
A review of Martin Wolf's new book The Crisis of Democratic Capitalism by Jonathan Kirschner at the LARB :
Wolf’s central argument is that capitalism and democracy are inherently interdependent, yet also often in tension with one another—and managing the balance of that indispensable relationship is akin to walking a tightrope. In traditional autocracies, the economy has been captured by those that control the state, and that control is the basis of their power (which is why they are so reluctant to let go of the reins of authority). Liberal democracies today face the inverse problem: the capture of the state by those that control the economy. This is plutocracy, and aside from the injustice it visits on societies, it is also profoundly dangerous, because in democratic plutocracies (like the United States today), the simmering frustrations of mass polities will at some point lead to the voluntary election of an autocrat: “[I]nsecurity and fear are gateways to tyranny.” Decades of stagnant incomes, rising inequality, and the erosion of high-quality jobs for the middle class and the less-educated have allowed the relationship between capitalism and democracy to become dangerously unbalanced. The Crisis of Democratic Capitalism argues that the fault lies with the failure of public policy to tame the excesses of capitalism; it warns that those excesses will unleash the forces that destroy democracy.
Economic inequality, on the rise for 50 years, has soared to ever greater extremes in recent decades. As Wolf reports, from 1993 to 2015, the real income of the top 1 percent of the population in the United States nearly doubled; for everybody else, over those same years, aggregate real income grew by 14 percent. More pointedly, as the very rich got much, much richer from 2005 to 2014, 81 percent of US households had flat or falling real income—a weighty reminder that we continue to live in a world defined by the Global Financial Crisis and its aftermath. Returning to the terrain of The Shifts and the Shocks, Wolf observes that the Wall Street titans who caused the crisis “mostly walked off with large fortunes, while tens of millions of innocent people’s lives were ruined”—a catastrophe exacerbated by the swift, misguided application of austerity measures as soon as it became clear that a complete financial meltdown would be avoided.
The role of the Global Financial Crisis (and the dismal political management of its aftermath) in exacerbating trends in inequality—and, at least as important, further fueling perceptions that the system was corrupt and fundamentally unfair—ought not be underestimated. Nor should it necessarily surprise. Wolf shows that the 1931 international financial crisis served as a tipping point in public support for the Nazi party in Germany, which won 2.6 percent of the vote in 1928 and 37.3 percent in 1932, and he cites a fascinating new academic paper that underscores this chilling point. The 1931 crisis, a global upheaval that sent the world economy reeling, started in Austria and then spread to (pre-Nazi) Germany, leading to the collapse of that country’s second largest bank. This accelerated the Nazi movement, according to the study, as “localities affected by Danatbank’s failure voted significantly more for the Hitler movement.” In any event, with or without this sobering parallel, as Adam Tooze argued in Crashed: How a Decade of Financial Crises Changed the World (2018), the norm-shattering American presidential election campaign of 2016 can only be understood in the context of the widespread revulsion at the 2008 crisis and that which followed. The emergence of new, powerful, populist movements from both the left and the right (and the inconceivable nomination of an inexperienced, ignorant reality-TV celebrity to be the Grand Old Party’s standard-bearer), is directly attributable to those societally backbreaking events.
Moreover, the 2008 crisis was not an exogenous shock; it was an accident waiting to happen, encouraged—and indeed rendered virtually inevitable—by the (politically buttressed) financialization of the American economy. It is hard to overstate the consequences of the rise of finance—and its transformation from a crucial facilitator of economic activity to an end in itself (for some). The pernicious metastasization of finance throughout the economy contributed to an orgy of reckless speculation—seen, to take one example, in the explosive growth of the (purported) value of derivatives transactions from $72 billion in 1998 to $653 billion a decade later. As Wolf archly observes, “[l]ittle of this expansion of financial balance sheets went into financing fresh investment,” and he finds it “hard to disagree” with the assessment that much of this activity is “socially useless.” This echoes John Maynard Keynes, who long ago reminded readers that, in a capitalist society, “the proper social purpose” of finance is “to direct new investment” towards productive enterprises. But “when the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”
This is no small matter, as the financialization of the economy, especially after the 1990s, and the fortunes amassed from that process, were part and parcel of a larger shift towards “rigged capitalism”—the emergence of which The Crisis of Democratic Capitalism places at the heart of the matter. In a remarkable (and laudable) intellectual evolution, Wolf, who welcomed and celebrated the Thatcher revolution in Britain, and not so long ago penned the book Why Globalization Works (2004), now attributes the crisis of our time to “what Adam Smith warned us against—the tendency of the powerful to rig the economic and political systems against the rest of society.” Superseding a well-ordered market society, rigged capitalism—a toxic brew of developments and practices including financialization, winner-take-all markets, reduced competition, increased rent-seeking behavior (the use of concentrated economic power to extract monopoly profits), tax avoidance and evasion, and the erosion of ethical standards—has led to a widespread loss of confidence in the legitimacy of democracy.
The Shifts and the Shocks decried a system in which “well-connected insiders” are “shielded from loss but impose massive costs on everybody else.” Democratic Capitalism emphasizes that this problem transcends the financial sector. In a country with half a million people in jail for minor drug offenses, “the members of the Sackler family,” who “bear heavy responsibility for […] probably the worst drug-related scandal since the opium wars,” are “not going to prison, but are just losing some of their billions of dollars.” As Wolf incisively (and inarguably) observes, “[s]uch power without accountability is a monstrous privilege, redolent of feudalism more than of a contemporary liberal democracy.”
These pathologies run deep, and well below the headlines. The use of political power to undermine competition—which must thrive at the heart of any capitalist society—is an endemic attribute of rigged capitalism. (And it is why we pay higher prices for most things than a “free market” would levy.) Many if not most giant corporations are now monopolies or near-monopolies, a situation that, as any card-carrying professional economist of even the most conservative stripe would agree, generates inefficiencies, rent-seeking behavior, and outright exploitation. Many markets have become shielded, protections reinforced by access to the corridors of power, with wealth extracted from consumers (and workers) in consequence: consider the atrocity of unskilled workers in fast food restaurants being forced to sign “non-compete” clauses, an act of collusive wage suppression.
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