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Can the West’s way of life endure? Martin Wolf on the crisis of democratic capitalism

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Podcast & Video

This episode of Hub Dialogues features host Sean Speer in conversation with Martin Wolf, the chief economics commentator at the Financial Times, about his must-read new book, The Crisis of Democratic Capitalism.

You can listen to this episode of Hub Dialogues on Acast, Amazon, Apple, Google, Spotify, or YouTube. The episodes are generously supported by The Ira Gluskin And Maxine Granovsky Gluskin Charitable Foundation and The Linda Frum & Howard Sokolowski Charitable Foundation.

SEAN SPEER: Welcome to Hub Dialogues. I’m your host, Sean Speer, editor-at-large at The Hub. I’m honoured to be joined today by Martin Wolf, the chief economics commentator for the Financial Times, who has been called the “premier economics and financial writer in the world” and the “anglosphere’s most influential financial journalist.” He’s the author of five books, including the must-read new one, entitled The Crisis of Democratic Capitalism.

I’m grateful to speak with him about why he thinks that the marriage between democracy and capitalism is coming undone and what can be done to restore public trust and confidence in the system that, as he puts it, is still the best for human flourishing. Martin, thanks for joining us at Hub Dialogues, and congratulations on the book.

MARTIN WOLF: Thank you very much. It’s a great pleasure to be with you.

SEAN SPEER: Let’s take the book’s title in sequence if that’s okay. What is democratic capitalism, and how is it a marriage of complementary opposites?

MARTIN WOLF: Well, this is the core of the book, so I’ll try to do it as quickly as I can. I think democratic capitalism is fairly obvious in a way. It’s the system we live in, in what we refer to as the West, though that, of course, also includes countries that are definitely not in the West like Japan and Korea, and, I suppose, Australia. So it is a system which combines democracy, by which I mean universal suffrage democracy based on representative institutions, which is the familiar Western model, and capitalism, by which I mean a market economy based substantially on private property but, of course, open to government regulation and underpinned by a rule of law, which is itself the product of legislative processes.

So that combination is democratic capitalism, and I describe it as a marriage of complementary opposites because I think there are fundamental principles of the market economy and democracy which are highly complementary in the sense that they both rest on basic ideals of individual agency in politics or in economic life. They both rest on the idea of some sense of status equality and that there aren’t hierarchies of inheritance in which there are aristocrats and people are born aristocrats and others were born serfs. All this is pretty revolutionary. We take it for granted, but it wasn’t like that a few hundred years ago. 

And so this makes them complementary, and complementary in other ways. I argue that without democracy or something like it, capitalism tends to get corrupted into various forms of anti-competitive crony structure. And in reverse, without capitalism or some sort of market economy, the concentration of political power in the hands of the government of those who run it basically makes democracy impossible, because if the government controls all economic resources, you really can’t mount serious democratic elections which are in any way fair.

So they complement each other, but there are opposites because, obviously, the capitalistic economy can generate highly unequal results, while democracy, the same principle that rests on the equality of citizens in capitalism naturally tends in its political form to generate plutocracy, and plutocracy is the antithesis of democracy. It’s a permanent threat to it. And if it doesn’t generate plutocracy often, and this is a big theme of the book, the democratic electorate then chooses a demagogic leader to protect it, as it were—and Plato wrote about that—against the plutocrats. And in that way, you get autocracy, and you can get both autocracy and plutocracy. So they are complementary, but they’re also in tension, and we’re seeing a lot of the tension in recent years.

SEAN SPEER: That’s a good segue to this other part of the title. Why is democratic capitalism in crisis, and when did it start?

MARTIN WOLF: Well, if I were completely honest, though I wasn’t aware of it at the time, it’s probably always in crisis in the sense that, as I explained in the book, this marriage of universal suffrage, democracy, and capitalism, which we consider as the age-old Western system, is really less than a hundred years old or is about a hundred years old. Basically, it was only the earlier 20th century we got to universal suffrage. Even as it developed in the 19th century, the suffrage was very limited in a whole range of ways, obviously by race, it’s obvious, but also by sex. And so it took a long time to get there. So it’s only been around about a hundred years at most And a lot of the time it’s been embattled. In the ’20s and ’30s, they tried to create democracy in interwar Europe after the First World War, when the empires had all collapsed, the European empires within Europe, and that led to complete collapse, to fascism, the rise of Nazism, and its disappearance. 

