THE CRISIS OF DEMOCRATIC CAPITALISM

Today I want to show some selected extracts from The Crisis of Democratic Capitalism by The Economist’s Martin Wolf puvlished in 2023. First the contents -

PREFACE: WHY I WROTE THIS BOOK

ONE: THE FIRE THIS TIME

Part I ▪ ON CAPITALISM AND DEMOCRACY

Prologue to Part I

TWO: SYMBIOTIC TWINS: POLITICS AND ECONOMICS IN HUMAN HISTORY

THREE: THE EVOLUTION OF DEMOCRATIC CAPITALISM

Part II ▪ WHAT WENT WRONG

Prologue to Part II

FOUR: IT’S THE ECONOMY, STUPID

FIVE: RISE OF RENTIER CAPITALISM

SIX: PERILS OF POPULISM

Part III ▪ RENEWING DEMOCRATIC

CAPITALISM

Prologue to Part III

SEVEN: RENEWING CAPITALISM

EIGHT: TOWARD A “NEW” NEW DEAL

NINE: RENEWING DEMOCRACY

Part IV ▪ A HINGE OF HISTORY

Prologue to Part IV

TEN: DEMOCRATIC CAPITALISM IN THE WORLD

CONCLUSION: RESTORING CITIZENSHIP

Acknowledgments

Notes

Bibliography

Index

This book is a response to this new and troubling era. Its central argument is simple: when we look closely at what is happening in our economies and our polities, we must recognize the need for substantial change if core Western values of freedom, democracy, and the Enlightenment are to survive. But in so doing, we must also 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. Only unbridled power can deliver a revolutionary overthrow of the existing order. But unbridled power is by its nature destructive: it shatters the security on which productive human relations can be based and decent lives lived. As Edmund Burke wrote in his response to the French Revolution, society is a “partnership not only between those who are living, but between those who are living, those who are dead, and those who are to be born.”8 Change is essential, both at home and abroad, but it must build on what is. Indeed, one cannot start anywhere else. The motto of this book is “Never too much,” as the ancient Greeks used to say.9 The health of our societies depends on sustaining a delicate balance between the economic and the political, the individual and the collective, the national and the global. But that balance is broken. Our economy has destabilized our politics and vice versa. We are no longer able to combine the operations of the market economy with stable liberal democracy. A big part of the reason for this is that the economy is not delivering the security and widely shared prosperity expected by large parts of our societies. One symptom of this disappointment is a widespread loss of confidence in elites.

Another is rising populism and authoritarianism. Another is the rise of identity politics of both left and right. Yet another is loss of trust in the notion of truth. Once this last happens, the possibility of informed and rational debate among citizens, the very foundation of democracy, has evaporated. In The Great Transformation, published in 1944, the same year as Friedrich Hayek’s The Road to Serfdom, Karl Polanyi argued that human beings would not long tolerate living under a truly free market system.10 Experience of the past four decades has vindicated this point of view. This need to reform the relationship between democratic politics and the market economy is not driven purely by domestic tensions, important though they are. It is made more urgent by the rise of autocracy worldwide and, above all, by the apparent success of China’s despotic capitalism. Western nations must improve their economic, social, and political performance in response. 

CONCLUSION – to Wolf’s The Crisis of Democratic Capitalism

Democracy and competitive capitalism make a difficult, but precious, marriage of complementary opposites. A market economy that operates under trustworthy rules, rather than the whims of the powerful, underpins prosperity and lowers the stakes of politics. In turn, a competitive democracy induces politicians to offer policies that will improve the performance of the economy and so the welfare of the people. Beyond these practical reasons for the marriage of liberal democracy and market economy, there is also a moral one: both are founded on a belief in the value of human agency—people have a right to do the best they can for themselves; people have a similar right to exercise a voice in public decisions. At bottom, both are complementary aspects of human freedom and dignity.

