C. Peter McColough Series on International Economics With Martin Wolf

Thursday, May 18, 2023
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Chief Economics Commentator, Financial Times; Former Distinguished Visiting Fellow for International Economics, Council on Foreign Relations; Author, The Crisis of Democratic Capitalism


Professor of Business, Columbia Business School; Retired Partner, Goldman Sachs; CFR Member

Martin Wolf discusses the relationship between capitalism and democracy, the origins of the “democratic recession” of the last decade and a half, and ways to strengthen democratic capitalism against its enemies.

The C. Peter McColough Series on International Economics brings the world's foremost economic policymakers and scholars to address members on current topics in international economics and U.S. monetary policy. This meeting series is presented by the Maurice R. Greenberg Center for Geoeconomic Studies.

This meeting is part of the Diamonstein-Spielvogel Project on the Future of Democracy.


COHEN: Ladies and gentlemen, good afternoon. I’m delighted to be here today. I’m Abby Cohen. And I am here with the esteemed columnist from the Financial Times, Martin Wolf. I’d like to begin with an apology. I had no idea that in the printed materials my biography would be twice as long as Martin’s. (Laughter.) That truly is an error. So let us proceed with that.

In the anteroom today, we had an opportunity to have a brief conversation. And what is so very clear is that there are many issues in the global economy, in the political economy, and politics themselves, that have become so urgent and so current. Today alone we have the G-7 leaders meeting in Japan, dealing with a number of the issues that Martin touches on in his excellent new book. I brought my copy. And basically, I wanted to show you that it is rife with notes. I have read it thoroughly, some parts of it more than once.

And I’d like to begin, Martin, by asking you a few questions about the book. I know that there are people in this room who would also like to ask you about some very current topics that you’ve written about in the FT. There will be an active Q&A session. But let’s begin with a discussion of the book, which I had found to be, in many ways, profound, provocative, and something that was, say, a little bit out of character, in that it addresses not just economic issues but also political issues, including some potential solutions to long-term matters. So if you wouldn’t mind spending a minute or two discussing the main themes of the book, but also why did you write the book now?

WOLF: So, first of all, it’s wonderful to be here, and particularly in this series which I’ve done before. Usually at a different time of the day. I’m very impressed with people as busy as you are being able to take off from work at 3:00 in the afternoon. So thank you. Do you really not have anything better to do? (Laughter.)

But the—so the answer to this question is very, very simple. First, I didn’t write it, in a sense, now. This book took a ridiculously long time to finish. And that was for two reasons. The subject constantly changed. And second, I really started this book with an intellectual blank sheet, or relatively close to an intellectual blank sheet, because it forced me to think about topics I hadn’t really thought about intensely since I was an undergraduate, which were the links, connections, between politics, economics, and political philosophy. So it was very difficult. And the—and it took me places I wouldn’t—didn’t expect to go.

The core of why I wrote it now is really the starting point, for pretty obvious reasons soon as I will tell you that the plan for this book was developed in 2016. And it was—it was linked, of course, basically, to two events. The first event—which coincided, effectively—the emergence of Donald Trump as the candidate of the Republican Party in the 2016 presidential elections and his subsequent election to president, and the Brexit vote in Britain, and the way the Brexit campaign had been conducted, and the characteristics of that campaign.

It became pretty obvious that a new form of politics was emerging in two countries, which most of us would have thought were about as embedded in traditional representative democracy as any in the world. In fact, most people would agree probably that the fact that representative democracy, liberal representative democracy, survived the 20th century was because, in large measure, of these countries. So this is a big story. And that then led me to ask, what is the nature of this new politics? Where did it come from? And where might it end up? Which is essentially what the book is about.

And that, and I will conclude with the sort of main theme, led me to ask myself—and I’m not the first person to do so, but I think my conclusion’s a little different in some respect—is what exactly is the connection, because I’m an economist, between the market economic system and how it works with the—the connection between that and our political system, representative democracy. And I explore that in great depth. At the same time, trying to link that to what Larry Diamond has called “the democratic recession,” of which these two events are particularly important exemplars. And, of course, there’s a subsequent history in both cases. But, of course, is going on all over the world right now.

And the final points I would make—obviously, I have a prior, which may be wrong but it’s my prior—that economics has played a fairly important role in this. Not the only thing by any means, but economics and the development of the world economy and development in particularly of our economies have played quite an important part in what we have seen. Which is ongoing, obviously, if you look at our politics and even more at yours.