It also led, by the way, to the Bolshevik Revolution. So that was hard to do democracy. That’s another product of the First World War. And, of course, even after the Second World War, vast parts of the world were run by autocracies. There are lots of autocracies coming back now, all over the place. And even within what we considered very well-consolidated democracies, those of the U.S. and Britain, we are seeing very strong signs of authoritarianism and the form of demagoguery that I mentioned. So one would have to say that it’s always been embattled. There was a period after the Second World War, at least in the West, when we thought it was really solid, and a period again after the fall of the Soviet Union when it seemed absolutely triumphant. But it sure doesn’t look like that now.

SEAN SPEER: You make the case that the recent string of political disruption is a function of economic failures rather than cultural ones. My former boss, Canadian Prime Minister Stephen Harper, agrees with you. He’s argued that it’s a case of revealed preferences—that is to say, so-called cultural agitations have arisen as an expression of economic anxieties. Why are the two of you right and those who argue that the rise of populism is fundamentally motivated by racism, xenophobia, and cultural loss aversion wrong?

MARTIN WOLF: Well, it’s certainly generated by loss aversion. I think we agree on that. And because I think it’s particularly important to focus on the rise of right-wing of populism, and left-wing populism is rather weak at the moment itself—a very interesting question, why that is the case. I should probably discuss it more, but I’ll leave that to one side. We can come back to it if you want. But there’s no doubt that people in the middle and lower middle have been experiencing a sense of loss, which is leading to anger and despair. And so this is what I think, if I understand it, where the cultural and the people who point to culture and the people who point to the economy agree.

The question is, “What are they losing?” And I would make, I think—I don’t want to be too definitive about this because my view, and I’d be trying to be careful about this—you can’t segment a human being and say, “Well, this is his cultural bit or her cultural bit, and this is her economic bit.” Because we’re not like that, of course. We live in society, and living in society—we are social animals par excellence, involves every bit of us. But what I would argue is that they can’t be separated either. And in particular, the sense of loss of position, the sense of nostalgia, is related very powerfully to economic loss. I mean, I don’t think that can be really much doubted that this is a very important factor. And I’ve explained many different ways in which those economic losses are crucial, particularly for the classic supporters that people are shifting to, as a word, the right-wing populist course, who tend to be non-college educated people in high-income societies like U.S. or U.K. who have very obviously suffered at decline in status and in economic position. Actually quite particularly true for men, who seem to be very important in this. 

Now, my theory is that the extent to which people feel powerfully the loss of cultural position is considerably exacerbated by the sense of economic loss. And in particular, the sense that their belief that they weren’t somehow treasured valued members of society—and therefore, no doubt, some say better than lesser people who were different from them as well in many cases, though not always—that sense was related to their very obvious loss of economic status and security. So, in that sense, I think the two go together.

I would add to this, and it’s an important part of this, that I also think it’s a tactical thing on the part of the people who run right-wing parties, which is an absolutely classic thing. I called it the Southern Strategy, but it goes far more than that. Which is you base your power, if you’re a plutocratic elite, in significant measure or in a democracy in splitting the votes of people who are much poorer than you are. One of the well-known ways of doing it is on racial lines. So I don’t regard the cultural conflicts that they are pointing to, and that are so deep, as having nothing to do with economic objectives because they obviously have to do with the economic objectives of people who run right-wing and centre-right parties. And that’s not original. It’s been clear for a very long time.

But the final point I would make is we have to explain, it seems to me, the timing. These cultural conflicts about race have existed for a long time. Immigration in the U.S., for example, hasn’t increased in any significant measure at all. In fact, if anything tended to fall in the last couple of decades. The civil rights and the rising and improving position of ethnic minorities, particularly Blacks, is many, many decades old. So why is it suddenly boiled up into the shift from a Romney to a Trump, or from a standard conservative government to Johnson arguing for Brexit?

And I argue that the crystallizing factor, just as happened in the ’30s with Germany, which of course is parallel, though of course incomparably worse, the crystallizing factor is the enormous shock of the financial crisis on top of decades of decades of relative decline of the industrial working-class, blue-collar workers in many parts of the country where the manufacturing jobs were so important. So it seems to me impossible to give a good story of what happened and why it happened now, why this incredible burst of nostalgia happened, without pointing to economics as a major factor. Is it the only one? No.

