Читать книгу The Third Pillar: How Markets and the State are Leaving Communities Behind - Raghuram Rajan - Страница 8

Why do our neighbours 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? Despite the state and markets having taken up many of the early community’s functions, the proximate community still performs important ones. It 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 community can also be narrow-minded, traditional, and resistant to change. A successful modern community supports its members even while being more open, inclusive, and dynamic. We will see why it is difficult for a community to do all this, but also why it is necessary if the community is 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, some 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 neighbourhood. 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 neighbourhood 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 neighbourhood 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, co-religionists, 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 neighbourhood 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 favour, 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 favour 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 labour 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 recognise 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 – to the extent altruism toward kin is a genetic trait that helped its own survival in the Stone Age, when much of our evolution happened, it helped itself be passed on.4 Similarly, we may be genetically evolved to help others, provided they reciprocate the favour, and we are 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.

They offer their members a sense of identity, a sense of place and belonging that will survive the trials and tribulations of modern life. They do this through stories, customs, rituals, relationships, and joint celebrations or mourning so that when faced with a choice between self-interest and community interest, or between community members and others, members are more inclined to put their own community first. Often, communities inculcate shared values and goals in members, as well as imbue in them a sense of personal utility from various actions that benefit the community.

The community also monitors economic transactions as well as noneconomic ‘favours’ within the community, and it sees that everyone delivers their promised part fairly, if not immediately then over time. It assists those falling behind, as members contribute to those in need. It also aggregates the capabilities of all its members and brings them to bear to enhance collective well-being. Let us examine all these roles in greater detail.

Survival: Training and Socialising the Young

A community needs to train its young to be productive, to 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 and learn to internalize the norms and values of the community.

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 only in the degree of physical or mental pain from tribal initiation ceremonies.

The community plays a very important role in supporting education, even in modern schooling systems. As Chicago Nobel laureate economist James Heckman emphasises, 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 for school boards, for staffing and supporting extracurricular programmes, as well as for providing 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 mutual friendships, as they are drawn together in a common endeavour.

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 a dispensable burden. To give the elderly an incentive to share their wisdom, even while protecting their position, the socialisation 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. A mother nurses her child with no thought of sending a bill for services rendered, while 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:

‘What had been given must be returned, and at the appropriate time – in most cases, within two market weeks. For more valuable gifts, like livestock, one should wait until the giver is in sudden need and then offer financial aid. In the absence of banks, large presents of this sort are one way of saving…. I couldn’t remember [who gave what]; I didn’t think anyone could. But they did, and I watched with amazed admiration as Udama [the headman’s wife] dispensed handfuls of okra, the odd tenth-penny and other bits in an endless circle of gifts in which no one ever handed over the precise value of the object last received but in which, over months, the total exchange was never more than a penny in anyone’s favour.’ 6

Gifts among the Tiv, as in most societies, serve to strengthen social bonds. That a gift is not returned in exact and equal measure prevents gift exchange from becoming a market transaction. Indeed, the very point is that nothing is demanded in return by the giver – social ties are built only when the giver seemingly forgets the gift as soon as it is given. Yet someone who only receives and never gives is quickly ostracised, hence the advice to return the gifts. Relationships are built not just by offering gifts but also by offering services. As Bohannan sat with neighbours assisting a woman’s childbirth, she reflected:

‘I also remembered that my great-grandmother had her first child alone with her husband on the frontier; in her diary, she had longed for another woman then…. More generally, though, I could see that where we multiplied specialists and services, these people multiplied personal relationship …’

In small communities where there are few specialists to provide services, neighbours fill in the gaps. For example, in Amish communities in rural Pennsylvania, everyone comes together in ‘barn raisings’ to build a barn for someone in the community. It is as much a community celebration as collective work. Such actions broaden the areas of interaction and help deepen relationships within the community. Indeed, every transaction within a community, whether economic or not, is just the most recent link in a set of cross-linked block chains which stretch back into the past, and likely will well into the future.

