PART I

Democratic Capitalism at Risk

WHEN I GRADUATED from Harvard Business School in 1960, I had no idea, not in the furthest reaches of my imagination, that capitalism might someday undermine democracy. The preceding 15 years, post–World War II, marked at least in the United States what was perhaps the highest level of responsible capitalism ever achieved. Veterans retrained for new jobs, employment rose, investment soared, differences between executive and worker salaries were barely 20 to 1, relations between labor and management were generally good, banks and corporations promoted balanced growth, and consumption rose. Hardwon liberty and freedom of enterprise were linked. Every indication suggested that these favorable trends would continue.

But then something happened, as I narrate in the pages of this book. First, capitalism began adopting and then entrenched a new motivation, secrecy, that is now as important as its original motivation, profits. Second, parallel with the growth of this secrecy motivation, mechanisms were created and continue to be expanded enabling income and wealth accumulation in staggering amounts, trillions and trillions, hidden from view, driving oppressive economic inequality. Third, these realities are fostering the noticeable decline of democracy and the relentless rise of authoritarianism.

The simple truth is, capitalism purposefully operating in secrecy and democracy attempting to operate with transparency cannot coexist. Democratic capitalism must change if the system is to survive this century’s move toward and perhaps beyond ten billion in global population, most living in economic straits.

Severe imbalance now characterizes the way democracy and capitalism are functioning. Democracy is expected to convey equal political rights, and capitalism should offer fair economic opportunities. Instead, these two guiding tenets are becoming decoupled, no longer functioning in sync. The capitalist side of the equation is running out of control, eroding the social contract, facilitating crime and corruption, evading obligations, maximizing income and wealth inequalities, and thus jeopardizing democracy. I lay the onus for these outcomes primarily on rogue capitalism rather than on a collection of other societal problems.

The original pillars of democracy—popular vote, rule of law, representative legislatures, protection of minority rights—though imperfectly posited and often challenged have not fundamentally changed since their formulation in the late 1700s.

The original pillars of capitalism—making profits, spreading wealth, and generating public goods—are now radically altered. Capitalism has taken on the ulterior motive of masking income in the trillions of dollars annually and wealth in the tens of trillions of dollars cumulatively in the coffers of the richest countries and the richest people.

Earning income and accumulating wealth in a hidden manner explains why economic disparities are soaring. Wealth inequality is exploding in both rich and poor countries. Capitalism increasingly directs its gains into the hands of its most privileged elites. The wealth of the top 1 percent nearly equals the total wealth of the remaining 99 percent. Much of this wealth is in stagnant accounts earning less than or barely the rate of inflation, essentially stored up value, underproductive, rather akin to hoarding currency notes in a vault. This at a time when hundreds of millions of people around the globe, mostly the young, are underemployed. And this at a time when illegal money is closely associated with loss of freedom and civil liberties and declines in the rule of law and accountability in scores of countries.

Income inequality is likewise growing almost everywhere and more so than appears in economic statistics, since income data seldom record what is earned on assets transferred via the financial secrecy system outside of citizens’ countries. Both wealth and income disparities are wider than available data reveal.

Balance within the democratic-capitalist system depends on some semblance of an equitable social contract that navigates the space between equal political rights and fair economic opportunities. The ambition inherent in capitalism and the justice expected through democracy are now severely out of balance. Trust, essential to both parts of the system, is weakening. The social contract, however defined or formulated, is fraying.

Democracy is faltering in scores of countries around the world. Authoritarian political elites readily use the financial secrecy system for personal enrichment and find advantage in cultivating and maintaining the democracy deficit.

Rising inequality and weakening democracy contribute to political instability. With little stake in the economies and the politics of their countries, citizens take their discontent to the streets in their own cities and across borders, seeking shelter or joining others of like mind in rebellion and violence.

These trends are unsustainable. Severe imbalances in income, wealth, opportunity, freedom, and security, much of this fostered by a decidedly underachieving capitalist system, will not underpin a peaceful world.

The democratic-capitalist system is at risk. Conventional wisdom holds that the troubles in democracy lie within the mechanisms of democracy itself. I disagree. The troubles within democracy lie primarily within its capitalist counterpart. Capitalism is failing to live up to its stake in the bargain: providing a fair share of well-being for all. Rogue capitalism is on a collision course with democracy, threatening democracy. Rising economic disparity is the fertile field on which political alienation is so often cultivated.

Rebalancing capitalism and democracy is, along with climate change, the most difficult and important challenge facing the world in the twenty-first century, a critical issue around which much of the fate of political economy will turn. Today’s flawed two-part system cannot endure through the decades ahead.

We are truly at an inflection point, a historical moment when the democratic-capitalist system that has guided a good part of the world for some 250 years is now threatened by widening economic inequalities, raging financial illegalities, and advancing political authoritarianisms. As currently practiced, our two prevailing doctrines are not working well together and will not get us through the twenty-first century. This book is about improving prospects for the survival of democratic capitalism.

The good news is, we created our problems and therefore we can solve our problems. And we must. We must either reform capitalism or we will weaken democracy. This is the stark choice before us, a pivotal issue in the twenty-first century, a hinge in human affairs going forward. The whole of humanity can rise with a renewal of capitalism’s contributions to freedom and liberty.