What, exactly, do we mean by “democracy” anyway? Surely, it cannot mean that your property can be confiscated by the state without reason, or that you can be arrested without warrant and sent to a prison camp without a trial. And yet, communist countries of the twentieth century called themselves “democratic republics,” as indeed the communist “Democratic People’s Republic of Korea” calls itself today, appropriating the word “democracy” to mean something completely at odds with our liberal idea of democracy.1 Closer to home and our times, Hungarian Prime Minister Viktor Orbán has copied pages from Vladimir Putin’s playbook and is transforming his country into an authoritarian, one-party political system.2 By corrupting the independence of the judiciary, using the state apparatus to punish opposition media and organizations with arbitrary tax investigations, and consolidating power with changes in the electoral law and the creation of a friendly media cartel, Orbán proudly declares Hungary as an “illiberal democracy.”3 Similar illiberal democracies can also be found in Poland,4 Turkey, and Brazil, where democratically elected populist governments are unraveling liberal institutions in the name of nationalism and the “will of the people.” But can such a thing exist? Can a democracy be “illiberal”?
Apparently, the answer is yes. As political scientist Yascha Mounk explains in his book The People vs. Democracy,5 we often confuse democracy with liberalism, and this confusion can be a barrier in forging a broad consensus on the nature of the problem that we are grappling with. So let’s clarify those terms and how they relate to one another. Democracy is essentially a decision-making process, or a procedure, whereby a group of people take a collective decision based on majority rule. When there is more than one proposal about what to do, the one that gets the greatest number of votes wins. In a democracy everyone has an equal right to a vote, but that’s all. It’s as simple as that, and no different from two wolves and a sheep voting on what they will have for dinner.
Liberalism, on the other hand, is not a process but a political and moral philosophy that was born out of the European Age of Enlightenment three hundred years ago. Until then European society was stratified on the basis of family bloodline, which meant that a minority enjoyed a higher social status simply because they happened to be born in a family stemming from the landowning nobles of medieval times. Kings were the ultimate lawmakers and rulers by divine right. Liberalism’s fundamental, and revolutionary, idea was that everyone had equal rights simply by virtue of being born a human and regardless of family origin. But once you make that intellectual leap, and remove the divine right of kings as lawmakers, as well as the privileges of the aristocracy, you are faced with the following problem: who should decide—and how should they decide—on the laws of a liberal polity where everyone is equal?
This question is far from straightforward. Having equal rights suggests that all citizens should decide collectively on the laws of their polity by using a democratic process. But liberalism stipulates many other rights beyond the right to vote. These rights include, for example, property rights. Given that not everyone is of equal wealth and that the majority are usually less affluent than a wealthy minority, adopting a democratic process in legislation poses an obvious conundrum: how will the property rights of the wealthy minority be protected if the impoverished majority votes to confiscate their wealth? In a direct democracy it is not only the rich who should fear the whims of the majority. What if the majority, for example, decides that same-sex relations should be punished by imprisonment or death? What if the majority votes in favor of expelling “foreigners,” or immigrants, or those whose religious beliefs are different from those of the majority? What about their rights? The same problem of protecting the rights of minorities applies to almost everything, including the right of free speech and expression. Using a democratic process to make decisions in a liberal world of equal rights sooner or later leads to inequality, oppression of minorities, and a reduction of liberty and freedom.6
Democracy, without the checks and balances of a liberal system of government and its institutions, is inherently illiberal. So let us agree that, when we speak about “democracy,” what we really mean is “liberal democracy,” which is different from direct democracy or other forms of democracy—as, for example, democratic socialism. Inspired by liberal philosophical values, liberal democracy is a system of government that adopts a representative form of democracy in order to defend citizen and human rights against the tyranny of the majority.7 But, to do so, liberal democracy must keep ordinary citizens as far away as possible from deciding on laws or having a direct say in the running of government. In a passage of his work The Social Contract Jean-Jacques Rousseau beautifully summarized the dilemma of liberal, representative democracy: “The people of England regards itself as free; but it is grossly mistaken; it is free only during the election of members of parliament. As soon as they are elected, slavery overtakes it, and it is nothing.”8
