Raghuram, Rajan. The Third Pillar. How Markets and the State Leave the Community Behind. Penguin. New York. ISBN: 9780525558330

The decline of modern society has been a topic of conversation and discussion over the last 70 years or so. Every so often, a public intellectual will publish some book decrying the decline of community and offering some prescription to fix it. Rajan Raghuram’s book is another contribution to this genre, but unlike other works it is one of erudition and develops concrete proposals to address societal issues. Despite numerous limitations, it should be read by business professors. What is noteworthy is not the diagnosis or the recommendation but rather its authorship by a finance professor who recognizes the limitations of both the market and the government. A strength of this book is its recognition that nationalists and populists are correct in some of their diagnoses. Unlike other elite intellectuals, Rajan writes with empathy and understanding. Although critical of Trump, Sanders and other populists, Rajan notes that these politicians have legitimate concerns and that we need to address inequality. However, he also notes that their nationalistic solutions are doomed to fail because their policies need to resonate with their followers, a precondition that makes their solutions an impossibility. Although he does not use the term rent-seeking, he notes that the “economic game” is rigged for some. As a solution, he suggests providing communities with more power and allowing for inclusive participation at the local level. Rajan takes the reader for a long ride through history to explain how markets and national governments emerge and why communities disappear. Take welfare as an example. Poverty for Victorians was personal and localized. As the government got involved in welfare, it eliminated the personal aspect of the relationship and promoted large bureaucracies that distanced administrators from welfare users. A trade-off thus developed between an increase in funding and a decrease in judgement and also responsibility. Rajan thus wants to assign more power to local authorities, notably in educational policy. Though worth a read, the book has real limitations. This is a sociology book written by a finance professor. While there are some real insights here, the finance perspective consistently trumps the sociological ones. For example, Rajan criticizes the college degree requirement of certain jobs. He is correct that much of this is signaling. But businesses do need college degrees to assess important job characteristics, such as intelligence and personality, because of the difficulty in assessing these traits directly. He also fails to recognize the social benefits of going to university. A college education not only allows people to signal their abilities but also provides them with lifelong social contacts and friends. Surprisingly, Rajan has written a book on the interface between economy and society without ever citing or discussing the works of Mark Granovetter, an omission akin to writing a macroeconomics book without a reference to Keynes. Moreover, when he does cite various writers, he gets their arguments wrong or ignores their contributions. For example, he cites Daniel Bell but fails to note that Bell predicted and diagnosed the decline of community in his works from the 1970s. Instead, he focuses on Bell’s comments on the Chinese Communist Party. Rajan also misstates key findings. For example, Charles Murray does not argue that residential sorting has occurred due to concerns over children; instead, he sees it as due to the academic sorting of individuals and the breakdown of communities. Murray notes that the average American’s values and interests are different from those of the elite American’s. Rajan even gets Milton Friedman’s writings on corporate social responsibility wrong, ignoring that Friedman opposed greed and supported business ethics. Rajan does not seem to understand what makes a …