Angus Deaton asks why, in advanced countries since around 1970, the economy no longer serves most citizens' interests, and he looks at what has been lost amid so much material technological gain

Angus Deaton

Rather suddenly, capitalism is visibly sick.

The virus of socialism has reemerged and is infecting the young once more. Wiser heads, who respect capitalism’s past achievements, want to save it, and have been proposing diagnoses and remedies.

But their proposals sometimes overlap with those who would tear the system down, making nonsense of traditional left-right distinctions.

Fortunately, Raghuram G. Rajan, a former governor of the Reserve Bank of India who teaches at the University of Chicago Booth School of Business, brings his unparalleled knowledge and experience to bear on the problem. In his new book, The Third Pillar: How Markets and the State Leave Community Behind, he argues that the cancer afflicting contemporary capitalism is the failure neither of “Leviathan” (the state) nor of “Behemoth” (the market), but of community, which no longer serves as a check against either monster. Rajan thus prescribes an “inclusive localism” to rebuild communities that can furnish people with self-respect, status, and meaning.

Rajan’s book, like Oxford University economist Paul Collier’s The Future of Capitalism, is part of a rapidly growing genre of critiques by capitalism’s friends. Rajan is a proponent of capitalism who has accepted that it no longer works in the interest of the social good, and must be brought back under control.

The Third Pillar offers deep historical context to explain the current moment, but it is most successful when it retraces developments after World War II to explain why everything started unraveling around 1970. Until then, the world had been busy recovering and rebuilding, and economic growth had received an added boost from the adoption of frontier technologies through replacement investment.

But trend growth has decelerated since 1970, accounting for many of our current difficulties. Through it all, governments have had no idea how to address the slowdown, other than to promise a restoration of the lost postwar paradise. In most cases, that has meant additional borrowing. And in Europe, elites have pursued continental unification with the great aim of stopping recurrent episodes of carnage. Yet in their rush to secure the obvious benefits of integration, they forgot to bring their citizens along. They have since learned that after hubris comes nemesis.

The success of social democracy in the postwar era weakened the market’s power to act as a moderating influence on the state. According to Rajan, these weakened actors, in both Europe and America, were in no position to deal with the revolution in information and communication technology (ICT) that they were about to face, leaving ordinary people to face the threats on their own. Rather than helping their workers manage the disruption, corporations made it worse by using their employees’ vulnerability to enrich their shareholders and managers.

And how they enriched themselves! With median household incomes largely stagnant and a growing share of wealth accruing to the rich, capitalism became manifestly unfair, losing its popular support. To manage its opponents, Behemoth called on Leviathan for protection, not understanding that a right-wing populist Leviathan eats Behemoth in the end.

Two points of Rajan’s story need to be emphasised. First, declining growth is a key, albeit low-frequency, cause of today’s social and economic distress. Second, the unfortunate consequences of the ICT revolution are not inherent properties of technological change. Rather, as Rajan notes, they reflect a “failure of the state and markets to modulate markets.” Though Rajan does not emphasise it, this second point gives us cause for hope. It means that ICT need not doom us to a jobless future; enlightened policymaking still has a role to play.

Rajan’s account of corporate misbehavior is very well told, and it is all the more effective coming from a professor at a prominent business school. From the start, the near-absolutist doctrine of shareholder primacy has served to protect managers at the expense of employees, and its malign effects have been exacerbated by the practice of paying managers in stock.

In The Future of Capitalism, Collier gives a parallel account from Britain, telling the story of the most admired British company of his (and my) childhood, Imperial Chemical Industries. Growing up, we all hoped someday to work at ICI, whose mission was “to be the finest chemical company in the world.” But in the 1990s, ICI amended its primary objective by embracing shareholder value. And in Collier’s telling, that single change destroyed the company.

What of community? The United States once led the world in public education, providing local schools where children of all talents and economic backgrounds learned together. And when elementary education became insufficient, communities started providing access to secondary school for all.

Today, however, when a college degree is a prerequisite for success, the more talented kids pursue theirs far outside of the community, ultimately self-segregating in fast-growing cities from which the less talented are excluded by the high cost of living. Ensconced in their glittering cloisters, those who succeed form a meritocracy in which their kids – and almost exclusively their kids – do well.

Collier tells the same story for Britain, where talent and the share of national income have become increasingly concentrated in London, leaving gutted and angry communities behind. Yet as Janan Ganesh of the Financial Times points out, these metropolitan elites now find themselves “shackled to a corpse.”

