This is an edited transcript of our podcast episode with Martin Wolf, published 16 June 2023. Martin is chief economics commentator at the Financial Times, London. He was awarded the CBE (Commander of the British Empire) in 2000 ‘for services to financial journalism.’ His latest book is ‘The Crisis of Democratic Capitalism’. In this podcast, we discuss the reason for writing on democracy and capitalism now, why capitalism and democracy are linked to each other, how capitalism disrupts existing hierarchies, and much more. While we have tried to make the transcript as accurate as possible, if you do notice any errors, let me know by email.
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Now onto this episode’s guest Martin Wolf. Martin is Chief Economics Commentator at the Financial Times, London. He was awarded the CBE in 2000 for services to financial journalism and he has published a new book called The Crisis of Democratic Capitalism.
Now, onto our conversation. So greetings and welcome Martin. It’s always great to have you on the podcast show. I’m a big fan of your column in the FT, which you’ve been writing for many, many years. But I’m an even bigger fan if I’m allowed to say that. Your books that you published and your most recent one, The Crisis of Democratic Capitalism, I think is an excellent book.
I’d recommend everyone to read it. So first of all, congratulations on the book and publishing the book.
Martin Wolf (02:38):
Bilal Hafeez (02:39):
Before we go into the core of the arguments that you lay out in the book, I do have to ask you how do you do it in terms of your productivity here, writing books, writing the column. What’s your process around it all? I don’t really understand how you can produce these types of works on a regular basis.
Martin Wolf (02:55):
Well, it’s not that regular, to be honest, when I look at some of my friends with what they churn out. But the answer is… I’ve really only written two major books in the last nine years. By the standards of some people that’s pretty slow-going. But I do think that the book I wrote on globalisation back in the beginning of this century, which I think actually quite a lot of it holds up, despite many changes.
The couple of books I wrote on finance and this one are modestly significant. And certainly, I did a fair amount of work on them. So they weren’t the conventional sort of journalist books. They’re much more academic for better or worse than that. They did take a fair amount of work, but I wouldn’t say I’m ridiculously or excessively prolific or even impressively, perhaps that’s a better adjective.
The process is fairly straightforward. I can’t write books while I’m writing columns. I think there are some people who manage this. Writing books for me is a long hard process because I want to sort out the ideas. I don’t write books if I don’t find that it’s an important, I’d have to find that it’s an important topic and a difficult one to which I’m deeply attractive and which I think, perhaps arrogantly, I can contribute something to.
Almost by definition, that means a lot of work. And since I’m quite academically inclined for a journalist, that means also particularly a lot of reading. And that is not something I can easily do, absorb and think about while doing my daily job, which is driven by the needs at the moment and the columns. So what I do and what I’ve done ever since I started writing books in the beginning of now 23 years ago at the beginning of this century, the millennium is I write my columns, which accumulates lots of itself, some degree of knowledge because just thinking something through for a column, reading stuff for a column is very helpful.
In the background is my thinking about my next book, whatever it is. And then in the summers, I basically take the summers off mostly, but basically I write in the holidays. My holidays, fortunately the FT is generous about this, they’re long and I really need it. I’ll take a month or so of leave of absence and then I write these things over successive summers. Now in this case, this took much longer than the previous two big books or three big-ish books, which took two successive summers. I’m reasonably quick when I get going. I’m used to writing.
This book was a much more difficult affair because it involved… Well, the two big difficulties. One, the story was moving on all the time, so obvious. And second, to make a sense of it in the way that I wanted to, I had to find a way, a personally satisfactory way of weaving together at least two and one might argue three, somewhat different strands of thought.
The first being economics and economic change and how the world economy is evolving and how that affects economic activity, employment, inequality, all that sort of stuff, including economic policy. The second strand was politics. Political science and political philosophy because this is about democracy and that’s a philosophical idea and there’s a deep value there. And the third strand, which I think I did less deeply, but was clearly there, was about social behaviour, which is in a way the link between economics and politics.
Now, very few people in our very professionally divided world are very well-trained in all these disciplines. That in a way left me with an opportunity because I didn’t feel there was that much competition. There are lots of journalists who do this, but they do it in a somewhat more journalistic manner than I tend to, which is a bit more scholarly and academic, for better or worse.
Most economists don’t think about the questions I was thinking about. I had a very recent conversation with a very intelligent economist who I greatly respect. Then basically the point he made was, ‘Well, for economists, all this political stuff is exogenous.’ And I said, ‘Yeah, that’s fine if it actually is exogenous, but of course it isn’t. It’s endogenous.’ And if you don’t have a general theory of that, you don’t have a general theory of economics because you don’t know what’s going to shape policy like Brexit. That wasn’t an economic decision. It wasn’t an exogenous political decision. It was a decision that came out of both. And there are many, many examples.
