PRH

The Crisis of Democratic Capitalism

 By Martin Wolf

Penguin Random House/2023

Reviewed by Colin Robertson

April 17, 2023

The pre-eminent Financial Times columnist Martin Wolf wrote The Crisis of Democratic Capitalism after reflecting on the 2008-09 financial crisis and the subsequent rise of populists such as Donald Trump. In Wolf’s view, this sequence of events has generated profound social, cultural and then political convulsions that threaten both democracy and capitalism.

At the same time, China is now pushing its alternative — what Wolf calls “bureaucratic absolutism” — to our liberal rules-based system. For the Chinese, the 2008-9 financial crisis was evidence that the West is in decline and the East is rising. As Xi Jinping told Vladmir Putin after their recent Moscow meeting, “Right now there are changes – the likes of which we haven’t seen for 100 years – and we are the ones driving these changes together.”

But the larger threat to democratic capitalism comes from within — with the decline of public trust in our democratic capitalist system and our institutions. Into the gap generated by the loss of faith steps the home-grown populists who would take us down the road of what Wolf calls “demagogic autocracy”. In another time, they would have been ignored or dismissed. The critical filtering function once provided by professional journalism has been supplanted by social media, which gives free access to anyone with a cause or complaint, the louder the better.

Democratic capitalism, argues Wolf, is fragile and a relatively recent phenomenon. The emergence of liberal democracy in the 19^th century followed the development in the 18^thcentury of modern capitalism. Both depend on liberal foundations.

For Wolf, capitalism is defined by the core feature that each individual and collections of individuals have the right to do their best in the economy. As Adam Smith explained, it relies on the rule of law to start new businesses, as well as to regulate and stimulate investment and innovation. Wealth is not defined by inheritance or ascribed status but by what you achieve. Profoundly individualistic, capitalism creates a natural pressure for political representation – the genesis of liberal democracy. For its part, democracy is a web of social, political and legal constraints buttressed by political parties and free and fair elections around which the core idea of electoral politics operates.

Wolf describes how capitalism generated urbanization, mass industrialization and huge concentrations of workers. By the late 19th century, capitalists realized that they needed educated workers and so the ruling classes embraced mass education. An increasingly educated, literate and urban population, organized in industry, accounting for a huge proportion of the population, compounded the pressure for equal, democratic rights. As history tells, us this evolution was by no means linear or tranquil or universal.

Both capitalism and democracy demand constraining institutions, the rule of law, and a limited state. All of it is fragile, especially as it effectively separates power from wealth. Wealth will always try to gain power.

The natural tendency of an oligarchy controlling the political process is to preserve its own wealth by eroding competition. This inevitably encourages cronyism and corruption, creates inequality and leads down the road to autocracy. If, on the other hand, as in China, the government controls the state and all resources, it is impossible to have genuine democratic competition.

A well-functioning democracy, says Wolf, checks these tendencies and, through its legislation, ensures a safety net for health, education and old age while its regulatory powers ensure progressive taxation and competition policy.

Wolf attributes much of our current malaise to the decline of the industrial working class and the rise of selfish elites. “The corruption, injustice, and lies of elites are powerful solvents of bonds that tie citizens together, inevitably replacing patriotism with deepening cynicism,” writes Wolf. “Without decent and competent elites, democracy will perish.”

Marx’s theory that it would be the industrial working class that would generate the end of capitalism, says Wolf, turned out to be historically false.

The working class, Wolf argues, played a critical part in the evolution of modern democracy in the most advanced economies. Marx’s theory that it would be the industrial working class that would generate the end of capitalism, says Wolf, turned out to be historically false.

Instead, it was pressure from the working class that obliged capitalists to create the welfare state, as in Bismarck’s Germany, and to extend the franchise, as in Edwardian Britain. Once it had been allowed a share of power, the working class became a stabilizing force for democracy. Wolf also points out that in the United States, it was consistently anti-Communist. What they wanted was not revolution but a stable society with a safety net. This was how they and their children could become more prosperous. And they became incredibly prosperous by historical standards. This is what defined the American dream.

