This discussion took place in January 2023 as part of the
Ahead of the Curves series, in partnership with Stifel Europe. This phase of the programme focused on the crisis surrounding democratic capitalism. You can also listen to the podcast interviews which provoked this discussion here.
The messages contained within Martin Wolf and Nouriel Roubini’s recent books are downbeat if not outright pessimistic. Both are men of a certain age (76 and 64 respectively) who believe that our democratic capitalist system has its best post-World War Two years behind it and is now under severe threat.
They are not alone in believing there is a problem. Around the world, powerful voices argue that capitalism is better without democracy; others that democracy is better without capitalism. For our system to survive we need what Wolf calls “a civilized civil war” a conflict where loyalty to one’s side is overridden by a respect for an adherence to one’s society.
The relationship between liberal democracy and capitalism changes over time, as do the policies needed to make them mutually supportive. Not for the first time, changes in the structure of capitalism have lately moved faster than the policies required to domesticate them. Liberal democratic governments are scrambling to catch up.
Many citizens are fed up. They feel the capitalist system is rigged and isn’t rewarding many of those who have placed their faith in it. Thus, the appeal of The Strongman leader and individuals like Donald Trump who during his first election campaign said: “I’ve joined the political arena so that the powerful can no longer beat up on people who cannot defend themselves”. This is a classic populist trope which has been in use for thousands of years. An addition to bread and circuses.
So, what can Western businesses do? For all its recent failings, Wolf argues, including slow growth and productivity, increasing inequality, and widespread popular disillusion, democratic capitalism is still the best system, not a mere slogan. It’s all a far cry from the optimistic days when Fukuyama in the early 90s predicted the end of history with the good guys of liberal democracy having won.
This was the latest discussion in the Ahead of the Curves series sponsored by Stifel and Eithne O’Leary, President of Stifel in Europe. Eithne opened the conversation. “It’s certainly possible to argue that democracy and capitalism which should be joined at the hip have been diverging over the last 30-40 years. Capitalism has been very good to people who own things (stock/shares/houses), it’s benefitted a smaller number of people than it should and that does sit slightly at odds with the way that democracy needs to work. People need to participate in it and vote and be satisfied with it. The contract to some degree has broken down.
“However, as far as democracy is concerned, maybe it’s making a bit of a comeback. 2022 wasn’t a vintage year for the autocrat. Competency matters a lot and I’d say there is more of it on show in democratic capitalist societies than the alternatives. I saw a sense of people pulling together and listening to largely sensible government advice during the pandemic in the face of a common – and largely unexpected – enemy. I come out on the optimistic side of things”.
Martin Wolf responded: “This is a personal voyage, and I didn’t expect to end up where I am now – it seems to me that it’s a simple story told in detail. The last 4 decades in the western economies have created quite considerable increases in inequality of income and wealth. There have been enormous gains for those who receive high income and a very big divergence of income between the most successful university-educated people and the working class. It’s very clear that policy choices made by countries have affected these outcomes dramatically.
“What caused this? Some factors are profound forces in economics that we could not have easily avoided; some forces in the economy that we could have avoided – welfare state policies of various kinds etc.; and there are some things that happened due to the dynamic of a free-market economy which generated, through political process, declines in competition, rent extraction etc.
“Then we had the huge financial crisis, which was crucial politically and economically. After the crisis, all economies in the western world stopped growing at their pre-crash rate and the UK was the most dramatic. In a political sense, it demonstrates to everybody that something is going very wrong with the elite, and they have no idea what they’re doing. In the UK now we have a stagnant economy which makes all politics zero-sum, and any decisive political action is very difficult”.
Eithne wondered whether “we all failed to realise at the time that protecting asset prices from 2007 onwards at the expense of the taxpayer was going to present us with a crisis down the road. There is a mismatch in terms of accountability”.
Martin argued, “The problem for the policymakers was that you really don’t want the banking system to collapse, so you had to rescue it. You don’t want asset prices to collapse across the board, including house prices. The difference with that financial crisis was that we didn’t allow the complete collapse of the banking system and asset prices – which the US did 90 years ago and why the depression in the 30’s became the great depression.
