Martin Wolf on the Crisis of Democratic Capitalism

I think the answer to both questions is yes. That is to say, I think democracy and capitalism are individually in crisis in that they’re not working very well and that the combination of the two in one political and economic system, which we have come to think of as the Western Way, is in crisis not only because the two component parts are in crisis, but because they’re in crisis interactively. That is to say it is impossible to separate the economic system from the political system. It has never been possible to separate them, because going back to the very beginning of humanity, the one thing we know is that organized cooperation was how we made ourselves thrive economically. In other words, in, as I put it getting our living.

Organized cooperation in large groups of intelligent animals means politics. It’s very clear that chimpanzees have politics, if you look at the profound ethnographic studies that have now been done. In the same way human beings are, as Aristotle famously said, political animals. So, the two failures of the economic system and the political system can never be separated and discussion of one system without the other is, I think, a very big error.

Well, this is obviously a very deep question and I spend a lot of my time thinking about it. I mean, first of all, I think we should never ignore historical evidence and so I start with that, but the conceptual ideas flow from that in a way. So, back in the beginning of the 19th century, there weren’t any democracies. There had been a few republics in history and a few small democracies, but never before in history had large countries with large populations and with great power been governed democratically. There weren’t any in 1800. So, in the 19th century, there began to be the emergence of wider franchises, more people allowed to vote, and the result was even by 1900 a significant improvement.

Then there began a complex history in the early 20th century and into the middle of the 20th century. But after the Second World War most prosperous high-income countries were fully democratic in the way we think of it and increasingly after 1980 that spread across much of the world. So, it became the most popular form of government. So, historically there was something about the market economy, because these were all market economies that became consolidated democracies, that seemed at least to be favorable to democracy. Furthermore, all the non-market economies and the fully socialized economies that didn’t allow any room for private enterprises at all were dictatorships. That’s a pretty powerful historical fact.

Now, I think it’s possible to explain this because when the market economy really got going, it created economic and social and political forces that brought about the transformation of politics. Some of that was inherent in the ideological basis of the market economy. We tend to forget how revolutionary it once was. In the old days, the economy was run on the basis that the landowners owned and controlled everything. Commerce was really very doubtful and dubious and periodically the monarch seized all the fruits of commerce. It took a long time for the commercial sector to become autonomous, powerful, and dispose of enormous wealth in the way that Monarchs had once done and landowners had once done.

They did this on the basis of a really remarkable proposition, which was within the law anybody could start a business. Anybody. They didn’t need to be educated. They didn’t need to be among the socially entitled. In fact, many of them weren’t. You got the constant stream of innovation and enterprise from new people creating new economic systems and new wealth and shifting around the power system in terms of who as individuals controlled it. Now, that was, I think, the fruit of something very powerful, which was the idea that we should run the economy without ascribed status. We should run the economy on the basis of an individualistic idea. Everybody had the right to have a go. That’s very radical. Of course, once you have that idea, well naturally, you apply it everywhere else, including politics.

Now, if individuals who are not necessarily the most educated or the most entitled can start a great business or just a small business and be independent then, of course, they have the right to a say in politics. Why should the vote and the say only go to the landowners or the very, very rich? They also have value. In other words, both share this idea that the individual matters. It’s just one is in commerce and business and in life as an economic agent and the other in political and social life. So, it’s natural, I think, to have these two aspects. If you’re going to allow people to have weight in politics, everybody’s entitled to it. Then over time you end up extending the franchise and that’s what’s kept happening, because you could never justify the further restrictions. It’s impossible.

Then there are very profound economic forces in a market economy, which makes these demands irresistible. So, what are these? First you have mass industrialization and urbanization. You have large concentrations of people who have no political rights, are economically at the bottom, but they’re economically indispensable. They have to make these factories work and they learn fairly soon that if they strike, they can stop the factory and ruin the value of the capital. There’s a real power for the lower classes for the first time in a way that the peasantry really never had. They couldn’t be organized in this way.

