Alert to capitalism’s crises: the FT’s chief economics commentator Martin Wolf. Photography for Prospect by Sarah Lee

When markets fail, according to Martin Wolf

Martin Wolf is the doyen of economic commentators. Having spent a career marvelling at the wonder of free markets, he now worries their excesses could lead to an unravelling of democracy itself
January 25, 2023

“The great thing that democracy and the market have in common is feedback,” Martin Wolf tells me. “You can’t sell your product, you go out of business; you can’t persuade voters, you go.” At one level, the economics oracle is doing what he always did, and arguing that the broadly liberal way of running things is best.

But as Wolf—the Financial Times commentator once hailed by former US Treasury secretary Larry Summers as “the world’s pre-eminent financial journalist”—publishes what he’s promised his wife will be his last book, there is no mistaking a new intensity. The liberal promise is not just feedback, he tells me, “it’s feedback without death… a spectacular social invention. For most of history, a change of regime meant mass murder. So this is an incredibly great achievement”. It is also a fragile one.

The Crisis of Democratic Capitalism is a work of sweeping intellectual confidence. It soars up to offer a (literally) Olympian view of political economy since ancient Athens, and dives down to interrogate wonky ideas for tweaking the contemporary model, from risk-pooling pensions (which get a thumbs-up) to a universal basic income (thumbs-down), citizens’ juries (thumbs-up) and “central bank digital money” (potential thumbs-up). This confident book’s motivation, however, is nervousness—even fear.

After decades of commenting on the vast impersonal forces of globalisation, Wolf opens with a revealing roam into autobiography. His own twig on the family tree grew from a branch almost entirely destroyed by the Holocaust. “Roughly 40 or 50 of my parents’ cousins, uncles and aunties were slaughtered, and—I promise you—I was aware of that throughout my childhood,” he says. Only relatives who saw the trouble coming and fled were spared from the “the collapse of Europe’s civilised order”.

Wolf’s anxiety about where the 21st century’s civilised order might be heading began with the election of Donald Trump. He was ribbed by American friends when he wrote early in 2016 that the playboy pretender could win, but the column on “how great republics meet their end” looked ever-shrewder amid the election denialism and ­Capitol-storming of 2020–21. While many of us were reassured by the shambolic failure of the Trumpians at that moment, Wolf remains fixated on how close they came—and the stubborn failure of the Republican party to disown the ousted president’s mendacious account of his downfall: “There is a German word for a political organisation in which the duty of members is loyalty to a leader who alone can determine what is true,” he says. “It is Führerprinzip.”

It isn’t that Wolf can hear the jackboots just yet—it is rather that he sees a sweeping away of the old safeguards. “How can a democracy survive,” he asks, “if all these people think lying doesn’t matter? Democracy, after all, is a moral system resting on moral values. We must consider ourselves as equal citizens, we govern through debate, we are peaceful in our political relations and we argue honestly. With these values gone, what is left but violence?”

This emotional question at the heart of Wolf’s book is accompanied by an intellectual revelation about the sheer contingency—even unlikeliness—of the ground rules of governance that the luckier parts of the world take for granted. Elaborating in person, Wolf explains that, in liberal democracies, “you’re trying to separate power and wealth, and separating power and wealth is not normal.” Attempts at early democratic government in ancient Athens and Rome are so interesting precisely because they stand out. “The normal way to structure the economy and politics has been for power to marry wealth, and wealth power… Absolute monarchs ultimately owned everything, and—being the richest and most powerful—they did what they liked, more or less.”

In wrestling with all this, the man known for commentating on the latest IMF reports in his paper’s pink pages has gone back to the very beginning, grappling with how agrarian property hierarchies first emerged from among the gatherer tribes of the forest. In this at least I’m reminded of Thomas Piketty, with his 2020 socialist doorstopper Capital and Ideology, and indeed Marx himself.

Wolf, of course, is anything but a socialist. He is still a high priest of free trade between nations, who hails the “market-driven transformation” of many developing economies and the creativity of commercial competition. He uses a brusque half-page in his book to assert that, without private property, the state and its agents will “control all economically valuable resources”, strangle the free media and set a country on a slide towards the Venezuela of Nicolás Maduro.

Interestingly, though, this is a point that is registered rather than developed. Where Wolf used to defend the technocratic centre by aiming towards an anti-market left, his real energy now is consumed with protecting the political centre ground from that weird hybrid—the plutocratic/populist right. The US Republican Party is, he writes, “dedicated to the material interests of the top 0.1 per cent”, which can survive in a system of universal suffrage only by reinventing itself as “an antidemocratic cult”. And while Wolf airs interesting thoughts on the symbiotic evolution of market capitalism and liberal democracy, stressing that both reject ascribed hereditary status, he seems most seized by the danger that the each-pound-is-equal logic of the market could overwhelm the every-vote-is-equal values of democracy.

The market must earn its place in the polity it is embedded within

There are clearly many other pressures on the system besides inequality. Wolf buys the American economist Robert Gordon’s assessment that the technological breakthroughs and associated rapid growth of the late industrial age were unique. That implies future productivity gains will be lacklustre, undermining the scope for a politics that can make everyone better off and exacerbating democratic ­disillusion. He frets about how the world will manage climate migration, and also nurses more specialist worries. Wild, and sometimes perverse, flows of capital have already “culminated in a huge financial crisis”. The continuing lack of coordination between the world’s great savers (Germany and East Asia) and its (largely Anglophone) splurgers could spell further trouble.

