Democracy and Prosperity: Reinventing Capitalism through a Turbulent Century

by Torben Iversen, David Soskice

A groundbreaking new historical analysis of how global capitalism and advanced democracies mutually support each other

It is a widespread view that democracy and the advanced nation-state are in crisis, weakened by globalization and undermined by global capitalism, in turn explaining rising inequality and mounting populism. This book, written by two of the world's leading political economists, argues this view is wrong: advanced democracies are resilient, and their enduring historical relationship with capitalism has been mutually beneficial.

For all the chaos and upheaval over the past century--major wars, economic crises, massive social change, and technological revolutions--Torben Iversen and David Soskice show how democratic states continuously reinvent their economies through massive public investment in research and education, by imposing competitive product markets and cooperation in the workplace, and by securing macroeconomic discipline as the preconditions for innovation and the promotion of the advanced sectors of the economy. Critically, this investment has generated vast numbers of well-paying jobs for the middle classes and their children, focusing the aims of aspirational families, and in turn providing electoral support for parties. Gains at the top have also been shared with the middle (though not the bottom) through a large welfare state.

Contrary to the prevailing wisdom on globalization, advanced capitalism is neither footloose nor unconstrained: it thrives under democracy precisely because it cannot subvert it. Populism, inequality, and poverty are indeed great scourges of our time, but these are failures of democracy and must be solved by democracy.

Genres: Politics, Economics, Nonfiction, History

360 pages, Hardcover

Published February 5, 2019

Reviews

[Justpassingby]

At a superficial level this book is the right-wing optimist answer to the left-wing pessimist Capital in the Twenty-First Century by Thomas Piketty.

Iversen and Soskice argue that the increasing inequality of incomes and of capital assets does not pose a threat to democracy, as the different social strata do vote, at a certain level, in their own material interest.

They start by pointing out a dichotomy among the political systems that we usually identify as traditional capitalist democracies aka The West. One the one side are countries with majority voting systems such as the United States, Canada, the United Kingdom and to a certain extent France (as far as the important presidential elections go); on the other side are countries with proportional representation: basically all the others including Belgium. They claim that this distinction followed naturally from the extent to which cooperation between estates was rooted in the history of each country (although this does not explain how Belgium and other countries passed from majority vote to proportional representation at the end of the 19th century). The dichotomy does not change the conclusion of their analyses but it does influence the argument along the way, especially because populism takes different shapes in the two types of voting system.

Then they analyse the golden age of low inequality, roughly between 1920 and 1980, that Piketty also highlighted. According to Iversen and Soskice this low inequality was not brought about by wars and the demographic explosion, but by the nature of the industrial economy called "Fordism". Fordism was the economic system that revolved around large industrial companies (such as the Ford Motor Co.) where trade unions were not only tolerated but even encouraged by the capitalists, since stable employment and buying power of the semi-skilled workers was in the interest of everybody involved.

The knowledge economy, symbolized and triggered by the rise of electronic computing, changed the relationship. Skilled and semi-skilled workers are no longer in the same boat, and the skilled or professional elite no longer perceives an interest in collectively negotiated wages for the semi-skilled. The former are critical to the success of a knowledge-based company, while the residue of semi-skilled and unskilled workers are reduced to a disposable commodity, which results in larger income inequality.

Thatcherism and Reaganomics, the authors argue, were not the ultimate cause of liberalization, globalization and increased inequality that started in the 1980s. The British conservatives, the Republican Party and similar right-wing governments in other democracies acted in their own electoral interest because a majority of their constituencies stood to benefit directly from their policies, or perceived opportunities through which their children would have a better life (aspirational voters), or supported the knowledge economy on general altruistic principles. The knowledge economy requires free flows of capital (accompanied by a credible macro-economic policy including controlled inflation), flexible immigration laws and general tolerance towards different lifestyles.

It has been argued that the knowledge economy will lead to a downward spiral ("race to the bottom") because knowledge-based companies can relocate more easily than industrial plants; not true, says this book, because production is rooted in a large body of tacit knowledge that can only be preserved by human networks in close daily contact - a colocation stimulus reinforced by the job security offered by clusters of similar companies, the need to look for sexual partners among one's own educated class as well as the desire to consume luxury goods and services. This is the new urban elite that yuppified formerly derelict city centres and reversed the de-urbanization trend. This movement creates a sharp and painfully visible distinction between sophisticated smart cities (often but not always university towns) and left-behind areas (old industrial towns and rural areas).