This is not just an abstract and theoretical notion, let alone a utopian one. The world’s stable liberal democracies have prosperous market economies, while the prosperous market economies are almost all liberal democracies. There are no exceptions to the former rule. Hong Kong and Singapore may be viewed as exceptions to the latter (though the former, alas, not for much longer). Yet both benefited from an exceptional phenomenon—a benevolent pro-capitalist autocracy. The template for Hong Kong was, however, created by colonial outsiders and is now disappearing under Xi’s heavy-handed rule. The rulers of Singapore not only inherited a colonial system, but also must give foreign capitalists, on whose knowledge and connections they rely, the security and openness they need. This is a vital constraint on what they may safely do: if voice is relatively impotent in Singapore, exit is not.

China might ultimately become a far more significant exception to the rule that rich market economies are also liberal democracies. But its gross domestic product per head (at purchasing power parity) was still eightieth in the world in 2019, between Suriname and Turkmenistan.3 For all its progress, it is a very long way from being a high-income country. It is also quite likely to flounder under Xi’s increasingly heavy-handed rule.

Prosperity is far from all that this is about, important though it is. On almost any measure one could imagine—life expectancy, educational standards, and the progressive push for equal rights—the high-income democracies are the most successful societies in human history. The freedom they grant, together with their opposition to ascribed status, opens opportunities for improvement of both individuals and society. And what is the alternative? It is either unaccountable rule by thugs and bureaucrats or the iron cage of custom. Both are recipes for stagnation and oppression. They are death to the human spirit and social progress. For all its faults, democratic capitalism is worth defending. But it is in grave peril. Remember what makes a working democracy: elections must be seen to be free and fair, and victors must be accepted as politically legitimate. For this to happen, the ties that bind participants to one another must be as strong as those that bind people to factions. In chapter 9, I argued that patriotism—a shared attachment to place, history, values, and culture—is the most powerful source of the needed sense of a common identity. Such patriotism may also be called civic nationalism. It may be based in part on myths. But myths are a universal attribute of human communities.

There exist other sources of democratic political legitimacy. An essential one is widely shared prosperity. Another is a shared trust in rules of the game viewed as fair by all. Yet another is confidence that, whoever may (temporarily) be in power, the government will be competent, the law will be impartially applied, and the rights of all people to live their lives freely will be protected. Expressing the foundations of a stable democracy in this way makes clear how fragile it is. Democracy is peaceful civil war. The divisions that emerge in democratic politics may, in the wrong circumstances and with the wrong people, become sources of insurrection, civil war, or creeping authoritarianism in the name of the people. The latter has been happening recently all over the world. It has definitely been happening in the US, the heartland of contemporary democracy, with Donald Trump’s insurrection against the presidential election. Democracy is not yet a lost cause. But it is highly endangered. Elite failures and malfeasance, along with the economic, social, and technological developments discussed earlier in this book, have broken the confidence of many people in the institutions and values of democracy. This has facilitated the rise of the demagogues against whom Plato warned. In the US, above all, the Republican Party has ceased to abide by core democratic norms. It resembles movements in which the Leader’s word defined what was true and right more than it does a normal democratic political party. The most notorious example was the Führerprinzip of the Nazis: if the Leader said jump, the question was just “how high.”4 So, too, it now seems to be with Trump. Yet, amazingly and depressingly, the subservience of Republican elites is the product not so much of fear, as it was for many in the Germany of the 1930s, as of personal ambition and moral collapse.

The danger Donald Trump posed to liberal democracy was clear when he was elected on a platform that was part nationalism, part xenophobia, and part cult of personality. As president, he rejected alliances, multilateralism, international rules, science, truth, and the reality of climate change. Yet in 2020, even after the disastrous experience with the pandemic, he won 46.8 percent of the vote. More important, the majority of Republicans agreed with him that the election had been rigged against him by the Democrats.5

