There are two main reasons why many observers are beginning to question the assumption — previously taken for granted — that capitalism and democracy are firm allies. First, modern capitalism is global, while democracy is mainly rooted at national and more local levels. Second, modern capitalism is driven by finance, which leads to increasing inequality. Yet, high levels of inequality threaten the operation of democracy.
That globalization presents a problem for democracy is clear. Much of the global economy is unregulated, and where it is regulated, it is done so by international organizations only very indirectly answerable to democratic bodies, or by informal and usually confidential arrangements among corporations themselves.
Furthermore, transnational firms can compromise the authority of national democracy by choosing to invest only in countries that pursue policies they like. The most visible manifestation of this is the decline in taxes on corporate earnings that has taken place across the world, as governments compete to offer the most generous fiscal regimes. The result has been a shift in the burden of taxation to individual citizens and a decline in the resources available to public services.
Governments could, of course, counter these developments by joining forces to confront the corporate challenge and protect space for autonomous political decision-making, but the temptation of trying to become the country that offers corporations the most generous terms usually prevents them from doing this. The European Union is a partial exception, and its parliament is the world’s only example of transnational democracy. Its impact, however, is weak, with European democracy facing two hostile forces: corporations lobbying the European Commission and individual governments at levels European Parliament cannot reach; and xenophobic populists trying to pull power away from the EU and back to the nation states. And because most populists are from the political right, they are not bothered by nations losing out to corporate power.
Corporate lobbying is so powerful at both the European and national levels because growing inequality has generally strengthened the political might of the wealthy. This is the second threat posed by contemporary capitalism to democracy.
Democracy operates in two different theatres: the formal roles played by elections and parliaments; and the informal actions of lobbying and other forms of political pressure that take place across civil society. For the former, we are careful to ensure considerable equality: one person-one vote, irrespective of wealth. Informal politics, by contrast, does not have many rules, and that is basic to its vitality and to our freedom. We can at any time use many different kinds of pressure to try to persuade governments to pursue various policies, provided we do not resort to corruption or violence. But our ability to exercise pressure depends on the resources we can command, so informal politics favors the rich, even though we all benefit from it. The equality rule that is fundamental to democracy is breached. This does not matter too much if inequality is limited, or if power exercised in one policy area cannot easily be transferred to another. This was broadly the case for the first three decades after World War II. Since then, however, inequality has been growing — not so much in the form of inequality within the broader population, but inequality between tiny groups of the super-rich and everyone else. One needs a lot of wealth to able to wield political power, and this small group, perhaps 0.1 percent of the population, is in such a position. This degree of inequality is most prominent in the U.S., but it is spreading to Europe.
Capitalism is creating problems for the effectiveness of democracy
The main motor of this inequality is the financialization of the global economy. The ownership and manipulation of financial resources produce earnings like no other form of human activity. Having acquired vast wealth, an individual or corporation can use some of it for political lobbying purposes, and this can mean securing government actions – tax policies, regulatory changes, government contracts – that enable the wealth holder to secure even more income in the future. There is a vicious spiral linking increasing inequality to the weakening of democracy.
There is however another spiral that works in the opposite direction. Modern capitalism depends on mass consumption for its profits, and mass consumption depends on the masses having growing income. In 2014, an OECD Social, Employment and Migration Working Paper (no. 159) indicated that in the U.S., the top 1 percent of earners had captured nearly 50 percent of national income growth between 1975 and 2007 (the year before the financial crash). The great majority of wage earners had experienced static or declining incomes, and yet they continued to consume. This was possible because they took on heavy debt loads, risky behavior accepted by a financial system that had been deregulated thanks to heavy lobbying by the banks. Eventually, the burden of high-risk debt became too much for the financial markets to bear, and the crash, from which we have not yet fully recovered, took place.
Does a form of capitalism that generates increasing inequality but depends on mass consumption have any other way out of its dilemma than to encourage households to take on unsustainable levels of debt? At present, democracy seems unable to find an answer to that question. Global capitalism can only be reined in at a transnational level, while our political parties seem divided between those that have succumbed to corporate lobbying and do not believe in regulation, and those that want to retreat back to the limited reach of nationalism.
Capitalism is creating problems for the effectiveness of democracy, but capitalists have no reason to be dissatisfied with that form of government. Democracy guarantees the rule of law and clear procedures for changing the law, including lobbying for or against those proposed changes. These features are attractive to capitalists. On the other hand, though, democracy can produce a mass of regulations to protect non-market, non-corporate interests. Capitalists’ preferred regime is really post-democracy, in which crucial features of democracy continue operating, including, importantly, the rule of law, but where the electorate has become passive, responding to parties’ carefully managed election campaigns, but not engaging in disturbing activism, and not generating a civil society vibrant enough to produce awkward counter-lobbies that try to rival the quiet work of business interests in the corridors of government. The resurgence of nationalism creates some problems for this placid scene, but by concentrating on the nation-state, these movements do not disrupt the global level, which remains beyond their reach.
We have not yet arrived at a situation where the corporate dominance of our politics is complete; otherwise, all consumer protection and labor laws would already have been abolished. But that is where we are headed, boosted by continuing growth in inequality and the mutual reinforcement of political and economic power. Democracy in some form probably continues to be the best available shell for capitalism; but the reverse may no longer be true.