Reviewing Martin Wolf's The Crisis of Democratic Capitalism (April 2023)

In The Crisis of Democratic Capitalism (2023), Martin Wolf, chief economics commentator of the Financial Times, warns that the 'difficult marriage' between a democratic political system and a capitalist economic system is in danger in the 21st century. Although both democracy and capitalism have in common the importance of individual initiative, the 'marriage' is difficult in that for democracy there is value to the social dimension, while under pure laissez-faire capitalism there is not. Wolf argues that because of the contrary objectives in the social sphere, there is an inherent tension between these political and the economic systems. And, it is this tension that accounts for the relatively rare occurrence of democratic capitalism in human history.

Above all, the survival of liberal democracy depends on the separation of control over economic resources from political power. Being hugely rich must be neither a necessary nor a sufficient condition for holding political power; and similarly, in a competitive market economy holding political power must be neither a necessary nor a sufficient condition for acquiring wealth. Just expressing it this way indicates how fragile such a system has to be.

Not only has autocratic government predominated in the past, but it is again in the ascendancy, even in the West, long thought to be the bastion of political and economic freedom. And so the central message of Wolfe's latest book is that what may for many appear to be a permanent standard of political economic organization is in fact vulnerable and reversible, thus requiring immediate attention and reform to prevent a collapse into the dark ages of despotism.

Wolf's views expressed nearly 20 years ago in Why Globalization Works (2004) have remained consistent in terms of his emphatic belief in the significance of the strong correlation between economic liberalism (and therefore economic growth) and political democracy. Despite reservations, Wolf's 2004 book presents a strong defense of globalization, linking economic integration with both increasing economic growth (prosperity) and increasing democracy (freedom). The first premise of this 'conservative' defense of globalization is that prosperity can be expanded, and poverty thereby reduced, by increasing the size of the economic pie rather than redistributing (re-slicing) the existing economic pie. And the second premise is that expanding economic prosperity tends to promote expanding political rights and freedoms. In The Crisis of Democratic Capitalism, published a generation later, the author holds to the first premise, but expresses some doubt with respect to the second premise owing to China's remarkable economic growth within an autocratic political system and the fact that the authoritarian governments are on the rise in 2023 relative to 2004.

Throughout the book, Wolf references the multitude of challenges to the system of liberal (i.e., limited or constrained) government and market capitalism, each of which poses challenges for the future of democratic capitalism and which collectively presage a dangerous road ahead. The Trump presidency and the attempted coup after the 2020 presidential election threatened to undermine the world's paramount liberal democracy, and the fragility of America's democratic institutions puts them at risk. The global financial crisis of 2008 exacerbated the already polarizing secular trend to greater economic inequality within the high income countries, and America has already proceeded well down the path towards plutocratic governance. China's creation of a powerful economic system of state capitalism challenges the long-held assumption that democratic institutions are a precondition for capitalism, opening the door for other autocratic-leaning nation-states to pursue a different path toward capitalist growth as in most of the BRICS countries (Russia, China, Brazil, and India), Turkey, the Philippines, and even Poland and Hungary in the EU. And then there is the Russia-Ukraine War, which marks a previously unimaginable retrogression from post-WWII European peace and stability to an earlier time of horrific and violent wars of nation-state aggression. Once again the words of the 17th century Dutch jurist, Hugo Grotius, writing about the Thirty Years' War, in On the Law of War and Peace, ring true for Europe—"Throughout the Christian world I have seen a lawlessness in warfare that even barbarian races would think shameful."

Wolf's conclusion from the above-mentioned hazards is that the crisis of democratic capitalism reveals the delicate balance of political and economic liberty, which cannot be assumed to mark an endpoint—an ultimate and inevitable stage of human social organization—the 'end of history' as we were informed after the collapse of the Soviet Empire. On balance though, Wolf seems optimistic that humanity can overcome the 21st century crisis of democratic capitalism. He turns to the Western tradition of political philosophy—Plato, Aristotle, Hobbes, and Popper—for guidance away from authoritarian rule and towards circumscribed majoritarian rule. He absolutely idolizes Franklin Delano Roosevelt as a great leader in moving the US towards a more inclusive society consistent with Aristotle's judgment that it is the great middle of the polity that must first be supported in order for it to give its assent which is critical for legitimacy and endurance. While Plato opposed rule by wealthy elites, his views on democracy left much to be desired as shown by the Austrian philosopher, Karl Popper, whose views on piecemeal social change favour reform over revolution and are clarified by his method of discovery through falsification. For Popper, eliminating error is the best that can be done given that no amount of confirmation can ever 'prove' an inductive conclusion. The piecemeal approach is picturesquely captured by fellow Austrian Otto Neurath's metaphor of sailors repairing their vessel at sea. The excess of Hobbes' Leviathan—'despotic Leviathans'—as in the former USSR and modern China, must be shackled, in other words, liberalism—defined as limited government where the rule of law obtains universally—is requisite for democracy, but at the same time Leviathan must be capable of maintaining the political and economic order unlike the 'paper Leviathans' of South American countries like Argentina. And, of course, in terms of economic policy, the interventionist school of thought represented by Keynesianism is, for Wolfe, consistent with the tenuous equilibrium between democracy and capitalism unlike the eccentric individualism of the Chicago School and its faculty, among whom Milton Friedman is the most admired and best recognized.