This loyalty continued even after the invasion of the Capitol on January 6, 2021, which he fomented. Indeed, believing in his “big lie” about the stolen election became a litmus test for recognition as a true Republican. The Republicans had moved from being a normal political party in the world’s most influential liberal democracy to embracing the view that not only was losing an election ipso facto illegitimate, but riot and murder were acceptable responses. The implications of this for democracy in the US and, given that country’s historic role in defending democracy, for liberal democracy worldwide are disturbingly clear. How did this happen, particularly after the euphoria of the collapse of Soviet communism? The Trump-led Republican Party, or for that matter the Johnson-led Conservative Party, did not come from nowhere. They came from forty years of elite failure. The fragile marriage of liberal democracy with capitalism requires maintaining difficult balances between individual and community, between private and public, between freedom and responsibility, between economics and politics, between money and ethics, between elites and people, between citizen and noncitizen, and between the national and global. This is why ΜΗΔΕΝ ΑΓΑΝ (Nothing in excess) has been this book’s motto. When these balances work, the marriage of liberal democracy with market capitalism is the most successful system in the history of the world. But liberal democracy is vulnerable to the selfishness of elites and ambitions of would-be despots. Historically, democratic republics have been exceptions. The normal human political patterns have been plutocracy or tyranny. The latter always waits in the wings. In today’s world, tyrannies—demagogic and bureaucratic—are not just in the wings, but on the march. 

Parts III and IV of the book set out an agenda for restoring a balance in both democratic politics and market economics. It takes into account both the internal weaknesses and global responsibilities of liberal democracies. The proposals are pragmatic, but also idealistic. They are based not on revolutionary transformation, but on reform of democratic institutions and economic policies. But we must recognize, too, the scale of the task: the combination of new technology with laissez-faire ideology has accelerated the emergence of a plutocracy dedicated to increasing its wealth and power and of new technologies with extraordinarily destructive potential.

We do indeed need to build on the foundations we have. But we cannot go back to the past. The world of the mid-twentieth century is, for both good and bad, gone forever. We need to “build back better.” The path forward is to adapt the goals of the reformers of the past to the needs of thepresent. The most important reformer of the twentieth century was Franklin Delano Roosevelt. In his speech on January 1941 on the “four freedoms,” he laid out a role for the US in the world, predicated upon a domestic transformation. 

Building on this outline, chapters 7 and 8 set out the following goals for reform of the capitalist economy: 

1. A rising, widely shared, and sustainable standard of living

2. Good jobs for those who can work and are prepared to do so

3. Equality of opportunity

4. Security for those who need it

5. Ending special privileges for the few

Removing harms, not universal happiness, is the objective. The approach to reform is that of “piecemeal social engineering,” as recommended by Karl Popper, not the revolutionary overreach that has so often brought calamity.6

Behind these specific proposals is a wider perspective. A universal suffrage democracy will insist on a citizenship that is both economic and political. This means that business cannot be free to do whatever it wishes.

It means that taxes must be paid, including by the economically powerful. It means that the state must be competent and active, yet also law-governed and accountable. All of this was the clear lesson of the twentieth century.

There are, it is true, alternative ways to seek power under democratic capitalism. All will fail. One extreme is to offer a fully socialized economy. But the economy will founder, and the rulers will be forced out of power or seize it undemocratically, as happened most recently in Venezuela. An opposite extreme is to marry laissez-faire economics to a populism founded on anti-intellectualism, racism, and cultural conservatism. Such plutopopulism is also likely to end in an autocracy in which even plutocrats are insecure. A still faster route to autocracy is via a blending of the two extremes in nationalist socialism (or national socialism). This combines a welfare state with arbitrary rule by demagogues. This, too, will ultimately ruin both the economy and democracy, as the unaccountable gangster in charge rewards cronies and punishes opponents. Interwar Europe, the history of Latin America, and the more recent experience of many emerging and developing economies, including some of the former communist countries of central and eastern Europe, offer copious warnings. The greater the inequality, insecurity, feeling of abandonment, fear of unmanageable change, and sense of injustice, the more vulnerable to collapse the fragile balance that makes democratic capitalism work will become.