So you have to bring the two together and do your best to do that. And then you have to link this in a philosophical framework, which are valued framework. To do that, you have to address questions which serious people at least, and I know I’m most familiar inevitably with the Western tradition, but serious people in the West have been thinking about for two and a half thousand years very seriously.
So that’s obviously a great deal of intellectual work. The reason I explained this at such length is it explains why in fact this book took five years. So instead of two, I had to redraft a lot. I ended up with a book that was much too long and my editors rightly said it was much too long. And they asked me to cut 40,000 words, which is a lot of words and reshape some of it. And that hasn’t happened before because I was really a process of creating the book while thinking it through.
In the end, at some point you have to decide that’s enough. I could have gone on forever. That subject is inexhaustible. There are so many dimensions that I dealt with imperfectly. But in the end, after this struggle, so probably over those five years, something like a year’s work came out of that to do this book. And that’s the story of how I do it.
Why Capitalism and Democracy Are Linked to Each Other
Bilal Hafeez (09:01):
That is great. We’re sort of lucky to have your five years summarising two and a half thousand years of thought for the benefit of us. But maybe let’s touch on those trends. And so you do call the book, well you mentioned democratic capitalism, so you link the two together, democracy and capitalism.
At the beginning of your book you do outline why they are linked together. So perhaps you could articulate why you think they’re linked together and kind of the value proposition of why you think that’s the optimal setup of society.
Martin Wolf (09:29):
I think that is indeed the core question and it brought me directly in connection in contact with some very important issues and strands of thought. Inevitably, and I do discuss this perhaps not in sufficient detail, but inevitably the rise of China has sharpened these questions.
For any intelligent person, the question of whether the Chinese have created some new way of doing all this, which will work is fundamental. I am, as I explained in my book, somewhat sceptical about how well this will work. But no doubt, they’ve done something extraordinary. But I think the difficulties they’ve got into, which are completely obvious I think now are reflection of the difficulty of running a capitalist economy in a completely autocratic state. There is a tension there. And that gets to your question. So when I began to think about this, what is the relationship between our economic system and our political system, at least in the contemporary west?
My book is very much focused on that. A globalisation book was actually all about developing and emerging countries. But this is really focused on my home countries as it were, particularly the English-speaking ones of the West, but not exclusively. I think there’s a lot of relevance in it for countries like let’s say Turkey, Brazil, Hungary, Poland and even India and now Israel and then many of my friends in these countries and I have friends in all these countries have commented upon the aspects in which this sort of politics becomes relevant.
What’s the connection? Well, first there’s a simple historical connection. I started off by investigating the rich wealth of literature on the history of democracy and particularly some of it sort of statistical. There’s a database, it’s called Polity IV, but it’s a rather nice database which actually makes an attempt quantitatively to estimate how many democracies there have been over the last… Since 1800.
Of course democracy described quite loosely, but basically means countries in which the decision on who holds power is determined by elections in very significant measure. They’re reasonably fair elections and there’s a reasonably wide franchise, not a fully wide franchise but a… And the answer is in 1800, there weren’t any according to this. And that’s not surprising if you think of what the world of 1800 looked like.
Even in America, which was a republic of some kind, I was rather struck with this in 1800, the proportion of the adult population that had a vote was 6%. That’s an oligarchy. That’s not a democracy in any sense. It’s obviously not a democracy, it’s an oligarchy. Of course it excluded all the women and all slaves, obviously, and everybody who didn’t have property, which was a lot of people. So that wasn’t a democracy.
By 1920 to ’30, most western countries have become universal suffrage democracies. That’s pretty dramatic and universal suffrage democracies hadn’t existed before. Universal suffrage democracies hadn’t existed before anywhere, as far as I know, at least in the Western world. I don’t know about elsewhere in every country. So why did that happen? My argument is, well, because actually, capitalism came first, but capitalism is a midwife of the process of democratisation. I describe them as complimentary opposites.
What makes it complimentary? Well, there’s an ideological theoretical sense and there’s a practical process sense. The ideological sense and we’ve lost this. Mostly we’ve lost this idea, not all, but the capitalism is actually in some fundamental sense, an extraordinarily radically egalitarian notion.
In this sense, if you think about most societies, organised societies, post-tribal societies, agrarian, settled, organised, structured, with developed institutions of various kinds. And these have existed in Eurasia for at least 5,000-6,000 years.
What was that characteristic? Well, they were always very hierarchical. They had a monarch almost always. There were few exceptions. And an aristocracy. The characteristic of the monarch and the aristocracy see is essentially they owned all the land and most of the rest of the society were peasants of various kinds, more or less dependent on these people. That varied over time in some states like the Greek ancient states and Rome, that there was an independent peasantry, very important.
But basically there was this oligarchic structure and power was inherited. Power was simply the inverse of wealth and it was inherited. The way you lost it was getting defeated in war where upon somebody else came along and replaced it. Then I would say if you look at the power structure of ancient China or ancient India or ancient Egypt or pre-modern Europe, they all looked like that.
