What‘s eating liberal democracy?

A New Social Contract, Part 2

“We are all are immigrants in time, immigrants from an earlier world, living in an age essentially different from anything we knew before” — Margaret Mead

The politics of the 20th century were defined as the battle between two opposing ideas: capitalism and socialism; ’right’ vs ‘left’; the free market vs the social-democratic state, the private sector vs the public sector; the individual vs the collective, the owners vs the workers. In the blue corner, Hayek and Friedman. In the red corner, Marx and Keynes.

It used to be reassuringly easy to pick a side and vote for it. As a member of the working class or a compassionate liberal, you instinctively voted left, championing solidarity, collective ownership, worker rights and human rights. Big state, small markets. As a member of the property or business owning class or as a social conservative you instinctively voted right, championing private ownership, enterprise and competition. Big markets, small state.

Even then, there were cracks; signs that the ideological battle lines had been mis-drawn. On the Left, social liberalism found itself in an uneasy alliance with statism. On the Right, ‘small c’, (Burkean) conservatism found itself in an uncomfortable alliance with globalised corporate capitalism, which in turn found itself in an (equally contradictory, but surprisingly rarely questioned) alliance with the liberal, Smithian idea of free, competitive, markets. Over the decades, other intellectual frameworks (such as those of Henry George, William King, Jane Jacobs, John Turner and Elinor Ostrom ) have fallen down the cracks, simply because they didn’t fit the simplistic ‘Left’ vs ‘Right’ narrative.

For some reason, the overarching ‘Left vs Right’ narrative won out; shaping our political tribes and our political ideas for almost a century.

Perhaps the reason it was so successful was that it aligned perfectly with the everyday tensions of the industrial systems that created it: those of the first and second industrial revolution. As agricultural workers moved into the cities and became factory workers, issues such as ownership of land, access to the commons and trading tariffs seemed secondary to the immediate issues of fair pay, housing conditions, workers’ rights, public services and redistribution of profits through taxation, and behind them the broader question of the ownership of utilities, mines, factories and businesses as the ‘means of production’.

As I explored in Part 1, here, our relationship with these industrial systems was a deeply entangled one. Yes, they turned us into human robots, mere cogs in a machine, but they also shaped us; they gave us a sense of purpose, identity, pride, belonging. They embodied a social promise: that if you worked hard you’d get qualifications, a job, a good house, health, holidays and financial security. They created whole new towns, and whole communities where almost everyone worked in the same industry, sometimes even for the same company.

And they yielded more than GDP. They also drove huge moral and cultural progress as a society. This is a contradiction that is often lost in simplistic binary debates, but it is one that we must come to terms with, however uncomfortable it may make us. The fact is that whilst creating huge inequality and massive environmental destruction with one hand, these systems also dramatically increased our life expectancy, reduced infant mortality, reduced war, created social systems such as the NHS. They underpinned the gradual journey towards ending slavery and apartheid, towards tolerance of other religions, towards greater democratic representation, towards greater equality for women, towards Universal Human Rights, towards fighting racism, towards LGBT rights. As the late Hans Rosling argued so eloquently, it is no accident that the societies with the greatest levels of gender equality tend to also be the most industrialised (he explained this using the example of the washing machine). Kate Raworth’s ‘doughnut’ diagram provides a superb framework for thinking about this.

Some environmentalists and activists on the Left tend to instinctively welcome systemic crises and collapses as an opportunity for change, but the boring reality is that our gradual steps towards a more tolerant society tend to happen after the crisis has been solved, during times of growing abundance and security, not during moments of scarcity and insecurity. The better angels of our nature stand a better chance when there is food on our own table first, and the nourishment or liberation of others costs us nothing.

So it’s fair to say that these 20th century industrial systems had a huge amount riding on them. There was no way back down from them that wouldn’t incur loss of livelihoods, loss of identity, and a rewind on progress and human rights. They embodied a deep social contract. They represented the original ‘too big to fail’ scenario.

Which was fine, because everyone knew they wouldn’t fail.

Until they did.

