# Rajan vs Giddens: community or the social investment state? Two answers on opportunity

> Anthony Giddens's The Third Way (1998) asks the state to become a social investment state that builds people's capacities, starting with education. Raghuram Rajan's The Third Pillar (2019) says markets and the state have grown strong while the local community, including its schools, was left behind, and proposes 'inclusive localism'. The radical-centre position takes the funded national entitlement from Giddens, delivery and discretion close to the family from Rajan, and keeps income support alongside both, because social investment that relies on families to find their own way reaches the better-off first.

- URL: https://www.radicalcentre.eu/en/articles/rajan-vs-giddens-community-or-social-investment-state
- Language: en
- Publisher: radical centre / centro radical
- Published: 2026-11-06
- Topic: Ideas & history
- Author: radical centre
- Licence: CC BY 4.0

## Key points

- Giddens's The Third Way (Polity, 1998) has a chapter on the social investment state and another on state and civil society; its aim was to renew social democracy.
- Rajan's The Third Pillar (2019) names three pillars, the state, markets and the community, and says the community, including local schools, was left behind.
- Rajan's remedy is inclusive localism: more decisions and funding at local level, with communities kept open to newcomers.
- Cantillon and Van Lancker (2013) warn that social investment can favour the better-off, because use of services such as childcare follows employment and income.
- The radical-centre synthesis: the state funds and guarantees, the local school and council deliver automatically, and income support stays in place.

Twenty years apart, two books tried to get politics out of the old argument between more state and more market. Anthony Giddens published *The Third Way: The Renewal of Social Democracy* with Polity in 1998, a year after Tony Blair's New Labour came to power. Raghuram Rajan, former chief economist of the IMF and former governor of the Reserve Bank of India, published *The Third Pillar: How Markets and the State Leave the Community Behind* in 2019. Both are on our reading list for the week, both want to widen opportunity, and they disagree about who should do the work. For a week that has followed a child born poor in Spain from [birth to 16](/en/articles/exercise-mobility-ladder-birth-to-16), the disagreement is practical.

## Giddens: a state that invests

Giddens wrote, in his own preface, for social democrats ready to revise their old views more thoroughly than most had done. The book's chapters show the plan: a chapter on state and civil society, with sections on democratising democracy and on crime and community, and a chapter called "The Social Investment State", on equality as inclusion, positive welfare and social investment strategies. We set out the whole argument in our [explainer on The Third Way](/en/articles/giddens-the-third-way-explained).

The core move is to ask the welfare state to spend in a way that builds people's capacities, so that they can take part in an open economy, with education first in line. When Blair and Gerhard Schröder turned the idea into a joint paper in 1999, they wrote of turning the safety net into a springboard to personal responsibility. Helmut Wiesenthal's 2010 retrospective on the German side finds that much of that agenda was later dropped by the SPD, and that the part that lasted was the education focus: more weight on early childhood education and training, and on the international standing of universities. Europe absorbed the idea, as we described in [Giddens and social investment in childhood](/en/articles/giddens-social-investment-childhood-what-europe-learned).

## Rajan: the pillar both forgot

Rajan starts from a different picture. A society, he argues, stands on three pillars: the state, markets and the community. Technology and globalisation have made the first two stronger and left the third behind. His community is the proximate one: the neighbourhood, the village, the municipality, its local government and local institutions such as schools. When he presented the book at Brookings in February 2019, he described how the school is where the community happens, where parents meet and start visiting each other's homes.

His account of opportunity runs through that school. As skills pay more, families with means move to wherever their children will have the best-prepared classmates, and children left in weaker schools lose their route to college. His answer is inclusive localism: move decisions and funding down to communities, so that they can build better schools and colleges themselves, and keep those communities open to newcomers. He admitted the phrase sounds like a contradiction in terms, and said it is no more of one than competition and property rights, which sit together at the heart of a market economy. He also argued that we need political competition as much as economic competition, which is a decentraliser's case that sits comfortably on the liberal right.

Diana Thomas's review for the Center for Ethics and Entrepreneurship credits Rajan with treating community as more than a leftover and finds the theory unfinished: communities have to be thick enough to give identity and open enough not to block mobility, and the book leaves that knot tied. She also notes that his showcase example, the Indian city of Indore, turns on the city government's role.