Essentially, what it looked like. The people in charge were not only the richest, they were the most powerful and their claim to power basically rested on their inherited position. Then along comes capitalism and it says anyone who can get into business, anyone who can borrow money can borrow money, anyone who makes money can make money. And if you satisfy the wishes and desires of a large enough portion of the population, can get very rich and very powerful.
And it doesn’t depend on who your father or mother were. It just depends on who you are. And some really extraordinary phenomenon I don’t discuss this in my book, but it’s an extraordinary one to think of the story of the Rothschilds. Who were they in the late 18th century? Nobody. Absolutely nobody. Money changes in Frankfurt and then suddenly by the middle of the 19th century, they the richest people in Europe, more or less, and with the status that went with that.
And of course if they lost money, it went. This was revolutionary. And once you start saying, ‘Well, anybody who’s able and talented has a right to get into the economy in this way and become rich.’ Well of course they become influential in the same process. But you get more and more people like this. A large middle class emerges, a large prosperous middle class and increasingly prosperous working class towards the end of the 19th century increasingly organised. And they all start saying, ‘Me too.’
And this is society based on law and ultimately to a significant extent, consent. How else can a market economy operate? You need stable rules which are underpinned by consent and the rule of law. That’s how the market economy operates.
So when people start making these claims and say, ‘Well, we should have a say in political power too.’ And by the way, it was as a matter of practise, the capitalists found they needed an educated labour force. They all started backing universal education. By the late 19th century in Europe, most societies had achieved at least something close to universal basic literacy.
That’s a very important change. And the most successful societies have really achieved it rather successfully. And then they sort of could organise properly and they could make demands. Over time the franchise was extended more and more widely because the alternative was civil war. The capitalists on the whole didn’t want a civil war. They wanted nice stable market economy where they could go on making money. This was reinforced by other things which are the need to conscript and create armies that defend societies.
But this became, I think, a very natural process. It’s very well described in the literature. It didn’t happen everywhere, it didn’t happen in Germany, but it happened in Britain. It happened in America. To give you one example, which isn’t in my book, but what was the biggest, one of the biggest forces for the end of slavery?
It was a free labourer in the market saying, “We don’t want to be competing with people whose products are the result of violence and suppression because it’s not fair competition.” That was actually the free labour argument was one of Lincoln’s most important planks of his view of the world. And it is a very long answer to a fundamental question. Now I made one other.
This is the way they’re complimentary. They’re opposites because capitalism can lead to extreme inequality. It can lead to profound economic changes which people can’t accept. And in that situation, there can be two possible outcomes, both of which go back into history. One is that the people who feel that they’re being cheated, that they’re not getting what they want will do what Plato described actually in Athens, which is go for a demagogue. And a demagogue is somebody who pretends to be a Democrat but in fact wants to be a dictator.
We’ve seen that already in Athens and we’ve seen this many time again and we’re seeing it now. At the counter to that, but it’s not necessary counter is a restored plutocracy. If there’s an extraordinary concentration of wealth and power back in the capitalist system of wealth, it’s going to lead to concentration of power, this leads to essentially the reestablishing of a plutocracy. The most dangerous thing I think of all, which is what I worry about most is that the oligarchy and the would-be demagogue combine to produce a new autocracy with usually a crony sort of capitalism.
That’s the way they are opposites. But I would stress that there are ways in which they really do benefit each other. As I argue, I don’t think you can have a democracy without a market economy of some kind because you need people who are independent from the political process, particularly a sizable middle class who can live under either alternate or the alternative political power groupings.
Because they are independents, then their life doesn’t depend entirely on politics and who are independent enough and well-informed enough. So you need in independent media. Again, that really can only exist in a democratic and capitalist society. Independent media that inform them of the choices which allow the different parties, including the ones not in powered to address them.
So you need a democracy for that. Democracy needs some form of economy. And so it’s not at all an accident. Let’s be very clear, there has never been, whatever they say, a democratic socialist country. That can’t be because the power concentration in the pan of politics are too great. But the politicians who control the system, everything depends on continuing to control the system. Because if they don’t, then nobody, absolutely nobody, they can’t defend themselves at all.
For the people, well they’re completely dependent on the government. So how can they really mobilise against it in any real sense, given the levers of power? But I also argue, and this is the very last comment in this very lengthy answer, which is that capitalism needs democracy for many reasons. But the most important, precisely to prevent the concentration of power in a small and possibly predatory plutocracy.
This is why competition policy broadly defined policy, to open up opportunity to the widest possible range of potential entrepreneurs is such an important part of successful capitalism. I was reminded of this discussion I had very recently with a German friend because that was precisely what the so-called or those schools of liberals who came into power or influence in the post-war World War II period articulated as the most important role of the state in preserving capitalism and democracy simultaneously. Those as quickly as I can are my reasons for thinking this is a interconnected, complex, fragile, but fantastically valuable system. And nothing that is happening in China and very much not what is happening now in China persuades me that any other system is going to do better.
