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

by Raghuram G. Rajan

Society suffers when any of the pillars weakens or strengthens overly relative to the others. Too weak the markets and society becomes unproductive, too weak a democratic community and society tends toward crony capitalism, too weak the state and society turns fearful and apathetic. Conversely, too much market and society becomes inequitable, too much community and society becomes static, and too much state and society becomes authoritarian. A balance is essential!

Technological change has created that nirvana for the upper middle class, a meritocracy based on education and skills. Through the sorting of economic classes and the decline of the mixed community, however, it is also becoming a hereditary one, where only the children of the successful succeed.

If effected carefully, this decentralization will preserve the benefits of global markets while allowing people more of a sense of self-determination. Localism—in the sense of centering more powers, spending, and activities in the community—will be one way we will manage the disorienting tendencies of global markets and new technologies.

the ability to not keep count is the mark of true friendship.

the community and the market are two ends of a continuum.

in a small community, not only am I assured that those I help will stay committed to me, but I also know if I don’t help someone in deep trouble, my community may shrink and leave me worse off. In a small community, therefore, everyone has a stake in everyone else’s well-being. We are spoiled for choice as the community grows, which could hurt the community.

Since the debt contract is written down, it is not dependent on the frailty of human or community memory. Favors can be forgotten—debt cannot.

it is from the very harshness of the debt contract, and the lender’s ability and willingness to enforce it, that the borrower gets easy access to funds.

markets help constrain the state and protect property as part of the balance.

Studies show wider distribution of land, especially when also efficient, helped improve local governance.

Nevertheless, many of these countries reached similar points—a constitutionally limited state with generally competitive markets.

Smith believed the government had only three essential duties: “First, the duty of protecting the society from . . . invasion of other independent societies; secondly, the duty of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, . . . and, thirdly, the duty of erecting and maintaining certain public works, and certain public institutions, which it can never be for the interest of any individual, or small number of individuals to erect and maintain.”

The state and the market had grown together from the crumbling edifice of feudalism. The constitutional limitations on the state that we traced in the last chapter did not shrink the state. Instead it helped the state build out its military and fiscal capabilities as it gained access to finance. Once the state had created a framework to ensure security and protect property rights, the proponents of laissez-faire started questioning how much more it should do.

Fortunately, neither Rockefeller’s nor Marx’s visions—at their hearts, essentially a coming together of the state and markets pillars—was realized in the industrializing West. Democracy preserved market competition, and market competition preserved democracy.

the special role played by the community in keeping the state and markets apart.

While the nomenclatures vary, at the heart of such regimes is a pact between the cartelized markets and the state, leaving little room for economic or political competition, or the community.

populism, then and now, is typically a movement that emphasizes the purity of the common people and their simple values, the self-interested, corrupt, and undemocratic behavior of the elite, and the need for the people to organize against the elite to effect change.

As the state became constitutionally limited through Parliament, which was dominated by the propertied interests, these interests no longer needed feudal protections against it. Free of the fear of expropriation by the state, the markets flourished, but sometimes to the detriment of the community. The fight for suffrage was, in many ways, a fight by the community for some of its lost power, the power to influence the state, and thereby markets. The democratically empowered community was positioned to help restore the balance.