The End of Democratic Capitalism?

Daron Acemoglu

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The world is in the throes of a pervasive crisis. The gap between rich and poor has widened in most countries. Although industrialized economies are still growing, the real incomes of people working in them have barely increased since 1980, and in some places, such as the United States, the real wages of low-skilled workers have dropped sharply. The economic malaise has a corollary in politics: democracy is floundering. According to Freedom House, more countries have lost freedom than gained it every year for the past 17 years. Authoritarianism seems to be on the rise. For many governments, China’s statist form of capitalism offers a tempting model. Russia, under President Vladimir Putin, has launched the biggest war in Europe since the end of World War II. The twenty-first century so far has been marked by repression, turbulence, and the disintegration of democratic institutions.

Two thought-provoking recent books seek to anatomize these pessimistic times in fresh ways. In The Crisis of Democratic Capitalism, Martin Wolf, a veteran economics commentator at the Financial Times, suggests that the root cause of this malaise lies in the breakdown of the relationship between capitalism and liberal democracy. In A World of Insecurity, the economist Pranab Bardhan argues that the ills plaguing the world are best understood not in terms of inequality but in terms of insecurity—simmering economic and social anxiety about job loss, declining incomes, poverty, and cultural change.

Bardhan opens his book with a warning from the German novelist Thomas Mann, who wrote in 1938 that the biggest mistake that people in democracies can make is “self-forgetfulness.” Mann feared that it was dangerously easy for societies to take democracy for granted, erasing from the collective memory the difficult process of creating the institutions underpinning self-government and assuming that these institutions were invulnerable. This sentiment is shared by both authors. In a slew of countries, people have committed the sin that so concerned Mann, failing to uphold democracy, the duties of citizenship, and the goal of shared prosperity.

Politicians, pundits, and the well-off are in shock that their fellow citizens are turning to troubling alternatives to democracy—or, at the very least, to the form of democracy that was offered to them. Democracy is not perfect, these concerned commentators insist, but it is the best option available. Some intellectuals blame democracy’s struggles on the public. People are not mature enough to make democracy work, they claim. In their view, citizens have become incompetent or have succumbed to the lure of authoritarianism in a time of uncertainty. Or as the anti-enlightenment French philosopher Joseph de Maistre expressed it more succinctly, “Every nation gets the government it deserves.” But Wolf and Bardhan have it right: the problem is that institutions have failed people, not the other way around.

Both authors turn to the state for solutions. Bardhan argues that modern societies can reverse this trend by more equitably distributing wealth, using a range of tools, notably universal basic income—a regular payment to all people in a country no matter their means. Wolf thinks the answer lies in strengthening social safety nets and investing in better jobs. Neither author pays sufficient attention to another important fix: regulating technology so that it will improve workers’ productivity rather than eliminate their jobs. Doing so would also help address the grievances that have fueled much dissatisfaction, especially in the hollowed-out industrial heartlands of the West.

But both authors rightly recognize a fundamental obstacle to any solution: all these measures will be difficult to implement if people refuse to trust the very institutions that govern their lives.

SECURITY DILEMMA

The two books begin with a detailed examination of how democracy started to crumble, including the factors that led to heightened inequality, insecurity, and the loss of agency among populations in rich and poor countries alike. They then explain why these tensions have led to an authoritarian turn in places as diverse as Brazil, Hungary, India, Turkey, and the United States.

But their explanations differ. Bardhan focuses more on inequality and suggests that as income gaps between the rich and the poor have widened, economic insecurity has risen. His analysis is refreshingly concise and is often backed by recent academic studies.

Wolf provides a more sophisticated and expansive account, highlighting structural weaknesses in the particular version of democracy that the West has come to practice over the last five decades, a form of governance that has overlooked the poor and the working class. Instead, many democracies have enthusiastically embraced rapid globalization, deregulation, and other arrangements that have favored the interests of capital over those of labor. Leaders claimed that these changes were in everybody’s interest, but in reality, people at the bottom of the social ladder bore the costs and saw few of the gains, especially as democracies failed to strengthen their safety nets to help those falling behind. Wolf correctly identifies the intimate links between the collapse of shared prosperity and the crisis of democracy.

