Make economies work for people to save democracy

The last global financial crisis prodded social scientists and policymakers to think more thoroughly about serious problems that afflict our economies. Why have our societies become so deeply divided, which is inimical to democracy? How do growing income inequality and distributional conflicts impact governance structures? Why has ‘fake news’ often taken precedence over truth, with social media playing a nefarious role in this respect? What should be done to avert the rule of law from being undermined by the ‘rule of the mob’, when so many people seem to lose confidence in governing elites and succumb to the sirens of anarchism, violence-peddlers and authoritarianism?

The COVID-19 pandemic, energy and climate crises, Russia’s war in Ukraine and geopolitical confrontations make the defence of democracy harder against the backdrop of social divisions and tensions, disgruntled citizens and mistrust in politicians. It may be that the lasting effects of recent crises are harbingers of a new turning point in the evolution of capitalism.

Over its history, capitalism has evolved as a social and economic system. This evolution is interlocked with cycles of ideas, public policies and institutional change. A mixed economy took shape over time, in which a public sector and a private sector cohabit, based on market dynamism and entrepreneurship, with the shares held by the two sectors shifting in accordance with historical circumstances and local conditions. Modern capitalism has among its core principles the notion of ‘equal opportunities’. To what extent reality befits this principle is an open question, and part and parcel of the current quest to re-examine the functioning of capitalism.

The debate that started after the outbreak of the financial crisis more than a decade ago is not, chiefly, about capitalism versus socialism, but about the path of capitalism, the mixed economy and democracy. There is the lesson of communism, a totalitarian regime that should not be judged as the distortion of an enlightened project, and that of national socialism in Hitler’s Germany and fascism in general. Capitalism – when embodied by unrestrained markets, a lack of rules and regulations, blatant policy capture by powerful vested interests and market fundamentalism – is itself detrimental to the functioning of a fair market economy and democracy.

The great stake in the current debate on the future of capitalism is to safeguard democracy as a liberal political regime. Democracy has liberalism in its genes; democracy boils down to power in the hands of citizens and decision-making via institutionalised checks and balances – what John Kenneth Galbraith and others referred to as ‘countervailing power’. Democracy is epitomised by the separation of powers.

It is not redundant to repeat that climate change and the energy transition enormously affect the functioning of our societies and influence the debate on the future of democracy. This debate gets an additional dimension against the backdrop of the war in Ukraine that highlights the role of NATO and the need for security arrangements in Europe.

An age of crises and turmoil: climate change and COVID-19

The threat of climate change is not new. The past years’ sequence of climate events, from wildfires and melting ice caps, to floods and dramatically changing temperatures, pinpoint a dangerous future for mankind, with a possible extinction of humans if nothing is done to rescue ourselves.

Our behaviour and relationship with nature must change. Unless this is done, a spectre of ‘hydraulic civilizations’ – in which access to water resources equates to power – looms, which would encourage authoritarian tendencies.

We must change public policies, bolstering public budgets that would allow for timely interventions in case of emergencies, as well as systematic actions that would help tackle major adverse shocks and increase economic and social systems’ resilience and versatility. European politicians and people at large are increasingly taking climate change seriously. The NextGenerationEU programme is a step in the right direction. International financial institutions, too, are gearing to the forefront of action to deal with climate change. The International Monetary Fund (IMF) stresses the need to combat carbon emissions and revisit public policies to this end; a carbon tax implemented globally would be a step forward. Moreover, the global accord on climate change must be underpinned by both the United States and China so that fossil fuel dependence be reduced drastically. The provision of global public goods demands cooperation among the global powers in spite of geopolitical adversities.

Regarding the COVID-19 pandemic, partial lockdowns revealed the possibility for many companies and public institutions to continue functioning with a considerable reduction in the number of employees. Homeworking, digitalisation and new technologies entail sweeping changes to the activity of many firms, leaving their hallmark on the future structure of labour market. This impact is to be seen in the context of an increasing number of ‘losers’ due to unrestrained globalisation and inadequate public policies.

Automation and artificial intelligence (AI) have a severe joint impact on labour markets. Mass redundancies would heighten social issues and structural unemployment. The introduction of minimum guaranteed wages has been experimented as a means to prevent social tensions from going to the extreme. The financing of a minimum guaranteed income could lead to an income redistribution from businesses that use robotics that displace human labour to those losing their jobs. Education and training programmes should help people find alternative jobs. Such ideas are meaningful as we strive to avoid joblessness and a mass psychology of human destitution and indignity.

A big issue is ageing, which strains pensions schemes and raises questions about retirement horizons and inter-generational relations. Ageing societies cumulate economic, social and psychological challenges.

The return of the state

Recent and current crises – all of them seen also as major national security concerns – have triggered a tendency for stronger state presence in the economy in a bid to provide safeguards and key public goods, as well as address key challenges, such as resilience, inclusion, to face geopolitical challenges, to promote or support economic ‘champions’, and, not least, to deal with climate change.

We need to avoid turning our societies into ‘winner-takes-all’ economies!

In Europe, more resources in the EU budget are envisaged to be collected via its own resources, such as new carbon, digital and financial taxes or by fighting tax evasion and tax avoidance. The pandemic and energy crises called for massive interventions on the part of both governments and central banks. Although featuring a temporary component, some of the new measures are quite likely to remain on geopolitical, security, economic, social, industrial or environmental grounds.

