In this ambitious but flawed book, University of Chicago economist Rajan (I Do What I Do) rigorously argues the importance of local communities as one of the three pillars, along with the state and markets, supporting global economies. Rajan impressively builds the foundation for his view of society in a fleet history of economic development that tracks the development of mostly Western economies from the earliest prohibitions on usury to the development of the 20th-century Progressive movement. The historic survey and analysis are the strengths of Rajan’s work. The book falters when presenting potential paths to reasserting communities’ role as equal player alongside markets and the state, including a dramatic rethinking of educational systems and the decentralizing of governmental power. Rajan focuses on the benefits of change and does not seriously address the obstacles to implementing the changes he recommends. Though Rajan’s writing can stray into the academic, it is at times pithy (“Democracy preserved market competition, and market competition preserved democracy”), and he makes complex economic principles more accessible in brief end-of-chapter summaries. Rajan’s view of community makes sense, but the book undermines its arguments by failing to acknowledge that communities are not always willing to collectively act in their own best interest. This work may be imperfect, but it’s insightful and thought-provoking. (Mar.)
Capitalism builds private fortunes—often at the expense of the polity.
Communities—tribes, neighborhoods, and kindred social structures—are the basis of human commerce and the marketplace. Yet, writes Rajan (I Do What I Do, 2017, etc.), former chief economist and director of research at the International Monetary Fund, markets and the state alike have assumed many of the roles of traditional communities. By way of example, he writes that whereas in years past, we might have taken an auto-less neighbor to the grocery store, "today, she orders her groceries online." The insistence on credentialing is one cause, with licensed professionals dominating many services that were once done within communities. While there are reasons of liability and public health at play, Rajan notes that the one-off transactions of today do not have the same network-building value as the repetitive, within-community transactions of old; "only individual interests matter, and they have to be met transaction by transaction." This zero-sum economic scenario is especially prevalent in poor communities, but it is not inevitable—though it has a long historical basis in the replacement by modern structures of capitalism for the "reciprocal feudal obligation" of the pre-capitalist era. Strong communities, argues the author, can promote democracy and contain crony capitalism and corruption, just as healthy markets can contain the authoritarian impulses of the state. In that regard, democracy, capitalism, and community need not be mutually exclusive propositions even if the modern American emphasis on the market has produced profound inequalities that might have been tempered "by sensible government regulation." Inequality yields radical populism, which yields authoritarianism, all, again, working against community. Rajan is sometimes repetitive, but his emphases seem well-placed, especially because we can see so much of his argument playing out in daily life, with private interests ascendant and the public good untended.
A welcome survey of a big-picture problem: Rajan proposes a rebalancing to be brought about by decentralized politics, diverse immigration, and other measures that, though controversial, certainly merit discussion.
A Fareed Zakaria GPS Book of the Week
“Compelling . . . urges economists to recognize a blind spot. The places where people grow up, live and work are not simply agglomerations of economic activity. They shape people’s identities . . . Having been insufficiently mindful of this over the past few decades, business and government leaders may have little option but to brace themselves for frustrated communities demanding change.” —The Economist
“An important and timely new book . . . The Third Pillar represents a new departure into grand social history, which in its breadth often echoes big-picture theorists such as Barrington Moore and Francis Fukuyama and their attempts to tease apart the long-term tensions between capitalism and democracy.” —Financial Times
“The Third Pillar is an important contribution to understanding why, a decade after the crisis, the world’s politics and economics remain so brittle.” —Sunday Times
“Insightful and impressive . . . Mr. Rajan, a former Governor of the Reserve Bank of India, is a high priest of financial economics and central banking. His decision to champion county craft fairs and garbage collection is all the more compelling because it is unexpected. . . . And as local governments get to work, they could certainly use the help of more thinkers of Mr. Rajan’s caliber.” —Edward Glaeser, The Wall Street Journal