“Governments had to do it but the mistake was that nobody was held accountable for fraud. A lot of the bankers were allowed to leave with bonuses intact. I argued in the US case that they should have nationalised the banks and any profits accrued should have gone to the taxpayer. There have been about 130 banking crises across the world in the last 50 years – we should perceive the banking sector as part of the state. Bankers are basically very highly paid civil servants”.
Matthew Gwyther pointed out that Martin’s book emphasised not just the fragility of the democratic capitalist system but its youth as well – universal suffrage and corporate business are both really not much more than a century old. They are hardly permanent fixtures when looked at in the Long Run. But, he wondered, is the excess – the sense that capitalism has been rapacious and is eating itself – an inevitable product of markets finding their own dismal conclusions?
“In the last two centuries, we created a new sort of economy and a new sort of politics which went together in very complicated ways,” said Martin. “The new economy is one predicated on individual and collective initiative in a liberal market, broadly defined, with large corporate entities embedded within this market process. It generated something that so far as we know has never happened before, which is continuing growth – immense increases in life expectancy, mass urbanisation, new products and it’s been replicated across much of the world.
“None of our ancestors had any idea that this could generate growth forever and at the same time it changed all of society in many ways and in a direction that promoted democracy. It demanded that plutocratic, aristocratic structures would be moved in a more emancipatory direction – universal suffrage. Furthermore, these forces wanted to temper capitalism and create a state that would look after people. So you have the rise of social democracy – a mixed economy balanced system. The growth rates have slowed and it was probably unavoidable and may be permanent.
“Politics has changed for all these reasons too and because the media has changed. We have moved to a period with angry voters who deeply distrust elites of all kinds – that’s what populists live off, and they are prone to listening to demagogic forces. Can we develop in this circumstance, a new synthesis which will allow democracy and a market economy to work for the great majority of people?”
Neal Lawson pointed out that there have been “deliberate attempts to undermine democracy. For example, the 1975 report paid for by Rockefeller which led to the excess of democracy theory”. To counter this, he asked “Do you not see an increasingly networked society? In our networked digital age, everyone can say, talk, know, vote etc. Are there not opportunities for better democratic, participatory, social, economic and constitutional foundations in the world as it’s emerging now?”.
“Maybe” said Martin “but I’m not sure what that would look like. What would you vote on, how, amongst whom and how would choices be discussed? A governing system must generate stability for people and business and have a measure of predictability. We’ve just seen the consequences of changing our relationship with our biggest trading partner to something which can change day-to-day”.
“The problem is that what we’ve created at the end of the last 200 years is a complex machine and none of us can have the faintest idea how it really works but we all hope somebody does. We rely more than any society in human history, on experts. Expertise has in some ways got to be protected and operate within a democratic framework. How do we marry the expertise we clearly need to run a society like ours with democratic oversight?”
“The problem with a lot of internet discussion is that it’s just mostly nonsense and you can’t run a country on that, but the nightmare is that you’d end up with the sort of economic policymaking that has bedevilled Latin American countries. The deference has gone but a certain level of respect for expertise is essential in a society as complex as ours”.
Patience Wheatcroft wondered, “If democratic capitalism is to work then there has to be a sense of fairness about it. The discrepancy in the way that the cake is now shared, the gap between what those at the top take and those at the bottom do is enormous. How do we get that bit of democratic capitalism to work more effectively?”
Martin agreed, “We should look very carefully at how corporate governance works – there are questions about the tax system and how it deals with capital income as opposed to labour income. And the offshore tax issue. The point I make in the book is that for a really rich person, paying tax is just stupid and is optional. Electoral finance and the role of money in influencing tax systems has to be looked at. The most egregious tax mechanism is the carried interest in dealing with private equity.
“If you look at the left, you either have very naive neo-Marxist economics or no ideas at all but I don’t see why centre-left politics shouldn’t be more radical on the issues I’m addressing. I don’t think that people expect total equality but at least opportunity and an element of fairness.
Sanjay wondered – as someone based in the US – how Martin Wolf saw the role of technology in the tension between capitalism and democracy? In addition, he asked “How can we get out of the equilibrium that we see in the US where you have an increasing capturing of economic rent and opportunity by certain concentrated interest groups – what are the ways out of it?”
