Raghuram Rajan on free markets and political freedom

Rajan's most recent speech on democracy, inclusion and prosperity has drawn attention for quite the wrong reason: the reference to Hitler and the perils of strong government. Since Modi was being likened by the Congress to Hitler in the run-up to the last elections, the reference is liable to be misconstrued and, indeed, the highlighting of this particular point in sections of the media appears mischevous.

It's the larger point in the speech that deserves highlighting, namely, that liberal democracies rest not just on three pillars- rule of long, strong government and political accountability- as Francis Fukuyama has said but also on a fourth one, free markets.

Rajan sees competition in the market place as the counterpart of competition in politics. The two tend to support each other. However, he points out, there is a difference. In politics, every citizen has one vote. In the marketplace, the richer guy has more votes than the poorer guy. He then poses the question: why would voters not use the power of their votes to disenfranchise the rich? Because they see the owners of property or resources as spreading prosperity and benefiting the voters. Also, they don't mind richness as they long as they see a certain fairness about the acquisition of wealth. As long as these two conditions are met, voters will tolerate free markets and a measure of
inequality.

Well, well, the conclusions appear rather sweeping. It's not as if voters can disenfranchise the rich if they wanted to. The people who get voted in do support with the money power of the rich behind them. They are beholden as much to the rich as to the voters. And their natural affinity is towards the rich rather than the voters.

As for the fairness of the process, we do know that upward mobility has fallen in the US. And, we have one book (The son also rises) that claims that mobility has changed very little in the west over hundreds of years. In India, upward mobility has been made possible more by the political process rather than the markets. By grabbing political power, the backward classes and the scheduled castes have been able to advance. They have also advanced through government jobs. Markets and enterprise haven't contributed as much.

There isn't much fairness or legitimacy to the system we have. Political accountability has largely meant substituting one set of crooks supported by businessmen with another set of crooks supported by businessmen. The victory of Aap in the Delhi polls shows that people are still looking for a fix to the crooked political and economic system we have. A Nandan Nilekani emerging on the landscape doesn't mean much of a change in the Indian system. Inequality is more of an issue, perhaps, in Indian than in the US where it has emerged as an important issue.

In the long term, genuine democracy or political freedom does not seem compatible with deep inequality. How to get the political system to address such inequality will remain the fundamental challenge in the years to come.