The impact of inequality on western capitalism 


Continued from last week.

Democracy and capitalism were not often combined in history. Capitalism in the absence of democracy has been a common feature throughout history. This was the case not only in Spain under Franco, Chile under Pinochet, or the Congo under Mobutu, but also in Germany, France and Japan. It even occurred in the United States via the exclusion of blacks from the body politic, and in England with its severely limited franchise based on ownership of property at levels sufficient to include only the elite.

The slide away from democracy can take two forms. According to Joseph Nye, the former Dean of the John F. Kennedy School of Government at Harvard University, one is American and resembles plutocracy. The other may be called Italian. In the latter case, power is extraordinarily transferred to a technocratic government, albeit in an ostensibly legal fashion and within the democratic system.

Joseph Nye noted that technocracy may appear benign, led by people of unimpeachable integrity, but it nevertheless arises as a counterpoint to democracy. It thrives because democracy is shown incapable of solving problems. Technocrats can do it. Indeed, countries like Singapore are perfect examples of technocratic efficiency. However pleasant it might be to live under such governments, they are nonetheless not democratic. If democracy is a value in itself, they do not provide it.

The latest disenchantment with the United States Congress, which faces a public approval rating of less than 15% and was recently called by Washington Post columnist Ezra Klein “less popular than Communism,” may be seen as yet another indicator of the drift toward the rule of technocrats desired by some. Yet both the unelected rule by technocrats and the occult rule by the rich are deeply undemocratic.

All that was said previously about the evolution of democratic capitalism in the United States applies, obviously, to Europe. After all, it is from the Europe of Mario Monti and Lucas Papademos that we drew the examples of the technocratic drift. But Europe is exposed to additional pressures. As Branko Milanovic, Professor at the City University of New York’s Graduate Center argued, the most important is the pressure stemming from globalization, which frequently works both against workers and the middle class and favors the rich. He noted that Western workers and parts of the middle class are exposed to severe competition from workers in emerging economies, by virtue of increased trade, outsourcing or the attractiveness of foreign as opposed to domestic investments.

Branko Milanovic further argued that both the property-rich and the highly skilled gain because their financial and human capital is more mobile and cannot be easily taxed unless one wants them to flee the country. Low taxation in turn increases inequality between the rich and the poor because it undercuts the funding sources on which the modern European welfare state was built. The story of French actor Gérard Depardieu’s recent search for a more tax-friendly citizenship is a valuable example, not least because few individuals seem to embody “Frenchness” than Depardieu. When national icons run away, what remains for the others who can afford to move than to emulate them?

A second globalization force that Europe is ill equipped to deal with is migration. Migration is no different than other forms of globalization, exports and imports of goods and technology or movement of capital. So it is wrong to discuss it separately, or as somehow independent from the massive income gaps between nations that have been revealed and often exacerbated by globalization. Not only does Europe lack the experience of dealing with migrants that the United States, Canada or Australia has. But migrants who are often ethnically and religiously different from the native majorities bring different cultural norms that also undercut the welfare state.

Joseph Nye stated that the welfare state was built on the assumption of ethnic and cultural homogeneity of the population. Homogeneity not only increases affinity among different segments of the population, it also ensures that more or less all follow similar social norms. If no one cheats by pretending to be older in order to get a pension, or does not take sick leave when not ill, the welfare state is self-sustaining. But if not everyone observes these norms, it crumbles. The pressures that have come to bear on the welfare state, both directly from globalization and from migration, are in reality an attack on the middle class. Why? Because the middle class is the largest supporter and beneficiary of the welfare state.

According to Joseph Nye, it is true that in most studies we find that the poor gain a lot through unemployment benefits and social assistance. But the middle classes gain even more through free or subsidized health care and education, pensions, and more than anything else, through the certainty of being spared the life of poverty and want. The welfare state was thus an indispensable element in the strengthening of the European middle class and democratic capitalism. European democracy goes the way of the European welfare state. It came with it and it may leave with it.

However, one should not be unduly pessimistic. Europe has weathered other, more formidable challenges, even if, it is true, often after paying an enormous human and material price. It is still among the richest parts of the world and in terms of social rights and social attitudes, probably the most “civilized” part of it. It is, barring a war which indeed seems unthinkable, likely to remain the most attractive place in the world to live. But it is doubtful that it will be the most dynamic. And the key features associated with it in the second half of the 20th century, democracy and the welfare state, may be gradually fading.

Was the period between the end of World War II and the end of the Cold War an unusual interlude, in which capitalism became entwined with democracy, the welfare state and liberalism, features that historically it often lacked? There are arguments to see it that way, and to argue that capitalism is now simply reverting to its “natural” features.

As Joseph Nye noted, what many of us have lived through might just have been capitalism under “exceptional conditions.” It was a capitalism that responded creatively to the Great Depression by reinventing government, to war by marshaling resources to win it and to Communism by emphasizing social solidarity through the welfare state. Neither of these threats is present any more. So why would capitalism not go back to what it once was?