Martin Wolf: “The Crisis of Democratic Capitalism”

CHRISTIANE AMANPOUR, CHIEF INTERNATIONAL ANCHOR: Next, to a new book, “The Crisis of Democratic Capitalism”. It’s about the colliding challenges faced by democracies and their economies. The financial times chief economics commentator, Martin Wolf, argues that marriage has hit the rocks. He tells our Walter Isaacson just how and why it needs to be put back together.

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WALTER ISAACSON, HOST: Thank, you Christiane. And Martin Wolf, welcome to the show.

MARTIN WOLF, AUTHOR, “THE CRISIS OF THE DEMOCRATIC CAPITALISM”: Great pleasure.

ISAACSON: You have a great new book out called “The Crisis of Democratic Capitalism”. In it, you talk about how there is this pushback on capitalism and how, in many ways, it’s not working in terms of shared prosperity. But 40 percent of young people these days actually don’t even believe in capitalism. Can you give me a defense of capitalism? The way to say that it actually is something we have to save?

WOLF: It’s very clear that capitalism, as a system, by which I mean markets, competitive markets — properly competitive markets, has been and remains the most successful and dynamic economic system. It’s not an accident, after all, that it was after China made its move towards the market economy because such a shock that it has been such a stupendous success. And you see in the same thing in India after it started liberalizing in the early ’90s. And of course, our societies remain the richest, the most prosperous in human history, and they continue to generate extraordinary innovation. So, this is a remarkable system. All attempts to do without some sort of market economy to replace it with complete socialism have failed. And they’ve not just failed economically, they’ve also failed politically. And I argue the reason for that is obvious. The socialist regimes concentrate all resources in the state. They reestablished the old relationship between power and wealth. If you control all the wealth, you control all the power. Ultimately, that means not just that the economy is stifled because of the central control. Also, politics are stifled because no one can truly have an independent voice if a state owns and controls, directly or indirectly, everything. So, I would argue to these young people, they need capitalism, but a better capitalism. And they need a democracy, but a better democracy. And a lot of my book is about what that might mean. I’m trying to open a debate from, as it were, what I think of as the center which says, we’re not satisfied with what we have. I agree there are problems. But what we have to do is make reforms, quite radical reforms, that’s happened in the middle of the 20th century. Many countries, including the U.S., to make capitalism and democracy work better together again. But we must not suffer from the delusion that we can dispense with either or both and live in better societies. We know that isn’t true.

ISAACSON: You’ve talked about how China in the past, 20, 30 years has moved much more to a market economy. Moved more towards capitalism in a way. And yet, it has not moved more towards democracy and there’s been a great backsliding against democracy. Is it sustainable to have a capitalist system without democracy?

WOLF: I think that’s one of the biggest questions of our age and one of the biggest issues of our time. And the honest truth, from my perspective, is I’m rather — is — question that. I’m skeptical about this. And I think there’s a lot of evidence that the Chinese economy’s underlying performance has been deteriorating for quite a long time. If you look at trend growth and so forth, its debt problems and all the rest of it. If you consider — remember that it’s still a very poor country, a very substantially poorer, properly measured than all the high-income countries. That’s a quarter of the living standards of the U.S., will it close that gap? I think that’s becoming, at least, increasingly questionable. And the issue certainly is, can Mr. Xi exercise the, sort of, top-down control he has done. Imposing these restraints on businesses, done without consequences? Certainly, many of the business people I meet, including Chinese business people, are clearly pretty frightened of what he is doing. So, I think it’s a really big question. I would never predict the political future of China. But it seems to me also a rush (ph) to assume that this autocracy will last forever. I can still remember — not that I’m making comparisons, but I can remember very well that in 1980 nobody imagined, certainly in 1970, that within 20 years the Soviet Union would simply disappear. I think we cannot assume that autocracies, and autocracy like China, will win the great battle between freedom, both political and economic, and autocracy. And of course, that’s certainly the side I want to be on.

ISAACSON: President Biden just gave his State of the Union address. He’s been able to pass three major bills with $2 trillion in new spending for everything from infrastructure to environment. What marks do you give him on the economy? And how do you think the U.S. economy is going?

WOLF: This is a huge question. I’m very — I’m in very two minds. Well, first of all, I think the huge fiscal stimulus at the beginning of his term was excessive. I’ve always been with Larry Summers on this, and I think it (INAUDIBLE) — it was one of the reasons we got into the inflation problem. And it’s a significant problem for which we haven’t yet fully paid the price. So that, I think, it was a mistake. I think the attempts to use the government to promote infrastructure investment, to promote the green transformation are good, the directions are good. It’s what the government should do in conditions like this. Whether all the ways that have — it’s been done are the best. With another — I mean, I’m very surprised if some of the money won’t — didn’t turn out to be very much wasted. Some of the new industries that are created turn out not to work. But on balance, I think, in a country like yours where there’s so much skepticism about the ability of government to do anything, to have a president who is able to pass legislation which shows what — there are things governments can achieve, and they’re obviously important things even if not perfectly done. I think that’s very important. A very good thing. Because the opposition, which I somewhat fear now, not something I would have thought 10, 15 years ago, is really relies so heavily on these deep cynicism about government. A government that can’t do anything. And if — I think if people believe that it’s very difficult to believe in politics. And if you don’t believe in politics, I think democracy tends to wither.

ISAACSON: You, in your book, talk about your father. And your father escaping, I think in 1937 before the Nazis come to power. And then your mother’s family, a lot of them did not escape. Tell me about your life story and how that helped inform your views on democracy and capitalism.