Then it became crucial for businesses to have educated workers and the country wanted educated workers to make it more prosperous. The politicians wanted it, because they were in competition with other politicians in other countries. So, we moved to the system of universal education. That was all a consequence, I think, of the prosperity of the capitalist system and universal education naturally meant people started asking, ‘Well, we’re educated now. We’re literate. We have a mass labor movement. Now we want a say in politics. You’re not going to keep us out.’ And, of course, it became impossible to keep them out. They inevitably got the rights, which were legitimate for the ideological reasons I’ve already given you.

Now because they were politically powerful, that required some agreement among classes and factions on how this power should be shared more broadly. It wasn’t perfect, but that’s a big part of what the New Deal was about. Once finally, they’d done all that, then, of course, they started to say, ‘We’re going to have to make government work for us. Let it work for people who didn’t have vast wealth or who didn’t have independent means. They inevitably started saying, ‘Well, we want a bit of a welfare state and that’s happened in every advanced democracy. The state has gotten bigger paying for things like health, unemployment insurance, pensions, which are the demand of this newly entitled, politically engaged population.

So, I think that the two things went together historically and logically. It’s very difficult to operate it any other way. Capitalism on its own, as Marx himself said rightly, tends towards monopoly. Capitalists like to rig the markets in their favor. Of course, they do. That’s a big thing that Adam Smith said. What prevents that? Well, politics prevents that. If the democracy gets angry enough at the power of the monopolist, it will act against them and introduce competition policies. An active competition policy that breaks up coalitions like the Rockefellers, for example, and that actually helps capitalism. It’s what capitalism needs to be and what Adam Smith thought it should be. So, I think these relationships are very powerful historically and ideologically and too many people don’t realize how intimately the relationship between capitalism and democracy operated to bring us where we are.

So, there’s obviously a lot to unpack there. What I found most interesting was not the historical analysis, because I think historically you can make the argument that they’re just synergistic. Democracy helped spur capitalism and capitalism spurred democracy in different ways. But that doesn’t mean that they always go together. What I thought was fascinating about your early account was the fact that capitalism begins as almost a democratization of the economy itself. The fact that anybody can get involved, so there’s something in the zeitgeist, something in the essence of capitalism that translates back to democracy. It’s not just that the two are historically correlated. But that there’s something about capitalism itself that is fundamentally democratic.

The idea that anybody can start a business, that anybody can be involved in the economy, that anybody can be involved in that key part of our lives, which is the creation of wealth. That I think is truly fascinating, because I think that it makes us think about both democracy and capitalism a little bit differently.

Well, I never know what people find new. I think the history is important, because it has changed now. So, a big part of my book is it’s more difficult now, but I agree with you. Capitalism as it extended is democratizing in one very profound way, in that opportunity, in some profound sense, is open to all. Remember how many of the great fortunes were made by immigrants who had nothing when they came. So, it offered opportunities which were not seized by everybody, but was seized by some and it was destabilizing. The established aristocrats hated it. We forget that because they basically disappeared as a political factor. But they hated it and it is rooted in a liberal individualistic idea.

I just argue that the same liberal idea in essence even operates within the way we think about politics. But again, one of the great examples prior to the 19th century is no society would ever have chosen somebody like Abe Lincoln as their supreme leader. Where would he have come from? It would’ve been impossible. So, in this respect, this openness to the talents is something that they profoundly share. It has to do with an essentially optimistic, I would say in the English sense of the word, liberal idea.

Well, I think both are true though they’re not simple relations. Democracy helps capitalism in the sense it is a protection against a return to plutocracy and the natural tendency of plutocracy is towards economic ossification, because they don’t want competitors. Now, I’m going to use an analogy from America and that’s risky because my knowledge of American history is probably not great enough. But my understanding of American history is that the part of the United States where a genuine plutocracy was established was the American South. The wealth of the planter elite was extraordinary relative to that of the rest of the society. They controlled the politics of the southern states to a very, very high degree.

They didn’t want, and even more actually, after the slaves were freed, they didn’t want any serious competition for the labor of their workers. They didn’t want them educated. They didn’t want new business to come in. They certainly didn’t want them to be part of social Security and they succeeded with that. They prevented that, so they ossified their economies. Now, this hasn’t lasted forever. Clearly, nothing can last forever within this economy. But for a very long time, they ossified their economies. By the way, this was a point de Tocqueville noted already in his Democracy in America. So, the point is that if you have a real plutocracy with a single shared economic interest, they’re going to try and ossify the economy for their benefit. We see this again and again all over the world.