The older semi-skilled lower middle class, left behind by this revolution, turns to populist political parties that stand for tight immigration controls, social conformity ("protecting family values"), lower taxes (except for the "very rich", i.e., successful professionals) and the reduction of social benefits (mainly targeted at the proletariat anyway). This is not as irrational as it seems: these voters want to align economically with the elite and distinguish themselves from the native and immigrant proletariat. To the binary class struggle of the socialists, the authors oppose a new, ternary game where the middle layer exercises its democratic power to ensure that the inevitably growing income gap leaves them at the upper end.

Iversen and Soskice demonstrate that populism is strongly correlated to the stratifying effects of national education systems: the more difficult it is to elevate oneself socially through study, the more rapidly voters turn to populist candidates. Somewhat problematically in my opinion, they translate this correlation into causation. Their remedy for populism, therefore, is educational reform; in particular, a high-quality system of vocational training as well as easy access to academic degrees. Populism, a problem of democracy, will be solved by democratic means.

The argument is less transparent than Piketty's, despite the appearance of being data-driven, and I am not sure if I am buying all of it. Not a few elections have been lost by politicians who counted on the common sense of the people, and the authors do not even attempt to address the very real problem that elections can be bought - which was the greatest worry of Piketty's, anyway. Which is not to say that educational reform towards more vertical mobility is a bad idea; only for different reasons.

I do believe that there is a rational justification for certain forms of populism that the traditional (elite-owned) press have tried to write off as irrational. That is actually the most valuable lesson from this book: economic issues in politics can no longer be described on a linear left-right scale since the appearance of a third player, namely the lower middle class who were left behind by the rise of the knowledge economy.

[Andrew Norton · Rating 4 out of 5]

Theorists of the left and the right argue that there are tensions if not contradictions between democracy and capitalism. Left-wing theorists argue that business has undemocratic power, buying influence through political donations and altering policy by threatening to invest elsewhere. Right-wing theorists argue that democratic majorities vote for taxes and regulations that weaken incentives and undermine the efficiency of capitalist enterprises.

Judged by the normative standards of these theorists, these critiques have something to them. But judged by some other standard, such as elected governments maintaining capitalist economic systems with widespread high living standards over long periods of time, the ‘advanced capitalist democracies’ discussed in Democracy and prosperity: reinventing capitalism through a turbulent century, look very successful compared to other political and economic combinations.

One contention of the book’s authors, Torben Iversen and David Soskice, is that a symbiotic relationship between democracy and capitalism contributes to the success of these countries. Although business and rich people may, at least initially, resist the increased taxes that democracies impose for social policy programs, often in the long run these programs contribute to economic success.

For example, education is electorally popular and provides business with the highly-skilled workforces they need. Government unemployment, health, and retirement programs reduce workers’ uncertainty about their future welfare, reducing short-termist behaviour and industrial conflict. Workers are less dependent on their employers.

In turn, key constituencies in advanced capitalist democracies depend on a successful economy for their own jobs and the tax revenues that support social programs. They support political parties that competently deliver economic growth, limiting the political potential of parties that would damage the capitalist economy. The rejection of Jeremy Corbyn’s Labour in Britain is an example.

I would add that both capitalism and democracy have mechanisms to change policies and to peacefully replace failed leaders. So although at times capitalism and democracy under-perform relative to the past and expectations, and that is true in many Western countries today, each has significant powers of self-correction. In most Anglophone countries since the 19th century, and in most Western European countries since the late 1940s, this symbiosis has, despite periodic crises, proved to be remarkably resilient.

The authors are scholars of the varieties of capitalism. They are not saying that there is any one formula for successfully combining capitalism and democracy. Some of the most interesting parts of the book discuss the institutional differences between countries, especially between the Anglophone ‘liberal market economies’ and the ‘coordinated market economies’, including Germany and other continental European variants.

Each system has interlinking and complementary political and economic institutions. For example, countries which make greater use of coordination between unions, businesses and employer associations tend to also use proportional representation voting systems. These allow a wider range of interests and social groups to be directly represented in parliaments than the two-party systems that dominate the liberal market economies.