For his part, Rajan sees the meritocracy as a product of the ICT revolution. But I suspect it is older than that. After all, the British sociologist Michael Young published his prescient dystopia, The Rise of the Meritocracy, in 1958. Indeed, Collier and I are among the first British meritocrats. And just as Young predicted, our cohort broke the system for subsequent generations, while continuing to extol its virtues. In Scotland, where I grew up, the local community talent, the intellectuals, writers, historians, and artists have all gone in search of wider pastures, or simply given up competing with mass-market superstars. We are the poorer for it.

Like Rajan, I think that community is a casualty of an elite minority’s capture of both markets and the state. But unlike him, I am sceptical that stronger local communities or a policy of localism (inclusive or not) can cure what ails us. The genie of meritocracy cannot be put back in the bottle.

Angus Deaton, the 2015 Nobel laureate in economics, is Professor of Economics and International Affairs Emeritus at Princeton University’s Woodrow Wilson School of Public and International Affairs. He is the author of The Great Escape: Health, Wealth, and the Origins of Inequality. Copyright: Project Syndicate, 2019, and published here with permission.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment or click on the "Register" link below a comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.


Crony capitalism is not capitalism.

Capitalism still works.

It is the so called 'democracy' cripples it in the past 30 years.

Rubbish, what's crippling "capitalism" is high energy cost, and a financial system that is now parasitic on an economy and not supportative.

It is the so called 'democracy' cripples it in the past 30 years.

Wrong: it's ungrateful third world immigrants


I have no idea whther you have lived here all your life,or came from mainland China at some point. Our democracy is far from perfect,but here,you and i can speak our minds without worrying about a late night knock on the door,or as Tibetans,social activists and students in Tienanmen Square found,something much worse.
It was 'amusing' to hear a government spokesman insist that the internment camps for up to 1m Uighurs are like school camps where they have the freedom to contact relatives and even go home for weekends. Yea right.
I have just written to one of our government ministers in very unflattering terms and I may or may not get a reply,but I won't disappear. You know what? I'll take our messy and inefficient democracy any day.

Linklater, Bravo!

No its been sick since the mid 70s oil crisis when in the aftermath "developed" economies decided that the high cost of energy did not support manufacturing so switched to services and financial [mos-management] services in particular. Then take off regulation in the Raygun and Thatcher era on 'finance" and the entire sector became parasitic. Then the final nail in the coffin was around 2004~2006 when oil now approaching daily peak production took off in price and the already weakened by parasites economy could take it any more and in 2008 collapsed.

The fix is simple, hard work and no parasites but no one wants to go there.

Problem is the "Leviathan" (State) derives it's power from the community. And over time the politicians have quite successfully diluted the comminity's capability to hold the State, and it functionaries in the bureacracy to account. The challenge here is how to roll this back without the need for a bloddy revolution. The "behemoth" (market) has taken it's power from corrupting the Leviathan to ultimately create a 'too big to fail' situation. Thus when collapse is imminent the state bails out the market and not the community, because a collapse of the players will ultimately threaten their power too.

My oft repeated question is how do we change this?

That is the Q indeed. Though we can add in "when" "when" is sort of easy. It will be when enough voters who have lost so much their vested self-interest turns from supporting the status quo to really changing it.

However the choices as to what we have instead are not pretty.

Up until 1945 there used to be regular & useful large scale wars, especially for those with “British” attachments. A good cull, purge if you like of society. And up until about 1916 that society was replicated in the armed forces officers = gentlemen, non commissioned = working class and in the same ratio of numbers more or less. That created a whole lot of gaps and rungs to be filled and climbed, a new start and shuffle in the workforce. The UK though found out they had lost just too many, but of course, they had hardly any choice.Hence the immigration of the 50/60’s that Enoch Powell and others warned about, and in terms of those consequences, with quite some accuracy. So having said all that, to not answer your question the old answer was a war, but today? It has to be done politically by able and honest politicians. Perhaps the Lange/Douglas government was some example of dynamism and innovation, could we ever get that sort of application back in power again.

Good article.

"......that can furnish people with self-respect, status, and meaning........."

That was jobs, when we no longer needed the jobs we had / have the disposes-ed.

" longer works in the interest of the social good, and must be brought back under control."

Capitalism never works in the interest of the social good (and that is the idea), but it must be controlled for the social good.

Jobs will be coming back as we'll need human /animal labour as part the energy mix to replace fossil fuels. of course most ppl wont enjoy the thought of hard physical work.

solar and nuclear and better energy efficiency.

In Steve Keen’s three sector economic model, a rising private debt necessarily leads to a decreasing worker’s share of output. That’s a fruit of financialization, shown with a first principals mathematical model. Neoliberal economic policy doesn’t help by encouraging governments to run a surplus.