“The Third Pillar is a must read for everyone seeking a way to preserve democracy as we’ve known it. In Rajan’s brilliant new perspective, successful democracies require balance between competitive markets, honest governments, and healthy, local communities. But our communities have been ravaged by globalization and ICT. Restoration of that third pillar is therefore the most essential task facing policymakers today.” —Janet Yellen, Distinguished Fellow in Residence, Brookings Institution, and Chair of the Board of Governors of the Federal Reserve 2014-2018
“Rather suddenly, capitalism is visibly sick . . . 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.” —Angus Deaton, 2015 Nobel Prize winner in Economic Sciences
“Raghuram Rajan has done it again. Fresh, insightful and engaging, The Third Pillar offers a brilliant reckoning with one of today’s most important and potentially crippling challenges. He does more than analyze the unbalance that has developed among the three pillars that support society; he also tells us what’s needed to shift our prospects in favor of the exciting upside of technological progress that empowers, enables and enriches the many; and away from political anger, alienation and political radicalization. His clear and compelling case goes well beyond protecting the vulnerable. It’s also, critically, about enhancing the whole.” —Mohamed El-Erian, author of When Markets Collide and The Only Game in Town
“Insightful and thought-provoking.” —Publishers Weekly
“A welcome survey of a big-picture problem: Rajan proposes a rebalancing to be brought about by decentralized politics, diverse immigration, and other measures that, though controversial, certainly merit discussion.” —Kirkus Reviews
“My parents lived through the Great Depression, the rise of Fascism, and World War II. I thought I was brought up in a world organized in a fundamentally different way. I was wrong. We all need to start thinking about this issue right now and this book is a place to begin.” —James A. Robinson, Professor, University of Chicago, co-author of Why Nations Fail
“Few economists span the worlds of policy and scholarship with such distinction as Raghu Rajan, and fewer still have been so consistently right about the wrong turns the world economy has taken. In his latest book, Rajan reminds us of the importance of local communities—the social ties that bind those who live in close geographical proximity. We need to strike a balance not just between state and market, he argues, but also between these two and community. Rajan presents a bold, original vision that significantly advances our contemporary debate on the ills of democracies and moves it onto new terrain.” —Dani Rodrik, Professor, Harvard University, author of The Globalization Paradox
“A remarkably original and insightful take on the evolution, foundations and future of capitalism. Sweeping in historical perspective, Rajan argues convincingly that the conventional dichotomy between the state and markets misses the critical role of communities—the third pillar—in economic and social development. As a result, both progressives who favor a bigger and more centralized state, and conservatives, who prize market freedom, both miss a critical part of the recipe for a more prosperous and balanced society. A landmark treatise of profound depth.” —Kenneth Rogoff, Professor, Harvard University, former IMF chief economist, author of The Curse of Cash and co-author of This Time It’s Different
“A strikingly insightful analysis of the penalties of neglecting the critically important role of community, by concentrating too much on the perceived efficacy of the markets and the state. Rajan brings out loudly and clearly why this imbalance needs urgent correction.” —Amartya Sen, Professor, Harvard University, 1998 Nobel Prize winner in Economic Sciences
The central argument in this latest work by Rajan (Katherine Dusak Miller Distinguished Service Professor of Finance, Univ. of Chicago Booth Sch. of Business;$SPACE$Fault Lines) is that three elements of society—state, market, and community—must work together in harmony in order for a country to prosper. Community can refer to a localized social group with a shared history or culture that has, to some extent, shared governance. The author contends that communities have been weakened over time and that there needs to be a rebalancing with renewed emphasis on sharing. He provides a history of the prominent growth in both state and market at the expense of community, and thoroughly discusses the effects of international trade and the development of information technology. Rajan is a defender of the post-World War II liberal democratic order and maintains that, in order to preserve it, it's necessary to decentralize government and reform the market. VERDICT Rajan's intriguing analyses and policy proposals, will appeal to those with an academic or professional interest in the effect of government and economy on the current social order.—Shmuel Ben-Gad, Gelman Lib., George Washington Univ., Washington, DC