The book argues that different economic structures affect education systems. In Germany, industry-level wage bargaining reduces competition for labour between firms, and long-term investors reduce the need to maintain the short-term profitability that impresses financial markets. These firms are slow to lay off workers during cyclical business downturns. German firms are willing to invest in training as workers are likely to stay long-term. In turn, greater job security makes workers more willing to invest in firm-specific human capital.

By contrast, the more fluid labour markets of liberal market economies make firms less willing to invest in staff training. That won’t pay off if staff leave; it may benefit their competitors instead. This is one reason why education in Australia and other liberal market economies has much higher rates of private finance than in Europe. Students and workers in liberal market economies, for their part, invest in more general skills that they could use in a variety of jobs with a range of employers.

Although every version of capitalism evolves over time – I’ve read elsewhere that Germany has moved more in the liberal market economy direction this century – Iversen and Soskice dispute the proposition that globalisation necessarily leads to convergence. There is a left-wing fear, and a libertarian hope, that globalisation creates a dynamic of lower taxes and less regulation to attract footloose capital.

While capital flows more quickly and easily across international borders than it once did, the book argues that critical capitalist business activities are deeply embedded in physical places. They need to draw on the complex clusters of skills found in big cities. These in turn rely heavily on personal connections within firms and with local suppliers and customers. It is hard to replicate these in other locations. This is one reason why European countries can preserve their high-tax welfare states in a more globalised world economy.

Unlike many academic works – the authors are at Harvard and the LSE respectively – this book mentions ‘neoliberalism’ only briefly and dismissively. Although political and economic changes often represent ‘ideational’ shifts, this in the authors’ view does not mean that they have primarily ideological origins.

At one level, I think this is right. Despite the famous story of Margaret Thatcher pulling Hayek’s The Constitution of Liberty out of her handbag and declaring ‘this is what we believe’, her government like others in Western democracies was pragmatically looking for solutions to economic and political problems within the constraints of their historical social, political and economic beliefs and arrangements.

The market ideas later described as ‘neoliberalism’ had significant influence from the 1980s to the global financial crisis because they were seen as potential solutions to specific widely-acknowledged problems, not because the political class had converted to classical liberalism or neoclassical economics. Much of the academic critique of ‘neoliberalism’ has an ideas nobody believes causing things that never happened quality to it.

But I would still attribute more agency to ideas than Iverson and Soskice. The plausibility of ideas in people’s minds relates closely to their social, economic and political circumstances, but any one situation almost always has multiple possible interpretations and any problem has more than one potential solution. Ideas and intellectuals can influence which of these interpretations and solutions seem most plausible and attractive, and so change the dynamics of debate and policy.

Socialist ideas are enjoying a revival because pre-existing theories held by a small core of adherents could be quickly mobilised when the time seemed right. Economic problems have undermined the credibility of the previous market era and created a constituency that believes it could benefit from political change. Socialists may not end up in office in any liberal market economy – as of late 2019 a less anti-capitalist populist response looks like the more powerful political reaction to current difficulties – but they have already come closer to power than anyone thought likely 15 years ago, and arguably helped shift policy in the ‘big government’ direction.

Although ideas can be powerful, books like Democracy and Prosperity, with their careful attention to institutions and how they relate to each other, are reminders that the ideas underlying these institutions never perfectly match the models of economics textbooks or the principles of political philosophy. While theorists might think that democracy and capitalism or a welfare state and capitalism don’t go together, in practice these pairs are successful and enduring combinations.

[Sagheer Afzal · Rating 2 out of 5]

I purchased this book on a whim after having read a review of it in the Economist and it was toss up between this book and '21 THINGS YOU DID NOT KNOW ABOUT CAPITALISM'. Now having read it, I feel that I did not get my money's worth.

The authors central argument is that democracy as experienced by advanced capitalist democracies such as America, Britain, France, Germany etc are enjoying a symbiotic relationship with prosperity. The problem is that throughout the book the authors seem to conflate notions such as social corporatism and liberalism with capitalism. I'm not so sure that capitalism as understood by people today encompasses all these concepts.

