An Unpersuasive Book with Some Encouraging Insights.

• Author: Henderson, David R.

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

By Raguran Rajan

434 pp.; Penguin Press, 2019

In his latest book, Raghuram Rajan, a chaired professor of finance at the University of Chicago's Booth School of Business and former governor of the Reserve Bank of India, advocates what he calls "inclusive localism." His basic idea is that there are three pillars of a good and productive society: the market, the state, and the community. He argues that the community, which is the third pillar, nicely balances the excesses of both the free market and the state.

Although there is a strong case to be made for the importance of the community, Rajan does not make it nearly as well as he could have. The Third Pillar contains many insights and important facts, but his argument for inclusive localism is halfhearted. He concedes far too much to the current large state apparatus and, in doing so, implicitly accepts that communities will be weak. Again and again in the book, when contemplating how to make local communities more powerful relative to federal governments, he fails to call for a massive reduction in state power. At times he accepts the state apparatus because he believes, often unjustifiably, in its goodness and effectiveness, and at times he accepts it because he seems to have a status quo bias.

Moreover, although Rajan has better than the median economist's understanding of the free market, he misses opportunities to point out how the market would straightforwardly solve some of the dilemmas he presents. He also gets some important history wrong. And he makes too weak a case for free trade and favors ending child labor even in third-world countries where children and their families desperately need them to work.

The state replaces the market I In explaining the growth of national governments' power over the economy in the late 19th century and early 20th century, Rajan focuses on Germany and Britain. In the 1880s, he notes, German chancellor Otto Von Bismarck introduced government-financed insurance for sickness, industrial accidents, and disability and old age. Between 1906 and 1911, the British Liberal government implemented old-age pensions, set minimum wages, and introduced government-financed unemployment and health insurance. Rajan grants that these German and British measures "did diminish the role of the community," but nowhere in a book touting the importance of the community does he call for repeal of any of those measures. In discussing the U.S. Social Security program, for example, he advocates sensible reforms such as increasing the age of eligibility and reducing cost-of-living adjustments for Social Security, but he makes clear that those measures are intended to deal with the exploding federal debt and to keep Social Security afloat.

In a chapter titled "Responsible Sovereignty," he struggles with a dilemma that a fairly unobtrusive regulation would solve. He points out that U.S. chicken farmers crowd chickens together, whereas chicken farms...