It may be a fractious union, but neither democracy nor capitalism can survive without the other, says financial journalist, Martin Wolf
Wolf argues reform, not revolution is needed to patch up this relationship in his new book The Crisis of Democratic Capitalism.
It became obvious about 15 to 20 years ago that there were serious structural problems in the world economy, he told Jesse Mulligan.
Photo: FABRICE COFFRINI
“It was creating some very significant problems in terms of global imbalances, and the impact of those on the global credit system led, of course, to the financial crisis.
“But in addition, it became obvious that for a host of reasons, some inevitable, but some the result of policy choices, the growth we were generating wasn't as strong as we would have liked, particularly so since the global financial crisis.”
Inequality was also on the rise which eroded confidence in political and economic systems, he says, leading to the rise of populism.
This caused him re-think some long-held assumptions, he says.
“Populism generates very bad politics and very bad policy. So obviously, I had to rethink some of my views on economics and some of my views about how the economy related to politics.”
His book talks about the rise of what he calls ‘pluto-populism’ whereby the beneficiaries of a skewed system who had gained “extraordinary wealth” sought political leverage to maintain that position.
“And more or less ineluctably, and it's happened of course before, we've seen this before in history, they tended to play on the cultural, racial, ethnic fears and anxieties of people in the middle who were beginning to fear that they were actually going to fall down the ladder into a sort of abyss below them.
“And this formed an alliance, which I call pluto-populism, between parties of the right, predominantly financed at this time by the plutocrats, and people who are warriors in cultural causes of various kinds and the natural leaders that then emerged to bring this marriage together were populists.”
The son of two refugees from Nazi Germany, Wolf cautions against complacency, he says stable societies can and do turn towards barbarism under certain circumstances.
“What we consider to be stable, civilised, highly cultured societies can under sufficient pressure break down.”
Healthy democracies need a thriving middle class, he argues.
Photo: Penguin Random House
“Stable democracies require strong, robust and self-confident middle classes, who treasure stability and are aware that they need a reasonably supportive economy and government if they and their families are to thrive, but have the confidence to demand it, the confidence to organise themselves effectively in politics.”
While the working class has been hollowed out by the offshoring of manufacturing and automation, the middle classes are emerging from universities with scarce opportunities, he says.
“The old industrial working class and the new graduate population, often the children of the former, are both disappointed, and that creates an immensely powerful, influential pool of people in the middle of our societies who are profoundly dissatisfied, though in different directions, about what's happening to them.”
Various elites have become a focus for hostility, furthering a drift towards populism, he says.
“There's obviously the plutocratic elite, business bosses and successful business people who have done very well in the economy.
“We have the politicians and bureaucrats who run the state, who are obviously also very influential and powerful. And some of them are very closely connected to the former.
“And then we have an academic, intellectual, professional elite of highly educated people most have been to the more famous universities, who occupy, as it were, the academic high ground.
“And then of course, there's a whole cultural elite of people who shape our culture.”
Martin Wolf Photo: supplied
Politicians who inveigle against these elites, mobilise people on the right and left, Wolf says.
“It means that trust has been lost in the people running our society, and when trust is lost in the people running your society people will turn to leaders who say trust me, I know the answer.
“And that's how you start moving in a more authoritarian direction. And we've seen this in many countries in the past, and we're seeing it now.”
“Rigged capitalism” has exacerbated the situation, he says.
“We've known since Adam Smith, 250 years ago, that one needs to control the way the market operates. One needs competition policy, one needs a fair tax policy and one needs regulation to make it work. And that's become very difficult, because the people with the wealth, also have gained so much of the power.
“And that's, of course, what democracy is designed to prevent. You want to separate power from wealth if you want a proper democratic society. And that's the great challenge of making democracy work with capitalism.”
