DARON ACEMOGLU
The late-20th-century assumption that democracy and markets would ultimately triumph everywhere has since been met by an intellectual backlash that is even more wrong-headed. To chart a better path forward, we will need to revise our thinking in several policy domains at once.
WHEN Francis Fukuyama published his famous 1989 essay, “The End of History?,” he captured the mood in many Western capitals at the time.
Not everybody agreed with him that “the endpoint of mankind’s ideological evolution” had been reached, but few could deny the resonance of his message. In anticipating “an unabashed victory” for “economic and political liberalism,” he was channeling both the emerging policymaking consensus and what had already become the standard approach in much of academia.
This late 20th-century consensus rested on two distinct but synergistic pillars: political liberalism and economic liberalism. In the political domain, democratic institutions had the wind behind them and seemed to be taking root inexorably.
Humanity had been subjected to authoritarian despots and outright lawlessness for much of its existence. But ever since democracy had been “invented” in its modern form, the idea had been spreading around the world. Following the exhaustion of the alternatives (absolutism, fascism, communism) in the 20th century, many Westerners concluded that their model would ultimately triumph everywhere, even in places with little or no democratic history, such as the Middle East. Ordinary people would demand a voice, and even iron-fisted autocrats would not be able to resist the implications of this “Western idea.”
To be sure, the process would not unfold seamlessly. Fukuyama and the many others who shared his outlook understood that the triumph of democracy would take decades. It would involve rebellions, revolutions, civil wars, and large-scale disruptions to entire societies. Nonetheless, the arc of history was unmistakably bending toward democracy.
The proponents of this view drew heavily from the “modernisation theory” of the 1950s and 1960s. Adherents to this school believed that democracy followed naturally from economic growth, and that once a democracy had grown rich enough, it could never be dragged back into authoritarianism.
These conclusions also bolstered the old Kantian supposition that democracies do not go to war against other democracies. Thus, a world of democracies would create the conditions for international peace and the establishment of a “rules-based order.”
Politically, the future looked bright, and the economic outlook was no less bullish. By the late 1980s, a kind of free-market fundamentalism had taken hold across the “triumphant” liberal democracies. After all, there was clear evidence to show that market economies vastly outperformed centrally planned ones. They seemed to be better both at fostering innovation and at providing the kinds of goods and services that people wanted. For many, it seemed a short step to conclude that the less fettered markets were, the more innovation and economic dynamism they would produce.
But such arguments conveniently ignored the fact that the United States was a heavily regulated economy when it was outperforming the Soviet Union. The US government actively supported innovation, not only by subsidizing research and development but also by setting the direction of technology. Strong unions and minimum wages helped to institutionalise a norm of reciprocity that ensured that workers’ pay tracked productivity growth, while fiscal policy kept inequality in check by redistributing from the rich to the poor and the middle class.
The backlash
There has since been a widespread and broad-based backlash against economic and political liberalism. In the US and around the world, people are increasingly dissatisfied with democracy – particularly younger cohorts, which report a growing preference for left-wing or right-wing authoritarian regimes. On both sides of the Atlantic, it is now common to hear arguments advocating new forms of socialism or a move away from economic growth altogether.
This is a dangerous intellectual shift. The core assumptions behind such proposals are even more wrongheaded than the idea that economic and political liberalism are inevitable. As my own work shows, democracies do indeed outperform non-democracies quite consistently, both historically and in recent decades. Democracies deliver not only stronger economic growth, but also better health care and education for their citizens, notably the least well-off.
These benefits are undeniable, but they do not make the rise of democracy inevitable. Democracy takes work, and the processes that sustain it will always be contested. Democratic institutions necessarily reduce the power of elites and autocrats, who in turn will resist them. Democratic governance requires compromise, which can be a tall order in societies with a legacy of ethnic or religious conflict.
Democracy also requires an active and well-informed citizenry. But this is increasingly hard to come by when major television and social-media channels routinely spew falsehoods and citizens ignore civic engagement. During America’s long and costly “forever wars” in Afghanistan and Iraq, for example, the vast majority of its citizens were encouraged to go on with their lives, as if they had nothing at stake.
