Realist fantasies: a review of Martin Wolf’s The Crisis of Democratic Capitalism

What makes someone a realist? The Financial Times columnist Martin Wolf certainly sees himself as one. ‘Realistic’ is the adjective he seems most keen to attach to the reform proposals laid out in his new book The Crisis of Democratic Capitalism. He is against utopianism as a matter of principle — he describes it as ‘absolutely destructive’ — and is particularly scornful of anti-capitalist or degrowth variants of ‘utopian’ thinking. (I’ll come back to whether degrowth is really an example of utopianism later.) His preferred modus operandi is what Karl Popper called ‘piecemeal social engineering’ or elite-driven reform. ‘If the needed reforms are to happen, elites must play a central role,’ he writes towards the end of The Crisis of Democratic Capitalism. ‘Above all, they need to feel responsible for the welfare of their republic and its citizens.’

But how realistic is this? Is it plausible that the plutocratic elites that have largely captured US — and, to an only slightly lesser extent, UK — democracy can be persuaded to (re-)discover civic virtue and give up some of the power and wealth they have accumulated? This is the question on which the validity of Wolf’s claim to the realist mantle surely rests. After all, if you lack a convincing theory about how your ideas might get implemented, on what basis can they be described as realistic?

The Crisis of Democratic Capitalism is a dissonant book. Wolf’s diagnosis of what has gone wrong with democratic capitalism is clear-eyed and compelling; his prescription for saving it is anything but. He accuses financial and political elites in Western high-income democracies of playing a leading role in causing the crisis of democratic capitalism (his analysis of ‘pluto-populism’ in the US is particularly penetrating) — and then appeals to the self-same elites to fix the mess they’ve made. At times, he seems incapable of fathoming the people he is writing both for and about: ‘why people of immeasurable wealth should fight so hard not to pay taxes is beyond the understanding of any reasonable person.’ Perhaps he should try a little harder to understand these people — the ones who seem content to risk the collapse of democracy for the sake of a tax cut — and what it is about today’s political and economic order that so emboldens and empowers them.

In the prologue to Part III of the book, which is where Wolf sets out his reform agenda, he references Branko Milanovic’s argument that capitalism is now “alone” in the world. But he misses the significance of capitalism’s total victory. Communism’s fall, to quote the historian Gary Gerstle, ‘removed what remained in America of the imperative for class compromise.’ This is one of the key insights of Gerstle’s recent book, The Rise and Fall of the Neoliberal Order (too recent, alas, to have made it into Wolf’s extensive bibliography). Gerstle argues that it was the strength of support for communism in the US during the Great Depression that created the conditions for the New Deal Order to emerge in the 1930s. And it was the strength of communism abroad that then enabled the New Deal Order to become entrenched during the early years of the Cold War. The spectre of communism — both domestic and foreign — encouraged the capitalist elite to make concessions to labour. Once that spectre was gone, the willingness to make concessions went too.

This is particularly pertinent since Wolf frames his reform proposals as ‘a “new” New Deal’. The proposals are, by and large, sensible. But it is not at all clear that the political conditions exist today for a “new” New Deal Order to emerge the way the old one did. Franklin Roosevelt had to face down considerable resistance from the would-be plutocrats of his day, but he didn’t have to reckon with anything like the sophisticated and uncompromising political operation that Charles Koch and his coterie of hard right billionaires have built in the US since the 1970s. Nor did he have to wrestle with a global financial industry as economically and politically powerful as today’s.

Dethroning finance

For someone who writes for the Financial Times, Wolf is pretty scathing about the financial industry. ‘The financial sector wastes both human and real resources,’ he writes. ‘It is in large part a rent-extraction machine.’ But he is disappointingly vague about what can be done to make finance less extractive or less powerful (or, ideally, both). At one point, he cites Maurice Obstfeld, former Chief Economist of the International Monetary Fund, who argues that the power of the financial sector lobby keeps certain reform options off the table — for example, ‘the possibility of reimposing capital controls or some other sort of curb on cross-border flows.’ But then Wolf promptly forgets this and becomes part of the conspiracy of silence. The closest he comes to tackling the issue is when, having noted that cross-border flows of ‘debt — especially short-term debt and, above all, foreign currency debt — may create huge and long-lasting crises,’ he concludes that ‘this form of financial openness should be treated with great caution.’ You don’t say.

The power of financial markets over political regimes and business leaders alike is something Wolf underplays in his analysis of what’s gone wrong with democratic capitalism. He borrows James Carville’s famous slogan for Bill Clinton’s 1992 Presidential election campaign — “It’s the economy, stupid” — as a chapter title, but he misses the opportunity to quote Carville’s other famous bon mot: ‘I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a .400 baseball hitter. But now I would want to come back as the bond market. You can intimidate everybody.’ Just ask Kwasi Kwarteng and Liz Truss.