COHEN: That was a wonderful summary. I have to say, even so, there is so much depth within the discussions of the book that there’s much more to plumb. And one of the things I’d like to ask you to address has to do with one of the imbalances that has developed. And much of the book, of course, has to do with balances between, for example, capitalism and democracy. The balances between not-so-well-off people are doing and well-off people are doing. Balance between domestic and global considerations.

And one of the things that seems to have gone poorly in the last three or four decades, not just in the United States but also in the U.K., perhaps as demonstrated by the vote for Brexit, has to do with, let’s call it, the hollowing out of the middle class. And I’d just like to read one quote in the book that I found rather striking. And it basically says: It’s clear then that the best partnership in the country is the one which operates through the people in the middle. Because when the people in the middle are stronger, it’s better than when the people on either side are stronger. And when you have a strong group in the middle, there’s every chance of having a well-run country.

Now, I have paraphrased this. And you might think it was perhaps a Joe Biden political statement. This is actually from Aristotle. Aristotle, describing perhaps the ultimate decline of the Roman Empire. And so this is not a new argument, Martin. But I think you do a lovely job of discussing what’s happened over the last thirty or forty years. So if you could spend a little more time reviewing that, and talking about the impact that that’s had on the political system, particularly since the beginning of the global financial crisis, and then further exacerbated perhaps by COVID.

WOLF: So, first of all, I hesitate to do so, but since I’m a former classicist I’m just going to say, that this—you’ve jumped about 700 years. (Laughter.) This was actually the description of the state of the Athenian—well, the state of the Greek city-states in the fifth century. And Aristotle was the first political scientist. And he actually apparently did really serious research. He sent people around—his students, around Greece to look at all the constitutions. And they put together quite detailed studies and briefing notes, from which he wrote a book which is called The Politics. And it’s the second—it’s the second great work on politics in Western history, the first being, of course, Plato’s Republic, which also appears very strongly in my book.

I spend an awful lot of my time reading Latin and Greek. The, I like to say, probably not true, but I must be one of the few surviving economists who isn’t Greek who’s read all of Homer in Greek. (Laughter.) Now, that—but I really wanted to go back there because many of our ideas—but, by no means all. And I make clear the difference about democracy, the value of democracy, and what it means. We have inherited, or at least been influenced by, the ancient world. Though, our traditions evolved in a somewhat different way to produce representative democracy.

Now, to answer your question, the way I think about it now—and this is not necessarily so clear in my book—is it’s important to remember that universal suffrage democracy, or anything close to it, is really quite a recent development. And it—there’s a very good and beautiful database which American scholars have put together. And on any sort of sensible criteria—in 1800, there was none. There was no country that could be called, in any real sense, a democracy. There were countries with representative political institutions that turned into democracies. And this is now from memory, so I apologize because the figure—but my memory is that when I looked at it the proportion of the adult population that had the vote in the United States—we’re talking in federal elections in 1800—was about 6 percent. And obviously, they were all male. They were all male, they were all prosperous. And they were all White.

COHEN: And required to own land.

WOLF: And required—exactly. So property-owning democracy. In Britain at that time, it was even worse. We only go there in 1832. So we didn’t have—but over the succeeding 120 years, Western states—with a very important exception, but after the First World War it basically became almost universal—became pretty close to universal suffrage representative democracies. That was a real political revolution. And I won’t go to what happened in the interwar period, but after 1945, it was clear that was the Western model. And it was spread to Japan and other such places. So that was sort of a triumph, in a way.

And but it’s also clear—and it became very clear from the surveys I report, World Values Surveys and so forth—that there came into being a very deep disenchantment, very important sectors in our societies, very much through the years, with the democratic process, the outcome of the democratic process. And this was notably true—it seemed to be notably true of younger generations. The older ones, that was even more disturbing. So the question then is why? And the argument I make, very much influenced by Aristotle’s perspective, there are many more elements.

But on the base element, is in the postwar period a source of social and economic balance had been created out of the ferment of the industrial revolution and all the social and economic changes it was developed, in which a large, prosperous middle class had emerged consisting of the upper working class and people doing other businesses—other activities and businesses which had reasonably good living standards. The state had become more active and supportive. We had in various guises a sort of welfare state. There were differences, but clearly what had happened in the U.S. with the New Deal was quite transformative in that respect—Social Security and so forth.

There was a view that government’s job was to guarantee full employment. And the economies grew pretty satisfactorily and then really serious problems emerged from which we then had a whole series of reforms in the early ’80s, pretty well across the developed world, but particularly here and in the U.K. Now, if you start looking at what happened since then, that middle class was significantly eroded. And a lot of that was to do with things that could not be avoided, that were just what was going to happen.