I argue in my book that’s part of what we’re seeing with the tech sector. It’s, of course, what the trust busters of the 1900s or so were seeing with what was happening with the great oil cartels. So, if you want a competitive market economy, which is really what I mean by capitalism, you need a political system that will react against plutocratic control of the economy. That means it can’t be a plutocracy.

Now, the other way around, imagine that we have a fully socialized economy. So, we don’t have a marketing economy. It’s very extreme, but there’ve been attempts. Once the state actually owns everything and it’s legitimate that means the head of the state, the people at the top, essentially control everything. If you control everything, you are going to want to tell people what to do. That means you end up with a hierarchical, organized ordered economy, which we know tends toward stagnation and paralysis. Finally, once you’ve got an economy like that, and this links back to the democracy, how are you going to start on opposition movement? The people in charge own everything. They won’t want to lose power, because there’s nothing for them to do once they’ve lost power. There’s nowhere else to go. There are no other institutions which will support them.

Nothing is independent in such a society. So, they will say political opposition is treason. That’s what they do say and they fought it systematically everywhere. Even when they move towards the market economy a little bit, as in China, as soon as these capitalists start raising their voices just a little as Jack Ma did recently when he said, ‘Well, you know, the way you run your banking system is silly.’ He is a billionaire, incredibly successful who made a very mild remark and he’s immediately anathema. You can’t run a democracy, obviously, in a society which is organized like that. So, without a market economy, you don’t have democracy. Just as without democracy, the market economy won’t stand. They need each other very deeply in the long run.

So, I think the way I think about this is analytically. I’m not going to get into the morality of this though if you want to, you can. The process that led from the market economy to democracy started with the market economy and it took a long time. If I look at my own country, which is sort of where it all starts, the market economy had turned into industrialization. So, something more dynamic in the early part of the 19th century and the full universal suffrage, unambiguous for all adults was reached in 1930. So, it took 130 years. This is a very long process. I argue that the economy triggered the changes that brought this.

So, let’s think of an interesting case which sort of supports the thesis. Look at Korea and Taiwan. So, Korea was a dictatorship, a military dictatorship, under Park Chung-hee. At American instigation and because they were very concerned about their security, they’d reformed their economy and created a dynamic capitalist economy with strong Japanese characteristics or guided capitalism of a sort. This economy was spectacularly successful. Taiwan is a similar story, but of course its political fate is more ambiguous for reasons you know. By the 1980s there began to be really serious protests because by then already Korea was a highly educated society, immensely prosperous. The ways of the military dictatorship were increasingly intolerable and this led to upheavals.

But at the end of those upheavals what emerged was a pretty vibrant, complicated, difficult, imperfect democracy. The same has happened in Taiwan. So, I would say these stories fit in with this pretty well. In the long run, if you get a successful market economy, the demands for a democratic settlement rise to a level which you can’t resist. This actually did happen in Chile, which is actually a very vibrant democracy. There’s no doubt about that in all sorts of directions. However, in the Chilean case, this followed a crisis of the democratic system in which a revolutionary left was legitimately elected and overthrown. I personally think that the Allende government would’ve failed. It was embarked on a process that would’ve been too disruptive. But I wasn’t involved in this in any way and I think it was a very great tragedy.

But I do think that the stories broadly support the idea that if you create a successful economy with a rising middle class, the demands for democracy will become overwhelming. And though Chile is certainly imperfect, most people now I think would say of the states of South America, it has one of the more stable democratic systems and that’s at least very encouraging.

Definitely, Chile is an example where even though democracy collapsed in the 1970s, it did return, obviously, and like you said, it’s been one of the most stable democracies in Latin America since then. Even with the conflicts over the Constitution, Freedom House, and other ratings of democracy still continue to score Chile incredibly high in terms of its rating of democracy. If anything, those conflicts about its constitution are really just an expression of democracy, about what is it that our values are and everything else. I mean, these are just typical debates that happen over time in a democracy.

