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Yes, modern capitalism may be well matched with liberal democracy


The vibrant markets on which growth depends are systems of rules backed by public power as well as social norms. Wise policies are needed to ensure that the fruits of growth of growth are widely shared. When these conditions are satisfied, market economies tend to generate not only broad improvements in living standards but also growing middle classes that the poor can hope to enter. Market-driven economic growth tends therefore to support constitutional governance in its modern form, combining elements of majoritarian democracy with protected individual rights and liberties.

The Industrial Revolution sparked more than a century of reform, with the aim of taming capitalism’s excesses and cyclical instability. The failure of these efforts during the Great Depression led to the collapse of liberal democracies throughout much of the West and to the rise of anti-democratic regimes and ideologies on the Left and the Right.

Strong trade unions helped balance the interests of labor and capital. Social programs helped meet basic needs and provide security for sick, unemployed, and elderly citizens. Counter-cyclical policies reduced the severity of economic downturns. International institutions stabilized currencies and trade.

But beneath the tranquil surface of liberal democracies, disruptive pressures were building.Manufacturing employment–a leading source of stable, well-paying jobs–lost ground, first relatively, then absolutely. The rise of the knowledge-based economy created sharper disparities—between more and less well-educated workers, and also between regions.

As growth has slowed and fewer citizens share in the gains from growth, support for liberal democracy has weakened. The example of China has convinced some autocrats that the West’s model is no longer the only game in town: it seems that they can enjoy the benefits of rapid economic growth without liberalizing their politics or abandoning control over the commanding heights of their economies.

of individual and minority rights. The institutions that defend liberalism—independent constitutional courts, a free press, and robust civil society—are under attack.

The political challenge is clear. As the industrial economy has given way to the information economy, the post-war reconciliation of markets and liberal democracy that fostered social mobility and a strong middle class has become obsolete. We need a new strategy for a new era.

Completing secondary education and receiving at least some post-secondary training is now economically essential. To make this necessity a reality, public policy will have to do more—from pre-school to college–to break the link between family background and educational attainment.
Traditional regional subsidies are the equivalent of blood transfusions, keeping patients alive without restoring them to health. Instead, governments should ensure that all regions have the building blocks of economic growth—education, transportation, finance, information, and infrastructure.
In most advanced societies, economic concentration is increasing, limiting competition, innovation, and entrepreneurial opportunities. Europe has taken the lead in resisting these negative trends, and other market economies should follow suit. Consumer prices are no longer an adequate guide to anti-trust policies, if they ever were.
Wages for lower-skilled occupations in advanced economies will be limited by wages for these jobs in less-developed societies. Higher productivity helps, but not enough. Public policy must step in, with higher minimum wages, increased wage subsidies, and universal opportunities for workers to share in rising business productivity and profits.
The excesses of globalization must also be reined in. Capital mobility should be limited when it imposes intolerable costs on jobs, wages, and social stability in advanced economies. Trade rules should not give advantages to state-controlled economies at the expense of market economies.

politics and sparked the populist surge.

On the first track lie reforms to ensure neutral procedures for creating electoral districts; new measures to reduce the impact of money on political outcomes; and rules to increase incentives for elected officials to cooperate across partisan and ideological divides. On the second, reforms to restrict divisive media practices and rally civil organizations to build bridges among partisans in local communities. For example, laws governing social media platforms could be amended to hold them more responsible for messages promoting hatred, violence, and illegality, and foundations could invest aggressively in organizations promoting civil dialogues among citizens with divergent policy views and ideological commitments.

This menu of economic and political reforms is daunting. Although at present the gap between the need for effective leaders and the supply of such leaders is at a cyclical peak, we can reasonably hope that clear-sighted politicians with a gift for public explanation will emerge as they have in past crises, and that they will have the ability to inspire their peoples to undertake the tasks their future requires.