We also know that central planning is very seldom successful, especially when it comes to fostering innovation. History is replete with examples of economic growth being blocked because the state or powerful actors exercised too much control over innovation. In a world where poverty is still widespread, economic growth remains a moral imperative, and markets therefore remain a key part of the solution. But this does not mean that unfettered markets will reliably steer innovation in socially desirable directions. In fact, market economies work much better when they are appropriately regulated.
The seemingly simple solutions proposed by extremists – be it unfettered economic liberalism or some enlightened form of socialism – will not work. But until we have a new paradigm for thinking about the future, they will have a powerful influence on public opinion and policy debates.
Second, democracy’s future cannot be separated from the global context. We must abandon the idea that trading freely with authoritarian countries will “promote freedom” within their borders or make their governments any friendlier to democracy (as US President George H.W. Bush once claimed). Of course, this observation raises many more questions than it answers. How should democratic criteria influence economic ties and international diplomacy? Should democracies avoid supply chains that rely heavily on non-democratic countries? How should they think about technology transfers, joint research, and related issues? Neither academics nor policymakers have clear answers to such questions.
Third, it can no longer be assumed that economic growth will inexorably create shared gains. The US and the rest of the Western world have enjoyed significant technological progress and productivity growth over the past four decades, but workers, especially those without college degrees and specialised technical skills, have scarcely benefited. Textbook economic models generally suggest that productivity growth should ultimately translate into wage growth, but that has not been happening.
What the standard models usually miss is that the source of productivity growth matters very much, and the manner in which wages are set matters even more. Using machines to do what workers used to do may improve productivity, but it will not automatically bring shared prosperity. When output increases, employers and managers may choose to keep more of the gains for themselves, using automation to undercut workers’ bargaining power whenever the institutional framework allows.
Shared prosperity thus depends not only on productivity growth but also on the right composition of technology, institutions, and norms.
After market fundamentalism
We also need to rethink innovation policy. Yes, we in the West owe our prosperity, health, longevity, and modern conveniences to the three centuries of technological progress that never would have happened without market incentives. But the necessity of markets for driving innovation does not make them sufficient for producing social benefits. Markets direct investment toward technologies that will generate greater profits, which are not always the same as those that would foster growth or improve welfare.
In healthcare, for example, high-tech procedures and drugs targeting cures are more profitable than innovations to bolster public health and disease prevention, even though these could bring more social benefits. The market excessively favors the former, leading to underinvestment in the latter.
Similarly, left to its own devices, the market will continue to channel investment to fossil fuels. Taxation, regulation, and societal pressure are all necessary to direct more capital toward renewables. I have also argued that the market may be driving over-investment in automation, at the expense of the social and economic benefits that would come from improving worker productivity. In all these cases, we must move away from market fundamentalism in designing innovation policy. And yet, once again, much more research is needed to design better alternative frameworks.
Lastly, abandoning market fundamentalism means rethinking some of the key pillars of our regulatory regimes. A common approach in economics is to allow market processes to unfold before stepping in to consider whether there is too much poverty or inequality in the outcome. The standard fiscal tools of redistribution – direct transfers and safety-net programmes – are thus considered to be sufficient. But this assumption needs to be questioned.
A new regulatory framework must recognize the systematic distortions that can accompany market processes. Recent research shows that, contrary to the conventional academic wisdom, highly egalitarian countries like Sweden have not achieved more equitable outcomes solely through tax-transfer schemes. No less important is that their pre-tax income distributions are far more equal than in countries like the US. This reflects the more equal distribution of skills among Swedish workers, and that wage negotiations and the broader institutional framework are geared toward ensuring that workers receive a fair slice of the economic pie.
We have entered rough seas without a clear map of how to reach calmer waters. But there is much we can learn from new social-science research and intellectual innovation to help us navigate the way.
About the writer: Daron Acemoglu, professor of economics at the Massachusettes Institute of Technology, is a co-author (with James A. Robinson) of Why Nations Fail: The Origins of Power,
Prosperity and Poverty and a co-author (with Simon Johnson) of the forthcoming Power and Progress: Our Thousand-Year Struggle Over Technology and Prosperity.–Project Syndicate.