SEAN SPEER: Let’s unpack those economic dynamics if we can, Martin. Why have so many people and places in advanced economies come to feel left behind? Did policymakers overreach on globalization abroad and economic liberalization at home? Was there something materially different about the transition from a goods-producing economy to a digital one? How would you explain the growing numbers of citizens in countries like Canada, the United States, and Great Britain who’ve come to feel abandoned by democratic capitalism?

MARTIN WOLF: I think that is the core question, at least obviously for me as an economist, and I devote much of the book to it. And my argument is, in essence, “Well, it’s complicated.” So I would divide the causal—brief answer, I’ve got two huge chapters on this, but I’ll attempt at a brief answer. There were changes, and they’re very important, which undermined the mid-20th century economic settlement, which were essentially irresistible. And I think there were two of them. And both of them are really associated with deindustrialization. The first is we moved into an economy where the demand for manufactured goods in our societies didn’t plateau, but it slowed because we got most of them and we were in the replacement cycle for most manufactured goods. I can go through the long list of them. So we shifted our spending elsewhere to services of all kinds. And we all know that.

The second thing that happened is productivity growth in manufacturing has been extremely rapid everywhere. So we’re producing not vastly more manufacturing, it’s still growing, of course, but with fewer and fewer people. And I like to say that manufacturing is following the trajectory of agriculture. We produce vastly more food—Canadians know all about that—than we ever did 200 years ago. But the proportion of the labour force working in farming is shrunk in most countries from close to 70 percent to less than one, right? So nobody’s employed in that. Well, in manufacturing, it’s gone down. In time, the U.K. was a real industrial nation. So 60 years ago, it was half of the labour force. Now it’s 10 percent. Most of that is to do with productivity growth.

Finally, of course, there’s been a shift in industrial know-how to the rest of the world, and they’re very competitive. Now, it could have been slower if we hadn’t opened our economies. Well, I basically think it’s irresistible—the tendency for know-how to spread across the world. That’s how the industrial revolution got to America from Britain; it’s just irresistible. It was bound to happen at some point, and that shifted trade patterns. And by the way, trade isn’t the biggest factor by far. It’s pretty clear it isn’t. Countries with huge trade surplus in manufacturers, like Germany, have also had large declines in the manufacturing labour force, not to such low levels.

But what we did do, and this is where we get to real policy mistakes, those are the natural things, is we didn’t cushion it. We didn’t help people. We basically abandoned them and we abandoned the places in which they lived. We didn’t think about what we needed to do in education and training, and industrial policy to make sure there are new jobs, decent jobs for the people who lost out. And so they get very angry, and they look to protectionism in one case, which I think will do little good to them. And I think the Trump experiment has shown that pretty clearly. It’s really done nothing. But there is clearly a rage raging.

Finally, I would add that there are things we did which clearly made some of it much worse. In particular, the liberalization we pursued, notably in finance, and the competition policies we followed increasingly allowed the creation of, I think, what I call a rentier capitalists class, which has become spectacularly rich and powerful, dominates all our corporations. And that has really created a plutocratic elite, which protects itself quite understandably. That’s what elites do. And one of the ways they try to protect themselves is to fund the populism we are now seeing.

SEAN SPEER: That’s a comprehensive answer, Martin. Thank you for that. If it’s okay, I’d like to stay on the subject of financialization for a moment. It looms large in the book, and of course, it’s something that you’ve written regularly about in your columns. We’re coming out of a sustained period of low-interest rates and cheap money. How does that fit into your story? Is it a cause or effect of our slow growth, poor productivity, and economic malaise?

MARTIN WOLF: Well, I tend to think, as is well known, it’s more an effect than a cause. This is very controversial, I know, among economists. And that really was the theme that I’ve come back to it a bit in this book of my previous book, The Shifts and the Shocks. Now there are two ways of thinking about this, and they are linked, so it’s difficult to separate them. First of all, there have been huge macroeconomic shocks worldwide. And to me, the best symptom of that, I can come to the cause, is the collapse in real interest rates worldwide since the mid-’90s. And the collapse is staggering. Basically from the peak to the trough, we actually have measures of index-linked or real interest rates on bonds for the U.K, and the real interest rate is declined from the peak to trough by eight percentage points, which is, as far as I can see, unprecedented. And I believe that’s largely due to the phenomena associated with the entry of China into the world’s economy and the collapse in investment, a lot of which is to do with the economic forces I talked about in aging in the high-income countries.

