The Third Pillar: Why strong communities make economic sense

The Third Pillar: The Revival of Community in a Polarized World

Author: Raghuram Rajan

ISBN-13: 978-0008276263

Publisher: William Collins

Guideline Price: £20

In 2005 a prominent economist warned of an approaching economic crisis. Raghuram Rajan, who then held the role of chief economist of the International Monetary Fund, was widely criticised for his comments. To describe him as prescient would be a dramatic understatement.

Only time will allow us to know whether his new book, The Third Pillar – The Revival of Community in a Polarized World, will demonstrate similar prescience.

In this work he contends that three pillars support society – the State, markets and community – and that an equilibrium must develop between all three to allow the preservation of liberal democracies.

This work departs from most political economy in moving beyond trade-offs between the roles of governments and markets. It acknowledges the most fundamental of connections, the tissue of exchange and connection between humans.

It opens by making the case for the value of community. As individuals face a future that is unknown, collective efforts yield more than solitary striving. The author writes: “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.”

Strong communities allow trust to flourish, in turn reducing friction and cost and allowing effective coordination between individuals. This is the “Third Pillar”. It must be renewed and strengthened to respond to technological and social change.

The history of the different pillars is impressively reviewed. States developed as monarchs assured their subjects that their rule and power would be constrained. This is why “the absolute monarchy... gave way to a state that obtained more capabilities after giving up its power to be arbitrary.” The setting of these boundaries enabled trade to flourish between individuals and states.

The history of the development of both State and market concludes with modern challenges. The accelerated growth of economies after the second World War funded the development of the welfare state and bigger governments.

If people have lost faith in their ability to compete in markets, if their communities continue to decline... popular resentment can turn to rage

This inevitably moderated. American growth has slowed from an average rate in the 1960s of 4.5 per cent to about 2 per cent in this century. Attempts to refuel this growth through the super-charged supply of credit led to the financial crisis. An earlier book by this author Fault Lines, published in 2010, remains the single best book on the roots of the crisis.

Inclusive localism

The analysis is strong in arguing that the capacities needed to flourish in this changed economy are distributed unequally. Those opportunities to develop the required emotional and intellectual skills are too often best available to families already in possession of these capacities.

These factors have helped lay the seeds for the discontents of many democracies. “These are dangerous times. If people have lost faith in their ability to compete in markets, if their communities continue to decline... popular resentment can turn to rage” is the stark summary of our present challenge.

Solutions are offered, centring on the theme of inclusive localism. More power should be devolved to local communities. Schools should be given more autonomy. Local governments could be assigned more powers.

The author argues for “bringing back the largely self-governing community as the locus of self-determination, identity, and cohesiveness, taking pressure off the nation to fulfil much of that role”.

This has a European resonance. The concept of subsidiarity emphasises that decisions must be made at the most local level possible.

Identity issues

The analysis is precise in definition, arguing for physically proximate communities, organised around a sense of place. This approach is shared with the recent works of other political scientists such as Paul Collier, in his work The Future of Capitalism.

But does this create new risks which could further fuel the very challenges that the author is concerned with?

First, overtly strengthening identity at a local level could undermine national institutions and the ties of citizenship. More darkly, a risk exists that this charged localism could fuse into an ethnic focus that might unite a community but threaten others.

Second, this policy is clear about reallocating power away from the national level. This weakens the scale that is intrinsic to the modern state. National projects stretch across and through communities. Public transport, vital utilities and health require national funding and coordination.

Finally, this may weaken the ability of citizens to mediate the consequences of global and disruptive change. The author acknowledges the need for the State to respond to the challenge of reforming markets. Inclusive localism is not up to that task. This is part of “responsible sovereignty”.

These are significant issues that the practical implementation of a local approach to national issues must address.

In his introduction, Rajan writes “I hope this book stirs your blood”. That is a tall order for any work of political economy. But it certainly stirs the mind.

Paschal Donohoe is the Minister for Finance and Public Expenditure and Reform