John Lee

Take the United States. From the early 1940s to the 1970s, the fruits of economic growth were broadly shared. Real wages grew rapidly—on average, by more than two percent every year for both high-skilled and low-skilled workers. And from the end of World War II to 1980, overall inequality fell substantially. Since 1980, however, real wages have continued to rise among workers with postgraduate degrees and specialized skills but have stagnated or even declined for workers, especially men, who have only a high school degree or no degree at all. In the meantime, the share of total income going to the richest one percent of households has nearly doubled—from ten percent in 1980 to 19 percent today. To put it simply, the United States abandoned shared prosperity in favor of a model in which only a minority of people benefit from economic growth while the rest are left in the dust.

The situation is less dire in many other Western countries, thanks to higher minimum wages, collective bargaining, and social norms against inequality in the workplace. All the same, most industrialized countries have seen the real earnings of low-education workers stagnate or decline while the rich have gotten richer. Given this picture, it is easy to agree with Wolf’s insistence on the culpability of the economy in its failure to deliver the benefits of growth more evenly.

Bardhan, by contrast, argues that the problem is not so much inequality as it is insecurity, a broader angst about material concerns and cultural changes. As a diagnosis, this emphasis is not altogether convincing. Economic insecurity in the United States, for instance, has not increased as much as inequality in the past 50 years. Thanks to a series of social reforms begun by U.S. President Lyndon Johnson, poverty has become much less common since the 1960s. Child malnutrition and poverty declined especially sharply during the pandemic, as the U.S. government bolstered the social safety net, although these improvements have since started to reverse. Over the last half century, the United States has become economically more secure, even as it has become less equal.

Bardhan himself does not see economic insecurity as the only cause of democracy’s decline. He suggests that cultural insecurity is also to blame because relatively privileged groups, such as white men in the United States, are feeling threatened by the weakening of old social hierarchies. He is right that the current antidemocratic turn around the world has a major cultural element. But whether cultural insecurity is the right framework to understand it is less clear since several aspects of disruptive social change were even more rapid in Europe and the United States in the 1950s and 1960s—periods in which democracy did not decline significantly.

THE ILLUSION OF MERITOCRACY

Although Wolf forgoes a single organizing label for democracy’s ills, he recognizes that one of their key causes is the loss of democratic citizenship—the idea that for a democracy to work, citizens must assume responsibilities toward their community and institutions. Wolf’s account includes a long history. Ancient Greeks viewed democracy as closely entangled with the duties of citizens, including defending their city or state and helping the people around them. But Western democracy in the late twentieth century became decoupled from the duties of citizenship. Masses were encouraged to exercise democratic power while being absolved from having to make sacrifices for the good of others.

The disconnect became almost farcical during the presidency of George W. Bush. Shortly after the 9/11 attacks, while the United States prepared to enter two major wars, the president told Americans what their duty would be. “Fly and enjoy America’s great destination spots,” Bush said. “Get down to Disney World in Florida.” Only a small number of people, many from low-income backgrounds, were expected to join the military and risk their lives for their country. The rest were merely asked to overcome their fear of flying to stimulate the economy, without forfeiting their consumption or comfort. In effect, in a time of need, the president called for Americans to be consumers, not full democratic citizens.

But it is not just neoconservatives and right-wing politicians who have contributed to weakening democratic citizenship. As Wolf emphasizes, many on the left and the liberal middle have called for more open migration into industrialized countries, without reckoning with how this influx would reshape citizenship and democracy. If a large number of immigrants reject some of the foundational values and rights of their host country—such as the freedom to criticize or mock religion—they may be viewed by natives as undermining the nature of the social contract, as has happened in Denmark and France, for instance. It is hard for democracy to function when different constituencies fundamentally disagree about the nature of their republic.

Wolf also touches on, but pays insufficient attention to, another aspect of a larger cultural transformation: how the conceit of meritocracy has deepened the anxiety of less well-off workers in the West. If democracies are truly meritocratic, then people who succeed deserve their success, while those who fail deserve their failure. Of course, no society is truly meritocratic. Privilege (or the lack thereof) shapes the lives of most people. As the Harvard philosopher Michael Sandel has emphasized, the illusion of meritocracy has had pernicious effects: many Americans who have seen their real incomes decline or stagnate are being told, implicitly or explicitly, that their misfortune is their own fault. It is no surprise, then, that many of those left behind now reject the democratic institutions emblematic of the kind of meritocracy that blames struggling people for their own plight.