If the needed reforms are to happen, elites must play a central role. A complex society without elites is inconceivable. Alas, one dominated by predatory, shortsighted, and amoral elites is all too plausible. If such elites emerge in a democratic republic, it will collapse. That happened to the late Roman Republic. Anne Applebaum has described brilliantly how it has been happening in Hungary, Poland, and even the UK and US.7 Liberal democracy is a complex system of restraints, some of them in law, but many tacit. It depends ultimately on truthfulness and trustworthiness in those in positions of responsibility. The corruption, injustice, and lies of elites are powerful solvents of bonds that tie citizens together, inevitably replacing patriotism with deepening cynicism. As the great journalist Hunter S. Thompson declared, “In a closed society where everybody’s guilty, the only crime is getting caught. In a world of thieves, the only final sin is stupidity.”8 Only a corrupt oligarchy or autocracy is then possible. Democracy will perish.

Adrian Wooldridge of The Economist has rightly argued that members of the elite need to be competent.9 This is one of the reasons why equality of opportunity is a founding value of a liberal democracy. There is no alternative to some form of meritocracy. All societies have mechanisms for training such elites. But it is not enough for members of elites to be clever, well trained, and ambitious if they are also self-satisfied, narrowly educated, and selfish, possibly even amoral. Members of a functioning elite, which includes the business elite, need wisdom as well as knowledge. Above all, they need to feel responsible for the welfare of their republic and its citizens. Indeed, if there are to be citizens at all, members of the elite must be exemplars. It is not hard: instead of lies, honesty; instead of greed, restraint; instead of fear and hatred, appeals to what Abraham Lincoln called “the better angels of our nature.” Elite failings are pervasive in today’s story of the democratic recession in the high-income democracies and elsewhere. This is true on both left and right. It is a failing of the Brahmin elites of the left to downplay the distinction between citizens and noncitizens fundamental to any functioning democracy. It is a failing of that self-same elite to despise the conservative and patriotic values of less-educated fellow citizens. It is a failing, again, to rail against the patriotism on which any liberal democracy must depend.

Yet it is an even greater failing of economically successful elites to push for policies that generate enormous wealth for themselves and insecurity for everybody else. It is a great failing to encourage the emergence of a rigged capitalism, which destroys the legitimacy of the market economy and of the state that protects and promotes it. It is a great failing, above all, to cement power by creating a pluto-populist coalition based on self-seeking at the top and rage at the middle and bottom. It is all too easy to motivate people by hatred and fear and so by a tribalism that divides the world into the “good people” like us, and everybody else. But as society becomes more plutocratic, the sinews that bind citizens together snap. Then comes the false reformer and, worse, the faux populist—the ambitious demagogue who pretends “to drain the swamp” as he makes it wider and deeper. In his Republic, Plato, a fierce critic of democracy, pointed to the likely rise of the sort of demagogue we see all around us today. Instead of democracy, he proposed the selection of “guardians,” or philosopher rulers. These guardians would not only be philosophers. They would also be freed from temptation by being without possessions or family. Their children would be raised together. These guardians then would be not just a meritocracy but a monastic one.

The logic is clear. The danger with any elite is that it will subordinate the fulfillment of its vital social role to its personal interests. It can be almost impossible to avoid this. A long time ago, I was told why corruption was rife in the bureaucracy of a certain large developing country. The mechanism was simple and effective. A young, able, and idealistic recruit would be offered a large bribe early in his career. He would refuse it. This would happen a few times. Then, in a private meeting, he would be told by a superior that if he did not take the bribe, he would never be promoted. He thinks of his wife and hopes for a family. And so, next time, he would accept the bribe. This is blatant. Yet there are so many more subtle ways of corrupting people whose roles in society are those of guardians: lawyers whose only interest is in winning cases; business executives whose only interest is in creating a dynastic fortune; creators whose only interest is in getting the money they need to make their creations a reality; politicians whose only interest is in winning elections; and so forth. As professional standards erode, it becomes ever more difficult to be the exception. Honor and decency come to seem old-fashioned, even ridiculous. And so, when a corrupt thug accuses the elite of being corrupt, not to mention incompetent, it is easy for a great mass of the people to agree, because it is seen to be true. Without decent and competent elites, democracy will perish. Alas, as I write these last paragraphs in the winter of 2022, I find myself doubting whether the US will still be a functioning democracy by the end of the decade. If US democracy collapses, what future can there be for the grand idea of “government of the people, by the people, for the people”?

