A system is corrupt when it is strictly profit-driven, not driven to serve the best interests of its people.
Suzy Kassem
Most government is by the rich for the rich. Government comprises a large part of the organised injustice in any society, ancient or modern. Civil government, insofar as it is instituted for the security of property, is in reality instituted for the defence of the rich against the poor, and for the defence of those who have property against those who have none.
Adam Smith
Experience demands that man is the only animal which devours his own kind, for I can apply no milder term to the general prey of the rich on the poor.
Thomas Jefferson
The election of Margaret Thatcher in Britain in 1979 and Ronald Reagan in the US in 1981 were watersheds. They marked the beginning of a political backlash against post-Second World War regulated capitalism with Keynesian ‘pump priming’ enshrined in the benign intervention of the state in the economy.
This hitherto successful framework was blamed for the perniciously high inflation of the 1970s, bringing to a close the three decades of high growth in living standards that followed the Second World War. Budget deficits became anathema since they would lead to unsustainable levels of government debt and crowd out more productive private investment. Margaret Thatcher likened the country’s finances to those of the corner shop where she had grown up, meaning that you had to balance the books. Reagan echoed the new orthodoxy with: ‘We don’t have a trillion-dollar debt because we haven’t taxed enough; we have a trillion-dollar debt because we spend too much.’ The message was consistent; government should get out of the way of the more productive, efficient private sector, period.
In fact, Reagan did not actually practise what he preached; quite the reverse.1 US budget deficits actually got worse in the 1980s, for two reasons. While the US was not involved in a major conflict at the time, defence spending rose to pay for the cold war with the Soviet Union. And taxes were cut, benefiting the rich, under cover of the Laffer curve economic theory.
Popularised by economist Arthur Laffer, the Laffer curve theory argues that the more money is taken from a business in the form of taxes, the less money it has to invest. In a high tax regime a business is more likely to find ways to protect its capital from taxation by relocating all or a part of its operations overseas. Investors are less likely to risk their own capital if a larger percentage of their profits are taken. Workers are demotivated when they see a larger portion of their wages taken in tax. The argument is based on the notion that for every type of tax there is a threshold rate above which the incentive to produce more diminishes, in turn reducing the amount of revenue the government receives.
The Laffer curve quickly became a cornerstone of President Ronald Reagan’s economic policy, supporting the argument that tax cuts would pay for themselves and more, since this would stimulate economic activity, with the revenue lost due to lower rates more than recouped by the higher volume of income on which tax would be paid. This was part of the new consensus of encouraging the free market, known as supply-side economics, in contrast to Keynesian demand-side economics.
The Laffer curve and supply-side economics inspired what became known as Reaganomics. During the Reagan presidency the top marginal rate of tax in the United States fell from 70 per cent to 50 per cent in 1981. However, contrary to Reaganomics, later studies showed that this tax giveaway did not pay for itself, but reduced federal revenue by about 9 per cent or $129.4 billion (in 2012 dollars) over the first two years.2 David Stockman, Ronald Reagan’s budget director during his first administration and one of the early architects of Reaganomics, shocked polite society by appearing to disparage supply-side economics as a convenient cover for old Republican doctrine and the objective of reducing taxes on the most affluent, which was related to the old notion of trickle-down economics. Give tax cuts to the rich and their increased spending and investment would trickle down and benefit the rest of society. ‘It’s kind of hard to sell “trickle down”,’ he explained, ‘so the supply-side formula was the only way to get a tax policy that was really “trickle down”. Supply-side is trickle-down theory.’3
During Reagan’s presidency, the US national debt grew from $997 billion to $2.85 trillion. This led to the US transforming itself from the world’s largest international creditor to the world’s largest debtor nation.4 During the same time the after-tax income of the top 1 per cent nearly doubled, while the incomes of those lower down either increased marginally, or in the case of the bottom 20 per cent, actually declined.5
In reality, America had developed a debt addiction since it went off the gold standard – the US dollar being convertible to gold at a fixed price of $35 per ounce – in August 1971. This decision was taken under pressure from inflation rising to over 5 per cent, as the Fed maintained an easy money policy to help pay for the Vietnam War and to appease President Nixon. While it is probably true that the build-up of inflation in the 1970s was due to misguided policies by governments and central banks, this was in part because of the breakdown of the post-war system of fixed exchange rates to the dollar, which in turn was anchored by the fixed conversion rate to gold. Suddenly the global monetary system was cut loose and the inflationary genie soon escaped out of the bottle.
The Nixon tapes prove that Nixon pressured the Fed chairman, Arthur Burns, to ease monetary policy ahead of the 1972 presidential election, even though the economy was already growing at a healthy clip of around 3 per cent. The discount rate was lowered from 6 to 4.5 per cent between 1970 and 1972, while the Fed Funds rate dropped by a whopping 4 per cent. Moreover the data shows that the inflation of the 1970s was hardly due to massive government spending or tax cuts (i.e. big government) since budget deficits were relatively contained before Reagan (see Figure 7.1), so laying the blame for high inflation at the feet of big government was simply wrong. Inflation was more likely the result of loose monetary policy, the formation of the Organization of the Petroleum Exporting Countries (OPEC), which caused two spikes in the price of oil, and the ability of organised labour to push up wages to keep up with rising prices. Nevertheless, it suited the counter-revolution to pin the blame on big government.
