The Crisis of Democratic Capitalism. Nienke Beuwer interviews Martin Wolf

Capital Economy

The chief economics commentator at the Financial Times explains why the relationship between democracy and the market economy is in crisis and details a sustainable, inclusive plan to restore it.

In this edition of Author Talks, McKinsey’s Nienke Beuwer chats with Martin Wolf, chief economics commentator at the Financial Times, about his new book, The Crisis of Democratic Capitalism (Penguin Random House, February 2023). Wolf examines the geopolitical challenges threatening market democracy and charts a course for overcoming the modern era’s instability. It starts with better welfare, economic dynamism, and hope—a “necessary condition.” An edited version of the conversation follows.

Why did you write this book?

My new book is called The Crisis of Democratic Capitalism. In essence, what it says is that our system, which is about the marriage of democracy with the market economy, is failing. It’s failing economically, and because it’s failing economically, it’s failing politically. That has left us open to profoundly antidemocratic forces, and we have to reverse this before it’s too late.

I wrote this book for two reasons that came together: the personal and the historical. Starting in the middle of the last decade, but really with the [2008] financial crisis, I began to become worried about the stability and effectiveness of our economic and political system. My first worries after the financial crisis were about the economic system, since the financial crisis was an economic event.

I wrote a book immediately afterward called The Shifts and the Shocks, which looked at the financial crisis, why it happened, why most of us failed to realize how serious it could be, and where it had left our societies rather damaged. I finished that in 2014, and it began to be clear that economically, at least, things were getting a bit better.

That was encouraging, but very soon afterward the political system seemed to be in disarray. We got the immensely surprising emergence of Donald Trump as presidential candidate for the Republicans and then his victory in the election. We got the Brexit referendum in the UK. Both of these occurred in the same year, in 2016. It was clear we were getting strong populist reactions—that was becoming the characteristic of politics.

It was also clear in other countries. We were seeing it in Italy and in France, in Spain, and even in Germany. It was clear this was happening, and it was happening at the same time as a reaction against democracy worldwide, what Larry Diamond of Stanford calls the “democratic recession.” That was the economic and political context.

The personal context is that my own parents were refugees from Europe during the interwar years—my mother in 1940 when Germany invaded Holland. That led to a cataclysm for their wider families who were mostly killed in the Holocaust. I always thought that a big reason why this happened was the Great Depression, which really is what brought the Nazis to power. So for me, there was a personal worry that was linked very closely to the economic worry.

What is the essence of this book’s argument?

It tries to answer the question: Why did this happen, and why now? My answer to the question of why this happened is that in the “consolidated democracies,” as they tend to be called, of the West—particularly Europe and North America—the deal, as I came to see it, between the people and the elites that inevitably play a dominant role in society, is that the elites are legitimate if they deliver a reasonably satisfactory economic future for the people. This deal came out of the Industrial Revolution, which transformed politics and, as I argue, was really why democracy became such a potent force.

We welcomed the emergence of a democratic universal suffrage in the early 20th century, and I think it was a consequence of the market economy and a reaction to it. This deal seems to be coming undone, and there are two big elements in the unraveling of this deal. There’s been a long period of de-industrialization, quite weak growth, and, in many countries, rising inequality—all of which were to the disadvantage of the old working class and lower middle class in many societies, which became very disaffected.

Then came the financial crisis, my trigger, as it were, which made it clear that the people in charge of the economic system—the politicians, the technocrats—didn’t know what they were doing. Worse than not knowing what they were doing, they were then bailed out with huge amounts of government support, while the people at large suffered big declines in disposable incomes over very long periods as a result of austerity and other such policy choices.

I think this created a profound disillusionment with elites, which left open the political field to populists of many different kinds, but the most important of them were populists of the right. This is what we are now living with almost everywhere.

Why do you call the relationship between liberal democracy and market capitalism a ‘difficult and fragile marriage’?

If you look at the history of humanity in postagrarian society, in settled, complex societies with complex divisions of labor—for example, pharaonic Egypt or the Roman Empire, or even the Middle Ages in Europe—political power concentrated among the wealthiest people was the standard political structure.

If they didn’t have the political power, they had a strong tendency to lose their wealth, so wealth and power were essentially one and the same. The standard form of political organization was monarchy, oligarchy, or plutocracy of some kind, so republics and democracies were very rare.

If you look at what we created, we created societies in which—at least in principle, and I think to some significant extent in reality—political power is diffused among the public, among the voters. The people they elect become prime ministers or presidents, and they have enormous political power. There’s no doubt about that.

At the same time, we have an economic system that generates immense wealth for some individuals and immense concentrations of economic power, and that looks like something of a contradiction. How does that happen? Why did that happen? What makes it last?

My answer to why it happened is that in some very important ways, despite these obvious tensions, when properly done, the market economy and democracy go along with one another. They both rest on the novel idea that people can’t be defined by ascribed inherited status. People are entitled, and this has become more and more radical over time as we have generalized it more. People are individuals who have a right to pursue the best lives they can for themselves and their families. If they turn out to be very successful, they can become very rich, and they can become very powerful.

Take a remarkable case: Abraham Lincoln, perhaps one of the greatest American presidents, came literally from a log cabin. That’s revolutionary, but it’s [not independent from] the political and the economic system. The market system and democracy rest on systems of restraint. You can’t do whatever you like. The systems are governed by law. They require legitimate competition for both political power and in the market.

I also argue that capitalism needs democracy because often democratic policies will want—and we saw this in the Americans’ case in the early 20th century—to stop predatory monopolies. They will want to ensure competition. That’s very, very important in securing capitalism. That’s a way that democracy helps, and it helps a great deal.

On the other hand, if you have an independent market economy, that gives everybody the security to say, “Well, we can afford to lose the election. We can still go back and do another job. There are independent institutions that will continue to support us. They will allow us to continue political life.” The marriage, then, is the fact that there is an autonomous economy independent, to a considerable degree, from democratic politics.

What makes it fragile are pretty obvious dangers. One danger is that the economy won’t deliver to the great majority of people the sort of life that they want and hope for, in which case they think this political system has failed. Therefore, they start thinking democracy has failed. There’s a lot of evidence that a lot of people think just that, and the financial crisis was part of that. Then, they look for saviours or demagogues, which could be populist leaderssaviors or People come along and say, “We hate the elites. You hate the elites. Let’s get together and dethrone them.”

The other great danger is that a plutocracy emerges, and it’s not just the very wealthy—and it increasingly seizes control of the political machinery in many different ways. It gets to provide the funding that elects the legislatures, which will do exactly what these plutocrats want. In the end, you end up with a plutocracy. You get a demagogic tendency of the democracy gone crazy and the plutocratic tendency of capitalism gone crazy, and then you’re in terrible trouble. I think that is where we are.

So it’s a marriage, but like many marriages, if they’re going to survive a long time, you need a lot of compromise and adjustment between the parties. That is the theme of the book.

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Item Type:  Hardcover

Publication Date: 2023/02
Publisher: Allen Lane 
Size/Pages: 496p


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