2008 Financial Crisis

The idea that democracy and capitalism have any connection at all is largely a side-effect of the Cold War. Prior to 1939, the most passionate defenders of capitalism (think of the Austrian economists such as Ludwig von Mises or Joseph Schumpeter) were deeply alarmed by the expansion of suffrage in the 1920s, which had granted “the masses” their voice. In Europe, the demand that ordinary men and women be politically represented would have been more commonly associated with socialism than with capitalism. The catalyst for interwar neoliberal thought on the continent was precisely that democracy posed a growing threat to capitalism, a development that needed to be resisted. In the US, meanwhile, many of the most ardent defenders of the republic’s democratic tradition were fearful of the new industrial corporations and monopolies in the late 19th century. The Jeffersonian ideal of agrarian democracy was undoubtedly compatible with markets, but far less so with the forms of concentrated ownership and hierarchical management associated with capitalism. The birth of American populism with the formation of the People’s Party in Nebraska in 1892 took explicit aim at the capitalist elites, represented by Wall Street and the Federal Reserve, clustered in New York and Washington DC. The fact that “democratic capitalism” is anything more than an oxymoron is largely thanks to two things. Firstly, there was the postwar establishment of Keynesianism and social democracy, which sought to put economic growth in the service of social cohesion and mass citizenship, partly through applying constraints on the financial sector. The German sociologist Wolfgang Streeck has argued that the postwar Keynesian era was in fact the only time in history when democracy and capitalism have ever been meaningfully combined, because (until it broke down in the 1970s) this was the one phase of capitalist history in which financial markets were subservient to national political authorities. [See also: Fascism’s liberal admirers] Secondly, there was the new global hegemony of the US, whose ideological pitch was that American economic power was a guarantor of political freedom across the world. Public intellectuals such as Milton Friedman happily fell into line behind this anti-communist agenda, arguing that as long as an economy granted freedom to corporations and consumers, that was as much “democracy” as anyone might need. Reversing the original anxiety of prewar neoliberals, the alleged problem with socialism was now that it suppressed democracy. Of course, the “mixed economy” model of the postwar era fudged the issue by accepting elements of socialism (such as state ownership of key industries) into mainstream economic policy, but this only emboldened the ideological celebration of Western capitalism. The central claim of Martin Wolf’s new book, The Crisis of Democratic Capitalism, is that the synthesis of democracy and capitalism, “the political and economic operating systems of today’s West”, is now in grave danger. Nationalism and authoritarianism threaten the liberal institutions on which modern democracy depends, while economic stagnation and flagrant rent-seeking at the top is destroying the legitimacy of capitalism. Wolf is nuanced and evidence-based on the relationship between these two developments, highlighting the ways in which the capitalism of recent years has destroyed people’s self-esteem, dissolved their belief in the future and led them in search of scapegoats. Any credible plan for resisting the sort of plutocracy represented by Donald Trump will need to operate on political and economic fronts simultaneously. Wolf is clear that the alliance between democracy and capitalism is an uneasy one, that works at best as a delicate balance. This is no Friedman-esque polemic about the political freedoms that capitalism guarantees. “As is true of any marriage,” he writes, “that between liberal democracy and market capitalism may fail. It is sure to do so if the polity or the economy fails to deliver what is needed.” And yet Wolf is adamant that the relationship is still the best one available, in spite of inevitable imperfections. Historical periods of globalisation, such as the late 19th and late 20th centuries, have tended to coincide with those of democratisation. Where it has been established, the liberal separation of market from state, economics from politics, has delivered prosperity and peace over the past 200 years. This is what Wolf is fighting for. So why has this settlement broken down? And, no less importantly, when did it happen? It’s relatively easy to diagnose the crisis in the abstract. If the goal of liberalism is to maintain the uneasy balance between private economy and public politics, this can either go wrong when the state overpowers the economy (socialism) or when private economic power comes to pollute politics (plutocracy). While Wolf makes sure to attack Venezuelan socialism in passing, it is principally the latter threat – of economic powers that have broken free of political constraints – that he has in his sights. While he would no doubt be horrified by the comparison, much of Wolf’s economic critique is in line with what politicians such as John McDonnell and Bernie Sanders have been arguing for several years. A chapter entitled “Rise of Rentier Capitalism” includes a section with the impeccably Corbynite title, “Toward Rigged Capitalism”. Between the various graphs and scholarly references, one detects a note of disgust with the “elites” who seek to dodge their tax, abuse their market power and duck any public accountability. While it seems unlikely that The Crisis of Democratic Capitalism will convince many socialists of the merits of capitalism, it does appear to have been written partly to get Wolf’s more natural interlocutors – the global business class – to confront the consequences of their own political nihilism. Wolf is equally unsparing when it comes to the policy disaster of post-2008 austerity. “It was, in some cases, notably the UK’s, an attempt to shift the blame for the crisis onto fiscal profligacy from heedless finance.” By seizing the opportunity to slash public spending, the duplicitous Cameron government did untold social