We must not be complacent about this danger. Democracy is very recent: even a broad male franchise is less than two centuries old anywhere; universal adult suffrage representative democracy is only a little over a century old. For the first time in history, this system recognized the political rights of all adult citizens. It was a great achievement. It has already had to confront powerful enemies in World War II and the Cold War.

Yet the enemy today is not without. Even China is not that potent. The enemy is within. Democracy will survive only if it gives opportunity, security, and dignity to the great majority of its people. As Aristotle told us, it depends on a large, contented, and independent middle class. If, in contrast, the system benefits only the most successful, the most cynical, and the greediest, it will founder. If elites are only in it for themselves, a dark age of autocracy will return.

The renewal of capitalism and democracy must be animated by a simple, but powerful, idea: that of citizenship. We cannot just think as consumers, workers, business owners, savers, or investors. We must think as citizens. This is the tie that binds people together in a free and democratic society.10 It is by thinking and acting as citizens that a democratic political community survives and thrives. If that tie is dissolved, the democratic polity will founder. Its replacement will be some combination of oligarchy, autocracy, or outright dictatorship.

Citizenship must have three aspects: concern for the ability of fellow citizens to have a fulfilled life; the desire to create an economy that allows citizens to flourish in this way; and, above all, loyalty to democratic political and legal institutions and the values of open debate and mutual tolerance that underpin them. So, what might such a revival of the idea of citizenship mean, in today’s challenging global environment? Here are things this does not mean.

• It does not mean that democratic states should have no concern for the

• welfare of noncitizens. Nor does it mean that it sees the success of its own citizens as a mirror image of the failures of others. On the contrary, it must seek mutually beneficial relations with other states.

• It does not mean that states should cut themselves off from free and fruitful exchange with outsiders. Trade, movement of ideas, movement of people, and movement of capital, properly regulated, can be highly beneficial.

• It does not mean that states should avoid cooperating closely with one another to achieve shared goals. This applies above all to actions designed to protect the global environment.

Yet there are things it clearly does mean. It means that the first concern of democratic states is the welfare of their citizens. If this is to be real, certain things must follow.

• Every citizen should have the reasonable possibility of acquiring an education that would allow them to participate as fully as possible in the life of a high-skilled modern economy.

• Every citizen should also have the security needed to thrive, even if burdened by the ill luck of illness, disability, and other misfortunes.

• Every citizen should have the protections needed to be free from abuse, physical and mental.

• Every citizen should be able to cooperate with other workers in order to protect their collective rights.

• Every citizen, and especially successful ones, should expect to pay taxes sufficient to sustain such a society.

Those who manage corporations should understand that they have obligations to the societies that make their existence possible.

• Citizens are entitled to decide who is allowed to come and work in their countries and who is entitled to share the obligations and rights of citizenship with them.

• Politics must be susceptible to the influence of all citizens, not just the wealthiest.

• Policy should seek to create and sustain a vigorous middle class, while ensuring a safety net for everybody.

• All citizens, whatever their race, ethnicity, religion, or gender are entitled to equality of treatment by the state and the law. 

The West cannot go back to the 1960s. It cannot go back to a world of mass industrialization, where most educated women did not work, where there were clear ethnic and racial hierarchies, and where the Western countries still dominated the globe. Moreover, we face today, with climate change, the rise of China and the transformation of work by information technology—very different challenges. The world has changed too profoundly for nostalgia to be a sane response. Yet some things remain the same. Human beings must act collectively as well as individually. Acting together, within a democracy, means acting and thinking as citizens. If we do not do so, democracy will fail, and our freedoms will evaporate. It is our generation’s duty to ensure it does not. It took too long to see the danger. Now it is right there in front of us. This is a moment of great fear and faint hope. We must recognize the danger and fight now if we are to turn the hope into reality. If we fail, the light of political and personal freedom might once again disappear from the world.