Wolfgang Streeck: Markets vs. Voters


After 40 years of neoliberal reaction, in which the utopia of perfect market justice was touted by everyone from leading economists to politicians the world over, 2016 seems to have been a watershed moment in the history of capitalism. Between the rise of populism on both the right and the left, typified by the election of Donald Trump, and the decision of voters to defy the liberal elites with the Brexit vote, 2016 has seen the revenge of the voters, in however perverted a form.

In this extract from his new book, How Will Capitalism End?, Wolfgang Streeck argues that capitalism is riven with the contradiction between the needs of the market and those of the voters. Neoliberalism, Streeck argues, saw the dominance of market logic over that of voters, but is that now changing? 

Suspicions that capitalism and democracy may not sit easily together are far from new. From the nineteenth century and well into the twentieth, the bourgeoisie and the political Right expressed fears that majority rule, inevitably implying the rule of the poor over the rich, would ultimately do away with private property and free markets. The rising working class and the political Left, for their part, warned that capitalists might ally themselves with the forces of reaction to abolish democracy, in order to protect themselves from being governed by a permanent majority dedicated to economic and social redistribution. I will not discuss the relative merits of the two positions, although history suggests that, at least in the industrialized world, the Left had more reason to fear the Right overthrowing democracy, in order to save capitalism, than the Right had to fear the Left abolishing capitalism for the sake of democracy. However that may be, in the years immediately after the Second World War there was a widely shared assumption that for capitalism to be compatible with democracy, it would have to be subjected to extensive political control—for example, nationalization of key firms and sectors, or workers’ ‘co-determination’, as in Germany—in order to protect democracy itself from being restrained in the name of free markets. While Keynes and, to some extent, Kalecki and Polanyi carried the day, Hayek withdrew into temporary exile.

Since then, however, mainstream economics has become obsessed with the ‘irresponsibility’ of opportunistic politicians who cater to an economically uneducated electorate by interfering with otherwise efficient markets, in pursuit of objectives—such as full employment and social justice—that truly free markets would in the long run deliver anyway, but must fail to deliver when distorted by politics. Economic crises, according to standard theories of ‘public choice’, essentially stem from market-distorting political interventions for social objectives. In this view, the right kind of intervention sets markets free from political interference; the wrong, market-distorting kind derives from an excess of democracy; more precisely, from democracy being carried over by irresponsible politicians into the economy, where it has no business. Not many today would go as far as Hayek, who in his later years advocated abolishing democracy as we know it in defence of economic freedom and civil liberty. Still, the cantus firmus of current neo-institutionalist economic theory is thoroughly Hayekian. To work properly, capitalism requires a rule-bound economic policy, with protection of markets and property rights constitutionally enshrined against discretionary political interference; independent regulatory authorities; central banks, firmly protected from electoral pressures; and international institutions, such as the European Commission or the European Court of Justice, that do not have to worry about popular re-election. Such theories studiously avoid the crucial question of how to get there from here, however; very likely because they have no answer, or at least none that can be made public.

There are various ways to conceptualize the underlying causes of the friction between capitalism and democracy. For present purposes, I will characterize democratic capitalism as a political economy ruled by two conflicting principles, or regimes, of resource allocation: one operating according to marginal productivity, or what is revealed as merit by a ‘free play of market forces’, and the other based on social need or entitlement, as certified by the collective choices of democratic politics. Under democratic capitalism, governments are theoretically required to honour both principles simultaneously, although substantively the two almost never align. In practice they may for a time neglect one in favour of the other, until they are punished by the consequences: governments that fail to attend to democratic claims for protection and redistribution risk losing their majority, while those that disregard the claims for compensation from the owners of productive resources, as expressed in the language of marginal productivity, cause economic dysfunctions that will become increasingly unsustainable and thereby also undermine political support.

In the liberal utopia of standard economic theory, the tension in democratic capitalism between its two principles of allocation is overcome by turning the theory into what Marx would have called a material force. In this view, economics as ‘scientific knowledge’ teaches citizens and politicians that true justice is market justice, under which everybody is rewarded according to their contribution, rather than their needs redefined as rights. To the extent that economic theory became accepted as a social theory, it would ‘come true’ in the sense of being performative—thus revealing its essentially rhetorical nature as an instrument of social construction by persuasion. In the real world, however, it did not prove so easy to talk people out of their ‘irrational’ beliefs in social and political rights, as distinct from the law of the market and the right of property. To date, non-market notions of social justice have resisted efforts at economic rationalization, forceful as the latter may have become in the leaden age of advancing neoliberalism. People stubbornly refused to give up on the idea of a moral economy under which they have rights that take precedence over the outcomes of market exchanges. In fact where they have a chance—as they inevitably do in a working democracy—they tend in one way or another to insist on the primacy of the social over the economic; on social commitments and obligations being protected from market pressures for ‘flexibility’; and on society honouring human expectations of a life outside the dictatorship of ever-fluctuating ‘market signals’. This is arguably what Polanyi described as a ‘counter-movement’ against the commodification of labour in The Great Transformation.

For the economic mainstream, disorders like inflation, public deficits and excessive private or public debt result from insufficient knowledge of the laws governing the economy as a wealth-creation machine, or from disregard of such laws in selfish pursuit of political power. By contrast, theories of political economy—to the extent that they take the political seriously and are not just functionalist efficiency theories—recognize market allocation as just one type of political-economic regime, governed by the interests of those owning scarce productive resources and thus in a strong market position. An alternative regime, political allocation, is preferred by those with little economic weight but potentially extensive political power. From this perspective, standard economics is basically the theoretical exaltation of a political-economic social order serving those well-endowed with market power, in that it equates their interests with the general interest. It represents the distributional claims of the owners of productive capital as technical imperatives of good, in the sense of scientifically sound, economic management. For political economy, mainstream economics’ account of dysfunctions in the economy as being the result of a cleavage between traditionalist principles of moral economy and rational-modern principles amounts to a tendentious misrepresentation, for it hides the fact that the ‘economic’ economy is also a moral economy, for those with commanding powers in the market.

In the language of mainstream economics, crises appear as punishment for governments failing to respect the natural laws that are the true governors of the economy. By contrast, a theory of political economy worth its name perceives crises as manifestations of the ‘Kaleckian reactions’ of the owners of productive resources to democratic politics penetrating into their exclusive domain, trying to prevent them from exploiting their market power to the fullest and thereby violating their expectations of being justly rewarded for their astute risk-taking. Standard economic theory treats social structure and the distribution of interests and power vested in it as exogenous, holding them constant and thereby making them both invisible and, for the purposes of economic ‘science’, naturally given. The only politics such a theory can envisage involves opportunistic or, at best, incompetent attempts to bend economic laws. Good economic policy is non-political by definition. The problem is that this view is not shared by the many for whom politics is a much-needed recourse against markets, whose unfettered operation interferes with what they happen to feel is right. Unless they are somehow persuaded to adopt neoclassical economics as a self-evident model of what social life is and should be, their political demands as democratically expressed will differ from the prescriptions of standard economic theory. The implication is that while an economy, if sufficiently conceptually disembedded, may be modelled as tending toward equilibrium, a political economy may not, unless it is devoid of democracy and run by a Platonic dictatorship of economist-kings. Capitalist politics, as will be seen, has done its best to lead us out of the desert of corrupt democratic opportunism into the promised land of self-regulating markets. Up to now, however, democratic resistance continues, and with it the dislocations in our market economies to which it continuously gives rise.

Wolfgang Streeck's How Will Capitalism Endis out now and available to buy from the Verso website.