. It threatens to forget what has worked, even while ignoring what needs to change. The populist nationalists and the radical Left understand the need for reform, but they resort to the politics of anger and envy. The mainstream establishment parties do not even admit to the need for change. There is much to do, and the challenges are mounting—population aging and climate change need to be addressed without delay. We must start now to bring the state, markets, and the community into a much better balance within our countries, so that we can come together as confident healthy nations to address looming global problems.

The rest of this book is as follows. I start by describing the third pillar, the community. To some, the community stands for warmth and support. To others, it represents narrow-mindedness and traditionalism. Both descriptions can be true, sometimes simultaneously, and we will see why. The challenge for the modern community is to get more of the good while minimizing the bad. We will see how this can be obtained through the balancing influence of the other two pillars—the state and markets. To continue our exploration, we must understand how these pillars emerged historically. In Part I, I trace how the state and markets in today’s advanced countries grew out of the feudal community, taking over some of its activities. I explain how a vibrant market helped create independent sources of power that limited the arbitrary powers of the state. As the state became constitutionally limited, markets got the upper hand, sometimes to the detriment of communities. The extension of suffrage reempowered communities and they used it to press the state to impose regulatory limits on the market. People also demanded reliable social protections that would buffer them against market volatility. All these influences came together in the liberal market democracies, which emerged across the developed world in the early twentieth century. However, market downturns, especially following technological revolutions, were, and are, disruptive. The Great Depression, followed by the Second World War, seemed to sound the death knell of liberal market democracies in much of the world, and the ascent of the state. The balance was seriously disturbed.

In Part II, I describe how the United States shaped the postwar liberal order, and how both the state and markets grew once again to re-create a new balance. Democracy’s roots became stronger. The thirty years of strong postwar growth, however, were followed by years of relative stagnation as developed countries struggled for new ways of reviving growth. In response, the Anglo-American countries empowered the markets at the expense of the state, while continental European reforms favored the superstate and the integrated market. Both sets of reforms came at the expense of the community. I discuss how these different choices left countries differently positioned for the ICT revolution, the subsequent Global Financial Crisis, the backlash against the global order, and the rise of populism.

I turn to possible solutions in Part III. To strengthen the chances that society will stay liberal and democratic, we need profound changes that rebalance the three pillars in the face of technological change. We need more localism to empower the community while drawing on the state and markets to make society more inclusive.

Finally, some caveats. I intend this book to be comprehensive, but not exhaustive. Therefore, I illustrate the course of history with examples from prominent countries, but it would tax the reader’s patience (as well as my editor’s) if I substantiated points with the detail that specialists require. This book offers a broad thesis of its own, and draws on much academic work, but it is aimed at a wide audience. I also offer policy proposals, not as the final word but to provoke debate. We face enormous challenges, to which we need not just the right solutions but also ones that inspire us to act. It is worth recalling the words of Chicago architect Daniel Burnham, “Make no little plans; they have no magic to stir men’s blood and probably themselves will not be realized.”10 I hope this book stirs you to big plans.

INTRODUCTION
THE THIRD PILLAR

Why do our neighbors matter when we can reach people across the world with a click? What role do proximate communities play today in an advanced country that has both a well-functioning state and vibrant markets? The proximate community still helps define who we are. It gives us a sense of empowerment, an ability to shape our own futures in the face of global forces. It also offers us help in times of adversity when no one else will. Of course, the traditional community can also be narrow-minded and resistant to change. A modern community should support its members even while being open, inclusive, and dynamic. It is a product of delicate balances. It is also necessary to address the problems we face.

THE PROXIMATE COMMUNITY

We are shaped by the people who surround us. Our joys are more pleasurable when they are cherished by our friends, our successes more enjoyable when they are applauded by those whose opinions we care about, our protests are less lonely and our indignation less unsure when shared by our supporters, our hatreds more corrosive when goaded by fellow zealots, our sorrows less burdensome when borne with our family. Moreover, we gauge our actions based on how they affect people near us, on the indentations our actions make on their lives. Without such effects, we would be ephemeral passersby, with little evidence of ever having existed. Each one of us draws from multiple overlapping communities that help define who we are, that give us identity over and above the core we think is uniquely us.

