The Third Pillar: How Markets and the State are Leaving Communities Behind. Raghuram Rajan

the property of the few to creating and preserving opportunity for the many. Let us now elaborate.

      FREEING THE MARKETS

      In his book An Inquiry into the Nature and Causes of the Wealth of Nations, published in 1776, Adam Smith argued that by producing for the market and maximising his own profits, the manufacturer maximised the size of the public pie, and thus the wealth of the nation. Smith thus made the case for allowing the invisible hand of the competitive market, working through self-interest, to drive economic prosperity. The real damage was not caused by avarice or even the self-indulgence of the rich, it emanated from restraints on competition and the resulting distorted prices and quantities.

      Seen in this light, Adam Smith was pro-market, not pro-business. Indeed, he was no fan of the businessmen of his time because of their cartelising tendencies. In arguing against guilds and monopoly corporations, he wrote, ‘People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.’2 About businessmen’s suggestions for regulation, he emphasised that these should be ‘carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.’3 Smith was no starry-eyed forerunner of Ayn Rand, convinced of the heroism of the business class. Instead, he pushed for eliminating anticompetitive privileges, such as those enjoyed by the monopolist corporations of his time.4

      He was equally scathing about mercantilism. He dismissed the notion that an accumulation of gold would make a country more powerful and able to wage war – for a country like Great Britain, any feasible accumulation of gold would be too small given the huge costs of war. What was needed to sustain a long war was greater domestic productive capacity. To give domestic producers a monopoly by levying high import tariffs or prohibiting imports was therefore either ‘useless or … hurtful’. If the local product could be made and sold as cheaply as the foreign product, the prohibition was useless for domestic production would be competitive on its own. If local production was not competitive, the tariff was harmful for it raised domestic prices of the product, and diverted precious domestic productive capacity toward its making. Smith wrote:

      ‘It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. The tailor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a tailor … What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.’ 5

      Therefore, Smith pushed hard for freeing the domestic market from the hold of guilds and monopolists, while bringing down the barriers to foreign trade erected by the mercantilists. In the spirit of laissez-faire, Smith thought little of a government that tried to direct production or investment by the businessman from afar, for ‘every individual, it is evident, can in his local situation judge much better than any statesman or lawgiver can do for him.’ Indeed, Smith believed the government had only three essential duties: ‘First, the duty of protecting the society from … invasion of other independent societies; secondly, the duty of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, … and, thirdly, the duty of erecting and maintaining certain public works, and certain public institutions, which it can never be for the interest of any individual, or small number of individuals to erect and maintain.’6

      A PHILOSOPHY FOR THE MARKET

      It was a short step from Adam Smith’s work to the manifesto for individualism and the free market, On Liberty, written by British economist John Stuart Mill. It was published in 1859, soon after the death of his wife Harriet, whom he acknowledged had influenced the work greatly.7 Mill defended individual thinking and speech against the tyranny of the majority. He argued that the views of the community tended to be the views of the powerful or the majority, and there were good reasons to subject that view to challenge, including the obvious possibility that the majority view could turn out to be wrong.

      Mill saw all individual actions as permissible that did not hurt the interests of others. Apart from this, he saw an individual’s duty to society as sharing in ‘the labours and sacrifices incurred for defending the society and its members from injury and molestation’. Society had no call on the individual beyond this. He argued he was not advocating selfish indifference to the community, but voluntary engagement. Not only would an individual’s engagement on his own terms improve social enterprise, he believed ‘the free development of individuality is one of the leading essentials of well-being.’ Individuality should be valued in its own right and not just as a means to a societal end.

      Mill thus sought to restore free will’s role in the vibrancy and variety of human existence that Calvin had rejected. Calvinism emphasised obedience – ‘You have no choice; thus you must do, and not otherwise: “whatever is not a duty, is a sin.” Human nature being radically corrupt, there is no redemption for anyone until human nature is killed within him.’ Instead, Mill argued that ‘Pagan self-assertion’ is as much an element of human worth as ‘Christian self-denial’, that it is ‘not by wearing down into uniformity all that is individual in themselves, but by cultivating it, and calling it forth, within the limits imposed by the rights and interests of others, that human beings become a noble and beautiful object of contemplation’, and ‘in proportion to the development of individuality, each person becomes more valuable to himself, and therefore capable of being more valuable to others.’ He declared that ‘genius can only breathe freely in an atmosphere of freedom,’ for ‘the general tendency of things throughout the world is to render mediocrity the ascendant power among mankind.’

      Mill’s was thus an attack on the stultifying effects of the community, the ‘despotism of custom’. He viewed the freedom of trade, contracts, and markets as consistent with his beliefs on liberty. This also meant limits on the state, for ‘where everything is done through the bureaucracy, nothing to which the bureaucracy is really adverse can be done at all.’ Instead, the state should be an ‘active circulator and diffusor, of the experience resulting from many trials … [enabling] each experimentalist to benefit by the experiments of others; instead of tolerating no experiments but its own.’

      The state and the market had grown together from the crumbling edifice of feudalism. The constitutional limitations on the state that we traced in the last chapter did not shrink the state. Instead it helped the state build out its military and fiscal capabilities as it gained access to finance. Once the state had created a framework to ensure security and protect property rights, the proponents of laissez-faire started questioning how much more it should do. Smith and Mill were not rabidly antigovernment. Smith, for example, accepted a role for the state in education, as well as other services that would not be privately provided. For these reasons, he argued that the state in a civilised country would be larger than in a barbaric one.8 Yet these nuances were ignored, as were his asides on the perfidy of businessmen if they were entrusted with their own regulation. Instead, public debate became focused on steadily eliminating any restraints on business practice, as well as any protections to labour.

      Perhaps more than anyone else, the Reverend Thomas Robert Malthus epitomised the heartless side of liberalism, when taken to its extreme. In the various editions of his Essay on the Principles of Population published in 1798, he emphasised the tendency of man to reproduce faster than food supply. Man could restrain himself through self-imposed checks like delayed marriage or sexual abstinence, but Malthus did not believe these would work. Instead, disease,