So there was a big shift worldwide in savings relative to investment. And that depressed real interest rates, that in turn naturally led to a rise in real asset prices, equity prices, also housing prices. And those were the phenomena we saw. Now, policymakers realized there was—because they could see it—these disinflationary forces hadn’t gone into the direct effect of Chinese, the China Price, as it’s called, the falling prices of China goods. Whoever found disinflationary forces in the world, directly and indirectly. And the policymakers naturally found that if they wanted to hit any positive inflation target, their monetary policy had to get looser and looser. 

And by the way, for decades, they couldn’t raise inflation at all. I’ve just written a piece today, actually, as we’re talking, on the Japan problem. And Japan is trying to deal with the consequences of these processes, which were extreme in their case, for about 30 years. And they’ve had 30 years of near-zero rates. And they still made me worried about how to get inflation up. This isn’t normal. So it’s pretty obvious there’s something structural going on in the world economy that has driven central banks into these low-interest rate policies.

Now, I think it is valid to argue, we could have possibly chosen other policy responses, but they were really ruled out. It would’ve meant almost certainly bigger fiscal deficits or more dramatic shifts in the income distribution. Because one of the reasons for the excess savings in the developed world, and there’s some very good literature on that, which I’ve written about, is simply the distribution of income from people who spend a lot to people who save a lot, which is to do in part with the financialization you address. So there are combination of factors that have tended to drive down real interest rates and force central banks to hyper-expansionary policy. And I think given what was going on, which central banks did not control, if they hadn’t done this, we’d all have become Japan or worse. So that doesn’t strike me as a very sensible solution. 

So I’ve always thought the people who argue for that were basically saying, we should have another great depression. And I think that’s pretty stupid. Quite a wrap, apart from the fact that it’s pretty immoral. So I’m not in favour of that. The problem is that, however, clearly a very deep one. I think then you’ll ask me, “Well, what’s going on now?” Well, my answer to what’s going on now, and we really can’t be sure, is I believe this will probably prove to be a blip—a big blip. That is to say, we’ve got higher inflation because they made some serious monetary policy and fiscal mistakes in 2020 and 2021. Perfectly understandable, given the enormous unprecedented shock. People make mistakes; that’s fine. We’re now correcting them. And then we’ve got a war. So we’ve had the massive inflationary shocks.

But my guess is we will find at the end of this that things have not changed so much, and we’re going to go back to a low inflation, low-interest rate world, and the central banks will be driven back down. Now, I could be wrong; there are intelligent people who argue that that period of 30-odd years, which I’m talking about, is now completely over. And if so, we’re going to have to operate policy in a different way. But the idea that somehow we could do something completely different which avoided the low-interest rates and the zombie companies and all the rest of it without just pitching us into a huge depression, I just don’t buy.

SEAN SPEER: Yeah, it’s just such a fascinating backdrop to your broader story. Thank you for sharing those insights, Martin.

Let me come back to politics for a minute before we end our conversation by discussing what we can do to stave off further threats to democratic capitalism. The book places a real emphasis on the January 6th riots at the U.S. capitol and Donald Trump’s absence from Joe Biden swearing in two weeks later. What do these events signify for you, and why are they so important for your story?

MARTIN WOLF: Well, I think that wonderful question, and I think unfortunately when I look at what’s going on now in the U.S., it seems to be getting worse all the time in terms of voter suppression, the spreading of the big lies about the election, and so on. So we make basically two points. Here, I think my view has changed a little, not fundamentally, but I think there’s something going on that is U.S.-specific. But then, as I point out in my book, the U.S. is simply so important for the history and future of democracy and democratic capitalism that it’s an exception that makes the rule. It doesn’t prove it, it makes it. So the basic logic of democracy—any sort of democracy—the most fundamental logic of democracy is pretty straightforward. You need fair elections which are in accordance with the rules which allow the people entitled to vote to vote and to vote freely. You need to allow both those in power and those who are not in power to campaign freely, again in accordance to the same rules. And you have to accept the outcome as agreed by the independent institutions; every democracy is established to oversee elections and ensure that they’re fair. This is democracy 101; this isn’t difficult stuff. You can then get lots of discussion about, “Well, how much freedom should a government have? What sort of constitution do you have?” There are lots of things, but that’s 101.

