Breakingviews - Review: Capitalism and democracy are good friends

LONDON (Reuters Breakingviews) - Democratic governments are good for justice and bad for the economy, while competitive markets are just a good thing. Or perhaps it is the other way around. The debate on the relationship between electoral politics and rising standards of living is long-standing and has a new urgency. “Democracy and Prosperity: Reinventing Capitalism through a Turbulent Century” persuasively argues that the two are mutually supportive.

The authors, Torben Iversen and David Soskice, do much more than rebut the idea that state and market are always in opposition. The politics professors at Harvard University and the London School of Economics also dismiss the conventional wisdom that there is an inherent conflict between capital and labour.

And that is not all. In just over 250 pages, they explain that the political strength of multinational corporations is often exaggerated, provide a stylised history of almost two centuries of political conflicts in about two dozen advanced economies, explain how the development of electronics has changed both the economy and the political balance, and discuss the appeal and limits of populism.

There is no question about the book’s ambition. However, its intellectual framework is disappointingly modest. The authors assume that economic considerations are the sometimes hidden foundation of absolutely everything in politics. What they call the “material basis” of society lies behind the desire for freedom, peace, national greatness, justice and a quiet life.

Many voters might be surprised to learn that all they really care about is higher incomes for themselves and their children. Political scientists, however, have no scruples about disregarding some stated opinions. This is “false consciousness”: people do not know what they are really thinking.

This reductive approach hampers the book. However, three of its central claims are basically persuasive

First, democratic governments and competitive markets really do get along. It is not an accident that every single advanced economy has a multi-party system of representative government. This ensures that all the economic classes and interest groups have a voice, and encourages the compromises needed to keep social peace as the economy evolves.

The political system has created the welfare state, which moderates the rich and appeases the poor. Iversen and Soskice also point out that the government’s economic support extends far past income redistribution. It includes “vocational training and higher education, technology transfer and innovation systems, regulation of skilled labour markets and industrial relations, corporate governance and markets for corporate control”. In other words, markets function well because governments help, prod and constrain them.

Second, democracy can be expected to evolve along with the economy. The authors describe how political configurations and regulatory priorities changed in the early 20th century as the proletariat turned into the bourgeoisie and as average education and skill levels increased.

The development of a hyper-skilled, largely urban elite class in the current age of information and communications technology is bringing further political changes. For Iversen and Soskice, the discontent with legacy centre-left and centre-right parties in so many advanced economies is entirely caused by those groups’ failure to offer comfortable political homes to this articulate and economically influential group.

Finally, globalisation does not doom national politics. Iversen and Soskice reject the conventional wisdom that multinational companies are too powerful to be reined in by national authorities. They point out that today’s skilled workers need to be kept happy and cannot easily be replaced or transported. The plausible conclusion is that governments cannot be bullied by threats of moving investments in advanced industries.

The authors also argue, somewhat less plausibly, that the fine political balance of democracies prevents companies from buying and misusing political power. The voters would not accept anything that harmed their interests. In this case, the book seems to underestimate the power of money to create a false consciousness of what is good for voters and for the nation.

“Democracy and Prosperity” concludes with a chapter on populism. Unsurprisingly, its explanation is entirely economic, a “socioeconomic encapsulation of the old middle classes”. In other words, poorly educated people are left behind. The suggested cure – “opening the educational system to the middle and lower middle classes” – is suspiciously simplistic.

A look at China, Brazil, Russia, Turkey and the Philippines suggests that the appeal of authoritarian rule reflects far more than economic frustrations. It might be better to listen to other commentators, for example those who talk about the appeal of identity politics in atomising societies.

“Democracy and Prosperity” tries to do too much with too weak intellectual tools. The overreach can easily obscure the book’s significant accomplishment. Flexible, reasonably competent and democratically ratified political authorities really do play almost as large a role in the modern economy as competitive markets. Or at least they have up to now.