damage, which eventually contributed to the disaster of Brexit. It’s a shame Wolf wasn’t able to convince his own colleagues of this, when they wrote, in a Financial Times leader before the 2015 election, “The mix of a loose monetary policy and a tight fiscal policy has worked. Mr Cameron and his chancellor George Osborne, supported by Mr Clegg, showed political courage to tackle the public finances and shrink the state.” By contrast, Wolf is adamant that only a higher-tax, higher-spending state can now rescue us. While 2016 stands out as the year when Anglo-American democracy was shaken by illiberal forces, and 2008 when the excesses of financialised capitalism nearly sank the economy altogether, Wolf can also be frustratingly reticent when it comes to identifying historical origins and causal chains. It falls to the reader to piece together a historical narrative on the basis of throwaway observations and dates. We learn, for instance, that “democratic capitalism” actually began in 1870, because this was the point when government spending as a proportion of GDP began its ascent. We’re told that “The most important reformer of the 20th century was Franklin Delano Roosevelt.” More arrestingly, Wolf reports that “The Trump-led Republican Party, or for that matter the Johnson-led Conservative Party, did not come from nowhere. They came from 40 years of elite failure.” Forty years? I wonder who came to power precisely 40 years prior to the Johnson-led Conservative Party. One conclusion to draw from The Crisis of Democratic Capitalism is that the senior columnist of the world’s leading business newspaper is now a committed big-state social democrat, who blames Thatcherite neoliberalism for the breakdown of everything liberals hold dear. [See also: Theory wars: how postmodernism became weaponised] The problem is that if, as Richard Rorty famously put it, “truth is what your contemporaries let you get away with saying”, blaming Thatcherism and its heirs for the condition of Britain in 2022 is not a “truth” that Wolf’s contemporaries would let him get away with. In addition to Wolf’s impressive review of recent political and economic research, the book is littered with references to the sort of authors, such as Yascha Mounk and Francis Fukuyama, who get read in business-class lounges. At its weakest, The Crisis of Democratic Capitalism occasionally lapses into the kind of tautologous Blairite Davos-speak in which it’s advisable that the world pursues good outcomes, so as to avoid bad outcomes. All of which raises an interesting question about the nature of Wolf as a public intellectual, given his impeccable status as a source of independent commentary and economic analysis over the decades. What is Martin Wolf? He presents himself here as the voice of moderation and balance, in a world that has been disrupted by financial and political excess. He takes inspiration from Karl Popper’s vision of “piecemeal social engineering”, a kind of liberal reformism, that avoids trying to overhaul everything at once. “The motto of this book is ‘never too much’, as the ancient Greeks used to say”, he announces early on. Barack Obama’s principle of foreign policy, “Don’t do stupid shit”, describes the Wolfian philosophy just as well. The reasoning is always painstaking, even if the concrete conclusions are often underwhelming. A thoughtful and informed discussion of universal basic income concludes that it is a bad idea. An erudite discussion of university funding finds that Britain’s hated model of income-contingent student loans is the best available. Many of the most passionate demands are merely for the liberal state and its elites to rediscover some sense of public service that they once possessed in the past. Among other things, The Crisis of Democratic Capitalism is an exercise in expectation management. Whether this cautious scepticism is adequate to the scale of the world’s challenges right now is questionable, though there are flashes of wild ambition in talk of overhauling the global economy. The spectre haunting Wolf is that of war. The book opens with biographical details of how his parents met, having fled the Nazis: “I and my brother, born in 1948, are, like many millions of others, children of catastrophe.” The war in Ukraine and escalating tensions with China hover in the background. The example of the Second World War, and the lessons that were taken from it, seemingly drives Wolf’s crypto-Keynesian mentality, even if he is adamant that we cannot simply resurrect the political-economic system of the postwar era. One feels Wolf is torn between the solutionist optimism that is required to get a hearing on the global business circuit, and the pessimism that comes from knowing too much about the 20th century. But what if Streeck is right, and “democratic capitalism” was just a 30-year experiment, sandwiched between much longer phases of financial domination? That would surely require a more full-throated rejection of the Thatcherite paradigm. Wolf doesn’t go as far as calling for a new Bretton Woods (which would be necessary in order to bring finance to heel); indeed, he never seems to view finance in particular as the problem. However, he’s clearly under no illusions as to how socially destructive contemporary capitalism has become, nor how dire the political fallout could end up being. The Crisis of Democratic Capitalism will reach a wide and powerful audience. It will be read by world leaders and CEOs. If it convinces some of them to change tack, away from the plutocratic path that national and international economies are currently on, then we should all be grateful. Whether it will stir any of those outside of such rarefied corridors of power into action seems more doubtful, and perhaps beside the point. “The Crisis of Democratic Capitalism” by Martin Wolf is published by Allen Lane on 2 February 2023 Purchasing a book may earn the NS a commission from Bookshop.org, who support independent bookshops [See also: Do capitalism and democracy go together?]

The business-lounge intellectual

The next financial crisis is brewing in the UK’s corporate debt market

When finance and oil collide

Is this the energy industry’s “Lehman moment”?

Keir Starmer is letting a crisis go to waste