Michael Roberts – The crisis of democratic capitalism

Is Martin Wolf on the road to Damascus?

Michael Roberts is an Economist in the City of London and a prolific blogger

Cross-posted from Michael’s blog


In his latest book, FT columnist and Keynesian guru Martin Wolf, starts from the premise that capitalism and democracy go together like a hand in a glove.  But he is worried.  “We are living in an age when economic failings have shaken faith in global capitalism. Some now argue that capitalism is better without democracy; others that democracy is better without capitalism.”

Nevertheless, in his book, Wolf claims that while “the marriage between capitalism and democracy has become fraught”, any “divorce would be an almost unimaginable calamity.” Despite the faltering steps of capitalism in the 21st century: slowing growth, increasing inequality, widespread popular disillusion, “democratic capitalism” as he calls it, “though inherently fragile, remains the best system we know for human flourishing.”

Wolf defines ‘democracy’ as “universal suffrage, representative democracy, free and fair elections; active participation of people, as citizens, in civic life; protection of the civil and human rights of all citizens equally; and a rule of law that binds all citizens equally.”  By capitalism, “I mean an economy in which markets, competition, private economic initiative, and private property play central roles.”

Wolf reckons that “capitalism and democracy are complementary opposites: they need each other if either is to thrive.”  And maybe he is right that a fascist autocracy to sustain capitalism and the owners of capital – a real possibility in the next decade or so – would be the last throw of the dice for capitalism, as it would be finally exposed as not as a ‘complement’ to democracy, not the mother of democracy, but its opposite and its destroyer.

No wonder he is worried, as in his previous books, he lauded the success of capitalist progress across the world.  Now he says, “subsequent events have shown that this confidence was built on fragile foundations. Liberalized finance proved unstable. I realized this during the Asian financial crisis, as I explained in my book Why Globalization Works. But the concern became even more compelling after the global financial crisis and Great Recession of 2007–09, which were the focus of a subsequent book, The Shifts and the Shocks. Moreover, the world economy was generating destabilizing macroeconomic imbalances.”

Something has to be done, because for Wolf, there is a countdown to the end of ‘democratic capitalism’: “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 it seems that people don’t want his democratic capitalism.  “Karl Polanyi argued that human beings would not long tolerate living under a truly free market system. Experience of the past four decades has vindicated this point of view.”

What concerns him most is the possibility of revolution.  In the same way that the reactionary Edmund Burke of the 19th century condemned the French revolution, the aim now must be to avoid revolution because that leads to “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.”

Wolf is a believer in the benevolent development of democratic capitalism, when enlightened leaders transformed economies from serfdom to capitalism and from autocracy to democracy. But democracy was never the kind gift of capitalists.  What democracy we have now had to be fought for against bitter opposition from the powers-that-be over centuries, fought by the many over the few.  People had to fight to end slavery and the slave trade; they had to fight for the vote (the Chartists, the right of assembly; and to organize trade unions (Tolpuddle martyrs); and for the rule of law (against monarchies and dictators).  Capitalism did not grant these things – they had to be wrested from the hands of capital.  It was class struggle (“all previous history is the history of class struggle”) that achieved even these limited forms of democracy that some of us in the world now ‘enjoy’.  Democracy and capitalism do not go together.  Indeed when capitalism became imperialism in the late 19th century, there was no democracy for the billions in the colonial world (only vicious repression – Ireland, India, Vietnam etc).

Wolf does not want revolutions, but it was only through revolutions that people gained rights from the dead hand of capital.  The American War of Independence freed the colonists from the autocratic control of the British state.  The French revolution may have been bloody and eventually descended into dictatorship (Napoleon), but it also ended absolute monarchy, feudal rights and established some form of national assembly and the rule of law.  Would that have happened through some process of gradual change by benevolent merchants and capitalists?

The same counterfactuals can be applied to the Russian and Chinese revolutions.  If it had not taken place, would there eventually have been democracy in Russia or instead the continuation of absolutist Tsarism or some corrupt oligarchical autocracy (that Russia has now)?  Without revolution, would China have peacefully moved out of Japanese occupation, foreign imperialist control and ‘warlordism’ towards a democratic government based on capitalism that would lead the Chinese out of poverty?  Or did it require a Chinese state that abolished capitalism and planned the economy do that?

