I am so at home in Dublin, more than any other city, that I feel it has always been familiar to me. It took me years to see through its soft charm to its bitter prickly kernel - which I quite like too.

Liberalism goes neo



John Fanning writes: Twenty years ago Martin Wolf, chief economics commentator of the Financial Times, published the bestselling How Markets Work, an extended hymn of praise to global business corporations operating under free market conditions, arguing that they were the most extraordinary instrument of economic growth and individual wealth in history. He went on to say that globalisation had reduced inequality and poverty around the world in the last two centuries. Last year he published another lengthy analysis of the state of capitalism and came to radically different conclusions, aptly summarised in the title: The Crisis of Democratic Capitalism.

The importance of this publication stems from the importance of the author. Martin Wolf comes from a European Jewish background. His parents emigrated to Britain in the late 1930s and many of his relatives perished in the Holocaust. An Oxford graduate, he worked for a time for the World Bank but joined the Financial Times in 1987 and has been their chief economics commentator for many years. Originally influenced by Hayek’s The Road to Serfdom, he was an advocate of globalisation and free trade, but following the recession of 2008 he adopted a more Keynesian approach, arguing that public goods are the building blocks of civilisation and against overreliance on the private sector. He is widely regarded as one of the world’s most influential economic and political commentators and in the last decade he has used his columns in the Financial Times to warn against the direction of capitalism today. In a recent review of books on the subject, he concluded: ‘These books suggests that capitalism is substantially broken. Reluctantly, I have come to the same conclusion.’

In 2023 he published his new book, The Crisis of Democratic Capitalism, in which, while not turning his back on either free trade or globalisation, he argues that something has gone wrong with the way the system has developed in the twenty-first century which threatens not only capitalism but the very basis of democratic society. The problems were building since the collapse of communism in 1991, leading to the exaggerated ‘end of history’ triumphalism and eventually to the Great Recession of 2008. During that period liberalism was transformed into neo-liberalism, the free market became something of a religion and markets were allowed to operate with fewer constraints than at any time in the previous century. The resulting financial instability combined with the absence of any coherent left-wing alternative and severely weakened trade unions left large sections of the population feeling angry, ignored and unrepresented. In Britain and the US, the result was Brexit and Trump, and in parts of the rest of the world a turn to extremist parties and a decline of faith in democracy.

Wolf quotes the now familiar litany of statistics showing that belief in democracy has declined significantly in Europe and particularly the US where less than 25 per cent of the population now consider it essential to live in a democracy. He then rounds up the usual suspects to explain why this might have happened: economic stagnation, rising inequality, increasing personal insecurity all resulting in a shift to an illiberal democracy, or more alarmingly ‘demagogic autocracy’. Wolf suggests that we are now close to having to make the choice offered by the great American jurist from the Roosevelt era Louis Brandeis: ‘You can either have democracy in this country or you can have great wealth concentrated in the hands of the few but you can’t have both.’

Wolf notes that in 1820 the average income of the richest country in the world was five times that of the poorest. In 2017 the ratio was seventy to one. This inequality has been accompanied by soaring levels of executive pay. The end of the mixed economy in the late 1970s was followed by the so-called Washington Consensus: deregulation, privatisation, lower wages and weakened trades unions, by the gig economy and the rise of the precariat. Meanwhile the left retreated into the rabbit hole of identity politics.

Wolf pins the blame on the change which took place in the capitalist system in the 1980s which liberalised the financial system and led to the so-called ‘big bang’, resulting in the financialisation of the whole economy. Although the term has been criticised for being vague and imprecise, Wolf calls it ‘a hideous but unavoidable term’ for the growing influence of finance and the fact that the financial sector was playing a much more substantial role in the economy.

Some time in the 1980s finance departments and the management consultants who advised them succeeded in a bloodless coup in many companies, resulting in a single-minded concentration on increasing shareholder value. Instead of pursuing enhanced customer service or improved product quality, businesses devoted themselves to strategies that would result in an enhanced share price. This was facilitated by ingenious financial gymnastics and wholesale disregard for the workforce. The role of finance was no longer to facilitate investment but to maximise shareholder value through whatever financial devices that could be employed – such as buying your own company’s shares to enhance its share price.

