By Ulf Dahlsten, Visiting Professor, London School of Economics and former Secretary of State in Sweden.

The rise of right-wing populism is by many described as a rejection of capitalism. And so it is. To a certain extent.  Others describe it as a threat to democracy. And so it is too. But few recognize that the marriage between democracy and capitalism, sometimes called democratic capitalism, also is at stake and that this to a high degree is the underlying root of the problem.

Free trade and technology change have lifted hundreds of millions out of poverty in China and elsewhere, but many frustrated Westerners, factory workers as well as office staff, have seen their jobs replaced by robots and computers, disappear abroad or go to better qualified immigrants. The median income in most Western economies has not increased for thirty years.

When people have seen how riches have been amassed in the hands of a few, while the trickle-downs they have been promised by the liberal elite have failed to materialise, their enthusiasm for Global Market Liberalism has begun to dwindle. Technological progress, especially the IT revolution, has brought some compensation for the lack of increases in income, as have the possibilities to borrow at low interest rates in order to improve living conditions. But when house prices slumped during the Great Financial Crisis and asset bubbles burst, many have found themselves with another broken promise. Not only many of the young and unemployed but also many in older generations have lost their appetite for the global liberal market story and its promises altogether. Where is the future and where are the secure jobs for the children and their grandchildren, the opportunities that should be available for all; where is the fairness?

Neither can they mobilize any enthusiasm for the progressive liberal projects that have dominated the last decades and their emphasis on environmental protection, increased acceptance of gender and racial equality, social tolerance of diverse lifestyles, religions and cultures, international cooperation, and protection of fundamental freedoms and human rights. Over time their response to the projects can only be described as a cultural backlash. Less educated and older citizens, especially white men, who were once the privileged majority culture in Western societies, resent being told that traditional values are ‘politically incorrect’ when they have come to feel marginalized within their own countries.

Feeling unseen and forgotten many blue-collar workers in Western countries have turned their back on the Left and now support the Populist and Nationalistic Right.

Darkness is spreading as Enlightenment values are rejected all over the Western world and the two major liberal projects of the last decades have lost their broad appeal.

The challenge is how to respond. The Economist has in a broad analysis called for a renewal of the liberal projects. More of the same is to their mind not the answer to the challenge we face.

I could not agree more and many socially engaged politicians realize that there is a need for a new progressive agenda. They have also felt left out as the marriages between markets and politics that for decades have been so successful, whether we call them liberal democracy, democratic capitalism, the Nordic model, or something else, no longer are marriages between equal partners.

The market economy has outgrown the nation-states and become global, bereaving politicians of many of their tools. The market economy is a bottom-up system and, as such, it mainly needs predictable and transparent rules, not interventions. But it does need the rules; a level playing field is an essential precondition for effective markets and for the benefits to be shared by all. That was the lesson learned during the first phase of industrialisation. In an unchecked capitalist system, many workers are taken advantage of, while others are left unemployed. A skewed distribution of income and wealth is likely to develop, monopoly powers to evolve and lead to abuses, and the environment to be left unprotected. Many of those patterns returned a hundred years ago during a globalisation period driven by colonialization and a new phase of industrialisation and we see some of them once again. Now, as then, national governments have lost control of the globalisation process, especially of the financial markets. Once again the markets have run away from politics, to quote the German philosopher Jürgen Habermas.

It is not only the upper hand of democracy over capitalism that has been lost. There is also an indispensable centrepiece that has been weakened, the rule by and of law. The legal system, with its independent judiciary and formal institutions, has prevented the abuses that accompany unchecked capitalism and ensured civil, political and market liberal rights.

The leading powers are sometimes surprisingly fast and decisive, but that is basically only when the house is on fire. In general, the present order is reactive. The political response to the globalization of the markets has thus so far been weak, mainly consisting of more of global networking between national leaders in fora such as G20. Even if the public networking is accompanied by private commercial networks in everything from shipping to mining, it is a poor replacement for the upper hand that the public order had as long as the marriages were national.

There is:

  • Lack of authority.Most decisions taken on the international level need to be implemented at the national level to be enforced and by governments that, for different reasons, are susceptible to lobbying and “black-mail” from actors who oppose regulation.
  • Lack of transparency.The populations in general feel excluded from the networking and are suspicious of the motives of the participants. Meetings are surrounded more by rumours than by an enlightened debate.
  • Lack of accountability. There is no one to blame if we enter a new financial crisis. There is no one to hold accountable if climate change becomes irreversible. There is no one to blame than the insufficient regulated global economy as such.
  • Undermined nation-states.The room for manoeuvre by nation-states hasdeclined. Many Western economies are debt-ridden, have to consolidate their finances, and are in difficulties as a consequence of the mismanagement of the financial system. The rulers have increasing difficulties in meeting their domestic demands, promoting growth, and acting to correct negative externalities when companies and wealthy citizens threaten to vote with their feet.
  • Limited scope. A holistic approach to the world markets is lacking – an approach that covers trade, global imbalances and financial markets in an adequate way, but also, for example, entails the right to buy foreign assets, covers the need for coherent competition rules and an appropriate protection of IPRs, and which furthermore addresses the joint responsibility for global climate and environmental issues and regulates the right to exploit valuable and scarce resources in sensitive areas, such as the Arctic.

The challenge we face is how proper global governance based on the rule of law can be created and structured and how the power of the global markets can be both liberated and properly controlled. To build a future governance structure, which can be pre-emptive, coherent, transparent and effective, with the present ‘bottom-up’ approach based on networking has proved to be an awkward, if not impossible task. If we cannot create a global rule of market law democratic capitalism is doomed and with that the chances to restore the trust many have lost both in democracy and the markets.

Photo: Wikipedia Commons

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