For all the talk of the importance of fiscal discipline, in the 1980s President Reagan singularly failed to walk the walk even if he talked it. And yet, as we saw in Chapter 4, inflation came down as the Fed tightened policy under Volcker and labour union power was dismantled. So much for the much-touted errors of Keynesianism and the deleterious consequences of government deficits.
Figure 7.1 Annual US federal deficit from FY 1900 to FY 2020
The US conservative backlash against the liberal 1960s and the consumer activist movement spearheaded by Ralph Nader arguably began with the infamous memo by Supreme Court Justice Powell to the American Chamber of Commerce in 1971. This warned that business was losing control of society – ‘business and the enterprise system are in deep trouble’– and complained of the failure of schools and institutions in ‘the indoctrination of the young’.6 His vision was the restoration of a pro-business America as it was before Roosevelt’s New Deal, with a minimalist government and little regulation. Powell called for business to become more aggressive in moulding society’s thinking through the funding of various foundations and efforts to influence the federal government through lobbying.
Equally important were a number of judicial decisions protecting business influence in politics. Powell’s memo foreshadowed a number of his Supreme Court opinions, especially First National Bank of Boston v. Bellotti, which shifted the direction of First Amendment law by declaring that corporate financial influence of elections by independent expenditures (for example on advertising), should be protected with the same vigour as individual speech. Many future court decisions made reference to this landmark ruling.
These rulings essentially defanged any attempt to keep big money out of politics in America. That they were inspired by a lawyer who spent time as a director of Philip Morris, championed the tobacco industry and attacked the growing evidence linking smoking with cancer only underscores the moral bankruptcy and deep corruption at the core of the American political system. As Noam Chomsky said, ‘businesses need to shape ideology’. Any criticism of free enterprise was labelled anti-American. For Chomsky, the second step in the counter-revolution against the interests of workers and consumers involved a redesign of the economy by increasing the role of financial institutions. This was carried out over the ensuing decades. Financial institutions represented 40 per cent of profits in 2007, up from 11 per cent in 1990. At the same time, manufacturing shrank from 28 per cent of profits to around 10 per cent. The offshoring of jobs through globalisation reduced the share of income of American workers, not only within the US, but globally (see Chapter 3).
Ideas originating in America, the leading global economy, quickly crossed the pond to its European mini-me, the UK. There, Thatcher was in thrall to the teachings of monetarist guru Patrick Minford, and embarked on a similar crusade to cut taxes, reduce regulation and join the growing chorus of praise for the free market. Manufacturing was seen as old hat, with the future spearheaded by the gleaming new service sector. UK manufacturing output fell from 16.7 per cent to 10.1 per cent of the economy between 1992 and 2017.7 Jobs in manufacturing fell even more steeply, from 15 per cent to 8 per cent of all jobs, as mechanisation displaced thousands. At the same time, UK manufacturing exports grew sluggishly while the country found itself having to import more and more of the manufactured goods that it used to produce. This worsened the UK’s chronic trade deficit, which even the expanded services sector could not fully offset. Many industrial cities in England were left to decay as good jobs vanished for ever. The folly of relying on the absurdly volatile financial sector to drive an economy was cruelly exposed during the GFC. While some British politicians subsequently championed the need for conventional rather than financial engineering, there has been zero follow-through in policy or practice.
Even state-interventionist France under socialist president François Mitterrand could not swim against the tide for long. He performed a spectacular policy U-turn by embracing the free market within a few years of being elected in 1981. The simple truth was that any country not playing by the new rules would be left out of global economic growth, since capital was free to leave relatively highly taxed and regulated countries for low-tax, low-regulation jurisdictions. Once the capital controls of the post-war era had been dismantled, everyone had to fall in line.
The die was cast, Western governments following a laissez-faire policy of non-intervention in markets. Even when competition – an important condition for a self-adjusting market – was not present because one or a few players in an industry had become dominant (most obviously in the technology sector), regulators either turned a blind eye or were ineffective at breaking up monopolies. That this obvious contradiction between stated ideology and what was tolerated in practice by the political establishment and all mainstream political parties can only be plausibly explained by the capture of the political system by the interests of big corporations, top income earners and capital accumulators. We shall return to this central theme later.
Before we do so, we need to examine two more crucial factors: how the political systems of the advanced developed countries drove a complete change in their guiding model of what was good economic policy and the role of government; and the consequences of this new economic orthodoxy for the way democratic systems worked, or, more accurately, how they ceased to function in the interests of the majority.
The assumptions under which Western democracy found its legitimacy as a mechanism for making political choices is in danger of no longer holding. Its increasingly obvious failure to deliver the goods it promises is exposing some of its fundamental flaws and weaknesses. We need to take this stuttering mechanism apart in order to see if it can be repaired and saved, or whether we should even attempt to do so. Perhaps it is simply time to move on to a newer model and scrap the old one as no longer fit for purpose.
We had a good run, there’s no denying it. From the Industrial Revolution in the nineteenth century until 2007 the West was dominant economically, militarily, technologically, culturally and some might add morally. We have shown the way, and the rest of the world’s people have aspired to follow in order to catch up with our enviable quality of life and standard of living. We have also been trailblazers in the realm of personal freedom. The French and English revolutions liberated individuals from the arbitrary rule of hereditary monarchs and state policy designed to preserve and enhance the wealth and power of a minority. The last two centuries have been an unprecedented success for the West, with the developed nations most likely creating more wealth in the last century and a half than in the whole of history before then.