Rousseau pointed to the main problem of liberal democracy, which is that the people are only sovereign at particular points in the election cycle. Before and after those points our legislative and executive institutions are only indirectly accountable to us citizens. Disdain for the sovereignty of the many is arguably the bedrock of liberal constitutions. Many modern American liberal thinkers, such as Harold Lasswell and Walter Lippmann, have posited that the many, or the demos—the “ignorant and meddlesome outsiders,” as Lipmann called them9—are not fit for government and should not take part in it. For those thinkers, given the knowledge asymmetries between citizens of varied educational backgrounds and intellectual abilities, it is best to leave the serious business of government to an enlightened and educated elite. Liberalism requires that the public must be kept in a zombielike trance between elections, with their political power severely restricted, and only allowed to express their preference on a small number of narrow options during election time. In the presidential election of 2016, the Democratic candidate Hillary Clinton was merely echoing that conventional liberalist worldview about citizen power by referring to Trump’s supporters as a “basket of deplorables.”10 The Greek phrase “hoi polloi”—which means “the many”—has a negative connotation in English because it is interpreted and understood in the context of liberal thinking as meaning the “rabble” or the “mob.” And yet, that’s exactly what a democracy is: the rule of the riff-raff, or the “demos.” Disregard for the many inexorably leads to “undemocratic liberalism”—to use Mounk’s term11—where political elites in liberal democracies ignore the popular will or act against it. When this happens, populism returns with a vengeance to exploit the inherent tension between the democratic will of the many and the liberal idea of preserving equal rights by reducing the sovereignty of the people.
Take, for example, the issue of immigration in the European Union: in the name of the European Convention on Human Rights,12 liberals in European institutions resist the popular will that is squarely against increasing immigration from outside the Union. “Undemocratic liberalism” thus prioritizes universal human rights that apply to immigrants and citizens alike, while “illiberal democracy” prioritizes citizen rights that include citizens deciding that they do not want immigrants to enter and settle in their sovereign country. President Trump, nationalist Brexiteers in the United Kingdom, Bolsonaro in Brazil, the Italian,13 Polish, and Hungarian governments, together with alt-right parties in many European countries, use immigration and nationalism to attack core liberal values in the name of the “people.” They are successful, at least for now, because many citizens feel that liberal elites, in the name of universal human rights, have excluded them from the material fruits of globalization and ignored their voice. Clinton’s “deplorables” are the millions who came up short in the march toward globalization, saw their way of life annihilated, and experienced their values being ignored or ridiculed. Moreover, many citizens feel that liberal elites are colluding with the owners of capital, the bankers, the corporate bosses, all those who support the opening up of borders to foreign workers and corporations, and those who enjoy relative impunity from the law when things go wrong. The many also have it against technocratic experts, whom they consider to have sold out to amoral capitalists.
As a result, many citizens have ceased to trust expert and scientific opinion. Conspiracy theories proliferate over social media, challenging the truth of scientific discoveries and facts and leaving many of the biggest questions of our modern world open to debate ad nauseam. Does our planet overheat because of human economic activity? Do inoculations cause autism? Do foreign workers decrease, or increase, the economic well-being of a country? Is it better for the United Kingdom to be outside the European Union? Is there a “deep state” that seeks to overthrow Trump?14 It is an enormous historical irony that, at a time of great scientific advances, it is so difficult for facts and truth to be communicated and for them to be accepted by democratic societies with functioning public education systems. This is the deep crisis in liberal democracy we are faced with, and it shows in the numbers. More than half of the people living in liberal democracies are disillusioned with their political system, according to a recent study published by Dalia Research, Alliance of Democracies, and Rasmussen Global.15 The study found that 54% of citizens in liberal democracies believe that their voice does not have an impact on political decisions, while 64% think their government does not act in their interest. As Nico Jaspers, CEO of Dalia Research and co-author of the study, said:, “Political systems around the world are currently changing with a speed we have not seen in almost 30 years. Right now the biggest risk for liberal democracies is that the public no longer sees them as democratic.”16
It is ironic that free markets and open borders have triggered such a deep existential crisis in Western liberal democracies. Much treasure, blood, and ink have been spent during the Second World War and the Cold War to defend liberal democracy and free markets—as if they were inextricable Siamese twins. The military annihilation of fascism and Nazism, followed by the implosion of communism, were interpreted as history’s endorsement that open markets, representative democracy, free trade, and the rule of law were the only available path toward prosperity. As a result, the West was almost united in the belief that, as free markets expanded around the globe and raised living standards, liberal democracy would become the point where all humanity must ultimately converge.17