There are varieties of communities, some more tightly bound than others. A community could be a group of people who are linked together by blood (as a family or clan) or who share current or past physical proximity (as people in, or having emigrated from, a village). A community could be those who have a common view on how to live a good life (as in a religious sect), share a common profession (as in the movie industry), or frequent the same website or chat groups (as in my college alumni group, where everyone seems to have a different opinion on everything that they absolutely must express). Each one of us has multiple identities, based on the groups we belong to.1 Moreover, many of us have virtual identities in addition to real ones.

As communication has improved, and transportations costs have come down, more distant communities have gained importance. For some of us, these communities may be much more important than our neighborhood. Indeed, a central concern in this book is about the passions that are unleashed when an imagined community like the nation fulfills the need for belonging that the neighborhood can no longer meet.

Nevertheless, we will focus on the proximate community for much of the book for a variety of reasons. Through most of history when distances really mattered, it was the only kind of community that had a serious influence on most people’s lives. Even today, it is where much economic activity is centered. For most of us, the neighborhood is still what we encounter every day, and what anchors us to the real world. It is where we participate as sociable humans, not as clan members, coreligionists, professionals, or disembodied opinions on the web. It is where we have the best chance of persuading others that our humanity unites us more than our ethnicity, profession, or national origin differentiates us. It certainly is where we debate and persuade as we elect officeholders and participate in the governance of the local public services that affect us. It is where we congregate to start broader political movements. As we will see later in the book, a healthy, engaged, proximate community may therefore be how we manage the tension between the inherited tribalism in all of us and the requirements of a large, diverse nation. Looking to the future, as more production and service jobs are automated, the human need for relationships and the social needs of the neighborhood may well provide many of the jobs of tomorrow.

In closely knit communities, a variety of transactions take place without the use of money or enforceable contracts. One side may get all the benefits in some transactions. Sometimes, the expectation is that the other side will repay the favor, but this may never actually happen. In a normal family, members typically help one another without drawing up papers and making payments. In many societies, friends don’t really care who pays the bill at dinner, indeed the ability to not keep count is the mark of true friendship.

Contrast transactions within a community with a typical market transaction. I just bought a bicycle tire tube. I searched for one of adequate quality at a reasonable price through an online platform, paid by credit card, and the tube was delivered within the time promised. Even though this transaction took little time, there is an elaborate explicit understanding or contract behind it. If the tube is not delivered or it proves defective, I have contractual remedies. The transaction is arm’s length and one-off. Neither the seller nor I know each other. Each one of us is satisfied we are better off from the transaction even if we never transact again. We do not look for further fulfilment through a continuing relationship.

The more explicit and one-off the transaction, the more unrelated and anonymous the parties to the transaction, and the larger the set of participants who can transact with one another, the more the transaction approaches the ideal of a market transaction. The more implicit the terms of the transaction, the more related the parties who transact, the smaller the group that can potentially transact, the less equal the exchange, the broader the range of transactions and the more repetitive transactions are over time between the same parties, the more the transactions approach a relationship. The thicker the web of relationships tying a group of individuals together, the more it is a community. In a sense, the community and the market are two ends of a continuum.

In his magisterial work, Gemeinschaft und Gesellschaft (“Community and Society”), nineteenth-century German sociologist Ferdinand Tönnies argued that in a community tied together by strong relationships, individual interests are suppressed in favor of the collective interest whenever these interests diverge. By contrast, in a market transaction, “nobody wants to grant and produce anything for another individual, nor will he be inclined to give ungrudgingly to another individual, if it not be in exchange for a gift or labor equivalent that he considers at least equal to what he has given.”2 In this sense, only individual interests matter, and they have to be met transaction by transaction.

In this chapter, we will examine what makes communities useful.3 Those hearkening to the past, as in many a fantasy novel, often invoke an idyllic view of the community. Typically, this is a village—an arcadia where simple honest people look out for one another, offering goods and services without demanding prompt or equal compensation. The village community can be warm and supportive. Yet, it can also be small, closed, and intrusive. We will see how a community facilitates economic and social transactions, but we’ll also recognize there are limits to community effectiveness, and indeed situations where a community may be harmful to its members’ interests. That will be why a community works best as part of the balance.

