The Third Pillar

Raghuram Rajan (2019), The Third Pillar, HarperCollins, New Delhi, pp. 436

The Third Pillar explores the neglected variable ‘community’ that economists barely discuss in their analysis of market economy. The state-market is the bipolar continuum within which all economic policies embed themselves.  Leaving out the community is essentially leaving out people. This omission has a human-centred cost because of the uncertainties unleashed by automation, financial crises and climate change that characterize the anthropocenic age that we live in. It seems that the explanatory models of economics are complex; the policy prescriptions required to forestall calamities dependent on large structures and institutions. People who are caught in between are unable to secure quality university education, find employment, access social security and settle in families of their own This book examines the cause and consequence of this context, keeping the community, at the heart of its analysis.

When a financial economist reviews the role and the reality of the community, a lot of questions abound. How far can he go meaningfully within the limitations of his discipline? What new idea does he bring that the sociologists, anthropologists and historians have not given us? Rajan surprises the readers on both counts: the breadth of his analysis of the variable ‘community’ in reference to state and markets and the depth of his enlarged vision for the community in the near-future. To accomplish this creditable feat, he marshals evidence from economic history as well as case studies of countries and cities.

Inclusive Localism

The book is divided into three parts. The first traces the origin and rise of the three pillars- the modern state, the market economy and the community. He describes the historical circumstances under which each pillar rose with its particular characteristics and also addresses some lost possibilities. The second part argues why an imbalance of the three pillars in mid-twentieth century changed the equation of how we perceive them through various models in social sciences. The ascent of the market has come about with limited state capacity and unravelling community. Therefore, the problems of the market such as recurring financial crises could scarcely be contained or addressed by a depleted state and weakened community. The rise of populism and the anti-competition rhetoric has been an attempt to retaliate against the market’s logic of ups and downs that has resulted in widening economic and social inequality. The third and final part of the book addresses the measures to restore this imbalance. Rajan has proposed ‘inclusive localism’, a concept by which communities can remain diverse and vibrant whilst having the power and financial resources to improve their local institutions and keep the neighbourhoods in good health.

This book marries the abstractness of theory with the concrete implications of policy. It is one of those books that you will finish fast because it is too important to miss. It is this contemporary relevance, the authority of evidence and a delightfully fresh and non-pedantic voice that sees you out of the last page. A winner through and through!

Markets and Match Making

Alvin Roth (2015), Who Gets What and Why, William Collins, London, pp. 260

For anyone who is interested in the implications of market failure, this book opens a new road. In a breezily delightful work, Nobel Laureate Alvin Roth, illustrates the challenging field of market design and match making that comes into play when ordinary markets fail to trade certain goods and services. The main highlight of the book is how Roth accomplishes to convey a complex economic problem in an engaging manner by taking a conversational tone that makes reading this work a joy ride!

To begin with, markets fail to capture information of demand and supply through prices when it ventures to trade in certain types of goods and services. In such cases, non-market values crowd out market principles. Take the example of trading in organs like kidney or school admissions in public education system. The act of buying and selling these ‘commodities’ lead to undesirable outcomes for the society because of value preference that makes such trade repugnant or inefficient. Then, the efficient way to allocate resources becomes the task of a very different type of exchange- that of match making.

Match making markets are different from regular commodities markets not just in their provenance. Match making markets have interested parties on the demand and supply side who wish to be allocated with efficient outcomes without the help of price signals. To accomplish this, both sides provide an ordered list of their preference and a central agency allocates optimum matches.

Match making and market design has been successfully used to solve optimization problems in organ transplantation, school allocation, employment offers and much more. This book lucidly illustrates the illuminating problems on which Roth worked on.

This is an introductory work that is meant to get students and lay readers get hooked to the idea of designing markets. Like always, more math in store for those who want to progress further. What is a bit of game theory when you get to solve interesting puzzles like these? I say, go for it!

Deconstructing Financial Crisis

The Myth of the Rational Market, Justin Fox, Harper Business, pp. 340

Justin Fox is the editorial director of the Harvard Business Review Group and a contributor to Time magazine. In this fascinating historical narrative of the financial crisis of 2008 and the events leading up to it, Fox dissects ideas, people and their behavior. The perception of risk and the belief in market rationality is part of both economic thought and cultural history that consolidated the modern world of finance and investment. What the financial crisis did was, not only demolish fortunes, but also ideas put forth by intellectuals who battled to bring in a particular brand of capitalism.