The ties within a community enable it to act as a support of last resort. When all is lost, we can always return to our family or village, where we will be helped because of who we are rather than what we can pay or what we have accomplished. A study finds that 20 per cent of households within a caste group in India in 1999 sent or received transfers of money.7 The transfers amounted to between 20 and 40 per cent of the receiving household’s annual income. Each sending household sent between 5 to 7 per cent of its annual income, implying a number of them combined to help a household that had major contingencies like illness or marriage. Even with modern sources of social insurance such as unemployment benefits and pensions, the community is critical in filling holes that are left by the formal government and market systems.

Facilitating Transactions

Communities facilitate internal trading by monitoring behavior and ostracising defaulters, cutting them off from further transactions and community support.8 Some embed differential treatment of insiders and outsiders into their norms. Anthropologist Douglas Oliver observed that to the Siuai of Solomon Islands, mankind consists of relatives and strangers. ‘Transactions with relatives ought to be carried out in a spirit devoid of commerciality.’ With few exceptions, however, ‘persons who live far away are not relatives and can only be enemies … One interacts with them only to buy and sell – utilising hard bargaining and deceit to make as much profit from such transactions as possible.’9 With such an attitude, it would take a particularly confident outsider to contemplate trading with the Siuai, ensuring outside trades would be few and far between. But that may be the point! Parochial as the attitude may seem, it fortifies the community by strengthening within-community trade and limiting opportunities for members to stray outside.

Encouraging Favours and Resolving Conflicts

Bonds between members are obviously stronger if they grow up together, undergo common socialisation processes and rites of passage, and share common values and traditions. However, bonds can also build between members of a community in a more modern setting where they come together only in adulthood. Indeed, despite having access to a modern legal system, neighbours may rely on community norms to resolve potential conflict because it is cheaper.

Robert Ellikson, a legal scholar at Yale University, studied ranchers in Shasta County in Northern California and found that their community had developed a variety of unwritten norms to deal with various frictions. For example, cattle from one ranch might trespass onto another rancher’s land. If that rancher discovered an animal wearing someone else’s brand, he would inform the owner. The owner, though, might take weeks to pick up his animal in a collective roundup – it is too costly to go fetch each animal as it strays. In the meantime, the rancher would incur costs of hundreds of dollars for feeding the trespassing cattle. Nevertheless, he typically did not charge the owner for this.

Ellikson conjectures this is because in the thinly populated rural areas of the county, neighbours expect to interact with one another on multiple dimensions such as fence repair, water supply, and staffing the volunteer fire station, and these interactions will extend far into the future. Any ‘trespass dispute with a neighbour is almost certain to be but one thread in the rich fabric of a continuing relationship.’ Therefore, most residents expect giving and receiving to balance out in the long run – a shortfall in the trespass account will be offset by a surplus in the fence repair account.

Accounts need not balance over time. When a transfer is necessary to square unbalanced accounts, neighbours in Shasta County prefer using in-kind payments, not money, for the latter is thought ‘unneighbourly’: If one’s goat eats a neighbour’s plants, the neighbourly thing to do would be to replant them, not offer money. Indeed, when one of the ranchers paid to settle a trespass dispute, others rebuked him for setting an unfortunate precedent.10 The point is that neighbours prefer to keep an ongoing cooperative relationship rather than end it through ‘cold hard cash’, which can signal an arm’s-length dealing and poison the atmosphere. It is the web of credit and debit accounts within Shasta County ranchers, settled with favours rather than with money so that no one quite knows what the balance is, that seems to tie the community together.

In every such community, there will be potential deviants, who are happy to take but will not give. Ellikson describes a rising set of penalties for defaulters, starting with adverse gossip within the close community. A besmirched reputation is enough to stop the flow of favours, so most ranchers are very careful not just about adhering to the norms but about being seen to be adhering to the norms. If the deviant does not really care about his good name, aggrieved ranchers may take sterner action like killing the trespassing animals after giving the owner due warning, or reporting the owner to county authorities. While disputes are resolved under the shadow of the law, legal remedies are rarely invoked, and even then, typically against outsiders. As one rancher put it, ‘Being good neighbours means no lawsuits.’11 More generally, as we will see, communities can be diminished by the intrusion of the state, and it is not surprising that Shasta County tries to avoid relying on it.