And the most important of those was rapid deindustrialization, the reduction, therefore, of the old working class as an organized political force, a very profound change in the way businesses were run and who they were run for, and their relationship with capital markets. A pretty disappointing performance overall over a very long period, with a relatively small interlude in the early 1990s, with productivity growth. And the emergence, pretty clearly, of social stress in the old middle class. In the U.S., this is associated with the discussion of the deaths of despair, the opioid—the opioid crisis, which is so brutally discussed in Anne Case and Angus Deaton’s book.

On top of all that, which I think was already creating quite a lot of cumulative discontent about the future, there then came the financial crisis. And I think the financial crisis was quite a seminal event in our histories, particularly again in Britain and America, because we really did believe, in a very big way, that liberal finance was a core of what made us work. And what people, ordinary people, saw when they looked at this—what they saw was a shattering crisis which they didn’t understand but it turned out nobody else seemed to understand either. And what happened then is the full armory of the state was used to save the financial system and the people who ran it, and the people who owned the businesses in it.

None of that is simply true. I’m not suggesting it’s simply true. But that is certainly how it was perceived in very large parts of our societies. And they decided that they didn’t trust anybody then in charge. They wanted something different. And they were looking for effective leaders who would represent something transformative. Now, a very interesting question is why the center-right did much better than the center-left in that. I have theories about that but won’t have time to go into it. But at this stage, if it was going to be the center-right, it had to be a completely different sort of right.

And that’s what Boris Johnson and Donald Trump, in my view, represented. A form of right-wing politics which was fundamentally anti-establishment, anti-elitist, representing in some very profound way these people—these unhappy people. And, of course, that then fitted in with an ongoing culture war which they had already—had already been launched and could be easily mobilized. It had many historical roots I can’t go into.

So that, in my view, is why we got to the stage in the course of the last decade in which a new form of anti-elitist populism emerged, as it has before—and we saw it, of course, in the interwar period in different guises—as a driving force in our politics. And this form of anti-elitist populism has a very strong tendency, very quickly, to become anti-pluralist and anti-democratic because a lot of the elites they represent are running all the institutions that constrain the democratic process. So that, very briefly, is what I think has gone on. (Laughter.)

COHEN: That’s the happy part of the book. (Laughs.) So let’s pursue this a little bit further. I think you make a very compelling argument for why the economies have not performed as well as they might have done. Inadequate investment in education. Inadequate investment in infrastructure, in R&D, and so on. But you also talk a lot about what you refer to as rigged capitalism, in which—if you remember your economics—basically there’s an awful lot of rent that’s going to a very small number of participants. Can you explain that a little more thoroughly for the people here?

WOLF: This is where I don’t get out of this room alive.

COHEN: I thought I would mention that in front of this group.

WOLF: No, it’s fine. So I suppose I have a view, which is hardly original, that there are two ways in any economy of making money. And one way is—and, in most cases, in most activities, both are present. One way is to produce something new, productive, and transformative. And the other is to be parasitic. And there’s usually an element of both. And my argument in the book is if you look carefully at what’s been going on in our economies, there are quite a range of activities in which monopolies have formed and been allowed to form with extraordinary returns to the people who own them. I think it’s fairly easy to argue that the shareholder value maximizing strategy of the firm can be used as a way of extracting rent in pretty sizable ways, and I think that’s linked with the very large increases in incomes at the top. And I think it’s pretty easy to argue that at least a significant part of what goes on in the financial sector plays the same role. And it is, I think—has been, I think, a driver of a form of capitalism which many people feel is not actually working for them and certainly hasn’t been generating the sorts of jobs, opportunities that they thought they would enjoy thirty or forty years ago. So that’s quite a big part, I think, of what’s going on, both in reality and in the perception—in the perception of it.

COHEN: You also write about something that’s very close to you, which has to do with—I’ll call it the hollowing out of the news media.

WOLF: Uh-huh.

COHEN: The way the economic model of news gathering had become much more difficult, and how is it possible to have, for example, a well-informed electorate if you don’t have the right information or clear information being presented to people?