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The 3rd industrial revolution

But that failure was not sudden. It didn’t happen in 2015 or even in 2008. It was a slow, gradual failure.

It has become quite common in recent years to hear commentators describe current political events as unpredictable and unexplainable. And at the level of day-to-day news, that is undoubtedly true. But I’m going to stick my neck out, and suggest that if we take a longer view, there are at least two undercurrents that are reasonably predictable, and can explain quite a lot of what is happening to democracy today.

The first is automation. That is, the use of technology and innovation to encode human knowledge and skill into machines, and so to continually decrease the ‘marginal cost’ of producing more or less any given product or service. To choose an obvious example, in the 1960s if you wanted to send a letter you had to buy paper and ink, write the letter, post it, then wait for it to be physically shipped, a process that took a couple of days and considerable effort and energy. Today we can send text or email instantaneously, for almost zero cost. The same trend applies to all kinds of things, from finding information, to listening to music, to running the back-office of a taxi fleet, to producing a unit of solar energy or manufacturing a medicine. This phenomenon is described by the economist Jeremy Rifkin in his book The Zero Marginal Cost Society— he calls it “the glitch in capitalism”. The inventor Buckminster Fuller simply called it mankind’s unique ability to continuously “do more with less”.

The second undercurrent is a byproduct of the first: globalisation. In simple terms, globalisation can be roughly defined as it becoming ever cheaper and easier to move information, money, goods and people around the world.

It may seem over-simplistic to suggest that these two phenomena alone can offer an explanation for the crisis facing democratic institutions today. But if we ask ourselves ‘What has changed?’, it stands up. Basic human nature has not changed that much in the last fifty years, but in these two respects, the world in which our nature plays out has changed. Dramatically.

Even before the first and second industrial revolutions, Britain had long been a global trading nation— and previously an empire ––whose success had stemmed from its access-to and control-of the sea routes, overseas natural resources, and to cheap labour. But in the late 1970s and early 80s, computerisation and automation began to transform manufacturing and trade in a new way. Cheaper air travel and containerisation began to drive down the cost of international business and shipping. Companies and capital began to move offshore in search of cheaper prices, less obstruction by innovation-averse unions, cheaper, labour and weaker regulations.

Western leaders faced a decision. They could try to protect their industrial economies by raising tariffs and closing borders. Alternatively they could embark on massive, state-led investment into industrial transition: including lifelong education / retraining and social security, whilst insisting on global labour welfare and environmental standards. Or they could do neither; just embrace the future and leave it to ‘the market’ to resolve. After all, as long as shareholder profits were rising, and everyone was getting access to cheaper goods, it wouldn’t matter where those goods were physically being made: the wealth would ‘trickle down’.

As we all know, the UK, under Margaret Thatcher, largely chose the third approach.

The effect of the ‘third industrial revolution’ on UK and US cities is well documented: the decimation of mining and domestic manufacturing in many sectors, wiping-out the economy of whole towns, making whole streets of workers unemployed, sometimes literally overnight. It set in motion a process of industrial decline that is still evident today in many former industrial towns and cities.

But the real damage was harder to see. It also undermined that tacit social contract: people’s pride, their dignity, their sense of purpose, their optimism, their sense of control, their sense of belonging in society. It’s difficult to feel those things if you’re reliant on benefits, or the only job available is working low wage, insecure night shifts in a warehouse, whilst paying most of your monthly income in rent to an overseas landlord who has done nothing to address the mould in your children’s bedroom.

To outsource such a crucial layer of a national economy, and to cast aside such a large proportion of the electorate should have been political suicide – especially for any party that wanted to be seen as patriotic. But the Right had two things in its favour. First, so far, automation and globalisation had not yet hit the retail or service sectors, where many of the electorate were still employed. Second, it had a trick up its sleeve: aspiration. Aspiration is a powerful idea because it is addictive; and like many addictions it blindsides the addict. It allows you to sell a dream whilst removing the reality. The more distant — or meaningless––the reality gets, the more alluring the dream becomes.

In this case, the dream was property ownership.