This all came about parallel with the evolution of a political system of democratically elected representative government and the empowerment of the individual. Freedom to take risks independently of a landowner or feudal lord, and to keep the fruits of one’s risk-taking and labour lifted the lid on economic development. No wonder this inspired the first economists to construct elegant theories ‘proving’ the superiority of the free market.
While the coincidence of change in political system with an economy that took off is almost perfect, one should remain wary of the old trap of assuming that correlation is causation. Nevertheless, the West’s success under these twin regime changes has deeply anchored the belief that the two systems – the free-market and democracy – go hand in hand.
The new system worked because everyone was free and equal before the law. The transition from decrees by the ruler to the rule of law to which everyone has equal access guaranteed property rights and the enforcement of contract, which in turn enabled commerce and industry to take off. Equality eventually also meant one person one vote in free elections for representatives and heads of government or state. Each individual’s vote counted, and it counted equally. This promoted fairness in decision-making, and, by giving everyone an equal stake in the political process, it ensured widespread buy-in to the system. A new moral basis for organising society was born, superseding the religion that had anchored the divine right of kings.
The direction of causality also ran both ways, or so it appears. The rise of merchants and those engaged in commerce created the pressure for political change. Armed with wealth created outside feudal land ownership, they demanded a slice of the political pie to protect and further their interests. While early forms of Western democracy were only partial – not everyone was eligible to vote and some decision-making bodies such as the American Senate or the British House of Lords were made up of the rich, landowners, the aristocracy and the religious elite – it was only a matter of time before universal suffrage became the norm.
Democratic takeover of the political system not only provided an apparently elegant and moral solution to the problem of how to govern a society and arrive at decisions other than through the dictatorship of an individual or group, but was also a necessary and sufficient condition for a transformative leap in economic growth and rising living standards. What was there not to like? No wonder Westerners believed it was the best and only legitimate way of organising society and zealously exported our template with quasi-religious fervour. Witness our intervention in Japan, imposing a Western-style constitution and democratic system down the barrel of the gun, or in India, now the most populous democracy on earth, where democracy was introduced by decades of colonisation and by example. If it worked for us, it was an easy sell to others, especially as these societies aspired to follow in our economic footsteps. Not surprisingly, the occasional failure of this policy, as in the Middle East, not only stung, but proved utterly baffling.
The West’s conviction of the superiority and inevitable global triumph of its political-economic system was based not only on its economic success, but also its moral attributes, efficient decision-making processes and guarantees of dignity and freedom to individuals. In other words, democracy not only proved superior in practice, it was also the best theoretical solution to the problem of collective decision-making. The fact that this was not necessarily true was no impediment to its adoption, as we shall see.
Political philosophy has struggled with the problem of deciding on a justifiable and workable solution to political organisation and societal decision-making between competing options. The most obvious of the choices has to do with the distribution of income and wealth (and work) in society and the capacity for deriving satisfaction from either consumption or accumulation of capital. There are a number of competing alternatives. The problem is, no one has found the formula to determine how this should be done in a way that is not arbitrary and subjective. There is simply no generally accepted solution. There is no theoretical proof of the superiority of democracy over other political systems, because there is no proof of its superiority at producing the best outcomes for society. We may like it as a system because that is the culture we have been brought up in, but its moral and economic superiority is neither demonstrated in theory nor, more recently, in practice; consider the economic success of Chinese autocratic capitalism, for example.
The American founding fathers actually limited democracy in the Constitution in order to protect the wealthy minority, giving power to a Senate comprised of the unelected wealthy to enable them to protect their property from the masses. In ancient Greece, Aristotle had seen the flaw in democracy: that the poor would get together and take away the property of the rich. Arguments over how to divide up the cake and organise society swing from periods of democratisation, like the 1960s, back to regression towards concentration of power and wealth.
John Stuart Mill attempted to construct a formula by stipulating that each individual will derive levels of ‘utility’ (satisfaction) from each of the various outcomes that result from different decisions.8 He assumed that each individual has a combination of outcomes that maximises his or her utility, thereby enjoying the greatest happiness possible. He also assumed that each individual’s utility could be aggregated to society’s utility. If that is true, he concluded that the best state of society is one where decisions are made to ‘maximise the happiness of the greatest number’.
Unfortunately, this is fraught with obstacles. Even if one accepts that individuals can rationally choose the best option from all the permutations of possible outcomes that might affect them, the system still needs a way of measuring or calibrating all the different outcomes for each individual to determine which add up to the greatest total societal happiness. What is better, a society arranged to maximise total satisfaction but where satisfaction is skewed to say the top 10 per cent of the population, or one which produces less total satisfaction but provides more to the bottom 90 per cent? And how can you measure one individual’s satisfaction compared to another’s? If you can’t, how can you combine them? It is not as if satisfaction/utility can be objectively measured like temperature or weight.
Faced with these insurmountable flaws, the branch of study known as welfare economics moved on from utilitarianism and cardinal measures of welfare to a theory based on the principles of choice based on order of preferences. This sidesteps the need to measure satisfaction/utility/happiness. Instead, we can order our preferences between various combinations of outcomes and even make trade-offs between various ‘goods’ that provide us with satisfaction, although we may be indifferent to some combinations. For example, you may be happy to trade $100 less income per week for an extra four hours of leisure (you prefer the latter) but may be indifferent between $100 less income and an extra three hours of leisure.
