Capitalism, Democracy & the State

The 2008 financial crisis rocked global capitalism to its foundations. In its aftermath growth has slowed, living standards have stagnated, inequality has risen and tight fiscal austerity has re-shaped the social and political structure of many advanced countries. Developing economies have not been spared from these convulsions. A decade on, the economic and political order is unstable and uncertain. Grappling with the character and dynamics of contemporary capitalism is essential if we are to understand the world we live in and the challenges to which it is giving rise.

Capitalism after the crash

Capitalism after the crisis embodies a distinctive combination of the old and new. While the dynamics which were the hallmarks of pre-crash capitalism – globalisation, financialisation, growing trade and capital account imbalances, the development of new technologies, rising inequality – remain, they have been reshaped since 2008.

Globalisation – the tendency towards continued integration and inter-connectedness across the global economy – continues.  Though patterns of trade and foreign direct investment have slowed, global value chains have continued to evolve, as exemplified by growing ‘south-south’ trade and the emergence of new labour and environmental governance regimes. China’s development remains the central motor of global expansion, but in Latin America, South East Asia and Africa countries face new challenges such as the fall-out of the post-crash slump in commodity prices.

The ascent of global finance has been a defining characteristic of capitalist development over recent decades. Since 2008, the financial sector has retained its dominant position in the world economy, but it confronts new conditions, as central banks have taken a more active role in supporting and regulating the sector. Yet systemic financial risk remains high, not least due to the development of new forms of shadow banking and the enlarged scale of corporate balance sheets.

Since the 1980s global elites have secured an ever-increasing share of income and wealth, with the share of economic output paid in wages collapsing in almost all developed countries. But again, the post-2008 context has reconfigured distributional trends. ‘Quantitative easing’ (QE) and speculative investment in land and property have boosted the wealth of asset-holders. Public expenditure cuts have disproportionately fallen on lower income households, women and members of minority ethnic groups. Wealth inequality has taken on a sharply intergenerational as well as class-based character.

Information and communication technologies have taken on new forms, as the growth of giant digital platform companies has changed not just the character of production and consumption, but key patterns of social life. The newly central roles of data and digital infrastructure, combined with the potential for automation by artificial intelligence and related technologies, raise profound questions about the future of modern economies.

Meanwhile the longstanding accumulation of environmental damage by industrialised economies has gone from chronic problem to acute crisis. It is now clear that national and international attempts to curb greenhouse gas emissions are occurring much too slowly to avert disaster. The wider failures to control biodiversity loss, air pollution and soil degradation not only threaten ecological integrity and social stability; they look increasingly hard to address as multilateralism breaks down.

Politics after the crash

Within post-crash capitalism, profound shifts have also taken place in the sphere of politics, notably in the so-called ‘populist’ insurgency which has gripped the West in the last few years. In Europe, several right-wing nationalist parties have formed governments whilst others are now challenging for power. Social movements and parties on the left, such as Syriza in Greece, Podemos in Spain and the British Labour Party, have gained significant popular support. The Brexit referendum result has been widely interpreted as a popular revolt against political elites and an economy no longer raising living standards for most people. Among other emerging economies, all of the original four BRIC countries (Brazil, Russia, India and China) are now led by nationalist-authoritarian leaders. Most significantly, Donald Trump’s presidency has not only reconfigured US politics; it threatens to disrupt the international trade system and geopolitical order.

A new research agenda

Understanding these trends requires a focus on the nature of contemporary capitalism – and in particular its relationships to the state, and to democratic politics.  We focus on three kinds of research question:

• What is happening in the post-crash economic world? How are economies developing, what trends and dynamics can we observe, what forces are at play and how do they relate to wider processes of global restructuring?
• How should we best understand how capitalist systems work? What theoretical perspectives and analytical frameworks provide insight into their structures and dynamics?
• What ideas, discourses, policies and political processes might help society address the challenges which arise from capitalism in its contemporary form? What might help chart a path to economies and societies which are more socially equitable, environmentally sustainable and politically democratic?

Four broad perspectives inform our approach.

The first is a recognition that capitalism is a holistic system and social order. In public debate ‘the economy’ is often treated as an independent and autonomous sphere of activity. In some versions of economic theory, it is viewed as having a distinctive ‘market’ logic, analysable in terms of the rational decisions of self-interested individuals and profit-maximising firms. But these approaches neglect the deep embeddedness of the economic system within wider social and cultural norms, political institutions and policies, and environmental constraints. This embeddedness creates both different forms of capitalism in different places and at different times, and complex interactions between economic, social, cultural, political and environmental forces. Relationships of power – between capital and labour, finance and production, different geographical entities, market forces and communities – are always present, and in turn these shape and are shaped by those of gender and race.

