At first blush, a populist message of “us vs. them” might seem less effective than a message of “all of us together,” given that elections are won with broad coalitions. But under conditions of widespread alienation and distrust, the political gamble of an exclusionary, anti-pluralist message can pay off big.
CHICAGO – In the Middle Ages, Italian city-states led the European “commercial revolution” with innovations in finance, trade, and technology. Then something strange happened. In 1264, to take one example, the people of Ferrara decreed that, “The magnificent and illustrious Lord Obizzo … is to be Governor and Ruler and General and permanent Lord of the City.” Suddenly, a democratic republic had voted itself out of existence.
In fact, this was not an uncommon occurrence in Northern Italy at the time. As Niccolo Machiavelli explains in The Prince, the people, seeing that they cannot resist the nobility, give their support to one man, in order to be defended by his authority. The lesson is that people will abandon democracy if they are worried that an elite has captured its institutions.
Medieval Italy’s democratic institutions succumbed to what we might now call populism: an anti-elitist, anti-pluralistic, and exclusionary strategy for building a coalition of the discontented. The method is exclusionary because it relies on a specific definition of “the people,” whose interests must be defended against not just elites, but all others. Hence, in the United Kingdom, the Brexit leader Nigel Farage promised that a vote for “Leave” in 2016 would be a victory for the “real people.” As Donald Trump told a campaign rally the same year, “the other people don’t mean anything.” Likewise, former Colombian President Álvaro Uribe often speaks of the “gente de bien” (the “good people”).
There are two obvious reasons why such populism is bad.
First, its anti-pluralistic and exclusionary elements undermine basic democratic institutions and rights;
second, it favors an excessive concentration of political power and de-institutionalization, leading to poor provision of public goods and subpar economic performance.
Nonetheless, populism can become an attractive political strategy when three conditions obtain.
First, claims about elite dominance must be plausible enough that people believe them.
Second, in order for people to support radical alternatives, existing institutions need to have lost their legitimacy or failed to cope with some new challenge. And
third, a populist strategy must seem feasible, despite its exclusionary nature.
All three conditions can be found in today’s world. The increase in inequality over the past 30 years means that economic growth has disproportionately benefited a small elite. But the problem is not just inequality of income and wealth: there is also a growing suspicion that the social distance between the elite and everyone else has widened.
These economic and social disparities have profound implications for political representation. In the US, political scientist Larry M. Bartels has shown that while legislators have increasingly defended the interests of the rich, gerrymandering has spared them from political competition. In Europe, Jean-Claude Juncker, while serving as prime minister of Luxembourg, once described the European Council’s decision-making as follows: “We decree something, then float it and wait some time to see what happens. If no clamor occurs … because most people do not grasp what had been decided, we continue – step by step, until the point of no return is reached.” Such elitist logic is intrinsically vulnerable to populism.
In addition to managing new challenges poorly, institutions and policymakers have also failed to look beyond their own dominant narratives. For example, in the run-up to the Brexit referendum, the “Remain” campaign focused entirely on the economic costs of leaving the European Union, even though opinion polls showed that migration and other issues were of much greater concern to voters.
Finally, for populism to get a foothold, politicians themselves must see it as a viable strategy. Generally speaking, declaring that the “other people don’t mean anything” isn’t the best way to garner broad support. So, even when structural factors favor it, populism can succeed only in certain circumstances. In Trump’s case, the intense
partisan polarization in the US means that he can appeal to marginal or swing voters, because he knows that Republicans will vote for him no matter what. And, more generally, populism can win when the “other people” are narrowly defined or simply small in number, provided that they can still be depicted as posing a threat.
To defeat populism, then, one must address all the factors that make it a viable strategy. That starts with recognizing that populism can emerge only when there are real social and economic problems to give it electoral traction. It also means being honest about the fact that there are competing and contested visions of citizenship, which should be debated, not ignored.
As a de-institutionalizing strategy, populism appeals to the growing cohort of those who are disillusioned with existing arrangements. In the US, the widespread perception that institutions have failed to address issues such as inequality has been eroding public trust in major institutions since the 1970s. After failing to anticipate the 2008 financial crisis, US policymakers are now struggling to regulate (and tax) new “mega-firms” like Amazon and Facebook. They are also seen as having dropped the ball with respect to globalization and the effects of the “China Shock” on local labor markets. Similarly, in Europe, increased labor mobility and rolling refugee crises are widely seen as having surpassed EU institutions’ carrying capacity.
Finally, we need more democracy and representation – including, possibly, referenda – so that voters feel as though their concerns are being taken seriously. The political class should be exploring new ways to make government more representative of society. India, for example, has caste-based quotas for parliamentary seats and other positions, and many other countries do the same with respect to gender. There is no reason why the US and Europe couldn’t pursue similar measures.
