The Broadbent Blog


Does Trump signal the end for free-market capitalism?

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Donald Trump’s ascension to the US presidency is being hailed by some as the end of globalization as we have come to know it in the last four decades. Others see in Trump’s electoral victory the end of neoliberal economic policy, which promoted free trade and free markets, and limited the scope of government. But German sociologist Wolfgang Streeck discerns in the demise both of globalization and neoliberalism the end of capitalism itself, at least the variety of capitalism that exists in North America and Western Europe.

The very notion of the end of capitalism may seem like a radical heresy, destined for the dustbin of left-wing ideological delusions. Hasn’t modern capitalism survived, after all, for at least two centuries, despite innumerable crises, most recently the financial crisis of 2008, only to emerge with renewed vigour and purpose?

The problem with Western capitalism, as Streeck and others like Harvard economist Dani Rodrik have pointed out, is its uneasy relationship with democracy. The proclivity of free markets to generate unemployment, economic instability and “jobless recoveries” does not sit well with democratic electorates, who demand remedies from their governments. However, since 1980 governments—both right and left of centre—have responded with “more of the same” rather than with policies addressing the needs of the marginalized and the losers from globalization and neoliberalism. This has left the field open for right-wing populists like Trump, who has imitators in Europe and even in Canada.

We’ve seen this movie before, featuring the rise of Hitler and Mussolini, and we know how it ends.

The apogee of Western democratic capitalism, according to Streeck and Rodrik, occurred in the thirty years following World War II. The New Deal and Keynesian economics, emerging from the devastation of the 1930s Great Depression, demonstrated that the welfare state could coexist with capitalism—resulting in broadly-shared prosperity and economic stability. The postwar consensus empowered nation-states to maintain full employment through taxation, and through social programs that kept economic inequality in check. A crucial underpinning of this remarkably successful era was the regulation of the financial sector and constraints on international capital mobility.

With fading memories of the Depression, this postwar golden age (often regarded as the “Bretton Woods” era, born at the 1944 conference in New Hampshire at which Keynes was a leading policymaker) came under pressure in the 1960s. The financial sector was eager to end the constraints that had limited speculation at home and flows of hot money abroad. But the ensuing liberalization of the financial sector paved the way for financial crises and the hollowing-out of the welfare state through lower taxes on the wealthy and on corporations, and the proliferation of international tax havens.

In Streeck’s account, during the late 1970s, neoliberal policy emerged at first in the U.S. and the U.K. before spreading to other OECD nations. Democratic governments struggled with tax cuts to resolve distributional conflicts through inflationary fiscal and monetary policies. Those failed to restore full employment, and by the 1980s Western governments chose instead to run up public debt to levels not experienced since World War II. By the 1990s, fiscal consolidation and austerity had arrived to keep public debt in check. This in turn led, in the 2000s, to unleashing private debt as a way of accommodating the demands of those whose incomes were not growing, thereby also supporting businesses otherwise faced by consumers with waning purchasing power. This led to the financial crash of 2008, from which western capitalist democracies are still struggling to recover.

It is as yet unclear what the next chapter of this saga has in store for Western capitalist democracies. Oddly for someone in the Marxist tradition, Streeck himself does not predict a collapse of capitalism, let alone a socialist revolution. Instead, he envisages a long and slow decline, much like the decaying Roman Empire, with growing authoritarianism and the erosion of civil society. In this context, the advent of right-wing populism under Trump, and perhaps others yet to be elected, is ominous. And Streeck does not really address the prospects for state-led capitalism, as evinced by China and other East Asian countries, which are arguably the most dynamic capitalist economies in the world today, but hardly beacons of democracy.

One thing does seem certain. A necessary prerequisite for restoring Western democratic capitalism, and even more so social democracy or democratic socialism, is to force the genie of finance back into its bottle, subject to much greater restrictions both domestically and internationally, in order to constrain its tendencies to speculation and evermore serious crises. Thereby it may be possible to restore the fiscal capacity of states to ensure economic stability with social equity.

Given the strong representation of Wall Street in Trump’s cabinet, however, this is not likely to happen any time soon.

Roy Culpeper is a Senior Fellow of the University of Ottawa’s School of International Development and Global Studies, Adjunct Professor at the Norman Paterson School of International Affairs, Carleton University, and a Policy Fellow at the Broadbent Institute.

Photo:Michael Vadon. Use under a creative commons BY-2.0 license.