The MacMillan Center

Raghuram Rajan Gives Coca-Cola Lecture

RajanBig issues were at stake as Raghuram Rajan, author of the award-winning book Fault Lines: How Hidden Fractures Still Threaten the World Economy, and recently named chief economic adviser to the government of India, delivered the Coca-Cola World Fund at Yale Lecture to the university community. Titled “Are Capitalism and Democracy Failing Us? The Challenges Facing the Post-Crisis Industrial World,” the talk was held in Luce Hall on October 2.

“I believe that capitalism is stronger when there is a vibrant democracy, and democracy is stronger when there is a vibrant capitalism,” Rajan said. He argued for expanding opportunity for the middle class in order to save the “essential characteristics” of capitalism and democracy. He spent the first half of his lecture explaining how the middle class has been suffering due to technological innovations and globalization, especially post-crisis.

To explain the increasing gap between the upper and lower classes, Rajan cited Marc Andreessen, the founder of Netscape. “The world is being increasingly divided into people who tell a computer what to do and people whom the computer tells what to do,” he quoted, only half-jokingly. He then showed how even education–the “big equalizer,” as he called it–is now exacerbating the bifurcation between the rich and everyone else. As this gap increases, more and more Americans feel left out, he said, which threatens both capitalism and democracy.

Politicians and policy makers tried to respond to this inequality in the short run through expanding credit to people. But that backfired, Rajan said. Coupled with deregulation and a lack of skill building, this immense expansion of credit played a big part in causing the 2008 financial crisis. “We didn’t have a failure of capitalism but we had a failure to provide the things that capitalism needs: reasonable regulation but also a nurturing of the skill base of the economy so they can take advantage of capitalism,” he said. It wasn't the fault of the elite, he explained, but the fault of short-term populist policies that were designed to assuage pain. He added that in the long term, there is no shortcut: Education and skill building are crucial to get those who are behind back into the game.

If we don’t get the people who are behind back–if the masses don't see the opportunity in the globalized capitalist system–at some point “they are going to start protesting,” Rajan explained, ending on a somber note. “It seems to me untenable that any democratic society can maintain high levels of inequality without the pushback from it. Eventually, the social contract breaks down and then democracy itself gets delegitimized.”

The Coca-Cola World Fund at Yale was established in 1992 to support intersecting endeavors among specialists in international relations, international law, and the management of international enterprises and organizations. Previous lecturers have included Michael Doyle, Senator Gary Hart, Tom Friedman, Nicholas Kristof, Luis Moreno-Ocampo, Senator Sam Nunn, Sadako Ogata, Samantha Power, and Mary Robinson.