Review: The Third Pillar by Raghuram Rajan

This review first appeared in Economic Affairs, February 2020

The British vote to leave the European Union and the election of US President Donald Trump in 2016 were shocks which many have yet to recover from. Some continue to fight against both. Only now are we starting to grope, seriously, towards an understanding of why these events occurred. The Third Pillar by the University of Chicago’s Raghuram Rajan is one of the better attempts.

The three pillars Rajan refers to are, broadly, the state, the market, and the community. More or less, these refer to what you would expect. The first part of the book outlines how each pillar evolved – community, state, then market – and how they have fluctuated in relative importance over time. So, the emerging power of the market following the Industrial Revolution is succeeded in the twentieth century by the increasing power of the state, in the form of increased social spending and a responsibility for macroeconomic management. This was replaced, from the 1970s onwards, by a renewed dominance of the market, exemplified by the reigns of Thatcher and Reagan and the collapse of communism, which was the practice of untrammelled state power.

This is a deft bit of triangulation. The hollowing out of the community by the state echoes Marvin Olasky’s in The Tragedy of American Compassion (2008) and the triumph of market over community that of Michael Sandel in What Money Can’t Buy (2012). Overall, there is a large debt owed to Dani Rodrik.

The loser in this three‐way tussle has been the community. First, the state assumed responsibility for things such as education and welfare which had, previously, been provided by the community via such vehicles as friendly societies and local schools. These were replaced by the welfare state, social security, comprehensive schools, and the Department of Education. Then the resurgent market saw manufacturing jobs offshored. Finally, large‐scale immigration has eroded social bonds, particularly at the bottom of the socio‐economic ladder. The effect, Rajan argues, has been to leave adrift a large portion of the old working class. This has become susceptible to ‘populist nationalism’ as purveyed by Donald Trump and, presumably, by Nigel Farage, leader of the UK’s Brexit Party.

Rajan deserves credit for tackling this last point. He notes the importance of relatively homogeneous populations for the development and maintenance of social capital. This will, no doubt, invite all sorts of charges, and Rajan is braver than most writers in acknowledging the issue.

While there is much to stimulate here, both agreement and disagreement, the book is on much weaker ground when it moves to offering solutions.

Rajan’s proposed alternative to populist nationalism is something called ‘inclusive localism’. This seems to amount to a strengthening of local government, even an extension of federalism. In each county or canton, people will be free to adopt policies which suit them, allowing them to satisfy policy preferences which might get nowhere if they needed to be enacted at a national, or even a supranational, level. So “If some in the majority genuinely fear being swamped culturally, inclusive localism gives them a way to maintain their culture through monocultural communities …” (p. 286).

The obvious problem here is, as Rajan acknowledges, that the country might end up “dotted with segregated communities, each with its own race, national origin, and cultural traditions, and totally barred to outsiders” (p. 299). Viewing this as undesirable, Rajan goes on:

We must make sure that this is not the default outcome, not by forcing people to mix, but by emphasizing – if necessary, through laws – that in a nation, all communities are open to flows of people, goods, services, capital, and ideas, both in and out. (p. 299)

If, under inclusive localism, “all communities are open to flows of people, goods, services, capital, and ideas, both in and out”, how can it also give these same communities “a way to maintain their culture through monocultural communities”?

Practically, it isn’t clear how this will do much to lance the boil of populist nationalism. As an example of a community competency, Rajan offers retail zoning, saying “Communities should have the power to determine the nature of local production (such as the production of retail services through big‐box or small mom‐and‐pop stores) … (p. 306). In fact, many communities already have this power. Neither is it clear that the surge in populist nationalism is driven to any great extent by dissatisfaction with retail zoning laws.

But the community shouldn’t have control over residential zoning laws. That, Rajan argues, would exacerbate the kind of economic sorting which has left the old working class behind. The book smashes against this rock. There is a tension between ‘inclusiveness’ and ‘localism’ as Rajan defines each term. He makes it clear that when these clash ‘inclusiveness’ will win: “… in the trade‐off between inclusion and localism, inclusion should be given more weight” (p. 308).

So, to fight populist nationalism, we devolve power to communities to allow the people there to express policy preferences which might not pass at a higher level, but if these policy preferences deviate too much from what prevails at the higher level, they will be overridden. A lot of verbiage is expended attempting to set out rules for this ‘trade‐off’, but not to any great effect. Too often, Rajan descends into waffle, reading like the first draft of one of the more vacuous speeches of Tony Blair, the UK’s former prime minister. It is hard to see how this offers any protection against populist nationalism beyond what we have now. It is just lip service.

The book’s diagnosis contains much that is worthwhile and provocative. Its prescriptions read all too much as the consensus rebadged. Having concluded that this consensus is responsible for much of the populist nationalist ailment he seeks to cure, it is disappointing that Rajan’s remedy is barely there. The book is a good starting point for a discussion of our social ills, but much more work needs to be done.