As the chief economics correspondent of the Financial Times since 1996, Martin Wolf is one of the world’s most influential economists. He started his journalistic career as a vigorous advocate of globalization and deregulation, but since the global financial crisis his mood has darkened. His new book, The Crisis of Democratic Capitalism, is both his magnum opus and an explanation of his crisis of faith.
Wolf started writing the book in the annus horribilis of 2016. The twin hammer blows of Brexit and Trump’s election provoked lamentation and garment-rending in the FT’s London headquarters, where Tory supporters are as thin on the ground as Jehovah’s Witnesses, but Wolf was particularly upset. In a moving preface, he describes how both his parents fled from Europe in the late 1930s — his father from Austria in 1937 and his mother from the Netherlands in 1940 — and how members of his family who failed to make the escape were killed in the Holocaust. “I and my brother, born in 1948, are, like many millions of others, children of catastrophe.” The family memory of the 1930s left him with a permanent sense of the fragility of civilization.
Wolf argues that democracy and capitalism are complementary opposites: Opposites because capitalism depends on inequality of rewards while democracy depends on political equality, complementary because they both enshrine the principle of individual choice. But in recent decades this marriage of opposites has been falling apart, most importantly in the supposed standard-bearer of democratic capitalism, the United States.
The decline in productivity growth is leading to stagnation. Stagnation is turning more people against the system. And vulture-like populists are growing fat not just because they tell lies, but also because they tell a certain truth — that ordinary people’s prospects are not improving at anything like the rate that they once did and are frequently not improving at all. “Make America great again” resonates because it contains a big truth as well as a big lie.
Why has the promise of the 1980s and 1990s turned to ashes? Wolf points to three things: the rise of rentier capitalism, the corruption of politics and the demoralization of the elites. The tension between giant rewards for a handful of entrepreneurs and the universal franchise is manageable when the entrepreneurs create things, like cars and personal computers, that benefit the many. “The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls,” as Joseph Schumpeter said. In recent decades however, the few have devoted ever more ingenuity to extracting rents rather than creating value.
Managers rig incentive systems to make sure that they gain regardless of performance, buying back shares to boost their own remuneration for example. Companies move their operations to tax havens to reduce their tax burdens, with brand-name companies engaging in contortions that were once confined to spivs. Consultancies and law firms cast aside their professional ethics to service rogues and dictators. Wolf concludes that the liberalization of finance, which he once defended, has enriched a tiny number of people at the expense of destabilizing several companies and, in 2008, threatening to bring down global capitalism. From 1993 to 2015, the top 1% captured 52% of the increase in total real family income growth.
In a healthy polity democratic politics might provide a check to rent-seeking. But politics is far from healthy. In the United States the rich have all but hijacked politics through campaign finance contributions and ubiquitous lobbying. Democratic capitalism is becoming crony capitalism. In much of the rest of the world, politics suffers from the twin vices of professionalization and apathy: Professionalization means that identikit figures have taken over most parties — remember the Tweedledum and Tweedledee of David Cameron and Sir Nick Clegg in the 2010 Coalition government? — while popular apathy means that a growing number of people dismiss democratic politicians as crooks and liars. This provides the ideal conditions for populists who promise to sweep away a corrupt and stagnating system in the name of the people.
We know that these populists are liars — Trump did more to improve the lives of his fellow billionaires by cutting taxes than he did to address the economic concerns of his MAGA crowds — but again, the problem is not just that they lied but that they told a big truth: that the global elites have failed the people through a combination of incompetence and venality. The elites have repeatedly made promises that turned out to be hollow — most notably that they knew how to control the demon of global finance that they were letting out of the bottle. They have skillfully escaped from the consequences of their actions. Only one banker was imprisoned after the 2008 crisis in the US and none in the UK. US billionaires pay a lower tax rate than the little people. Leading members of the Sackler family remain free while millions of Americans, a disproportionate number of them Black, are imprisoned for minor drug crimes. All dry tinder for popular fury.
Wolf backs all this up with innumerable references to the economics and political science literature. The FT’s chief economic commentator is not a man to dirty his boots with visits to decaying manufacturing towns or dying seaports, or if he is, he doesn’t write about it; he is a man who digests reports, studies and surveys and chews the fat with big-name economists in Davos and Bilderberg. But his writing is often at its best when he returns to his first love, the classics (he read classics at Oxford before turning to economics and, as he noted at his launch party, he is one of the few non-Greek economists who has read Homer in the original).
