The Crisis of Democratic Capitalism
Martin Wolf
Penguin Press, $30 (cloth)

Martin Wolf is one of the most influential economic journalists in the world today, and he is unhappy—to use his frequent metaphor in his new book, The Crisis of Democratic Capitalism—that the traditional marriage between capitalism and democracy in rich countries is on the rocks.

Wolf thinks “democratic capitalism” is fraying because of slower growth and widening inequality.

Wolf thinks that “democratic capitalism” is the best system for fostering general welfare. But it has begun to fray, he argues, because capitalism has not been productive enough for high growth, and widening inequality has generated widespread misery and distrust in the basic institutions of liberal democracy. While plutocrats hoard wealth and dismantle policies meant to promote inclusive prosperity, a segment of the middle and working classes have revolted by embracing ethno-nationalist demagogues with seductive but ultimately vacuous promises, who in turn are destroying due process and political rights. Wolf thinks that restoring a general sense of citizenship, with shared interest and loyalty to the common good, is the only way out, but he is not very hopeful that the United States will remain democratic by the end of this decade.

There are valuable lessons to be drawn from Wolf’s rich and nuanced analysis, but overall the book has some serious weaknesses in both diagnosis and prescription. He tends to underemphasize the cultural factors fueling the rise of right-wing populism, and his proposals for reform are too timidly and thinly conceived. Along with economic precarity, it is cultural status anxiety and resentment that may best explain the embrace of anti-democratic figures in high-income countries. This is not a reason to condone economic inequality—on the contrary, we should do far more than Wolf proposes to combat it—but it is a reason to doubt that democracy will be saved so long as capitalism prospers and economic gains are somewhat more equitably distributed.

Wolf starts with a brief history of democracy, duly going back 2,500 years to Athens. (It appears not to be widely known—Wolf doesn’t mention it—that democracy in some forms sprouted in various parts of the ancient world, including among Native American and Indian-Buddhist communities.) Coming to the last couple of centuries, Wolf does not refer to a thriving literature on the origin of democracy—a literature that has some implications for the crisis today.

One strand of this work views (mainly European) democracy as a compromise between two broad groups: an economic elite interested in securing property rights and afraid of mass upheavals on the one hand, and the working classes and peasants clamoring for political rights on the other. Bargaining between them led to the extension of franchise and political representation and to the rights to express, assemble, and organize, which ultimately led to the creation of welfare states of varying strengths and the moderation of workers’ demands. In this settlement, the economic elite had the strength of wealth and the workers the strength of numbers, but group interests clearly played a larger role all along than what Wolf emphasizes: the idea of citizenship with a shared faith in the common good. While this interest-based theory of the origin of democracy, independent of the role of liberal ideas, cannot be a full explanation, it may not be completely ignored either.

Besides economic precarity, there are significant cultural factors at the heart of our democratic malaise.

One way of understanding the current crisis is to look for factors that explain the decay of this historic compromise. Money in politics—both in lobbying for business-friendly laws and regulations and in electing complicit politicians through corporate donations—has become much more influential, with increasingly expensive elections, so that the economic elite no longer needs to compromise as much on political rights of workers and welfare state expenditures. The United States is the country where this money in politics is most rampant; it is also the country where scorched-earth anti-union policies are more egregious than in other rich countries and the worker safety net that the welfare state provides is quite patchy.

Moreover, the vaunted rule of law in such democracies is often hollow; many laws are essentially up for sale. Center-left parties—led by a Tony Blair, Bill Clinton, or even Barack Obama—have struggled electorally (and lost the moral support of many independents) by remaining wedded to high finance that provided substantial campaign contributions and thus seriously constrained policies. In different parts of the book, Wolf is quite justifiably indignant about this pernicious influence of money, but except for urging that there should be less of it, he does not spend much time suggesting feasible institutional changes. There is much to learn from the experience of public funding for elections or political parties in Belgium, Spain, Germany, Sweden, and Canada and of limits enforced in some of these countries on expenditures by parties and candidates. There is a whole array of suggestions in Julia Cagé’s 2020 book The Price of Democracy. Not all her suggestions may be easily implementable, but at a minimum, eliminating tax deductibility for (large) private political donations should be. In recent years some political candidates have also been successful in crowdfunding or gathering small donations from numerous people.

