Democracy is in trouble. Recent survey data paints a sobering picture: Fifty-five percent of Americans say that their democracy is “weak,” and 68% fear it is getting weaker. Roughly half agree that America is in “real danger of becoming a nondemocratic, authoritarian country.” Further, many believe the system is rigged: Some 70% of Americans say that “Our political system seems to only be working for the insiders with money and power.” This is not just a U.S. phenomenon: Dissatisfaction with democracy has increased worldwide, with only 45% of people reporting that they are “satisfied with the way democracy is working in their country.”
These concerns are particularly pronounced among the young. Nearly two-thirds of Americans age 18 to 29 have “more fear than hope about the future of democracy in America.” In the U.S. and the UK, only around 30% of the youngest voters feel that it is “essential” to live in a democracy, compared with upwards of three-quarters of voters born before WWII.
These attitudes track closely with what has actually been happening around the globe over the past decade. Populist, authoritarian-leaning leaders have taken control in many countries, including the Philippines, Hungary, Turkey, Poland, and Venezuela — and even in the United States, the UK, and India. The Democracy Index, which rates the state of democracy in 167 countries on the basis of electoral processes, the functioning of government, political participation, democratic political culture, and civil liberties, currently gives the world a global score of 5.4 out of 10, the lowest score since the survey began in 2006.
I’m not the first to point out these trends, nor am I the first to try to understand how we got here and how we might survive this uncertain time in history. But I’m one of the few asking what’s at stake for business and whether corporations should do something to reverse these trends.
Democracy Under Attack: Series reprint
All things being equal, corporations seem unlikely to rush to democracy’s rescue. Business, after all, is booming. By many measures, the world has never been more prosperous. World GDP — on an inflation-adjusted basis — has increased sixfold in the nearly 60 years since I was born, and GDP per person has nearly tripled. Moreover, businesspeople tend not to care much for government, associating it with burdensome regulations, taxes, bureaucratic inertia, and incompetence. Rather than working to build up governments, business interests have waged campaigns against them for decades, often undermining the institutions that support democracy in the process. In the United States, businesspeople fought ferociously against the New Deal and against programs like Social Security and Medicare. Corporations have broken unions, clashed with the free press, and flooded the political system with money in an attempt to control policy.
But the result has been not the free market triumphant, as business leaders may have hoped. Instead, we’ve been left with a system that favors the rich and the well-connected at the expense of the general population. Inequality has skyrocketed, and environmental degradation has accelerated at an unprecedented rate. Without democratically accountable governments to ensure that markets remain free and fair; that “externalities” like pollution are properly controlled; and that opportunity is available to all, societies risk falling into populism. In countries around the world, left-wing populists are experimenting with state control, and right-wing populist governments are degenerating into crony capitalism (or worse). Neither is good for business, and both will have horrible effects on our society and the planet.
If government is the counterweight to the free market, democracy is the force that ensures that governments do not devolve into tyranny, seizing control of the markets in the process. I believe that strengthening democracy is the only way to ensure the widespread survival of free-market capitalism, and with it the prosperity and opportunity that has changed the lives of billions of people. It’s also the only way to tackle the world’s biggest threats, from global warming to inequality. Business has the resources, political power, incentives, and responsibility to make significant progress in this endeavor. Indeed, it has widespread support. People today report trusting their employer more than the government or the media, and a recent global survey finds that 71% of respondents believe that “it is critically important for my CEO to respond to these challenging times.”
The business community has played an important role in strengthening democracy and in rebuilding society in countries as diverse as Chile, South Africa, and Germany. It can happen again, but only if business leaders understand the extent to which free markets depend on democratic governments — and only if they are willing to stop actively destroying them.
What the Free Market Needs to Survive
The free market is one of the great achievements of the human race. It has been a driver of innovation, opportunity, and wealth around the world. But free markets need free political systems to succeed. To see what happens to markets in their absence, consider the case of Russia. After the fall of the Berlin Wall and the collapse of the Soviet Union, Russia moved aggressively to embrace an unconstrained market. But no one took the time (or had the inclination) to build the democratic institutions essential to a free market. The Russian government sold state-owned holdings — the vast majority of the economy — to a small group of oligarchs, creating a particularly nasty form of crony capitalism that still exists today.