## Where they collide

Put the two side by side and the question becomes who invests in the child. For Giddens the investor is the state, deliberately reorganised. For Rajan the state has already grown too far from people, and the investment has to be made closer to home, with the state keeping the walls low.

Each book has a weak spot the other exposes. The best-known critique of social investment, by Bea Cantillon and Wim Van Lancker in *Social Policy and Society* in 2013, says Giddens saw investment as something that would eventually replace traditional social protection, while Esping-Andersen and others hold that income security is a precondition for investment to work. Their sharpest point is about childcare: because use of the service follows employment and income, public money tends to reach better-off families first, a Matthew effect. Spain shows exactly this pattern, as we saw on [day 22](/en/articles/early-years-education-0-3-spain-proposal): places in early years education are taken up far less by the poorest families. A national programme can be well funded and still miss the children it was built for.

Rajan's weak spot runs the other way. Local power, left to itself, is very good at protecting what the people already inside have. Our [week on housing](/en/articles/week-3-answer-radical-centre-housing-programme) was a long study of how neighbourhoods use the rules to keep newcomers out, and Spanish school admissions by address can do the same thing to classrooms, as our piece on [segregation in Madrid and Catalonia](/en/articles/school-segregation-madrid-catalonia-data-solutions) showed.

## The radical-centre answer

The left is right that the state has to invest in every child's capacities, and right, with Cantillon and Van Lancker, that income support has to stay in place underneath, because a family short of money cannot use what is on offer. The market-liberal tradition is right that decisions and budgets work better close to the people they affect, with competition between places and providers and as little national prescription as the job allows.

What fits neither camp is the way we would join them. The state funds an entitlement and guarantees it: an early-years place, tutoring when a child falls behind, a grant at 16. The proximate community, the school and the town hall, delivers it automatically to the families who qualify, using the records the state already holds, so that nobody has to know the system to get the help. The school decides how to teach and spend; the national rule decides who must be let in. And every programme is judged by one test that would satisfy both authors: do the poorest families use it as much as the richest? Where they don't, the Matthew effect is at work and the design changes.

Giddens gives us the ambition and the money. Rajan gives us the place where it has to land. Tomorrow's programme moves to productivity, and the same question of who delivers will come back there too.

## FAQ

### What is the difference between Rajan's third pillar and Giddens's third way?

Giddens's third way is a renewal of social democracy in which the state invests in people's skills and capacities. Rajan's third pillar is the local community, which he puts beside the state and the market and wants to strengthen with more local power and money. Giddens looks to a smarter state; Rajan looks below it.

### What is the social investment state?

It is Anthony Giddens's name, in The Third Way (1998), for a welfare state that spends to build people's capacities, through education, training and early childhood, so that they can take part in the economy. Critics such as Bea Cantillon and Wim Van Lancker argue it works only alongside traditional income protection.

### What is inclusive localism?

It is Raghuram Rajan's proposal in The Third Pillar: move decisions and funding down to local communities so they can rebuild schools and opportunities, while keeping them open to outsiders. He argues that communities would be richer, economically and socially, if they were more open.

## Sources

- [Raghuram Rajan's latest book explores how stronger communities can save capitalist democracies](https://www.chicagobooth.edu/media-relations-and-communications/press-releases/raghuram-rajans-latest-book-explores-how-stronger-communities-can-save-capitalist-democracies), Chicago Booth (2019)
- [Markets, the state and community: a conversation with Raghuram Rajan (transcript)](https://www.brookings.edu/wp-content/uploads/2019/03/es_20190227_rajan_markets_transcript.pdf), Brookings Institution (2019)
- [The Third Pillar by Raghuram Rajan (review)](https://theceme.org/book_review/the-third-pillar-by-raghuram-rajan/), Center for Ethics and Entrepreneurship (2019)
- [The Third Way: The Renewal of Social Democracy (contents and preface)](https://content.e-bookshelf.de/media/reading/L-3840102-f671a021af.pdf), Polity (1998)
- [The 'Third Way' advocated by Gerhard Schröder and Tony Blair: retrospective account (2010)](https://germanhistorydocs.org/en/a-new-germany-1990-2023/the-third-way-advocated-by-gerhard-schroeder-and-tony-blair-retrospective-account-2010), German History in Documents and Images (2010)
- [Three shortcomings of the social investment perspective](https://www.cambridge.org/core/product/5E341A465ACB535D925DF32D935FA912/core-reader), Social Policy and Society (Cambridge University Press) (2013)