There is a widespread sense today that capitalism is in critical condition, and more so than ever since the end of the Second World War. Looking back, the crash of 2008 was only the latest in a long sequence of political and economic disorders that began with the end of postwar prosperity in the mid-1970s. Successive crises turned out to be ever more severe, spreading more widely and rapidly through an increasingly interconnected global economy. Global inflation in the 1970s was followed by rising public debt in the 1980s, and fiscal consolidation in the 1990s was accompanied by a steep increase in private sector indebtedness (Streeck 2011; 2013a). For four decades now, disequilibrium has more or less been the normal condition of OECD capitalism, both at the national and the global levels. In fact, with time, the crises of postwar capitalism have become so pervasive that they are increasingly perceived as more than just economic in nature, in a rediscovery of the older notion of a capitalist society: of capitalism as a social order and way of life, vitally dependent on uninterrupted progress of private capital accumulation.

Crisis symptoms are many, among them three long-term trends in the trajectories of rich, “advanced,” highly industrialized — or better, increasingly deindustrialized — capitalist economies. The first is a persistent decline in the rate of economic growth, recently aggravated by the events of 2008 (Figure I). The second, and associated with the first, is an equally persistent increase in overall indebtedness among leading capitalist economies, where governments, private households and non-financial as well as financial firms have,over four decades,piled up financial obligations with no end in sight (for the U.S., see Figure II). And third, economic inequality, of both income and wealth, has been on the rise for several decades now (Figure III), alongside rising debt and declining growth.

FIGURE 1 Source: OECD Economic Outlook: Statistics and Projections
FIGURE I — Source: OECD Economic Outlook: Statistics and Projections
FIGURE II -- Source: OECD National Accounts
FIGURE II — Source: OECD National Accounts
FIGURE III -- Source: OECD Income Distribution Database
FIGURE III — Source: OECD Income Distribution Database

Steady growth, sound money and a modicum of social equity, spreading some of the benefits of capitalism to those without capital, were long considered prerequisites for a capitalist political economy commanding the legitimacy it needs. What must be most alarming from this perspective is that the three critical trends I have mentioned may be mutually reinforcing. There is mounting evidence that increasing inequality may be one of the causes of declining growth, as inequality both impedes improvements in productivity and weakens demand. Low growth, in turn, reinforces inequality (OECD 2013) by intensifying distributional conflict, making concessions to the poor more costly for the rich, and making the rich insist more than before on strict observance of the St. Matthew principle governing free markets: “For unto every one that hath shall be given, and he shall have abundance: but from him that hath not shall be taken even that which he hath” (Matthew 25:29, King James Version).[1] Also, rising debt, while failing to halt the decline of economic growth, adds to inequality through the structural changes associated with financialization. Financialization, in turn, helped compensate wage earners and consumers for the growing income inequality caused by stagnant wages and cutbacks in public services (Crouch 2009; Streeck 2011; 2013a).

Can what appears to be a vicious circle of downward trends continue forever? Are there counterforces that might break it up — and what will happen if they fail to materialize, as they have for almost four decades now? Historians inform us that crises are nothing new under capitalism, and may in fact be required for its longer-term good health. But what they are talking about are cyclical movements or random shocks after which capitalist economies can move into a new equilibrium, at least temporarily. What we are seeing today as we look back, however, is a continuous process of gradual decay, protracted but apparently all the more inexorable. Recovery from the occasional Reinigungskrise is one thing; breaking a concatenation of intertwined long-term trends quite another. Assuming that ever-lower growth, ever-higher inequality and ever-rising debt are not indefinitely sustainable and may together issue in a crisis that is systemic in nature — one we have difficulty imagining what it would be like — can we see signs of an impending reversal?

Here the news is not good. Five years have passed since 2008, the culmination so far of the postwar crisis sequence. When memory of the abyss was still fresh, demands and blueprints for “reform” to protect the world from a replay abounded. International conferences and summit meetings of all kinds chased one another, but half a decade later hardly anything has come out of them (Mayntz 2012; Admati and Hellwig 2013). In the meantime, the financial industry, where the disaster originated, has had a full recovery: profits, dividends, salaries and bonuses are back where they were, while re-regulation got stuck in international negotiations and domestic lobbying. Governments, first and foremost that of the United States, have remained firmly in the grip of the money-making industries. These, in turn, are being generously provided with cheap cash, created out of thin air on their behalf by their friends in the central banks — prominent among them the former Goldman Sachs man Mario Draghi at the helm of the European Central Bank — money that they sit on or invest in government debt. Half a decade after Lehman, growth remains anemic, as do labor markets; unprecedented liquidity fails to jump-start the economy; and inequality reaches ever more astonishing heights as the little growth is appropriated by the top one percent of income earners — and its lion’s share by a small fraction of them (Saez 2012; Alvaredo et al. 2013).

