Capitalism Is Killing Liberal Democracy

The claim that capitalism goes naturally with liberal democracy has never been more discredited. Today, capitalism’s liberal form is increasingly challenged by a statist authoritarian model — and in many places it’s buckling under the strain.

Electronics factory in Shenzhen, China, October 11, 2005. Steve Jurvetson / Wikimedia

The emergence of capitalism in the ex-Communist countries of Eastern Europe, the Soviet Union, and China presented a new, unforeseen world to those of us with an alternative future in mind. Economist Branko Milanovic surveys this new world in his book Capitalism, Alone. Milanovic originally hails from Serbia in the former Yugoslavia, which affords him a unique background and vantage point from which to observe the transformation of Eastern Europe and the USSR.

The stock-in-trade of Milanovic, a former chief economist at the World Bank, has been international data on income inequality, as shown in his previous book, Global Inequality: A New Approach for the Age of Globalization. In Capitalism, Alone, he ranges well beyond that field to discuss the institutions and market arrangements of the contemporary world economy.

The basic dichotomy in Milanovic’s new world of capitalism is between what he describes as “liberal, meritocratic capitalism” (“LMC”) and “political capitalism” (“PC”). His two archetypes are the United States and the Peoples Republic of China (PRC).

“Liberal” in this context refers to both the old, nineteenth-century connotation, meaning fewer government constraints on markets and international trade, as well as to the more modern liberal idea of a commitment to reducing inequality. “Meritocratic” means there is more space for individual economic mobility, more equality of opportunity. The chief contrast here is to nineteenth-century capitalism, which entailed less mobility and little public policy aimed at reducing inequality.

Political capitalism in Malinovic’s classification features greater autonomy for the state and its bureaucracy in guiding the economy and less scope for democratic decision-making or input from civil society. Besides the PRC, in this category the author includes Singapore, Vietnam, Burma, Russia, Ethiopia, Algeria, and Rwanda.

In both categories, it is still capitalism that holds sway. Ownership of enterprises in the PRC is diverse, including cooperatives and varying degrees of ownership by provincial and local governments, as well as the national government. But there is no doubt that capitalism has triumphed in China and other “PC” nations. Production is geared towards markets. Capital is owned by individuals, not least by a new class of multimillionaires. Workers serve in a system of wage-labor.

Milanovic’s method is eclectic and empirical, informed by Marxist concepts but not limited to them. A fundamental one that undergirds his analysis is the idea that relations of production are a key determinant of social relations and institutions. Unlike Marx, the book does not offer a treatment of class. There is extended discussion of income strata, and of the shares of labor and capital in the national income. But there is no consideration of class formation and rule in the Marxian sense. This isn’t meant as a criticism, just a description of Milanovic’s approach.

The principal development driving the economy to its current state is the emergence of global supply chains, facilitated by advances in communications and transportation. Improved communications eliminate the need for the physical co-location of higher-level managers and workers. It also extends and deepens the reach of finance. Reduced transportation costs permit geographic dispersion of the stages of production. The latter, not incidentally, reduces the bargaining power of labor and explains Milanovic’s famous “elephant curve.”

Globalization thus gives rise to a different relationship between the Global North (developed nations) and South (underdeveloped nations). Under some old theories of imperialism, the model is one of colonial powers deploying armed forces to take over underdeveloped countries for the purpose of stripping them of their natural resources. The newer reality is the geographical dispersion of high value-added manufacturing and its integration in the production of final products. Think of auto parts shipped from the United States and assembled in Mexican maquiladoras, or the design in Oregon of Nike shoes that are built in Vietnam and sold back into the United States.

