Finding Community In Finance

Review: 'The Third Pillar: How Markets and the State Leave the Community Behind' by Raghuram Rajan

Raghuram Rajan / Getty Images
• March 2, 2019 5:00 am


We didn't need Raghuram Rajan's new book to convince us that economics attracts some of the smartest people on the planet, although Rajan himself is a fine example of that fact. Currently a professor at the University of Chicago, he has served as governor of the Reserve Bank of India, chief economic adviser to India, and chief economist of the International Monetary Fund, while receiving along the way nearly every accolade granted to rising young economists.

Back in 2005, for example, Rajan warned that the new mortgage-backed instruments of financial innovation were putting the international economic order at risk. At the time, former Treasury secretary Lawrence Summers dismissed his warnings as the misguided natterings of a luddite, but the subsequent economic collapse and long recession would prove Rajan the better observer of market behavior. His 2010 book Fault Lines was denounced by the New York Times's Paul Krugman—is there a finer recommendation in economics?—as unknowingly adopting the "politically motivated myth" of the American Enterprise Institute. But Rajan's discussion seems mostly unexceptionable, arguing that the U.S. government's mortgage subsidies contributed significantly to the creation of the financial crisis. In "The True Lessons of the Recession," a 2012 follow-up article in Foreign Affairs, Rajan insisted that "The West can't borrow and spend its way to recovery."

His latest book, The Third Pillar, claims that the world's current economic condition proves that finance and government are insufficient vehicles for human flourishing. Markets and the state, Rajan points out, have essentially abandoned the idea of community, and despite the monetary gains of computer connectivity, we are paying a steep price—both sociologically and politically—for the loss of shared civic feeling at the local level.

Rajan is right, of course. Or right, at least, in principle. We didn't need The Third Pillar to remind us how clear-eyed economists can be, but the book does the job, proving that Raghuram Rajan is one of our few essential observers of the economic order, discerning the consequences of the flow of money around the world. Unfortunately, The Third Pillar also demonstrates how blind economists can be. Think of economics not as an intellectual discipline. Think of it instead as a cultural mechanism for identifying the world's smartest idiots.

Raghuram Rajan's particular blind spot is metaphysics and the existential reality of the things he hopes to promote. The Third Pillar wants to pose community as necessary for civilization. In the old metaphor of a three-legged stool, Rajan pictures the seat of culture resting on finance, government, and community. Each leg aids the others and yet opposes them, resisting their excesses. When government becomes too oppressive, finance takes its revenge as taxpayers flee and less-oppressed communities flourish. When finance becomes too powerful, communities grow angry, and government feels compelled to step in. And so on. Find "the right balance between them," Rajan writes, and "society prospers."

Right balance is our problem these days. Strong economic growth will always prove unstable if unameliorated by the benefits of community. National government will flutter between indifference and intrusion without the particularized knowledge that community provides. Rajan notes, for example, the curious fact that new businesses tend to find better start-up loans when their options are limited to only a few local banks. He lays out the evidence that suggests ranchers do better when disputes over fences and wandering livestock are handled with local cooperation rather than nationalized in actions by the police, written law, and distant civil courts. And from such examples in his opening chapters comes the conclusion that community succeeds because its apparent problems—offering only limited choices and narrow solutions—are in fact advantages. Community may work precisely because of these constrictions, which gives its members "confidence that they will stay mutually committed."

There are several well-worn paths that an author could follow from this point, including communitarianism, the Catholic social theory of subsidiarity, or even full-blown distributionism. And sometimes Rajan can sound as though he's channeling G.K. Chesterton around 1920, laying out the history in which insufficiently constrained nation states and insufficiently fettered finance mechanisms undid communities around the globe. In our much later time, Rajan sees—although his clarity about the point varies—that computer and cellphone connectivity fails to provide a sufficient substitute for real community.

The question, of course, is what then makes community real. What are its unavoidable characteristics? What are its minimal arrangements? What constitutes its essential being?

I have suggested elsewhere that shared grief is necessary: "The living give us crowds. The dead give us communities." A community without a graveyard is not a community. But even short of such descents into the metaphysics of political theory, any attempt to insist on the importance of community will require some way of identifying the key existential elements, the locatedness in place and time, that distinguishes, say, virtual communities online from real communities in the physical world.

And Rajan seems simply to lack whatever is necessary to identify community in this way. Readers will approach the book glad to find an economist praising community and fretting about the twin millstones of nation states and financial markets grinding down to chaff the shared experience of local human interaction. In the end, however, The Third Pillar proves a disappointment. Brilliant as he is, Rajan is blind to anything he can't see through his economic and political lenses. Community gets defined politically and economically in the book, which eventually reduces community to politics and economics—exactly what The Third Pillar says community is important because it is not. He ends up praising the fading of national borders, after chapters explaining the advantages of the homogenous communities destined to be destroyed by lack of border control.

And so, by the end of The Third Pillar, the idea of community decays into a vague set of voters. Rajan recognizes that the modern nation state is suffering a loss of density, its very fragility creating dangerous populist efforts to restore the loss. His "central concern," he notes, is "the passions that are unleashed when an imagined community like the nation fulfills the need for belonging that the neighborhood can no longer meet." But he nonetheless recommends ever greater powers granted to nation states—including powers to intrude into the internal operations of communities to demand the nationally demanded principle of inclusiveness that those communities will have difficulty surviving.

The idea of community started strongly in The Third Pillar as a support for culture, empowered to stop the destruction caused by state and market. But it proves only a whimper that things used to be better—at best an economic and political device, controlled by economics and politics, for fooling people into not acting on their cultural unhappiness.

Brilliant, of course. And stupid.