• Once we understand that community matters, then it becomes clear why it is not enough for a country to experience strong economic growth… How that growth is distributed across communities in the country matters immensely.
  • What then is the source of today’s problems? In one word, imbalance! When the three pillars of society are appropriately balanced, society has the best chance of providing for the well-being of its people.
  • —Raghuram Rajan, The Third Pillar, page xvii.1

In his recent book, economist Raghuram Rajan argues that a well-balanced society rests on three pillars. One pillar is competitive markets. Another pillar is an effective but limited state (by which he means central government). A third pillar is vibrant local communities. The thesis of The Third Pillar is that contemporary society suffers a weakness in the third pillar of community.

Rajan takes care to spell out what he means by community. While there can be communities that are linked by kinship, occupation, or beliefs, he sees the traditional neighborhood as the most significant community.

In the preface, he introduces the community as a source of political action to constrain the other pillars. But Rajan soon moves beyond this narrow view of the value of communities.

  • 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. (page 5)

I would say that communities facilitate personal interactions and relationships. In contrast, markets and government facilitate impersonal transactions and relationships.

For more by Arnold Kling on specialization and trade, see the EconTalk podcast episode Arnold Kling on Specialization and Trade.

I would add that economic progress consists of increased specialization and trade. This inherently cuts into the role of communities, as households use markets to provide goods and services that in an isolated village would be provided by relatives, neighbors, or their own unpaid labor. As just one example, today fewer people mow their own lawns and fewer still pay the neighbor’s son to mow their lawn.

Markets work well when they are open, highly competitive, and specialized. But Rajan points out that communities require the opposite:

  • Community relationships are built when members have limited choices… Relationships, and thus communities, become more fragile when the available set of choices expands… (p. 15)
  • Relationships work better if partners interact over multiple activities—if one’s neighbor 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… As the community grows larger, therefore, we can call the professional midwife when the child is being born or the professional fire service when a cat is stuck up a tree, instead of our neighbor. (page 17)
“When people believe, correctly or not, that the state will take care of problems, they lose their motivation to mobilize as a community.”

Rajan points out that the state as well as the market can crowd out communities. When people believe, correctly or not, that the state will take care of problems, they lose their motivation to mobilize as a community.

Of course, community solidarity can shade into insularity. Community members may sacrifice the benefits of interacting with strangers or adopting new norms and practices.

  • 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. (page 18)

He adds,

  • Such restrictions are not imposed solely to protect the community, they also protect the powerful in the community. (page 19)

Reading this sentence made me think of the small community of scholars at the apex of the economics profession. Their norms and practices serve to preserve the power base of the economics departments of MIT, Harvard, and the University of Chicago, but there may be some intellectual sacrifice as a result. Rajan himself was famously scorned by the insular community of Federal Reserve economists when in 2005 he warned of weaknesses in the financial system.2

Rajan offers a historical narrative of the process by which states and markets superseded communities. In short, rulers found that by encouraging competition and protecting individual property, they could have stronger economies and greater tax revenues. Entrepreneurs and merchants found that by supporting the state they could in turn obtain greater freedom to pursue and retain profits.

Thus, Rajan sees an effective state and a competitive market as emerging in tandem. But there is a constant risk that the disease of cronyism will infect a modern society.

  • The private sector cannot be independent when it is largely reliant on the state for profits—when the state controls entry through regulation or licensing; elevates industry profits through protective tariffs; directs substantial military or government advertising contracts to favored firms; or turns a selective and convenient blind eye to the takeovers and predatory practices that lead to monopolization of industry. (page 108)

Rajan praises the Progressive movement for fighting against the monopolization and cronyism of the Gilded Age. But he faults Progressives for encouraging centralization and consolidation in education. In the nineteenth century,

  • The United States had a schooling system that was locally funded and locally controlled, free to all, nonsectarian, and increasingly professional. (page 121)

But this has changed.

  • Of the over two hundred thousand one-room schools in 1915, only twelve hundred were open in 1975. (page 124)

Population shifts and changes in the economics of schooling account for some of this. But Progressive attitudes also undermined local education.