This commentary appears in connection with the Trento Festival of Economics. For more information about the event, go here. For Project Syndicate’s compilation of related commentaries, go here.
Keeping track of the Jacksonians, Reformicons, Paleos, and Post-liberals.
I like to start my classes on conservative intellectual history by distinguishing between three groups. There is the Republican party, with its millions of adherents and spectrum of opinion from very conservative, somewhat conservative, moderate, and yes, liberal. There is the conservative movement, the constellation of single-issue nonprofits that sprung up in the 1970s —
gun rights,
pro-life,
taxpayer,
right to work
— and continue to influence elected officials. Finally, there is the conservative intellectual movement: writers, scholars, and wonks whose journalistic and political work deals mainly with ideas and, if we’re lucky, their translation into public policy.
Prestige is in our genes. According to biological anthropologist Joseph Henrich, it evolved because we are a cultural species, in the sense that our individual survival depends on acquiring the knowledge that resides in the collective brain. We acquire it through imitation, but we need to decide whom to imitate. Numerous scientific studies have shown that we tend to imitate people who are perceived to have prestige, a sense that develops very early in childhood.
Henrich suggests that this is the outcome of an evolutionary game in which prestige is payment for the generosity with which the prestigious share their knowledge. We share alpha-male dominance with our primate cousins, but prestige – a form of “payment” that predates money, wages, and stock options – is quintessentially human.
While prestige solved a problem that has been with us throughout our evolution, it has had to interact with the technological changes of the past half-century. In particular, the rise of what economists call skill-biased technical change – the reliance of modern technologies on highly skilled workers – has led to growing wage differentials between skill levels.
In his new book The Future of Capitalism, Paul Collier argues that this increased wage inequality has changed the self-perception of the highly skilled: their professional identity has gained greater salience than their sense of themselves mainly as members of the nation. Using a model of human behavior proposed by George Akerlof and Rachel Kranton, Collier argues persuasively that the satisfaction conferred by one identity relative to another – say, the profession over the nation – depends on the esteem with which others regard that identity.
As wage differentials grew, and the highly skilled shifted the focus of their identity from nationhood to profession, the value for all others of maintaining their national identity decreased. The low-skilled were trapped in a less valuable national identity.
This dynamic, according to Collier, explains the vote for Brexit in Britain and the rise in right-wing nationalism in other rich countries: it is concentrated among lower-skilled inhabitants of more rural, less ethnically mixed environments where traditional national identity is still dominant. It also explains declining trust in elites: because members of the elite identify primarily with their more global professional identity, they are perceived as caring less about their reciprocal obligations with the rest of the nation. Delegating choices to experts is passé, because experts no longer care about the rest of us.
Rising wage differentials may destroy the equilibrium proposed by Henrich. If the prestigious are already very well paid, and are not perceived as being generous with their knowledge, prestige may collapse. This may be another instance of the incompatibility between homo economicus and community morality emphasized by Samuel Bowles in his book The Moral Economy: the self-interested, transactional behavior that defines the market is not acceptable in the family or the community.
The collapse in the prestige equilibrium can do enormous damage to a society, because it may break the implicit contract whereby society uses critical skills. To see why and how, look no further than what has happened in Venezuela.
In 2002, then-President Hugo Chávez’s left-wing populist rhetoric targeted the national oil company PDVSA. The company was already a state-owned enterprise, so nationalization was not the issue. For Chávez, the problem was PDVSA’s meritocratic culture: to succeed in the company, political connections were of no use. What the company valued most was the knowledge needed to manage a complex organization.
Social barriers to entry at PDVSA were low, because Venezuela had a 50-year history of free university education and decades of generous scholarships to study abroad, especially in oil-related fields. But once in, advancement was merit-based. A similar culture developed in the power sector, the central bank, universities, and other entities that were critical for state capacity.
The populist revolt equated knowledge with privilege and threw it out the window. When the merit culture was threatened, the company went on strike, and more than 18,000 workers – over 40% of the company’s labor force and almost all of its senior management – were fired. As a result, there was a spectacular collapse in the performance of the oil industry and, eventually, in all the other institutions affected by the war on expertise, leading to the catastrophe that is Venezuela today.
The lesson is clear. Given the requirements of today’s technology, dismissing expertise as privilege is dangerous. But because gaining expertise takes time and effort, it is not freely accessible to “the people.” The only way to sustain it is through an implicit prestige market: the experts are supposed to be generous with their knowledge and committed to the nation. Society “pays” them back by according them a social status that makes their position desirable, even if wage differentials are compressed, as they often are in the public sector (and were in Venezuela at the time of the lethal attacks on expertise).
The alternative to populism is an arrangement whereby experts demonstrate authentic public spiritedness in exchange for society’s esteem, as often happens with military leaders, academics, and doctors. A well-functioning prestige market is essential to reconciling technological progress and the maintenance of a healthy polity.
