Martin Wolf

Martin Wolf is chief economics commentator at the "Financial Times". He was awarded the CBE in 2000 “for services to financial journalism” and in 2019 won the Lifetime Achievement Award at the Gerald Loeb Awards. His latest book is “The Crisis of Democratic Capitalism” (Allen Lane). Here, he speaks to J. P. O’ Malley about democratic capitalism and the greatest threats to peace and prosperity in the west.

You define democratic capitalism “as the combination of liberal democracy with market capitalism.” You believe they have to work together. Why?

First, you have to look at this historically. In complex organised societies, the dominant form of wealth was land. Those who controlled the land usually also controlled the armies, which meant they controlled power, and the people, the majority of whom worked for them. Over the last two centuries, a market economy became the dominant form for creating wealth. In this economic system, which replaced feudalism, a new capitalist elite was born in which everybody had a right to try to become a capitalist.

In that sense, it was egalitarian. Obviously, though, most people didn’t “make it”. But we eventually ended up with universal suffrage and democracy … Crucially, capitalism created the social and economic conditions that [helped produce] a society in which people have equal value and equal merit. I believe democracy prevents capitalism from becoming a predatory plutocracy. Just as a market economy prevents a state from becoming an autocracy.

Don’t international trade and capital flows (the movement of money for investment and trade) pose a serious challenge to this system?

One of the core tensions in democratic capitalism is that democracy is bound up with a territorial jurisdiction. Namely: you are a citizen of one country to which you are most attached, and to which you pay your taxes. But from its beginning, capitalism has had a transnational aspect. Because market opportunities exist across the world.

The level of prosperity that most of us now expect demands a very high level of international trade. Moreover, an essential part of international commerce is foreign investment, which allows capital to spread out across the world. A combination of trade and foreign investment has accelerated big social and economic changes in western societies, particularly with regards to deindustrialisation. This has seen the labour force in industry shrinking everywhere, though this is mainly because we can produce more and more goods with fewer and fewer people.

But the biggest source of instability to the global economy in recent years has been capital flows. Particularly in the uncontrolled financial sector, which was really what was behind the global financial crisis, which had a devastating long-term impact on the global economy.

However, I believe we can still sustain a liberal democratic capitalist system, while having open economies. In fact, there’s no real alternative for us. An open international economy is going to be beneficial for most of humanity. It gives tremendous opportunities for development. And we’ve got to try and do better to manage the consequences.

Your latest book, “The Crisis of Democratic Capitalism”, proposes ways to beat tax dodging by multinational corporations.

Tax reform is one of the big issues. We need to have land [value] taxes [taxing the rental value of land]. They’re very easy to impose actually. A lot of the value created by the corporate sector, and by investment more broadly, ends up in land values.

With regards to corporation tax, my view is that there is a legitimate case for allowing investment spending to be deducted from the tax base, because you want corporations to invest. But the rate of tax on profits which are uninvested should align with the top income tax. When you’re dealing with internationally mobile factors of production, which are very difficult to tax easily in an open mobile economy, where capital moves quickly, then the obvious thing to do is to reach international agreements. This will lead to further efforts to eliminate tax havens. But, more importantly, to agree on a common basis for tax, which could help raise substantially more revenue from corporations and their owners.

You also address the challenges faced by the World Trade Organization since it was founded in 1995. Why has cooperation not worked out as planned?

Well, the WTO was built around the idea that it would be possible to create a set of rules that governed all of world trade. That became more difficult, however, as the world started to divide into blocks, with the west on the one side, and China on the other. That makes it very difficult to run global trade rules.

All of this became very politically sensitive because globalisation had not benefited everyone. That has led to a political backlash, particularly in the United States, where the welfare state is weak. The policy solution for the US has been to become more protectionist.

What should have happened over the last fifteen years was a way for the west to bring the Chinese regime closer to our system. It was not impossible.

But it never happened. So we now have this rather unique problem, where we have this huge economic player – China – which doesn’t seem to fit into the underlying principles of liberal democratic capitalism, as we understand it. The Americans see this in geopolitical terms. And if you add those two things together, the WTO ceases to function, to cover all of global trade. The global order underpinning global capitalism from 1990 to 2007 has now gone. That is obvious. The question remains: how do we manage this process of reversal?

What are the biggest threats to peace and prosperity in the west today?

There is no doubt we are going through an enormously challenging period in global affairs. The war in Ukraine has created economic chaos. We also have the relationship between China and Russia and the adversarial relationship between China and the United States. It’s very difficult to predict how it is all going to end up. The outcomes are potentially very dangerous. Namely: extreme global nuclear war. I’m not forecasting that. But it’s clearly a threat that is very real.

So the west needs to protect its political system and its economies. That means basic economic and military security. It also requires some reconsiderations of our trade relations with the rest of the world, particularly with China. It doesn’t mean we should stop trade altogether with China.

However, we have to be sure that a Chinese influence does not infringe on our own freedoms or interfere with our own institutions. Managing relationships with rival powers is also important. The west has failed with Russia. We cannot fail with China.

What about the climate crisis? How does the west’s relationship with China factor in?

We have an obligation to look after our shared planet. For the first time in history, human beings are reshaping the planet in very dramatic ways. Notably, the extreme damage that is being done to the climate system, the oceans and the biosphere. China is also part of that. We cannot solve these problems without China. It is, after all, the world’s biggest emitter of carbon dioxide. China is probably more responsible for overfishing than any other country too.

But we have to compete and cooperate, while avoiding actually conflicting with China. Historically, relationships like this have often, but not always, ended up in war.

Relations between the United States and China are now really bad. Particularly from the American side, which has become quite paranoid. That is stupendously dangerous. And if we don’t manage that, all the rest of the arguments I present in my book will become irrelevant, because we won’t have a world that is worth living in.

This piece is from the New Humanist summer 2023 edition. Subscribe here.