Can Democracy and Socialism Work Together?
Bilal Hafeez (22:30):
I mean you always give such a comprehensive answers. I do want to attack it in different ways, but one critique is say from someone like Noam Chomsky who basically argues that it’s really capitalists that drive the system and we really have a plutocracy masquerading as a democracy.
So basically you have the capture of the state by capitalists and democracies kind of this way of appeasing the masses and with things like you mentioned independent media. Through capitalist ownership of the media, you manufacture consent and so on. So this notion of people having this liberty or individual ideas doesn’t actually hold in reality. What do you say to that critique? Because that’s quite a-
Martin Wolf (23:12):
Okay. It’s a very standard… Well the forefather of this critique as far as I know, was somebody called Karl Marx.
Bilal Hafeez (23:18):
Yeah, that’s true.
Martin Wolf (23:21):
Yeah. Very, very much so. He thought that… What I think he called it was democracy, I’m pretty sure it starts with him, was a fraud, wasn’t real at all. Well, it sure wasn’t as big a fraud is democratic socialism where the people in power over the state also control the economy and put everybody they disagreed with in concentration camps and killed a vast number of them and this has not stopped. So we can safely say that democratic socialism is empirically a will of the wisp, a vacuum intellectually.
So anybody who tells me, ‘Well, the alternative is democratic socialism,’ is in my view, genuinely talking about an intellectual fraud. And I like Chomsky, but I think that’s just obvious. I can go through the history of every country that wanted to become communist and some of them who pretended that it was going to be…
Of course, it couldn’t last and it didn’t. On this point, which is a big Hayekian point, Hayek was right. The liberals were right. Now, to get back to your question, my whole philosophy of life is nothing is complete and perfect. All life, all real human life consists, and particularly in complex societies, consists of trade-offs. So it’s never a one-zero choice.
I make this point about some propositions of my good friend Daniel Roderick. It’s never a one-zero, it’s trade-offs. It’s perfectly true that in a capitalist economy, capitalists have relatively great power. It’s completely wrong to think particularly if you run it well and aware of it, that they have all the power. It is pretty obvious if you look at the history of Western thought and political movements since say 1800, that intellectuals, my God, they’ve been powerful including Karl Marx, but also Jeremy Bentham and the mills and the influence of Adam Smith before that and Edmund Burke and many other thinkers have guided people’s thought.
They’ve guided people who are educated, therefore people who run the bureaucratic machinery, people who teach the future generations. My God! They have had powerful influence. So the idea that only power and money matter, I mean intellectuals matter enormously. It’s obvious they do.
Secondly, other interests matter because yes, money matters and of course it influences politics. But if you organise lots of people and you are allowed to organise lots of people and to put together the money of lots of people and have institutions that represent them like civil associations, trade unions. Trade unions are really important. I’ve become much more aware of this than I used to be. They can exert tremendous influence through their appeal to many people.
For capitalists to ignore that completely means turning the society into a overtly violent and suppressive society. My view is that overtly violent and suppressive societies create two mortal threats for capitalists. One is the person in charge will be a despot and the despot will seize all their wealth basically or control it. And that’s the demagogue point.
But the other is that they will lose the consent of the people. That means all their workers, that means all their customers. It’s very uncomfortable to be a loathed capitalist in a free society. Which is why so many of them have become as their opponents hate it, a ‘Woke’, because that’s what their customers and workers wanted.
The idea that this is all fraudulent, that the campaigning, the engagement of people in politics has nothing to do with finally happens. Well of course that’s not true. We wouldn’t have created welfare states, massive welfare states if that was true. Do you think the capitalists wanted that? No. The people wanted it and they discovered it was the only basis of a happy society and the alternative was a fascist state and they, on the whole, sensibly decided that wasn’t a good way to go.
Now, that’s a battle that is fought in every generation. But it isn’t a sham, it’s just a little bit of a sham. But everything in life is a little bit of a sham, even a happy marriage.
Was the Post-War Period a Special Case in Democratic Capitalism?
Bilal Hafeez (28:01):
That’s a very fair response to the Marxist/Chomsky critique. The other one I would put forward is more about whether what this balance between capitalism and democracy is a one-off like a post-war phenomena that had a good run for like 30, 40 years. It was to do with specific factors of coming out of a war, having a communist threat.
Even the capitalists would say, ‘Look. We don’t want to go in that direction.’ You had a manufacturing base which allowed low skilled workers to have jobs, which allowed the unionisation. So there was a certain set of contingencies that allowed this balance to occur. Whether that’s gone now and so any solutions that don’t recognise that will be doomed to failure.
