The crisis of democratic capitalism

Martin Wolf

The Rafael del Pino Foundation organised, on 25 October 2023 , the Master Conference "The crisis of democratic capitalism given by Martin Wolf.

Martin Wolf is associate editor of Economics and chief economics commentator at Financial Times. He is considered one of the most renowned economists on the international scene. The journals Prospect o Foreign Policy He is described as "the most influential financial journalist of the ".Anglosphere"and personalities such as Kenneth Rogoff and Lawrence Summers consider him to be "the world's leading financial and economic writer". He has been a visiting professor at Oxford and Nottingham Universities, a member of the World Economic Forum in Davos and of the UK Vickers Commission, as well as a member of the World Economic Forum in Davos. Distinguished Visiting Fellow for International Economics from Council on Foreign Relations. He is also a doctor Honoris Causa by the Universities of Leuven, London, Nottingham and the London School of Economics.


On 25 October 2023, the Rafael del Pino Foundation organised the conference "The Crisis of Democratic Capitalism", given by Martin Wolf, associate editor of Economics and chief economic commentator of the Financial Times.

Martin Wolf began with a quote. The better association in a state is one that operates through the middle classes. Those states in which the middle class is larger and stronger, stronger, than the rich or the poor, or stronger than either of those two groups, have every chance of having a well-run democratic constitution. This is the crux of my argument. This quote comes to us from Aristotle, the first political scientist.

There is another quotation, nothing too much, which appears in the temple of Apollo in Ephesus. Why? Because a sophisticated, civilised society is the result of a delicate balance of possibly conflicting elements. The great mistake made by those at the extremes is to believe that this can be simplified into a single thing.

In 1937, his father left Vienna and went to England alone. His immediate family miraculously managed to escape to Palestine, but the rest were trapped in Poland and perished in the Holocaust, except for one person. In 1940, my mother's father, who was a self-made man, managed to hijack a fishing boat to take his family to England as the Germans penetrated Holland. He asked his brothers to go with him, but none of them wanted to. They also perished during the Holocaust. This catastrophe was the result of the collapse of civilisation in early 20th century Europe.

Among the most important reasons for this collapse was the economic catastrophe, the Great Depression. Hitler ultimately came to power because of the Great Depression. My conclusion is that if people cannot earn enough money to live decently, if there is no hope of a certain prosperity, a peaceful and stable democratic order based on consent is difficult, if not impossible, to guarantee. We cannot take for granted the stability of even the most powerful civilised democracy, not even that of the United States.

Right now we are witnessing a democratic recession. In a liberal democracy, a democracy characterised by individual civil rights, the rule of law and respect for the rights of the losers as well as the legitimacy of the winners, fair and free elections determine who comes to power. Without that, it is not a democracy. Attempts by any head of government to overthrow elections, or to overturn the meaning of the vote, are a betrayal of the constitutional order. This is what Donald Trump has tried to do, both before and after the last presidential election. He failed, but even today, despite these Republican results, Trump continues to appeal to his party's base and to almost all presidential candidates. Meanwhile, staunch conservatives, such as Liz Cheney, daughter of Vice President Cheney, has been defenestrated for saying that Trump's big lie that the election results were a big lie is a big lie. More recently, many of the people who supported him in his campaign, saying it was a big lie, have now switched collars, thinking about that prison they face. So we are faced with the possibility of Donald Trump becoming president and imprisoned, or president instead of being imprisoned.

The Republican Party, therefore, no longer feels committed to the most basic of democratic norms, which is fair and free elections. But how can a democracy survive if people think that winning is the only important thing? Democracy is basically based on moral values, on ethics. We all have to think of ourselves as citizens. We govern through debate, not by forcing anyone, and we debate honestly and reasonably. If these values disappear, what is left? Only violence.

Sadly, Trump is not alone. Freedom House's Freedom in the World 2023 reports that this year has been the sixteenth in a row in the decline of liberal democracy. This democratic recession is closer now than it has been in the last fifteen years. This decline is occurring in all regions of the world, especially in the most fragile ones. But, above all, it is seen in core democracies in the West, including the United States.