Democratic government protects and strengthens free markets by providing (at least!) four of the essential pillars of genuinely free and fair capitalism:
An impartial justice system. Free markets require property rights and contracts, which protect everything from land and potatoes to ideas and information. They also rest on the understanding that participants in the market will keep their promises — and that if they don’t, there will be consequences. Both things depend on the rule of law. Without it, corruption flourishes: Property rights change hands at the whim of the powerful; contracts are not worth the paper they’re printed on. No legal system is ever completely impartial or effective, of course, but countries in which the government is democratically accountable tend to have much stronger and less corrupt judicial systems.
Prices that reflect true costs. Prices allow thousands of buyers and sellers to work together without the need for formal coordination — a daily miracle that creates global prosperity. Milton Friedman spoke eloquently about how the price mechanism works to facilitate the hundreds of transactions — among “people who don’t speak the same language, who practice different religions, who might hate one another if they ever met” — required to make something as simple as a pencil.
But prices work their magic only when they reflect the intersection between real costs and a real willingness to pay. In the United States, for example, fossil fuel–generated electricity is far too cheap. Power from coal-fired plants costs roughly five cents per kilowatt-hour (¢/kWh). But an accurate price — a price that reflected the cost of burning coal — would take into account how it worsens air pollution and contributes to global warming. The health costs associated with producing a kilowatt-hour of coal-fired electricity, for example, have been estimated at 4¢/kWh. Add to that another 4 cents in climate-related damage and the real cost of burning coal is much closer to 13¢/kWh. As long as prices remain artificially low, however, companies have little incentive to stop generating enormous amounts of particulate pollution and greenhouse gases. If markets are to be efficient, they need governments to ensure that externalities are properly priced — in this case, for example, by taxing carbon emissions and pollution.
Real competition. Markets are only free and fair when it’s easy to enter and leave them, and when participants are prevented from colluding. When this is the case, competition thrives, forcing firms to adopt the latest techniques and to improve efficiency and productivity. It drives them to innovate, propelling the cycle of “creative destruction” that political economist Joseph Schumpeter celebrated and that we enjoy every time we benefit from a new drug or the latest smartphone app. Without regulations to safeguard competition, innovation stalls, efficiency plummets, and prices steadily rise. It was government that broke up AT&T and IBM, triggering an explosion of competition and greatly reducing prices. It will almost certainly be government that ensures that there is genuine competition for companies like Amazon, Google, and Facebook.
Freedom of opportunity. Last but not least, markets are genuinely free only when everyone can play. When the economy is controlled by the state or the political elite, the opposite is true: Access to jobs and economic opportunity is tightly controlled. Relatives of the rich and powerful can start firms, but you can’t. Finding a job is a matter of connections and access — of going hat in hand to those who control the levers of power.
In a free market, anyone can participate. Immigrant entrepreneurs can set up their own firms and prosper. Women can become CEOs and doctors and sports icons. Governments are vital in supporting freedom of opportunity by serving as a check on the power of elites and by providing the public goods, such as education and health care, that lay the foundation for the success of all citizens, no matter their parents’ income or their race or gender.
Some people believe that the market can police itself and provide essential public goods — and sometimes it can. For example, the International Chamber of Commerce, which facilitates international trade by setting rules, arbitrating disputes, and engaging in policy advocacy, is an entirely voluntary, self-regulating body. But my research and that of many others suggests that such examples are relatively rare. In practice, the power of the market is most reliably balanced by the power of government — and government is best kept in check by the existence of a thriving democracy.
What Free Societies Look Like
Any single entity — whether it’s business, government, or labor unions — can become too powerful in the absence of countervailing power. The result is often an extractive system, one in which institutions concentrate political and economic power in the hands of a powerful elite that runs the state (and the market) for its own benefit. Such societies are characterized by patronage networks, weak property rights, and widespread monopolies. China, Angola, North Korea, and Turkmenistan are examples of nations with extractive institutions.
But when a country’s major institutions — both economic and political — are inclusive and in balance with one another, society flourishes. Inclusive economic institutions support the effective functioning of a free market, while inclusive political institutions enable everyone to participate in the political process and to monitor and control the government. The United States, Germany, Chile, South Korea, and Japan are all classic examples of societies with inclusive institutions.