  • Woodrow Wilson, who was president of Princeton University before he became president of the United States, stated while speaking of his students, “Our problem is not merely to help the students adjust themselves to world life. Our problem is to make them as unlike their fathers as we can.” Such attitudes could not help but diffuse through the professional educational bureaucracy… local control diminished further. The gap in views between parents and the professional bureaucracy widened. (page 125)

Rajan’s narrative of the past 75 years in the United States is roughly as follows: The federal government took on more of its proper responsibilities to provide social insurance. In the aftermath of the Second World War, markets expanded as the U.S. economy became more integrated internally and with the rest of the world. But by the 1970s, the U.S. government was trying to do too much and creating too many distortions and inefficiencies. By the early 1980s, policy makers were focused on increasing economic efficiency, and by deregulating they unleashed economic growth that was uneven, unequal, and unstable.

The contemporary legacy of this unbalanced economic growth includes many workers with poor job prospects. They are in turn embedded in a vicious cycle of weak communities failing to accumulate human capital, leading to worsening job prospects, even weaker communities, etc.

For a solution to this vicious cycle, Rajan envisions a central government that provides local communities with financial support but without the bureaucratic controls that come with current programs. He would like to see communities develop the leadership and initiative to implement local solutions to their problems.

Misunderstanding the Universal Basic Income

In discussions of the idea of a Universal Basic Income (UBI), many people, including some of its supporters, treat it as a policy aimed at supporting people who cannot or will not work. Unfortunately, Rajan reinforces this notion.

  • UBI essentially assumes that most people will not have a job, and there will be no point in them searching or one or attempting to retrain themselves since no new jobs will be possible. (page 323)

My analysis, which I believe is consistent with fairly basic economics, would say the opposite. Our existing income support programs, including food stamps, unemployment insurance, housing subsidies, and so on, all phase out as people return to work. If they were replaced by a UBI, the incentive to work would be greatly increased.3

For more on the Universal Basic Income [UBI] guarantee, see the EconTalk podcast episode Michael Munger on the Basic Income Guarantee.

Perhaps when it comes to encouraging work the UBI is too subtle, and some other policy, such as an employment subsidy—or simply a reduction in the payroll tax—would work better. But Rajan’s mis-characterization of the economics of a UBI is not helpful.

The Ideological Pillars

In my view, The Third Pillar suffers from an inadequate treatment of ideology in supporting or undermining community. Rajan pays no heed to the longstanding battles between the right and the left, in which the former sought to defend community and the latter treated it with contempt.

One can think of each of the three pillars as having an ideological base. The strongest support for the market comes from libertarian ideology. The strongest support for the state comes from progressive ideology. And I would argue that the strongest support for community comes from (socially) conservative ideology.

Rajan’s attitude toward populism is scornful, and perhaps properly so. But I was troubled by this remark:

  • Populism, at its core, is a cry for help, sheathed in a demand for respect. (page 217)

One could argue that a demand for respect is somewhat justified. Barack Obama spoke of people as “bitter, clinging to their guns and religions.” Hillary Clinton described them as “a basket of deplorables.” Other phrases that are hardly respectful include “toxic masculinity,” which carries further Gloria Steinem’s famous remark that “A woman needs a man like a fish needs a bicycle.”

Rajan’s own “cry for help” formulation is equally condescending and demeaning.

Also demeaning is his suggestion that laid-off manufacturing workers have the option,

  • … to go back to college to acquire or refresh their managerial, professional, or technical capabilities. This requires investment of time and money, but pays off eventually in higher salaries and greater job security.

This implies that there are people who don’t go back to college because they are lazy and/or impatient. But where is the evidence that the people whose jobs disappear actually do achieve higher job salaries and greater job security by going back to college?

Early in the book, Rajan writes,

  • Natural or economic catastrophes and technological progress are the big drivers of societal change. (page 41)

This materialist determinism afflicts many economists. I think that we are wiser if instead we allow for beliefs, especially shared beliefs, to act in their own right as a causal force in human affairs. Indeed, if ideas do not matter, then why bother writing this sort of book?

