The Fragile Compromise between Capitalism and Democracy

Capitalism and democracy are neither synonymous nor are they in a symbiotic relation. It is a well established historical fact that capitalism, defined as a profit-driven economic regime based on private property, and political democracy, understood as a rule-basedregime with free elections and the freedom of speech and organization as well as a independent judiciary, are separate regimes that can or cannot enter a marriage. For quite a long stretch the West was under the impression that capitalism and democracy are difficult to get separated when they are once united. In the last few years, though, it became obvious that the Western symbioses is not the only one that can be successful. Think, for example, contemporary China and you have – all details on the side – a profit-driven economic regime that is combined with political authoritarianism, and comes with unprecedented economic success. The simple idea of early versions of modernization theory that with capitalist advancement we see the emergence of political democracy, driven by blue and white collar worker interests, were never too convincing. Today, it seems that political democracy is on the retreat, not least due to voting behaviour of strong segments of blue and white collar workers. Why is that? One answer that dominates the debates is: globalization. Globalization, however, is a much too big category that it would explain a lot. Empirical data show that globalization lifted hundreds of million above the poverty line, in particular in China as well as in some parts of India. The emerging middle classes of those economies seem to be invested in more capitalism and not so much in more democracy, though. If we turn to the ‘old’ capitalist democracies in the West, the picture is slightly different. Rather then focusing on globalization, I suggest to look onto the social contracts in those societies that were formed since they 1950s, restructured during the 1980s and 1990s and eventually unilaterally cancelled in the 2000s. For a long time, capitalism was generating strong increases of productivity that were then – following the basic rules of social contracts – distributed along a mode of productivity-oriented wage increases. In a parallel manner, wage and profit earners were willing to contribute their tax shares to the state that was the guarantee of contracts and of social-economic progress. What we see is a slow but steady erosion of those contracts. The two main reasons for the erosion are (i) the inability of capitalism to continue generating ‘good’ growth and (ii) the unwillingness of globally mobile economic actors to contribute their shares to the state. ‘With ‘good’ growth I mean a form of economic growth that is based on technology- and knowledge-driven productivity, rather than a growth that is driven by FIRE-sectors.Moreover, ‘good’ growth comes with social net benefits, i.e. growth benefits are higher then growth costs. Latter can be seen as non-internalized costs like environmental damages, health damages, and the like. With unwillingness to contribute to the social good I mean the actions undertaken by globally mobile economic actors to to optimize their taxes, and thus the practice to circumvent the home nation-state.

A response to those deep transformation is the frustration of those segments of the population whose interests were secured in the genuine social contracts. Voters either abstain or they elect parties and leaders in order to signal their frustration with the new norm, often in ways that are actually counterproductive to their immediate economic interests. In other words, voter of Trump or voters in favour of Brexit may have been motivated by the hope to improve their economic position as well as by the motif to send out a strong signal to ‘the establishment’ that enough is enough. Capitalism needs social contracts in order to function properly. The new social contracts we see emerging in the US, in the UK, in Poland, Hungary, in the Netherlands and in places like Turkey are all build around the implicit or explicit notion of economic nationalism. This puts blue and white collar works of those nations against each other. It is the nature of economic nationalism that not everybody can win at the same time. On the contrary, economic nationalism is a doctrine and political strategy that tries to improve the position of one actor by excluding gains of others. This may or may not result in trade wars. In any case, economic nationalism is in stark contrast to the concept of embedded liberalism that was in place until the 1980s and it is also in contrast to the regime of financialization that became dominant since the 2000s.

How successful and how sustainable can a regime of economic nationalism be? The answers to both questions have a lot to do with the size of the economy, more concrete, with the depth and breadth of its domestic market. The larger the domestic market, the less sensitive is the economy to retaliation policies, i.e. it can follow a harsh strategy of economic nationalism without having to fear that the repercussions will one negative. However, domestic markets today are no longer domestic markets of the past. Across the board, we see regional or global cross-border value chains, and this is the Achilles Heel of economic nationalism. Moreover, as the case of Mexico shows, trying to optimize on a one-sided way economic interests may backfire in a situation where the economic nationalist economy at the same time is vulnerable when it comes to other issues, like drugs. Still, economies that are more dependent from the global economy are highly vulnerable to retaliations, and thus should not be in favour of economic nationalism. And yet, populist parties seem to think different, and follow an instinct that closing down critical borders will actually lift the position of those ones inside those borders. There is not much economic logic in such a hope. The question then is, what will happen if those populists can’t deliver? In functioning democracies the answer is obvious: they will be voted out of office. The reality may be different, though. Across the board we find efforts of populist parties and leaders to create scapegoats , be it the media, the migrant, the refugee, or others, that are made responsible for the lack of success. Scary times.