Tracing history

The book is divided into five parts. This section-wise division elaborates the timeline leading up to the financial crisis. In the beginning of the twentieth century, it was unusual to associate the idea of market with rationality. The first serious attempt to apply the logic and reason of science into economics began with Irving Fischer. In his time, the idea that man was infinitely selfish and infinitely far sighted prevailed. Fischer took this assumption by the horns and argued that the uncertainty of the future could be ‘tamed’, if not eliminated. This was the beginning of modeling the future outcomes with variables available in the present.

Fischer’s work was taken a step forward by Harry Markowitz, who introduced the ‘statistical man’ to the market with the help of quantitative approach to investing. The world events of the time prepared such intellectual pursuit because of the emergence of strategic thinking in the Second World War. About a decade later, it was Paul Samuelson, who wrenched the idea of rational market that was on the fringes of the economic thought into the centre stage of academic research. Samuelson, who was in the habit of reading every paper that was published in the Quarterly Journal of Economics, came across the idea of ‘market randomness’. In a case of remarkable serendipity, a doctoral thesis of Henry Bechelier filled with dense description of market behavior caught his attention. He immediately recognized that the randomness of market mathematically described was similar to what Albert Einstein described about the Brownian motion of random particles. This paved the way for the belief in the market as rational and random.

Age of Assumptions

      The decades that followed were notable for two major achievements. Modigliani and Miller came up with a simplifying assumption that argued that the market behaves only based on real considerations of how an investment would actually perform, and not on the packaging of the investment. Eugene Fama, a doctoral student of the Chicago school, proposed that the investor’s choice took random positions along a bell curve. The metamorphosis of the market from being rational to random and from there to being perfect was established. It was this cherished belief that was shattered in the financial crisis of 2008. Alan Greenspan, the chief of the Federal Reserve for 14 years admitted that the economists failed to anticipate the crisis and invite government intervention because ‘it (the market) has been working exceptionally so well’.

This book is an engrossing read that pays rich tribute to well-known and lesser acknowledged economists and thinkers of the twentieth century. The history of ‘risk and reward’ that the book captures brings out a lively account of the protagonists in the financial world and the anatomy of the financial markets.

Hard Choices

 

What Money Can’t Buy: The Moral Limits of Markets (2013), Michael J Sandel, Penguin  UK, pp 256

Renowned political philosopher, public intellectual, professor of Politics at Harvard University and the author of the best-selling book ‘Justice’, Michael Sandel asks some of the most important questions facing the market driven world in which we live in today in his book ‘What money can’t buy’. Sandel points out with provocative illustrations and examples, both from the developed and developing countries, the way in which market norms like sales and profit have crowded out the non-market norms and values that humans have cherished in their social lives for centuries. In a world where everything is up for purchase and consumption, where do values come in and how much ethics is practically viable? More importantly, what is the tipping point beyond which markets should not be allowed to invade society? 

Sandel sets the tone of the debate with patiently collected examples and illustrations from various fields and cultures. From paying for wombs in surrogacy to paying someone to stand in the queue, the cases range from the commonplace to the unacceptable where market values have been literally taken too far. Ideas like ‘stranger originated insurance’ where big corporations make a windfall by taking insurance on its employees to asking late arriving parents at an Israeli day care to pay up a fine, lucidly bring out the point where a fine turns into a fee and what is morally reprehensible becomes the norm. Thus, Sandel puts forth the idea that economics as a discipline has fostered a culture of monetary incentives and has simultaneously taken away stronger non-monetary incentives for inducing morally upright behaviour. This subtle corruption that has crept into our social psyche has far reaching consequences for the evolution of social behaviour and our collective conscience in determining cultural norms.

The author is not against market per se. Money is an effective way of allocating goods and services and in today’s world gripped by the economist’s way of thinking, even an acceptable way to do so. That Governments think of branding their country new, Sandel says, is a sign of times. Commercialisation, commodification and privatisation have emerged as the three powerful sources of coercion and corruption. Ultimately, the way in which a product is sold affects the moral value of the product itself. In a world aspiring to be more democratic and equal, we owe others a minimum level of equal chances and dignity that an absolute focus on wealth potential is likely to destroy. It is in our interest to resist this pernicious tendency and prevent ourselves from transforming from a market economy to a market society.

(This review was published in the July issue of The CSR Analyst, Mumbai)