But then it disappeared. Wolf writes that four things happened.

First, technology accelerated productivity growth with a profound effect on manufacturing jobs. Where it once represented about 40 percent of employment, today it is closer to 10 percent.

Second, the skill bias went through a profound shift favouring those with higher education for jobs in the new economy. The big losers are young men, especially those who only finish high school.

Third, the financial sector increasingly came to dominate the economy, creating an enormous expansion in credit and debt. Deregulation removed the guardrails, allowing therise of “rentier capitalism” — wealth created by actors who contribute nothing to society — creating quasi-monopoly profits, or “rents” with a percentage of the resulting wealth buying the political influence that sustains them.

Fourth, the new dominant tech sector shifted a lot of income. Tax ‘reforms’ meant taxation ceased to be progressive, generating vast inequalities in wealth and creating a new plutocracy.

Then came the financial crisis, destabilizing the new economy. It reinforced the claim by autocracies like China that theirs is the better system. For democracies, it undermined trust in the system, opening the door to populists whose “demagogic approach to politics undermined the rule of law, the commitment to truth, and the credibility of international agreements, all fundamental underpinnings of liberal democracy.” For Wolf, Donald Trump remains “an embodiment of the aspiration for arbitrary power even after his defeat in 2020.”

Whether we can restore democratic capitalism is an open question. Populism may run its course but before that happens democracy could well perish. “As I write these final paragraphs in the winter of 2022”, says Wolf, whose family suffered terribly at the hands of the Nazis, “I find myself doubting whether the US will still be a functioning democracy by the end of the decade.”

We need substantial change, argues Wolf, “if core Western values of freedom, democracy, and the Enlightenment are to survive”. Inspired by the Greek admonition “Nothing in excess”, Wolf draws on Franklin Roosevelt, whom he credits with saving democratic capitalism in the 1930s, to offer some suggestions.

First, our politics needs to refocus on broadly-shared welfare rather than fundamentally ‘zero-sum’ divisive cultural issues around identity, race and gender. This means more attention to lifelong training and continuous education that emphasizes skills. This will help resurrect a working middle class.

Second, a fairer tax system. This means closing the loopholes of tax evasion and avoidance that benefit the plutocracy. Death duties need to be restored. Progressive taxation must be reinvigorated. Oliver Wendell Holmes was right: “Taxes are the price we pay for civilization.”

Third, we need to ‘trust-bust’ across a whole slew of emerging sectors, where the lag between technological innovation and regulation has allowed for virtual monopolies — in both senses of the term.

Fourth, change corporate governance to give workers a greater say. The shareholder value–maximizing model has not worked.

Fifth, restore national service. This is especially important in democracies that are bringing in immigrants and refugees. Serving with those of different class, race, gender and geography will create a sense of shared citizenship and help to restore faith in institutions – governments, military and law enforcement, hospitals and schools, non-profits and business.

We need a vigorous debate on both policy changes and institutional changes but inreinvigorating our system, says Wolf, we must remember that “reform is not revolution, but its opposite. It is not just impossible, but wrong, to try to re-create a society from scratch, as if its history counted for nothing. The outcome of such attempts has always been destruction and despotism.”

The Crisis of Democratic Capitalism is a big book, daunting in parts, but important because it takes on the defining issue of our time. Drawing on Wolf’s lifetime of reading and reporting, it should be a standard text in civics classes. It is a critique but also a convincing defence of the symbiotic twin systems – capitalism and democracy. Flawed, yes, but not irreparable. And still better, as Churchill memorably pointed out, than any of the alternatives.

Contributing Writer Colin Robertson, a former career diplomat, is a Fellow and Senior Adviser with the Canadian Global Affairs Institute in Ottawa.