The Crisis of Democratic Capitalism

1. Democratic Capitalism's Fragile Balance

The health of our societies depends on sustaining a delicate balance between the economic and the political, the individual and the collective, the national and the global.

Interdependence and Tension. Democratic capitalism, a synthesis of democratic politics and market economics, is inherently fragile. It requires a delicate equilibrium between competing forces: the economic and the political, individual liberty and collective responsibility, national interests and global cooperation. When this balance is disrupted, societies become vulnerable to instability and decline.

Broken Balance. The current crisis stems from a breakdown in this equilibrium. Economic forces, such as rising inequality and financial instability, have destabilized political systems, leading to populism and authoritarianism. Conversely, political polarization and the erosion of democratic norms undermine economic stability and long-term prosperity.

Need for Reform. To ensure the survival of core Western values like freedom, democracy, and the Enlightenment, substantial change is necessary. This reform must build upon existing structures and institutions, recognizing that society is a partnership between the living, the dead, and those yet to be born.

2. The Intertwined Fates of Democracy and Market Economies

Capitalism cannot survive in the long run without a democratic polity, and democracy cannot survive in the long run without a market economy.

Symbiotic Relationship. Market capitalism and liberal democracy are deeply interconnected. Capitalism thrives in a democratic environment that protects individual liberties and the rule of law. Democracy, in turn, benefits from the economic prosperity and opportunities generated by a market economy.

Shared Values. Both systems share core values such as individual agency, equality of status, and freedom from arbitrary coercion. These values underpin the legitimacy and stability of democratic capitalism.

Potential for Conflict. Despite their symbiotic relationship, democracy and capitalism can also be in conflict. Democratic politics are national, while market economics are global. Democratic politics are based on equality, while market economics rewards success. Managing this tension requires careful attention to the balance between the economic and the political spheres.

3. The Erosion of the Middle Class and the Rise of Populism

What we may be witnessing is not just the end of the Cold War, or the passing of a particular period of post-war history, but the end of history as such: that is, the end point of mankind’s ideological evolution and the universalization of Western liberal democracy as the final form of human government.

Economic Disappointment. A key factor driving the rise of populism is economic disappointment. Many people in high-income countries feel that global capitalism has failed to deliver the widely shared prosperity and security they expected.

Status Anxiety. This disappointment is often manifested as "status anxiety," particularly among those who feel their social and economic standing is threatened. This anxiety can fuel resentment towards elites, minorities, and immigrants.

Cultural Factors. While economic factors are crucial, cultural factors also play a role. Status anxiety, religious beliefs, and racism can exacerbate economic grievances and contribute to the rise of populism.

4. Rentier Capitalism: A Threat from Within

Pre-modern states generated unprecedented opportunities for the accumulation and concentration of material resources in the hands of the few, both by providing a measure of protection for commercial activities and by opening up new sources of personal gain for those most closely associated with the exercise of political power.

Exploitation of Power. A significant threat to democratic capitalism comes from within: the rise of "rentier capitalism." This occurs when powerful individuals and corporations exploit their market and political power to extract wealth and resources from the economy, rather than creating value through innovation and competition.

Forms of Rent Extraction:

• Financialization: The excessive growth and influence of the financial sector
• Corporate Misgovernance: Prioritizing shareholder value over the interests of workers and communities
• Weak Competition: Allowing monopolies and oligopolies to stifle innovation and raise prices
• Tax Avoidance: Exploiting loopholes and tax havens to minimize tax liabilities

Consequences. Rentier capitalism leads to soaring inequality, economic instability, and a loss of trust in elites and institutions. It also undermines the legitimacy of democratic capitalism and creates opportunities for populism and authoritarianism.

5. The Global Power Shift and the Challenge of China

What we may be witnessing is not just the end of the Cold War, or the passing of a particular period of post-war history, but the end of history as such: that is, the end point of mankind’s ideological evolution and the universalization of Western liberal democracy as the final form of human government.

Rise of Authoritarian Capitalism. The rise of China presents a significant challenge to democratic capitalism. China's "authoritarian capitalism" has achieved remarkable economic growth while rejecting the link between capitalism and democracy.

Shifting Global Power. This has created a shift in the balance of global economic and political power, away from the US and the liberal West towards China and its system of bureaucratic absolutism.

Need for Response. Western nations must improve their economic, social, and political performance in response to the rise of China. This includes strengthening their own democratic institutions, promoting innovation and competitiveness, and addressing inequality and insecurity.

6. The Imperative of Domestic Renewal

Change is essential, both at home and abroad, but it must build on what is.

Domestic Focus. The most significant threats to democratic capitalism are domestic. Economic failures, rising inequality, and a loss of trust in elites have created fertile ground for populism and authoritarianism.

Building on Existing Structures. Reform must build upon existing structures and institutions, rather than attempting to create a new society from scratch. This requires a pragmatic and incremental approach, focused on addressing specific problems and building consensus.

Key Areas for Reform:

• Reforming capitalism to promote inclusive growth and shared prosperity
• Renewing democracy to strengthen civic engagement and accountability
• Reinvigorating global cooperation to address shared challenges

7. Reinvigorating Global Cooperation

No country is an island.

Interconnected World. No country can solve its problems alone. Global challenges such as climate change, pandemics, and economic instability require international cooperation.

Strengthening Alliances. Democratic capitalist states must strengthen their alliances to defend themselves, promote their core values, and protect global peace, prosperity, and the planet.

Engaging with Autocracies. While defending their values, democratic capitalist states must also engage with autocracies, such as China, to address shared challenges and promote global stability. This requires a complex strategy of competition, cooperation, and coexistence.

8. The Essential Role of Citizenship

Democracy is always imperfect. But tyranny is never the answer.

Responsibility of Elites. The health of democratic capitalism depends on the responsibility of elites. Commercial, cultural, intellectual, political, and administrative elites must safeguard the fragile achievements of democratic capitalism.

Core Values. This requires a commitment to core values such as freedom, democracy, and the Enlightenment. It also requires a willingness to resist the siren song of tyranny and to uphold the obligations of citizenship.

Call to Action. It is up to each generation to resist tyranny and to ensure that government of the people, by the people, for the people, shall not perish from the earth. This is not happening to the extent I once took for granted. On the contrary, many are succumbing.

Last updated: March 6, 2025