So Democracy 101 includes a very simple proposition that both sides accept the legitimacy of a legitimate outcome and recognize the legitimacy of the winner. It’s simple. And what happened in the U.S. in the last presidential election is that the losing candidate accepted neither. He didn’t accept the legitimacy of the outcome. In fact, he’s consistently denied it was legitimate. And he didn’t accept the legitimacy of his successor. And he showed that very clearly by not being there at the inauguration, which is in the U.S. an absolutely standard way of recognizing the legitimacy of the election and the legitimacy of the president. The president is dead; long live the president, so to speak. It’s not only that Trump violated this absolutely fundamental principle, but he has got his party’s representatives to align with him pretty well completely, particularly in the House of Representatives. He received no real censure from his party. He is still its most viable candidate for the next election. He got crucial media associated closely with the conservative cause and with this party, notably Fox, to support his lies, even though the people doing it, as we now know publicly, were perfectly aware that they were lies.

So we have, in my view, essentially a Goebbels-level campaign to undermine the legitimacy of the absolutely core practice of an institution of democracy, namely elections. And if or when Trump or someone similar becomes president, I do expect them to try and make their lie real by making sure that there won’t be any more fair elections, by which I mean elections that go against them, or by what they mean elections that go against them. Now, the thing that I have changed is I now realize even more fully than when I wrote this that what is going on here has also, and this has been going on obviously for 50, 60 years, the importation into the Republican party with the shift of the South from the Democrats to the Republicans from the ’70s onwards of the core political practice of the American South, which has always been voter suppression on ethnic lines. And that, of course, makes the cultural aspects of it stronger.

But again, I think it’s gone national because so many people are willing to listen to these lies because they’re so unhappy and so miserable, and they think Trump is their great protector. But to me, everything that’s happened, and I point, among other things, to the defenestration from the party of hyper-conservative people like Liz Cheney, whose crime was telling the truth. None of this is consistent with the survival of democracy in any form we could recognize it. If it is any democracy. It’s the democracy Alabama ran in the 1930s, and that’s not a democracy that anyone in the rest of the world would recognize as a democracy.

SEAN SPEER: That’s a sobering answer. Let’s turn our conversation to possible public policy solutions to address some of the underlying issues that are contributing to this legitimacy crisis in democratic capitalism.

The book cites the “hollowing out of the middle class” as a crucial determinant in the growing crisis that we’ve been talking about so far. The rise of so-called job polarization has witnessed the relative decline of mid-skill jobs in virtually every advanced economy. A lot of those jobs in Canada, similar to the United Kingdom, were in the manufacturing sector. Assuming we can’t restore those jobs, how do we create a new generation of middle-class employment? What are the policy tools to get us there?

MARTIN WOLF: I think this is an enormously difficult question, and I have probably too many words discussing all the different things that need to be done to make this possible. But to simplify, I have a section in which I suggest there are basically three things we can do, none of which are perfect solutions. First, we can create more good jobs by investing in them, and in particular investing in the technologies that are likely to generate new jobs and good new jobs. And we can see lots of pretty good new jobs have been raised. Second, we know most of those go to graduates. And I think, though it’s not a perfect solution, the policies of many governments, certainly including your own, have pursued in spreading investment educational opportunities and improving educational opportunities are central if we’re going to create more good jobs and more people from different classes who can enter those jobs. There are some really big problems in some countries in opening access to more people to good universities. There are clear signs of declining social mobility. I think this is pretty obvious in the U.S. which used to be the leader in the world in this respect 50 years ago but is now far from it. So education is crucial, and that combination might do us better in terms of generating good jobs. 