Martin Wolf (28:54):
I think that’s a much deeper question. I mean a much more convincing question. My answer to that is going to be completely honest and I think it’s very clear in the book, but perhaps it could have been even clearer. But I do discuss it a bit, that I really don’t know.
Because history hasn’t yet unfolded. It is perfectly fair to say that close to universal suffrage democracy, wide sufferage is a relatively recent phenomenon. It has proved most stable in prosperous societies which are highly educated and reasonably equal in the income distribution. Some of that was because of shocks like the wars. Some of that was because of broadly speaking, contingent economic factors such as the role of industry, the monopoly of industry, of the Western world, the lack of competition and therefore very large amount of rent of which could be comfortably shared between workers and capitalists.
And a political consensus formed partly by war. That meant that they really didn’t want to go back to the conflicts of the early 20th century and so highly consensual approach to policymaking. Even in the US. And I think of the post-New Deal. And that’s over, we don’t need universal conscription armies anymore. So lots of people, it doesn’t matter if they’re very unhappy, we don’t have to make them fight for us. We’ve lost the monopoly, industrial know-how, capitalists can move wherever they want so they feel more detached from their societies.
Citizenship erodes and politicians feel completely increasingly helpless and because they feel increasingly helpless, they become increasingly despised and the people no longer are engaged with them or with what they do, they just think they’re a joke. Politics itself seems a joke. And then you get along a politician who somehow combined perfectly the notion that one, politics is a joke and because it’s a joke.
The answer to that is to go for them. They’re not going to do anything for you, but at least it’s going to be fun and they’re going to beat up people you don’t much like. That’s where we end. We go out with a whimper.
I think that story is perfectly possible. The purpose of my book is to say that story, that could be where we end up but I don’t really believe, at least I’m not prepared to accept the predestination of it, that there is no other outcome. But I recognise completely that the risks of that what you described are happening, are very real. It is probably going to be quite a big battle to prevent it. And it may be naive of me to hope that it will be prevented, but I just feel, well what else? What’s the alternative to say the future lies with corrupt thugs?
That’s the best we can do in running our societies with all that we know that’s likely to mean. That can’t be accepted and it’s not in truth of what I believe most of our populations actually want. It’s only in the countries I know. We have to fight for something better. It is always possible that in great fights that matter to people, you will lose.
When people started the second… When the British decided to take one of the heroic moments of this country in 1939, and to go on fighting it after the fall of France, well lots of sensible people and many of them were in the cabinet went, ‘Well, it’s crazy. We’ve lost.’ But I don’t think accepting defeat before we’ve even started the battle is a very decent or proper thing to do.
I believe that two things. First of all, of the many lousy ways we’ve governed ourselves, this is quite a massively the least bad. Churchill understated it, pretty basic point. People want to live in our countries and they don’t want to live in other countries, of course it’s much because we are prosperous. I understand that and I understand a lot about the questions about how that wealth was created. I discussed that briefly. But they want to live in it also because they feel living in a society which is free, which has a law that protects them, where they can express their views without being put in prison. That’s rather nice.
That’s rather… It’s what most people want. Well if people want this and you have highly educated populations, if you have the plutocrats who are more aware, some of them are at least, that the way they’re going will not end up in a world they’re going to like very much. There’s more to life than having low taxes. Then I have to be optimistic that there will be a way forward found to recreate it and people will look at how close we’ve come to disaster and will change.
This is where I started my book as you know. Civilizations, even great civilizations, everything in our history tells us this are profoundly fragile. Anything sophisticated, complicated, which always by definition, such a thing depends on consent, it depends on willing engagement of the public. That’s even more true in a society like ours. All that is fragile and we have to fight for it by making everybody so far as we can feel included and part of it. That is my story. It may be a hopeless battle, I don’t know. Nobody, I think, knows and I’m very happy to have engaged in it.
Is Globalization Good or Bad?
Bilal Hafeez (34:44):
Let’s pick a couple of the big thorny economic issues that have really caused some of the stress in this system. One is globalisation. We had the Brexit vote, we had the Trump trade wars, we were told for years the neoliberal order, globalization’s good, it’s a win-win and so on. That turned out not necessarily to be correct. People in western economies felt marginalised and so on and then we had the result of say Brexit and Trump and so on. An issue like globalisation, how would you think about that? Have you changed your view on globalisation? You wrote the book of course about globalisation many years ago. Now, we’ve seen the way society has reacted to it.
Martin Wolf (35:24):
Well, my general argument, which I think is controversial, I hold to it, but I think it’s an argument others would differ with is that in large part, not entirely, but in large part, the problems we’ve got into are a function either of inevitable economic changes to which we’ve failed to react.
I argue for example that the biggest single change, which is the de-industrialization of the labour force in the western world was predominantly due to technological changes that were separate from globalisation.
