The Third Pillar

Title: The Third Pillar – How Markets and the State Leave the Community Behind

Author: Raghuram G Rajan

Publisher: HarperCollins India, 2019 (First)

ISBN: 9789353028398

Pages: 435

After a decade since the economic recession of 2007-08, the world economy is worried by trade wars and the prospect of slowdown in leading developing economies. A wholesome analysis of the development and future path of the world economy is hence warranted by circumstances. And there is nobody better suited to do it than Raghuram Rajan who is a financial bigwig serving the IMF and US academia. This engineer-turned-economist attempt a survey of human societies by identifying the three pillars on which every modern society rests. These are state, markets and community. All three have equal importance and the intricate balance between them is to be preserved if the society is to stave off breakdown. Of these, the community, which is the third pillar stands neglected in the larger scheme of things today. This huge book is Rajan’s diagnosis of what is wrong and his prescriptions for turning around.

Rajan presents a delightfully condensed version of the development of the three pillars of society. With the advent of the dark ages in Europe, trade diminished and centralised authority degenerated into numerous feudal manors and weak monarchs who linked them. As trade collapsed, exchange of money on a regular basis was no longer required and the church tightened the scriptural prohibition of usury. Centuries went by in this stagnant way. By the fourteenth century, trade picked up again with new routes opened up by the crusades. Moreover, the Black Death eliminated up to a third of the population. This in fact improved the fate of the survivors when real wages surged because of the manpower shortage. Money was essential for trade and the church liberalized usury restrictions or turned itself into a moneylender. Development of gunpowder and military technology made it economically unviable for small states to wage wars. This limitation forced them to consolidate by merger and acquisition of feudal units. Kings became powerful who kept the feudal lords under a tight leash. In principle, kings had unlimited power for taxing and appropriation of resources from his subjects. This was the pinnacle of state power. However, the monarchs found that some restrictions on their despotic power would be better in the long run. Parliaments came into being and taxation was slapped on the people only if accepted by the parliament which represented them. This limited monarchy assured the people of protection of their wealth and property if taxes were paid regularly and without arrears. This obviated the need for private militias and the monopoly of violence came to be rested on the state. By the late-eighteenth century, states assumed the fundamental characteristics we see in them today.

The development of the second pillar – markets – is a little more recent as the book suggests. Trade was a part of the lives of kingdoms and feudal lords, but the ideas of free competition and laissez faire appeared only in the eighteenth century. Capitalism and socialism saw markets as a tool to pave the way to their own ideological paradises. The socialist movement in Europe produced its communist offspring in 1917 in the Soviet Union. The markets were firmly under state control, and to be more precise, under party control. The great depression of 1929 was the greatest threat to capitalist order while Communism was still alive. The stock market crash and the recession which followed wiped away the livelihood and prosperity of millions in the Western world. The liberal governments had to reluctantly put in place measures to restrain competition in the market to ensure more equitable distribution of wealth. The theoretical background of the socialist tendencies of newly independent countries in the 1940s, especially India, is thus the 1929 recession. The post-World War boom helped mask the rising inefficiency of the system.

Rajan identifies many reasons for the definite shift away from state control of markets in the 1980s. After three decades of impressive performance, growth slowed in the 1970s. The oil embargo put in place by Arab states in protest against the pro-Israel stand of the West crippled economies in many quarters of the globe. A semblance of welfare state was standard fare in many countries that assumed a steady economic growth for the sustenance of the program. When growth withered, widespread social unrest followed. Clever politicians like China's Deng Xiaoping correctly identified that the time had come to free markets once again. Barriers to trade and procedural obstacles to entry of new businesses were scrapped in many parts of the world. India followed suit in 1991, twelve years after China made a start and it elicits no wonder to note that the size of China's economy at present is five times that of India. Capitalism had a sturdy road ahead through which its bandwagon rolled steadily forward. The essence of modern capitalism is the continued accumulation of wealth, not because of the pleasures it can by, or the material needs it can satisfy, but for its own sake. It was John Calvin who first provided moral legitimacy to capitalism in a world where avarice was a sin.

Almost half of the book is dedicated to define the third pillar, that is, community and to elucidate the ways to revive failing ones. Community contributes to our sense of who we are. A richer range of transactions can be undertaken within the community than would be possible if everything had to be contractual and strictly enforced by the law. The unfettered globalisation of the 1980s upset rural communities in the developed world. As companies crossed borders in search of cheap labour, production shifted to developing countries. Many semi-urban localities in the US witnessed closure of production facilities that couldn't withstand price competition with products coming from Asian countries. Civic infrastructure and cultural facilities broke down in those communities. The US maintained its lead in high technology and services which were very high up in the value chain. Members of the failed communities were not able to take up opportunities in this sector as their educational credentials were lower. Cheap foreign labour again cut them down in the form of highly qualified immigrants. This led to the growth of popular nationalism and the author levels some prescient warnings and arguments for not going down the way pointed out by the populists.

The latter half of the book is full of monotonous homilies on the way markets, state and community shall interact and exert mutual influence. The discussion is addressed towards the contemporary issues faced by developed economies. A few paragraphs that handle the hurdles on the forward path of India and China is surprisingly uninspiring irrespective of the author’s service as the Governor of India's Central Bank for three years and as an economic advisor to its finance minister. Rajan proposes inclusive localism as a panacea for all the problems faced by a developed country. This is essentially an inclusive nation that decentralizes many decisions to the local, physically proximate community. This concept has a strong correlation to the concept of Gandhiji’s Gram Swaraj (rule by village councils), though the book takes special care not to introduce Gandhi or other advocates of devolution of power even remotely. The book is structured in a textbook style with lots of headings and subheadings arranged in a hierarchical way.

Much of the book concerns with the idea of assigning a more prominent role for communities. Some are just musings or can even be intelligent speculation and nothing more. Many ideas flow out from sheer common sense and some others are mere platitudes such as statements like ‘the problem with too much easy money is that it tends to get wasted’ (p.346). It provides a very good description of American schooling which can be excelled only by pedagogical publications. Educators would find it very appealing. The sad part is the apathy shown to India and her growing concerns on the economic front. The fact that Rajan has mentally gone back to his American life is evident from his self-introduction in which he claims himself to be a professor of the University of Chicago, chief economist and head of research at IMF and adds as if an afterthought his stint as the administrator of India's Central Bank.

Population diversity is what Rajan prophesizes for developed economies as their populations age and prefers to reduce fertility rates. Many of the jobs will have to be undertaken by immigrants from developing countries. The population of the rich countries have no option other than prepare timely for the cultural shock of large scale immigration especially in culturally homogenous countries such as Japan. However, the treatment sometimes hints that it is the developed countries’ untransmutable destiny with an ominous ‘or else’ hovering in the air. The author’s suggestion that keeping out migrants might create a wider security problem if stateless youths, with little to lose, may take up arms and vent their anger against the unsympathetic world (p. 294) is plain blackmail. Moreover, he keeps silent on the jihadi proclivities of Asian immigrants which is the prime reason why local communities despise the entire immigrants.

The book is recommended.

Rating: 2 Star