There are other ways—in certain respects, more insidious—that the democratic compromise has been weakened. In the simplest story of the compromise, the working classes are taken as united, but they are often divided by wedges between economic demands (say, for minimum wages or public health benefits, which they generally support) and cultural demands (say, against gay rights or abortion or, in the peculiar case of the United States, against gun control). In this, the elite has been helped by the increasing gulf—in occupation, geography, lifestyle, and attitude—between the more educated, more professional, knowledge-economy workers and the less-educated blue-collar workers. Thomas Piketty has mockingly called the former the “Brahmin Left,” but this segment of the population also happens to be more sympathetic to the marginal groups of society—immigrants and minorities—than the wealthy “Merchant Right” and the right-wing parts of the working classes.

Beyond eroding a shared basis for making working-class demands, there is another way the divisions within the working class affect the functioning of democracy: outright exclusion or oppression. As Sharun Mukand and Dani Rodrik have pointed out, in the democratic compromise some groups that have neither wealth nor strength of numbers are often left out—the various minority groups in society (defined, say, by ethnicity, religion, language, gender identity, or sexual orientation). If there are tensions in their relation with the majority group, their civil and political rights are in jeopardy; protecting these minority rights requires special constitutional rules and institutions like an independent judiciary to enforce them. In their absence, as populist demagogues have recently demonstrated, democracy may degenerate into majoritarianism, or what James Madison called “the tyranny of the majority.”

Both kinds of division involve cultural issues, which do not get enough attention in Wolf’s book. Though he mentions some cultural factors, he gives primacy to economic factors: slower productivity growth, the loss of jobs due to trade shocks or automation, the 2008 financial crisis, the unearned rents and super-profits of the elite, and the resultant rising or high level of inequality as the source of working class anxiety and rage. More than the current economic status anxiety highlighted by Wolf the slowdown in intergenerational mobility is what particularly makes them anxious about their children when they grow up, even when the worker herself has a stable job. As economist Raj Chetty and coauthors have shown, children born in the United States in 1940 had a 90 percent chance of earning an (inflation-adjusted) income higher than that of their parents by their mid-thirties; for the cohort born in 1980, that chance diminished to about 50 percent.

In my judgment, these obviously major economic issues are intertwined with equally important cultural issues, but with chapter titles like “It’s the Economy, Stupid,” Wolf underplays the role of the latter.

Economic inequality is a standard left-wing issue, yet the lower middle and working classes in many countries are now turning right.

The puzzle Wolf needs to explain is that economic inequality is a standard left-wing issue, yet the lower middle and working classes in many countries are now turning right. Wolf does briefly raise the question but dismisses it in one paragraph; even there he barely talks about the cultural divide among workers, apart from referring to the ineffectiveness of Jeremy Corbyn’s “old-fashioned socialism” in the UK. (He ignores the somewhat more successful experiences of leftists like Bernie Sanders in the United States and Jean-Luc Mélenchon in France.) One of Wolf’s figures shows that in Sweden, the proportion of households with flat or falling real incomes in the period 2005–14 was only 20 percent (at a time when the average proportion for 25 advanced countries was 65 percent), yet anti-immigration sentiment surged and eventually contributed to significant electoral gains for the Sweden Democrats, an extreme right-wing party with neo-Nazi roots. Culture, more than the economy, looks to have played a major role here.

If Wolf cared to pursue the question further, he’d have to confront the salience of cultural issues. Consider several factors.