WOLF: Well, yes, I inherited very much from my father the values that I’ve always held in favor of both. My father has left Vienna in ’37. My mother left Holland in May 1940 with her immediate family, her parents and her siblings. Unfortunately, in both cases, their wider families were left behind and, essentially, they were all killed. The reason this matters to me, of course, is that I became aware because of their story and, of course, the story of so many people like them, of the extreme fragility of a civilized state, of the collapse that is possible in political and moral standards if things get bad enough and people are desperate enough and the wrong, sort of, leaders come along. Not — I’m not comparing anyone, anyone who is now around with the sort of leadership we saw, particularly in Germany in the inter war period. Of course, I’m not. But we are seeing a lot of countries being led by authoritarian leaders who use the rage in the public, the anger in the public against elites who establish autocratic power, the ride rough shot over the rule of law, deprive minorities of their rights. And this has happened in parts of central and eastern Europe. It’s happened in emerging countries. And there are politicians rooted in the old fascism who are really in very powerful positions now in Europe. And then of course, things, you know, obviously, we had all the difficulties about your last presidential election. And the widespread myth, as far as I can see, that they were stolen by Biden. This is all very frightening for me. The fear is not that we’re going back to fascism. It’s a very different time. But the democracy, the liberal societies that we have enjoyed in the post-war period as a result of the victory in the second world war could be replaced with backsliding. One scholar calls it a prolonged democratic recession. And that’s what we’ve been seeing. And we’ve been seeing it even in core western countries like, of course, your own.

ISAACSON: You talk about the threats of democracy partly being caused by a populist backlash that taps into resentments about the global elites and how they controlled the economy. But to some extent, there’s some understandable resentments there. To what extent do people who are trying to defend democracy, trying to defend capitalism need to figure out how to deal with the resentments towards the elites that seem to have created a winner take all economy?

WOLF: That’s an absolutely central point of my book, a core point. I go to great lengths to explain how I think we’ve emerged to take as one aspect of elite, the business and commercial elite, financial elite. We’ve created, sort of, ronche (ph) form of capitalism which competition has been really corroded.

ISAACSON: And let me — when you say ronche (ph), let me just explain. You’re talking about like renters. Like, people who have capital can get by and make a whole lot without really adding to society, right?

WOLF: Yes. Exactly. That they use their position, their economic positions to extract income which is well above what they actually have contributed to —

ISAACSON: Give me an example of that. You’re talking about bankers?

WOLF: Well, the — perhaps one of the best examples is — or one of it’s controversial to, if you look at what sometimes called big tech. They have been allowed to create monopolies. Effectively, partly it’s natural. Their natural monopolies, but partly because they’ve been allowed to buy all their competitors, accumulatively buying their competitors, absorbing them into their huge tent. Now, there are natural monopolies in many tech industries. Many tech activities, such, for example, if —

ISAACSON: Yes, but (INAUDIBLE) being disrupted even as we speak this week.

WOLF: Yes and no — I mean, one of the things we —

ISAACSON: So, I mean, isn’t that what capitalism does?

WOLF: Well, one of the things we’re going to see, and I think the very important question, is whether the natural competitive process of capitalism will all on their own reverse this. We haven’t seen that for a long time. It would be wonderful if it did. Yet another and much more controversial issue is corporate governance. If you run corporate — corporations, essentially, solely for the interest of shareholders which basically is determined by the management who represents them, then there is a very big argument about whether to the returns to the company. The rewards of the company are appropriately shared between shareholders and management and control the whole business. On the one hand, not all the people who work in the business is on the other. And that explains in the fact that this is into some extent extract and explains is simply staggering increases in the pay of top executives vis-a-vis the rest of the people working in their companies. So, that’s another example of essentially extractive process is. And I think there are — another one again and perhaps the most important is using the money. Individual (INAUDIBLE) of corporate money to influence the political system to grant extremely favorable terms above all for taxation, international taxation, and so forth which allows an enormous amount of tax avoidance and evasion in all sorts of ways. And I’ve present lots of examples of that. So, the — I think when people think the system is, to some extent, rigged against ordinary people and in favor of people with wealth and therefore power, that’s correct.

ISAACSON: Let me read you one of the great passages from your book. The enemy today is not without. Even China is not that potent. The enemy is within. Democracy will survive only if it gives opportunity, security, and dignity to the great majority of its people. And then you go on to say, if elites are only in it for themselves, a dark age of autocracy will return. It seems, in a way, that you are blaming so of the problems we have, not just on the populist reaction but on the elites themselves. And you know that elite very well. Explain it to me.

WOLF: The populist reaction which we’ve seen, the voting for people on the left and right who really say, we’re going to get rid of the people and create a swamp is a — which is a network of lobbyists, politicians, and of course bureaucrats. They — the — it’s legitimate for them to complain because actually if you look at the performance of our economies and the benefits that many people have achieved from the progress we’ve made, it has been extremely, unequally shared. And it hasn’t been a very well managed. That’s why I emphasized the impact of financial crisis. One of the many figures I have in my book to show how huge the losses of income have been across our countries since the financial crisis. And so, that really does indicate quite a profound failure. So, I think that this sense that the elite are remote from us, the completely different lives, basically hold all the power in our society, they basically determine how things are done in regulation, in taxation, in how market competition works. That they buy the politicians. This is a perfectly understandable view. You can see the same phenomenon in the Brexit campaign here, and the sense of alienation of ordinary people. Particularly people who didn’t go to college from all this. It seems to me to have become very, very profound. And that’s linked, of course, with really profound social changes which are also discussed about — which are to do with a fact that one of the biggest changes over the last half century is the way our economies have moved against people who are not college educated and in favor of people who are college educated and particularly a subset of the latter. This created a new class division which generates huge anger and very clearly part of what somebody like Donald Trump appeals to.

ISAACSON: Martin Wolf, thank you so much for joining us.

WOLF: Great pleasure.