Having read this book you are not really sure whether or not capitalism is rigged in favour of the elites in society but you are left in no doubt that the authors believe that is a good thing. Their arguments roughly follow this pattern.

1) Democracy gives more people rights -> 2) They can choose a better life for themselves -> 3) They want to jump in on the knowledge economy which can only be utilised by those with education -> 4) so the corollary is greater education which will lead to greater prosperity.

Nothing to disagree with there. But then how do you address the problem of the rising inequality in these advanced capitalist countries. Especially in America, the rising homelessness in the big cities, the soaring number of illiterate children leaving state schools? Or the excessive land-use restrictions that keep housing prices high and make it more difficult for more people to move to areas with better jobs, schools and amenities?

Should not the tide of capitalism lift all boats? As opposed to those with greater education and more fortunate geography?

The authors make what I felt to be a bold statement. They purport that advanced capitalist democracies are loth to redistribute their wealth to the poor, the people at the lowest rung of society? And this raises an important question. Should democracy be committed to redistribution?
The answer is a resounding yes.

So what then has gone wrong?

The authors spent perhaps too long analysing the effects of Fordism, how it was responsible for lifting millions of blacks out of poverty, how its decline led to the social deprivation of millions. As an aside, they look at Britain and France.

In the case of Britain, the analysis of the authors was a little flawed. I grew up in the Thatcher era, and it is true that one of the great achievements of Thatcher was to break the power of the unions. Thatcher embodied all that people love and loath about capitalism.

The unions had brought down the government of her predecessor Ted Heath. People like my father can testify that Britain was in decline. Piles of rubbish littered on the streets, a populist racist organisation called the National Front was thousands strong.

By breaking the power of the unions and allowing the central bank to set the growth rate of the money supply, Thatcher really did lift the country. Her policies enabled wealth creation by empowering educational institutions and freeing markets from government regulation which in turn led to increased competition.

This allowed for upward social mobility as the Asians of my fathers generation can testify. There did seem to be a ladder that had been created by capitalism. A working class person could and did have children that did well at school got a good job and lived in a better larger house than his father.

The authors correctly state the middle class is the best yardstick by which to measure the success of capitalism. They also agree with the media pundits on CNN, who attribute the success of Trump to the way he reached out to those on the rust-belt, the people in declining manufacturing jobs who had little formal education and as such were swayed by all his populist rhetoric.

But what the authors failed to explain how the 30 million uneducated people in America were able to overpower the sentiments of the 131 million educated people in America? (Ricky Philips and Mina Roller, if you are reading this I would be interested to know your views)

And this raises a fundamental argument about capitalism. Should capitalism sustain a parallel welfare state? Those uneducated, unintelligent folk who do not have it in them to rise up the ladder? Should these people be able to enjoy the largess of the affluent folk?

Should a democratic country provide for their welfare like a father supporting a less-able child? The answer as witnessed in a lot of capitalist democracies is no. This reality weakens the fundamental argument made by the authors. Yes, capitalism thrives within the environs of a democratic country but you could equally argue that capitalism could thrive just as well in an undemocratic country like China.

The authors seem to think that a country can have a globally integrated economy, a strong nation state and democratic policies all at the same time. I don't see how this argument can be justified.

A country can choose integration and democracy, but give up the nation-state and disappear into supranational government. (As seen with Brexit) Or it can choose the nation-state and democracy by embracing impoverished self-sufficiency as witnessed by the examples of Italy and Greece.

Curiously, on the final page of the book my home town of Peterborough in mentioned. The authors state that:

'The US Knowledge Economy has been driven by the major cities such as California, New York and Massachusetts. They all got increasing political autonomy and strongly support the flourishing of the knowledge economy. A similar constitutional push is taking place in the UK where the government has created urban regions such as Peterborough and Cambridge with directly elected mayors with decision-making powers over a wide area of policies'

I don't know about the resident of California and New York but as a resident of Peterborough I can most definitely say the mayor has not done anything noticeable in terms of policies. A local newspaper has ranked Peterborough as one of the most deprived constituencies in England.

Which makes you wonder if the authors really did their homework?

[Karl-O]

The Economist | Votes of confidence https://www.economist.com/node/217652...

