The Twin Tailspin of Democratic Capitalism

From Harvard Business School's Malcolm Salter: A system that was once the envy of the world is fast becoming less democratic and less capitalist. But it’s not too late to reverse the slide.

Malcolm Salter is the James J. Hill Professor of Business Administration, Emeritus, at Harvard Business School. This is the first in a series of columns by Professor Salter on renovating democratic capitalism. These columns were adapted from his book, “The Fading Light of Democratic Capitalism,” published by Cambridge University Press in 2024.

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Over the past several decades our espoused model of political and economic governance, commonly referred to as “democratic capitalism,” has become less democratic and less capitalist. And at the same time, survey after survey have shown that its two vital building blocks — democracy and capitalism — have suffered dramatic setbacks in popular confidence.

If this twin tailspin remains unattended during the Trump administration, our market economy is likely to drift even further toward oligarchy and isolate citizens from the political process even more than they already are. This would effectively end the tenure of democratic capitalism as a credible national ideal and cornerstone of our national identity. Stemming this dangerous drift is reason enough to want to save democratic capitalism.

An equally compelling reason is that the arc of U.S. history over the past 75 years suggests that when our system of political and economic governance is working at a high potential, democracy and a market economy can co-exist and prosper together.

In the decades following World War II, we came closer than ever before to achieving this ideal state of democratic capitalism. Until recently, our unique pairing of democracy and capitalism has been both economically rewarding and, from the perspective of democratic principles, morally justifiable — even if true political justice remains a work in progress.

Our system of political and economic governance proved capable of delivering a level of innovation and economic growth far superior to that of other industrialized nations. It gave us a rising standard of living that became the envy of the world. It produced a rich national treasury that could pay for valued government programs, including safety nets for those in need. In addition to economic prosperity and security, democratic capitalism gave us the possibility of political freedom in the form of free and fair elections, protection of individual liberties, and rule of law. Citizen access to the political process, always somewhat problematic, rose to its highest level ever.

Along the way, Congress and regulatory agencies established by Congress were able to rein in many excesses of free markets and hold private parties controlling the factors of production accountable to the public will. Many personal freedoms, particularly in the areas of civil rights and access to essential services, were enhanced significantly.

Despite intermittent economic breakdowns and corruptions, and continuing shortfalls in achieving political equality for all, many citizens, like me, who grew up during the economically prosperous postwar years, considered our system of political and economic governance to be working reasonably well and offering a respectable governance model for the future -- especially after the enactment of Great Society programs in the 1960s affecting voting rights, health care, and education.

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In recent decades, however, dark clouds have appeared, casting a warning shadow across this bright light of democratic capitalism.

These clouds come in many forms. Stagnating (and declining) real incomes for some trades and professions. Increasing inequality in income and wealth. The adverse side-effects of the shareholder wealth maximization revolution. Inattention to capitalism’s losers. Intense gaming of society’s legislated rules of the road by businesses. Highly publicized cases of accounting fraud. Large executive pay packages that appear unconnected with accountability for corporate misdeeds. And unsurprisingly, given all that, an historically low level of trust in government.

To this catalogue of clouds, we must add the especially poisonous effects of pervasive cronyism and restricted suffrage. Indeed, this toxic duo constitute the ultimate “deal killer” for democracy and democratic capitalism. Together, they create a concentration of power in the hands of the few, while limiting the voice of the many — a truly undemocratic situation.

The “few” in this case are wealthy and powerful members of society, including the owners and leaders of our all-important business firms, who have the capacity to influence public policy for private advantage through virtually unlimited campaign contributions and massive lobbying efforts. Opportunities to secure such privileged advantage in the world of business typically emerge in the form of friendly congressional legislation, targeted exemptions from legislation, advantageous rules drafted by regulatory bodies, preferred access to credit, direct subsidies, preferential tariffs, and tax breaks.

“The laughter of the gods” by Udo Keppler. Published by Keppler & Schwarzmann, Puck Building, 1909 November 3. From the Library of Congress.

Cronyism greatly diminishes the democratic aspect of democratic capitalism. Cronyism also diminishes the capitalist aspect of capitalism, when accruing wealth comes from simply being powerful rather than from successfully serving customers in competitive markets.

The financial costs of cronyism are large and growing. Many of the direct economic costs — such as costs stemming from legislation and rulemaking favorable to business — can be crudely estimated. For example, a recent Cato Institute study calculated that the federal government spends more than $180 billion annually on direct and indirect subsidies to small businesses, large corporations, and industry organizations.

Other costs of cronyism – namely, the degradation of such values as self-restraint, truthfulness, trustworthiness, and lawfulness that are vital to the functioning of capitalism and democracy — defy precise quantification but are arguably the most important ones over the long run.

