Martin Wolf’s new book dissects in great depth the threat of a “crisis of democratic capitalism.” He leaves this reader feeling rather pessimistic about the future.

It was just a few decades ago that the Western world was celebrating the end of the Cold War, and the victory of democratic capitalism over communism and economic planning. But today, according to Martin Wolf, the West and especially the US are facing a crisis of democratic capitalism. Wolf is well known as the chief economics commentator at the Financial Times newspaper. He has also offered deeper analyses of the global political economy in a series of books like “Why Globalization Works, Fixing Global Finance,” and “The Shifts and the Shocks: What We’ve Learned—and Have Still to Learn—from the Financial Crisis.”

“The Crisis of Democratic Capitalism” is a more ambitious undertaking, being framed in a “long historical circle–a circle that includes not just my life but also those of my parents,” writes Wolf. His parents were Jews from central Europe who managed to escape to Britain during Adolf Hitler’s command, something which much of his family were unable to do.

Wolf’s family history makes him aware of the “fragility of civilisation.” He believes that “Homo sapiens is prone to orgies of stupidity, brutality, and destruction. Humans naturally separate people into those who belong to “their” tribe and outsiders. They slaughter the latter gleefully.” Wolf reminds us that the 1931 international financial crisis served as a tipping point in public support for the Nazi party in Germany. What worries him is that “Today’s challenges are beginning to look as significant as those of the first half of the twentieth century.”

At the heart of Wolf’s book is a symbiotic relationship between democracy and the market economy which is failing. And because it’s failing economically, it’s also failing politically, leaving us open to profoundly antidemocratic forces. This has been most evident in the emergence of Donald Trump in US politics, as well the Brexit referendum in the UK, both events occurring in 2016. However, these populist reactions are also being seen in Italy, France, Spain, and even in Germany. The reaction against democracy has been described by Larry Diamond of Stanford University as a “democratic recession.”

Wolf notes that democracy is only a recent phenomenon in world political history, having only appeared in the past century or so. He sees it as a product of the industrialisation, urbanisation, and rising education standards associated with the Industrial Revolution. But in this new democratic world there was a “deal” between the people and the elites who inevitably play a dominant role in society – namely that for the elites to be legitimate they had to deliver a reasonably satisfactory economic future for the people.

Wolf worries that this deal is coming undone. One factor has been a long period of de-industrialisation, weak economic growth, and, in many countries, rising inequality. These trends disadvantage the working class and lower middle class in many societies, which have become disaffected. Further, Wolf argues that business moved away from market capitalism toward “rentier capitalism,” meaning the use of political influence to gain privileges and advantages. There is also the financialisation of the economy, as evident in the excessive profits earned by Wall Street banks and investment houses.

Then, as a trigger for a populist reaction, came the global financial crisis of 2008/09, which saw the finance industry being bailed out with huge amounts of government support and virtually none of the miscreants ending up in jail. Due to the financial crisis and government austerity policies, many working class people became unemployed or suffered large declines in disposable incomes during this time.

So, the elites who should be ensuring a reasonably satisfactory economic future for the people have lost the confidence and trust of such. Wolf recognises that political and technocratic elites, who were in charge of the economic system, as well as economics journalists like himself, didn’t know what they were doing. Unsurprisingly, this created a profound disillusionment, which left open the political field to populists, especially those of the right wing, like Donald Trump and Boris Johnson.

This is where we are now, with the risk that things might only get worse if Donald Trump, or someone with his stripes, gets elected as US president in 2024. The US is already ranked as a “flawed democracy,” rather than a “full democracy” by the Economist Intelligence Unit (EIU), and could see the quality of its democracy deteriorate even further. And with the US having functioned as a beacon for global democracy during the postwar period, there are grave risks of contagion elsewhere in the world. It is for this reason that much of Wolf’s text focuses on the US and the effect of Donald Trump.

Wolf regards democracy as one of the great inventions of humankind, as it offers prosperity, freedom, and human dignity in contrast to other politico-economic systems. Moreover, democratic capitalism has only been with us for a very short period of human history, and only 24 of the world’s 167 countries covered by the EIU would have full democracies. As evident from the democratic recession, it is a very fragile system.

What solutions does Wolf propose to save democratic capitalism? While he calls for a “new” New Deal, many of his proposals are “old chestnuts” – like restoring economic growth, generating opportunities for most people, protecting people from the most extreme vicissitudes of life, investing very heavily in education to prevent the development of a hereditary underclass and a hereditary superclass, and tackling global environmental challenges. To improve political systems, Wolf suggests that we think about how we select political leaders, how parties work, the role of the media, and restoring the credibility of experts, in addition to his ideas for restoring citizenship.

Wolf calls upon elites to drive reform to salvage democratic capitalism, writing “If the needed reforms are to happen, elites must play a central role.” However, it does not seem likely that plutocratic elites who have captured the state in the US and UK will put the public interest ahead of their own by correcting the systemic mess that they have allegedly created in democratic capitalism. But as Wolf says, “Without decent and competent elites, democracy will perish.”

Overall, Wolf’s new book on democratic capitalism is a vast, sprawling enterprise of some 500 pages with loads of detailed background information and argumentation. It is certainly not a book for the fainthearted! But the crisis of democratic capitalism is real, and this book is certainly a good guide to the issues.

But it will not leave the reader feeling optimistic. Towards the end, Wolf doubts “whether the US will still be a functioning democracy by the end of the decade. If US democracy collapses, what future can there be for the grand idea of government of the people, by the people, for the people?” Thus, he concludes “If we fail, the light of political and personal freedom might once again disappear from the world.”

This is a review of Martin Wolf, The Crisis of Democratic Capitalism (Allen Lane, 2023). ISBN: 9780241303412 (hardcover).

John West is adjunct professor at Tokyo’s Sophia University and executive director of the Asian Century Institute. His book Asian Century … on a Knife-Edge was reviewed in Australian Outlook.

This review is published under a Creative Commons License and may be republished with attribution.