Why is democratic capitalism in crisis? Review of Martin Wolf, The Crisis of Democratic Capitalism (Penguin, 2023)

Martin Wolf’s excellent new book, The Crisis of Democratic Capitalism, provides a panoramic tour of our current breakdown of democratic capitalism—and an optimistic vision for renewal. As the chief economics commentator at the Financial Times, Wolf has provided some of the most forceful challenges to the economic management of the United Kingdom after the financial crisis. In this book, he takes a broader historical perspective, addressing our current crisis as a moment in the longer historical relationship between democracy and capitalism, which he calls a marriage of complementary opposites.

In Wolf’s telling, democracy and capitalism have balanced each other, with capitalism driving unprecedented productivity growth, while democracy ensures the gains of such growth are widely shared and the system receives popular support. Yet today this marriage is on the rocks. Slower growth and the rise of what Wolf calls “rentier capitalism” has undermined faith in the system. Increasing economic insecurity has driven voters away from mainstream parties and towards the populist right. In response, Wolf argues we need both a “New” New Deal that would restore faith in capitalism as well as a deepening of democratic citizenship in the face of oligarchic domination.

Wolf’s writing is marked by his combination of remarkably broad reading of social-scientific research with lucid philosophical and political commentary. In this book, he aligns himself with two “camps” in contemporary academic debates. First, on the political side, he firmly sides with “economic anxiety” explanations for populism. And second, his economic argument aligns with recent Keynesian arguments, and in particular the secular stagnation thesis associated in particular with Larry Summers. As I will discuss more below, this introduces some unacknowledged tension into his argument, insofar as the positive vision of refounding a broadly inclusive economic regime seems undercut by permanently lower productivity growth. But before getting to that, we should lay out Wolf’s vision of the relationship between democracy and capitalism.

For Wolf, democracy and capitalism rest on the same foundations: a belief in equal status of all members of a polity, which implies both freedom of economic interaction and freedom of political choice. Both capitalism and democracy rely on the basic principles of the rule of law, fairness, and the separation of powers. Furthermore, capitalism and democracy are symbiotic because, in Wolf’s telling, capitalism lays the foundations for democracy. Capitalism provides the prosperity and prospects of a better future that enable people to focus on more than mere survival and to participate in public life. And capitalism produces a separation between economic and political institutions that enables a plurality of social groups to compete for power.

Wolf tends to emphasize less what democracy does for capitalism. While his argument is resolutely committed to the ideal of democracy, very often his argument focuses on how democracy enables societies to take advantage of capitalism by responding to ordinary people’s desire for security. Capitalism is the dynamic, driving force in Wolf’s story, wjo;e democracy plays a defensive role, ensuring that people’s need for security from the vagaries of the market is satisfied enough that they do turn to a demagogic outsider. To be sure, Wolf recognizes the threat that capitalism poses to democracy—especially when unconstrained market competition produces inequality or leads to concentrations of economic power. Recall that for him this is a marriage of opposites. Democracy rests on a logic of collective decision-making, which requires cooperation, while capitalism rests on a logic of competition and individual initiative. But I still had the question: what is democracy’s role in this relationship? And what are the implications for capitalism of a more ambitious and vibrant role for democratic decision-making in the economy?

After his historical account of the courtship and marriage of democracy and capitalism, Wolf turns to what ails the present moment. Here, Wolf sides firmly with those who would advance an economic explanation for the rise of right-wing populism. Wolf contends that the failure to provide security in the face of increasingly disruptive and unstable forms of financialized and globalised capitalism has produced broad constituencies who have lost faith in the system. People are understandably resentful of elites when they lack any material stake in the system and do not capture any of the gains from technological change. Right-wing populism is a consequence of the failure to appropriately manage globalisation. These conditions also, Wolf argues, make immigration a political flashpoint. As with much of the book, Wolf charts a moderate path, arguing for a non-exclusionary form of civil patriotism that would entail moderate restrictions on immigration. The other side of Wolf’s story is the increasing viability of non-democratic forms of capitalism and the geopolitical rivalry between the USA, representing the democratic capitalist order, and the authoritarian capitalism of Russia but especially China. While at the end of the Cold War democratic capitalism stood alone, victorious, today it faces credible rivals. All this together points to the need for a re-founding of democratic capitalism, which preoccupies the final portions of the book.

Wolf ends the book with a call for a “New” New Deal and an ambitious vision of democratic reform. Together, these arguments place him firmly as a liberal social democrat, wary of transformative change and focused on combining liberal principles of market competition with the equal dignity and economic security characteristic of social democracy. While his proposals—good jobs with dignity, reducing inequality, protecting the political system from corruption—are neither new nor radical, they fit together nicely into a unified vision of centre-left political change. What is particularly notable is that Wolf was himself previously one of the main advocates of market-oriented globalization. One can read these sections as mea culpa, a reasonable recognition that political circumstances have changed, or a perhaps opportunistic reflection of our more market-sceptical zeitgeist. Wolf’s position now could be called a moderate statism, one generally reminiscent of Blue Labour’s combination of moderate civic nationalism with more stable forms of economic security and social esteem.

But there is some tension between Wolf’s diagnosis and his proposed solutions. As noted earlier, Wolf is sympathetic to the idea of secular stagnation—that structural forces are slowing down the rate of productivity growth in capitalism. This slower growth then goes with the ability of a small group of high-skilled workers to capture most of the wage gains from those productivity increases that are available. Yet if the secular stagnation hypothesis is true, then the preconditions for his economic reforms seem undercut. If we live in a permanently low-growth world, it becomes less clear how to restore broad economic security without some more fundamental economic reforms that may have to, for example, address the unequal distribution of wealth and capital. Wolf rejects the more radical ideas, such as a universal basic income, as an avenue to rebuilding capitalism, pointing to worries about cost. But this seems to miss the main thrust of current arguments for a UBI. The worry is that current welfare states, by being predicated on a widespread need for work, cannot adapt to a low-growth world. Thus, a UBI, funded through wealth taxes, would accompany a post-work world where technological automation has reduced necessary labour. I do not necessarily endorse this line of reasoning. But I do wonder if Wolf’s argument is missing a step: why have governments and overall economic regimes turned towards debt and finance driven growth? Is it just a matter of mistaken beliefs or bad policy choices? Or does the pervasiveness of that model of growth point to deeper structural issues in contemporary capitalism?

Overall, I worry that a certain 1990s nostalgia limits Wolf’s field of vision. From streaming Friends to a Gen Z taste for grunge t-shirt, the public seems to be longing for the 1990s. And no wonder. The 1990s was the moment of democratic capitalism triumphant, with moderate Third Way politicians overseeing economic growth with widespread prosperity. And my sense is that Wolf shares this feeling. Both his diagnosis of what ails capitalism and his prescriptions seek to rebalance economic growth from globalization with the security of democratic self-determination. Yet what if that combination was historically specific, driven as much by the epochal entrance of China into global capitalism than any specific policy choices on the part of centre-left parties? And what if our current situation is such that other, perhaps more radical, shifts in how we structure investment are required if democracy is going to respond to epochal challenges such as climate change? As much as Wolf’s book provides a powerful, synoptic overview of the crisis of democratic capitalism and a tantalizing vision of how to fix it, its argument risks hiding a more disquieting thought: what if the fate of democratic capitalism, and by extension our fate, is less under our control than we think?

Steven Klein, King’s College London