“My view of the US now” said Martin “is that when the constitution was created it was clearly created to be plutocratic. Over time it became less so because events forced the creation of a more dynamic and interventionist government. Over the last 50 years, the US has been moving back to plutocracy. I don’t see how this gets reversed. To me, it’s about not making it worse and avoiding a complete collapse of democracy. I have a long chapter on political reform which includes citizens assemblies and recommends the establishment of a house of parliament decided entirely by lot. It is a very fruitful way to go. The Athenian political system was centre of members chosen by lot. Greater citizen participation.”
Matt Painter pointed out the degree of dissatisfaction worldwide and not just in democracies: “If you look at the Ipsos ‘annual broken system index’, a measure of the level of social and political disaffection across 28 countries. 2/3 of people globally think the economy of their country is rigged to advantage the rich and powerful and more than half want to see a strong leader who can take their country back from the rich and powerful”.
Martin acknowledged this fact: “If you look at longer-term trends there is evidence of increasing interest in the strong leader idea and the younger generation have less interest in democracy. The deinstitutionalisation of politics is also very important. Institutions matter. In the media, it’s a very big problem – the question is what sort of process would allow media to be free without disseminating lies cheaply? I haven’t read anything about what we can do about this.
“The system works if fair elections continue. If you elect somebody who exploits weaknesses in the majoritarian system to subvert core institutions in such a way, it becomes very hard to get rid of them”.
Nick Moore of Stifel brought the group back to business. “Such people tend to get removed before something totally catastrophic happens to their country,” he said. “However, this is often not the case in business and there are numerous examples of major corporate collapses, costing thousands of job losses and more, as witness to the effect that one or a small group of malign or less competent actors can have on a corporation, absent robust corporate governance. Growth and productivity is becoming much harder, looking at the world today I think there are three big themes that you’d find democratic support for: 1) decarbonisation and clean energy; 2) wholesale reconfiguration of global supply chains and onshoring; and 3) the conflict in Ukraine and military industrial reinvestment”.
Martin had some ideas about the cause of stalling productivity gains: “It’s a product of immense success, we have sectors (agriculture and manufacturing) which have shown continuous growth in productivity. In the UK we’ve ended up with people working in caring activities, health, education, tourism, construction etc. and these sectors are so very hard to improve productivity in. On Nick’s points, none of these are big enough to make a difference. The thing that might make a big difference is if we can use AI to replace much of our service activity and if we could do that we would be in a world so new that we have to rethink society as we know it”.
Finally, Simon McDougall wondered “where in the world should we be looking for optimistic green shoots for democratic capitalism?”
Martin responded: “When I first visited South Korea it was just about as poor as Ghana and its ruler was about to become a brutal dictator with American acquiescence. Then in the 80’s after he was shot, the South Koreans got a democracy and survived a huge financial crisis under a leftist leader. It’s an imperfect democracy but has a dynamic culture. Autocracies often fail dramatically and people, as they become more educated, hopeful do insist upon being treated as human beings.”
It’s interesting that combined with this democratic success South Korea now has a growing soft power. It’s not just cars, smartphones and flat screen TVs that the Koreans can make. The tone in the immediate aftermath of the Oscars victory for “Parasite” as best film was one of rejoicing, with analysts calling it a huge step forward for the country.
Contributors to the discussion included:
- Matthew Gwyther, Partner, Jericho Chambers
- Simon McDougall, Chief Compliance Officer, ZoomInfo
- Nicholas Moore, Managing Director, Biopharma, Healthcare, Stifel
- Eithne O’Leary, President, Stifel Europe
- Chi Onwurah, Labour MP for Newcastle upon Tyne Central, Shadow Minister Digital, Science & Technology
- Matt Painter, Managing Director Corporate Reputation, Ipsos
- Sanjay Patnaik, Director Center on Regulation and Markets, Brookings Institution
- Lesley Smith, Corporate Advisor
- Baroness Wheatcroft, Member, House of Lords
- Martin Wolf, Chief Economics Commentator, Financial Times