American capitalism is supposed to be the epitomy of democratic capitalism; certainly Wolf would argue that for the 20th century.  And yet, American capital has fought against civil rights, trade unions and the taxation of the rich, equality before the law – and all this in the golden age of ‘democratic capitalism’.  Wolf is now worried about the rise of Trumpism and populism threatening democracy.  But he has nothing to say about ‘Bushism’ before that.  Did American capitalism achieve democracy in its invasion of Iraq and Afghanistan?  And when there was a democratically elected socialist government in Chile in the 1970s, did capitalism quietly accept democracy there or did it organize and support a brutal military coup that abolished all Wolf’s democratic criteria?  Did global capital support the decades-long struggle against the apartheid regime of South Africa; or instead go along with the jailing and executions of black leaders fighting for democracy?  Does democratic capitalism condemn the nightmare absolutist Saudi regime of unelected sheikhs who are waging a horrific war in Yemen; or does it support this media-murdering regime with weapons?

According to Wolf, the expansion of capitalism and the market economy globally has gone hand in hand with the rise of democracies globally.

And here he quotes Marx and Engels from the Communist Manifesto as predicting the success of capitalism back in the mid-19th century.  “Karl Marx and Friedrich Engels understood this. In the Communist Manifesto, one of the most important documents of the nineteenth century, they described the emerging capitalist economy brilliantly.”  I think this is why, at the launch of his book at the LSE, Wolf apparently said that: “You can’t be an intelligent social scientist unless you’re a Marxist”.

Of course, he was deliberately ignoring the other side of the capitalist coin that the Manifesto explained.  With capitalist accumulation and growth came the intense exploitation of human labour. Capitalism emerged from previous modes of production, not through some benign expansion of democracy, but through the destruction of common land and enclosures forcing people into wage labour for capital; and by the suppression of indigenous peoples driving them into slavery and subjugation.  Capitalism did not arise as a ‘complementary opposite’ with democracy but was built on capital accumulation facilitated by slavery: “the veiled slavery of the wage workers in Europe needed, for its pedestal, slavery pure and simple in the new world. . . capital comes dripping from head to foot, from every pore, with blood and dirt”. (Marx, Capital).

Wolf’s position is either naïve or just plain hypocrisy.  He ignores the contradictions in his ‘complementary opposites’ of liberal democratic capitalism.  Instead, he highlights that real enemy of democracy is not just Trumpism but “the rise of autocracy worldwide and, above all, by the apparent success of China’s despotic capitalism.”

And here comes Wolf’s almost desperate plea.  Whereas in the 1990s, he was convinced overwhelmingly of the future as one of liberal democratic capitalism and backed the (in)famous statement of Francis Fukuyama that, with the collapse of the Soviet Union, it was the ‘end of history’ “that is, the end point of mankind’s ideological evolution and the universalization of Western liberal democracy as the final form of human government.” But now it has all gone ‘pear-shaped’.

Why has it all gone wrong?  It’s the economy, stupid!  It seems that the capitalist economy is not such a success after all: “economic disappointment is one of the chief explanations for the rise of left- and right-wing populism in high-income democracies”.  Now “many people in high-income countries condemn the global capitalism of the past three of four decades for these disappointing outcomes. Instead of delivering prosperity and steady progress, it has generated soaring inequality, dead-end jobs, and macroeconomic instability.”

Why is capitalism failing?  Wolf first admits that the Golden Age period of the so-called Keynesian ‘mixed economy’, where the market could be ‘managed’ by wise governmental policies to avoid economic crises and market excesses, did not last.  It was discredited by “the combination of high inflation with high unemployment” and government interference only made things worse by reducing the profitability of companies and slowing productivity.

Then in the neo-liberal period from the 1980s, inequality of incomes and wealth rose sharply and the financial sector began to take over, leading to a fall in productive investment and thus productivity growth and the rise of what Wolf calls ‘rentier capitalism’.  So it’s all the fault of the switch from progressive productive industrial capital to fragile, unproductive financial capital: “the macroeconomic fragility plaguing high-income countries was largely due to the reliance on the financial system for generating demand.”

