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 half-hearted. 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 he 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. Rajan 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.

This is from David R. Henderson, “An Unpersuasive Book with Some Encouraging Insights,” my review of Raghuram Rajan, The Third Pillar, Regulation, Fall 2020.

Rajan’s Misunderstanding of the Term “The Dismal Science”

In making his case that we can go too far in the direction of markets, Rajan writes, “Reverend Thomas Robert Malthus epitomized the heartless side of [classical] liberalism, when taken to its extreme.” Commenting on Malthus’s claim that disease, war, and famine would be natural checks on population growth, he writes, “No wonder historian Thomas Carlyle termed economics the ‘dismal science.’” But that is not why Carlyle coined the term. Instead, in noting that the dominant economists of his day strongly opposed slavery, he said economics was dismal because they opposed slavery. That is a big difference.

Rajan on Child Labor

One thing that is well established in economics is that child labor in very poor countries is a boon to children and their families. I made that point in Fortune in 1996 and Nobel economics prizewinner Paul Krugman made it in Slate in 1997. We both pointed out that children who work in “sweat shops” are virtually always better off than in their next best alternative. That next best alternative, if they are lucky, is a lower-paid job in agriculture or, if they are unlucky, picking through garbage or starving. Yet Rajan, who comes from a poor country, writes, “All countries should, of course, respect universal human rights, including refraining from using slave labor or child labor.” He is right on slave labor; he is horribly wrong on child labor. If he got his way, millions of poor children would suffer needlessly.

Rajan Has a Way with Words

One bright spot is Rajan’s refreshing way of expressing insights. For example, he sees a lot of problems with China’s unusual mixed economy and coins a beautiful phrase to describe it: “competitive cronyism.” And here is how he characterizes populism: “Populism, at its core, is a cry for help, sheathed in a demand for respect, and enveloped in the anger of those who feel they have been ignored.”

Read the whole thing.