WOLF: I suppose this is something I’m driven back to thinking about a lot. In the process of thinking about what makes a democracy work, you can’t really get away from this notion—which Daniel Patrick Moynihan put it particularly well; it’s a cliché—that you are entitled to your own opinions, but you are not entitled to your own facts; that is to say it’s really rather—democracy is obviously a permanent discussion. It’s a debate. And if it is to be a productive and fruitful debate, there has to be some core of shared understanding of what’s going

on—not the same as agreeing what you should do about it or what’s important, but at least on what’s going on. And that’s always difficult, but without it, it’s very difficult to see how anything could be resolved. You really disagree about the nature of the world in the most profound way in just the reality side of it. It’s really very difficult to see how political arguments can be decided other than by violence. And certainly if you really think that you differ from people, not only in their values, but even on their essential sense of what’s going on, then the likelihood you are going to agree on anything in policy terms becomes significantly less. So truth has to be part of the political process, and to do that there has to be some recognized and agreed sources of it.

By accident in the ’20s—in the early part of the twentieth century in different ways, public service broadcasters were created to do that. In the U.K, that was reasonably successful for a while. You had a very different setup with the old networks, which disappeared. But over the last forty years, we have had a series of radical experiments in the deregulation of mainstream media—of standard media, television and so forth. And the complete transformation of the technology of media, with social media and the new economy, and complete transformation of the main publishers—you know, my view is that organizations like Facebook are the biggest publishers in the world—but there are no checks and balances on it.

Now I’d be quite honest about this. I think it’s a very, very big problem, but I’m not completely convinced—and this is a big argument that I have with others—that it’s the dominant problem because it’s very clear that if the conditions exist in which large groups in society simply cannot recognize the legitimacy of the position of other groups in society, democracy collapses anyway. We saw that in the interwar period.

So I’m not sure how much of this has been created by the new media, but it certainly did enhance by creating bubbles within which people can exchange views—including complete fantasy views—very freely and become completely accepted by the public. That makes it really difficult to understand how you can operate a democracy, and I will give you the most clichéd example possible right now because I happened to write about it a few weeks ago in the context of a column on Fox TV’s contribution to the understanding of the last elections, and of course, the Dominion case, which is a very remarkable event, that the overwhelming majority of Republicans, when asked who won the last election, are convinced that it was Donald Trump. If in a democracy you can’t agree on who won the election, you have quite a problem because it means the incumbent, you see, is fundamentally illegitimate. And this is a product, obviously, of political entrepreneurship and the way the media work.

I don’t know that there is a solution. I wish I did. But it is clearly that the interaction between the desire for transformative change of various kinds with the technology that allows us to communicate with people just like us and nobody else, as it were, that’s pretty—pretty scary.

Anne Applebaum would add, by the way—and I don’t have this in my book, but I know it’s her—(inaudible)—that in addition to all this, these media are infinitely penetratable by bad actors across the world and have been and are being, and I think that’s right, too. So we have a media—and I have to say the final thing, pretty obviously; I would believe this, wouldn’t I—but media play a pretty fundamental role in generating some consensus about what is true, and the development of the media—initially the newspapers, then radio and television—were absolutely fundamental, complementary complements to the emergence of modern democracy. Indeed you couldn’t imagine modern democracy about it. So what we’re talking about is something pretty central.

COHEN: Yeah, absolutely. In the book—which, just as a reminder, is entitled Democratic Capitalism—the point is made that the system works best when the two features—democracy and capitalism—are sort of in sync and they are symbiotic with one another.

And so there is one other element in the news right now that I’d like to ask you about, and that is the role of what some people would refer to as the administrative state. And I’m thinking, of course, about the possibility that a single judge located in Texas can overrule the technological and research competence—scientific

competence of the FDA in terms of approving a drug. And of course, it has been the goal of many on the far right to basically say we want to get rid of elites who are experts in topics because we’d like to drive it through some other process.

Talk to us a little bit about that and what danger that could present economic activity and growth.

WOLF: So this is a theme of one of my chapters which discussed the politics, and it raises a very profound question. So the question obviously—or questions—what is the relationship—so first, what is the state, and what do we expect it to do? What is the relationship of the state to the politicians who are elected? And the—since there’s bound to be a state—(inaudible)—theory in command of all this, and what is the relation of the politicians to the people in voting?

Now in the U.S. you have a sui generis system which is a very elaborate constitutional structure in which these sorts of questions are resolved by reference to a constitutional document, as amended, which is ultimately interpreted by judges. And the role of the constitutional court in this country is, I think, in the major democracies, unique. This is important for this purpose because I think what’s going on—and you know here much, much more about this than I do—is really a discussion of what it means to be a constitutional democracy in the twenty-first century, and how far it can go back to being the sort of thing it was in the eighteenth.