First, Wolf repeatedly claims that the economic failures of contemporary capitalism—and the fact that the elite architects responsible for the devastating financial crisis of 2008 got away with impunity—have made workers lose trust in the elite. But which elite? Right-wing demagogues are more opposed to the liberal cultural elite than the financial elite; one of the first things they typically do after coming to power is reduce taxes for the rich and weaken business regulations, all the while castigating liberals for appeasing minorities, immigrants, and sexual “deviants.” And certainly not all socially conservative workers are driven by economic rage; many are not vocal about the abuse of market power and the financial rigging of capitalism that Wolf deplores. In her book Strangers in Their Own Land (2016), sociologist Arlie Hochschild reports, based on field surveys, that poor white workers in Louisiana are more resentful of minorities and immigrants than of the large petrochemical companies that have poisoned their land for decades and caused many cases of cancer in the community.

Second, if inequality and rage at an unfair rentier economy is the main source of working-class anger, why have parts of it rallied under the banner of plutocrats like Donald Trump, Nigel Farage, Marine Le Pen, and Viktor Orbán? One must look to the cultural appeal of their nationalist and anti-immigrant slogans and their coarse manner of socking it to the liberals. In the UK, as Wolf himself points out, the Tories were supported by the victims of the Tories’ own austerity policies, seduced by the cultural appeal of Brexit slogans. In my new book, A World of Insecurity: Democratic Disenchantment in Rich and Poor Countries, I have suggested that more than inequality, it is insecurity—both economic and cultural—that has distressed and agitated workers, including those in the middle class. They are less bothered about how the top 1 percent is accumulating their wealth.

Third, in many cases the right has taken the wind out of the sail of the left-liberals by adopting (or co-opting) welfare policies or measures of social protection for workers. Much of the welfare state is supported by the extreme-right AfD party in Germany and Le Pen’s National Rally party in France. The United States is the exception: the Republican Party has opposed child assistance policies that are avidly supported by the ruling right-wing PiS party in Poland.

As their tax cuts reveal, right-wing demagogues are more opposed to the liberal cultural elite than the financial elite.

Fourth, the cultural narratives used by the right have been more effective in influencing public opinion than the economic narratives of class politics used by left-liberals. Survey results have shown that people tend to vastly overestimate the size of immigrant and minority populations but dramatically underestimate the extent of wealth inequality and the racial wealth gap. The narrative of a besieged cultural majority and the spell of white nationalist conspiracy theories like the Great Replacement are difficult to break, fueling a victimization complex and toxic cultural forms of status anxiety. The whole situation is exacerbated by social media, where the right seems to have an advantage in spreading falsehoods; the more outrageous they are, the more viral they are likely to go (and the more profits the social media companies make). There is evidence that in the three months before the 2016 U.S. presidential election, false stories on Facebook favoring Trump were shared about 30 million times, whereas false stories favoring Hillary Clinton were shared about 8 million times.

The metaphor of the difficult marriage of capitalism and democracy is so dominant in Wolf’s way of thinking that the solutions he proposes often have the flavor of a marriage counselor’s advice. He appeals to “moral values of duty, fairness, responsibility, and decency” and urges that “members of the elite must be exemplars . . . 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.’” Such moral exhortations have clear limits particularly in the context of conflicting collectivities in society and polity—conflicts that raise issues of bargaining, countervailing power, and maybe even class struggle.

Strong trade unions are one obvious form of collective resistance to rigged capitalism. Wolf recognizes that the weakening of unions has had “tragic social and political consequences” but does not follow through in terms of how they could be rejuvenated and their goals redefined. He seems to support restrictions on international capital mobility on macroeconomic grounds, but he does not emphasize that they would also improve labor bargaining power by blunting capital’s  asymmetric leverage when it threatens to move elsewhere. (Rodrik noted this asymmetry in the early literature on globalization.) There are also strong arguments for reforming labor law in the United States to expand union activity to the sectoral rather than the firm level.

The narrative of a besieged cultural majority is difficult to break, fueling a victimization complex and status anxiety.