This attempt to solve the problem of collective decision-making and social choice using an ordinal system of ranking preferences remains problematic since a mechanism is needed to aggregate individuals’ orders of preferences. The democratic process of one person, one vote fails miserably on this count, as proved by the simple example commonly known as the paradox of voting.9
Let A, B and C be three possible outcomes for three people 1, 2 and 3, and assume people are rational.
Individual 1 prefers A to B and B to C
Individual 2 prefers B to C and C to A
Individual 3 prefers C to A and A to B
So a majority prefers A to B and a majority prefers B to C, therefore a majority prefers A to C.
But a majority also prefers C to A, so what to do?
If this approach breaks down with only a tiny number of people and choices, imagine the even smaller likelihood of obtaining a clear, consistent outcome for millions of people and multiple choices. And if it is theoretically impossible to ensure a rational choice between outcomes for people, as demonstrated above, how can the democratic process in the form of one person, one vote, electing representatives who will have to deal with a myriad of choices and possible outcomes, realistically hope to produce socially rational choices, let alone the ‘best’ results?
Worse, economic theory positively demonstrates that popular democracy is inherently dysfunctional. Why? Voter ignorance.
According to Anthony Downs, ‘it is irrational to be politically well informed because low returns from data simply do not justify their cost in time and other resources’.10 For any one individual voter, it is mad to spend lots of time educating himself or herself on political issues in order to vote in elections or referendums, since the expenditure of time and effort is huge compared to that individual’s likely gain from making a better-informed choice. That is because a single person’s vote is extremely unlikely to make any difference to the outcome: it will probably not be the casting vote. In other words, ‘If time is money, acquiring political information takes time, and the expected benefit of voting is roughly zero, a rational selfish individual chooses to be ignorant.’
This, however, is a classic case of the generalisation principle – my walking on the grass makes no difference but I must not because if everyone did there would be no grass left. In fact, this could be an argument for making sure all citizens take the time to inform themselves on key issues that will come up in votes, rather than an apology for selfish laziness (all must get informed = do not walk on the grass). It is not acceptable to be a free rider in the democratic process if one attaches value to it as a political system. In fact, it is inconsistent to believe in democracy and not do the work.
However, this still does not solve the problem of aggregating individuals’ preferences in a justifiable way to derive justified political decisions.
If there is no theoretical basis for choosing democracy as a political system other than its simple appeal to a sense of justice through equality – one citizen, one vote – on what basis can it be chosen? To answer ‘a common sense of justice’ is unfortunately subjective and dependent on an unprovable assumption of what is just. Who is to say that a choice imposed on 49 per cent of the population by 51 per cent is just if it oppresses the 49 per cent? A referendum where 51 per cent of the population voted to confiscate the wealth of the bottom 49 per cent, and so return society to a more feudal state, would pass the democracy smell test, if not an ethical or economic one.
If we reject such an outcome, this means we do not believe in the absolute and unconditional validity of majority rule through the democratic process. To some, the tyranny of the ruler has simply been replaced by the tyranny of the majority, with no guarantee of a socially optimal outcome; far from it. History is stuffed full of examples of injudicious decisions democratically arrived at, not least of which was the election of Adolf Hitler as German chancellor.
Perhaps more convincing is the empirical link between political systems and the underlying technological and economic reality of the times. If we can’t justify democracy on theoretical or moral grounds, perhaps the fact that it has worked to deliver the greatest increase in living standards in human history is sufficient. If there is no rational solution to the problem of decision-making by society, the next best hope might be to find the system that demonstrably works best in practice. That may be so, but what happens when this ceases to be the case, as in the last few decades? We will return to this question.
In prehistoric times man was a hunter-gatherer. Gradually, it made sense to join together in groups for protection and more effective hunting. This economic mode went hand in hand with the birth of tribal societies. Without delving too deeply into sociology or anthropology, there is a Marxian sense in which we can explain the organisation of society according to what best serves its economic, technological and security model at the time.
Similarly, as man evolved and learned to cultivate the earth and breed and control certain animal species, the notion of land ownership within clear boundaries gave birth to feudalism – society based on ownership by landowners or rentiers, tenant farmers and serfs around city states, followed by nations and empires. This coincided with the rise of organised religions, such as Christianity, which provided legitimacy to the rule of the king or emperor at the top of the pyramid, anchoring the ruler’s political power and the use of force. To make it in feudal society, one had to be either a landowner or rise through the ranks of the church or the army.
Western religion legitimised only the family unit and monogamous sex in order to clearly delineate ownership of land and wealth and to facilitate its orderly and efficient transmission from one generation to the next. One can be forgiven for thinking that if Christ did not exist, he would have had to be invented anyway. Indeed, it is the rigidity and simplicity of this structure that gave the West a leg up in transforming essentially agricultural wealth into the next phase of the economy, based on commerce and industry, and, eventually, finance.
There is of course no sharp frontier in time separating one social system from the next. Political assemblies providing checks and balances on the power of the leader came into existence during feudal times in Europe, and democracy was invented as far back as ancient Greece.