Neo-liberals have not exactly been successful in getting governments to take up that suggestion.

what I meant was.. one of the four core tenets of neo-liberalism is government austerity. All that does is suck money out of the economy leaving credit creation for the private banks, which just accelerates the trend that Keens modeling uncovered. look at global private debt as a % of GDP since the 70's.

I think we should coin a new term in the spirit of Godwin's Law.
It is that all economics arguments lead to Steve Keen. Same rules should apply; censuring of the comment and the reiteration that if you base your arguments on that of Steve Keen, the comment is largely worthless.

Steve Keen is quite literally the Donald Trump of Economics.

The key paragraph is the final one:

Like Rajan, I think that community is a casualty of an elite minority’s capture of both markets and the state. But unlike him, I am sceptical that stronger local communities or a policy of localism (inclusive or not) can cure what ails us. The genie of meritocracy cannot be put back in the bottle.

For a working example, try yer local City Council. Long since captured by the Elitist Staff, and useless to try to change things by electing yet another set of Councillors: their only employee is the CEO (who then employs everyone else). No CEO change = no staff culture change = preservation of turfs, perks, and continuation of the pursuit of their own agendas. We get to find out afterwards just precisely what was in 'em.

the people a little way down the chain are all on shortish term contracts, which must be stressful and detrimental to long term employee usefulness.

Seem to be following you around today. Glad of it. Yep my thoughts exactly. Impenetrable, unanswering, unaccountable. proud coat of arms of The Brown Cardigan Brigade.

The crisis of the 70s - a cost-push wage/price inflationary spiral caused by OPEC that was dealt with extremely badly - was used to end state aggregate demand management and the historic compromise (workers would share in productivity gains).

The monetarist neo-liberal era that followed has served not to stabilise capitalism but to re institute a Victorian version of it that makes young Millennials rightly question what's in it for them.

We need to return to a activist state managed capitalism that sets the rules so that all share in productivity gains and that redistributes income more fairly. Modern Monetary Theory helps one to see how aggregate demand can be sustained much better than it has since the 1970s using functional, sensible deficits to offset demand leakages and especially in its use of a Job Guarantee as a anchor for price stability by hiring off the bottom (for labour that has zero bid) in recessions avoiding the inflationary pressures that old fashioned military Keynesianism can create.
The NAIRU has a lot to answer for. The idea that a swathe of the population must be kept as an underclass to discipline inflation must end. The reliance on monetary policy has to end. The central bankers are like toddlers with a fake steering wheel thinking they control the economy. When it's fiscal policy that does the real driving.

Haven't central banks shown what damage can be done when power and decision making becomes too centralised? State managed capitalism sounds equally terrifying and just as prone to corruption and incompetence if not more.

Edit: State managed capitalism sounds a lot like socialism?

Don’t you dare go there. They worked hard for that wealth. If those 1% weren’t born that wealth would never exist, nor would the products of that wealth that we all enjoy today...

CJ and NZDan. Why do you think it's capitalism? Have a look at the income concentration graph as per

Do you think there was no capitalism leading up to the 70's? And if you agree there was, what would you attribute the drop in the wealth of the 1% - would that be capitalism as well?

Yeah but they aren't using the money to crush the little guy, and make your life a misery. The fact that they are rich, doesn't hurt you, in fact many of them have produced things that everyone values. You should try doing that, instead of blaming people for being rich, as if somehow that was capitalism's fault, as if it is even a problem. Without those people, there would be less money in the world, and it still wouldn't be distributed evenly.

They are crushing the little guy. Today two incomes and a 30yr mortgage are necessary to afford the basics: a home, transport, utilities and food. Credit is created out of thin air by private unaccountable institutions. Fletchers own dozens of building materials companies. Foodstuffs have acquired new players like Raeward Fresh. Fertility rates have dropped because the basics are not affordable.

Today two incomes and a 30yr mortgage are necessary to afford the basics: a home, transport, utilities and food.

I'm doing it on one. 1950s style. Remember they had smaller houses back then, and often just one (or no!) car.

And the financial sector has long since indoctrinated the population to idealise zero taxation of capital or unearned income (which would lower the income of the financial sector) but rather the vast bulk of taxation being on the little guys doing the work for wages. Thus wage earners facing an ever smaller portion left over after the costs of finance and taxation.

