The Crisis of Democratic Capitalism

To prep for my interview with popular Financial Times columnist Martin Wolf, I read his fascinating new book The Crisis of Democratic Capitalism. This is one I’m highly recommending for you all. The book is timely, diligently researched, extremely well written, and covers a subject of supreme importance. Since our not-to-be-missed podcast episode is dropping next Tuesday, what I thought I’d do today is try to summarize some the key themes for you all.

At the core of Wolf’s thesis is a compelling analysis of the symbiotic nature between capitalism and democracy. Underpinning both systems is the radical (at least from the historical perspective) idea of equality of status, a world-transformative conception of a society where every individual has the natural right to a voice in both public affairs and in economic life. It’s not that these two systems must always go together. In fact, there are two obvious alternatives in operation in the world today: 1. Authoritarian Demagogic Capitalism (e.g. Putin’s Russia) and 2. Bureaucratic Demagogic Capitalism (e.g. Xi’s China). But when they do come together in the right way—in support of equality—there is no greater formula for prosperity and freedom.

Wolf argues, rather convincingly, that democratic capitalism is not just threatened but actually already in crisis across the world. The thrust of his argument is that because capitalism has devolved too far in the direction of plutocracy and failed to deliver sufficient general prosperity, democracy has become vulnerable to populist demagogues, who prey upon the economically insecure with the politics of fear and exclusion. While the current threat is mostly from the populist right—e.g. Trump in the US, Erdogan in Turkey, Orban in Hungary and Modi in India—the conditions are ripe for populists of all flavors to obtain control.

Wolf diagnoses the economic problem as a function of the rise of rentier capitalism. To understand what he’s talking about here we have to go back to old-school economics and to the idea of economic “rent,” a term that’s kind of lost its meaning over time. In classical economics, rent was not just what you paid your landlord but rather a kind of unearned income. Wolf defines it as “income over and above the opportunity cost of the factors of production employed.” In plain English, what this means is that rents are profits that are not economically necessary. The idea is that there is a certain amount of profit necessary to incentivize the market to produce each good and service in the economy and rents are profits beyond this. While the idea of classical economic rent is somewhat confusing, we all know exactly what it is—rents are those high prices that monopolies can get away with charging because there is no competition. Other examples of economic rent include the profits that accrue to landowners and patent holders.

In the book, Wolf does a masterful job cataloguing all the evidence of the pervasiveness of rentier capitalism in our system. He covers things like:

• The lack of antitrust action against giant tech monopolies

• How the idea of the shareholding maximizing firm (instead of the stakeholder model) has incentivized powerful insiders to extract massive benefits for themselves at the expense of both employees and our communities

• Tax avoidance by corporations (e.g. outsourcing and holding their patents in low tax jurisdictions) &

• Tax avoidance by the ultra-wealthy like the carried-interest exemption for hedge fund, private equity and venture capital investors.

While there are many problems with rentier capitalism, the main issue is that it produces a level of income and wealth inequality that is threatening to democratic processes.

For the marriage between capitalism and democracy to work there must be “separation of control of economic resources from political power.” Wolf argues that what’s happened in the West over the last 40 years is that the rich and the elite have been able to take almost complete control of government and have used that control to extract benefits for themselves at the expense of the poor and the middle class. As a result, people have lost faith in both government and capitalism, which feel increasingly unfair and rigged.

For democracy to work people have to believe that the government is not playing favorites or engaging in predatory activity. If “the first duty of government is to do no harm and the second is remove it,” the populist reaction to plutocratically controlled systems, which do neither, seems both inevitable and predictable. I don’t think it’s a question whether democracy is under threat. That much is clear And I think Wolf nails the diagnosis that economic problems are the root cause. The question now is: can anything be done to fix this mess?

Fortunately, Wolf thinks the answer is “Yes.” A smile came across my face when I got to this section of the book, for I felt like I had found a kindred spirit. In discussing the proposed solutions to this mess, not only does Wolf explicitly reference FDR’s “Economic Bill of Rights,” something I wrote about here!, but also argues that the revitalization of the civic virtue in the West is the absolute key to success. As you all know, this is something I’ve been writing about for years here in these pages!

Wolf finishes the book by cataloguing all the things we could do to fix our broken system. He offers a few dozen ideas on how to fix the rentier capitalism problem—familiar ground for someone who writes about this stuff every week in the Financial Times—and offers an impassioned argument that democracy can be saved only by the combination of:

1. Political leaders willing to abandon the politics of fear and division in favor of the politics of hope and unity

2. Establishing a “New” New Deal based upon these principles:

• A rising, widely shared, and sustainable standard of living

• Good jobs for those who can work and are prepared to do so

• Equality of opportunity

• Security for those who need it

Ending special privileges for the few &

3. The revitalization of civic virtue.

Since citizenship is one of the meta-themes of Profit+, I can think of no better way to end this summary than with Wolf’s compelling call to action:

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