I think the evidence of that is very strong. Lots of work on that. The other big changes to do with the shift in a skill intensive direction in labour demand and particularly university created skills and the extraordinary increases in incomes at the top of the income distribution again, had very little to do with globalisation per se, but had a lot to do with again, technology and certain forms of capital market liberalisation, which I think of as distinct from though linked with globalisation.
I think that the story is as a matter of fact, far more complex. Second, it does seem to me clear and this is… I’m very careful. I want the distinction globalisation from belief that completely liberal markets are perfect. You know will know in the literature of which I’m most familiar in trade, people… Long ago, a very distinguished friend of mine wrote some very wonderful pieces on this in the ’60s, which was basically arguing, yes there are lots of arguments for intervening in the economy but they’re not on the whole good arguments for protection.
We forgot that. We pretended that if you were against protection that meant you were in favour of completely free markets. The two cases got elided but they had distinct this perfectly good arguments for interventions of… So some of them you might call industrial policy, some of them to do with labour market policy, some of them to do with regional policy, some of them are to do with welfare, state compensation for risk bearing and so forth.
Some of them are to do with corporate governance, which is a big issue, I think. Some of them to do with the way financial markets, where God knows we’ve had problems with that. None of these are directly linked to the case for free trade. They’re quite separate. In my first book on globalisation and even more this, I want to separate the arguments for trade, from the arguments from completely free markets. I tried to do this.
There are lots of arguments for intervention in our economies. It’s difficult to do well but I discuss a lot of it. But it needs to be done. There’s no question that complete laissez-faire is not a sensible policy and that’s been obvious since the middle of the 19th century, I would say. And that the fact we’re still debating that it’s very strange. But accepting that there’s a case against laissez-faire, a very big case is not the same thing as saying the best tool is protection.
And this then links to my final point. The reason we go for protection when what we want is intelligent interventions of many kinds is because it’s so easy to blame foreigners. It’s a political thing. Britain, we know what happened with Britain. We had lots of problems in the British economy. Those of us have written about them for a very, very long time know that they were overwhelmingly due to domestic policy failures. None of which were in any way actually affected by EU membership. Our inability to build houses, our inability, which is planning controls, our inability to do sensible regional policy, our ridiculous over centralization of government in our country, the failure to improve our schools and education for skills.
The failure to create new innovative companies in the tech sector which succeeded. The loss of dynamism of our capital markets. None of this had to do with the EU, none of it. The EU was trivial in all this. Why do we blame the Europeans? Because they’re foreigners and it’s easy to blame foreigners for the things we are not prepared to confront ourselves. And it became perfectly obviously to anyone after the Brexit referendum when it was quite clear they didn’t know what to do about anything that actually, nothing that they needed to do was made easier by Brexit because it was never affected by the EU and they were as cowardly about doing any of these things as they’d always been because the reason they couldn’t do it, because it was so domestically sensitive.
The same applies to Trump. The idea that the principle problem for America, if you look at all its social and economic problems, its trade with China is simply not born out at all by the evidence.
Yes. There was a China shock that could have been dealt with much better. It’s a trivial part of the total story. Now, one area I would say that what I say is more questionable, that’s about capital outflows and capital flows more broadly. My friend has argued that what’s so surprising when we get anguished about globalisation is focus on trade, which is second order. We don’t really consider what finance has done, which is closer to first order. Because it has a massive influence on corporate governance. It’s a massive influence on financial instability, which has been a very big issue and it’s a massive influence on the position of labour because capital has the opportunity for exit.
Now, those are I think questions that do need genuinely addressing. I discussed some of those, perhaps I should have addressed more. Tax avoidance is a big issue in that context. But the globalisation that I would argue has mattered least or the globalizations that have mattered least are the ones we are most paranoid about, trade and migration. That’s not an accident. Because it’s so easy to focus on these people and not on the powerful people whose role in other areas is actually far more significant.
I do want my book, I’m sure I’ll fail, but I don’t want to create a war cry for ‘progressives’. I want to create a consensus, if I can, among what I think of as British politics, relatively sensible Starmer, let’s say.
I think there is no reason why Starmer and Sunak who are fairly sensible people it seems to me, shouldn’t agree there is a problem, this is the sort of problem we have and these are the sorts of policies we should be pursuing. I want that sort of consensus to be formed because that seems to me the only basis for what progress. And then that leaves the Chomskys on the far left and the complete crazies on the far right out in… And to do out.
That’s what I wanted to. I didn’t want to be so radical as to really frighten the horses and that perhaps explains it. But I think I have explained my big point. Most of this is xenophobia. Xenophobia is the most powerful motivation in human affairs. We are always naturally tribal, it always leads to trouble and we should try, we don’t got any sense, to control, curb and manage xenophobia because once you really let it rip and surely you know this, anything can happen.
Capital Controls and Tax Havens
Bilal Hafeez (44:02):
That’s very powerful arguments there. I think I like your nuance around globalisation about we should be clear about what we mean by globalisation, which area of globalisation, role of technology, what you can blame and so on.