Restricted suffrage, the second element of the toxic duo, refers to election rules and practices that muzzle the political voice of ordinary citizens by limiting ballot access for prospective candidates and accessible voting for those wanting to register their voices in elections.

Discriminatory practices limiting the right to run for office include restricted primary processes. For democracy to function, however, every viable candidate should be able to compete, and every election should meaningfully reflect diverse viewpoints. This is clearly not the case across the country, however, because numerous states design their primaries to prevent viable candidates from running for office.

Discriminatory practices limiting the right to vote include the partisan redesign of voting districts to limit the influence of certain racial and ethnic groups or political parties, the closing or moving of polling stations, restrictions on community-based registration drives, elimination of same-day voter registration and early voting, and the absence of time off from work to vote.

Most rules and regulations affecting voting rights are state-specific, per Article Four of the Constitution. The major exception to this generalization is the Voting Rights Act of 1965, which outlawed many discriminatory voting practices adopted in the South after the Civil War and afterward. Since 1965, however, various protections of citizens’ rights to vote that were spelled out in the act have been eviscerated by U.S. Supreme Court decisions — such as 2013’s Shelby County v. Holder, which has had the unfortunate effect of striking down preclearance for any changes in voting law or practices such as redistricting before their implementation. The predictable result was an immediate wave of redistricting across Southern states to either exclude Black voters’ voice or favor one political party over the other – not unlike what we see unfolding today in Texas.

Pervasive cronyism and restrained suffrage are a deadly combination. Taken together, they create a governance system that is neither truly democratic nor truly capitalist. In addition, pervasive cronyism coupled with restricted suffrage destroys the perceived legitimacy of capitalism. Finally, a governance system that is perceived to be dominated by special interests and unresponsive to citizen needs is highly vulnerable to the capture of disconnected and disenchanted voters by political demagogues and reckless actors.

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This situation has not gone unnoticed by the public. Repeated polling by Gallup, Frank Lutz, Harvard’s Institute of Politics, and the Edelman Trust Barometer tells us that our system of political and economic governance has steadily lost public confidence and popular support. Today, only about one in five respondents trust U.S. big business; the same small share feels that the current system of political economy is working for them. Along with recent election results, these surveys seem to reflect an increasing sense that the political and economic “game” has become rigged against common citizens.

Reversing this deep decline in public support and correcting the underlying causes of democratic capitalism’s “decline” is a daunting task.

To begin, a successful renovation of democratic capitalism will require time-consuming and expensive changes of both a structural and cultural nature. Many of these changes — especially those aimed at curbing cronyism — can only be successfully implemented if our business leaders become evangelists for these changes. Without the support of a critical mass of business leaders, who are incontestably the central actors in our political economy, it will be impossible for core democratic principles — like political equality (the antithesis of cronyism) — to be re-embedded in the governance of our political economy.

This is bound to be a tough sell. Many business leaders have been reluctant to publicly support movements that may be deemed controversial by one or more of their constituencies or allies. Overcoming this reticence will be a major challenge. It will require answering the question of why business leaders should be interested in including political equality in their remit as fiduciaries for their investors and other suppliers of capital.

Beyond that, it will also require answering the question of why business leaders should see themselves, in the first instance, as guardians of our espoused system of democratic capitalism.

This is not to say that all business leaders eschew this role today. Especially in the domain strengthening suffrage, we have seen early movers like Patagonia, Levi Strauss, PayPal, Alphabet, Apple, Amazon, Southwest Airlines, and, for many decades, the Conference Board’s Committee for Economic Development supporting reform initiatives and related policy research. Yet, even for these “early movers,” few management leaders chose to publicly promote and evangelize for the work that their companies are doing in supporting our capitalist democracy.

For these forward-thinking leaders, and for vast number of CEOs and senior executives who have yet to engage in actively preserving democratic capitalism as a national ideal, we need to make the case that major changes are needed to preserve the promise of American-style democratic capitalism and that the active participation of our business leaders is critical to the success of this change process.

To do this, it will be useful to remind everyone what the idea of democratic capitalism entails and call attention to the risks we run if we continue to retreat from its underlying principles. From this stage setting, we can then turn to the range of changes required to restore our unique system of democratic capitalism as a national ideal, highlighting along the way the vital principles and values that underlie the proposed changes. At this point, we will be prepared to address the question of how our business leaders — many of whom are our most fluent defenders of capitalism – can serve as evangelists for the principle-based renovations of democratic capitalism that appear increasingly mandatory.

I will explore all of these points in forthcoming columns for The Renovator. There is much to discuss.