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The debt machine

Just as computerisation was transforming manufacturing and shipping, it had also begun to transforming another industry: banking and finance. Over the 1970s and 1980s, the combination of increasing computing power and decreasing deregulation expanded banks freedom to create new money in the form of credit card and mortgage loans.

The result was that even as the manufacturing economy — and many urban economies — were in decline, banks could make people ‘feel richer’, by giving them mortgage loans. Thus allowing people to become something that they had always aspired be: not just ‘workers’, but ‘owners’.

Because people could borrow more, they had more to spend, so the price of homes — or more specifically, the price of the land beneath those homes — began to inflate. The properties themselves were no better, no bigger, no better located, no less crumbling, it was just that people’s ability to pay had increased, so sellers could ask more for the same property.

Then something odd happened. Because in theory, mortgages are ‘secured’ against the value of the property, the banks counted this new, inflated land value as solid collateral, so began to lend even bigger, even cheaper mortgages. They realised they didn’t even need to wait to collect the interest on these loans. They could sell on these credit assets as bundled ‘mortgage backed securities’ (a story familiar to anyone who has seen the film The Big Short). They found themselves with — in effect — a licence to print as much money as they could get people to borrow. Regulators and credit rating agencies, now in global competition with others, looked the other way.

Thus began a vicious inflationary loop. Adverts abounded for 0% APR loans and full value mortgages. More and more, property speculators began to jump on the inflation bandwagon, using their capital to buy land and property, sometimes to extract rent from, or build small, minimum-quality houses on, sometimes simply to sit-on, and wait for its value to go up. Foreign investors queued up to store their money in UK property, pushing prices even higher. Homeowners too were encouraged to think of their homes ‘doubling in value’ – even though they could never access this ‘wealth’. All they were really doing was taking on more and more debt. Later, daytime TV programmes with titles like ‘Property ladder’ would encourage people to get in on the game.

Between 1971 and 2016, the average home in the UK increased in price by around 5000% — four times faster than the average income. Frequently the land beneath your home could ‘earn’ more in a year than you could.

And investors began to realise this. With lower yields coming from the increasingly automated, low-margin real economy, why bother investing in risky, increasingly low-value things like providing actual products and services, when you can just park your money in property and watch it inflate? At the time it was celebrated as a ‘housing boom’ and a ‘financial services miracle’, but in truth it was a form of imaginary wealth; a form of debt-driven inflation that disguised– and in fact exacerbated— the underlying decline.

Across the economy, a similar pattern of ‘financialisation’ and rent extraction was playing out. More and more, people were finding ways to take a profit without making actual goods or services any better or cheaper, and without paying workers more. As the economists Marianna Mazzucato (in the Value of Everything) and William Lazonic (in Profits without Prosperity) have explored in detail, from the 1970s onwards, as marginal costs fell, a profound change was taking place. Company executives began to realise that instead of re-investing their profits into expanding their market, or making more, better products, they could use the power of automation, offshoring or low-cost, ready-skilled migrant labour to reduce the cost of production. Or, in case of private equity takeovers, they could simply asset-strip the company. The savings and returns could then be distributed as dividends to the shareholders, share ‘buybacks’, and executive bonuses, or other, more personal forms of self-dealing.

Similarly, big capital investors began to realise that instead of investing in innovation, it was much less risky to take advantage of the political fashion for ‘privatising’ (selling) national infrastructure and services, effectively allowing them to purchase a monopoly position from the government, from which they could then extract economic rent .

The Third Way

By the late 1990s and early 2000s, a new generation of leaders on the Left — such as Bill Clinton and Tony Blair — faced a choice. Should they regulate to break this cycle of inflation, financialisation and extraction, and re-invest public money into the crumbling towns, cities, public services and infrastructure that were being left behind by automation and globalisation? Or should they let this distorted version of capitalism continue to suck the life out of society and the real economy?

They didnt like the sound of either. So instead, they chose what they called the ‘Third Way’ of neoliberalism. The idea was that instead of reigning-in this new incarnation of capitalism, they would double-down on it, unleash it, but then try to harness and redistribute a small percentage of the proceeds to provide public services and infrastructure, as a kind of compensation for the damage done to society.