THE VALUE OF COMMUNITY

It is easy to see why the community is so appealing. Apart from contributing to our sense of who we are, a richer range of transactions can be undertaken within the community than would be possible if everything had to be contractual and strictly enforced by the law. The record of what one does for the community continues to be visible in the community, and it does not vanish into an anonymous marketplace. This leads to greater pride, ownership, and responsibility. The community comes together to raise its young and to support its weak, elderly, and unlucky. Because of its proximity, and the degree of information it receives, the community can tailor help to the specific needs of the situation. It also recognises freeloaders far better than any distant government could and can shut down their benefits. As a result, given any quantity of available resources, it can offer a far-higher level of benefits to the truly needy. Communities therefore aid the individual, preventing them from drifting – untaught, unaided, and unanchored – in life.

The work of economic theorists like Oliver Hart, who won the Nobel Prize in Economics in 2016, offers a related explanation for the economic value of communities. The real world is plagued by the problem of incomplete contracts. We cannot fully anticipate what will happen in the future, and even if we can, we do not have the ability to prove who did what, and when, to the satisfaction of a court of law. We cannot thus write the full range of arm’s-length contracts that would be necessary to deal with all the problems that might arise in real life. For instance, to deal with the problem of stray cattle with explicit arm’s-length contracts, every rancher would have to contract with every other rancher on what ought to be done if his cattle strays, as well as on the necessary payments for services rendered. With little ability to verify when the cattle wondered off the ranch, or what the quality of their treatment was in the hands of the rancher who found them, lawsuits could proliferate. The system of implicit community responsibility and enforcement might be far more effective in protecting cattle and minimising transactions costs than using explicit contracts and the legal system. Communities thus can be more than the sum of individuals who compose them.

Finally, an important modern function of communities is to give the individual in large countries some political influence over the way they are governed, and thus a sense of control over their lives, as well as a sense of public responsibility. Well-structured countries decentralise a lot of decisions to local community government. To the extent that individuals can organise collective political action within the community more easily, it affords them a vehicle to affect issues on a national stage. The community then magnifies the power of the individual. We will return to the political role of the community later in the book.

DYSFUNCTIONAL COMMUNITIES

We have seen what functional communities do. Consider now a classic picture of a dysfunctional community and what it does not do. Dysfunctional communities in developed countries can be virtual war zones, with widespread drug addiction, crime, failing schools, and broken families. Who would expect significant public engagement if even leaving home is dangerous? This is why the Pilsen community we discussed in the Preface set about tackling crime as the first step in community revival. However, dysfunctional communities are present in even fairly safe areas around the world.

In the mid-1950s, social anthropologist Edward Banfield spent nearly a year studying a poor village in Southern Italy, to which he gave a fictitious name, Montegrano. The extent of underdevelopment of the village can be gauged by the fact that many of the inhabitants were illiterate and did not have toilets with running water. The village remained underdeveloped even in an Italy that was then undergoing a miraculous economic transformation, in part, as Banfield argues, because of ‘the inability of the villagers to act together for their common good’.12 Anyone who has been to dysfunctional communities around the world will recognise some of Montegrano in those communities.

The main occupation in Montegrano was agriculture, but with limited untilled land and small land holdings, it was unlikely that peasant families would prosper by staying in agriculture. Even so, the main path of upward mobility for children, education, was largely blocked. Only five grades of school were taught in the village, the schools were poorly equipped, teachers poorly paid, and attendance, both by students and teachers, was irregular. Moreover, ‘After finishing the fifth grade some students can barely read or write or do simple sums … According to a Montegrano school official, one-third of the [school] graduates are illiterate several years after graduation.’13 Many children did not attend schools regularly, and some farm people sent their children to school willingly only so long as they were too young to work in the fields.