Little reason indeed to be optimistic. For some time now, OECD capitalism was kept going by liberal injections of fiat money, under a policy of monetary expansion of which its architects know better than anyone else that it cannot forever continue. In fact, several attempts were made in 2013 to get off the tiger, in Japan as well as in the U.S., but when stock prices plunged in response, “tapering,” as it came to be called, was postponed for the time being. In mid-June, the Bank for International Settlements (BIS) in Basel, the mother of all central banks, declared “quantitative easing” to have to come to an end. In its Annual Report, the Bank pointed out that central banks had, in reaction to the crisis and the slow recovery, expanded their balance sheets, “which are now collectively at roughly three times their pre-crisis level — and rising” (Bank for International Settlements 2013, 5). While this had been necessary to “prevent financial collapse,” now the goal had to be “to return still-sluggish economies to strong and sustainable growth.” This, however, was beyond the capacities of central banks which

… cannot enact the structural economic and financial reforms needed to return economies to the real growth paths authorities and their publics both want and expect. What central bank accommodation has done during the recovery is to borrow time… But the time has not been well used, as continued low interest rates and unconventional policies have made it easy for the private sector to postpone deleveraging, easy for the government to finance deficits, and easy for the authorities to delay needed reforms in the real economy and in the financial system. After all, cheap money makes it easier to borrow than to save, easier to spend than to tax, easier to remain the same than to change (ibid.).

Apparently this view was shared even by the Federal Reserve under Bernanke. By the end of the summer, it once more seemed to be signaling that the time of easy money was coming to an end. In September, however, the expected return to higher interest rates was again put off. The reason given was that “the economy” looked less “strong” than hoped for. Immediately, global stock prices went up. The real reason, of course, why a return to more conventional monetary policies is so difficult is one that an international institution like BIS is freer to spell out than a — still — more politically exposed national central bank. This is that as things stand, the only alternative to sustaining capitalism by means of an unlimited money supply is trying to revive it through neoliberal economic reform, as summarily characterized in the second subtitle of the BIS’s Annual Report: “Enhancing flexibility: a key to growth” (Bank for International Settlements 2013, 6) — the bitter medicine for the many, combined with higher incentives for the few.[2]

A problem with democracy

It is here at the latest that discussion of the crisis and the future of modern capitalism must turn to democratic politics. Capitalism and democracy had long been considered adversaries, until the postwar settlement seemed to have accomplished their reconciliation. Well into the twentieth century,owners of capital had been afraid of democratic majorities abolishing private property, while workers and their organizations expected capitalists to finance a return to authoritarian rule in defense of their privileges. Only in the Cold War world after 1945 did capitalism and democracy seem to be birds of the same feather (Lipset 1963 [1960]), as economic progress made it possible for working-class majorities to accept a free-market, private-property regime, in turn making it appear that democratic freedom was inseparable from and indeed depended on the freedom of markets and profit-making. Today, however, doubts about the compatibility of a capitalist economy with a democratic polity have powerfully returned. Among ordinary people, there is now a pervasive sense that politics can no longer make a difference in their lives, as reflected in common perceptions of deadlock, incompetence and corruption among what seems an increasingly self-contained and self-serving political class united in their claim that “there is no alternative” to them and their policies. One result is declining electoral turnout together with high voter volatility, growing electoral fragmentation due to the rise of “populist” protest parties, and pervasive government instability.[3]

The legitimacy of postwar democracy was based on the premise that states had a capacity to intervene in markets and correct their outcomes in the interest of citizens. Decades of rising inequality have cast doubt on this, as has the impotence of governments before, during and after the crisis of 2008. In response to their growing irrelevance in a global market economy, governments and political parties in OECD democracies more or less happily looked on as the “democratic class struggle” (Korpi 1983) turned into post-democratic politainment (Crouch 2004). In the meantime,the transformation of the capitalist political economy from postwar Keynesianism to neoliberal Hayekianism progressed smoothly (Streeck 2013a): from a political formula for economic growth through redistribution from the top to the bottom, to one expecting growth from redistribution from the bottom to the top. Egalitarian democracy, regarded under Keynesianism as economically productive, is considered a drag on efficiency under contemporary Hayekianism, where growth is to derive from insulation of markets and of the cumulative advantage they entail, against redistributive political distortion.