There are many other examples of international finance bringing national governments (more often left-wing ones) to heel in recent decades. The same is true of corporate executives who have tried to put into practice the idea of serving all stakeholders, not just shareholders — an idea Wolf approves of. In the decade I’ve worked in the field of corporate sustainability and business transformation, I’ve watched a string of CEOs who have championed the idea that business exists to do more than maximise profits be forced out by investors.

• Antony Jenkins, CEO of Barclays between 2012 and 2015: made a concerted effort to re-acquaint the bank with the values of its 17th-century Quaker founders; sacked by the bank’s board of directors after less than three years in the job.
• Peter Hancock, CEO of AIG from 2014 to 2017: tried to clean up the culture of an institution that had played a starring role in the Global Financial Crisis: pushed out by activist investors after less than three years in the job.
• Alan Jope, CEO of Unilever from 2019 to 2023, doubled down on the ‘sustainable’ and ‘purpose-led’ approach to business that Unilever became famous for under his predecessor Paul Polman; Jope did well — he survived four years before the activist investors got him.

It’s all very well to urge CEOs to take the interests of all stakeholders into account, but the brutal reality of today’s capitalism is that, if they dare to put the belief that shareholders’ interests are not always paramount into practice, they will almost certainly find themselves out of a job sooner rather than later. And a few ‘stakeholder capitalist’ CEO heads on spikes is enough to keep the rest of the global C-Suite in line.

Bluntly, an agenda for revitalising democratic capitalism that does not seriously grapple with the question of how to curtail the power of financial markets is not realism; it is pure fantasy.

So what would a genuine reform agenda for finance look like? For a start, restricting capital’s freedom of movement should certainly be on the table. Otherwise, the threat of capital flight will always hang over democratically-elected governments, like a sword of Damocles, curtailing their freedom of (political) movement. Reducing capital’s mobility would also increase the incentive for capitalists to act responsibly and share some of their gains with the societies they are embedded within.

A second priority is ensuring that investors and peddlers of financial products are properly on the hook when things go wrong. In her book, The Code of Capital, the legal scholar Katharina Pistor tells the story of how the International Swaps and Derivatives Association (ISDA), founded in 1985, successfully lobbied more than fifty legislatures to change their bankruptcy laws to create exemptions for financial derivatives. These legal changes, sold to credulous governments as mere technical fixes, insulated the purveyors of swaps, derivatives and repurchase agreements (repos) from the downside risks associated with these financial products, which went on to play a major role in triggering the Global Financial Crisis of 2007–8.

A related issue is the limited liability of shareholders. As Pistor has written elsewhere, ‘under current conditions, markets simply cannot price risk adequately, because market participants are shielded from the harms that corporations inflict on others. This pathology goes by the name of “limited liability”, but when it comes to the risk borne by shareholders, it would be more accurate to call it “no liability” … limited liability insulates investors from the externalities created by the companies they own.’

Proposals for reforming limited liability laws exist: for example, economist Charles Goodhart and legal scholar Rosa Lastra have suggested dividing equity holders into two classes — insiders and outsiders. ‘The insiders would be those with the power to monitor and control the corporations. These insiders should have multiple liability, even perhaps unlimited liability for the CEOs. The outsiders would be those who lack the power to monitor and control the corporations. Lacking this power, and so lacking responsibility, these outsiders would continue to enjoy limited liability.’ The point is to link power to liability: if an investor wants to be able to influence a company’s strategy, it must also be exposed to the risks associated with that strategy going wrong, otherwise where is the incentive to act responsibly?

There is much more that could be said about what it will take to restore a balance of power between global finance and national democracies — and, if I’m honest, Martin Wolf is much better qualified to opine on the subject than I am. It’s a shame he neglects to do so.

The fantasy of “de-emissioned” growth

Wolf, as already noted, is no fan of degrowth. He dismisses it as ‘at best unrealistic utopianism. At worst, it is yet another in a long succession of “progressive” calls for tyranny.’ He argues that ‘a practical and acceptable solution [to the climate crisis] can come only from a technological transformation that eliminates emissions of greenhouse gases from the economy. What is needed is not de-growth, but rather “de-emissioning” growth.’

Leaving aside the question of why he felt the word decarbonising was inadequate, there are two issues with the belief that sustaining economic growth is a necessity in already high-income countries. (Clearly, there is a much stronger case that it remains a necessity in low-income countries, but that’s not the case that Wolf makes).

The first issue is that sustaining growth may simply be unattainable in the medium run. Economic growth rates in the high-income democracies that are the focus of Wolf’s book have been trending down since the 1960s. There are all sorts of theories for why this is, but as Danny Dorling, a professor of geography at the University of Oxford, points out in his book, Slowdown, declining economic growth rates are of a piece with a much wider deceleration — particularly in the rate of technological change and of population growth. It is possible that something will reverse this slowdown, but it seems at least equally plausible that we are headed inexorably towards a world of zero (and then negative) economic growth within a couple of decades.