In Greece’s ‘golden age’ (starting around the fifth century BC), the political units were cities such as Athens, where the citizens were sufficiently few and local that the assembly could be attended by all of them. This was direct democracy in action rather than representative government through elections. However even this system did not insulate Athens from capture by certain interests. It has been estimated that only 3,000 or so people actively participated in politics. Of this group, perhaps as few as a hundred citizens – the wealthiest, most influential, and the best speakers – dominated the political arena both in front of the assembly and behind the scenes in private political meetings.11 Direct mass participation may appear to be the fairest version of democracy, but in practice probably only about 10 per cent of the citizenry participated. And there was no guarantee that this would yield good decisions: ‘Critics of democracy, such as Thucydides and Aristophanes, pointed out that not only were proceedings dominated by an elite, but that the demos could be too often swayed by a good orator or popular leaders (the demagogues), get carried away with their emotions, or lack the necessary knowledge to make informed decisions.’
This sounds depressingly familiar even 2,500 years later, proving that not much has changed.
Fast-forward two thousand years, and European nations such as England and France were wresting political power from absolute monarchs in favour of elected assemblies of representatives. These states were too big geographically to operate direct democracy as in ancient Greece, so the only solution to the puzzle of how to empower citizens, to deliberate over issues and make decisions, was for them to elect representatives to meet in one central location for that purpose on their behalf.
Seen in this light, it is almost surprising that the mechanics of the political system have not evolved with the enormous changes to the economic structure of society and the rise of technology. Frozen for centuries, political sovereignty still rests, wholly or in part, in national assemblies such as the House of Commons in the UK, Congress in the US or the Bundestag in Germany. In an age of smartphones, artificial intelligence, instant messaging and information, the principle of electing representatives on our behalf sticks out as an anachronism, at least from a technological point of view. If modern communications empower us to involve all citizens in direct political debate and decisions, just like the ancient Athenians, why would we not switch to this form of democracy?
Irrespective of our answer to this question, we should also ask: what is so sacrosanct about democracy? Should we always prefer it to another political system, whatever the outcomes in practice? Are its moral foundations strong enough to support it even if it fails to deliver the goods that its citizens expect? And how absolute and unconditional is our belief in the principle of one citizen, one vote?
These are real and pressing questions, because as we move from an industrial society with high-paying manufacturing jobs to a service society dominated by finance and technology, history suggests a corresponding political regime change is in order and probably overdue. This is a huge issue because our system of representative democracy is manifestly under stress, no longer delivering the goods that have justified its existence. In the UK the chaos that has engulfed government and parliament in trying to deal with Brexit has cruelly demonstrated how these institutions are no longer fit for purpose and are falling into disrespect.
The recent rise of populist and nationalist forces, the decline of the established political parties and platforms and the election of mavericks such as Donald Trump in America, and the Five Star movement and Northern League in Italy, have real causes that have been allowed to fester and grow for too long. Some of these causes, such as stagnant real wages, record inequality and job insecurity in the West, we have already discussed, but we need to link the discussion to the working of our democracies. How have the rich and the large corporations succeeded in capturing political systems to their sole advantage, including persuading politicians to alter tax and regulatory systems for their benefit and pursue other policies that have cumulatively favoured the minority at the top of the income ladder?
At the global level, Western governments’ abetting of the enormous transfer of economic weight and relative income from the West to China must stem either from negligence, corruption or both. This transfer has been achieved via an international trading system that handicaps Western companies and workers through forced knowledge and technology transfers to the Chinese and has failed to gain access to the Chinese market equal to that provided to them. In other words, it has not even met the basic criteria required for free trade to be mutually beneficial. We will discuss this in more detail in Chapter 10.
Why and how this has come about shows how our democracies have been captured by the principal beneficiaries of the international trading system. When did Western electorates vote on and acquiesce to a massive transfer of income and wealth from them to the East? Clearly never, and the casualties of this transfer are becoming increasingly unhappy.
The debasement of Western political discourse, manifested in the increasingly shrill and angry intolerance of others’ rights to express conflicting opinions, is symptomatic of societies slipping closer to the edge of the political cliff. We are morphing from a culture of political consensus, openness to debate, tolerance and non-violence to a society composed of groups living with closed minds in the silos of their beliefs, aggressive and prepared for violence towards others. In short, we are turning into a nasty ragbag of tribes that our grandparents would not recognise.
Western voters are finally waking up to the fact that the precariousness of their jobs and the poor prospects for their children are not the temporary cyclical effects of the GFC, but are entrenched and structural aspects of our economies which they have endorsed over decades without understanding the consequences. The realisation that they have been sold a pup has rightly ignited people’s indignation and anger. No surprise that a growing proportion of the electorate is prepared to tear down a political system which is too weak to change course and incapable of offering solutions let alone hope.
The clear conflicts of interest between elected representatives and those who elected them have burst into the open and decimated respect for authority. If our lawmakers are really on the take or only in it for their own career interests, why should we respect their laws? Underfunded health, education and other public services, poverty and exclusion, and cuts in policing resources have all conspired to create areas and types of crime where the law can no longer effectively be enforced.
We will now explore the multiple and interrelated dimensions in which this growing political cancer risks killing Western society and democracy, unless a dramatic course change is undertaken soon. For those of us who still care, understanding must go hand in hand with action.