Nevertheless, Wolf is decidedly pessimistic at moments, for example when considering the possible return of Trump or a Trump-like plutocratic demagogue. He is, however, not as pessimistic as Katarina Pistor in her concluding remarks in The Code of Capital, in which humanity's incorrigible and indomitable will to power can never be subdued.

The second trajectory may, sadly, already be under way, as illustrated by the rampant attacks on independent judiciaries and the free press, not only in relatively young democracies, such as Poland or Hungary, but in countries with a long tradition of democracy and the rule of law, such the United Kingdom and the United States. If these trends continue, naked power will once more gain sway over legal ordering, as it has done over most of human history—and we will all be worse off for it.

Without referring to Pistor, Wolf does acknowledge a substantial part of her thesis that the economic value of a stable and predictable marketplace and the cooperative participation of law-abiding and productive citizens—all of which are social goods comprising a favourable investment climate—should be acknowledged to be worthy of earnings in the same way the entrepreneurs/investors rationalization of their rewards for risk-taking is commonly accepted. For example, market capitalism, he states "started in countries that supplied enough of the basic preconditions for such a revolution: stable property rights; a commitment to scientific and technical progress." And later, he adds that "[c]orporations (and so also their shareholders) benefit from the range of goods [or preconditions]—security, legal systems, infrastructure, educated workforces, and political and social stability—provided by the world’s most important liberal democracies." It is in part the refusal to acknowledge the economic value of social goods in accumulating fortunes that jeopardizes the legitimacy of highly asymmetric capitalist societies.

Yet Wolf returns to his optimistic outlook, concluding his book with various programs for mitigating the perils and improving the resiliency of democratic capitalism. Generally speaking, Wolf calls out the inequities of existing capitalist societies and advocates reforms that in European countries might not appear radical but which in the US would be regarded as an incarnation of the menace of socialism—an unholy economic doctrine in the minds of so many Americans. Wolf's sympathy with FDR-like social democracy would be beyond anathema to Republicans, Libertarians, and even some moderate Democrats in the US, but Wolf asserts that the very credibility of democratic capitalism is at stake. Economic fairness must be advanced in order to win back the confidence of those in the vast middle who feel that only a resolute and powerful CEO type can restore the prosperity—the American dream—that has slipped or is slipping away in part due to the anticompetitive business practices of foreign firms and states unleashed by contemporary globalization.

In the same vein, Wolf regards plutocracy as an enemy within that must be dealt with by eliminating the privileges of the few, and here he seems to be in agreement with Pistor in calling into question those legal arrangements that code special protection for limited liability corporations/partnerships and their shareholders, special tax treatment that allows some incomes to be taxed at lower capital gains rates, and bailouts for reckless and greedy companies, especially in the financial sector, that crash but claim to be "too big to fail" and thus get bailed out by the state at the expense of taxpayers and to the detriment of social programs. With regard to the latter, the moral hazard the international community finds unacceptable in countries like Argentina is somehow different from the moral hazard that encourages American banks to assume high-risk portfolios to maximize investment returns in the knowledge that in a financial crisis, preventing their failure will be a top priority for government. There is no will to permit high-risk greed and misgovernance to be subjected to the market's punishment, because banking failures threaten to precipitate a collapse of the whole system bringing ruin on the masses and the malefactors alike.

For Wolf, economics prevails over politics meaning that the body politic will forego democratic institutions and values before it will sacrifice material well-being. Echoing his views from Why Globalization Works, Wolf summarized the situation thusly: "The world’s stable liberal democracies have prosperous market economies, while the prosperous market economies are almost all liberal democracies." But the new angle in The Crisis of Democratic Capitalism is that "China might ultimately become a far more significant exception to the rule that rich market economies are also liberal democracies." If China can do it, then other countries, including the US, can do it—or so it will be claimed. And that adds significantly to the tension between democracy and capitalism already felt by the excluded middle who are not beneficiaries of the privileges afforded by what Pistor calls "the code of capital."