Inclusive Versus Extractive Institutions
Of course, things are not always black-and-white. Countries may be economically inclusive but politically extractive, and vice versa. Singapore, for example, boasts a vibrant and open market, but political elections are neither free nor fair and freedom of speech is limited.
You might be thinking, Are extractive governments always a bad thing? Look at China: Its economy has enjoyed remarkable growth — its government seems great for business! And it’s true that some of the world’s fastest economic growth has been in nations with extractive institutions. In Nigeria, for example, an extractive government that catered to oil interests and received massive kickbacks from drilling operations saw its GDP grow at an average of 7.6% a year from 2006 to 2015. Over the same period Turkmenistan, which strongly represses religious and political freedoms, grew at 11%.
But impressive numbers like these are often driven by the fact that in weak economies, small reforms can make a big difference. It’s no surprise that when countries historically closed to global trade liberalize targeted segments of their economies, dramatic growth often results. But growth rates are much more stable under inclusive regimes, since inclusive institutions appear to be much more likely to encourage the kind of creative destruction that leads to sustained growth. By contrast, extractive institutions are often unable to generate substantive innovation because potential new entrants are routinely thwarted in their efforts to create value. And when innovations do emerge, they are often either expropriated or wiped out by established entities.
The stifling effects of extractive governments can’t be overstated. Some years ago, I met a young man from one of the Eastern European nations that has recently embraced a particularly virulent form of nationalist populism. At the time, he was in the midst of starting a software company and was proud of the fact that he was putting his U.S. education to work creating jobs in his native country. His company has thrived, but when we met recently, he told me that he was deliberately restraining its growth. “I mustn’t get too big,” he said. “If I do, the politicians will take the firm from me.”
Strong inclusive institutions are associated with not just better economic performance but lower income inequality, greater socioeconomic mobility, greater social freedoms, and larger increases in social welfare. The United States, a prototypical liberal market economy, is a classic example of this dynamic — at least until recently. (As historian Jill Lepore notes, “in 2016, the [Democracy Index] for the first time rated the United States a ‘flawed democracy,’ and since then [it] has gotten only more flawed.”)
It’s not always smooth sailing with inclusive governments, of course. As any business leader will tell you, even the most inclusive and best-regulated governments can be exceedingly difficult to work with. But this is the nature of the beast. The give-and-take of the political process in combination with a focus on the public good rather than on private profit means that governments often look less “efficient” than business. But while efficiency is something business leaders often obsess about, it is not the right measure for assessing the success of government. What matters more is whether the government is clean, responsive, transparent, and democratic. Business is a superbly efficient profit-making machine, but without the guardrails that a democratic government can provide, it ultimately undermines its own success. And that’s exactly what’s happening today.
Where the World Is Headed If Nothing Changes
My husband, James Morone, a historian who’s spent the past year writing about political polarization in America, wandered into my office one day last fall. “You know,” he said, “I’m struck by how similar the run up to the Civil War feels to our present moment: the same conviction that the other side wants to destroy the republic; the same willingness to do anything to ensure that one’s own side wins. It’s unnerving.”
He may be onto something. One of the first indications that a nation is becoming less democratic is that it becomes more polarized. We see this happening in the United States. Owing in large part to gerrymandering, upwards of 90% of U.S. representatives are reelected. The only real threat they face is from within their own party, a dynamic that drives them to take increasingly extreme positions. Few lawmakers have any incentive to compromise.
Increasing polarization is leading to deadlock. Pair that with widespread voter suppression and problematic mechanisms like the electoral college, and it’s no wonder people are cynical about democracy. If society fails to address these problems, inequality will only get worse even as the accelerating effects of climate change make it ever harder to build a more sustainable economy.
I think it’s unlikely that revolutionary mobs will come for the rich, and I don’t believe the United States is headed for another civil war. But I fear that the U.S. and the world will become ever more polarized, ever more unjust, and ever more uncomfortable. In this unsettled environment, countries are more likely to fall prey to populism. And as I mentioned, populism is often no friend to the free market. I know few businesspeople who are fans of the UK Labour Party’s platform, for example, and left-wing populism has caused enormous economic (not to mention social) damage in South America and Africa. Right-wing populism has an equally, if not more, troubled track record. Time after time, right-wing populists have become authoritarian dictators. Perón gutted the Argentine economy, and Hitler and Stalin — both classic right-wing populists — utterly destroyed their entire societies.