The goals and functions of trade unions also need to be broader. We have strong evidence from the long experience of German works councils that substantial worker representation in the governing bodies of large companies helps productivity and builds trustful industrial relations without hurting profits. (In her 2020 presidential primary campaign, Senator Elizabeth Warren was a major proponent of this idea.) If workers have an important voice in the running of the company, they can influence its decisions to outsource or relocate and redirect R&D investments in a labor-absorbing direction away from the current labor-replacing direction. And a federation of unions that demands voice in the formation of international trade and investment rules—which hitherto have been heavily influenced by corporate lobbies—could reduce the anti-global fervor of rank-and-file workers.

Moreover, trade unions can go far beyond their economic bargaining role by playing a pivotal cultural role, in collaboration with civil society groups, in forging shared citizenship. In the past, particularly in Europe and Latin America but also in the United States, trade unions served an important function in the local cultural community. The decline of unions has hollowed out a shared sense of meaning and identity among workers. Into this cultural void the demagogues have stepped with their racist, xenophobic culture war agenda. In a world of virulent disinformation and fake news and with social media amplifying anger and resentments and creating echo chambers of extremism, labor unions—in collaboration with other community organizations—can try to be active in providing links to public information services and news provided by demonstrably independent agencies.

The role of unions in fostering democracy is part of a larger discussion of democratic institutions that goes beyond the state and the market—a discussion that Wolf largely neglects. The late Marxist sociologist Erik Olin Wright had a whole project of what he called “Real Utopias”—ideals grounded in the real potential for social change and exploring concrete institutional alternatives to status-quo capitalism. (As Wright notes, some examples already exist, from Wikipedia and free and widely available open-source technologies to the Mondragon federation of worker cooperatives in Spain.) In the first volume in this project, Associations and Democracy (1995), Joshua Cohen and Joel Rogers suggest ways of strengthening secondary associations mediating between individual citizens and the state and thus enhancing democracy—organizations like unions, works councils, neighborhood associations, parent-teacher groups, and women’s societies. Though Wolf does envision some radical reforms of the state—including a second legislative chamber drawn by lot and designed for informed democratic deliberation—his institutional thinking would have been greatly enriched had he more seriously engaged the large literature on this subject.

The book’s treatment of innovation suffers from a similar weakness. Wolf largely ignores the special features of other varieties of capitalism where experiments have been carried out without giving up on democracy or hurting the economic dynamism of capitalism. German and Scandinavian capitalism are more labor-friendly and more intensive in taxation of high-income households than U.S. capitalism, yet they are not less innovative according to some global innovation indexes. It is also essential to acknowledge different types of innovation. Some innovations are disruptive, challenging incumbent firms—exemplified by U.S. private innovators in collaboration with venture capitalists. (Here Wolf approvingly cites Joseph Schumpeter on “creative destruction.”) Wolf does not discuss other, less disruptive, more incremental forms of innovation that add up to significant gains—forms that some large corporate organizations in Germany, Japan, and South Korea have excelled in.

Patents and copyright spur Schumpeterian innovations, Wolf notes, and he acknowledges they can be instruments of extortion or even barriers to further innovations. But he is sketchy on alternatives. Wolf mentions proposals to replace patents with prizes, but there are now also some compelling experiments in advance market commitments for vaccines. Another model is for the state to buy private patents and place them in the public domain (as the French government did in 1839 for the patented photographic invention of Louis Daguerre; doing so led to the rapid development of photographic technology). In general Wolf seems to support cautious engagement with industrial policy in developing “dynamic capability” but is wary of picking “winners.” Yet in many situations of initial discovery there are not too many firms in a fledgling new industry. In East Asian industrial policy, for example, firms have been picked by the government, but their export market performance within a reasonably short period in the face of international competition has often been used as a disciplining device.