I did want to pick up on the financialization point. One thing is obviously we’ve had deregulation of financial markets since the ’80s onwards and open capital accounts. Would you advocate for restricted capital flows, cross border capital flows or not? Like return to capital controls of some kind?
Martin Wolf (44:34):
The honest answer is my book is already ridiculously big and it discussed the ridiculously large number of policies. Many critics would say, ‘There’s too much in this. You don’t have a single answer for all this.’ Or not even a single two answers. And the answer to that is no I don’t because I don’t. But I have read a lot of literature and I’ve not convinced anyone else that it does either.
My answer to you in general is no. That is to say I am reasonably comfortable actually with the position I adopted. Which is I think the high-income democracies can contain and manage financial liberalisation reasonably well in its cross-border effects, as long as they’re reasonably sensible. Because they have, by and large, the confidence of the markets. Not perfectly, but they do. That gives them very substantial degrees of freedom.
They issue reserve currencies to a greater or lesser extent. That allows them to manage countercyclical policies. And they are part of a global and above all, Western system which is centred, in one which the financial system is centred. So I think for us, for the Europeans, the Japanese and Americans going for exchange controls would be pretty ridiculous. But if I were running India or China and I’m not, I would say, and they came to should we get rid of all our capital account controls? I would say what I’ve been saying for now a long time way back since I wrote about the Asian crisis, think about it very, very, very carefully before you start.
It’s not the most important thing for you to do. There are many situations in which you will lose control of your domestic polity if this happens. And that’s a very bad place to be. I think the case for emerging…
I was very sceptical about the case advanced in the early ’90s by the IMF for universal capital account liberalisation. The Asian financial crisis sort of killed it. And I think that’s right. Now, I’m more concerned in our countries about other aspects of financialization and to me the area where I think I’m weakest but I raise all the right questions is corporate governance.
How far do we want corporations to be run as it were for the interests of capital market players? What is the consequence of doing that? I think there are some very big questions there. And perhaps… That’s one really big… I give some answers there but perhaps I should have gone further. The second big issue is and where I think the West is beginning to understand is we cannot allow capital account liberalisation to mean complete loss of control over the ability to tax capital income and capital wealth.
We can’t have hugely powerful people living off the institutions we have created and the societies that support those institutions without contributing to them as taxpayers. For that reason, I’m overwhelmingly behind the attempt of this administration to create sort of universal minimum corporate taxation.
I think basically tax havens should be demolished. I think they might discuss that at length. They are absolutely lethal predators and the corporations should not be allowed to place huge amounts of their valuable assets by all intellectual property in the current world beyond the network of domestic taxation and regulation as well in this way. And we have the power to stop it. Of course we do.
If we told the major Western companies that do this that if they continue to do this, they can no longer operate in our countries, that will be the end of it, immediately. It’s perfectly obvious. Do you think the US can’t prevent American companies from taking advantage of this?
It’s not that the plutocrats rule the whole of society, but they rule it pretty effectively in certain narrow areas. And taxation or regulation are very definitely part of it. And we’ve seen this again with banking, with this different ridiculous deregulation in the US that allowed these recent absurdities.
Can we eliminate that? No, not in a democracy. But should we be aware that a lot is going on in my view in the political process as a result of very careful and deliberate special interest lobby, not a general assault on everything, but special interest lobby particularly focused around the financial sector though not only, and that’s a big issue. That seems to me obvious.
Policies to Save the UK
Bilal Hafeez (49:30):
I just wanted to round off and finalise our interview with just one final sort of question which is, you touched on if you have sensible politicians in charge, UK, you mentioned Sunak and Starmer seem reasonable, in the US, whoever that may be, what types of policies would you advocate that they implement? Or what policies in general do you think we need to restore to get rid of this crisis of democratic capitalism?
Martin Wolf (49:54):
Well, my view is… This is very different. America is a generous country and in a way, you need to generate a whole set of ideas about how to make the American past consistent with a decent American present. I’m not going to focus on that because that’s a whole new discussion.
But in the British case, my view is roughly the following, Britain is a European country. I know we don’t want to think we’re a European country, but actually we are a European country. The countries that are most like us in terms of attitudes of that, it’s all perfectly clear from the… Are continental countries.
I think the British people have been sold a bill of goods. I don’t know whether this can check. And the bill of goods is you can have a fully developed sophisticated welfare state and pay significantly less tax than anyone in continental Europe.
And that’s a bill of goods. I think the British public actually wants, I’m not talking about becoming Denmark, but they would like the welfare state that the Dutch offer. Much richer country by the way and perfectly successful. That means we have to pay more tax and that means I have to pay more tax and that’s what we have to do.