It is easier to define the interests of politicians than those they represent. Why? Because it is the job of the political process to work out and discover what the citizens’ interests are – as we have seen, a problematic task. If the test is through the ballot box, we don’t know specifically what the majority has voted for, given that the alternatives presented by candidates include a long menu of policies. And as we have seen above (see page 190), even if the choice is only between three choices, there is no guarantee that a clear winner will emerge. Even with a seemingly simple single issue and binary question, the majority that voted for one side of the question may have done so for several incompatible reasons. For example, in the 2016 UK Brexit vote, some leavers voted because they wished to restrict immigration but wanted to preserve the UK’s access to the single market – in reality two mutually exclusive outcomes.
We won’t discuss areas of social policy which are not directly relevant to our case, which is one of political economy. Nevertheless, in spite of the difficulties of pinning down what is in society’s interests, we can express certain high-level principles in economic terms, subject to constraints about environmental sustainability and work conditions. For example, we could agree that it is in the interests of society to raise the standard of living of all its citizens over time, subject to preserving the environment. In order to build in an intuitive sense of fairness, we could add that it is unacceptable for any significant section of society (by income band) to suffer stagnant or declining living standards over the medium to long term, if not all sections of society suffer the same. This is to prevent some parts of society making out like bandits at the expense, in absolute terms, of others.
A political test of such a consensus could indeed be the restoration of social peace, respect for laws, tolerant, respectful debate, and freedom of expression without intimidation. We can argue about the finer details, but let us agree that this is how we imagine some of the interests of society and so the electorate.
As for the interests of the political class – our elected representatives – it is not hard to see that these are specific to them. We can approximate their interests as centring around their careers. These can be defined in terms of getting elected and re-elected, implementing their beliefs and leaving a positive legacy. Politicians may be conflicted within their career objectives. For example, they may seek office and power in order to do good, but may find that the policies needed to achieve this conflict with the need to be elected or re-elected. This is because the policies that are necessary to promote society’s interests over time may require a sacrifice in short-term income growth for example. In concrete terms, mending public services that have suffered decades of underfunding relative to their needs probably requires the courage to be unpopular and raise taxes, taking money out of private pockets. But this may be a vote loser, so not a career-enhancing move.
The fact of the matter is that politicians are constrained by the rhythm of the electoral calendar, which is too short (four or five years) for desirable policies that work in the long term to show their benefits. We should not lay the blame entirely at the feet of politicians either. The electorate is also short term in its thinking, or at least politicians assume it is, and is likely to be swayed by promises of instant gratification, like tax cuts. Since getting elected is an intensely competitive business, it is difficult to avoid being dragged down to the lowest common denominator in terms of policies in the absence of strong, principled leadership. Recent political discourse in Britain, including on climate change, more responsible business and spending on health and education, suggests that the pendulum is starting to swing back from the free-market-small-government ideology that has dominated for so long. The UK Labour Party’s 2019 general election rout had more to do with poor leadership and the party’s indecisive and insincere stance on Brexit, since its main policies of renationalising the railways and utilities polled as popular. Even Boris Johnson’s victorious Conservatives have promised to open the spending taps on infrastructure and health, sensing the need to tackle the causes of the anger and frustration felt by whole swathes of the British population. Failure to grasp the extent of the task, act to rebalance key economic relationships and upgrade the economy for the twenty-first century will bring back disappointment with a vengeance, perhaps irretrievably deepening the divide between citizens and their elected representatives.
The conflict of interest between voters and their elected representatives is most harmful in the area of education. The better educated children and young adults are, the more they can aspire to fulfilling and well-compensated jobs and compete in the world. The educational capital acquired by citizens determines a country’s competitiveness and ability to grow in a globalised world. It is therefore crucial to make the necessary investment to raise and maintain educational standards and universal access to top-quality education. To promote a globalised system of trade and not do this is to condemn a country not endowed with the advantage of plentiful natural resources to disappointment and relative decline.
Unfortunately, it takes a generation for an upgrade in educational standards and resources to show through in economic terms. Needless to say, by the time a politician has climbed the greasy pole to be in a position of power, their time horizon is seldom that long. Why should they take money from short-term needs to invest in projects that will take years to put in place and decades to bear fruit, only for their successors’ successors to claim the credit? In a globalised world where technology is rapidly superseding human labour in multiple tasks, failure to make this investment must logically condemn increasing swathes of society to low-pay jobs or unemployment. Politicians have opted for free trade and competition but neglected to equip their populations with the skills to compete with countries that, while they may not be democratic, do have long-term plans and prioritise education.
As the saying goes, when the tide goes out, it reveals who was swimming naked. Since the GFC, the social contract which tolerated some inequalities resulting from capitalism in exchange for generally rising real incomes and job security has been broken in the West. This in turn undermines the legitimacy of democracies which are clearly no longer delivering the goods.