TRUST FALL

Indeed, public trust in the fairness and capabilities of democratic governments has eroded throughout the industrialized world, especially in the United States, although the exact causes of this decline are still poorly understood. It is hard to expect people to fulfill their duties as citizens when their faith in state institutions is so low. Some scholars, such as the Harvard political scientist Robert Putnam, have blamed the waning of trust in government on the disappearance of local institutions, such as bowling clubs and churches, that served as the connective tissue for communities. With fewer ways to build cooperation and trust at a local level, people may become estranged from all institutions, and particularly from the federal ones that they have always perceived as distant. Other observers emphasize a broader decline in trust: less confidence in the intentions of business partners and neighbors, and less trust and communication between managers and workers. Many people in democracies have ceased to see themselves as part of a community, viewing their compatriots instead as strangers or members of fundamentally opposed groups.

As both Bardhan and Wolf emphasize, the functioning of state institutions depends on some degree of trust and cooperation from society. In the United States, for example, a historically low 20 percent of the public say that they trust the government to do the right thing most or all of the time. My own work with the political scientist James Robinson has emphasized that democratic institutions can survive only if civil society and state institutions are equally strong. Such a balance can also boost people’s confidence in government. For example, when they believe they can sway governments and elites, citizens feel more comfortable giving such institutions a longer leash to govern. But the balance of power between civil society and the government is precarious and depends on the vigilance and political participation of regular people. Democracy cannot be engineered by clever constitutions; it requires people to get involved in the political process and make their voices heard.

Once again, it is possible to see the decimation of trust in institutions as a failing of the people. But Wolf’s argument takes another tack: state institutions abandoned people first. This is clearest in the United States, where politicians, bureaucrats, and influential pundits enthusiastically supported rapid globalization and various forms of free-market fundamentalism that have deepened inequality. For example, U.S. politicians touted both the North American Free Trade Agreement and China’s integration into the World Trade Organization as beneficial not just to U.S. companies but ultimately to all Americans. The same figures also kept reassuring the public that it would soon reap the rewards, thus inflating aspirations and paralyzing efforts to build better institutions to deal with the disruptive effects of new technologies and globalization. Worse, many of these policies were presented as technocratic, scientifically supported truths. This misrepresentation facilitated the acceptance of these policies in the short run. It also further contributed to the decline of trust in state institutions and experts in the longer run.

Voting in Limbdi, India, December 2022Amit Dave / Reuters

Although it is clear that this decline in trust has led people in democracies to lose faith in their institutions, it is less clear why the disenchanted have turned toward right-wing populism and authoritarianism rather than to left-wing alternatives. Wolf and Bardhan suggest a handful of reasons, but neither sufficiently explores the motivating force of nationalism. Wolf mentions the resurgence of nationalism but does not emphasize it as a leading source of democratic erosion. Bardhan has a short chapter on nationalism that does not offer a compelling explanation for its resurgence today. Both writers see resurgent nationalism as a consequence, not a cause, of democracy’s decline.

In truth, a rising tide of nationalism has turned the discontent in both rich and poor countries into support for right-wing populism, especially when skillfully fanned by politicians such as Donald Trump in the United States, Narendra Modi in India, or Recep Tayyip Erdogan in Turkey. Regimes dubbed right-wing populist, authoritarian, majoritarian, or religiously conservative, including those in India and Turkey, are actually first and foremost nationalist in their orientation. Leaders exploit patriotic feelings to boost their popularity—and their control over the population. Such is also the case in China, where school curricula and media propaganda have stoked nationalist sentiment.

Globalization appears to play a major role in the resurgence of nationalism. It has created new inequalities, by allowing companies to avoid taxes and by failing to contribute to job creation domestically, and has deepened tensions, because it challenges social norms via the spread of ideas through the Internet, movies, television, and music.

FEUDAL LORDS AND TECH TITANS

Wolf and Bardhan both propose renewed versions of social democracy (although Wolf never uses this term), but there are big differences between the two authors’ suggested fixes. Wolf argues for more equality of opportunity and investment in the welfare state. The centerpiece of his proposals is “good jobs for those who can work and are prepared to do so.” This is consistent with his overall message that citizenship, democratic participation, better institutions, and shared prosperity must be built and maintained in concert. Of course, the difficulty is that nobody has a perfect recipe for creating such good jobs.

All the same, Wolf is right. Good jobs, which pay high wages and provide a sense of security and purpose, are essential for shared prosperity and democratic citizenship. It was once believed that countries with low inequality, such as Sweden, achieved relative parity through heavy redistribution. Research by the economists Thomas Blanchet, Lucas Chancel, and Amory Gethin published in 2022 shows that this is not the case. Inequality is rooted in countries’ pretax income distributions. For example, because Sweden has strong collective wage bargaining, a more equal distribution of skills across its workforce, and jobs that use these skills, wages are more equal in Sweden than they are in the United States before taxes.