[Marc Sabatier · Rating 5 out of 5]

One of the best books I've read in Political Science, period. What impressed me was 1) the contrarian nature of the main argument, 2) the amount of original supporting arguments, 3) the thoroughness of the argument. It was no wonder that the authors had to recap the main argument often, due to the terrain that each chapter covered, where each recap showed how the argument was expanded and strenghthened.

Often, one can read a social science non-fiction book fairly quickly (examples: Oded Galor's book on growth, Quick Fix by Jesse Singal, Behave by Sapolsky etc.), because most examples are pretty generic and simple. This is not the case here. Rather, the reader is presented to a constant argument, that challenges itself to explain how fits to the real world - and it does so persuasively. The reader the learns a lot.

One point of critique would be the the chapter on populism. I agree with the authors that populism overall doesn't challenge the fundamental symbiosis between advanced capitalism and democracy. But I believe the authors 1) underrate culture, 2) measure/define "populism" in an interesting way.

1) Yes, we can see populism as an economic phenomenon, but the language of populism and the anti-woke movement (and vice versa, the woke movement) is remarkably similar and it's hard to surpres that some culture war is going on. The authors remark that populist leaders (i.e. Trump) don't actually policies that benefit their constituents. Yes, that is weird from the political economy view, but thinking about culture wars - and to make it academic, Fukuyama's emphasis on recognition - then it makes a lot of sense. Trump and others make people feel recognized in a world where elites scorn their very existence. Of course, we can then say income signals recognition, and the whole thing falls together, but I would rate culture higher than Soskice and Iversen (S&I).

2) S&I focus on "populist sentiments" and the degree of populists politics, rather than focussing on populist parties. This makes sense, and the analysis is on the electorate, but even though it is only a minority of the populace that have "true" populist sentiments, populist parties/candidates can still have a big effect. In Denmark, the way the right has been able to create a majority has been strongly driven by the populist party taking votes from the center-left party. As a reaction, the center-left (social democrats) have largely adopted immigration policy from the populist party, and to some extent, its cultural position, which has greatly weakened the populist party. Is populism strong or weak in Denmark? Well, perhaps few hold true "populist" sentiments, but the populist party has changed a lot of parties and changed what politicians are able to say. Perhaps that's just politics, but I believe that populism interacts with the whole system, and is not merely representing a small part of the electorate that is politically negligible (I'm harsh here, and there's a lot of nuance in the book, so do read).

[Maxim · Rating 4 out of 5]

The book makes a strong, and indeed largely convincing, case that is at odds with a lot of (mainly left-leaning) social science: that democracy and “advanced capitalism” are not antagonists but symbiotic and mutually reinforcing.

Iversen/Soskice show how liberal (US/UK) and co-ordinated (Continental Europe) market economies have evolved from pre-existing economic structures and also begat specific political systems: majoritan or proportional representation. In both systems it was in the interest of the electorate to advance capitalism, with a stronger social element in the co-ordinated market economies. Contrary to many claims of the subservience of politics under capital interests Iversen/Soskice make the case that strong market competition and thus lack of co-ordination undermines such influence and the geographical embeddedness of large (knowledge-based) companies prevents them from effectively threatening to leave to push through their policy preferences. In other words: knowledge based multinationals are decidedly _not_ footloose.

The book explains the rise of populism through the economic stagnation of an “old middleclass” of semi-skilled (mainly white and male) workers who were not (other than a majority of citizens) able to profit from the rise of knowledge-based capitalism, but instead where confronted with higher insecurity and blocked roads to advancement. The best medicine that Iversen/Soskice identity is investment in education to expand the circle of those being able to participate in the high-return knowledge based
economy.

Overall Iversen/Soskice make a good job to support their thesis and from my own business perspective many of their claims (esp on geographical embeddedness) are intuitively convincing. The main criticism that can be levelled is their somewhat simplistic, mainly “median voter” based view of political decisions and influence.

[Jose Miguel · Rating 4 out of 5]

A departure from traditional political economics, this text made me reconsider the relationship between capitalism and democratic institutions. I recommend it for anyone interested in economic history of developed nations, the decline of Fordism, the impact of the ICT revolution, or wants a window into how the least-well off must seize democratic power if they want representation. At times the text is a bit dry, but in many others, it is elucidating.

[Ed · Rating 4 out of 5]

See review at https://edsteffes.me/2019/07/17/democ...