The Third Pillar by Raghuram Rajan Summary

The Third Pillar examines the interplay between markets, governments, and communities, arguing that modern societies suffer from an imbalance where markets and states overshadow local communities. Rajan traces this dynamic through history, linking today’s populist movements and inequality to weakened communities. He proposes “inclusive localism” to decentralize power and strengthen grassroots institutions as a corrective measure.

Policymakers, economists, and readers interested in socio-economic systems will find this book essential. It’s particularly relevant for those exploring solutions to inequality, globalization’s discontents, or the rise of populism. Rajan’s blend of historical analysis and policy recommendations offers actionable insights for reforming institutions.

Yes—Rajan provides a compelling framework to understand modern crises like stagnant wages, political polarization, and community decline. His interdisciplinary approach connects economic theory with sociological trends, making complex ideas accessible. Critics note he could advocate more aggressively for reducing state power, but the book remains a timely critique of institutional imbalances.

Rajan defines the three pillars as:

• Markets: Drivers of economic growth and innovation.
• State: Ensures rule of law and redistributes resources.
• Community: Provides social cohesion and grassroots accountability.

He argues that post-1980s hyper-globalization and tech advancements skewed power toward markets and states, eroding community resilience.

Rajan views populism as a backlash against communities marginalized by globalization and automation. When people feel economically abandoned and culturally disrespected, they turn to nationalist leaders promising restoration of dignity. This “cry for help” stems from the state-market duopoly neglecting localized needs.

Inclusive localism empowers communities through decentralization, granting them authority over education, infrastructure, and welfare programs. Rajan advocates subsidiarity—decisions made at the lowest feasible level—to rebuild trust and adaptability. However, he warns against insularity, stressing the need for inclusive policies that avoid exclusionary practices.

The ICT Revolution accelerated market globalization while automating jobs, disproportionately harming low-skilled workers. States expanded to manage fallout (e.g., welfare), further sidelining communities. Rajan suggests redirecting tech gains to fund community-driven upskilling and safety nets, preventing a “race to the bottom” in labor markets.

Some argue Rajan underestimates state overreach, offering tepid solutions like incremental decentralization instead of radical state rollback. Critics also note his reliance on corporate self-regulation and market-driven ethical fixes, which may perpetuate existing power imbalances.

Rajan links inequality to communities’ declining bargaining power. He proposes revitalizing local institutions to advocate for fair wages, worker retraining, and antitrust policies that curb monopolies. Strengthening community voices ensures markets serve broader social goals, not just efficiency.

The book analyzes medieval guilds, post-plague labor reforms, and the Industrial Revolution to show how pillars rebalance after crises. For instance, the Black Death shifted power to workers, while the 2008 financial crisis exposed overreliance on market self-correction.

Unlike Fault Lines, which focused on macroeconomic risks, this book emphasizes socio-political foundations of economic systems. It aligns with his RBI governance advocating financial inclusion but expands into institutional design and community agency.

With AI disrupting labor markets and populism reshaping democracies, Rajan’s warnings about pillar imbalances feel prescient. His ideas inform debates on regulating tech giants, revitalizing rural economies, and preventing authoritarian backlash—a toolkit for today’s policymakers.