But later, Rajan allows for a causal role for ideology. He takes a dark view of the role played libertarianism in the 1980s.

  • Thatcher [the British Prime Minister during the 1980s] did not believe in the value of community, preferring individuals and families to navigate the world alone. She had a vision of an individualistic market economy, shepherded by a strong but limited state, with no real place for social structures, the community, that might balance the two…
  • The Conservative and Libertarian academics and intellectuals who had been preaching in the wilderness since the Depression did not expect to ever have the ear of policy makers. Now that they had it, they did not want to let it stray. Their reaction to the postwar state overreach was often ideological, and sometimes untainted by the realities of the world. (page 166)

Rajan thus reinforces the standard anti-market view of Progressives, focusing entirely on the conflict between the market and communities. He ignores a vast and deep conservative literature on the conflict between the state and communities. The names Robert Nisbet and Yuval Levin do not appear in the index to The Third Pillar.4

The conservative narrative for the breakdown of community does not rely on economic inequality as the sole driver. Conservatives emphasize family breakdown, and they blame Progressive ideology. They point out that liberalized divorce laws, single motherhood, and the decline of religious affiliation have contributed to social breakdown, particularly among lower-income households. (Rajan does cite Ross Douthat and Reihan Salam on the adverse impact of divorce on lower-income households.)

Conservatives also see the Progressive approach to fighting poverty as undermining families and community. A single woman with children and a low income is eligible for many government benefits. Should she marry a man who also earns a low annual salary, she will lose those benefits. For her, the economic value of marriage is much attenuated.

Finally, conservatives have long valued Tocqueville’s America of voluntary associations. They believe that when government takes over functions like social insurance and poverty relief from churches or voluntary service organizations, it takes away some of the purpose for affiliating with these institutions, causing them to lose membership and support. In short, conservatives see community-based institutions as having been enfeebled not by the market but by the state.

Rajan suggests,

  • … following the principle of subsidiarity strictly—powers should stay at the most decentralized level consistent with their effective use. Empowerment will force each one to take some responsibility, and make it harder to succumb to apathy or finger pointing. It will allow groups the possibility of maintaining identity, cultural continuity, and cohesiveness. (page 285)

But Rajan does not get into any specific implications for which decisions might be left to communities or which federal programs would be eliminated with responsibilities handed down to lower levels. Were he were to make any specific proposals, chances are that his allies would be limited to conservatives.

If Rajan is correct that in order to thrive, a society needs a balance of the three pillars of the market, the state, and the community, then I would argue that it needs a balance of the three intellectual bases of progressivism, conservativism, and libertarianism. The overwhelming dominance of progressives in academia strikes me as dangerous. The Raghuram Rajans of the world could benefit from more direct interaction with conservatives.


[1] Raghuram Rajan, The Third Pillar: How Markets and the State Leave Community Behind. Penguin Press, 2019.

[2] See Justin Lahart, “Mr. Rajan Was Unpopular (But Prescient) at Greenspan Party.” The Wall Street Journal, updated January 2, 2009.

[3] See my essay, “Universal Basic Income: The Basic Trade-offs”., August 21, 2018.

[4] See my essays: “Communities versus the State”, Library of Economics and Liberty, September 5, 2016, and “The Conservative Way Forward?” Library of Economics and Liberty, April 4, 2016.

*Arnold Kling has a Ph.D. in economics from the Massachusetts Institute of Technology. He is the author of several books, including Crisis of Abundance: Rethinking How We Pay for Health Care; Invisible Wealth: The Hidden Story of How Markets Work; Unchecked and Unbalanced: How the Discrepancy Between Knowledge and Power Caused the Financial Crisis and Threatens Democracy; and Specialization and Trade: A Re-introduction to Economics. He contributed to EconLog from January 2003 through August 2012.

Read more of what Arnold Kling’s been reading. For more book reviews and articles by Arnold Kling, see the Archive.