And the point I make is this is a genuine dilemma because to operate a modern society; that is, an urbanized, internationally integrated, highly technologically sophisticated economy and society with massive externalities in many decision-making processes—and you can go through all of them—pretty well every society in the world that has got to any advanced status—has had to create large, technically competent regulatory bodies. That’s the—we’ve created large, permanent state machines. These are, as it were, the technocratic elite.

And in my view, this is inescapable. There is no way ‘round that. We aren’t going to go back to the eighteenth century society and economy. We’re going to continue to live in the way we do, and that world, we can’t get away from this sort of state. It is perfectly legitimate, it seems to me, to say that when the founding fathers thought about what the U.S. should be, this is not what they imagined, right? Nobody did at the time. And this evolved over the succeeding couple of hundred years, and particularly in the last 120, 130 years or so.

So the question is how do you fit that into a democratic context. That’s a big question—and I discussed this at length—and we have had to work out compromises for that. So we have a permanent state, there is democratic political oversight, the laws can be changed, but ultimately that state is allowed to continue to operate, and it isn’t on a day-to-day basis controlled by politicians because it’s impossible for them to do so. That’s pretty clear. And that’s a—that became, obviously, a far more significant issue in the U.S. after the New Deal, which created the American state as we know it. But in other countries it emerged roughly the same time.

So that’s a set of—and this is very much part of the way about things—everything that makes a political and economic system works is a series of compromises or what I call balances—as you did—between things that you would like to have but you can never have them in full—you can never have anything in this in full. You can’t actually have the legislature running the polity on a day-to-day basis without a significant bureaucracy, and that bureaucracy has to have rules and regulations of its own, which is clear. And it has to be independent to some significant extent of day-to-day political meddling. At the same time, it has to be ultimately under the oversight of elected politicians, and the people have to feel that the politicians do have some oversight, but they also have to trust—and this is a big problem—that these regulatory machines are working in their interest. What do you do when they’ve lost that confidence? You get Donald Trump, and you have a problem—a very, very deep problem.

But come back to your big question, it will, as it were, from a point of view of trying to understand why we need these systems, be quite interesting to observe what happens in the U.S. if they are all closed down. So if the regulatory state is truly closed down—so there’s no drug approval anymore, and anybody can sell any drug,

and subject to tort law, and all the rest of the safety regulation—you know, the aircraft safety regulation—I don’t remember what you call it—and all the rest of it.

And why is there a tension? Because there’s a tension because of this perception in significant quarters in the U.S. that this is not consistent with the Constitution as designed in the eighteenth century and should be dismantled. But it is clear that if your regulatory structure is not seen as legitimate and effective, you have a tremendous problem because it will also come to be seen as undemocratic, as not legitimate in the eyes of the people, and if they start selecting politicians who take that as a cornerstone of what they are doing, you’re going to get an awful lot of chaos.

And I think—you asked me earlier about COVID. Some of what happened in COVID reflects that, and it’s very, very worrying because the balance, and particularly the balance of confidence needed in the system that we actually need today is being under pretty profound attack because it is seen as illegitimate.

COHEN: I will ask one more question before turning the floor over to our members, and this is also from the news. I think it was just yesterday you wrote a column describing the dance now underway in Washington about the debt ceiling, and you referred to it as absurd. Would you elucidate a little bit more on that?

WOLF: That’s relatively simple it seems to me. I should say that the problem—I mean, it’s obvious. It’s a very important point, though. Many of these debates are unique to the U.S. This doesn’t make them unimportant, but pretty obviously they remain crucial. And I think it is important to say when—it’s banal it’s so obvious—but I honestly don’t think democracy will survive in the world if it goes here. I just think it’s inconceivable, so—in any real sense.

So this is the most important country by far, and if you look at the world today where the overwhelming majority of people live in—or a substantial majority of people live in authoritarian regimes of different kinds, that’s a pretty—that’s a pretty big deal. But of course democracies have to demonstrate they can be self-governing in a sensible way. And it’s very difficult to do that if you set up a system—which I understand goes—I now understand goes back to the First World War, and prior to that, it was even worse—in which you can legislate to do something. The government that will legally allow or even required to do it, but legislation of the financial means to do what is being legislated is not automatically forthcoming.

And there are some who might argue that this is beneficial because it will improve the trajectory for public finances, but as I point out in my column, the trajectory for public finances in the U.S. is actually pretty spectacularly bad by the standards of really bad countries. So it doesn’t seem to be working from that point of view, but it does guarantee regular political crises.