And yet here we are today, some thirty years after the fall of the Berlin Wall, witnessing liberal democracy’s moment of truth. According to Freedom House,18 2018 was the twelfth consecutive year of decline in global freedom, without any signs of this trend abating anytime soon. Seventy-one countries suffered net declines in political rights and civil liberties, with only 35 registering gains. States that a decade ago seemed like promising success stories—Turkey and Hungary, for example—are sliding into authoritarian rule. The Pew Research Center found19 that 17% of Americans think military rule would be a good idea, while 22% favored a “strong leader”. Numbers in the United Kingdom were fairly similar. Younger generations, with no memory of the Cold War, are more susceptible to the sirens of nationalism and authoritarianism, particularly when framed around immigration, terrorism, and job insecurity.20 People feel that capitalism has released forces that liberal democracy cannot effectively grapple with. As a result, all studies point to a huge crisis of confidence among the electorate towards democratic institutions. At the same time, nondemocratic States, such as China, are successfully managing capitalism to raise the living standards of their people. What has gone wrong with free markets? And why are liberal democracies failing to spread the benefits of capitalism more equitably?
Following the Great Recession and the anemic growth in workers’ wages in developed economies over the past decade, we are now witnessing the steepest rise in income and wealth inequality ever recorded, with the globe’s 1% richest owning half the world’s wealth,21 and eight men owning more than 3.6 billion of us.22 What is particularly shocking is that the world’s richest people have seen their share of the globe’s total wealth increase from 42.5% in 2008, at the height of the financial crisis, to 50.1% in 2017, or US$140 trillion.23 The World Economic Forum has identified rising income and wealth disparity as the number one risk and biggest driver of international affairs over the next ten years, adding that it is “fraying the social solidarity on which the legitimacy of our economic and political systems rests.”24 Economic growth in liberal democracies seems to have ceased to work for everyone: the rich seem to accelerate their wealth while the rest of us are either stuck in neutral or falling behind. Put another way, those who own capital are becoming vastly better off than those whose main contribution to the economy is through work.
One reason for this is that, in today’s globalized money markets, capital can quickly relocate and be invested anywhere in the world, and it does so in mostly “unproductive” investments (for instance, investment in complex financial products), rather than in equipment or infrastructure, or in investments that increase human productivity25 and, therefore, wages. Low interest rates due to the quantitative easing policies of central banks further encourage this nonproductive allocation of capital. At the same time, the globalization of capital has created a deep interdependence between myriads of interconnected systems: banks, governments, exchanges, investment funds, commodity markets, supply chains. This interdependence reduces resilience, and the resulting supersystem—what we call the “global economy”—has become prone to unpredictable chaotic phenomena.26 Massive deregulation of labor markets over the past few years has left workers in the developed world exposed and vulnerable to such chaotic phenomena—or “black swans”—that have a devastating impact on the financially weak. The COVID-19 pandemic—arguably a predictable event—exposed the fragility of globalization by triggering a deep recession, disrupting supply chains, and sending unemployment numbers through the roof.27 Given the instability of the global economy, work in the West has ceased to be a guarantee for a good living, for raising a family, or for giving back to society. Our parents and grandparents lived at a time when earning a decent wage was possible, as it was possible to put aside savings for a rainy day, for their children’s education, for retirement, or for investment. This way of life is collapsing. We are now living in the era of job insecurity and uncertainty. US labor data show that 40.4% of workers are contingent or contract workers, with uncertain incomes and little or no job security.28 In the United Kingdom one in four families have less than US$130 in savings.29 Similar trends are evident across the rest of the Western world.
As capitalism and free markets seem indifferent to the wishes, or the will, of the demos, the real tension between capitalism and democracy emerges. Citizens, as research has shown, feel that their voices are neither heard nor taken into account. They see their governments as subservient to lobbies and special interest groups that exert enormous influence on public policy and decision-making. Those special interest groups ensure that markets are neither free nor open, but skewed in their favor. Without access to political decision-making, citizens are frustrated by the lack of political transparency, which explains in many ways why fake news and conspiracy theories abound. Lack of participation and, therefore, responsibility by the many in the exercise of politics systematically corrodes trust in democratic institutions.