An engineer from Northern Italy, who was shocked at the lack of professionalism among teachers in Montegrano, perhaps best captured what was wrong: He noted that during the summer vacation, a teacher from more prosperous Northern Italy might hold informal classes, take children for walks into the country and explain a bit about nature, or even go on picnics. In contrast, teachers in Montegrano spent their summers ‘loafing in the piazza’, and did not speak to their students when they saw them. The teachers simply did not care if their students learned anything.14

Apathy was evident elsewhere too. There were no organised voluntary charities in the village. An order of nuns from outside the village maintained an orphanage for little girls in a crumbling monastery, but even though girls from local families were at the orphanage, ‘none of the many half-employed stone masons has ever given a day’s work to its repair’.15 There was not enough food for the children, ‘but no peasant or land proprietor ha[d] ever given a young pig to the orphanage.’16

The nearest hospital was five hours away by car, and few villagers could afford the trip. There was no organised effort to bring a hospital nearby, despite villagers complaining for years about the lack of access to medical facilities. Stopgap measures to improve access to education and health care, such as rescheduling public bus timings to transport village children to schools elsewhere, or funding an ambulance to carry emergency cases from the area to the hospital, were simply not considered.

A functional community would have put pressure on the local government to improve public services, failing which volunteers would have gathered to undertake the task. While Montegrano had an elected mayor and council, decisions ‘even to buy an ashtray’ were taken by the prefect, a member of the civil service sitting in Potenza, the nearest large town.17 Similarly, the director of schools reported directly to Potenza, public works were not under the purview of local government, and the police were under the Ministry of Justice in Rome. Too few important decisions were taken locally, a problem we will discuss later in the book, but even so, villagers did not even try to influence them.

The problem in Montegrano, as Banfield argues, was the extreme distrust between villagers, their worry about losing relative social position if they helped someone else improve their lot, and their corrosive envy of those who did succeed. Given this attitude, anyone who undertook a public-spirited action felt they incurred the full costs of acting, would probably receive only a small part of the public benefits, and would feel diminished by the public benefits that went to others. As one teacher explained, not only was there little public spirit, but many people positively wanted to prevent others from getting ahead.18 Such public apathy explains why voluntary efforts to supply public services – for example, masons repairing the monastery – simply did not emerge.

There are a variety of reasons why these attitudes exist in communities. When economic opportunity is very limited, economic activity might be seen as zero-sum – your gain comes at the expense of mine. The problem is exacerbated when families are at risk of slipping in social status, from the barely self-sufficient but still respectable to the ‘deplorable’, who are dependent on others for subsistence. With few savings and little wealth, many peasants were just one hailstorm or one pig’s unfortunate death away from a winter of deprivation or worse. While families were willing to help one another tide over temporary misfortune, more general public spirit required a degree of comfort with their economic situation that they simply did not have. Given the difficulty of staying afloat economically, villagers’ focus was on providing for their immediate family rather than maintaining a broader public spirit.

This inward focus may actually do public harm. A common example of what Banfield calls ‘amoral familism’ is visible in many developing countries, where people keep their houses spotlessly clean, but unceremoniously dump the garbage collected inside on the street outside. The ultimately self-defeating effects of having unclean and unhygienic public spaces surrounding clean homes can only be explained by extreme public apathy, a fundamental characteristic of dysfunctional communities.

The state, despite being recognisably apathetic, distant, and nonfunctional itself, nevertheless dampened initiative in Montegrano. The faint hope that the government will dig a latrine, pave a road, or discipline school teachers can prevent the local population from organising to do so. In frontier towns in the United States, the community raised a barn or built a road itself, knowing there was no one else who would do it. In dysfunctional communities where the government is closer, the misplaced expectation that the ghost of the inefficient government will eventually appear and do the job crowds out what little private initiative there is.

