Book Review | The Third Pillar

An Economist’s Argument for Preserving Communities

How Markets and the State Leave the Community Behind
By Raghuram Rajan

Review By Oren Cass
February 27, 2019 | The New York Times

As a former central banker, Rajan gives special attention to the community’s role in financial markets and goes so far as to defend long-ago prohibitions on usury. Neighbors helping neighbors represents a form of saving, creating a reciprocal obligation to be repaid when the tables inevitably turn. Small, young firms tend to get more and better loans when fewer banks are present, perhaps because less competition means a higher likelihood of retaining a firm’s business as it grows. This leads to a crucial, more generalizable point: “Relationships seem to be stronger when the members of the community have fewer alternatives, for it gives the members confidence that they will stay mutually committed.”

The modern market’s greater abundance of choice is not without trade-offs.

These threads dissolve in the hundreds of pages of vaguely sketched economic history that follow. While ably describing how both a growing market and a growing state have eroded the community’s relevance and vitality over time, Rajan gradually redefines the third pillar from “communities whose members live in proximity” to merely democracy or the “voting public.” An intrinsically valuable and varied local institution congeals into a homogeneous tool for ensuring that the market and state behave…[More]

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