I want politicians to persuade the British public that that’s perfectly reasonable. Our welfare state is going to become more expensive. We’ve always known that, because of ageing and because of the risks that we’re now being asked to bear. But if we don’t do that, we are going to have more and more of these massive social problems. By and large, not completely, they’ve got many…
The Continentals, I think, have handled this better, particularly in Northern Europe. So that’s the first point I would make. I’ve made this point for about 25 years in various columns. You can’t have a European welfare state on these tax ratios and the problem will get worse. Now, of course I didn’t expect us to go almost X growth. But the second point is we have a really big growth problem and we know that and it has many dimensions.
We need to have a serious package. What are the key things? Well, pretty obvious, the national savings rate is far too low. We under-invest chronically both privately and publicly. Our tax system has not been well-designed to promote savings and investment. We are under saving in our pensions, we are under investing in our pensions. We have done a pretty… We are beginning to get some good ideas I think on skills, but we have been not willing to invest in them. That comes back to the tax issue.
I do think we have to develop and I have ideas about this, a serious regional policy. We can’t just have one region of the country which is world-class and the rest is sinking. And we need an industrial innovation policy, which in my view is built around the combination of massive inventions in science and engineering and massive promotion of essentially VC related public, private related innovations.
I think the most successful model of that, which might be relevant for us in these areas was DARPA in America. It’s the most successful industrial policy tool ever. The money involved in that is not that large. I think that was one Dominic Cummings one good idea in information technology and life sciences, which are both very good areas for us. We have some good people and we can track third place skill.
We have to reopen our society to the very best and to some degree, we’re doing that, the best scientists and would-be scientists and technologists and entrepreneurs from around the world. I think we’re beginning to do that again. We’ve been much better on Iation policy than I fear. When I read how many immigrants we’ve got, I feel great. But that means of course we have to get to planning and housing and building and so it’s a lot of stuff at the end of this. Finally, we need to have a financial innovation. Finance is important but it can’t run the economy and it isn’t going to be our only source of value added in the world because it’s too narrow and too fragile.
Now, so I would say we just have to step back and say, look at where we are now, in the rank. Some of what we did with Margaret Thatcher was right and good and worked, but we over-invested in the idea that deregulation will do it. We fail to deregulate in some of our most massively important sectors, activities like planning and land use.
We ignore that in addition to deregulation, you have to have a policy for innovation and capital accumulation and having the lowest savings and investment rate in the developed world, which essentially we do have, with a pretty feeble technology promotion and innovation policy, creating moving ideas into activities.
Without that, it turns out for a modern sophisticated economy, which isn’t world-class in scale like the US, it’s not enough. That’s what I would focus on. What that means specifically and whether any politicians can do that, I don’t know. But I think we’ve got a ditch Thatcher as it were. We’ve done that. Now we move on. It wouldn’t be like Biden because for God’s sake, we can’t get a subsidy war with the US. That’s mad. But we have to find our own way of using our deregulated, liberalised society, deregulating more in certain vital areas and becoming a serious accumulator of capital and knowhow. That seems to be the broad strategy for Britain. Is that doable? I don’t know, but I can’t see what the alternative is.
Bilal Hafeez (56:06):
That’s very compelling arguments then. I hope politicians and all the movers and shakers do listen to this. Now, I would urge all our listeners to buy your book, The Crisis of Democratic Capitalism. It’s on Amazon. I bought on my Kindle and I sort of very much enjoyed the read.
Obviously Martin, you have your column in the FT, which people can read as well. I also see that you have a mini podcast series where you are interviewing or having discussions with prominent thinkers to elaborate on some of the themes in your book as well, which I’d also recommend people. What’s the name of the show’s? FT.
Martin Wolf (56:40):
Saving Democratic Capitalism and it’s in FT Podcast.
Bilal Hafeez (56:43):
FT Podcast, yeah.
Martin Wolf (56:45):
And it’s going to be a five-part series and the next one going up is with Anna Applebaum, which is wonderful. She’s a wonderful woman. I think it’s quite a sobering and intelligent, I would say that, wouldn’t I? Series discussing with some quite significant thinkers on, to me, not the only big challenge of our time, there are so many others, but the one that is closest to home for me, because it’s the crisis of my own home.
Bilal Hafeez (57:13):
Yeah. No, that’s great. No, with that, thanks a lot Martin and thanks a lot again for your columns, your book and all your contributions you’re making to this debate.
Martin Wolf (57:21):
Well, it’s wonderful to do it. It’s been a particularly rich and inspiring discussion and it makes me think if only I could start rewriting this book from scratch. But you have to move on.
Bilal Hafeez (57:35):
Yeah. Thank you very much, Martin. Once again, I’d like to thank the sponsor of this episode, Kalshi. Kalshi is the first fully regulated financial exchange that allows you to trade a new type of asset class event contracts. With event contracts, you can trade directly on a variety of economic and financial factors, including what inflation will be, our Fed interest rate changes, whether the debt ceiling will be raised or if TikTok will be banned.
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