How Can Business Help Rebuild Democracy?
Today’s challenges are daunting and enormously complex. While there are proactive steps that individual business leaders can take on their own — speaking up about the importance of government, giving employees the day off to vote, being transparent about their political spending — things are unlikely to improve until business as a whole acknowledges its central role in the ongoing erosion of democracy. And then it’s incumbent on business and government to work together to save it. Let’s look now at moves business could take to drive positive change:
Stop eroding democratic institutions. One of the reasons that global democracy is in decline is because business has spent enormous sums of money subverting it. There are no shortages of examples of this; let’s look at a couple from the United States. In 1971, future Supreme Court justice Lewis Powell asserted in a widely circulated article known as “the Powell memo” that the American economic system was under attack — from government. At the time, the charge seemed somewhat plausible. Government was popular and strong, and the younger generation was actively challenging the merits of capitalism. The Powell memo called for mobilization for political combat: “Business must learn the lesson…that political power is necessary; that such power must be assiduously cultivated; and that when necessary, it must be used aggressively and with determination — without embarrassment and without the reluctance which has been so characteristic of American business.”
Many business leaders took up this challenge with alacrity. Perhaps the most successful have been Charles and David Koch, sole owners of Koch Industries and — until David Koch’s passing — two of the richest men in America. They were the de facto leaders of an ongoing effort to reduce the size and power of the U.S. government (today, Charles carries the torch alone). The network they founded, now funded by more than 200 wealthy donors, is committed to cutting taxes, blocking or eliminating business regulation, reducing funding for public education and social welfare initiatives, weakening public and private labor unions, restricting easy voter registration, and cutting back voting days and hours.
Democracy has been further undercut by the increasingly corrosive influence of money in politics. Following the U.S. Supreme Court’s 2010 Citizens United decision, external spending on presidential elections surged from $338 million in 2008 to $1.4 billion in 2016. This spending excludes politically motivated donations by the tax-exempt charitable foundations of U.S. companies, which a recent study estimated at $1.6 billion in 2014. Spending on lobbying more than doubled from 2000 to 2010 (from $1.6 billion to $3.5 billion) and has since stabilized at around $3.3 billion per year. Although much of the growth in political spending has likely come from very wealthy individuals rather than from business corporations, the fact that there is now a great deal more corporate money in politics is beyond doubt. Much of this is “dark money”; we don’t know who is behind it. Such spending is corrosive because it creates the perception — and plausibly the reality — that the system is rigged in favor of the rich and that citizens’ individual votes don’t count.
In 2014, for example, political scientists Martin Gilens and Benjamin Page published a study examining the relationship between popular support for a policy and the odds of its becoming law. They found that in the United States there is almost no correlation between the views of the “average citizen” and changes in policy. Proposals supported by 90% of the general population were no more likely to pass than proposals supported by 10%. But if the rich supported a policy, it got passed. Polls taken ahead of the 2017 tax cut, for instance, suggested that it was not popular among most voters — and even now, two years later, only around 40% of Americans approve of the law. That’s not surprising: Most estimates suggest that at least 80% of the benefits from the cut have gone to the wealthiest 10%.
In the U.S. and many other countries today, the pillars that have kept the market free and fair are eroding and opaque interest groups and corporate monopolies (consider any of the major tech companies) are gaining political power. Inclusiveness is giving way to extraction. These trends strengthen a narrative of “the rich” making out like bandits while trashing the world for future generations. Fewer and fewer people believe that their children will be better off than they are. By helping to weaken inclusive government’s guardrails, business may have strengthened its financial position in the short term, but it has been sowing the seeds of its own destruction.
This must stop. Business must renounce its political power and lobby hard against money in politics. It must take action to strengthen the very institutions that can oppose corporate interests. Business can be a valued contributor to the policy conversation, but only when consumers, experts, labor unions, and grassroots organizations are all playing a strong role. Otherwise, corporations’ engagement in politics is dangerously destabilizing. Business must become a partner in building society, not a master.