THE POSITIVE ROLES OF THE COMMUNITY

Evolutionary psychologists argue that we help others who are related to us or look like us because it is genetically hardwired into us—altruism toward kin is a genetic trait that helped its own survival in the Stone Age, when much of our evolution happened, and so was passed on.4 Similarly, we may be genetically evolved to help others, provided they reciprocate the favor. We are also programmed to have a strong distaste for freeloaders who do not. Since evolution is slow, we are fully adapted to the challenges of the Stone Age, and we continue to retain such propensities, even if no longer critical for survival. In other words, we are predisposed to be social.

We have built on this predisposition. People have always banded together because a group is better at defense (or attack) than an individual. In modern society, healthy communities continue to police themselves and their surroundings to ensure safety for their members. They do more, though—much more.

Survival: Training and Socializing the Young

A community trains its young to be productive so that they can take over from current adult members as they age. Equally important, the values of the young members have to be shaped to protect the well-being of the community. Most communities train their young through apprenticeships, where they are taught skills. Also, through stories, customs, rituals, relationships, and joint celebrations or mourning, the young learn to internalize the norms and values of the community. When faced with a choice between self-interest and community interest, or between community members and others, these youth will then be more inclined to put their own community first.

Apprenticeship often ends with a rite of passage that signals the coming of age of a youth into adulthood. In a number of tribes such as the Aborigines in Australia or the Papuans of New Guinea, the rites were so physically brutal that those up for initiation occasionally died.5 Not only did the ordeal prevent those who did not have the requisite tolerance for pain, or desire for greater power and responsibility in the tribe, from achieving full manhood, but those who did survive it also would likely be even more committed to the tribe. Modern communities like fraternities at colleges, law firms, research universities, or the military have their own rites of passage, differing from tribal initiation ceremonies only in the degree of physical or mental pain they inflict.

A key role of the community is supporting education, even in modern schooling systems. As Chicago Nobel laureate economist James Heckman emphasizes, a child’s attitudes toward learning, as well as her future health, are shaped in the critical preschool years where the family and community matter far more than the formal education system. Moreover, even after children enter the formal schooling system, the community determines whether they make use of it to the fullest extent. Whether children are given the time, encouragement, and the support to do homework depends on the environment at home and the attitude of their friends toward academic effort.

Linkages between the school and the community are also important. Parents will be more eager to monitor and support teaching if they feel they can influence how the school is run—many successful schools draw on parents to staff school boards, to support extracurricular programs, and to provide funds for equipment that is not accounted for in the normal budget. Communities help the young outside schools, whether it is through preschool learning, summer jobs, or watching out for, and counseling, teenagers who might stray. Equally, teachers, coming from the community, can work to build alternative local social supports for students whose families are broken. Schools are also an important focal point for parents to build friendships, as they are drawn together in a common endeavor.

The community shapes the views of its members about one another, so as to encourage mutual support. The elderly are a store of knowledge and have experiences and wisdom that can be very important in guiding the community. Nevertheless, in environments where reproductive capabilities matter enormously or much of the work is physically taxing, the elderly may be seen as a dispensable burden. To give the elderly an incentive to share their wisdom, even while protecting their position, the socialization process often inculcates respect for age. In modern South Indian Brahmin marriages and coming-of-age ceremonies, the elderly have an important position as they guide the young on the specific rituals to be followed. The young signal their acceptance of the natural order by repeatedly prostrating themselves before anyone older, asking for their blessings. Rank or position in the outside world is immaterial in determining who prostrates themselves before whom—all that matters is age. More generally, communities may allocate authority and power in ways that have nothing to do with economic capability, but help keep the community together.

Creating Binding Social Relationships

In close-knit communities, few transactions are explicit exchanges of broadly equal values. We ply dinner guests with food and wine with no concern of when they will reciprocate. As ties get weaker in the community, more reciprocity is expected, but usually in such a way that the original gesture is never fully reciprocated so as to “close the account.”

American anthropologist Laura Bohannan spent years working with the Tiv people of Northern Nigeria. When she arrived to study the community, she was inundated with gifts by the very poor villagers—a common experience for guests in traditional societies. Not wanting to appear rude, she accepted them but was eventually taught the appropriate etiquette by the headman’s wife, who told her to “stop wandering aimlessly about the countryside and start calling to return the gifts” she had received. Bohannon concluded: