The crisis of democratic capitalism and the rise of zombie ideas Martin Wolf, Chief Economics Commentator, Financial Times KU Leuven Leuven 1 st February 2018
Crisis of democratic capitalism “[D]emocracy, national sovereignty and global economic integration are mutually incompatible: we can combine any two of the three, but never have all three simultaneously and in full.” Dani Rodrik 2
Crisis of democratic capitalism “Happy families are all alike; every unhappy family is unhappy in its own way.” Leo Tolstoy, Anna Karenina 3
Crisis of democratic capitalism “Enemies of the People.” Daily Mail , 4 th November 2016. Headline of an article on the High Court decision that the government had to consult parliament on notification of Brexit, 4
Crisis of democratic capitalism ● Democracy and global capitalism ● Erosion of trust: the long term ● Erosion of trust: the crisis ● Return of zombie political ideas ● Return of zombie economic ideas ● Challenges 5
1. Democracy and global capitalism ● We increasingly see anti-capitalist democrats and anti-democratic capitalists ● So what is the relationship between capitalism and democracy? ● There are good reasons for believing the symbiosis is natural: ○Historically: ■ The rise of capitalism was at least associated with the elimination of serfdom and slavery and by ultimately successful movements for extensions of the franchise ■ Driving these changes were widely-shared prosperity, the spread of education, emergence of organised labour and the mobilisation of the adult population (male and female) for war ■ Also rising prosperity created an opportunity for “positive-sum politics” 6
1. Democracy and global capitalism ○ Moreover, ideologically: ■The underlying idea of capitalism – that of that of the people engaging in “truck, barter and exchange” under the protection of the law – implies that the choices of individuals have an inherent value. ■The underlying idea of democratic citizenship – that of individuals engaged in collective decision-making - also rests on the assumption that individual choices have value, this time in making public choices. ●Yet there are also potential conflicts between democracy and capitalism: ○Democracy rests on an egalitarian ideal (one person one vote); capitalism rests on an inegalitarian ideal (one dollar, one vote). ○Democracy is the domain of “voice” and capitalism is the domain of “exit”. ○High inequality may turn democracy into plutocracy or populist autocracy (or both, in alternation) ○Most relevant, global capitalism threatens “citizenship rent” – that is, the economic value of citizenship 7
1. Democracy and global capitalism TRADE, WAR AND THE RISE OF DEMOCRACY GLOBALISATION AND DEMOCRACY (Source: "Our World in Data" and Center for Systemic Peace) 70% 70% Trade over World GDP at Purchasing Proportion of democracies in world 60% 60% 50% 50% Power Parity (per cent) states (per cent) 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Klasing and Milionis (2014) Penn World Tables Version 8.1 Democratisation (Polity IV) 8
1. Democracy and global capitalism ●Yet the world is now in a “democratic recession”: ○According to Freedom House 2017 Annual Report, “A total of 67 countries suffered net declines in political rights and civil liberties in 2016, compared with 36 that registered gains. This marked the 11 th consecutive year in which declines outnumbered improvements.” ○Moreover, “in 2016 it was established democracies – countries rated “Free” in the report’s ranking system – that dominated the list of countries suffering setbacks.” ○Also, according to Roberto Foa and Yascha Mounck, “Over the last three decades, trust in political institutions such as parliaments or the courts has precipitously declined across the established democracies of North America and Western Europe.” ●Trust has been lost in both the democratic (political) and capitalist (economic) systems and this is not only in emerging and developing countries, but also in advanced countries 9
2. Erosion of trust: the long term ●At bottom, trust has broken down in those who manage the political and economic systems and so in the systems themselves ●Is this a cultural or an economic phenomenon? This is a heated debate. ●I would argue that It is impossible to separate cultural from economic factors: ○ Citizenship is indeed about identity; but citizenship is also an economically valuable asset ○ Gender roles are a cultural phenomenon; but they have economic causes and consequences ○ De-industrialisation is an economic processes;, but it has cultural and social consequences ○ Immigration, too, is an economic process, but one with cultural and social consequences 10