The key distinction business needs to make is between civics and politics. Rather than taking a partisan position (or spending money) on specific policies, firms should instead focus on the policy-making process, actively supporting a healthy, functioning democracy so that all stakeholders and communities can engage in active debate about what those policies should be.
Form coalitions with government. Rebuilding democracy is almost certainly going to require legal or constitutional changes to ensure that every citizen can participate in and influence the political process, and that lobbying and political spending is openly reported and disclosed (or eliminated entirely). It will also require reestablishing trust in the media and nurturing some kind of organized voice for employees.
No single firm can put these kinds of changes in motion. But history suggests that when groups of firms or business leaders act together in partnership with civil society and government to support structural change, great things can happen. Take the case of Denmark. In the second half of the 19th century, Denmark was a nation in trauma. In 1864, the country was defeated in the Second Schleswig War by Prussia and Austria, losing territories that had been under Danish control since the 12th century. This was one of a long line of defeats that had left Denmark a small, poor country that could no longer aspire to great power status. By the 1890s, bitter conflict between the Danish Right Party (an uneasy alliance between big agriculture and Denmark’s leading industrialists) and the Social Democrats (the party of the working class) threatened to cripple industry and tear the country apart.
But in 1896, Niels Anderson, a member of Parliament and a railroad entrepreneur with a skill in building consensus, took the lead in forming the Confederation of Danish Employers, or the DA. He sold the idea to his colleagues as a means to influence public policy in the absence of a legislative majority and to achieving industrial peace by unifying the voice of business. He was remarkably successful in achieving both goals. The DA worked hard to unite Danish unions into a single federation — the LO, or Danish Confederation of Trade Unions — and then collaborated with it to put in place a national system of collective bargaining and close collaboration with government.
Today, Denmark combines a fiercely competitive free market with national health care, heavily subsidized early childcare, and significant investments in worker training — a combination that has given it one of the highest average minimum wages in the world at $16.35 in 2015 and one of the lowest levels of income inequality among the OECD. Policy making in Denmark is highly collaborative, bringing government, employers, and unions together in a joint process that now goes back more than a hundred years. The approach has made possible a unique mixture of relaxed labor regulations (which favor firms) and a strong welfare state (which favors workers).
This is one of several such examples. When Seewoosagur Ramgoolam became the first prime minister of a free Mauritius in 1967, after a bitterly fought election, the country seemed at risk of collapse. He could have created a one-party state or nationalized the country’s sugar plantations. But instead he formed a government of National Unity, reaching out from his own party of avowed Marxists to the sugar baron capitalists who dominated the economy. The opposing party decided to cooperate, and together the two sides entered a true power-sharing agreement. The agreement proved to be surprisingly successful: Elections have been free and fair and have consistently led to transfers in power. Today Mauritius ranks 13th in the World Bank’s Ease of Doing Business Index and as the eighth “freest economy in the world.”
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Could such cooperation happen again? Could businesspeople band together, alongside government, to support democratic reform? And can they find a way to maintain the peace and prosperity that have made the past 50 to 100 years a golden age for so many?
One hopeful sign is that this crisis is starting to pique the interest of business leaders: One survey found that nearly 70% of executives were concerned about the status of democracy and more than half believed that business leaders have a responsibility to fix it.
The case is strong for collective action — and business already acts collectively all the time. Trade associations press for change that will benefit the industry as a whole. The U.S. Chamber of Commerce is precisely the kind of “peak association” that made so much difference in the case of Denmark. And there are already many examples of businesses acting collectively at smaller scales. In U.S. cities like Minneapolis, Cleveland, Detroit, and Chattanooga, for example, local business associations work closely with local government to support investment in education and transportation and to address global warming. In the U.S. in particular, democracy is very much a local process, and city- or state-based business associations are well positioned to make a huge difference should they decide to throw their weight behind political reform. For example, voting rules are almost entirely in the hands of U.S. states. If the business community across every state united in support of democratic reforms, things might change very quickly.
Sometimes people dismiss my examples and arguments, or question whether business will step in to save democracy any time soon. “In every case you mention,” they say, “the country was close to disaster; business had no choice but to act.” Exactly. I believe we are uncomfortably close to the edge of — if not disaster — then very serious dislocation. Will business choose to act? Will you?