The Third Pillar

How can societies remain prosperous, fair, and stable amid rapid technological and political change? Economist Raghuram Rajan argues that every successful society stands on three interconnected pillars: the state, the market, and the community. The state provides security, the rule of law, and essential public goods; markets generate opportunity and innovation; and the community grounds people in relationships, trust, and identity. When these pillars are balanced, societies thrive. When one dominates, the structure wobbles.

Rajan’s thesis is at once historical and prescriptive. He shows how communities once mediated between individuals and institutions, but waves of industrialization, globalization, and government centralization eroded their capacity. The result is a fraying of social bonds, populist anger, and loss of belonging. His remedy—what he calls inclusive localism—invites you to restore power to local communities without abandoning open markets or capable states.

How the three pillars evolved

Medieval Europe was organized around tight community networks—villages, guilds, and the Church. Markets were limited, and the state was weak. As trade revived, the introduction of enforceable debt contracts allowed lending across social boundaries and gave rise to impersonal markets. Over time, property rights, contract law, and restrained monarchies created the limited state—the framework markets needed to grow. England’s Glorious Revolution and institutions such as the Bank of England illustrate how states gained power by limiting arbitrariness and earning public trust.

Industrialization and rising global trade then expanded market power further. But when competition led to monopolies—from Rockefeller’s Standard Oil to modern platform champions—democratic movements and regulatory reforms stepped in. Throughout history, markets and states alternately checked and reinforced each other. Community, however, gradually lost influence, as welfare systems and bureaucracies displaced local initiative, and global corporations disrupted geographic ties.

When imbalance sets in

The twentieth century tilted power toward the state after the Great Depression and two world wars. Centralized welfare programs and national safety nets stabilized democracies but crowded out community engagement. Then, after the 1970s oil shocks and fiscal strain, neoliberal deregulation and shareholder-value ideologies swung the pendulum toward markets. In both cases, communities were weakened—first by dependence, then by neglect.

As technology and trade accelerated in the late twentieth and early twenty-first centuries, local economies and middle-skill jobs hollowed out. Many workers lost not only income but also role and esteem. The result, Rajan writes, is the social despair visible in rising deaths of despair and populist backlash. When market and state functions scale globally while the community remains local, the third pillar crumbles under the strain.

What revival looks like

To restore balance, Rajan prescribes inclusive localism: devolving decision-making to communities that can act effectively, while maintaining open national markets and civic cohesion. You see this in places like Chicago’s Pilsen neighborhood, where the Resurrection Project used faith-based organizing and partnerships with local businesses and schools to turn decline into renewal. The guiding logic is that local institutions—community banks, school boards, neighborhood councils—translate soft information into action better than distant agencies or impersonal markets.

Yet inclusive localism is not parochialism. Communities must stay open—to ideas, talent, and trade—so they remain dynamic rather than insular. The state’s task is to build connective infrastructure (roads, broadband, digital access) and guarantee equality of opportunity across localities. Markets should reward initiative but be embedded in fair competition and moral legitimacy. Together, these actions rebuild the interdependence of all three pillars.

Core message

Whenever one pillar of society—state, market, or community—grows too strong or too weak, the whole system destabilizes. Rebalancing means re-empowering the community without rejecting global markets or the modern state.

Reading The Third Pillar is like tracing the architecture of civilization: how we moved from moral economies rooted in villages to global networks bound by code. Rajan urges you to look beyond policy silos and see that sustainability—economic, political, and moral—depends not only on rules and contracts, but on the proximity, trust, and dignity that only living communities can provide.

Rajan begins by showing how markets emerged historically out of personal, moral economies. In medieval times, credit and exchange were embedded in relationships of trust and reciprocity. Charging interest was often forbidden—seen as usury—because communities valued mutual aid over impersonal gain. But with codified contracts and enforceable law, debt became a tool for expanding commerce, allowing strangers to transact without personal bonds. Each new layer of legal and financial innovation—from collateralized loans to bills of exchange—underpinned the rise of markets and eroded communal control.

From feudal reciprocity to contractual society

Feudal hierarchies organized production and protection through reciprocal obligations rather than markets. That changed when the Black Death decimated Europe's population. Scarce labor gave peasants bargaining power, land gained market value, and mobility increased. Debt markets expanded as monarchs needed to fund wars and merchants sought to finance trade. The legal innovations that protected creditors also required predictable state institutions. Over time, this produced states strong enough to enforce contracts yet limited enough to reassure property owners—what Rajan calls the paradox of the capable but constrained state.