2. Erosion of trust: the long term ●Furthermore, culture does not explain change well. It simply alters too slowly. ●It may explain why particular groups are open to various populist appeals. But it does not explain why, relatively suddenly, populist, xenophobic and anti-market appeals became so attractive, as happened in the 1930s. ●The obvious explanation is that the economy has had very disappointing results. ●I will argue that this has been true in longer run and, even more so, since the financial and economic crisis of 2007-09. ●The US and UK have been particularly politically vulnerable. This may be because these countries were particularly attached to the free-market ideology. So failure has undermined the legitimacy of elites even more than elsewhere. 11
2. Erosion of trust: longer term ●Immigration ●Globalisation ●De-industrialisation ●Inequality ●Employment 12
2. Erosion of trust: immigration ●The age of globalisation has been an age of mass migration, as was also true in the late-19 th century. ●Immigration reinforces the effects of globalisation of trade and capital. ●But it adds a powerful cultural dimension to these forces. ●In the context of the democratic state, immigration also raises questions about who “we” are. ●Citizens want to decide who can live with them or become citizens themselves. 13
3. Erosion of trust: immigration IMMIGRATION FOREIGN-BORN POPULATION (as per cent of total)(Source: OECD) 20% 20% 17% 18% 16% 16% 13% 14% 13% 13% 12% 12% 12% 11% 12% 11% 10% 9% 10% 8% 8% 6% 5% 4% 4% 2% 0% 2000 2013 2000 2013 2000 2013 2000 2013 2000 2013 2000 2013 2001 2013 2000 2013 Canada Germany Sweden UK US France Italy Spain 14
2. Erosion of trust: globalisation ●One element of the hollowing out of national sovereignty is supra-national decision-making. This appears to be a particularly big issue in the superpower. ●Another element is the increasing effectiveness of “exit” by owners of capital and labour. (See Richard Baldwin, The Great Convergence .) ●Yet another element is the rise of supra-national business entities that no longer “belong” to a country. National capitalism has morphed into global capitalism. ●This has undermined what I call “citizenship rent”: the value of the birth right of citizenship. ●The “China shock” also seems to have been exceptionally severe in the US, perhaps because of the scale of the country and obstacles to moving. (See David Autor et al, “The China Shock”.) 15
2. Erosion of trust: globalisation GLOBALISATION RISE OF GLOBAL VALUE CHAINS ( foreign value added share of gross exports, 1995 to 2011, per cent)(OECD) 35 30 25 20 15 10 5 0 D A A P N A U R D N E S E T R S A W P C B L I J U D F G E N C E S O 1995 2011 16
2. Erosion of trust: de-industrialisation ● All high-income economies have seen a huge decline in the proportion of employment in manufacturing ● This change has been particularly large and the share has reached particularly low levels in the UK and US ● De-industrialisation of employment is largely driven by changes in demand and productivity growth. But trade has also played a role ● The reduction of employment in large manufacturing establishments has a particularly large effect on the job opportunities of medium-skilled men 17
2. Erosion of trust: de-industrialisation DE-INDUSTRIALISATION SHARES OF MANUFACTURING IN TOTAL EMPLOYMENT (Source: OECD) 30% 25% 20% 15% 10% 5% 0% Italy Germany Japan EU France UK US 2008 2016 18
2. Erosion of trust: de-industrialisation DE-INDUSTRIALISATION SHARE OF EMPLOYMENT IN MANUFACTURING 40% 35% 30% 25% 20% 15% 10% 5% 0% 1970 1975 1980 1985 1990 1995 2000 2005 2010 US Germany 19
2. Erosion of trust: inequality ●A related challenge is inequality ●While this is not a universal phenomenon, it is quite general ●Inequality has political implications, since the possession of economic resources is always converted into political power ●Inequality is particularly high in the US and has risen more in the US than in other high-income countries 20
3. Erosion of trust: inequality INEQUALITY: DOWNS AND UPS IN THE US AND UK INCOME SHARES OF TOP 10 PER CENT (Wealth & Income Database) 55% 50% 45% 40% 35% 30% 25% 1913 1923 1933 1943 1953 1963 1973 1983 1993 2003 2013 US UK Japan France Germany 21
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