This is part of the Author Talks series at Mckinsey. Nienke Beuwer of Mckinsey interviews Martin Wolf, the Financial Times’ Chief Economics Commentator on his new book titled: The Crisis of Democratic Capitalism. As the title suggests, in the book Wolf posits that the combination of democracy and market economy that has delivered global prosperity since WW-II is now under threat.
“…our system, which is about the marriage of democracy with the market economy, is failing. It’s failing economically, and because it’s failing economically, it’s failing politically. That has left us open to profoundly antidemocratic forces, and we have to reverse this before it’s too late.
…Starting in the middle of the last decade, but really with the [2008] financial crisis, I began to become worried about the stability and effectiveness of our economic and political system. My first worries after the financial crisis were about the economic system, since the financial crisis was an economic event.
I wrote a book immediately afterward called The Shifts and the Shocks, which looked at the financial crisis, why it happened, why most of us failed to realize how serious it could be, and where it had left our societies rather damaged. I finished that in 2014, and it began to be clear that economically, at least, things were getting a bit better.
That was encouraging, but very soon afterward the political system seemed to be in disarray. We got the immensely surprising emergence of Donald Trump as presidential candidate for the Republicans and then his victory in the election. We got the Brexit referendum in the UK. Both of these occurred in the same year, in 2016. It was clear we were getting strong populist reactions—that was becoming the characteristic of politics.
It was also clear in other countries. We were seeing it in Italy and in France, in Spain, and even in Germany. It was clear this was happening, and it was happening at the same time as a reaction against democracy worldwide, what Larry Diamond of Stanford calls the “democratic recession.” That was the economic and political context.”
He then explains why he reckons democratic capitalism is in crisis:
“…in the “consolidated democracies,” as they tend to be called, of the West—particularly Europe and North America—the deal, as I came to see it, between the people and the elites that inevitably play a dominant role in society, is that the elites are legitimate if they deliver a reasonably satisfactory economic future for the people. This deal came out of the Industrial Revolution, which transformed politics and, as I argue, was really why democracy became such a potent force.
We welcomed the emergence of a democratic universal suffrage in the early 20th century, and I think it was a consequence of the market economy and a reaction to it. This deal seems to be coming undone, and there are two big elements in the unraveling of this deal. There’s been a long period of de-industrialization, quite weak growth, and, in many countries, rising inequality—all of which were to the disadvantage of the old working class and lower middle class in many societies, which became very disaffected.
Then came the financial crisis, my trigger, as it were, which made it clear that the people in charge of the economic system—the politicians, the technocrats—didn’t know what they were doing. Worse than not knowing what they were doing, they were then bailed out with huge amounts of government support, while the people at large suffered big declines in disposable incomes over very long periods as a result of austerity and other such policy choices.
I think this created a profound disillusionment with elites, which left open the political field to populists of many different kinds, but the most important of them were populists of the right. This is what we are now living with almost everywhere.”
In the rest of the interview, he provides solutions to the crisis, how it can be fixed, which should make the book a fascinating read. For those who prefer, there is a 5-episode podcast series on the book: Martin Wolf on saving democratic capitalism.
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