WHEN DO COMMUNITIES WORK AND WHEN DO THEY NOT?

Communities can be fragile even without becoming dysfunctional. They tend to work best when they are small and have little competition. Community relationships are built when members have limited choices, both at a point in time and over time. Relationships, and thus communities, become more fragile when the available set of choices expands, as when communities grow or when the outside market starts offering more opportunities to community members. Communities can also distort decisions, reducing the incentives for individuals to move, change, or adapt. While this may be the right individual choice, when many members make such choices it can drag down a community.

Too Many Alternatives

Mitchell Petersen of Northwestern University and I were interested in uncovering the effects of the greater availability of potential financial partners on the strength of relationships.19 We examined the relationships between small firms and their banks. Small firms typically find it hard to get finance, and young small firms especially so. Most economic theories would suggest that in areas with greater bank competition, young small firms would be better off.

Interestingly, we did not find this. Instead, in areas in the United States served by fewer banks, and hence with a less competitive banking market, we found small young firms got more bank loans, and at lower interest rates than similar small young firms in areas with many more banks. Importantly, they also seemed to pay back for this help. As the young firms aged, the interest rate they paid on their borrowings moved up faster in areas with few banks, with older firms paying more in such areas than in areas with more competitive banks.

Why were banks more willing to help out young firms in areas where firms had less choice of banking partners? The answer seemed to be that they knew they could build stronger relationships. As in the community relationships described above, a banking relationship is based on give and take over time. Lending to untried young firms is costly because even a small loan requires a fair amount of due diligence by the banker, and the size of the loan does not allow the bank to recoup the cost of the effort invested quickly. Moreover, many small firms fail, adding further to the bank’s costs as such loans have to be written off. A bank therefore takes a chance on an untried young firm only if it is reasonably confident the firm will survive, grow, and give it more profitable business in the future.

In areas with many banks, a successful firm could always renege on its implicit promise to the bank that helped it early on, by replacing it with a new banking partner at better terms. In areas with few other banks, however, the successful firm would likely stay with its original banker because of the lack of choice, and thus would compensate the bank with additional profitable business for the risk the bank took when the firm was young. A bank in such an area, being more confident in the (forced) durability of the relationship, would then be more eager to support young firms.

Thus, relationships seem to be stronger when the members of the community have fewer alternatives, for it gives the members confidence that they will stay mutually committed. An interesting corollary is that communities within a larger economy that are partially ostracised by others may flourish because members build stronger ties within the community. For instance, a disproportionate number of entrepreneurs during England’s Industrial Revolution were nonconformists such as Unitarians and Quakers, who were excluded from civil or military office and from Oxford or Cambridge University.20 The silver lining may have been that, given their exclusion from the larger community, nonconformists trusted one another more to continue maintaining business ties, with marriages eventually cementing the community links that provided initial business finance and business partners. Not only was entrepreneurship one of the few attractive career outlets that was not proscribed to capable Quaker youth, many a budding entrepreneur got help from others in the community as he started out.

In sum, in a small community, not only am I assured that those I help will stay committed to me, but I also know if I don’t help someone in deep trouble, my community may shrink and leave me worse off. In a small community, therefore, everyone has a stake in everyone else’s well-being. We are spoiled for choice as the community grows, which could hurt the community.21

Relationships also work better if partners interact over multiple activities – if one’s neighbour is not just a source of the odd gardening tool but also helps deliver our child, we are likely to have stronger bonds. However, this requires the community not to have specialists, else most of us would prefer our child be delivered by a professional midwife or gynecologist. There is no point specialising as a midwife if one is to serve a community with only a handful of women of childbearing age, but it makes more sense if there are hundreds – as Adam Smith famously wrote, ‘the division of labour is limited by the extent of the market’. As the community grows larger, therefore, we can call the professional midwife when a child is being born and the professional fire service when a cat is stuck up a tree, instead of our neighbour. Members have more choice, and the quality of goods and services they have access to increases, but the breadth of interactions that take place between members narrows. This social distancing or alienation once again diminishes the strength of relationships and the value of community.