The strange thing about the Third Way was that politically it’s hard to imagine anyone ever really believed in it. Not in a passionate way. No crowd ever formed in in parliament square with placards, chanting ‘What do we want? More Private Finance Initiatives! When do we want them? Within this electoral cycle and/or fiscal quarter!’. Tony Blair’s campaign ads were hilariously vacuous. But the Third Way didn’t need passion. Its managerial doublespeak, veneered with optimism, bolstered by the tabloids and littered with ironic euphemisms such as ‘affordable homes’, ’inward investment’ and ‘public private partnerships’– enjoyed widespread support, because it was just irresistibly convenient. It printed money, it let the rich get richer whilst giving the Left everything it had always wished for. It offered everyone a cheap mortgage and a degree, it funded the NHS, it paid for childcare, it made benefits available to those who needed them, it gave methadone to addicts, and it compensated us for industrial decline with credit cards, inflating housing, supercasinos and lottery-funded regional art galleries.

The ‘Third Way’ was sold to us as a reconciliation between ‘Left’ and ‘Right’. It promised to give us the best of both worlds: free, competitive markets and a strong, fair, well-funded democratic state.

In practice, what it actually delivered was the precise opposite: marketised states, and statist markets.

Instead of free, agile, competitive markets (as Adam Smith would recognise them), what we got was a system of state-engineered private monopolies — what Jonathan Ford of the Financial Times calls “organised rip-offs” — the centralisation of market-power into the hands of an increasingly small number of rentiers and speculators.

And instead of a strong, fair, well-funded state, public bodies increasingly found themselves forced to compete with each other, treating citizens as ‘customers’ and outsourcing their public services to a handful of huge, unaccountable private companies, who would exploit the abundance of public sector funding and the clumsiness of public sector procurement to keep prices high, while providing users with Ryanair-quality public services.

The same story played out in almost every aspect of life: from housing, to construction, to electricity, to trains, to hospitals, schools, to waste collection, to IT procurement. Amusingly, it even extended to the 2012 Olympic Games where, in London (a city blessed with one of the world’s most impressive, diverse food economies), the only available meal was McDonalds or the offerings of a network of bizarre, statist, school-food style outlets carrying labels such as ‘Sandwiches’ or ‘Mexican food’. The historian Tony Judt once suggested that a general rule of political economy should be ‘Never privatise the railways… never nationalise the sandwiches on the trains’. Somehow, neoliberalism had contrived to do both.

But it gets worse. Because by making the public sector so dependent on these extractive private ‘partners’ to deliver any kind of public goods at all, the Third Way had signed government into a kind of Faustian Pact with them. They became ‘too big to fail’, and it became necessary (arguably even responsible) for policymakers to effectively rig the system in their favour; to underwrite them, to subsidise them if necessary, to do whatever it takes to keep them ‘viable’ (profitable) at all costs, even at the expense of the productive, competitive small business, or innovation, or long term investment, or even human welfare. In this context, citizens became merely ‘consumers’ and ‘stakeholders’, to be ‘consulted’, but only in the unspoken knowledge that nothing they say will have any real influence over the outcome. It is a kind of tacit corruption that pervades the culture of government at all levels, making it seem institutionally weak and dishonest, even when its servants are hard working and well-intentioned. The result, of course, was a gradual erosion of public trust in democratic institutions and public officials.

With hindsight, it’s easy to see that the ‘compensation’ strategy at the heart of the ‘Third Way’ was always absurd. It is the logical equivalent of asking an organ thief to steal your kidneys on the condition that they cut you with a 20% share of the profits. But at the time, it looked like the magical, election-winning panacea that previous generations had just been too dumb to spot. It became consensus, and was declared the ‘End of History’.

Then, in 2008, history rather rudely restarted.

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The End of the End of History

In the aftermath the 2008 financial crisis, Barack Obama and David Cameron too had a choice.