How did the combination of democracy and the market come about? In 1800, there was no democracy in the world. No country had a sufficient number of electors, nor a genuine electoral process to decide what was democratic. The United States was a republic, but only 6% of adults had the right to vote. Even when republican institutions existed, the franchise was severely limited on the basis of sex, race and wealth. In the 19th century these franchises expanded, universal democracy emerged and gradually began to make itself known in half the countries of the world. This did not happen all over the world, nor did it include every major country, such as China, but it did happen in enough nations to change the world.

In 1800 there were 10% from democratic countries. After World War I there were 40%. Democracy collapses in the years of communism and fascism. Then it soars as Europe becomes liberated after the fall of Nazism and fascism. It stabilises until 1980 and then explodes after the fall of the Soviet Union. The openness of the world economy, measured as global trade over GDP, correlates with the advance of democracy. There is a certain link between democratisation and the dynamism and confidence in the world that a liberal economy instils.

Why do these exceptions occur? It is important to remember that, historically, in agrarian societies, the most normal way of structuring economies and politics is that power has been married to wealth and wealth has been married to power. The most powerful are the richest and vice versa. Absolute monarchs were masters of everything. Why is this revolutionary change taking place? Why are we moving towards democracy? The answer lies in the emergence of the marriage between liberal economics and democratic politics. Market capitalism and democracy are complementary opposites. Both reject the ascribed hereditary status. They defend the idea that people can decide on important economic and political matters by and for themselves. Democratic capitalism is based on ideals of work, individual effort, reward for merit and the force of law.

In historical terms, albeit with difficulty, the market economy has achieved urbanisation, a growing demand for a more skilled and better educated workforce, the newly organised working class, as well as opportunities for positive-sum policies because economies are indeed beginning to grow. Democracy, as Aristotle says, rests on the existence of a group of economically independent citizens. That is why economic progress turns out to be so important. A fully socialist society will inevitably be a dictatorship, since the ownership of productive assets lies entirely with those who control the state. Absent market coordination through productive mechanisms, then the state will be in charge of allocating these valuable resources, it has too much power. Markets protect democratic politics from this excessive concentration of power, but democratic politics also protects markets from excessive concentration of wealth. Thus, democracy and the market economy complement each other.

The two are also opposites. The market economy tends to be global, cosmopolitan, while the democratic state, by definition, is territorial. The market is the domain of output; democracy is the domain of voice. The market economy tends to be unegalitarian (one dollar, one vote), while democracy is, by definition, in theory, egalitarian (one person, one vote). The tension between capitalism and democracy will therefore resurface. If the economy does not serve the interests of the majority, the sense of shared sovereignty will weaken and we will see populist demagogues emerge.

Populism per se is not bad for democracy, as long as it takes the form of justified hostility against predatory elites. Too often, however, it becomes hostility to pluralism per se, and pluralism is an essential element of democracy. When this happens, democracy becomes a plebiscitary dictatorship, and ultimately a dictatorship. At the other extreme, the concentration of wealth can lead to plutocracy because wealth becomes power. All this is happening in our countries, more specifically in the United States. In fact, it is quite likely that there is a predatory autocracy and a corrupt plutocracy. That is basically the system that governed the Roman Empire. In short, democracy and the market are linked, but like many marriages, they are difficult.

In the democracies of high-income countries, increases in inequality, the worsening prospects of the middle classes, have been eroding the foundations of and confidence in democracy. Fear of losing economic power has created what is called status anxiety. This, propagandists have been turning into racial and cultural resentment, especially in ethnically diverse societies. This is not new. It has been the bedrock of political culture in the American South and in European fascism. These resentments have been worsened by the emergence of a large but disaffected class of university-educated civil servants dedicated to progressive culture and racial politics. This identitarian army of the left clashes with the identitarian army of the right and creates a great social cleavage that becomes the most important feature of politics in many countries. The rise of the new media has facilitated all these trends, but not created them.