On the subject of corporate concentration, Wolf rightly emphasizes the need for vigorous anti-monopoly policies, but he does so on the grounds of promoting competition, efficiency, and growth rather than improving labor power. He also does not join in the growing demand for Big Tech to pay back for the profits it extracts from the ownership and control of the massive amounts of private data it collects from its billions of users. The state is in a better position to bargain with Big Tech than isolated, private users; it might, for example, demand on their behalf a share of the digital dividend be earmarked for a public fund. Other proposals are in the offing, too. The city of Barcelona has implemented a civic data trust so that citizens have greater say over data collection and the purposes for which data are used. Andrea Nahler, a German social democratic leader, has argued for a national data trust with the aim of democratizing data capital. Wolf engages none of these ideas.

There is plenty of evidence that anti-democratic populism can arise independently of economic failure.

Going back to the cultural arena, the prime cultural issue of nationalism is treated too shallowly in Wolf’s book. He mainly discusses ethnic nationalism, but there are other, less divisive and less poisonous forms of nationalism, and we should not allow demagogues to arrogate the whole terrain. Both the United States and India—the largest democracies in the world—have some history of a civic nationalism based not on ethnicity but on liberal constitutional values, including respect for minority rights without sacrificing legitimate national pride—much like the pride in the national soccer team while celebrating diversity in its composition. Institutions that foster these values are essential for democracy. Jürgen Habermas likewise contrasts “constitutional patriotism” with the “blood and soil” patriotism that devastated the world under Nazism. Assimilation, on this view, only requires acceptance of the principles of the country’s constitution. This limited kind of multiculturalism may defuse some of the usual complaints of ethnic nationalists against culturally alien immigrants.

Finally, Wolf’s analysis is limited in several respects by his narrow focus on high-income democracies. Some may say that the marital bliss democracy and capitalism have enjoyed in these countries has depended on a large global servant class, as it were, and sometimes it has been at the expense of the flourishing of democracy and capitalism elsewhere—a fact that should take some of the shine off Wolf’s cheerful statements like “Periods of buoyant global capitalism and periods of democratization have coincided.” In the larger perspective democracy is neither necessary nor sufficient for capitalist development. Chinese authoritarian capitalism shows it is not necessary; the fact that the first four decades of democracy in India did not particularly facilitate capitalist development suggests that it is not sufficient.

Developing countries also supply ample evidence that anti-democratic populism can arise independently of economic failure. Strong growth has not stopped the erosion of democracy in India, Turkey, Poland, and Indonesia. Even comparing across regions within a country, right-wing extremism has not exclusively thrived in areas that have been “left behind.” In India it has flourished in fast-growing states like Gujarat, Karnataka, and Maharashtra, and in Brazil economic inequality significantly decreased under more than thirteen years of rule by the Workers’ Party, yet the party lost to Jair Bolsonaro in 2018 and only squeaked past in 2022. (This phenomenon is evident in developed countries, too. Matteo Salvini’s Northern League is the dominant party in an economically advanced part of Italy, and as has been argued in these pages, the most significant part of Trump’s base, from an electoral standpoint, lives in relatively well-off, rapidly diversifying suburbs where status threat is acutest—not in impoverished rural America.)

We should doubt that democracy will be saved so long as capitalism prospers and economic gains are more equitably distributed.

Accounting for all these facts would have made the salience of cultural factors more obvious. More attention to developing countries, where informal workers dominate the labor force, might also have prompted Wolf to recognize the need for policies to bridge formal and informal workers to strengthen labor’s bargaining power—policies like universal health care and universal basic income, which are absent in the United States and India, where the labor movement is fragmented and weak. Wolf too quickly dismisses universal basic income, which in my view is a particularly compelling policy for poor countries.

Overall, then, Wolf offers many sensible generalizations about reforms—following his eminently defensible motto of “nothing in excess”—and also has here and there some plausible, even radical, suggestions. But he stops well short of proposing an alternative architecture of viable institutional forms for both democracy and capitalism. The thin gruel of exhortations for shared citizenship is no match for today’s crisis.

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