I’d like to step to where we start to talk about the crisis, because we’ve made the case about how you see these two coming together, democracy and capitalism. But you also make the case that they’re now in crisis and I think it begins with this idea of status anxiety. Can you explain what it is and how it changes the stability of democratic capitalism?

Well, I suppose my basic idea as it evolved, which I was starting to write in 2016, which is when I really thought about this book and the question was how did we get here? Why did so many Americans think that Donald Trump was the best available president? Even if he didn’t get the majority of the vote a lot of people thought he was the best available president. Why did our people decide we should cut our links with EU and basically repudiate everything that expert opinion thought was sensible? What had happened? Why were they so disillusioned? So, the view I came to is that, of course, there are always many people in a society who are disaffected and distressed. That’s quite normal in complex societies.

But for people to want changes of this scale, who are repudiating the system itself in this way, they have to be pretty unhappy. So, what might have made them pretty unhappy? The obvious answers in my view is that over quite a long period economic changes and the performance of the economy interacting produced quite a large number of people who feared that they were becoming losers. They feared that they risked falling into the condition of people who really were at the bottom. They had struggled very hard, both as individuals and collectively, to escape in the creation of the modern capitalist economy of the middle 20th century with strong unionized labor forces, high wages, and that in itself then generating a lot of quite good service jobs as well.

These were fairly equal societies by historical standards both before the mid-20th century and afterwards. Thomas Piketty has written about that. What then happened was a series of very powerful changes. First of all, productivity growth, therefore, the underlying growth of the economy, slowed not insignificantly from where it had been in the 50s and 60s. Secondly, we began a process of mass deindustrialization. Part of that was trade, but the biggest factors related to productivity, growth, and satiation. We had a huge rise in demand for more educated people in the new sectors and what is technically called skills bias. Technical progress brought very big rises in the wages and incomes of the more skilled that is predominantly university educated people as against unskilled labor. By unskilled, I mean people who hadn’t got university degrees. Many of them also hadn’t even finished high school.

This combination of events led to a marked divergence of opportunity and prospects. I think it’s gotten worse since then in different ways between the more educated and less so. On top of this, economic reforms and liberalization led to the immense growth of the financial sector and the dominance of the financial sector in management, which generated some simply staggering fortunes at the top of the system for chief executives and others connected to this part of the system. So, we recreated an oligarchy. I think there’s no doubt about that.

Then you found a lot of people in the declining working class, this seems to have been across all the European and American countries, started feeling really insecure about their own future and that of their children. Many of them lost their jobs and they ended up with far worse and less secure jobs. They felt downwardly mobile and that’s made them very anxious. They felt the parties pf the center-left had largely abandoned them and were no longer really interested in their fate. They passed through voting for the normal center-right and then increasingly were interested in the more radical center-right.

A crucial role in all this was the financial crisis. Because it delegitimized the core of the financial, economic, and political establishment. It was an obvious failure. It was a very expensive failure. It led in the short to medium term to massive disruption, high unemployment, lots of defaults and lots of houses that people had bought. The only people who seem to be saved were the rich. Of course, the establishments of both parties in all our countries were deeply involved. You know, the Republicans were in power when the crisis happened in the US. But, of course, the Democrats then were in power when they put it all back together again.

After that to add insult to injury, there was a pronounced fiscal austerity and though they may not have been aware of it, a lot of the price of that austerity took the form of modest growth and restrictions on spending and support of these people. So, they became very, very angry. The status anxiety turned into real anger. They were looking for leaders. Since they didn’t trust any of the established leaders, they’d lost trust in them quite obviously. They were looking for somebody who wouldn’t necessarily fix their problems. They didn’t, I think, alas believe that anyone could fix their problems. But they sure as hell wanted somebody who would express their anger and identify with them. That’s, I think, why they chose Brexit and that’s why I think why they chose Trump.

We see this in many, many other countries. Essentially an increasing sense that the failure of the economic system was a failure of the system and the deal they had struck both politically and economically. Something had to change, but they didn’t really know what. But at least this demagogue came along and looked attractive. Then I found to my surprise, when I looked back at the writing on this, this sort of process had been described mutatis mutandis by Plato back in the Republic. I don’t deny cultural and social factors play a big role, but there’s a lot of evidence, a lot of evidence that economic disruption, economic failure, and especially economic crises have profound political effects precisely because they make these cultural and social differences politically salient.