This is also the conclusion that Gaya Herrington, a sustainability researcher, came to in 2021 when she revisited the models and scenarios created by the authors of the ground-breaking 1972 study, The Limits to Growth, and tested them against real-world data. She found that the two scenarios from the original study that most closely align with the subsequent data both involve ‘a slowdown and eventual halt in [global economic] growth within the next decade or so’. Again, it is possible that we can postpone the end of economic growth for longer than this, but the evidence suggests that doing so will only make the subsequent downward “correction” imposed by our environment more extreme, more painful and longer lasting.

The second issue is that it requires a very significant leap of faith to believe that “de-emissioning” growth at the rate and scale required to keep global warming below 2°C (let alone 1.5°C) is possible. Certainly, there is no evidence of this decoupling happening to date. On the contrary, global greenhouse gas emissions have continued to rise (and fall) in near-perfect lockstep with global GDP growth. The idea that a ‘technology transformation’ alone might get us to net zero emissions, globally, within the next 27 years is pie in the sky.

So I am not at all convinced that thinking about the end of growth is a form of utopianism, as Wolf alleges. In fact, I think it is the only realistic option: degrowth will either be imposed on us by forces outside our control, or we can plan for it and seek to bring about the necessary downsizing of our material and energy consumption in a manner that minimises the potential negative impact on human welfare.

What about the accusation that degrowth is both anti-capitalist and anti-democratic? To address the first charge, we need to first understand what is meant by capitalism. Wolf, like so many contemporary commentators, uses the terms capitalism and market economy more or less interchangeably. Others draw a clearer distinction between the two: the historian Fernand Braudel argued that markets are ways of exchanging goods through the medium of money (C-M-C’ for commodity-money-other commodity), whereas capitalism is the art of using money to get more money (M-C-M’). In this respect, capitalism and free markets are in fact in tension with one another: as the anthropologist David Graeber explained in his book, Debt: The First 5,000 Years, ‘normally, the easiest way to [make money from money] is by establishing some kind of formal or de facto monopoly. For this reason, capitalists, whether merchant princes, financiers, or industrialists, invariably try to ally themselves with political authorities to limit the freedom of the market.’

If we accept the distinction made by Braudel and Graeber then yes, it is fair to say that degrowth is broadly an anti-capitalist agenda as capitalism, thus defined, requires growth to sustain itself. But degrowth is not necessarily an anti-market agenda, since markets pre-date capitalism and are not inherently growth-dependent. But even this is too simplistic. Degrowth is not about ending the growth of everything: even in a world where the aggregate energy and material throughput of the global economy is falling, there will be plenty of sectors and regions where growth is vital. In some of these, capitalist models of ownership and investment may have a role to play. It’s just that markets will need to operate within a different set of parameters.

So it is perfectly possible to envisage a degrowth-orientated mixed economy, albeit with the private sector probably making up a smaller proportion of the mix than it does in most (if not all) ‘capitalist’ economies today. In any case though, there is no fixed proportion of a country’s economy that must be in the hands of the private sector to qualify as capitalist: in the US, government spending represents 35% of GDP; in France, government spending represents 55% of GDP; both are regarded as capitalist countries. Moreover, as Wolf highlights, the rise in the share of government spending in GDP over the last century has been huge across all members of the high-income democratic capitalist club. Between 1870 and 2019, the share of government spending in GDP more than doubled in Australia; more than quadrupled in France, Italy, the Netherlands, the UK and the US; and more than octupled in Sweden and Norway. All these countries were capitalist at both the start and the end of this period, despite the dramatic shift in the balance between public and private sectors. It is entirely possible that degrowth will require a less substantial shift in this balance than has already occurred since the start of the capitalist era.

The charge that degrowth is anti-democratic rests on an assumption that people won’t vote for it, which in turn rests on an assumption that degrowth would require the living standards of the majority to fall. Wolf is explicit about the first assumption, asserting that ‘no political party with such goals has the slightest chance of gaining power.’ This is an untested hypothesis. I accept that there is no imminent prospect of a degrowth-minded government being elected anywhere in the world, but that doesn’t make it an impossibility. Political realities are easier to change than scientific ones.

As for the second assumption, it is certainly the case that degrowth will mean that some people’s living standards are likely to fall (assuming you define living standards in purely materialistic terms), but which people and how many people this affects is a political choice. The watchwords of the degrowth movement on this front are redistribution and sufficiency. Coupling degrowth with redistribution is crucial if it is to garner majority support. But this is hardly a major departure from the politics of today: inequality is already a big political issue. Indeed, Wolf argues that inequality is a primary cause of the crisis of democratic capitalism and reducing it is one of the main tasks for would-be reformers.

In the end, the political challenge of implementing either degrowth or a “new” New Deal is broadly the same. As Wolf puts it, ‘the obstacle to any of this is the power that corporations and wealthy people have over governments.’ The only difference between his agenda and that of the degrowth movement is that Wolf tries desperately to make his pitch palatable to those corporations and wealthy people, whereas the degrowth movement does not. One seeks elite-driven reform, the other expects the impetus for change to come from outside today’s elite. Which theory of change is ultimately more realistic, only time will tell.