Re-live: The Crisis of Democratic Capitalism - with Martin Wolf and Martin Hellwig

Liberal democracies are in a deep crisis. We discussed with Martin Wolf and Martin Hellwig whether the ailing partnership can still be saved.




4. APRIL 2023



Rewatch the discussion

Today, antidemocratic tendencies are visible and potent in most of the world’s core democracies, including the US and UK, and most of Europe. In his new book, “The Crisis of Democratic Capitalism”, Martin Wolf, chief economic commentator at the Financial Times, looks at the challenges facing democracy and the role its partnership with capitalism plays in its decay.

Wolf argues that neither democracy nor capitalism can survive without the other, but warns that their former harmonious coexistence has turned into self-reinforcing collapse characterized by rentier capitalism, populist demagoguery, illiberal democracy, and personified autocracy. We invited him to discuss his theses at our New Economy Short Cut with Director Emeritus of the Max Planck Institute for the Study of Common Goods, Martin Hellwig. Can the crisis of democratic capitalism still be solved?

Martin Wolf started off his talk with an unexpected personal perspective. His father successfully fled from Vienna to London during World War II, yet lost many of his family members in the ensuing catastrophe. Given this context, it doesn’t come as a surprise that Wolf set out to write a book about the crisis of democratic capitalism. While Wolf didn’t insinuate a similar collapse of civilization will happen again, he cautioned that one must never assume the stability of a civilized democratic order. Even in a country like Germany, with a relatively robust democracy, the question of the stability of democratic institutions and their ability to function successfully in the face of fascist notions, cannot be of enough importance, he stressed.

The main argument that Wolf put forward is that without a basic level of economic prosperity and equality, democracy becomes increasingly hard to sustain. Therefore, any democracy shall have a strong and functioning middle class that prevents too much power concentrated in the hands of a few. Quoting Aristotle, he argued: “It is clear therefore also that the political community administered by the middle class is the best, and that it is possible for those states to be well governed that are of the kind in which the middle class is numerous, and preferably stronger than both the other two classes […], for by throwing in its weight it sways the balance and prevents the opposite extremes from coming into existence.” Wolf fears that democratic capitalism fell prey to thuggish autocratic rule and a rentier class of capitalists that, due to a lack of competition, manage to earn outsize profits and salaries at the expense of other workers, customers and suppliers, thereby threatening our freedoms and our prosperity.

The election of Trump as president of the United States to Wolf is one of the crucial historic moments that shows the precarious state of liberal economic democracies. But how could things grow so dire? To explain this, Wolf traces back centuries, to the onset of the relationship between democracy and the market economy. Wolf attributes the unprecedented triumph of democracies during the late 20th century to the marriage of the market-economy and democracy. He calls them ‘complementary opposites’ that started to coexist in a kind of self-reinforcing harmony based on their shared principles of the rule of law, reward for merit and discussion and debate. With the market economy came massive changes, the perhaps most important of which was the organization of the working class as a political force.

“Markets protect against the excessive concentration of power by the state, and democracy protects against too much wealth and power in the hands of few as it guards the interests of the majority.”
Martin Wolf

Today, this fruitful marriage is broken. Many factors, Wolf argues, have contributed to the crisis of democratic capitalism, among them a rapid deindustrialization, rising inequality, the weakening of trade unions, that with it has brought down social democratic parties, declining competition and the rise of monopolies, and uncontrolled globalization. All this taken together led to the concentration of power in the hands of few, the decay of the prospects of the middle working class, a fear of downward mobility, status anxiety, and political cynicism, that has been diverted into cultural and racial resentments by right wing parties. The Great Financial Crisis was the final nail in the coffin that convinced many people that their elites are corrupt and incompetent.

In addition, a decline in growth and productivity growth together with ageing populations create a large amount of fiscal stress. Where politics turns into a negative sum game, political choices become increasingly difficult.

Surprisingly, after his dire analysis, Wolf doesn’t plead to tear down elitist institutions, but demands that his fellow elitists make good on the responsibility that goes with their privilege. He urges for a renewal in policy and politics, one where politics is once again animated by the idea of citizenship. As people, we should think of ourselves not only as consumers, investors, or workers, but as a citizenship. What misses, he said, is a loyalty to democratic values, a concern for fellow citizens to thrive in this democracy, and an interest in an economy that serves the interests of the people.

Martin Hellwig on the contrary was less optimistic. “What is the bigger problem: The delegitimization of markets, institutions etc., or the narratives about them?”, he asked. He also noted his worries with regards to the disappearance of the respect for truth and the surge in alternative facts that today play a decisive role in media and public discourse. He was also much more skeptical about the idea that elites were subscribed to the notion of equality and respect of the freedom of others and hence capable of leading the marriage of democracy and capitalism back to fruitful terrain. Historically, he noted, the rise of democracies was an exception. What motivated the elites to permit a greater participation of the masses were not high moral standards but the need to mobilize the masses during World War I and II.


“Capitalists are people after power who use their ability to trade back and forth to gain power without any acceptance of equality and rules other than the ones they and other capitalists may have agreed to. That the management of power is key for successful capitalists is something that gets lost when we talk about the notion of equality.”
Martin Hellwig

He did agree that globalization was a key factor in pushing antidemocratic and populist movements. Not least did globalization allow national elites to lobby their political leaders in their favor, or else they would move their assets abroad. However, with globalization being deeply entrenched into free market capitalism, this, according to Hellwig, then questions the entire idea that democracy under capitalism can be revived.

Where then to turn for renewal? The problem, said Martin Hellwig, is that both economic and political leaders think that the current system is in their favor. One of the crucial parts of the New New Deal would be to have much more public investments, public goods, infrastructure and so forth. This idea, states Hellwig, has been lost over the past 25 years. What is more, after years of austerity and privatization, governments today often lack the ability to use public money effectively.

While both displayed different degrees of optimism with regards to reinstating the once fruitful coexistence of capitalism and democracy, they both agreed that change was urgently necessary.

“All these things are incredibly difficult to do. But we have to do them.”
Martin Wolf



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