The relationship between democracy and the market economy preoccupied Western intellectuals throughout the twentieth century. This issue captured the attention of a range of thinkers, from the philosophically engaged Nobel economists F. A. Hayek and James Buchanan to economically informed philosophers like Michael Novak and Irving Kristol. 

The success of markets in delivering economic growth depends upon property rights, rule of law, and free prices not being suppressed by governments, including democratically elected governments. Markets also depend upon people accepting that unequal economic outcomes are inevitable if sustained economic growth is to occur.

These features of markets come into tension with aspects of modern democracy. In democracies, it is the norm that many disputed questions—including many economic issues—are settled by majority will, whether through legislatures or popular votes. This gives democratic governments considerable scope to curtail the workings of markets. 

Democracy likewise attaches, as Alexis de Tocqueville stressed, a high premium to equality. This passion for equality, Tocqueville worried, could easily lead to democracy threatening liberty insofar as freedom generates numerous inequalities. Hayek agreed and subsequently devoted much of his Law, Legislation, and Liberty to outlining ways to prevent democracy from crushing freedom.

Some of these tensions feature in The Crisis of Democratic Capitalism, authored by the Financial Times’ chief economics commentator, Martin Wolf. Both modern capitalism and contemporary democracy are products of a post-Enlightenment world. Their advance, Wolf points out, has gone hand-in-hand from the Industrial Revolution onwards.

Now, however, the marriage is under strain. In Wolf’s view, a divorce would prove disastrous. Staving off such a catastrophe, Wolf claims, is ultimately “the responsibility of elites” who, he insists, must safeguard “the fragile achievements of democratic capitalism” against “an incoming tide of plutocratic populism and tyranny.” It’s unclear how elites can fulfill this role, when Wolf acknowledges that they presently lack credibility. This unresolved question pervades Wolf’s book.

Failed Elites, Populist Demagogues

Like many others, Wolf holds that the rot in contemporary democratic capitalism accelerated as a consequence of the 2008 financial crisis. This shattered many people’s post-1990s faith that the only political question left was how quickly different nations would embrace liberal democracy and market economies. Since 2008, Wolf argues, growing doubts about capitalism have been accompanied by emerging skepticism about liberal democracy on the right and the left, something matched by Communist China’s effort to build an alternative—“bureaucratic authoritarian capitalism”—to liberal democratic capitalism.

Wolf makes his case by describing the politics and economics that characterize democracy and free markets, before outlining what has gone wrong with them in recent decades. Wolf then describes the reforms that he considers necessary to create “a more inclusive and successful economy and healthier democracies.” He concludes by looking at how “a reinvigorated alliance of democratic capitalist states” might push back against those anxious to undo this political-economic system.

Democratic capitalism’s present troubles, Wolf maintains, are underpinned by what he calls “economic disappointment.” Instead of “prosperity and steady progress,” many believe that post-1990s capitalism is marked by “soaring inequality, dead-end jobs, and macroeconomic instability.” Whatever its validity (I have doubts about the accuracy of the first and second of these claims), this narrative’s saliency on much of the right and left has produced economic and political realignments that risk undermining the legitimacy of markets and democracy.

Central to this shift, from Wolf’s standpoint, are three phenomena. The first concerns negative long-term economic trends ranging from low-growth rates to population decline. Such economic challenges have stimulated a second problem: the spread of “status anxiety.” This manifests itself, Wolf indicates, among those who are doing well economically, but not so well that it would take much for them to fall back down the social ladder.

Such apprehension also reflects the impact of a second factor: that liberalized markets unleash a dynamism driven by the movement of people, goods, and capital within and across national boundaries. This brings immense benefits, not least being the economic growth that takes and keeps people out of poverty. But the same dynamism also generates economic, social, and political changes, and some cope with that better than others.

The third phenomenon is what Wolf describes as “what Adam Smith warned us against—the tendency of the powerful to rig the economic and political systems against the rest of society.” This underlies the emergence of what Wolf calls “rentier capitalism,” whereby “a small proportion of the population has successfully captured rents from the economy and uses the resources it has acquired to control the political and legal systems.” While Wolf regards America as especially prone to this problem, I would suggest that it is just as widespread in the European Union whose addiction to regulation, technocracy, and bureaucratic gatekeepers provides countless opportunities for such cronyism to thrive.

Citizens are not blind to the rentier problem that pervades Western democracies. This leads them to regard economic and political elites as hypocrites who talk a big game about free markets but who are actually highly accomplished rent-seekers. As Wolf notes, this incentivizes people to seek alternative leaders. These tend to be individuals skilled at identifying themselves as opponents of elites and peddling simple solutions to complex problems. The result is the election of populists who pursue mistaken economic policies, whose failure, in turn, fuels more discontent, which drives more bad politics and economics. The end result, Wolf worries, is the ongoing Latin Americanization of politics and Latin American economic outcomes.