Strategic foresight at the macro level will probably acquire higher significance. The EU prods member states to develop strategic foresight capacity, which should not be mistaken for neither forecast analyses nor policy planning conducted in traditional terms. France announced a resuscitation of the ‘Plan Commission’ (Commissariat du Plan), as part of a strategic foresight and guidance of its investment policy. Other countries will probably follow suit and the EU might develop such a capacity. This, it makes sense to assume, collides with the current logic of state aid if the goal of fostering European champions is decided upon as a means to underpin sectors that promote innovation and technological excellence.

The ‘return of the state’ comes, nevertheless, with a risk: as markets alone can neither solve social issues nor surmount economic crises, considerably higher public support will not automatically ensure lasting solutions. Large public debts are telling evidence in this regard.

Public governance should address market failures and create public goods on a necessary scale. For this to happen, states need robust budgets and higher public revenues as well as more efficient public spending. This implies combating tax evasion and tax avoidance resolutely, punishing unethical corporate conduct firmly, revamping fiscal regimes, raising taxes on the wealthier members of society eventually and fighting tax havens; it also demands combating undue rents that some industries, including finance and Big Pharma, extract from the economy. How to achieve all this is a big question as vested interests hold immense political clout and swaying power.

We need an agile and nimble state that, with no countless resources, should do more by putting in place policies designed to get more people out of servitude to social security – to restore individual dignity and their feeling as active, not abandoned, members of society. We need also more responsibility and accountability on the part of decision-makers and enlightened leadership. This is a must in the struggle to regain the trust of society in political leaders and business elites. Fighting top-level corruption, double-talk and hypocrisy is also a must in the struggle to restore trust.

There is a need for a pragmatic approach to public policies, for accountability, for rediscovering the middle ground represented by ‘community’ and ‘reciprocity’ through mutual rights and obligations, for belonging to more than oneself, and for loyalty, dignity, respect and moral values in general. It is not simple and some would argue that it is mission impossible, yet we need to find a right path and avoid further setbacks.

The world is changing, not least due to the redistribution of economic power among countries. Capitalism is in the throes of major changes by the force of events, and public policies are adjusted, frequently erratically. We will likely go through a transition period, an interregnum with a lot of mayhem and mushrooming tensions, with global governance rules being eroded markedly, and with ‘survival of the fittest’-type reactions.

Which way goes capitalism?

Challenges for capitalism originate not only in idiosyncratic inclinations of some leaders, vested interests and sheer struggle for power, but from deeper roots, such as unrestrained globalisation and market fundamentalism; neglect of social aspects, such as inclusion and fairness; market abuse perpetrated by large players, such as firms; the impact of AI and new technologies; and oblivion of ethics and disregard for citizens.

Certain trends are likely to define capitalism in the years to come:

• governments will be more present in economic life for the sake of providing public goods;
• industrial policies will be on the rise, not least for competitiveness and security concerns;
• a new arms race is underway and it will affect resource allocation and the structure of economies; it will entail more fragmentation and supply-chain reorientations, as well as trade restrictions in the global economy;
• there will be louder calls to regulate AI that can be detrimental to human beings and turn it into an existential threat;
• tax regimes will be revisited to make them fairer and to bolster budget revenues for green and industrial policies;
• wider regulation of finance, including ‘shadow banking’ and crypto-assets, will be adopted;
• inclusion and fairness will likely acquire more prominence in public policies; and
• migration will be high on the agenda of governments, as changing demographics and inflows of migrants can easily destabilise societies.

The debate around the ideal model should be about the form of capitalism that can foster more innovation and productivity gains, while markets are reined in so that inclusion, fairness and income distribution are met as policy objectives.

The EU’s big dilemmas

The European model is epitomised by EU principles and values. Its weaknesses derive from the incompleteness of the Union and a suboptimal design of the eurozone rooted in political constraints. The EU model faces big challenges that are reflected by social strife, a decline of mainstream parties, illiberal propensities, the rise of extremist groups and populists, a crisis of ‘social paternalism’ and spreading cynicism. How to reform the functioning of the EU model and deal with economic divergences in the eurozone are formidable challenges and clear solutions are often not available. Some venues for action are nonetheless clear. For instance, in the eurozone, a judicious combination of risk-reduction and risk-sharing is needed, and, to this end, a joint ‘fiscal capacity’ is a must to enhance robustness and resilience; a collective deposit insurance scheme (EDIS) would help too. The EU energy market also asks for a better design.

As to its soft power, the EU should adapt its policies, including economic aid, towards low-income countries to new realities in a changing multipolar world.

To sum up, this debate is about the future of capitalism, the mixed economy and democracy, and how we can tackle climate change and other huge threats, such as a nuclear Armageddon. The stakes are much higher than a simple battle between political families and political philosophies; it is about the fate of democracy and human dignity. Rethinking capitalism means exploring the virtues of economic freedom, social cohesion, fairness and the sense of belonging within a community.

If the number of ‘losers’ in economic competition is ever higher, extremist groups will gain the upper hand in politics. If we do not change public policies to create fairer societies, xenophobia, chauvinism and racism will enhance authoritarian and illiberal tendencies, fuelled by social and political anger, as well as violence; civil wars and military conflicts will proliferate.

It may be that our societies have entered a new ‘turning point’ that could bring about more social strife and economic warfare, against the backdrop of geopolitical confrontations and chaotic developments in various parts of the world. There are numerous signs that allude to it. If this is the case, the fight to defend democracy will be ever harder.

This article is part of our Rethinking economics series, find out more here. The views expressed in this #CriticalThinking article reflect those of the author(s) and not of Friends of Europe.