Capitalism vs democracy, Part 2: Help! Help! The ark is sinking!

The system that has held democracy and capitalism together for the last century has started to unravel.

In 1997, the same year that Fareed Zakaria coined the term "illiberal democracy," economist Lester Thurow gave a stark warning about the growing tension between capitalism and democracy in the era of globalization.

In the years since the tension has placed ever greater strain on newer democratic governments in developing countries, often leading to illiberal democracy that careens toward oppressive government. Poorly considered "cookie cutter" free market reforms packaged in aid and development assistance have only contributed to trends against genuine democracy in developing nations.

Yet US foreign policy has blithely continued to back free market reforms regardless of their applicability on a country-by-country basis. So it's as if we're bailing water on one side of the boat and pouring in buckets of water on the other. Slowly the democracy ark is sinking despite the large number of democracies to emerge in the past quarter century.

What is illiberal democracy? It's the kind I lampooned in the 2005 Democracy Stage Show Kit post; it looks like a duck but quacks like a moose. Put more formally:

[...] the term is almost always used to denote a particularly authoritarian kind of representative democracy, in which the leaders and lawmakers are elected by the people, but abuse their power while in office. This may be due to either widespread corruption or the absence of an adequate legal framework to restrain the power of the elected government. Thus, although free and fair elections do take place, the people are cut off from real power.(1)

What was Lester Thurow's warning?

[...] Historically the social welfare state and social investments in education have been used to make capitalism and democracy compatible. The state would take actions (progressive taxes, for example) to equalize market outcomes, and would help provide for necessities (with, say, a special tax benefit for home mortgages). The state would provide support when individuals are no longer wanted by the market (pensions, health care, unemployment insurance), and would help individuals get marketable skills (public education) so they could earn a good living. [...]

The elderly are putting this system at risk. Ever larger government expenditures on ever more numerous elderly voters have to be financed by reducing social welfare benefits for other groups, by cutting social investments in the future (education, infrastructure, and research), or by raising regressive payroll taxes.

The last becomes impossible with globalization. Higher payroll taxes raise the effective wages that firms have to pay and end up simply driving industries and employment abroad -- as is now dramatically visible in Europe. Those left behind have to pay higher and higher taxes to support the elderly. Lower social investments in education, skills, infrastructure, and knowledge generation (research) make American companies and workers less competitive in world markets. With lower earnings, both are less able and less willing to pay the taxes necessary to finance investments in their own future. [...]

The system that has held democracy and capitalism together for the last century has started to unravel. As earnings distributions widen due to globalization and a skill-intensive technological shift, and as government seems unable or unwilling to do anything about it, that majority of workers who face lower real earnings has to become disaffected sooner or later with democracy. [...] (2)

Now one can argue that in America there are forces mitigating the grim scenario Thurow describes but that's just the point: China and other big US trade partners are not buying up government debt in a newly emerging democracy trying to follow the free market prescription for prosperity. Yes, the vast and powerful American nation has options other nations don't, but you can apply Thurow's warning to say, present-day Latin America to appreciate his argument.

Does all this mean that the US should abandon our great emphasis on capitalism and focus instead on shoring up the most basic infrastructures of democracy? With the ghosts of von Mises and Ayn Rand scowling over my shoulder -- sometimes yes and sometimes no; it depends on the country situation and US objectives at the time.

What we need to abandon is the cookie-cutter approach to promoting US foreign policy goals. We don't need to cast off our ideals; we need to retire the theoretical bubbles in which the ideals are applied to vastly different situations. We need to modernize our approach by making it more empirical. We need to stop applying the same schema to vastly different phenomena.

An example of thoughtlessly applying the same schema to wildly different conditions is the economic 'shock therapy' theory pushed by Jeffrey Sachs. It worked in some cases; it had no hope of working in others. Yet the theory was prescribed and applied wholesale to every government that bought the idea that shock therapy was the new Promised Land -- no matter what the country conditions.

You can't prevent theoretical bubbleheads like Sachs from acting as advisors to governments, but it doesn't follow that the US Department of State and other US foreign policy organizations have to live in a theoretical bubble. Yet that's exactly where Paul Bremer was living while he oversaw the CPA, with infamous results. That's exactly where US envoys to Venezuela were living, with the result that Iran's military now stands behind a shrewd populist who is planning to make himself ruler for life.

Meanwhile, China's envoys run around the globe with open checkbooks and ask governments in other developing nations, "What do you want?"

Here we come to a snag. It's not just political exigencies that prevent State from adopting an empirical, case-by-case approach to foreign relations; it's also insufficient manpower and inadequate data filters. There's virtually limitless data readily available about any country you can name; the task is filtering the data so it becomes information useful to tailoring a US foreign policy initiative to a specific country.

Yet no amount of database wizardry and additional personnel will work, unless there's a change in mindset. The highly empirical information age arrived some time ago, but key US policy institutions have yet to join the modern era. They are still looking for the next new Promised Land: the one theory that will explain everything, fix everything.

Somewhere I hear laughter. Maybe it's the ghost of Bruce Lee, who transferred the empirical approach to martial arts. He taught that self defense is not a particular system of fighting; it's a fight for your life. From that view, you learn as many means of defense as you can and practice, practice, practice combining and applying them to every new fighting situation you meet with.

If US advisors would only remember that foreign relations are pegged to defense and not systems of economics and government, they'll avoid the land mines in US aid and development assistance without betraying core US principles.

1) Wikipedia

2) The Boston Globe, One nation divisible: As government's role recedes, capitalism and democracy clash. I am grateful to Michael Eisenscher for preserving the article on the Internet.