If, every single time, it is resolved, however messily, in a sense that doesn’t matter; it’s theater. And it’s not important theater, it’s just fun theater, if you like—watching the legislatures and the administration running around like headless chickens trying to resolve these unnecessary crises can be regarded as amusing.

However, if it actually happens that the United States runs out of money voluntarily from this resolve, the consequences are just completely unpredictable, but potentially very frightening. And of course it would depend on how long it went for.

So it falls somewhere between ridiculous and scary, and I can’t make up my mind from day to day—since I’m an outsider in this—what one should view it as. My own prior is the chances that the debt ceiling will be raised are very, very high, but they’re not one hundred percent. And if you repeat the game often enough, this is like playing Russian roulette with, you know, a hundred-and-ninety-nine empty barrels and one which is loaded. If you shoot it often enough, you’re going to kill yourself.

COHEN: On that note—(laughter)—I’m going to turn it to our members for questions, and I believe there is a microphone coming around.

Mr. Hormats, please.

Q: First of all, thank you, Martin, and thank you, Abby.

I would like to ask if you could switch gears a hundred and eighty degrees and talk—because you’ve talked about democracy and capitalism—talk about China. Here is a country which has no democracy, and they would say they have no democracy, and has really not a capitalistic system of the kind that you have described, although there are semblances of it.

And you made a very interesting point about recognizing the legitimacy of different political groups within a country. One of the big gaps we have between the United States and China is recognizing the legitimacy of the other country’s system.

So I was wondering if you could take the context that you have described here in this—primarily in this book, and relate it to how you deal—as a country that is a democracy and a capitalistic system, and believes that democracy is the source of legitimacy—with a country that has a very different political system, a very different economic system, and sees legitimacy in a totally different way; in a way that Americans find difficult to understand. How do you deal with a world that is divided in those very, very different contexts or frameworks going forward?

WOLF: OK, that’s a very, very big set of questions. At the—

Q: (Off mic.)

WOLF: —yeah, OK, well, there is a fair amount in this book about China—I mean, it’s not the focus. The focus on the book is trying to rebalance and strengthen the link between democracy and capitalism in our societies because I certainly don’t believe we have any credible alternative to making our system work. And the sort of autocratic capitalism we are likely to move into is what is sometimes called liberal democracy nowadays, and I argue very strongly that is inevitably a highly corrupt crony system. So we really shouldn’t want to go there. And the—so we need to make our system as effective as we can, and I’ve written a lot on this.

But it’s obvious—point two—that even if we do quite well in restoring our system and, you know, the United States avoids becoming a gigantic version of Orbán’s Hungary, the—we live in a world in which we are not alone. And China is a very different beast. Part of the difference is, I think, at least come from profound historical differences between these cultures, which would probably mean that China were completely different from us even if it had never become communist.

So I think one of the interesting questions to me is how much of the difference between us and China is because China was conquered by Mao, as it were, and how much of it is because, well, that’s what—given Chinese culture and history—is likely to emerge. It has been—to the extent it has functioned—an unbelievably sophisticated bureaucratic state long before anybody else got there. And Frank Fukuyama’s recent work in this area has been very, very important. So it is the other anyway.

The third question, of course—which I would just put in a footnote—is I do think it is worth discussing whether we can expect the Chinese system, as it is now, to continue to perform anything like as well as it has done in the last four decades. I know there’s a lot of discussion I’ve noticed suddenly about whether we are at “peak China.” I personally doubt whether we’re at peak China, but I think it’s very plausible that Chinese performance will continue to slow significantly, and that China is entering now into some very big difficulties of its own—in

the economy, in society, in the political system. And I think therefore it’s important not to exaggerate our impotence, as it were, in dealing with a rising China in that sense.

And it gets to the really big question you asked, which is how—assume that China continues to be a major and successful power with a relatively rapidly growing economy, and even if it’s growing 3 to 4 percent, it’s growing relatively rapidly relative to us, which certainly seems to be possible even given their demographic problems.

How do we relate to it? And how does the difficulty we have in relating to it—how much does it have to do with ideological differences? Here I’d just say—and this gets to the core of your question—I think it is perfectly arguable—and I know of people here and in China who would argue—that the core of what’s going on is not an ideological difficulty; it’s a power difficulty—something much more fundamental. The U.S. is the incumbent superpower, and China is a rising power. And that just creates frictions which lead to war—that have led to war—this is Graham Allison’s thesis—and in this context it is worth knowing—noticing that though, of course, there were not insignificant political differences between Britain and Germany before the First World War—they weren’t gigantic in truth—they still managed to have a world war.