James Dimon and Ray Dalio are among the most successful capitalists in the U.S. today. So when they worry aloud about the future of capitalism, it’s worth listening.
“I believe that all good things taken to an extreme become self-destructive and that everything must evolve or die. This is now true for capitalism,” Mr. Dalio, founder of hedge-fund manager Bridgewater Associates, writes on LinkedIn.
Mr. Dimon, chief executive of JPMorgan Chase & Co., writes in his annual letter to shareholders: “In many ways and without ill intent, many companies were able to avoid—almost literally drive by—many of society’s problems.”
Captains of industry have always opined on the issues of the day. Still, these latest missives are noteworthy for three reasons.
First, the authors: Mr. Dalio anticipated the financial crisis; his systematic management and investment style has made Bridgewater the world’s largest hedge-fund manager. Mr. Dimon is arguably the country’s most successful banker, having steered J.P. Morgan clear of the subprime mortgage disaster to become the country’s most valuable financial institution.
Second, the timing: They are speaking out at a time when the free-market capitalism that has served them so well is questioned by many Americans, including prominent Democrats.
Third, the content. Mr. Dalio and Mr. Dimon love capitalism and aren’t apologizing for it. But they recognize the system isn’t working for everyone, and they have ideas for fixing it, some of which might require rich people like themselves to pay more tax. Yet they fear the federal government is hamstrung by intensifying partisanship. So they are putting their money and reputations where their mouths are by speaking out, backing local initiatives and hoping like-minded business leaders join them. In effect, they are breathing life into the shrinking nonpartisan center.
In an interview, Mr. Dalio says many business leaders “don’t want to get into the argument. I can understand that. I say to myself, Should I get in? I do think if everyone keeps quiet, we’re going to continue to behave as we’re behaving, and it’s going to tear us apart.”
Mr. Dalio’s essay was inspired by a longstanding interest in the parallels between the 1930s and the present:
the growth of debt and
the relative impotence of central banks, the
widening of inequality and the
rise of populism.
Capitalism, he says, is now in a “self-reinforcing feedback loop”:
companies develop labor-saving technologies that enrich their owners while displacing workers.
The haves spend more on child care and education, widening their lead over the have-nots,
whose predicament is compounded by underperforming schools,
the decline of two-parent families, and
rising incarceration.
Mr. Dalio thinks inequality has fueled populism and ideological extremism, which he fears means capitalism will be either abandoned or left unreformed.
His solutions start with taking partisanship out of the mix. He would like government to join with business and philanthropic leaders with proven track records to find, fund and evaluate projects with high potential social returns, such as early childhood education and dropout prevention. The rich might have to pay more taxes, provided the money is used to raise the productivity and incomes of the bottom 60%, or establish a minimum safety net.
Mr. Dimon is less introspective about the flaws of capitalism than Mr. Dalio and more impatient with the recent fascination so many Americans are showing with socialism. His letter, written in the blunt, combative style in which he speaks (it should be read aloud in a Queens accent for full effect), reiterates familiar complaints about excessive postcrisis regulation.
But, like Mr. Dalio, he worries partisanship has crippled the country’s ability to enact basic reforms that elevate economic growth and strengthen the safety net, such as
improving high schools and community colleges’ provision of useful skills,
more cost-effective health care,
faster infrastructure approval,
more skilled immigrants coupled with legalizing illegal immigrants, and
requiring fewer licenses to start a small businesses.
“Can you imagine me saying, I can do a better job for the Chase customer if I don’t get involved in details, the products, the services, the prices, how we treat people, how call centers work?” Mr. Dimon asks in an interview. “Policy has too often become disconnected from the analytics; we got slogans instead. It’s driving people apart.”
There’s a chicken-and-egg problem with these well-intentioned calls for nonpartisan problem solving: It requires a level of nonpartisanship that doesn’t exist; otherwise the problems would, presumably, have been solved.
If business leaders can’t persuade with words, they may by example. Mr. Dalio and his wife, Barbara, have donated $100 million to the state of Connecticut, to be matched by the state and other philanthropists, to create a $300 million partnership devoted to reducing dropout rates and promoting entrepreneurship in underserved schools and communities.
For its part, J.P. Morgan has under Mr. Dimon combined commercial and philanthropic resources to finance affordable housing, small business and infrastructure and job training in Detroit, announced $600 million in workforce development grants since 2013, and boosted salaries for lower-end employees. Mr. Dimon, in his shareholder letter, called on fellow CEOs to “take positions on public policy that they think are good for the country.”
It doesn’t always work. The Business Roundtable, which Mr. Dimon chairs, successfully pressed Congress and President Trump for lower business taxes, but unsuccessfully for more infrastructure and legalizing illegal immigrants. Says Mr. Dimon: “We should give it the best shot we’ve got.”
