S3E11: Extreme wealth will destroy democracy - FT’s Martin Wolf
Martin Wolf is Chief Economics Commentator at the Financial Times (FT). In his book 'The Crisis of Democratic Capitalism' he argues that market capitalism and democracy rely on each other to function but that both are failing. How did we get here, what’s at stake, and is there anything we can do?
What you should remember from this episode
Martin Wolf is the FT’s Chief Economics Commentator and has just written the book ‘The Crisis of Democratic Capitalism'
Democratic capitalism means a society that has a democratic political system as well as a decentralised market economy.
Martin says the relationship between democracy and capitalism is a bit like a marriage - it’s complex.
The battle ground is formed because capitalism concentrates wealth in the few, and wealth is power, which can undermine equality and democracy. You can see how this becomes problematic when wealth starts to determine power in a democracy - e.g. if some rich people can put a lot of resources into a campaign (and leverage their connections) when others can’t.
Martin argues that demagogy is the enemy of democracy.
A demagogue is someone like Trump who says ‘they’ll drain the swamp’. Trump riled up the masses by pitching the ‘real people’ against everyone else, including the political elite (Hilary Clinton) and outsiders like immigrants.
Trump has delegitimised democracy by saying the election was stolen.
Mussolini was a demagogue. Other current examples include Viktor Orbán (Hungary) and Recep Erdoğan (Turkey).
If you have proper elections you can vote politicians out but this is why people like Trump attack the legitimacy of elections so they stay in power. Remember Putin was voted in originally…
It’s crucial to remember the post war world was created and maintained by America which is a stalwart of democratic capitalism (or at least has been over this period).
America has defended the democratic order since WWII so if Americans start thinking Putin is their friend and the EU is their enemy - as many Republicans do now - where will that leave the world? Who will care about the survival of democracy (and have the power to maintain it) if not America?
Trump has said he’ll put a 10% tariff on everything which will massively affect trade. You need huge domestic markets to prosper in a protectionist world (which we don’t have in the UK).
The post war world has seen massive improvements in living standards but it may not last.
Over the last few decades things have started to change, argues Martin:
It started with the oil crises of the 1970s which moved us toward privatisation.
The industrial age ended and the working class shrunk. Productivity growth slowed.
Industrial areas (like the North of England and Wales) moved into a slump.
The distribution of income worsened because of the decline of the middle and working classes.
Then we had the financial crisis which blew up the credibility of free markets - the banks got saved by the state.
Then after the financial crisis, UK growth collapsed.
If growth had continued in the 17 years since 2007 at the same rate it had been before, the average GDP per capita in the UK would be 39% higher than it is today. It’s pretty sad writing that out.
This cocktail of economic malaise also saw big increases in wealth inequality. Whilst most of the population stagnated, the rich got richer, which laid the foundations for unrest.
Martin says the Brexit argument was essentially a vote for change against the status quo, against the elite - against the people in charge.
The same thing happened in the Republican Party which has moved towards Trump because the existing order wasn’t working.
The long running decline of economic performance led a lot of people to think the system wasn’t working for them. They needed to vote for someone different - in our case Brexit, in the US’s case Trump.
Martin also argues that austerity caused Brexit. We borrowed loads to get through the financial crisis, racking up a huge national debt. The Conservatives decided to reduce this deficit, but something like 80% of those efforts came from cuts to spending rather than raising money through taxes. And these cuts hit the poorest harder - a lot of whom then voted for Brexit because Brexit was a vote for change.
Political parties don’t promise higher taxes because they think they’ll lose elections.
If we wanted to fund a universal basic income (UBI), Martin says we’d need to spend at least 5% of GDP - which is what we spend on education. But he argues that most of the additional benefit of a UBI would go to people who don’t need it (like himself) because we already have a welfare state looking after the poorest (in theory). He thinks a UBI would be a colossal waste.
The relative stability we’ve enjoyed in the UK in the post war era might not last, not least because we have an ageing population and an economy growing at 1% - 2% a year.
Martin thinks the UK should invest in assets which are clearly valuable, like housing. He says councils could attack the housing problem (if they had the power) by buying agricultural land at cost and then selling it to property developers at market prices, raising revenue to invest in services and ultimately creating more houses. The housing problem is an economically and technically solvable problem, if a government wants to.
There are things that the government should be prepared to borrow for - but not all things. Can we have better taxes? Martin argues for a better system for land taxes in particular - council tax hasn’t been recalculated since 1981. Whilst inheritance tax doesn’t apply to anyone truly rich.
Martin thinks we have reached a point where we’re now scared of change/reform as a country and that is maybe the biggest worry of all because if we can’t change then we’re just stuck in the mess we’ve got.