So the first thing you have to do is work out a way of dealing with a rival, and that means accepting your relative diminution of power. You just have to accept that the world you live in now is not the world of the sole superpower, and that’s sort of difficult, and the difficulty of doing so has frequently led to war. I think Graham is absolutely right. So that’s the first thing. You have to decide that there are lots of things that you would like to happen in the world you cannot ensure because there is a very, very potent player that is likely to get in your way. And I don’t think, to be honest, that the U.S. has made that adjustment. And that’s really quite difficult.

Second, of course, that gets much more difficult when the country concerned seems so different, and I have argued already that some of that profound difference is due to the fact it really is quite different and always has been. China is not—it’s the first great power America has dealt with which isn’t European, and that’s pretty important. The—well, Japan, too, I suppose, but it was a relatively brief rivalry resolved relatively quickly.

The final element, of course, is the ideological elements, and the view of the state and society that go with that. I tend to think that, compared with the Cold War, the ideological element is actually relatively small. China does not seem to me a seriously proselytizing Marxist state. It is a great power rival with a highly centralized bureaucratic—no, a bureaucratic structure which doesn’t recognize individual human rights in the way we do. That’s the difference to my mind.

And the question is can you live with that sufficiently, and I think—and this gets to the very last element—you have to define the areas where you must defend yourselves, and your values, and your interests. You have to find the areas where you are going to continue to say, we simply disagree with what you are doing, and you have to define the areas where you have to cooperate between the alternative is a catastrophe. And those include the core global public goods and, of course, the maintenance of peace. So you have to do three things—very difficult things—at the same time, and recognize you are going to have to go on doing those things for a century or two or three. That’s the challenge, and if you are a superpower, that’s the sort of thing you have to do.

Now the question is can we manage that combination of relationships—neither hostile in everything nor friendly in everything, but somewhere in between. And what institutions, and practices, and behaviors do we need to maintain and strengthen to ensure that happens?

I’ve written quite a bit about in this book about this, and in articles, and my main point in this discussion would be we cannot organize the world effectively on the basis of unremitting hostility to China. It isn’t possible. It’s mad. But of course, we have interests, values which we must defend, and interests and values—interests we have we share, and we have to manage those at the same time. So we need a really sophisticated long-term policy, and the job of the Council on Foreign Relations is to produce it. (Laughter.)

COHEN: By tomorrow. (Laughter.) Yes—

WOLF: I’m sorry for such a long answer, but it was—it goes radically, radically unsatisfactory on multiple dimensions.

COHEN: That’s right, and as Martin indicated, he does address many of these issues in the book, and one of the things that really struck me is the idea that we don’t really have a good model for doing this because the other countries with whom we have had rivalries before had different structure, different culture, and of course, perhaps not the same level of economic prowess that China has.

If we could please bring the microphone up front? Sorry, I didn’t see you there. If you could identify yourself, please?

Q: Thank you. Hello, can you hear me?

WOLF: Yes.

Q: Yes. Thank you very much for a really—thank you for your remarks, Martin. My name is Eddie Mandhry with Schmidt Futures.

My question is related to a piece you recently had in the Financial Times that described AI as polyvalent, given its ability to disrupt economies, politics, and so on. And so my question is about, you know, particularly when you think—when you talk about how innovation has contributed to hollowing out of the middle class, what concerns you the most about AI as we enter this age, or what excites you the most about it?

WOLF: Yeah, I—that’s a lovely question. I’ll be very—I think I can be brief. Absolutely nothing about excites me. I think it’s awful—(laughter)—but then I’m a pretty old person, and I like the idea that we did the thinking on the planet, and I don’t really want the trend to have a machine displace me—but, sorry, I’m close to retirement. Somebody sent me a ChatGPT—I decided that I wouldn’t use it for various reasons—version of what they thought a Wolf column on the subject of AI would look like, and it turned out—to my great pleasure—to be really boring. (Laughter.) So I’ve still got an edge for six months at least before the program catches up.

I think the—I don’t know—they fall into two categories. There’s the jobs effect, which—and there’s everything else. The jobs effect—I had a very interesting discussion with some experts last night, and my own view at the moment—there are many people here who know all there is to know—but basically it’s not the old middle class that is threatened—by middle class I mean the upper working class, and so forth, that are threatened by this. They’ve already been dismantled. It’s going to be low—middle and upper-middle-level knowledge workers who are going to be affected, which is the most important part of the middle class that is left—probably not the people in your—here, but the people who work for you. I pity the young people who might enter this.