Globalisation also weakened loyalty to the country in which a business was founded, resulting in widespread tax avoidance, tax evasion and a general erosion of ethical standards. According to Wolf the result of all these developments is a rentier economy where a small proportion of the population has captured rents and uses the resources it has acquired to maximise its own wealth. Thomas Piketty explained the process ten years ago, showing how wealth grows at a faster rate than income. Owners of assets get richer more quickly than sellers of labour, causing a vicious spiral leading to a rentier economy.

Wolf argues that management now has the incentive to rig the system in its own interests, diverting money from long-term investment. Managers now spend too much time avoiding taxes and lobbying governments to cut out competition. In the US in particular the rentier economy has also resulted in this sector acquiring a dangerous level of control over the political and even legal system.

Wolf makes a brave stab at recommending action to curb some of the most egregious characteristics of detached capitalism. He cites Roosevelt on a number of occasions and it is clear that he would welcome a return of the progressive lawyers of the 1930s and 1940s, a new generation following Louis Brandeis who introduced measures to expand the government’s efforts to fight poverty, regulate business and protect the environment. Progressive lawyers viewed the US constitution at the time as a living document that could be interpreted in the light of changing lives but their conservative opponents wanted to reverse the process believing that the constitution should be interpreted in the light of its original intended meaning, the philosophy known as originalism.

They launched a well-funded campaign to effectively take over the country’s legal system. A group of law students in the Ivy League universities founded the Federalist Society, whose aim was to ‘foster the rule of law in protecting unbounded freedom and traditional values’. They succeeded: after the Trump presidency six of the nine Supreme Court judges were members of the Federalist Society. The overturning of Roe versus Wade is a direct consequence.

Wolf also advocates for much tighter control over social media platforms, whose role in undermining democracy is now clear. He challenges their assertion that they are merely platforms, when they are now self-evidently publishers. Believing that the media are too important to be left to the unmediated whims of private individuals, he advocates more public regulation of the sector, with high-powered staff hired to check the implications of social media algorithms. All of these proposals could be implemented by a determined progressive government, but the more daunting challenge is to restore the public’s faith in democracy and here the book’s recommendations are less sure-footed.

Without specifically mentioning the philosophy of Civic Republicanism Wolf is effectively arguing for much greater integration of the principles of this philosophy into civic society; actively encouraging greater civic involvement, educating all members of society in the story of who they are and how they are expected to behave. At the risk of falling into the trap of Irish exceptionalism it could be argued that we don’t do too badly from this perspective and Wolf mentions Ireland favourably in connection with our transferable voting system, which he regards as more democratic than most. Civic Republicanism is a hard sell but in view of the book’s analysis of the growing problems faced by the remaining democracies it may be well worth the effort.

Wolf has performed a valuable service in laying bare the dangers of unregulated capitalism but although he makes a brave attempt to provide some solutions one is left with the impression that he feels an overwhelming sense of betrayal by the capitalists whose cause he eloquently championed for so long and a lack of belief in the ability of the political left, the judiciary or the state to reform the system.

Bidenomics possibly offers grounds for optimism. Understandably, overshadowed by the appalling, and still escalating, wars in Gaza and Ukraine, Bidenomics has crept in under the radar but represents an extraordinarily ambitious revolution in US economic thinking, under the guise of the modestly and misleadingly titled Inflation Reduction Act. A new Financial Times film (freely available on YouTube) makes it clear that this Act involves a completely new industrial policy, trade policy and climate policy, representing a fundamental break with the core philosophy of Reaganomics which has dominated US economic policy since the end of the Cold War. Overturning the idea that the government is the problem not the solution, it is based on the premise that markets don’t necessarily know best and that governments have a critical role to play in directing industrial policy. The argument is summarised in the film by Martin Wolf: “we thought we were in an era of free market globalisation: now we’re not”. He delivers this line with evident satisfaction.


Previous article
Next article