Living standards have been held back by austerity and underlying feeble real wage growth. In many countries the baby boom generation is seeing its children struggle to secure good stable employment and reliable pension rights of the kind they themselves enjoyed. According to Federal Reserve data, millennials in the US earn 20 per cent less than boomers did at the same stage of life, despite being better educated.12 Another report estimates that only 60 per cent of the cohort born in 1960 was better off in 1990 than their parents were at thirty. For those born in 1940, 90 per cent were better off at thirty than their parents had been at the same age.13
The damage has been greatest in southern European countries such as Spain and Greece, where youth unemployment remains persistently high. Even in the UK, opinion polls consistently reveal the pessimism younger people feel at their economic prospects. Half of respondents to a poll conducted by Ipsos in late 2016 said they thought today’s youth would fare worse than their parents, compared to 22 per cent who thought young people would fare better.14 This broadly reflects the feeling in many Western countries. In the UK, the so-called silent generation (born 1928–45) and baby boomers both enjoyed considerably higher real incomes than their predecessors at each age. This progress has all but disappeared for generation X (1966–80) and millennials (1981–2000) in spite of the fact that many more of them are university graduates.15 In fact, generation Xers who have reached the 45–49 age bracket appear to be earning no more in the UK than the boomer generation before them did at the same age. The 2019 audit of political engagement by the UK’s Hansard Society shows that opinions of the country’s system of government are at their lowest in the fifteen years the survey has been running and that 54 per cent of Britons say the UK needs ‘a strong leader who is willing to break the rules’.16
As Bernie Sanders has tried to hammer home, given record wealth and inequality, people all over the world are losing faith in democracy as they recognise that the global economy has been rigged to reward those at the top over everyone else. This is fuelling anger which is turning destructive. There are signs that this breaking down of the social contract in the West is being recognised. As far back as 2012, the FT’s John Plender noted:17
Such resentment is not completely new. It bears some resemblance to the hostility towards profiteers after the First World War which prompted Keynes to remark; ‘to convert the business man into the profiteer is to strike a blow at capitalism, because it destroys the psychological equilibrium which permits the perpetuance of unequal rewards … the businessman is only tolerable so long as his gains can be held to bear some relation to what, roughly and in some sense, his activities have contributed to society’.18
What is new, according to Plender, is the aggressive way companies shed labour now that executive pay is linked to short-term performance targets: ‘In effect, the American worker has gone from being regarded as human capital to a mere cost.’
As for the free-market model of maximising international trade, even the more sentient members of the establishment are beginning to recognise its shortcomings. For Harvard’s Lawrence Summers, ‘international agreements [should] be judged not by how much is harmonised … but whether citizens are empowered’.19 John Nelson, ex-chairman of the very international Lloyds of London insurance market, has gone on record as saying, ‘capitalism must demonstrate that it is an engine of economic growth for all; not for an exclusive minority’.20 But for all the talk, virtually nothing has been done to try to stop let alone reverse the trend.
The social contract underpinning Western democracy was not just about rising living standards for all, but also about hope. It is now failing us to the point that we are giving up hope. Even the great American dream – that in the land of opportunity anyone can make it – ceased to be true some time ago. In the US today a child’s life chances are more dependent on the income of his or her parents than in Europe or any of the other advanced industrial countries for which there are data.21 Waking up to the fact that the American dream is now a myth is proving a shock to many US citizens. Well before President Trump took power, years of declining trust in public institutions led the Economist Intelligence Unit to demote the US from a full democracy to a flawed democracy – a nation it defines as having free elections but weighed down by weak governance.22 Like many so-called democracies across the globe, once-proud Western exemplars have morphed into grubby plutocracies.
Another crucial part of the social contract underpinning the legitimacy of our democracies was the understanding that, if there were losers along the way, the system would compensate them so that they did not become disaffected. The deal was that capitalism would deliver the goods. This has ceased to be the case. A fundamental change since the free marketeers took over in the early 1980s in the West has been the capture of the system by a minority of winners who don’t feel the need to share out their gains and don’t bother to look out for the losers.
For market ideologues, deregulating finance and trade, promoting unfettered global competition and weakening the power of trade unions was the sure-fire way to turbocharge growth for everyone. The opposite has been the case. The economic principle that more redistribution would be needed to compensate those on the losing side of this new economic deal has simply not happened. Instead, the free marketeers have got away with maintaining that the rest of the population would catch some of the crumbs falling off the high table – better than nothing. In practice, the trickle-down effect, if it ever operated, has hardly compensated for the lack of growth and the concentration of wealth into fewer and fewer hands.
The crowning hypocrisy of the free marketeers is their ultimate theoretical defence: that governments must refrain from intervening in markets and their outcomes because doing so restricts the growth of the economic pie. They admit that inequality is a by-product of an unfettered free-market system, but interference to reduce inequality should be avoided as entrepreneurs’ spirits would be dampened by the resulting loss of incentives. Even if the pie’s slices are unequal, in absolute terms there will be more for everyone.
In the US, the facts flatly contradict this. In the decades when income inequality was low, the 1940s, 50s and 60s, average real growth rates were robust, around 4 per cent per year. In contrast, the 2000s and 2010s, the most unequal since the 1920s, have only managed growth rates averaging around 2 per cent. Far more egalitarian societies such as Sweden have produced higher average rates than the very unequal US or UK. So much for this self-serving myth.
The negative social and health impacts of inequality are alarming. In the US a growing section of the population is falling victim to drugs, legal or not. And, after decades of improvement, mortality rates among white middle-aged men and women in the US ceased declining around the turn of the century and began to rise. Research by Princeton’s Anne Case and Angus Deaton shows that ‘the story is rooted in the labor market … nor can those in mid-life today be expected to do as well after age 65 as do the current elderly’.23 The deterioration is particularly marked among the less well educated (high school degree or less), and, when analysed in more detail, Case and Deaton’s findings show that the rise in the death rate is driven by drugs, alcohol and suicide – what the authors grimly term ‘deaths of despair’ – which more than offset decreases in deaths from heart disease and cancer.