But the other thing is we can make the existing jobs better. And so, I’ve come to believe very strongly in much higher minimum wages. I’ve come to believe in things like good maternity leave, childcare, earned income tax credits, or similar wage subsidies to raise the incomes of people at the bottom. Support again for training—something my wife is very involved in Britain—not just for the universities, but to make sure that people who lose jobs—the Scandinavians have been very good at this—you really provide a lot of government support, public policy support, for retraining and re-education for people for the jobs that are available. Allowing people to go back to education, including university education, as they get older. It may be that somebody missed out when they were 18, maybe they can go when they’re 35. I think we have to—so the combination is really investing in good jobs and really investing in making existing jobs better.

I think we have some models, particularly in Scandinavia also Germany, where they’ve done pretty well. And I think this is the sort of model that we have to follow rather than make people feel that they’ve lost the only decent job they have had. Everything else is going to be a terrible, minimum-wage job. And that creates all the despair we see. So clearly declining life expectancy, which is happening also in the U.K. It’s very, very depressing. None of that, I think, is necessary.

SEAN SPEER: For those who favour a more globalized economy, what trade-offs do we have to accept to the current model of globalization? Do we need institutional reforms? Should modern trade agreements permit more scope for national governments in policy areas like intellectual property or procurement? How do we rebuild the settlement in favour of globalized exchange of people, goods, and capital?

MARTIN WOLF: Well, I feel that—I haven’t discussed this at length—the most difficult one in a way is capital, which we put the least focus on, and it links with the broad financialization problem. And I think we do need to think about the mobility of capital and how it operates, and how far is it actually operating for the general welfare. So I start with capital, which, by the way, is the least regulated, lease controlled, where the WTO is in no way involved, and of course this is a power thing.

Now, we talk about trade as basically trading goods. Trading services is limited. There are some areas of trading services, like online communication, which no one’s really going to be able to stop unless they are the Chinese government. And we’re not going to be the Chinese government. So there are some jobs that will be lost as a result. But I think in goods, we have a number of areas we can look up. Part of these are security issues regarding trade with China. Part of them is about supply chains. We know about that. It’s pretty, pretty straightforward. And I think intellectual property is a big issue, but it cuts both ways. If we want to preserve our intellectual property, I think it’s very important that we don’t take the position that we’ll never allow anybody else in the world to use our intellectual property. Because part of the opportunities in the world as a whole, including for ourselves, has always depended on other people being able to exploit ideas. Ideas are, in some sense, public goods; trying to wall them off imposes very, very real costs. I think we need proper adjustment assistance.

I think there are some areas where we just never going to—it’s probably too late now, but we’re never going to get people in the West to go back to working in sweatshops, for God’s sake. Or at least, I hope not. It would be ridiculous to compete with women in Bangladesh. I mean, that’s just absurd. So we need to give people, as I say, training adjustment assistance, and so forth, so they move into more skilled jobs in which we actually have a comparative advantage. And that will continue to develop and evolve. There’s nothing we—I don’t feel that anything in the last 200 years suggests we can stop that process. So adaptation and adjustment is essential in the area of trade, but we have to preserve our security and we have to make sure that the capital markets don’t run amuck in all sorts of ways.

SEAN SPEER: A penultimate question: How do we get our economy growing faster? Is there something predetermined about our current experience with secular stagnation? Or can we reasonably expect higher rates of economic growth?

MARTIN WOLF: I have also discussed that at very great length. And the answer is I think we don’t fully understand what’s happening. It’s been a bit of a puzzle. It’s not just to do with interest rates; it’s pretty clearly been there now for decades, except the brief blip upwards in the ’90s associated with the development of the internet.

I think as far as secular stagnation, which I consider predominantly a demand phenomenon, we can do a lot by promoting more investment. And there’s an obvious area for the world to promote investment, which is in the green transition. So we could do a lot more investment, generate a lot of demand. And increasingly, a lot of it—not all—looks as though it’s going to be quite competitive. It may even lower the price of energy for many countries. Less true for Canada, obviously, but Canada’s pretty unique. It’s a rich energy-producing country. So I think there’s a real opportunity there.

The big problem I feel is, and I’m one of the pessimists here, and I may be of course wrong, but there’s a very famous book, I think a wonderful book written by Bob Gordon, American economist, a few years ago on the rise and fall of American growth. Or maybe it’s the rise and decline; I can’t remember exactly. But his basic idea is in the end, how fast growth is depends on the opportunities we have for improving the productivity of what we do.