Formerly underdeveloped countries are eager hosts for this kind of outsourcing and do not require foreign military minders to protect foreign-owned assets from expropriation. To be sure, a proliferation of US military bases remains, but they arguably figure more in US geopolitical machinations than in guarding the colonial exploitation of natural resources. Back in the day, some radicals reached for explanations of the Vietnam War as founded on control of rubber or tin production. The Balkan intervention was sometimes explained by reference to mining in Kosovo. There was chatter about the desire for a pipeline across Afghanistan. This sort of mechanistic analysis has vanished, though US interventionist efforts remain.

Replacing the direct physical threats posed by foreign military occupiers are the financial constraints imposed by the International Monetary Fund and other lending institutions, and the governance of trade by the World Trade Organization, all dominated by the United States and European powers. An irony of this state of affairs is that it was made possible by the success of Communist revolution, particularly in the Peoples Republic of China, which liquidated feudal institutions and then dutifully self-liquidated its socialist principles to clear the way for foreign direct investment, including the crucial transfer of technology.

The historic stages of economic development, from feudalism to communism to capitalism, fly in the face of the older Marxian view which expected communism to launch where it did not — the advanced capitalist countries — and thought it would not, or should not, appear in underdeveloped nations. A common Western view of development also ran aground on the same historical eventualities. In political capitalism, feudalism did not give way to bourgeois revolutions, and the germination of small-scale capitalist firms did not transition to huge monopolies.

The global consequence of economic change has been a great rebalancing of wealth and political power between the United States and Europe on one side, and Asia on the other. Africa remains out in the cold. This is reflected in Milanovic’s specialty of inequality measurement. It has huge political implications, but it does not map very well to the author’s categories of LMC and PC. India, Japan, Taiwan, and South Korea do not make his list of PC economies, but their economic growth surely plays a huge role in the rebalancing of Asia vis-à-vis the United States. Japan and South Korea have also had more economic coordination effected by the state than the United States.

For the Western reader, what may be most interesting here is the analysis of political capitalism, rather than the more familiar models of the United States and the European Union (which still includes the United Kingdom at the time of this writing). In Milanovic’s schema of political capitalism, the bureaucracy requires discretion to function effectively. That means it is only bound loosely by the law. It also means that corruption will be greater, the price of expanded discretion. The trick for a society is to ensure that the costs of corruption are exceeded by the gains to economic prosperity.

Meanwhile, the dilemma for liberal, meritocratic capitalism is the tension between ample welfare state provision and the political pressure generated by immigration and international integration. One angle is the increasing difficulty of taxing mobile and in many cases secretive financial capital. Another is the impact on public spending that can be attributed to migrants. My view is that both of these tend to be exaggerated, particularly by assorted racist demagogues and think tanks dispensing fake research, but they cannot be discounted altogether. That does not necessarily contradict the moral case for a more liberal immigration regime, nor its political wisdom for the Left. It does make an “open borders” demand more difficult to defend.

One off-putting note in Milanovic’s basic dichotomy is the “meritocratic” dimension. That mobility is greater under “liberal, meritocratic capitalism” than “political capitalism” is not obvious. Of course, some of the richest in the United States came from modest origins. But China has plenty of new superrich who could not have but come from such origins as well. At the same time, the constraints on mobility in the United States are obvious. How much do family connections in the PRC condition life chances? The case for greater meritocracy in the United States is not made in this book. Doubts also attach to the “liberal” angle, as far as redistribution goes. The post-WWII social-democratic era may have ended in the 1980s, but the constraints on dynastic wealth formation in LMC nations were always questionable and have become much more so today.

But the greater threat to the “L” in LMC is the erosion of democratic institutions in the United States and other notable cases, such as Brazil, the Philippines, Turkey, Israel, Hungary, and India. The drift towards neofascism in LMC nations is alarming, and the associated costs of corruption, military belligerence, and the weakening of human rights and civil society may presage a new era of slower economic growth, a less successful capitalism. Meanwhile, rising opposition to capitalism or whatever you want to call it in the United States raises the prospect of a revival of the social-democratic, post-WWII model.

Capitalism may be alone, but it won’t be left alone.