Second, we seek to understand capitalism as a historical process. Economies evolve in path-dependent ways. Technological advances, financial cycles and public policies often interact in analogous ways in different periods. Since 2008, some have expressed surprise that market liberalism has survived the crisis. But after the Great Depression of the 1930s, it took over fifteen years and a world war for the regime of ‘managed capitalism’ to be put in place; and after the crises of the 1970s, more than a decade for the free market ‘neoliberal’ order to emerge. Historical analysis can help inform current prognoses.

Third, capitalism always assumes a geographical form. It is shaped by distinctive institutional structures and political contexts at the local, regional, national and supranational levels. Different models or ‘varieties’ of capitalism co-exist, such as the Anglo-American liberal model, the coordinated models of Northern Europe and the developmental states of East Asia and Latin America. Recognising the diversity of capitalism is essential. At the same time, adopting a geographical perspective allows us to capture how national and regional economies are integrated into wider international orders, and the huge internal power imbalances – between metropolitan centres and neglected rural and ex-industrial peripheries, for example – which profoundly shape the politics of many countries today.

Fourth, capitalism is simultaneously dynamic and dysfunctional. Driven by technological innovation and credit creation, capitalism tends not just to increase productivity and generate the accumulation of capital, but to restructure patterns of social life. These processes generate internal tensions which weaken the conditions for future growth. Rising inequalities, speculative flows of capital and over-dependence on limited environmental resources render capitalist economies highly susceptible to instability and crisis. Such economies are at once dependent on the state – to provide order, infrastructure, public services and the conditions for continued social reproduction – and under constant pressure from business interests to limit public expenditure and taxation. Capitalism therefore both relies uponand is constantly driven to undermine the social and environmental foundations on which it relies for its success.

A political economy approach

Seeking to understand capitalism in these ways is the work of political economy. It involves the study not just of ‘the economy’, understood in terms of market agents and their behaviours, but also of how economic activity is embedded within and shaped by wider constellations of social and political power. In the post-crash world, for example, creditor states and financial institutions have a vested interest in maintaining the prevailing order, while social and environmental movements, and insurgent political forces, seek to disrupt it. There are businesses which may support reform and others which will resist it. The future of the global order is not therefore determined simply by the ‘structural’ logic of the global economy.

Modern economies operate within a huge and diverse array of laws, public institutions and infrastructure. The ‘boundaries’ between these political institutions and economic activity are constantly subject to negotiation, not just over specific state actions but over the very role and legitimacy of state activity in the economy. In this way capitalist economies are deeply influenced by politics, at the level both of policy and of ideology. So the relationship between politics – in particular democratic politics – and capitalism must be at the forefront of analysis.

In the period prior to the 2008 crash, policymakers sought to insulate market mechanisms from the democratic system in a variety of ways. Independent central banks, the growth of powerful regulatory agencies and new transnational legal forms precipitated a shift towards ‘post-democratic’ forms of governance. The various populist movements which animate the ‘post-crash’ world embody a backlash against this institutional order. At the same time, the democratic powers of domestic legislatures have been further eroded in the post-crisis era, for example in the EU’s new macroeconomic architecture and through the rise of authoritarian tendencies in the West. The world’s second largest economy is non-democratic in form. The relationship between ‘democracy’ and ‘capitalism’ is increasingly characterised by tension and new sources of possible conflict.

The post-crash world is riven with deep structural weaknesses and sharp antagonisms, but this period is also charged with possibility. The intellectual foundations which underpinned the pre-crash order have been radically undermined. A space for alternative models of development has decisively emerged. New ideas, analysis, policies and political strategies need to be formulated. By bringing analytical insights from political economy to bear upon the pressing challenges created by the interplay of capitalism, democracy and the state, SPERI’s research aims to contribute to meeting this difficult intellectual and political task.

This piece was originally published on the SPERI website as part of a series on their new research agenda.

This blog series was collectively planned and written by members of the SPERI research team: Andrew Baker, Laura Bennett, Matt Bishop, Martin Craig, Remi Edwards, Desiree Fields, Laura Foley, Katy Fox-Hodess, Andrew Gamble, Jon Kishen Gamu, Ellie Gore, Colin Hay, Andrew Hindmoor, Tom Hunt, Michael Jacobs, Patrick Kaczmarczyk, Scott Lavery, Genevieve LeBaron, Owen Parker, Tony Payne, Ed Pemberton, Kaisa Pietilä, Andreas Rühmkorf, Liam Stanley and Peter Verovšek.