The Third Pillar | Raghuram G. Rajan

Summary of: The Third Pillar: How Markets and the State Leave the Community Behind
By: Raghuram G. Rajan

Introduction

Welcome to the world of ‘The Third Pillar: How Markets and the State Leave the Community Behind,’ a thought-provoking book by Raghuram G. Rajan that explores the intricacies of medieval European societies and highlights the complex relationships between state, market, and community. Journey through the fascinating ages of nation-state formation, the rise and fall of markets, technological innovation, and the impact of globalization on today’s economies. Discover the concept of ‘inclusive localism’ as a potential solution to rebalancing the power dynamics between the three pillars and fostering a more equitable society for all.

The Rise of Nation States

In medieval Europe, self-governing manors were owned by noble families, and peasants paid taxes in exchange for permission to work on part of the land. The manors were governed by lords who ensured justice and settled disputes. An important aspect of this social arrangement was that the Church prohibited usury, thus cementing the sense of community within the manors. However, the development of technology such as the siege cannon changed the rules of the game and created a need for funding a large army and defensive structures. As a result, rulers began to combine their estates, leading to the rise of nation states. These states eventually became so powerful that they eclipsed the Church, and monarchs ruled a unified people and levied taxes on the gentry to fund expensive wars.

The Rise and Fall of the Market

The consolidation of nation-states at the end of the fifteenth century marked the Golden Age of the state. It was the period when monarchs were happy with the commercially minded gentry acquiring unproductive land, leading to higher tax revenues and greater freedom for the new class. The Glorious Revolution of 1688 made the gentry more powerful by deposing King James II and replacing him with a more pliant monarch. The market then became central to European nations, praised by philosophers such as Adam Smith in his book The Wealth of Nations. But, the late nineteenth-century “robber barons” in America abused these newfound freedoms and provoked a public backlash. Rockefeller, an industrialist, became the world’s richest man by eliminating competition to his oil-refining business by cartels, leading to legislators withdrawing his main company’s charter. As poorly paid workers demanded better representation, most Western countries had expanded the right to vote to male workers by the early twentieth century, returning the community pillar to the forefront of social and economic life.

The Rise and Fall of Western Economies

Despite the free market’s resilience, the Great Depression led to anti-market measures surrounding rampant capitalism. The outbreak of World War II and the subsequent postwar era fostered unparalleled economic growth, allowing governments to establish welfare states and welcome immigrants. Nevertheless, the 1960s brought economic instability, a problem that deregulation and privatization of state-owned enterprises aimed to solve. Governments clashed with unions in the UK and the US, leading to the market’s preeminence. However, this shift wasn’t beneficial for communities.

Rise of Shareholder Value

The concept of maximizing shareholder value gained prominence in the 1980s, leading to a shift in focus from contributing to society to increasing profits. This viewpoint was popularized by economists like Milton Friedman, who believed that the sole responsibility of businesses was to boost share value and profitability. This approach led to greater efficiency but also resulted in widening pay gaps and job insecurity. The rise of technological innovation further fueled a winner-takes-most economy, benefitting a select few while smaller musicians and businesses struggled to compete.

The Winners and Losers of Technological Innovation

The labor market has significantly transformed due to technological advancements. While these changes have eliminated established jobs, they have created new positions. However, there is an alarming disparity between the winners and losers in the workforce. Automation has decimated menial jobs, causing job losses for less skilled workers but creating new opportunities for niche specialists. Unfortunately, the workers losing their jobs to automation are not equipped to compete with highly educated and globally mobile labor markets. Moreover, residential sorting has exacerbated the inequalities in the workforce. Affluent families seek high-achieving schools, driving up property prices and driving out poorer families. This social stratification has fueled populist movements, such as the Tea Party in the US and Brexit in the UK. The book explores the impact of these changes and highlights the political and social consequences.

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