And the crucial point he made is that between 1880 and about 1960, we revolutionized everything. There was no area of the economy where there weren’t fundamental transformations. And in the last 60, 70 years, most of the transformations have been associated with IT. And IT is important, but actually it’s not that important. There’s so much of the economy that isn’t, at least so far, affected by it. Now, maybe IT will be the transformative wonder, and then productivity will explode, but it will also clearly create gigantic adjustment problems for humanity. But that is the only thing I can see, apart from possibly the green transition, which will be completely transformative.

But what makes it so difficult to raise productivity, in my view, is a very simple proposition, apart from the lack of across-the-board revolutionary change. And I’ve got a whole slew of ideas on that, which we can’t go to. 

The basic point is anything we could generate massive productivity improvements in, like agriculture and like manufacturing, we don’t employ many people anymore because that’s the revolutionary transformation. We can produce all the goods we need with about 12 or 13 percent of the labour force. Extraordinary idea. Now, well, once you’ve got down to say 15 percent, let’s be generous, 15, maybe even 20 percent of the labour force, it doesn’t matter how fast productivity growth in those sectors are, it doesn’t change aggregate productivity very much.

But the other areas where productivity growth is very low, like restaurants and education and health and household services and personal services, and looking after old people, and looking after young children, we find really hard to raise productivity. The number of adults you need to look after children under five has not been changed by technology. 

 And you may believe that robots will do it all, but I must say I don’t expect it. But this is important. In America now the health sector is almost double the size of the manufacturing sector. So raising productivity in health turns out to be really, really, really hard to do. And we’re not making much progress in it. So I think one of the reason productivity growth is so slow is we are the victim of our own success.

I’m not the only person who’s argued that. I’ll cite a very interesting book on that very subject. Essentially, we’ve done the easy stuff. This is also Tyler Cowen’s argument in one of his books. We’ve got the lower-hanging fruit. We have revolutionized what was easy to revolutionize, and what’s left is stuff where it’s really difficult to transform, fundamentally, our productivity. Cooking food is still basically a hopelessly labour-intensive event. Maybe we can make some of it by machine, yes. And there are robots, but it’s much more difficult than running a Ford Motor plant or Foxconn, which is why those little goods get cheaper and cheaper all the time and more productive all the time. And they matter less and less in the total GDP. 

SEAN SPEER: You’ve been so generous with your time, Martin. Let me just put a final question to you. At this point, are you optimistic or pessimistic that we’ll ultimately overcome the crisis in your book’s title?

MARTIN WOLF: I go up and down. Right now, it’s 50/50. And not better than 50/50. I was very pleased, though I hated the reason, that there was some unity of the Western powers in the case of the Russian invasion of Ukraine. We saw that, rightly, as a fundamental violation of core principles. I was pleased that Joe Biden won the election, that he’s president, and that Trump lost. I was pleased by the midterms. I’m pleased that British politics is returning to normality, and that most of the right-wing populists in Europe look like they’re becoming normalized; they’re behaving like normal people, most of them, and their societies are becoming more resistant to this.

But I’m still very, very disturbed by the direction of the Republican Party and the likely candidacy of Donald Trump. I’m very, very concerned by the spread of liberal democracy or just outright autocracy in much of the developing world and concerned by what’s happening in India. It’s a very important country. Turkey, Brazil, it’s a temporary hiatus maybe. China and Russia are increasingly self-confident and increasingly assertive. 

So I would have to say that we would have, at least from my perspective that you’re asking, will democracy, liberal democracy—which I believe in passionately has incomparably the least bad system humanities discovered, and the one that people mostly love. People don’t migrate to China; they migrate from it. It’s pretty obvious, but I would say there’s a real treason from my point of view going on. There are rich, powerful people who are supporting the suborning of democracy and its replacement with outright plutocracy or dictatorship. And we have to be realistic and recognize that 40 years ago, 30 years ago for sure, I would never have imagined this in full but it seems to be realistic—we’re in a battle. We’re in a huge battle. And some of the battle is in the most important country in the world, from our point of view, the United States, your southern neighbour. So I’m alarmed, but the battle goes on.

SEAN SPEER: Well, if listeners want to understand the causes of that battle and ultimately how to win it, I’d strongly recommend they read The Crisis of Democratic Capitalism. Martin Wolf, thank you so much for joining us at Hub Dialogues.

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