Members could try to preserve a sense of community as it grows larger and more anonymous, urging everyone to take into account community benefits in deciding whether to transact locally or in the larger marketplace. They then run into the free-rider problem. We may all benefit from having a local bookstore, where we can browse through books before buying, and meet for coffee or for book events. It may well be that the associated benefits of building community through purchases from the local bookstore outweigh the lower price from ordering more cheaply online. However, if everyone else does their purchasing locally, the bookstore survives, leaving me free to cheat and patronise the cheaper online bookseller. The anonymity of a larger community will make individual transactions harder to police. When everyone acts in a rational self-interested way, the neighbourhood bookstore closes down, to the detriment of all.

Too Little Incentive to Change

We have just seen that self-interested people do not take into account the loss of benefits to community health when they transact outside the community. Equally problematic is when they rely overly on community support when they make individual decisions, staying too long within the community when the outside makes more sense. One situation where such incentives may be at work is when an important source of livelihood in the community is threatened by technological change or trade. A well-documented tragedy of the Industrial Revolution in England is the fate of the handloom weavers.22

The automation of spinning toward the end of the eighteenth century meant that there was much more yarn available to be woven. Automated power looms were only slowly being introduced, so there was strong demand for the labour of handloom weavers to weave the now abundantly available yarn into cloth. Unfortunately, the writing was on the wall – these jobs would be automated also. Indeed, because it was costly to let expensive power looms lie idle, the handloom weavers were already the first to be deprived of work when business slowed. Nevertheless, even as wages in handloom weaving fell as automation and the entry of workers created a labour surplus, the numbers joining the handloom weaving sector continued to increase. Eventually many ended up unemployed and destitute. Why did so many workers continue to stay in, or join, an industry that was so clearly doomed?

We will see such behavior again in modern United States. The explanation cannot be disassociated from community. Handloom weaving meant following the traditional family occupation, staying at home in the village with family and community close by, and enjoying all the benefits of community support. Changing jobs would mean moving to a dirty slum in a town and working in a hot, noisy factory. For the individual household that moved, this would have also meant foregoing the support the community could offer, and essentially tearing up all the implicit claims they had on it. Staying, even if the likelihood of job loss was high, was made less unpleasant by the prospect of community support.

As the entire handloom weaving industry collapsed, though, the weaver communities were severely weakened and unable to provide the support that was expected of them. Destitute unemployed weavers were forced to petition for public support from the government, which never came – in fact, the Poor Act in England was reformed in 1832 to tighten the conditions of eligibility for public relief.23 While it would not be fair to place the entire burden of this tragedy on the community, it is reasonable to conclude that the presence of the community can distort the decisions of its individual members. When trade and technological change affect many members of the community, their suboptimal individual decisions can end up dragging the community down with them as they place too much of a burden on it.

THE COSTS OF INSULAR COMMUNITIES

Communities through history have understood how detrimental the free and unconstrained choices of their members can be to community survival. For much of history, this did not matter because people had few alternatives, and change was slow. At times of great change, however, communities have had to react. Some of their actions may have made the communities much less useful in promoting social well-being.

Take, for example, the problem of excess outside choice that we discussed earlier. Most obviously, communities can prohibit or restrict contacts between their members and the outside, especially if such contacts can infuse new and uncomfortable ideas or make members more economically independent of the community. As we will see in the next chapter, feudalism was an example of enforced community, and was perpetuated by severe restrictions on what people could do.

Such restrictions are not imposed solely to protect the community, they also protect the powerful in the community against challenge and the community from desirable change. Ellen Barry of the New York Times followed the travails of a group of women from the Nats community in Meerut, a few miles from New Delhi.24 During the wedding season, the community men worked as musicians in wedding bands, but begging was the traditional off-season occupation for the community. As India started exporting buffalo meat in large quantities, some women started to work in a nearby meat-processing factory, and earned considerably more than their husbands. With the women contributing to family finances, and reducing the extortionate stranglehold of moneylenders, the male elders of the caste, some of whom not coincidentally were moneylenders, struck back. They decreed that the women should stop work, ostensibly so that they would not be exposed to the sexual advances of outside men.