“Angus Deaton asks why, in advanced countries since around 1970, the economy no longer serves most citizens' interests” - Gee, could it be the abandonment of the gold standard in 71 which lead to the funny money we have now and the proliferation of rent seeking due to it. Why try to be productive when you can speculate. Seriously though, since 71 in the US, the financial sector share of gdp has doubled to around 9% and the financial sectors wages have gone through the roof. The income share of the top 1% also saw a trend reversal after 71 (it was declining) to shooting up to where it is today and often quoted at that.
Capitalism isn’t broken, outdated or sick at all. Our financial system is.

The "problem" for capitalism in advanced economies is that the advanced countries are no longer competing with morons. The world has become increasingly capitalist (with a few notable exceptions) and the scope for advanced economies to excel is diminished.

Your answer is right there in the article, when you mentioned post war growth. If you want that replicated, you know what you have to do, don't you?

Ah PA you are on to it. Take the USA the Armour family for example. Absolute fortune made out of war. And for the USA itself. no ground warfare, no damage, on its soil since 1812. War creates growth, industry, jobs, technology and money. Yes lots and lots of money. But who pays? That is the terrible question. Don’t know that that is a part of corriculum these days but it certainly was a means to the end if, to put it absolutely simply and clinically, for post WW2, Germany and Japan.

We either learn to live without growth or we will end up blowing each other to smithereens once again. It is not only capitalism that will need adjust itself through this.

Capitalism is working just fine, even unemployed people have a ps4 and a smartphone, get paid for doing nothing, free healthcare, the right to vote, free education. What tf is wrong with people that they need to poo poo how good things are. Try being unemployed even 50 years ago, or disabled, or retarded. Things are getting better and bettter. The fact that some people are stupidly wealthy should motivate you to get rich, not moan about how unfair it all is.

Meanwhile back in the jungle. Jungle? What jungle? You seem to conveniently forget there is more than just the human race on this planet and that we are completely reliant on it. Capitalism might well be"working fine" right now, but we are digging deeply into the reserves of this planet and the future of it in order to do so. It can't last.

News flash, your food doesn't come from a jungle, it comes from a farm. We are completely reliant on capitalism, not the jungle. Without capitalism everything collapses.

Oh I see, are you suggesting that orangutans are somehow capitalists or something? Again, we are NOT the only species that relies on this planet and many of them do indeed rely on their food supply in the jungle. Yes, I do not think we should think that we own this planet or that it is only us that it should serve.

Capitalism needs a system of measurement that is constant from one place to another and from one time to another. Isaac Newton knew this when he designed the monetary system that gave rise to the trading system of what became the British Empire. As the state began to waste more and more wealth on military matters the Empire fell apart, aided by German Imperialism and American Banking. The US paper based monetary system that replaced Newton's gold and silver based system is a system based on stretchy tape measures and distributes wealth based on the ability to game the system, not on the basis of productivity.

Keynes foresaw all this way back in 1919 Economic Consequences of the Peace:
Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.

Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

In the latter stages of the war all the belligerent governments practiced, from necessity or incompetence, what a Bolshevist might have done from design. Even now, when the war is over, most of them continue out of weakness the same malpractices. But further, the governments of Europe, being many of them at this moment reckless in their methods as well as weak, seek to direct on to a class known as "profiteers" the popular indignation against the more obvious consequences of their vicious methods.

These "profiteers" are, broadly speaking, the entrepreneur class of capitalists, that is to say, the active and constructive element in the whole capitalist society, who in a period of rapidly rising prices cannot but get rich quick whether they wish it or desire it or not. If prices are continually rising, every trader who has purchased for stock or owns property and plant inevitably makes profits. By directing hatred against this class, therefore, the European governments are carrying a step further the fatal process which the subtle mind of Lenin had consciously conceived. The profiteers are a consequence and not a cause of rising prices. By combining a popular hatred of the class of entrepreneurs with the blow already given to social security by the violent and arbitrary disturbance of contract and of the established equilibrium of wealth which is the inevitable result of inflation, these governments are fast rendering impossible a continuance of the social and economic order of the 19th century. But they have no plan for replacing it....

Amen to that. We seem to be always commenting on the symptoms and not the cause. Great read thanks Roger.

Thanks Withay, I think the current decline in the west seems better explained in this way. Science relies on measurement. Newton basically gave us modern science, our current monetary measurement system is equivalent to engineers not using calculus because it is hard. (Newton also gave us calculus, he thought it was a useful fudge). I think the US adopted the current system as a cold war necessity, but there is no will to reform as it upsets too many powerful interest groups, ie US government staff and US banking.

Capitalism works for capitalists the bigger the capitalist the more it works .
Any group of people ending up on a remote island having to start all over again would not operate Capitalism they would work for the common cause .