The crisis of modern liberalism is down to market forces

Wolfgang Munchau in The FT 

When I think about the crisis of our liberal system, I am reminded of an encounter almost 20 years ago in Berlin with Wolfgang Kartte, a former president of the German cartel office. I asked why he and his successors often took such a conservative view on competition cases and in particular why they were so dismissive of economic arguments. 

Like the majority of economic policymakers in Germany, Kartte, who died in 2003, was a lawyer. He said he considered his job as helping the little guy to defend himself against the big guy. This was the job of a lawyer, not of an economist. Moreover, he said he was not interested in levelling the playing field, as the metaphor goes, but in tilting it in favour of the little guy. 

The crisis of modern liberalism has similar elements. We have our own version of the little guy versus the big guy problem today — except that there is no one to tilt the field in the other direction. Smaller companies pay more taxes relative to their income than large multinational corporations. The economic policies that followed the financial crisis ended up widening income and wealth differences. Large immigration flows created insecurity, as did the arrival of new technologies. When you call voters deplorable — or patronise them, as happened in the UK after the Brexit vote — you add insult to injury. 

Kartte was an old-fashioned German ordoliberal, a school of thought that originated after the breakdown of German democracy in the early 1930s. The macroeconomics of German ordoliberalism is somewhat dodgy. But they excelled at one particular thing. Their intellectual leaders explained better than anyone else how the German liberal order of the 1920s collapsed and how it drove a majority of the population away from supporting it. 

The short, flippant answer is that the Weimar Republic favoured the big guy. The macroeconomic shocks of the period — hyperinflation and depression — are well understood. They contributed to a large extent to the political alienation of the middle classes. But they were not the only causes. The period also saw an increase in industrial cartels that threatened the livelihoods of small merchants and entrepreneurs. 

When the ordoliberals finally came to power in postwar Germany, they began by tilting the playing field in the other direction by creating a corporate and financial infrastructure to support small and medium-sized companies. Germany’s Mittelstand is both a reason for German robustness, but also for stagnation. And one of the main lessons of modern economic history is we cannot be oblivious to the distribution of income and wealth. 

This is not an argument about redistribution. This is about actively managing capitalism’s playing field to ensure that the majority of the population stays on it. Recall Margaret Thatcher’s successful brand of entrepreneurial capitalism in the UK in the 1980s. Through privatisation, she turned ordinary savers into shareholders. Through the sale of council houses, she turned tenants into property owners. 

We cannot replicate this example: there are no council houses to be sold, nor companies to be privatised. But to save modern capitalism we will need to find ways to keep the median voter committed to the system, just as Thatcher did in the 1980s. I would argue that voters are still broadly content in places such as Germany, the Benelux countries and in Ireland. I am less sure about the UK, France or Italy. 

What often leads the supporters and defenders of modern liberal democracy astray in their analysis is their addiction to macroeconomic aggregate variables such as gross domestic product and the officially recorded rate of unemployment. The decade before the Brexit referendum was a decade of reasonable GDP growth. There was nothing in the data that would suggest the UK would vote to leave the EU. But granular information paints a different picture. Data based on the official family resources survey and from the Resolution Foundation, a think-tank, showed household income after housing costs stagnated for the 60 per cent of households towards the bottom of the income distribution between 2002 and 2015. 

The current wave of discontent in France also contrasts with relatively solid GDP growth since the financial crisis. But a study by the McKinsey Global Institute showed that income growth came to an abrupt halt for almost all households in the advanced economies. 

The main constituency backing the Thatcher revolution in the 1980s was the C2s — the demographic classification for skilled working class people. Thatcher looked after the median household. Her successors first lost the middle classes, and then pretended to be shocked by events such as Brexit. 

Any system that leaves behind 60 per cent of households will eventually fail. It is the ultimate irony: liberalism is failing because of market forces.