What I’m also hearing from you is that capitalism became less democratic. To steal some terms from business and MBA schools, it seems that the people who describe themselves as left behind faced both entry barriers and exit barriers. They faced entrance barriers because they didn’t have the education necessary to get those extraordinarily high paying jobs. But at the same time, they also faced exit barriers to be able to leave their communities to move into those cities where those high paying jobs existed where more opportunities might exist in the United States. We might be thinking about the coasts like California and the East Coast in Britain. We might be thinking about London as opposed to Northern England and some of those other areas.

But you’ve got these exit barriers involving the price of real estate to be able to move into those communities. The loss of family morally but also economically where you don’t have somebody to be able to watch your kids if you have both parents working outside the home. There’s so much that you’re giving up to be able to make that transition. It becomes almost impossible once somebody’s already made a life for themselves. So, it feels very much that capitalism lost its democratic edge at this point and became, like you described, much more plutocratic, almost aristocratic.

That is a beautiful way, better than I did, of expressing part of what happened. It brings out the aspects of regional differences, particularly because we’ve essentially ended up with two overlapping core class divisions. So, you’ve got the working class which is clearly downwardly mobile. There is no doubt what they had is no longer as valuable as it used to be. Economics is working against them. Then you have the emergence of an increasingly numerous, and increasingly economically and culturally influential, what I following Thomas Piketty call the Brahman class, which basically means the university educated. It is extraordinary that now the number of people that have been to university in the younger generations is greater than the number of working-class people.

It’s an incredible transformation of our society and they feel dissatisfied too because of the last class, which is immensely successful, what’s called the top 1%. In some cases, just the top 0.1% of the people own everything and the most successful professionals, business leaders, and so forth whose incomes have exploded dramatically so in the US and who look like being overwhelmingly the winners to everybody else. Then, as you rightly say, most people aren’t in the great cities. They can’t access the new jobs, which are very concentrated in certain areas. The San Francisco region in America, obviously Silicon Valley and all that, LA, New York, Boston. I suppose around a few other cities like Chicago, Atlanta. I don’t know how many. But they’re expensive. They’re absolutely full of very ambitious, highly educated people grappling for all the good opportunities.

This is a very tough environment and if you’ve got an ordinary job, you’re actually going to be better off staying where you are. So, this ossifies things. These are immense problems and they’re not going to be easy to solve. Some of this is just about obvious policy change. We could do some of the things about the housing market probably. We can do some things about regional support. We can do other things.

But the economy itself and this only became more obvious to me in the course of writing, but the economy itself isn’t doing democracy friendly things in the way that it was when mass industrialization created all these opportunities for all those immigrants who came to the US without many skills and found… You know, it’s tough, but they found, in the end, jobs with much higher pay, much higher security than they’d ever had before. That created over time this blooming, blossoming American middle class and similar things happened elsewhere. The economy isn’t helping us to do that anymore. I think if you look at the future with AI and so forth it could be worse.

So, I became persuaded in my reading of the literature on this that all populists start off with one thing in common. They rail against the elites. They’re anti elite and often they’re anti elite for good reason. That is to say they succeed because a very large proportion of the population share their contempt for the existing elites and they articulate it well. I think every country I can see where what we would call a populist politician with those sorts of themes has succeeded. A lot of them in Europe, but also in Turkey, in India, in Brazil. You can understand why there is this popular resentment of the elites.

Then in some cases, many cases, this populist also carries a lot of straightforward anti-democratic baggage that only becomes obvious when he gets into power with his anti-elite language. Being anti-elite doesn’t work indefinitely. Once you are the elite, you have to play some other game. So, what they need to do is to provide a motivation for continued support. At this stage though, sometimes earlier, they start adopting what scholars call anti-pluralism as their motto. What that means is they start saying, the reason we are not succeeding is that there are enemies within and they’re not just the elites. There are profound segments of our population who are essentially treasonous. They’re not the real people. We are the real people and I am the only real leader, because I represent the real people.