They could acknowledge — as Alan Greenspan had — that what was happening was a correction; a crisis decades in the making, revealing a “flaw in our mental model of … how the world works”. It would then be logical to argue that what was needed was a fundamental rethinking and restructuring of the economy. The problem with this option was that it would have meant admitting shared culpability for the crisis, as opposed to being able to blame their opponents for “crashing the car”. It also would have required admitting that much of the capital that had disappeared wasn’t real wealth in the first place, and shouldn’t come back. That’s a difficult headline to sell.

So instead, they framed it as a crash, implying that what was needed was a ‘recovery’, which could be provided in the form of bail-outs and tax breaks in order to get back to business as usual.

Much has already been written about the damage that austerity did to the economy and to society, but when it comes to public trust in liberal democracy, it might have been the bail-outs that did the most damage. They served as a very public confirmation that the rhetoric of free markets and a robust, fair state had been a myth. They gave absolute concrete form to people’s perception of a rigged economy and a corrupt society; a perception continuously reinforced by a succession of scandals: the Iraq dossiers, the horse-meat scandal, the parliamentary expenses scandal, the phone-hacking scandal, the Snowden revelations, Libor rigging, the Panama papers, numerous Facebook scandals, and almost daily revelations of tax-avoidance, political lobbying, and corporate bonuses. In the Internet age, leaks are the norm. As Slavoj Žižek observes, often we don’t learn anything from these revelations that “we didn’t already presume to be true. But it is one thing to know it in general and another to get concrete data”. The worst part is that, even after these scandals, there is rarely any evidence that much has been changed. We get outraged for a few days, then we go back to business as usual.

To then try to pay-off the resulting national debt by cutting public services was adding injury to insult. It was like taking away society’s methadone. It took away the compensation. With cheap mortgages now already gone, it took away the public services, the free university degrees, the investment into the NHS. It broke once and for all the 20th century social contract; the promise of progress; the idea that we are all in the same boat.

It is almost as if 2008 had torn-off the wallpaper of the Third Way and revealed the economic reality that had been there all along: an automating, globalising economy, a deeply unfair, extractive model of capitalism that had captured government and was holding it to ransom, increasingly precarious employment, rising costs of living, rising debts, increasing loneliness, loss of identity, rising rents, stagnating wages, a flatlining economy, shrinkflation, crumbling public and community infrastructure, public services stretched to the limit, towns and cities in terminal decline. It revealed the extent to which our political ideas, and institutions are obsolete. And yet, afterwards, our leaders barely said anything. They continued to parrot the same, failed ideas, seemingly for want of any better ones. We entered a phase of zombie politics, where the old stories had died, but no new ones came to replace them.

And nationalism did what it has always done: it rushed-in to fill the void.

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The zero sum society

“Many people… have nothing to looking forward to — nothing except a ‘change’. Something wholly vague and wholly undefined, but a change” — John Maynard Keynes, Germany, 1932

When we talk about the rise of nationalists – and their imitators– we tend to focus on how it was they that ‘stole’ power. But the reality is that at any given point in history, those same voices are always there, waiting in the wings, ready to exploit any anger or resentment, to drip poison in our ear, to inflame humiliation, to appeal to our worst instincts, to blame immigrants or minorities, or whichever democratic institution they want out of the way. “They’re laughing at us.” “We’re waving the white flag.”

That never changes. What changes is whether or not there are ears ready to listen. A society of angry, disenfranchised citizens, led by weak, captured institutions, and forced into conditions of austerity makes fertile ground for those wishing to sow the seeds of lies and fear. As Frances Coppola argues with superb lucidity , “a straight line can be traced from the financial crisis, through the years of stagnation and austerity, to the rise of UKIP and ultimately to the Brexit vote”. She and others have made the inescapable historical parallel between the austerity and humiliation of the 2010s and the austerity and humiliation of early 1930s Weimar Germany, which provided the fertile ground for the rise of Nazism.

At its root, the entire formula of nationalism relies on one, fundamental economic assumption: that ‘there isn’t enough for everyone’. Once you can establish that premise in people’s minds, it will completely change the way they see everything. They will perceive society is a zero-sum game — that is to say, one where there must be winners and losers. It then becomes very easy to propagate false, emotive narratives. ‘The (insert name of racial minority or immigrant group here) are taking your (money/jobs/services/housing/women)’. Or ‘Those foreign bureaucrats / liberal elites/intellectuals are controlling you and laughing at you’. There’s nothing clever about it. It is much easier to exploit fear, anger and prejudice than is to inspire optimism, trust and tolerance. But it works, because the vision of scarcity and self-preservation that it paints quickly becomes self-fulfilling. Trust breaks-down, elbows come out, and indecency becomes normalised.