How limiting power enabled growth

England’s experience epitomizes this balance. By curbing aristocratic magnates and redistributing church lands to the gentry, Tudor monarchs dispersed power. Religious upheaval during the Reformation also shifted property from monastic communities to market-oriented hands. The Glorious Revolution of 1688 then constitutionalized these changes, giving Parliament control over taxation and the judiciary independence. Once the state’s arbitrary reach was curbed, lenders financed long-term debts, funding infrastructure and military expansion. This institutional architecture birthed capitalist modernity and reliable public finance.

Markets, monopolies, and democratic response

As industrial markets matured, competition brought efficiency but also concentration. Nineteenth-century laissez-faire optimism faded when firms like Standard Oil dominated trade. Public backlash and muckraking journalism (Ida Tarbell’s exposés, Upton Sinclair’s novels) galvanized reforms. The US Sherman Act and the creation of the Federal Trade Commission illustrated democratic pushback—proof that vibrant democracies must discipline private monopolies as well as public despotism. Rajan reminds you that markets, left unchecked, self-corrode: they create vested interests that subvert competition.

Lesson

The limited state and robust market coevolved: markets demanded predictable governance, and constitutional restraint gave markets legitimacy. But both remain stable only when embedded in moral and civic norms.

By tracing these origins, Rajan prepares you to see later imbalances—the growing dominance of the state in the welfare era, the resurgence of markets under neoliberalism, and the neglect of the community. Each historical rebalancing brought progress but sowed future risks, making the search for equilibrium perpetual.

After World War II, democracies built a global order that appeared to harmonize state, market, and community. The Marshall Plan, Bretton Woods institutions (IMF, World Bank, GATT), and national welfare programs created growth and social stability. Citizens trusted governments and businesses; growth funded expansive social promises. Rajan calls this the high watermark of equilibrium—each pillar reinforced the others.

The age of managed prosperity

In Europe, reconstruction leveraged US aid and stable exchange rates to enable investment and catch-up growth. In the US, the GI Bill expanded education and homeownership. Britain’s Beveridge Plan promised cradle-to-grave security. The result was an unprecedented rise in middle-class living standards and institutional trust. But this golden age rested on continuous productivity growth and favorable demography. When those conditions changed, the burden of promises became visible.

From fiscal strain to ideological shift

By the 1970s, stagflation, aging populations, and slowing productivity made universal welfare expensive. The Volcker disinflation of the 1980s brought stability but ushered in neoliberal reforms: deregulation, privatization, and the shareholder-value revolution. These reforms restored efficiency but eroded long-term commitments. As Milton Friedman proclaimed profit the only social responsibility, the moral dimension of enterprise thinned. Short-termism replaced stewardship, and the local links between employer and community dissolved.

This era also exposed global interdependencies. ICT and trade integration offered efficiency but rewarded highly skilled workers and global firms disproportionately. Communities tied to manufacturing lost their anchors. The old postwar equilibrium imploded—the state’s redistributive capacity strained, the market globalized beyond national oversight, and the community drifted toward despair or populism.

Takeaway

Institutions that once stabilized the West—managed trade, social insurance, corporate responsibility—depended on conditions that no longer hold. Rebalancing requires rebuilding community voice, not just tweaking fiscal or monetary levers.

Rajan’s narrative makes clear that the twentieth century’s mix of solidarity and efficiency succeeded precisely because communities, markets, and states shared responsibility. Once globalization and automation decoupled economic and social geography, communities no longer felt represented. This set the stage for today’s populist and nationalist revivals.

Rajan connects modern discontent to how technology and globalization have hollowed out local middle-class economies. Automation eliminated routine tasks, while global supply chains shifted production abroad. The ICT revolution, containerization, and digital coordination cut the costs of distance, rewarding superstar firms and professionals while leaving many localities behind.

Job polarization and social crises

Economists like David Autor and Daron Acemoglu show that automation rather than trade has been the primary driver of lost manufacturing jobs. Yet trade magnified impacts in particular towns—the so-called “China shock.” Rajan points to the human toll: half a million excess deaths from drug and alcohol abuse among middle-aged men in the US between 1999 and 2013. The collapse of purpose-fed despair; communities unravel when their economic and social capital vanish simultaneously.

When meritocracy sorts and divides

The ICT economy concentrates opportunity among highly educated workers and global cities. Wealthier families cluster in high-quality school districts, further entrenching inequality. Geographic sorting magnifies skill gaps and leads to self-reinforcing cycles: prosperous hubs grow stronger while peripheries languish. Rajan notes that these inequalities are not just material but moral—people feel abandoned.