What has happened to create this status, especially with people who have not gone to university? In the long term, there is an important phenomenon which is economic phenomena: deindustrialisation, growing inequality, falling productivity. In the UK, the proportion of people working in industry has fallen by twenty-five percentage points, from about 40% to 12%. In Spain and Germany it has also fallen sharply. The United States and the United Kingdom have the highest levels of inequality among high-income democracies. Moreover, they have had some of the far-right populist policies. Is this by chance? I doubt it.

At the same time, productivity per hour worked shows a drastic worsening of productivity growth, which determines prosperity in these countries, especially in the most successful ones in the early period. Easy credit masked these trends, but it exploded in the international financial crisis. The scale of this crisis, the bailout of banks and bankers, convinced many people that the elites running societies were not only incompetent, but also corrupt.

The period following the financial crisis has also been tremendous. In 2021, GDP per capita in Spain was 31% lower than it would have been if the pre-financial crisis trend had continued. Another country that is very close to Spain is Italy. The UK has also fared badly. The country that fared less badly was Germany, which survived the financial crisis relatively well. In the last fifteen years we have seen a dramatic change and we have seen income levels stagnate in all these countries. In the United States it has fallen by about 20%. That, and the bailout, is why the US establishment was so ripe for the taking by the populists. What happened discredited both parties, as it did the Conservatives in the UK. The shift towards skill-intensive sectors and technologies, the deindustrialisation of labour, globalisation, the rise of China, are all factors in which powerful underlying economic forces are important.

Even so, there is ample evidence of the emergence of rentier capitalism with reduced competition, increased monopolies and unbridled executive selfishness. Moreover, the role of money in US politics has eroded the tax base. Not surprisingly, people do not believe in conventional politics.

Where do we stand today with democratic capitalism? Capitalism will survive, the question is what kind of capitalism will win, what Branko Milanovic calls democratic capitalism or what he calls political or authoritarian capitalism. There are two types of authoritarian capitalism in the world. The most common version, and probably the least dangerous at the global level, derives from a hostile takeover bid from within on democracies. The autocrat eats democracies. It usually starts as a populist demagogue, with a coterie of trust that is loyal to the leader. Plutocrats often find it necessary to support the leader, who is usually a gangster. Ultimately, they only survive if their cronies do. The other problem is bureaucratic authoritarian capitalism, such as the Chinese system. The Chinese bureaucracy operates a capitalist system that can be self-disciplinary, can be forward-looking, technocratic and rational. Even so, democratic capitalism also suffers from the voices of authoritarianism, especially the tendency towards corruption and crony capitalism. These failures concern both the economy and political legitimacy. Bureaucratic capitalism is a rival to Western democratic capitalism. Still, autocracies are and remain bad systems. They have no accountability structure, no open debates, cannot guarantee a peaceful transfer of power, and tend to rampant cronyism and corruption.

Liberal democracy has overcome many difficulties over the past centuries. It is still the best system. It is based on a brilliant belief, which is that people have the right to decide what they want to decide and to live what they want to live, in societies where joint decisions are made with the active consent of the governed. The difficult thing is to renew democracy and capitalism. This renewal must be animated by a simple and powerful idea, which is shared sovereignty. For democracy to work, we cannot consider ourselves only as workers, savers, consumers, investors. We must also see ourselves as citizens, and citizenship has three aspects to fulfil: fidelity to democratic, political and legal institutions and to the values of open debate and mutual tolerance that underpin them; concern for the ability of citizens to live full lives; and a desire to create an economy that allows all citizens to hope for a better future.

The world has changed too much and we cannot respond with nostalgia for the past. Human beings have to act individually and collectively. If we do not think and act as citizens, democracy will fail. If our core loyalties do not go with society, democracy will fail.

The Rafael del Pino Foundation is not responsible for the comments, opinions or statements made by the people who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their sole responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio González, are the result of the debates held at the meeting held for this purpose at the Foundation and are the responsibility of the authors.

The Rafael del Pino Foundation is not responsible for any comments, opinions or statements made by third parties. In this respect, the FRP is not obliged to monitor the views expressed by such third parties who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their own responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio J. González, are the result of the discussions that took place during the conference organised for this purpose at the Foundation and are the sole responsibility of its authors.