The truth is, nationalists didn’t steal power, we let them take it. Trump, Bannon and Farage are not the cause — they are symptoms, made possible by our collective failure to put nationalism out of business by building a version of globalised capitalism that is not a zero sum game; where there is enough for everyone. It should have been Democrats, not Trump who came to power by promising to “drain the swamp”, “end government corruption”, “economic stagnation” and to revive manufacturing. It should have been liberals and progressives, not nationalists, offering people the chance to “take back control” (of public land and infrastructure, for example). But it wasn’t. Successive liberal governments — Left and Right — have failed to develop an economic model that works in an increasingly automated, globalised world. And in doing so, they have left the door open to nationalists and billionaire-backed charlatans, who have no compunctions about dismantling democracy for short term personal gain.

The fourth industrial revolution

If this framing is right: that the crisis faced by democracy today has its roots in our relationship with automation and globalisation, then we have not yet reached the darkest hour. In fact, we have barely begun. The third industrial revolution is bringing automation and globalisation to manufacturing, a sector that at the time accounted for around 30% of UK employment. Most of those jobs were replaced by jobs in the service, retail and knowledge sectors.

Today, the fourth industrial revolution is bringing automation and globalisation to the service, retail and knowledge sectors: which currently account for 80% of UK employment.

Take an oft-cited example: the haulage industry. There are around 6.4m lorry drivers in the US and Europe today. We are rapidly approaching the moment where it is conceivable that a single algorithm, owned by a single company in a single country will be able replace all of them. That company would, under current business norms, be expected to avoid paying tax on its profits (for example by claiming that the ‘transactions’ are taking place on an offshore server, or by reinvesting all their revenues in buying-up and shutting down competitors, and so never reporting a net profit). So almost overnight, that company will have created a vast public sector cost liability in several countries, and yet will have contributed almost nothing back to the social security, re-education and re-employment of those left behind, save for a reduction in the cost of shipping goods around.

The social, economic and political disruption will make the last few years look like a dress rehearsal.

Let’s be clear. As tempting as it may seem, Nationalism cannot provide any real answers for this. It will just become more and more desperate, more and more inhumane. It is a dark irony of Trump’s ‘wall’ that he is creating it around the same time in history that it will become possible to create a drone capable of carrying a human being for a few hundred dollars. So we are not really talking about a “wall”, we are talking about an automated killing machine. Any society that is protected by such a wall will have to acclimatise itself to the daily spectacle of death and human suffering on its own doorstep.

This is also what makes nationalists refusal to acknowledge climate breakdown so bizarre, and their aversion to overseas aid and international development so self-defeating. Because those policies more or less guarantee precisely the kind of migratory pressures that their supporters most fear.

Automation and globalisation will not be put back into their box. Sooner or later, we will realise that we do not have a ‘migrant crisis’. Rather, we live in a world where migration will be the norm now. But our institutions weren’t designed for that world.

Similarly, our leaders do not face a challenge of ‘bringing back jobs’, rather of working out what wellbeing and work should look like in a world where the concept of the ‘job’ as we know it makes less and less sense.

If we really want to restore the possibility of an open, humane, society, we need to understand and take ownership of the digitised, globalised world we are heading into. Then, we need to ask ourselves what a civilised, democratic, successful version of society might look like in that world, and what new (or renewed) ideas and institutions we might need to invent to make it happen.

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Part 1 of this series is here. In Part 3, (here) I will try to map out a framework for understanding the politics of the fourth industrial revolution (making sense ofthe world we’re heading into), and in Part 4 (here) I’ll really stick my neck out, and suggest some basic ways we might begin to redesign our systems to fix democracy and capitalism for a digitised, globalised (and destabilised) world.