For his part, Bardhan endorses a number of well-known ideas, including the dispersal of power to local governments; more international coordination on combating climate change, pandemics, and tax evasion; stronger efforts to fight corruption; and more public research supporting the development of technologies that will benefit workers (something I have also advocated over the last several years). But his main fix is a universal basic income that pays a certain cash amount to all people. The new wrinkle here is his argument that UBI would be especially powerful in developing countries such as India, where inequality is high and getting higher; public services are inefficiently provided, if at all; and there appears to be little appetite for building a better social safety net. Because Bardhan views economic insecurity as a critical driver of the current democratic crisis, he sees UBI as a potent tool to relieve economic insecurity and thereby bolster democratic institutions.

Reacting to exit polls for Turkey's presidential election in Istanbul, May 2023 Hannah McKay / Reuters

But UBI is the wrong policy aimed at the wrong problems. The trouble is not just that UBI will be costly but also that it will fail to provide people with the sense that they are contributing to society, which conflicts with the notion of citizenship on which democracy needs to be built. A 2022 study by the economists Reshmaan Hussam, Erin M. Kelley, Gregory Lane, and Fatima Zahra shows the important relationship between psychological well-being and income. The study examined attitudes toward work among Rohingya refugees in southern Bangladesh. The researchers offered some participants weekly cash and gave others an opportunity to engage in paid work. The researchers found that those who worked reported significantly improved psychological well-being, while those receiving the cash payments without work did not. Despite their poverty and difficult conditions, when given the choice, approximately two-thirds of participants were willing to forgo the cash option to take up employment for lower pay.

UBI reflects a fundamentally defeatist view of the future. It accepts that a large fraction of the population cannot contribute to society, in part because of technological advances. Accordingly, the only way forward is for a small minority to earn all the income and provide crumbs to the rest—a demoralizing conclusion.

It is also wrong to accept that new technologies and globalization will necessarily create inequality and joblessness. Throughout history, control of technology has determined how the gains from economic growth are shared. When landlords in medieval Europe controlled the most important technology of the era, such as water and wind mills, they ensured that improvements in productivity enriched them, not their workers. In the early stages of the Industrial Revolution, when entrepreneurs rapidly introduced automated production processes and corralled workers, including women and children, into factories, they benefited, while wages stagnated and may even have fallen.

Fortunately, it is possible to change who controls technology and thus alter its application, especially in terms of whether it will disempower workers and automate work or increase worker capabilities and productivity. The reason Western countries have become much more unequal is that they have allowed a small group of entrepreneurs and companies to set the direction of technological change according to their own interests—and against those of most workers.

Universal basic income is the wrong policy aimed at the wrong problems.

Although Wolf’s solutions are on the right track, they do not go far enough. Modern market economies need to be fundamentally reformed; otherwise, companies will continue to overinvest in the kind of automation that replaces workers rather than enhances their productivity. Companies are also likely to double down on massive data collection and surveillance, even though these activities are anathema in a democracy.

It is up to governments to regulate and redirect technological change. If companies continue to automate without investing in training and technologies that could help workers, inequality will continue to worsen, and those at the bottom will feel even more disposable. To prevent such an outcome, policymakers must determine which broad classes of technologies can be helpful to workers and deserve public support. They also need to regulate the tech industry, including its powers to collect data, advertise digitally, and create large language models, such as the artificial intelligence chatbot ChatGPT. And the government must give workers a voice in the process of regulating tech companies. That does not mean the government should allow labor unions to block technological change; rather, it should ensure that worker representatives can negotiate how technology is being used in workplaces.

But such regulation is very hard to devise because policies over the last four decades have destroyed trust in state institutions. It is even harder when the labor movement has been gutted and the pillars of democratic citizenship have weakened.

Democratic capitalism is indeed in crisis. Any solution must begin with a focus on restoring public trust in democracy. People in democracies are not, in fact, helpless: there are ways to create a fairer type of economic growth, control corruption, and curb the excessive power of large companies, as the economist Simon Johnson and I have argued. This will not only help reduce inequality and lay the foundations of shared prosperity; it will also demonstrate that democratic institutions work—ensuring that this crisis of democratic capitalism does not spell democracy’s end.