Contrary to the predictions of a long and distinguished literature, spanning from Marx on the Left through Polanyi and Schumpeter to Mill and Hayek on the Right, that saw democracy and capitalism as partially if not fully incompatible, democratic capitalism reigned unchallenged in the advanced world throughout most of the twentieth century. It did so, according to Democracy and Prosperity, Torben Iversen and David Soskice’s new, bold, and, overall, optimistic book, because democracy and capitalism are indeed “generally mutually supportive” (p. 5). Democracy “makes” (rather than replaces) markets (p. 258). In turn, a well-functioning capitalism, by delivering growth to an expanding middle class, makes democracy possible.
According to Iversen and Soskice, that “symbiotic relationship” (p. xii) derives, in a nutshell, from the internal logic of both capitalism and democracy. On the one hand, advanced capitalism relies on the use of an educated labor force whose skills are “cospecific with other skilled workers, and … with other relevant technology” (p. 14). To operate efficiently, firms and skilled individuals “colocate” together in regional clusters. “Cospecificity” and “colocation” then have two crucial consequences. First, both capital and skilled labor benefit from, and therefore demand, public goods—ranging from well-run bureaucracies to infrastructures and education—that generate those skills and reinforce the complementarity of factors. Second, capital is not footloose: firms, embedded in production clusters, are relatively immobile and hence deprived of Lindblom’s structural power to exit. On the other hand, skilled labor, which includes educated workers proper and “a wide aspirational community of families concerned that their children can access these advanced sectors” (p. 31), constitutes the majority of the electorate or at least the decisive voting bloc in advanced democracies and, because it benefits from well-functioning markets, supports growth-enhancing policies and public goods that reinforce advanced capitalism. Moreover, the immobility of capital allows policy makers to establish a generous welfare state, which, in addition to having a redistributive dimension, operates as a provider of public goods (such as universal insurance policies that minimize the costs of job searches, maximize the health of the workforce, or lessen social conflict).
There is much to learn and admire from the theoretical edifice of Democracy and Prosperity. It offers a plausible explanation for “the exceptional resilience of advanced capitalist democracies (in comparison to any other type of nation state in the last century or so)” (p. 4). At the same time, however, a deeper examination of the theory’s three main assumptions—the nature of complementary labor, the role and stability of cospecificity and colocation, and the majoritarian position of skilled individuals—leads one to question the claim that democracy reinforces rather than follows from capitalism and, more generally, the overall optimistic conclusion that capitalism and democracy are intrinsically compatible.
First, Iversen and Soskice’s emphasis on capital–labor complementarity, which contradicts the conventional view that the interests of capital and labor clash with each other, is correct. Still, the type of labor that has been complementary to capital has evolved over time. Broadly speaking, it changed from artisans in preindustrial economies to unskilled workers in the first industrial revolution and then from semiskilled individuals during most of the twentieth century to highly skilled employees in the current knowledge economy. That evolution modified, in turn, employment patterns, wages, the distribution of income, capital’s incentives to invest in public goods, and, arguably, the political arena. By focusing its attention on the “virtuous” outcomes of the twentieth century (and, more tentatively at the end of the book, on today’s labor market), Democracy and Prosperity downplays important historical tensions between capitalism and democracy. For example, nineteenth-century capitalists opposed full suffrage, because of their concern about the condition and demands of labor. Likewise, today’s growing inequality and stagnant median incomes (Anthony Atkinson, Inequality, 2015; OECD, “Under Pressure: The Squeezed Middle Class,” 2019), which challenge the book’s thesis that society’s middle strata continue to be the winners of democratic capitalism, are feeding the rise of populism.
Second, there is no doubt that cospecificity and colocation have contributed to the clustering of production and the “immobility” of capital. Nevertheless, two key transformations are weakening those forces and, as a result, destabilizing democratic capitalism. In the first place, regional production clusters and nation-states arguably overlapped under Fordism. But their coincidence has declined in the last few decades, giving way to a well-known divergence between urban clusters and peripheral regions, at least in medium-sized and large countries (cf. David H. Autor, “Work of the Past, Work of the Future,” AEA Papers and Proceedings, 109, 2019; Christophe Guilluy, Twilight of the Elites: Prosperity, the Periphery, and the Future of France, 2019). Their overlap was also weaker during the nineteenth century, mostly because of the spatially uneven rise of manufacturing, and this resulted in strong tensions within nation-states. In the second place, cospecificity has not prevented the rise of factoryless manufacturing, triggered by declining costs of transportation and of coordination brought about by new information and communication technologies. Even though these new production chains have developed within “continental triads” or regions (North America, Europe, and East Asia), they are not contained within national borders, hence jeopardizing the symbiotic relationship between democracy and capitalism.