He explains the decay of our elites with reference to Plato and Aristotle. Plato argued that society can only save itself from the perils of tyranny and anarchy if it devoted energy and ingenuity to training a class of guardians who are distinguished by their willingness to prioritize the common good over personal gain. Aristotle insisted that societies can only flourish if they have a large and healthy middle class. Both preached the importance of restraining animal appetites in the pursuit of excellence and wisdom.
How can we cure the twin degeneration of capitalism and democracy? Wolf rightly warns against the dangers of nostalgia: The community-promoting world of big industry and big labor has gone forever, more because of technological innovation than globalization. He rightly eschews fashionable business fads such as forcing companies to declare a “purpose” or embrace stakeholder capitalism. He prefers instead what Karl Popper called “piecemeal social reforms”: that is, in Popper’s words, “searching for, and fighting against, the greatest and most urgent evils of society rather than searching for, and fighting for, its greatest ultimate good.”
Wolf’s long list of “piecemeal social reforms” includes repealing the Supreme Court’s Citizens United ruling, which claimed that companies should have a political voice like any other citizen, removing the generous treatment of debt in tax codes, treating “carried interest” as income rather than capital gains, and making senior managers more accountable for corporate failures that they help to manufacture — in other words the stuff of a thousand FT (and Economist) editorials.
Wolf clearly senses that such small-bore reforms will not carry the day without a more general remoralization of society. He ends by calling for a revival of the communal spirit before beginning his final paragraph on a downbeat note: “This is a moment of great fear and faint hope.” Though it may sound churlish to ask for more from an already long and comprehensive book, I wish he had taken more for a sustained discussion of the history of liberalism, in all its rich variety, before throwing his intellectual weight behind communitarianism.
For surely liberalism is the magic ingredient that civilizes both “democracy” and “capitalism” and fuses them together into a working whole? Liberal theory puts constraints on the power of majorities and encodes the rights of minorities in law. Several experiments with democracy in the Middle East and Latin America have failed not because the voting was rigged, but because they replaced all powerful non-elected rulers with all-powerful elected ones. Liberal theory also lays down the rules for an effective market by not only giving limited rights to the “little republics” or corporations but also preventing the formation of monopolies.
Liberalism has grown sick during the past 40 years of its supposed triumph. A philosophy that was born in rebellion against the old order has become the philosophy of a self-indulgent and self-dealing ruling class. Now what is best in liberalism is threatened on all sides. Universities are increasingly dominated by progressive liberals obsessed with group rights and collective guilt. Anyone who dissents from the new orthodoxy is deprived, if not of their jobs, then at least of power. Global institutions, particularly the European Union, are run by technocrats who regard democratic input as an irritation. Most worrying of all, tech companies are busy developing clever ways of manipulating our preferences.
We are arguably seeing the birth of a profoundly illiberal form of capitalism: information capitalism that thrives by sucking up vast amounts of information from apathetic consumers (who give away their secrets as the price of getting convenient apps) and then using that information to manipulate consumer choices. If the promise of democratic capitalism is that it gives us the freedom to control our lives, what does it mean if our information overlords can shape our decisions without us knowing? Add to that the rise of authoritarian capitalism in China, and the association between capitalism and liberalism in the 20th century may well prove to have been a mere passing phase.
The job of fixing democratic capitalism arguably involves more than fixing democracy and capitalism. It involves fixing the philosophy that once elevated them both and is now in disrepair: Restore liberalism to its radical roots, re-center it on individuals rather than on groups and on opportunity rather than grievance, rewrite the rules of information capitalism according to liberal principles and bust concentrations of power wherever they occur, be it in the boardroom or in politics. Liberal intellectuals have repeatedly fixed capitalism over the past century, in the early 20th century to discipline the robber barons and in the wake of the Second World War to build welfare capitalism. To have any chance of repeating the trick in the current one, they need to rethink what liberalism means in an era of information capitalism, populist rage and Chinese power.
Adrian Wooldridge is the global business columnist for Bloomberg Opinion. Views are personal, and do not represent the stand of this publication.
Credit: Bloomberg
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