This rentier capitalism has many aspects: “financialization, corporate (mal-)governance, winner-take-all markets, rents from agglomeration, weaknesses of competition, tax avoidance and evasion, rent seeking, and the erosion of ethical standards.” Wolf gives us chapter and verse with a range of revealing graphs on rising inequality, falling productivity growth, the rise of the financial sector, the end of expanding global trade etc – what the IMF calls Slowbalization.

This malaise was especially exposed following the Great Recession of 2008-9 and the ten years afterwards before the pandemic slump – the period that I call the Long Depression.  “The economies of the Western world are poorer than they imagined ten years ago. They must look forward to a long period of retrenchment.”  Oh dear.

But these are symptoms not an explanation.  Why did the ‘golden age’ capitalism of the 1960s give way first to ‘stagflation’ in the 1970s and then to falling productivity growth and a rentier economy in the last two decades of the 20th century?  Wolf hints only that this “malaise is partly the outcome of profound and inescapable forces, especially the slowdown of productivity growth, unbalanced impact of new technologies, demographic changes and rise of emerging countries, especially China.”  Wolf offers no proper explanation: the profitability of productive capital is not considered.

Capitalism is failing. So what to do?  Well, we must save capitalism with a range of reforms.  After all, as Branko Milanovic, formerly at the World Bank argues, capitalism is “alone”: it has won. “No other credible system for organizing production and exchange in a complex modern economy now exists.”

The alternative of democratic socialism with a planned economy run by workers organisations is both a nonsense, not possible and downright dangerous. “Almost nobody still argues in favor of a centrally planned economy without at least some reliance on market forces and private ownership of productive assets.”  Democratic socialism is no alternative: it’s either ‘democratic liberal capitalism’ of the West or ‘autocratic political capitalism’ of the East. That is the only choice on the menu for humanity.

Those who “aspire to nothing less than anticapitalist revolution” have no chance of gaining power. And thank God.  Because such a transformation “could only be implemented by a dictatorship, and a global dictatorship at that. No such regime is (happily) in prospect. This is at best unrealistic utopianism. At worst, it is yet another in a long succession of “progressive” calls for tyranny.”  For Wolf, the idea of a socialist democracy is “a chimera, a will-o’-the-wisp”.  Such a combination of economic and political power will end up, sooner or later, like the Venezuela of Hugo Chavez and Nicolas Maduro or the Soviet state. Even in China, “arbitrary state power makes all private property insecure and so threatens the market economy”.  You see, “full socialism is inherently antidemocratic and anticompetitive. This is because, at bottom, it is yet another system in which political power and control over valuable resources are fused” – unlike capitalism, of course.

Having ruled out revolution and socialism as the answer to the failure of liberal democratic capitalism, Wolf unsurprisingly reverts to a Keynesian-style New Deal.  In this ‘new’ New Deal, “what we need are societies that serve everybody, by offering opportunity, security, and prosperity. This is not what many high-income democracies now have.” Indeed!  “But the key requirement is to be prepared to be quite radical (! MR), while thinking systematically, rigorously, and realistically. This is piecemeal social engineering in practice.”  There we have it: radical.. but realistic ..piecemeal… social engineering.

What does this involve? “We need to make our democracies stronger, by reinforcing civic patriotism, improving governance, decentralizing government, and diminishing the role of money in politics. We must make government more accountable. We must have a media that supports democracy rather than destroying it. Only with such reforms is there any hope of restoring vigorous life to that delicate flower, democratic capitalism.” All this seems to me just as utopian as Wolf claims that democratic socialism is; and clearly inadequate in raising productivity growth, reducing inequality and raising incomes for the world’s people.

Although liberal democracy is threatened by a range of autocratic states (apparently, it’s not the other way round: namely the ‘democratic capitalism’ of the US and its allies threatening resistant ‘autocratic states’), we should avoid war with the likes of China and Russia (sorry about that last one). “The relationship with China must be one of cooperation, competition, coexistence, and confrontation, but not, we must hope, of open conflict, let alone of armed conflict. That would be a catastrophe.”  Tell that to the strategists of democratic capitalism in America and Europe.

Wolf ends his long essay with a deal of pessimism on the prospects of his New Deal happening.  “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”?”  That grand idea has long gone in the US already. And it has no future under capitalism in the 21st century.

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