Another reason why liberal democracies consistently fail to make capitalism work for the many rests with our representational system of government. The professional political class, to whom citizens have delegated the authority and responsibility of government, have goals that do not always align with the goals of the many—something that is often called the “principal-agent” problem. In politics, citizens are the principals, and our elected representatives are our agents. Representatives are supposed to act on our behalf and do their best to maximize our welfare. But representatives have their own priorities too, the most important of which is to get reelected. Moreover, they are usually immune to the costs and repercussions of their decisions. By not having “skin in the game,” our representatives can pursue their own self-serving agendas to the detriment of collective welfare.
The principal-agent problem in politics becomes more acute when there are multiple “principals”—in other words, when our representatives must make a decision that impacts conflicting interests of the various constituencies they supposedly serve. In such cases the constituency that can exert the most influence on the politician will have its way. This is the basis of lobbying, and it leads inexorably to undemocratic outcomes where powerful and influential minorities advance their agenda and interests while weak majorities fall behind and often bear the costs. The principal-agent problem was seen in action during the global financial crisis and its aftermath. Politicians on both sides of the Atlantic prioritized the interests of a powerful and influential minority called “bankers” and shifted the debts that stemmed from their bad bets onto the shoulders of millions of taxpayers, their children, and their children’s children. The moral hazard of those actions still reverberates today and fuels the rise of populism and democratic illiberalism. A recent study30 by Princeton University and Northwestern University has confirmed how truly “undemocratic” is the political system we call “liberal democracy.” By shifting through nearly 1,800 US policies enacted between 1981 and 2002 and comparing them to the expressed preferences of average Americans (50th percentile of income), affluent Americans (90th percentile), and large special interests groups, researchers concluded that the United States is dominated by its economic elite. As stated in the research report, “When a majority of citizens disagrees with economic elites and/or economic interests, they generally lose. Moreover, because of the strong status quo bias built into the US political system, even when fairly large majorities of Americans favor political change, the generally do not get it.”
The principal-agent problem is also evident when private businesses interact with governments in the context of regulation. There, the misalignment of goals between government representatives, citizens, and business of various sizes results in an uneven field for competition and, in a worst-case scenario, to public administration corruption. As compliance with government regulation reduces profitability, businesses have an incentive to lobby, or bribe, government officials in order to get exemptions. At the same time government officials have an incentive to make regulation more complicated. Corruption does not manifest only in the taking of bribes. “Revolving doors,” whereby public sector representatives get lucrative private sector jobs to run corporate government relations departments, provide another way to incentivize increased, and unnecessary, complexity of regulation.
All those instances of principal-agent misalignment lead to suboptimal outcomes for the general welfare and incur economic costs usually called “agent costs.” These costs are ultimately paid by us citizens, either by having to pay more for goods and services, or by having innovative new businesses excluded from competition due to high compliance costs, or by getting taxed onerously so that the public sector get even more bloated and more powerful, or—as was the case during the global financial crisis—by having the private debt of failed banks become public debt. In all those different instances, and more, agent costs reduce our economic liberty. This is why big government and onerous regulation should be resisted on the basis of fundamental liberal values. The only way to reduce the principal-agent problem, and defend economic liberty, is to realign the interests of representatives, business, and citizens, so that everyone has skin in the economic game, and the costs, as well as the gains, are shared more equitably among the players. Later in the book I will suggest ways to use technology in order to get—at least some—economic realignment between agents and principals in the postdigital economy of the twenty-first century.
Liberal democracy is far from perfect. It is a continuous balancing act between conflicting interests. Although it includes the word “democracy” in its self-description, it is fundamentally undemocratic, and for good reason. Liberal democracy was first and foremost designed to defend economic liberty. This liberty, however, is constantly undermined by the inherent principal-agent problem of political representation. On reflection, it is quite amazing that a political system with so many faults and internal contradictions has managed not only to survive but also to prosper and beat all rivals—at least until now. Perhaps the best explanation for the continuing existence of liberal democracy is that it has used capitalism and free markets to spawn innovation.