As they dug deeper to understand the causes of this phenomenon, it became apparent that slow-burning sociological trends, such as declining employment-to-population ratio and the drop in marriage rates had effected a long-term process of decline. Since the early 1970s, the steady deterioration in job opportunities for the less well educated meant that
Traditional structures of social and economic support slowly weakened; no longer was it possible for a man to follow his father and grandfather into a manufacturing job, or to join the union … people moved away from the security of legacy religions …[to] less structure to choose their careers, their religion, and the nature of their family lives. When … such choices … fail, the individual can only hold him or herself responsible. It is not low wages by themselves that explain the rising death rates, but the broad social and sexual consequences.
Low wages and bleak prospects also made men less marriageable. Less stable and more temporary partnerships formed, divorce and separation rates soared, often adversely impacting the children.24 In 2016, 40 per cent of children were born to unmarried mothers across OECD countries, up from 7.2 per cent in 1970.25
Case and Deaton’s conclusion makes for grim reading: ‘we can see globalisation and automation as the underlying deep causes. Ultimately, we see our story as about the collapse of the white, high school educated, working class after its heyday in the early 1970s, and the pathologies that accompany that decline.’
In an interview in January 2018, billionaire investor Ray Dalio revealed that his analysts had calculated that the proportion of the vote captured by populist candidates in the West had risen from about 7 per cent in 2010 to 35 per cent in 2017. The last time this happened was just before the Second World War. He could not, though, see what would reverse the trend, partly because digital technology is exacerbating inequality by eliminating jobs. ‘We’re heading for a world where you’re either going to be able to write algorithms and speak that language or be replaced by algorithms.’26
The election of the anti-establishment League and Five Star Movement in Italy in 2018 is just one example of a desperate electorate turning as a last resort to ‘anything but the usual bunch’. This was perhaps inevitable in a country where real GDP per head in 2018 was still a whopping 13 per cent below its high-water mark a decade earlier.27 Since 1999, the Italian economy has been caught in a Japanese-like zombie state of near zero growth.
Unfortunately, the administrations swept into office by the swelling current of discontent remain hemmed in by the system they have inherited. In the US the political process is controlled by the financial and corporate elite, while in the Eurozone the German-led orthodoxy of one-size-fits-all monetary policy without corresponding centralised fiscal control is bound to lead to further disappointment. With interest rates already as low as they can go in the Eurozone, and Mario do-whatever-it-takes Draghi retiring in November 2019, the European Central Bank is effectively out of ammunition should the next crisis come any time soon, in which case, it is questionable whether the EU’s institutions could survive.
The historian Fritz Stern warned, before his death in 2016, that there were signs of resurgent fascism including in the US. These included ‘the corruption of public discourse and a world in which everything has become opinion’.28 There has been a sharp degradation in public discourse, including hitherto-unthinkable attacks worthy of the worst fascist demagogues on institutions of democratic government. When three UK judges ruled that the government would need the approval of parliament to trigger Brexit, the Daily Mail ran a banner headline calling them ‘enemies of the people’. Members of parliament expressing the view that the UK should remain closely tied to the EU have allegedly received death threats. This, in a country that was the global template for civilised behaviour, respect for rules, courtesy, politeness, tolerance of different views and above all fairness and integrity in politics. The British were not liars, cheaters or violent – until now.
It seems that nature hates a vacuum in human affairs as well as in physics. Columbia University’s Mark Mazower has argued that the rise of fascism in the 1930s was underpinned by a profound crisis of liberal democracy. People blamed legislatures for their woes and saw a solution in concentrating more power in a ‘strong’ leader: ‘Parliaments were written off as facades that rubberstamped what unaccountable lobbies and elites demanded.’29 Politics moved to the extremes and parties denied each other’s legitimacy. Judges and police lost their neutrality and became politicised. Mazower notes that the hollowing-out of institutions and the extremism and violence of political discourse that enable dictators to take power are well under way today. Ominously, he reminds us that history is no one-way street of progress; democracy has turned authoritarian before.
Our societies are falling apart before our very eyes, and our politicians have no answer. At best they are still blinkered and constrained by a free-market ideology that is not fit for purpose in the modern world; at worst, as we’ll see in Chapter 8, they are in the pockets of special-interest groups which are sucking our societies dry. Instead of delivering to their citizens the promised sunny uplands of prosperity via the best allocation of resources delivered by free global markets, the political class has steered the ship of democracy to within sight of the rocks. Corporate greed has run amok, hamstringing the West’s ability to grow and generating stratospheric rewards for those at the top that cannot be considered fair by any measure. Those who have missed out are becoming very restless; one more serious jolt and the mood could suddenly turn very nasty indeed.
It has been a completely different story for the other winner of the last three decades: China. Just as the rise in Western median living standards has ground to a halt, so China’s leap in income and wealth has been breathtaking. Playing a long game, the Chinese have correctly identified the venality and short-term horizons of our leaders, both corporate and political, and effected an unprecedented transfer of income and wealth from West to East. It is worth dwelling on this central aspect of the West’s decline in more detail, since the symbiotic relationship between the Western money elites and China is a central cause of our plight. We will come back to China in Chapter 10. For now, we will look at another factor in the breakdown of the social contract: the capture of the political system by private interest groups.