Democratic capitalism is in crisis, or so argues Martin Wolf. In his latest book, “The Crisis of Democratic Capitalism”, Financial Times chief economics commentator claims that the democratic and economic system we live in, although still the most effective and prosperous, faces critical challenges. Wolf, a known pessimist, paints a dismal picture of the current situation. In the first chapter, the author draws alarming parallels between the present day and the most tragic years of the last century. While in the 20th century we witnessed World War I and II, the Spanish Flu, and the Great Depression, the 21st century has seen the Great Recession, the COVID-19 pandemic, an authoritarian China, and Putin’s barbaric invasion of Ukraine. As a result, Wolf warns us: “When we look closely at what is happening in our economies and our policies, we must recognize the need for substantial change if core Western values of freedom, democracy, and the Enlightenment are to survive”. His message is clear: to have prosperous societies, capitalism and democracy must live in perfect harmony.

While he calls for perfect harmony, the reality is that the relationship between capitalism and democracy is often fraught with tension and challenges. However, at their core, both systems are built on a fundamental principle: equality of status. As Wolf aptly describes, these systems are “symbiotic twins.” In a democratic framework, everyone has the right to express their concerns and voice what they want to be changed. Similarly, in a free market, individuals can exchange goods and services as they please. The convergence of capitalism and democracy engenders a complex interplay between economic and political forces. The survival of this marriage relies on the separation between political and economic power, and it is here that Wolf thinks that things went wrong. The primary source of the malaise of democratic capitalism is crony capitalism.

In one of the most powerful chapters of the book, titled “The Rise of Rentier Capitalism,” Martin Wolf describes how the once productive and dynamic capitalist system has devolved into crony capitalism. According to Wolf, there are two ways in which the balance between political and economic power can be disrupted: when the state takes control of the economy or when capitalists take control of the state. To ensure that the marriage between capitalism and democracy is successful, we must find what Acemoglu and Robinson call “The Narrow Corridor” – a delicate balance that allows for both state and societal autonomy, the necessary authority to provide public goods and enforce legal standards, while also refraining from gaining excessive power that could result in authoritarianism and impinge upon personal liberties and autonomy. Martin Wolf argues that we are moving away from “the narrow corridor” towards a plutocracy, as the walls separating power and wealth are breaking down, with capitalists taking control of the state. Wolf shows how authors dating back to Ancient Greece have warned about the consequences of a broken democracy. Plato, for example, believed that as the political and economic elites become more intertwined and distant from the average citizen, society would look for a protector against the wealthy. Plato believed that insecurity about the future, fear, and resentment could lead to tyranny. It is remarkable how accurate this description remains today. Populist movements and leaders all over the world have been using this resentment as fuel. They claim to be “against” the corrupt elite and present themselves as protectors of the people. However, as Wolf rightly points out, these leaders are themselves a competing elite, leading to what he calls “pluto-populism”.

Unfortunately, while Martin Wolf correctly identifies crony capitalism and the resulting inequality as the primary cause of dissatisfaction with democratic capitalism and the rise of populist movements, he fails to address the root cause. In fact, Martin Wolf’s analysis of the problem is limited to state capture by market forces. Rather than framing the problem as otherwise well-intentioned or naive politicians being led astray by “greedy capitalists”, it is vital to recognize the collusion of interests between the two groups, which has allowed them to shape the rules of the game to their own advantage.The correct identification of the problem is important as it might discourage calling for more government intervention as a way of fixing the problem. After all, if both the state and businessman are to blame for this rigged system, why would anyone believe that more state intervention would be the cure?

Moreover, while Wolf acknowledges the significance of shaping institutions to prevent individuals from harming the system, his emphasis on individual morality may be overstated: “it depends ultimately on truthfulness and trustworthiness in those in positions of responsibility”. While it is true that moral and ethical considerations can influence individual behavior, structural issues such as crony capitalism cannot be fully explained by pointing to individual morals. By emphasizing individual traits, he overlooks the need for institutional reform to curtail cronyism. It is worth remembering the infamous advice of David Hume on how to design proper institutions: “Political writers have established it as a maxim, that, in contriving any system of government, and fixing the several checks and controls of the constitution, every man ought to be supposed a knave, and to have no other end, in all his actions, than private interest. By this interest, we must govern him, and, by means of it, make him, notwithstanding his insatiable avarice and ambition, co-operate to public good. Without this, say they, we shall in vain boast of the advantages of any constitution, and shall find, in the end, that we have no security for our liberties or possessions, except the good-will of our rulers; that is, we shall have no security at all.”.

Overall, the book has the merit of correctly identifying cronyism as the cause of some of the ills of our current system, even if it fails to point out the root causes of it and by consequence proposing solutions that may exacerbate the problem. Given the dismal scenario that Martin Wolf describes throughout the book, it comes as no surprise that he finds himself “doubting whether the U.S. will be a functioning democracy by the end of the decade.”. Perhaps the tone is too pessimistic, but Wolf is right in his message that our liberal democracies have seen better days. For everyone concerned about the state of our democracies, this is a must-read book. We live in trying times in which both our economies and geopolitical order are unstable. The way forward is not the path of nationalism, tribalism, and protectionism. The wonders we have achieved as a society are the result of flourishing markets and pluralistic democracies that live in a happy and respectful marriage. But we should not take that for granted, as this book articulates. Crony capitalism is indeed a threat to our economic system. Despite his pessimism, Wolf´s book is also a message of hope. In the dedication of the book to his grandchildren, Wolf writes, “May their generation do a better job than mine has.” Their generation is ours. The time is now. May we live up to the challenge.