Escaping the Trap

If Wolf’s diagnosis is accurate, reversing these negative trends becomes imperative. Part III of his book is devoted to outlining broad and specific solutions to democratic capitalism’s present problems.

Economically speaking, Wolf believes that we must allow markets to work, abandon utopian aspirations to a perfectly just world, but also engage in “piecemeal social engineering” to address “the greatest and most urgent evils of society.” Such engineering must, in Wolf’s view, be implemented by “an empowered, but socially responsible, technocracy” overseen by political leaders capable of providing leadership and vision. This adds up to what Wolf calls “a ‘New’ New Deal.” He even invokes Franklin D. Roosevelt as someone whose vision constituted “a convincing statement of the policy objectives of wise democracies.”

Herein lie contradictions never resolved in Wolf’s book. Wolf’s program puts considerable faith in experts and the political class. Yet these are the same elites that Wolf believes have severe credibility problems and who, I would add, are as culpable for the rise of rentier capitalism as business leaders. Much of Wolf’s economic agenda is also reminiscent of the neo-Keynesian arrangements that prevailed in the Western world after 1945. But these policies not only contributed significantly to the stagnation of the 1970s to which many countries seem to have returned today; they also saddled Western societies with expensive welfare states, which even politicians who favor limited government have struggled to restrain in the face of democratic pressures.

When it comes to democracy, Wolf wants to limit the potential for populism to generate majoritarian tyrannies led by demagogues. At the same time, Wolf sets himself against those who would limit universal suffrage to promote rule by experts and the better-educated and more talented. Though merit and ability are important, so too, Wolf stresses, are basic values like “decency, reliability, honesty, self-respect, diligence, kindness, and respect for fellow citizens and the law.” Intellectual ability and expertise guarantee none of these things, and Wolf does not hesitate to highlight instances where contemporary political and business leaders have conspicuously failed to display such attributes. 

Patriots and Citizens

This attention to values leads Wolf to contend that saving democratic capitalism goes beyond politics and economics. He holds that elites and the wider population need wider reference points that encourage them to think about the common interests that ought to bind them. Here, Wolf points to the ideas of citizenship and patriotism as having the potential to overcome the deep fractures marking democratic capitalist societies.

Broadly speaking, these ideas translate into two things. The first is a basic commitment to one’s fellow citizens as members of the same country. The second concerns adherence to the idea of civic virtue. This, according to Wolf, goes beyond obeying just laws. It also means embracing a type of mutual consideration for each other.

But while citizenship and patriotism have binding effects, Wolf stresses that they also have exclusive dimensions. Patriotism involves a particular attachment to one political community without viewing other nations with contempt. Nationalism, conversely, often involves dislike of, if not hostility towards, other countries. Patriotism thus excludes the ethno-nationalism presently manifesting itself among sections of the right.

Likewise, citizenship of a given country binds us to our fellow citizens. But the same citizenship involves denying particular rights (e.g., voting) to non-citizens who live in that same country. Those who Wolf calls (following the economist Thomas Piketty) the “Brahmin left” for whom equality trumps everything cannot accept this.

Living these ideals of patriotism and citizenship also has particular political implications. They rule out, Wolf stresses, identity politics—something that much of the left and right presently indulge. But taking patriotism and citizenship seriously also has significance, he states, for charged issues like immigration policy.

While citizenship and patriotism are compatible with accepting immigrants, Wolf emphasizes that they also require migrants to embrace the norms and culture of the country to which they have migrated. We should have no illusions, he adds, about how long and difficult this process can be. To that extent, Wolf is an immigration realist. Indeed, it is the values of patriotism and citizenship that, in Wolf’s view, give governments the right and responsibility to manage immigration in ways that promote not just a nation’s economic interest but also the type of social harmony that no democracy can do without.

A Values Turn

Will Wolf’s proposals shore up democratic capitalism from within so that it can resist the alternatives offered by populists at home and autocrats from abroad? Wolf seems uncertain. We live, he says, in “a moment of great fear and faint hope.”

Part of that fear involves elites. In his concluding chapter, Wolf returns repeatedly to the incompetence, failings, and rentier-mindset of democratic capitalist elites. “Without decent and competent elites,” Wolf writes, “democracy will perish.” The prospects of such elites emerging throughout the West, however, seem remote at present. As for Wolf’s economic proposals, they do not substantially differ from postwar neo-Keynesian arrangements. If history is any guide, we can be confident that the same dynamics that brought these liberal social democrat arrangements to grief in the 1970s would eventually manifest themselves again.

That said, Wolf is right to stress the embrace of citizenship and patriotism as central to any renewal of democratic capitalism. If the fracture between discredited and distrusted elites and a wider population vulnerable to populist seduction is central to democratic capitalism’s present crisis, we need values capable of overcoming this split in highly pluralistic societies. Patriotism and citizenship surely number among these. If they can gain traction in Western societies, democratic capitalism has a fighting chance.