Populism and the demand for belonging

As economic anchors crack, political entrepreneurs promise emotional substitutes: nationalism, nativism, and the comfort of exclusionary identity. Populists on the right scapegoat immigrants and trade; those on the left blame capitalist elites. The Global Financial Crisis of 2008 magnified the sense of betrayal. Bank bailouts confirmed for many that elites had privatized gains and socialized losses, fueling movements ranging from the Tea Party to Brexit and the European far right. Rajan warns that without fixing community foundations, such populism will keep recycling grievances.

Insight

Economic dislocation alone does not create populism; it is loss of dignity and community belonging that fuels political rage. Rebuilding both requires local empowerment and renewed civic purpose.

Rajan’s treatment helps you see that macroeconomic trends translate into micro-social shocks. Technology, trade, and financial concentration generate vast efficiencies, but without a responsive community and safety net, they produce social fragility and authoritarian temptation.

After diagnosing imbalance, Rajan moves to remedy. He argues that the path forward lies not in protectionism or hyper-centralization but in reconstructing vibrant local communities that can adapt to change. He calls this program inclusive localism: devolve meaningful resources and authority to local entities while preserving openness and civic equality.

Reviving civic muscle

Healthy communities socialize, monitor, and support their members. Ethnographic evidence—from Tönnies to Ellickson—shows that local norms can resolve disputes efficiently and build trust. But communities fail when inertia, distrust, or envy dominate, as Banfield’s “amoral familism” documented. The trick is to combine cohesion with openness: Amish barn-raisings demonstrate cooperation, but guild secrecy historically blocked innovation. The best communities, Rajan insists, are open and networked, not nostalgic enclosures.

Infrastructure for inclusion

Inclusive localism also depends on the physical and digital environment. Affordable housing near jobs and transit prevents segregation; broadband ensures participation in a digital economy. Rajan highlights zoning reforms, transit-oriented housing, and municipal broadband as tools to connect people and revive civic equality. Without such “connective tissue,” local initiative cannot scale.

Balancing autonomy and fairness

To prevent local fiefdoms or discrimination, Rajan proposes constitutional limits on local protectionism. Communities should not block mobility or trade; the state must guarantee equal rights and connectivity. The federal role is to provide oversight, anti-corruption safeguards, and transfers to lagging regions. Markets play their part by disciplining inefficiency and injecting competition.

Principle

Empowered communities govern better when anchored in networks of transparency, supported by fair transfers, and insulated from capture by elites or bureaucrats.

From Indore’s sanitation overhaul to Chicago’s Pilsen renewal, Rajan identifies common elements of success: local leadership, asset-based strategy, targeted early wins, and cooperative capital. He cautions that not every place can be saved—but even partial revivals can restore dignity. The cumulative effect can reknit a fractured nation.

In the final synthesis, Rajan broadens his view from the village to the planet. He observes that globalization, data, and corporate power now transcend national borders, challenging democratic accountability. His concept of responsible sovereignty aims to reconcile openness with self-determination. Nations should keep trade liberal but reserve discretion over capital flows, data, and regulation that affect domestic risk and social cohesion.

Reforming markets and firms

Rajan critiques excess financialization and overextended intellectual-property regimes. Platforms hoard user data and create monopolistic lock-ins; non-competes and licensing restrict worker mobility. He urges reform: mandate data portability, shorten patent length, and ensure interoperability to keep competition alive. Within firms, he proposes redefining corporate purpose—managers should maximize not immediate shareholder value, but long-term enterprise value, including employee and supplier-specific investments. This shift rebuilds trust and shared responsibility.

Safety nets and lifelong learning

To cushion disruption, Rajan favours a Beveridge-level safety net—basic security for all—complemented by community-managed top-ups. This model, inspired by Germany’s Elberfeld system, preserves local knowledge and dignity while avoiding the fiscal and motivational pitfalls of universal basic income. Equally essential is continuous education: digital adaptive platforms can personalize learning, while credit-based financing encourages lifelong skill renewal. Singapore’s SkillsFuture and India’s Pratham illustrate scalable paths.

Civic nationalism and global cooperation

To counter ethnic populism, Rajan endorses inclusive civic nationalism—loyalty to shared values rather than ancestry. Communities can preserve local traditions, but national law must ensure openness and equal rights. Internationally, partnerships should focus on minimal harmonization and trust, like India’s UPI and Europe’s digital directives that return control to citizens. The goal is a world both connected and plural, where states remain accountable and communities remain vibrant.

Final message

The health of markets and states ultimately depends on the vitality of communities—and the moral imagination of citizens who see themselves as neighbors, not merely consumers or voters.

In Rajan’s framework, equilibrium is not static but civic: it requires institutions that link local experience to global opportunity, responsibility with freedom. Only by strengthening the third pillar—the community—can societies harness innovation while preserving justice and belonging.