But inequality aggravates such economic perils—witness the destabilising debts held by virtually every part of the American economy other than the richest households. The deeper problem is traced back to Aristotle’s warning, quoted in the book, that when “a superabundance of good fortune” sits alongside great deficiencies, “the result is a state not of free men but of slaves and masters, the former full of envy, the latter of contempt.” A state incapable of “partnership”.

Wolf does not disguise that he has been on a journey. His book opens: “My opinions have altered as the world has unfolded”. He is especially conscious of how the 1997 Asian crisis and the 2007–08 crash darkened his view of finance. It turned out that the money men were not efficiently parcelling-up risks, but instead playing pass the parcel-bomb. Rigorous and far-reaching regulation became an imperative. As Wolf’s estimation of the bankers has lowered, his take on the trade unions has mellowed: they “were really important social institutions”, he tells me, something “I didn’t used to think”. Their collapse and the resulting “atomisation of the working class” is “a disaster”.

While there is something in Wolf’s caveated manner (the unions need to be “sensible” like those in Germany) that can leave you missing the distance he’s travelled, his writing is another matter. The new book, like the famous FT columns, punctuates dry propositions resembling a High Court judgment with the odd tabloid punch. The Trumpian approach to trade policy, for example, is “idiotic”: “it cannot work.”

It is the evolution of these jabs that is most revealing, as I found when looking back to a few articles for this magazine in its early days. In 2001, he damned as “infantile lefitism” a book by the campaigning economist Noreena Hertz, who railed against the “corporate pressure” that was redefining the public realm and risked ­“shattering the implicit contract between state and citizen that lies at the heart of a democratic society”. Today Wolf tells me: “I am particularly critical of the role of the corporation in making the law, so an important part of what I’ve been recommending… is separating politics from corporate power. That’s very important if we’re going to have a democracy”.

He was equally dismissive of the leftist Naomi Klein’s attack on neoliberalism in 2003, calling the very concept “a neo-Marxist phantom”. But he now writes about a generalised, four-decade “move to the market” that has also “been a move to shift risks onto ordinary people from employers and government.” “Neoliberal” is still not one of Wolf’s words, but this is a pretty good definition of it. He elegantly captures the warping effects of the “public bad, private good” doctrine: “if government is treated with contempt, it is rather likely to become contemptible. The more the functions of the state are commercialised, the more difficult preservation of a public service ethos becomes”.

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Dark times: the 2007–08 crash altered Wolf’s view of finance. © BEN STANSALL/AFP via Getty Images

Third, in a 2002 debate with development expert Robert Wade, Wolf wrote that growth was “almost inevitably uneven”, and that to regret the resulting inequality was “to regret the growth itself”. Today, Wolf stands by the view that open trade has reduced absolute poverty, but his whole tone is different. His book carefully documents the great growth grab by the global and the American top 1 per cent, who have been capturing, respectively, more than a quarter and more than half of all the gains in pre-tax incomes. He now judges that this matters “a great deal”: the lopsided progress we have seen means that “GDP growth itself tells us little about changes in the welfare of the population”. He reports that inequality has a “sizeable and statistically significant negative impact on growth”: “unevenness” is actually impeding prosperity.

Most profoundly, he now fears that the “huge increase in the inequality of people’s condition… erodes the ability of the mass of citizens to feel part of a shared political project”. In the US, at least, “democracy is for sale”.

Wolf is worth tracking because he has been ahead of elite opinion before. Sounding older even than his 76 years, he tells me how he started out as a “Gaitskellite” (the centrist Labour leader, Hugh Gaitskell, died in 1963), moved towards being a free-marketeer, before shifting some way back again. As a twentysomething in the early 1970s, when most of his contemporaries would have thought a creaking postwar settlement was due a serious shove to the left, Wolf instead became seized by dark visions of state control.

He tells me that in his first job, at the World Bank in Washington, he was horrified by the sort of printing-press monetary regime and drawbridge trade policies then exemplified by Argentina. When he looked to Britain, “the nature of the class war that was going on, and the disruption of the profits—which basically ended up at zero” made him think “we were in the process of destroying ourselves in the same way”. He read the free-market thinker Friedrich Hayek and “concluded we had to restore a more functioning market as part of a functional order.” From independent central banks to tighter union laws, such analysis would, for better or worse, soon inform what happened.

While Wolf still admires much in Hayek—the great merit of markets in “coordinating without a plan”, the imperative of “an economic sphere which enjoys independence from the political sphere”—his overriding emphasis is now on “balance”. The market must earn its place in the polity it is embedded within. “The Hayekian attempt to abolish politics as a human activity”, he reflects, “I now think that’s complete nonsense. I used to believe that 30 or 40 years ago. I find it rather embarrassing now.”

We cannot recreate a vanished industrial past, but we can and must go back to first principles as regards the rights, responsibilities and risks faced by different elements of society. “The ‘Third Way’ people”, like Bill Clinton and Tony Blair, “were perfectly sensible, and sort of trying to do that, they just didn’t realise how much more radical they needed to be.” A real rebalancing would involve asking for more accountability from corporate insiders, and building stronger shelters for those most exposed to life’s vicissitudes. That may require extra revenue, but this can be raised without harm—especially if distortionary loopholes for the wealthy are closed.

Wolf would always have accepted that closing these loopholes is efficient. Today, he sees such action as essential to salvaging shared citizenship. And that, his book concludes, is the only thing we have to ensure that the light of freedom will not “once again disappear from the world”.

Martin Wolf’s “The Crisis of Democratic Capitalism” (Allen Lane) is out in February