And all I would say is if we dismantle the last bit of the middle class, and the people who do all the writing, and thinking, and so forth, and use this machine—these machines instead to do all of the basic legal work, basic accounting, all the rest of it—basic journalism, and so forth—we’re going to have a pretty big social problem. That’s that side. I don’t know about that, but that seems to me the interesting possibility.

Then, of course, we know the wider implications. There is obviously a very real possibility—constantly talking about—the infinitely cheap creation of fake video, fake films, fake news of the most sophisticated kind—really difficult ones to manufacture. If you are really stupid, you will start automating all of your military systems, and God knows what that will mean.

There’s obviously an immense amount of wider implications of, potentially, of this technology, and I would say, myself—but then I do conclude that we can’t do anything about it, and we won’t—but the—but if we knew 25 years ago what social media was going to do to us, and particularly to our younger people, I think we would probably have said that’s not a very good idea. So I really would like people to work out what this is going to do, and at least have some plans for handling it. And as things are, a very small number of very, very, very brilliant people in very brilliant firms, in competition, are of course flooding the world with this, absolutely uncontrolled, and I suspect our grandchildren and great-grandchildren will view us as certifiable lunatics.

(Pause.) I hope I’m wrong. (Laughter.)

COHEN: We have time for one more question. Please, in the back, yeah.

Q: Hi. Thank you. My name is Pote Videt with Lombard Investments.

Is the U.S. still the best role model for democratic capitalism? And what constitutional amendments would you propose to improve the system?

WOLF: Well, if you look at Freedom House—well, it depends what you mean. It’s a very large country, and running democracy in very large countries which are very diverse is obviously more difficult than in small, homogeneous ones. So you could say it’s a role model given the challenge. And you can also say that, in many respects—very important respects, the capitalist bit, particularly on the innovation side, works relatively well, OK, and has done so. So that’s an—those are good upsides.

I would say, however, compared with the more successful—some other countries around the world, it’s very clear that, on many norms, U.S. democracy would not be regarded as the best, and the best indicator of that is look at Freedom House rankings. That’s pretty standard, and the U.S. comes way down in the list of democracies on Freedom House rankings on democracy, and it’s not particularly surprising. Some of them are embedded in your Constitution, and some of them got worse, like voting rights and so forth.

And then the—and on the capitalism side, average GDP per head is very high, productivity per head is pretty high, but other measures—some other measures of welfare, which is—(inaudible)—like life expectancy and so forth, are just ghastly. And there’s—we asked about rentier capitalism. I mean, your health system is probably the single-most paramount example of that.

So I would say the U.S. has immense strengths, immense weaknesses, but it couldn’t any more be regarded as the model of democratic capitalism. But I would say it remains and will remain—so long as it is a democratic country—the most important democratic capitalist country, and I include India in—

Q: Changes you would propose.

WOLF: Sorry?

Q: Changes—

COHEN: Changes.


COHEN: You had some wonderful recommendations.

WOLF: Yeah. What would be—well, how radical am I allowed to be? OK, let me make a very simple suggestion, which will be accepted in India, for example. The management, supervision, and control over federal elections should be entirely and exclusively in the hands of the federal government. The states have no legitimate role, in my view, in running federal elections. Now if that’s a constitutional revolution all its own, but I don’t really see any good arguments of democratic principle against this.

And having a serious debate about whether state legislatures can overturn the results of elections because they want to is really not serious. So that is where I would—and this gets to a broader point, which is—this is—in 2023, the structure of U.S.—the U.S. federal system, which has immense strengths, could do with some pretty serious overhaul. One of the things I would do—which the Indians do try to do, by the way—is to adjust the borders of states so they were—you didn’t have all these dinky little states with two senators, and gigantic and important states with two senators with the result of which is your—one of your two most important legislative bodies is just ridiculously unrepresentative. I understand why that was done at the beginning, understand the history of that, but that’s 250 years ago. I think that it would be quite sensible to say Wyoming doesn’t make sense. I know that I will never get out alive, but that’s my view. (Laughter.)

So those are two things—and there are many others. None of these are going to happen. It’s irrelevant. You have to make do the best with what you have, but there are some really pretty profound difficulties with making this system work well at the moment, and it would probably do with a bit of reform.

COHEN: And one of the other recommendations in the book is to vote for competent politicians. (Laughter.)

WOLF: Yeah, that was—every book should have one good joke. (Laughter.) And that was it.

COHEN: Martin, thank you very much. (Applause.)


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