A free market economy, where economic liberties and property rights are protected by the law, encourages the smartest to take risks and explore or invent new things since, if those ventures prove successful, the risk-takers will reap handsome material rewards. Risk-taking and the necessary capital to finance risk are the parents of human innovation. The many, who theoretically hold the ultimate veto in a liberal democracy, should therefore be content with an imperfect system of government, as long as they too benefit from the synergy of capital, risk, and new ideas delivering economic growth. The social contract between liberal democracies and the many is therefore founded on the assumption that innovation will deliver economic growth, which will then trickle down and create new jobs, new opportunities, better public services, and an overall increase in living standards for everyone. So one could argue that liberal democracies may currently be under duress, but given enough time, and as innovation keeps creating enough economic growth, citizens will once again see the benefit of allowing the liberal elites to rule. Nevertheless, if the survival of liberal democracy hinges on sustainable economic growth that can absorb the shocks of economic cycles, it behooves us to examine how hopeful one should be about the future of this system of government.
According to the economist Robert Gordon, in his book The Rise and Fall of American Growth, the outlook is rather gloomy, as the age of the great inventions ended in 2004 and we are currently surviving mostly on fumes from past innovations. By looking into twentieth-century market data in the United States, Gordon identified two historical periods of high innovation and economic growth. The first was from 1920 to 1970 when output per hour in the United States rose by 3% annually. Gordon defines this output as “total factor productivity” and considers it a measure of innovation. Essentially, total factor productivity is growth in output minus the extra input of labor and capital, that is, the part of growth that can be attributed purely to innovation. During those golden decades, humanity reaped the rewards of industrial innovation in energy with the exploitation of oil, the expansion of the electrical grid to every home, the invention of chemical fertilizers and plastics, clean water and sewage enabling better hygiene, antibiotics saving lives from infections, and air travel. Our grandparents and parents were the first to buy new household machines that made their lives easier, more comfortable, and more productive: washing machines, refrigerators, electric lights, and automobiles. News became electronic and zipped around the globe with the speed of light. On July 20, 1969, people on every continent watched together in amazement, on television, as Neil Armstrong set foot on the Moon.
A second wave of accelerated growth, although less dynamic than the first, took place between 1994 and 2004, when the world enjoyed the benefits of the Internet. But since 2004, according to Gordon, we have entered an innovation trough reflected in the stagnation of wages and nearly flatlined growth. This trough was made worse with the outsourcing of many blue-collar jobs from Western countries to developing countries because of globalization and the savings to companies from labor arbitrage. Although those savings were translated in cheaper imports and low inflation, good jobs for middle- and low-skilled workers have virtually disappeared. Meanwhile, Gordon says, we are still addicted to oil, airplanes keep flying at subsonic speed, and infections are becoming resistant to antibiotics without our having discovered a new arsenal for our defense. And we are still stranded on this planet, the Moon seemingly further from our reach than ever before. We may all have smartphones that enable us to play our favorite games while traveling on crowded public trains, but humanity remains stuck in enjoying benefits of inventions past.
Nevertheless, a new innovation has now arrived that can change everything and reignite the path toward accelerated growth. Artificial intelligence (AI) is a general-purpose technology, similar to steam power or electricity. This means that it can power and enable the development of many other derivative technologies. Because of this multiplier effect, the economic benefits derived from AI are expected to be enormous. According to research by management consulting company Accenture, AI will double global economic growth by 2035.31 Most other economic analyses agree with respect to the positive economic impact of AI. For example, PwC estimates that by 2030 AI will have added US$15.7 trillion to the global GDP.32 Their analysis shows that the impact will be driven by productivity gains both on the supply side, as businesses automate processes and “augment” their workforce, and on the demand side, as AI makes available personalized or higher-quality products and services. So the big political question regarding AI is how much of that expected economic bounty would find its way into improving the lives of ordinary citizens in liberal democracies. Could AI be the groundbreaking innovation that halts the downward spiral toward illiberalism? And if yes, what needs to change in our system of government and our capitalist economy for this to happen? To answer these questions, let us first take a quick tour of what AI is and what it can do now and in the future.