A central topic of current anti-democratic rhetoric is the fiscal crisis of the contemporary state, as reflected in the astonishing increase in public debt since the 1970s (Figure IV). Growing public indebtedness is attributed to electoral majorities living beyond their means by exploiting their societies’ “common pool,” and to opportunistic politicians buying the support of myopic voters with money that they do not have.[4] However,that the fiscal crisis was unlikely to have been caused by an excess of redistributive democracy can be seen from the fact that the buildup of government debt coincided with a decline in electoral participation, especially at the lower end of the income distribution, with shrinking unionization, the disappearance of strikes, welfare state cutbacks and, as noted, exploding income inequality (Streeck 2013b). What the deterioration of public finances was related to was declining overall levels of taxation (Figure V) and tax systems becoming less progressive, as a result of “reforms” of top income and corporate tax rates (Figure VI). In fact, by replacing tax revenue with debt, governments contributed further to inequality as they offered secure investment opportunities to those whose money they would or could no longer confiscate and had to borrow instead. Unlike taxpayers, buyers of government bonds continue to own what they pay to the state and in fact collect interest on it, typically paid out of increasingly less progressive taxation; they also can pass it on to their children. Moreover, rising public debt can be and is being utilized politically to argue for cutbacks in state spending and privatization of public services, further restraining redistributive democratic intervention in the capitalist economy.

FIGURE IV -- Source: OECD Economic Outlook: Statistics and Projections
FIGURE IV — Source: OECD Economic Outlook: Statistics and Projections
FIGURE V -- Source: OECD Tax Revenue Database
FIGURE V — Source: OECD Tax Revenue Database
FIGURE VI -- Source: Alvaredo et al. (2013)
FIGURE VI — Source: Alvaredo et al. (2013)

Institutional protection of the capitalist market economy from democratic interference has advanced greatly in recent decades.[5] Trade unions are on the decline everywhere and have in many countries been rooted out, above all in the United States. Economic policy has widely been turned over to independent — i.e., democratically unaccountable — central banks concerned above all with the health and goodwill of financial markets.[6] In Europe, national economic policies, including wage-setting and budget-making, are increasingly governed by supranational agencies like the European Commission and the European Central Bank that are beyond the reach of popular democracy. Effectively this de-democratizes European capitalism without, of course, de-politicizing it.

Still, doubts continue among the profit-dependent classes as to whether democracy will, even in its emasculated, post-democratic version, allow for the neoliberal “structural reforms” necessary for their regime to recover. Like ordinary citizens, although for the opposite reasons, elites are losing faith in democratic government and its suitability for rebuilding societies in line with market pressures for unimpeded technocratic decision-making and unlimited adaptability of social structures and ways of life. Public Choice’s disparaging view of democratic politics as corruption of market justice in the service of opportunistic politicians and their clientele has become common sense among elite publics, as has the belief that market capitalism cleansed of democratic politics will not only be more efficient but also virtuous and responsible.[7] Countries like China are complimented for their authoritarian political systems being so much better equipped than majoritarian democracy with its egalitarian bent to deal with what are claimed to be the challenges of “globalization” (Bell 2006; Berggruen and Gardels 2012) — a rhetoric that is beginning conspicuously to resemble the celebration among capitalist elites during the interwar years of German and Italian fascism and even Stalinist communism for their apparently superior economic governance.

For the time being, the neoliberal mainstream’s political utopia is a “market-conforming democracy,”[8] devoid of market-correcting powers and supportive of “incentive-compatible” redistribution from the bottom to the top. Although that project is already far advanced in both Western Europe and the United States, its promoters continue to worry that the political institutions inherited from the postwar compromise may at some point be repossessed by popular majorities, in a last-minute effort to block progress toward a neoliberal solution of the crisis. Elite pressures for economic neutralization of egalitarian democracy therefore continue unabated, in Europe in the form of a continuing relocation of political-economic decision-making to supranational institutions such as the European Central Bank and summit meetings of government leaders.

Based on a lecture presented in the course “Rethinking Capitalism.”


[1] The “Matthew effect” was discovered as a social mechanism by Robert K. Merton (1968). The
technical term is cumulative advantage. On cumulative advantage in free markets see also Piketty (2014).

[2] And even that may be less than promising in countries like the United States and Britain, where it is hard to see what neoliberal “reforms” could
still be implemented.

[3] See several chapters in Schäfer and Streeck (2013).

[4] This is the Public Choice view of the fiscal crisis, as powerfully put forward by James Buchanan and his school (see for example Buchanan and Tullock 1962).

[5] A practical demonstration that capitalism can do better — i.e., be more capitalist — without democracy was initiated in 1973 by Henry Kissinger and
the CIA, in cooperation with the local financial elite, when they removed the elected socialist President of Chile from office in order to clear the
way for a successful field experiment in Chicago economics. The coup inaugurated the neoliberal revolutions during the subsequent era of

[6] One often forgets that most central banks, including the Bank for International Settlements, have long been or still are in part under private
ownership. For example, the Bank of England and the Bank of France were nationalized only after 1945. Central bank “independence,” as introduced by
many countries in the 1990s, may be seen as a form of re-privatization under public ownership.

[7] Of course, as Colin Crouch (2011) has pointed out, neoliberalism in its really existing form is
a politically deeply entrenched oligarchy of giant multinational firms.

[8] The expression is from Angela Merkel.