It is hard in these times to not reminisce the Austrian economists such as Friedrich Hayek and Ludwig von Mises. They warned of the perils of excessive state control of economies and the need to have decentralized markets that respond to local signals, aggregate demand and supply appropriately, and are not systematically injected with bias or noise by centralized interventions (including sustained monetary interventions by central banks).
When I read Raghuram Rajan’s latest book “The Third Pillar: How Markets and the State Leave the Community Behind”, in some ways I got to appreciate the tremendous depth of the thesis postulated by the Austrian economists. The book explains convincingly, in a scholarly manner as well with much humane touch, that when policy control in economies becomes unbalanced towards the center, efficient properties of markets end up being compromised too, either by few large incumbents extracting rents via markets or by ill-informed distortions through central planning; even more devastatingly, features that bind local communities together – such as informal lending, small and medium-sized enterprises, medical support for elderly and those at risk – get eroded, leading to much social discontent and an affinity for populist leaders regardless of the suitability of their long-run plans to address the underlying distortions. In turn, the global economic and social order might end up at even greater risk under such misguided populism, the book contends.
I have been a big fan of Raghuram Rajan’s earlier book, “Fault Lines,” that was released post the global financial crisis. It had the novel insight that few commentators then had – that the global financial crisis might have had its roots in the displacement of manufacturing jobs in the developed economies; the pursuit of sustained global imbalances by export-oriented economies; the offering of subsidized housing credit and fueling of asset-price bubbles by banks, government-owned enterprises and central banks in the developed economies; and, the spectacular collapse of the resulting house of debt like a heap of cards during 2007-08. The book had presciently highlighted that if short-term fixes are adopted to addressing the root cause, there could be grave implications for the next decade.
“The Third Pillar” reinforces and recognizes the playing out of this concern over the past decade, with what I find a highly unusual but significant extension of the thinking of the Austrian economists – that imbalance towards centralization via the state and the markets has hit at the core of what glues our communities together and made these institutions distant from whom they were designed to serve in the first place. The book gives a historical perspective on evolution of each of the three pillars – the state, the markets, and the community; lays out the disturbing recent trends; and, proposes several thoughtful solutions to restore normalcy.
As the key point of the book is that the state and the markets are necessary for healthy and sustained economic growth, but need to maintain balance with the community at a local level rather than disenfranchising it, the solutions also apply to all three pillars – ceding of certain powers by the state, reorientation of the markets and corporations to a broader stakeholder view, and empowerment of the community. It is possible that in steady state, not all of these need to be undertaken together; for example, ceding of powers by the state could help keep markets straight and narrow on what they do best such as efficient allocation of resources in the economy and creative destruction that leads to innovative growth, and by so doing, the community need not get marginalized by a few large players in the economy. Nevertheless, given that we need to transition to the steady state, the book’s solutions need to all be given serious consideration, in my view.
In “Fault Lines” too, Raghuram Rajan paid much attention to the role of information technology in propelling our standards of living but simultaneously displacing jobs; there too, he stressed that the most robust long-term solution might be education and skilling since these have the potential to equalize opportunity and that keeps democracy and capitalism both strong as well as balanced. “The Third Pillar” covers much more breadth, helping the reader relate to deserted or dismantling townships that were thriving just a few decades back but are now saddled with crime, drugs, and unemployment; to the re-emergence of nationalism with the familiar themes of immigration and trade staging a comeback as convenient villains; and, to the risk that Hayek called “the road to serfdom” from treading down the path of imbalance towards greater and greater centralized or state control.
In the end, sound normative economic theory of the state implies that it should focus on the dispensation of public goods that markets cannot provide so as to enable individuals and the community to grow and thrive; the state should at the same time allow markets to remain competitive and efficient in their provision of private or non-public goods. To me, this comes through as a core message of the book, along with the necessity for community champions to arise and to be celebrated as a decentralized form of leadership that can propel the global growth engine sustainably forward.
“The Third Pillar” is beautifully crafted; it reflects the many moods of optimism as well as anxiety that Raghuram Rajan must have experienced during the craft; it inspires (“I hope this book stirs your blood”, he writes) in pushing for better economics as a way to secure and maintain global peace; it engages at a personal level with examples of communities that have gone through the travails but are beginning to rise; and, it covers developments across the globe, both microscopically as well as with a 35,000 feet perspective. You may or may not agree with all of its diagnosis and all of its proposals, but a good author’s or artist’s job is not to solve every problem – it is to make you see things in a way you had not seen before, to get you to reflect deeply, and to convince you to act responsibly. “The Third Pillar” does all of this and much more. Go, read it, I say.
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- Reviewed in the United States on April 15, 2019
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- CONSUELOReviewed in Mexico on August 14, 2020
Enjoyable reading that makes us reconsider our old ideas.