The real reason, Barry surmised, was that the women’s earnings had begun to undermine the existing order. When some of the women refused to obey the decree, they were ostracised by the community. Of course, when community members want to break free, ostracism may have little punitive effect, so it was followed by violence. The women were forced to appeal to the police and the judiciary to protect them, as well as to ensure their constitutional right to work. In older India, neither would the job opportunity have arisen nor would the legal system be open to helping them. Markets and the state do open up the community, reducing the extent to which it can become oppressive.

In addition to remaining small to build relationships, the community may also need to remain small if it is to share information effectively.25 Apart from the costs of foregone growth, information sharing has its downsides. The community can be very intrusive and cloying, poking its nose in members’ private affairs. Gossip can be helpful in straightening out aberrant behavior, but it can also be mean, hurtful, and intolerant of deviance from age-old traditions. Transparency can highlight budding problems, but those in the community fishbowl, naked to the view of all, may be civil in public while hiding seething resentment. By comparison, the anonymity of the city can be liberating, even though it distances us from social relationships.

The pressure in some communities to stay small and only transact internally can also come at some cost to the broader system. Medieval Chinese master craftsmen typically found apprentices within the family or the close-knit clan. In contrast, the guild system in Europe allowed masters to take on apprentices from almost anywhere, and apprentices, on becoming masters, similarly could move to their hometowns to set up their workshops. According to economic historians de la Croix, Doepke, and Mokyr, a consequence of the looser guild structure in Europe was that technical knowledge was shared widely, improved upon, and shared again.26 In contrast, it remained relatively stagnant when confined within the clan in China. They argue that this can explain the vast improvements in Europe between 1500 and 1750 in a variety of technical areas, such as watchmaking, relative to China. It is a lesson that we will take to modern times when we examine firms and patent rights later in the book.

Communities may also try and hold together by overemphasising traditions as the source of the community’s strengths. In doing so, the community risks making members suspicious of the choices presented by the modern world, allowing them to become trapped by the past. This is particularly problematic in matters of science. Economic historian Joel Mokyr argues that a major spur to the scientific discoveries in the seventeenth century was the realisation that Aristotle’s scientific observations were often wrong.27 Equally energizing for scientific progress was the comfort that contemporary scientists like Galileo, Newton, and Leibnitz had extended the boundaries of knowledge far beyond what was contained in the ancient texts, and there was nothing extraordinary or eternal about the classics. This led scholars to challenge old knowledge in every area, breaking from their earlier conformism. In contrast, centres of Islamic learning, perhaps to promote the commonality and thus cohesiveness of historic Islamic thought in a rapidly expanding and disparate community, turned their gaze backward. Islamic scholars, whose predecessors had kept scientific knowledge alive and expanding during Europe’s Dark Ages, started studying older Islamic texts to uncover their eternal verities, and contributed little to the progress of science from the thirteenth century onward.

CONCLUSION

Although communities can be supportive, they are effective in special circumstances. Either community members are socialised to be concerned about the greater utility of the community and its members relative to their own – typically true of groups that grow up together or are ethnically homogenous – or the community needs some surplus value (what economists term ‘rents’) embedded in relationships for members to find cooperation worthwhile. As we saw with banking relationships, arguably the most important problem the community faces is the centrifugal pull of the outside on community members – the competition that emanates from the outside world erodes rents within the community. Ideally, the community would offset that centrifugal pull by the centripetal attraction of the warmth of its relationships and the noncontractual support it provides. Indeed, the point of inclusive localism, as we will see, is to create enough benefits through proximity that the community can afford to be inclusive. Nevertheless, the human desire to protect its valuable relationships and to create new ones by limiting competition and the pull of the outside, will be a recurrent theme throughout the book.