For some, probably a tiny minority, the long summer holidays are an opportunity for reflection on the future of democracy in the context of increasing uncertainty and signs that times are not what they used to be.

A new book, The Crisis of Democratic Capitalism, by Martin Wolf, the Financial Times’ chief economics commentator, will help one understand how the relationship of political democracy with the market economy is evolving.

Wolf compares the present system to a marriage of liberal democracy with the market economy, which he believes is economically and politically failing. This breakdown will have severe consequences for the free democratic world. The first signs of the crisis appeared in the middle of the last decade with the financial crisis of 2008. Many failed to realise how severe this crisis was and how much damage it caused societies.

Still, by 2014 things improved. Politicians bailed out distressed banks but failed to understand the damage the crisis inflicted on many ordinary people. Wolf argues that in Western democracies, particularly in Europe and North America, in the post-Industrial Revolution era, there was a deal between the people and the political and business elites that helped create stability up to the end of the last century. People consider the elites as legitimate if they deliver a reasonably satisfactory economic future for the people. This was the determining factor behind the potent force of democratic capitalism for many decades.

So, what has happened in the last two decades that has weakened this deal? For the past few decades, many Western economies have witnessed a long period of de-industrialisation, weak economic growth and rising inequality. Wolf argues that two political events confirmed that the deal between the political and business elites and the people was collapsing. 

Donald Trump, the most prominent populist leader, emerged as the presidential candidate for the Republican Party in the US. In the UK, people were faced with the Brexit referendum. The surge in populism continued to gain strength in other countries, including Italy, France, Spain and even Germany.

The financial crisis triggered many people’s doubts about the economic system, with politicians and technocrats not knowing what they were doing. Governments used taxpayers’ money to bail out businesses considered too large to fail. Still, ordinary people suffered significant declines in disposable income over very long periods due to austerity measures.

This created a profound disillusionment with political and business elites. Traditional political parties saw their electoral bases eroded as populists of different kinds promised a better future that the establishment could not guarantee.

For the past few decades, many Western economies have witnessed a long period of de-industrialisation, weak economic growth and rising inequality

In his book, Wolf extensively reviews the economic history of the last three centuries that saw an agrarian society adapting to industrialisation and then adapting again to an era of de-industrialisation. The current relationship between liberal democracy and market capitalisation is characterised by communities in which political power is diffused among the public and voters.

At the same time, we have economic systems that create immense wealth for some individuals and immense concentrations of economic power.

This apparent contradiction can be understood if we consider that when correctly managed, the market economy and democracy go along with one another. Wolf argues that the market system and democracy rest on systems of restraint. You cannot do whatever you like. The systems are governed by law. They require legitimate competition for both political power and in the market.

Wolf identifies the most urgent and fundamental things that need to happen to safeguard democratic capitalism. The objectives are not difficult to identify.

The difficult question is how we should go about achieving these objectives.

The first objective is to restore economic growth that is sustainable in the longer term. This growth must have as broad an impact on various sections of society as possible. It needs to create opportunities for most people and protect them through the extreme vicissitudes of life. Gaps in the current welfare systems must be addressed, especially in the US.

But the real challenge will be the re-engineering of economies to make them more dynamic. This task is even more daunting as all countries face global environmental risks, particularly climate. Wolf believes that these challenges can be won as technology has moved in favour of a low-emissions and even zero-rated economy. But managing these challenges will be costly and often politically unpopular in the transition period.

Not surprisingly, Wolf believes that investing heavily in education, particularly the education of young children will determine how successful countries will be in resolving the crisis of democratic capitalism.