Now, once you’ve got a leader who has these things, he’s justified morally, intellectually and politically in doing two very important things. The first is undermining the elite institutions which are mostly the constraining institutions of society that the most important elite institutions like the police force, the legal system, security, and other such bodies, the armies, of course, the power system and basically saying, ‘All the people who run these things are traitors and I’ve got to replace them with people who are loyal to us.’ In the process, of course, of getting rid of these constraining institutions, this person basically seizes control of the political system.

The other thing that happens is he starts mobilizing politics at the day-to-day level and society at the day-to-day level around the theme of you people who support me are the good people and the people who oppose me and particularly the people who oppose me because they’re different from you… They might be pointed intellectuals or they’re blacks or they’re gay or whatever it may be. It could be Jews. This is in a way arbitrary. It depends on what works. They’re the enemy and basically we should deprive them of political rights so far as we can, and indeed, we’re entitled to because they’re not part of the real people and they’re the enemy.

At this stage, obviously, the populist leader morphs into a despot and sooner or later he’s likely to say, ‘Well, we don’t need elections anymore, because you’ve got the right leader. We all know that don’t we.’ That’s of course also happened and is happening. So, this is a process of hollowing out democracy from within by a leader whose initial rhetoric is populist, but whose intentions are more malign. But there’s something else that can be said, which is very interesting, an anti-elite politician is sometimes an inescapable and desirable tool of democracy. That’s where it becomes important to make distinctions.

So, I essentially argue in the book that properly there’s no politician in the last century who has used populist motifs and populist rhetoric more powerfully and more effectively than FDR. In my view, he was fully justified in doing so. What he was saying was true despite, of course, many people, as you know very well, better than me argued at the time that he was a would be dictator and was going to turn American to a dictatorship. Actually, he used the energy that he generated through his populism, saying, we have got to change things profoundly and to actually introduce a number of absolutely first rate reformers into his administration to make many experiments, some of which failed and some of which were dramatic successes.

He relegitimized American democracy out of the catastrophe of the Depression. He brought in reforms like Social Security which were incredibly important. He began to introduce much better macroeconomic policies. So, a populist politician or at least a politician with demagogic appeal can, I think, and now might well be what is needed to restore healthy democracy. I think the key difference is, do you in the end respect the core institutions of the state and do you recognize that pluralism is a desirable and inherent characteristic of a democracy or do you think it needs to be suppressed?

Yeah, what you need… this particularly true in America, I think elsewhere it’s different. I think America is now alas, and it’s terrifying, because it’s so incredibly important, in greater difficulty than elsewhere. I go in great length on why that’s so. Partly it’s just a much more complex society. But yeah, you need a populist as effective as Trump with a personality which is the 180 degrees opposite. I have to say that all in all, I have immense respect for what Biden is trying to do. It’s highly imperfect and lots of criticisms can be made. He’s clearly not FDR. How could he be? I’m not really expecting that. But I think he sort of gets it.

He gets the need to speak to the people who feel anxious and understands why, because of his working-class roots. He has brought together a broad democratic coalition, which can represent a whole range of important groups that need protection. He has proposed a really quite brave economic program in the so-called inflation reduction act. I would have liked that to be bigger and the fiscal package they put in at the beginning smaller, but we can debate that. I think he’s really trying to create the conditions in which ordinary Americans will feel government can actually do things we need to get done and that we want to get done. It can be effective.

It can make us better off, because you can’t run a modern country without a reasonably effective government and that essentially the nihilism that has now seized the Republican party, alas, is a cul-de-sac. If a majority of people of America could feel that, which is clearly what Biden is trying to achieve, that seems to me it could open up a great deal of opportunity. The crucial thing, I think, in terms of its potential to solve these problems, not the likelihood, is America’s better placed than anywhere else in the world. It has staggering resources. It has the most dynamic economy at the frontier of the world and still continues to do so. It has the best educational institutions. It has a huge number of the world’s most successful corporations and it’s essentially self-sufficient in vital resources.

If it can’t fix these problems and restore the vitality of democracy, who can? And why would anyone imagine that anything else will be worthy of the American Republic?