The unraveling of the economic conditions that propped up twentieth-century democratic capitalism leads us to the third key assumption of the book: the political mechanisms that drive democracy to sustain capitalism. In the wake of a growing split between winners (capital and complementary labor) and losers (the rest of labor), it is unclear whether the former will continue to be a majority or at least decisive enough to set policy. If they are not, then, democratic capitalism may unravel: either noncomplementary workers (together with a growing mass of retirees, who are much forgotten in the political economy literature) may vote against capitalism-enhancing policies, or winners may choose to redesign the political system to avoid being outvoted. Alternatively, if the latter continue to be the majority, as defended in the book, it is still unclear whether they will have any interest in investing in and redistributing to losers and their children. The hollowing out of middle-class jobs combined with strong immigration flows, which might strain the social contract on which the universal public provision of insurance rests, could push the majority toward welfare chauvinism.
Democracy and Prosperity explores the symbiotic relationship of democracy and capitalism mainly through the examination of the political and economic equilibrium that crystalized in the world’s “North” in the central decades of the twentieth century. Unfortunately, the single-case nature of the study makes it particularly hard to establish that democracy and capitalism were mutually supportive in equal fashion—that is, that each one contributed to the outcome “independently” of the other, as Iversen and Soskice argue. In fact, the history of contemporary capitalism challenges the idea that democracy and capitalism necessitate each other. Nineteenth-century capitalists abhorred mass democracy. Contemporary capitalism developed and thrived in earnest in a substantial number of nondemocratic countries: in Germany until 1948 (with the brief interlude of the Weimar period), in southern Europe until the 1980s, and among the East Asian “Tigers” until the 1990s. Today, an important literature has already uncovered the inordinate power of wealthy sectors in policy making, at least in the United States (Larry M. Bartels, Unequal Democracy: The Political Economy of the New Gilded Age, 2008; Martin Gilens, Affluence and Influence: Economic Inequality and Political Power in America, 2012). Thus, it seems more plausible to conclude that twentieth-century democratic capitalism was the result of a particular configuration of production technologies and economic institutions that enabled the emergence of an enlightened middle class, making democracy possible.
With its emphasis on the overall relationship between democracy and advanced capitalism, Democracy and Prosperity attenuates the causal relevance of the differences among several capitalist regimes suggested by the literature on “varieties of capitalism,” to which the authors have contributed decisively. Still, the book insists that the distinction between coordinated and liberal market economies matters in at least two regards. On the one hand, the two types of market economies differ in their (capacity to develop a) response to the distributional conflicts that have followed from the diffusion of information and communication technologies. There is little to disagree with here. Those regimes correlate with social spending and the nature of the welfare state, even though they may not have caused them.
On the other hand, both types of market economies informed (or perhaps embodied) their distinct evolution toward democratic capitalism through the rules governing the selection of political representatives, the provision of human capital, and the extent of enforced redistribution. More specifically, Democracy and Prosperity identifies two paths to democracy. In liberal (or protoliberal) economies that lacked good training systems, industrial elites, in need of a skilled labor force, introduced democracy to overcome the resistance of landed elites to mass education. In protocorporatist countries, endowed with a skill-generating system supported by unions, business, and the state, political and economic elites could do without democracy. Trade unions, however, were unified and strong enough to force a full democratic transition.
The existing empirical evidence makes these claims unconvincing. As shown by Christian Morrisson and Fabrice Murtin in their comprehensive study of education around the world, Britain, France, and Germany had the same average years of schooling in 1870, just before the expansion of democratic institutions identified in the book Their levels of educational attainment also evolved at a similar pace throughout the twentieth century (“The Century of Education,” Journal of Human Capital, 3 [1], 2009). The electoral reform of 1867, hailed as a political breakthrough that allowed liberal elites to democratize Britain and expand public education, only enfranchised one-third of male adults, a threshold that the standard literature does not define as democratization. In fact, Westminster extended the franchise to all men (and most women) in February 1918, only a few months ahead of the full democratization of Germany, which the book posits as an example of change achieved through working-class pressure. Indeed, a robust literature challenging the coevolutionary thesis of Democracy and Prosperity has shown democratic transitions (or, at least, democratic consolidations) to be endogenous to the process of economic development spurred by capitalism (Daniel Treisman, “Is Democracy in Danger?: A Quick Look at the Data,” manuscript on file, UCLA, 2018).
Iversen and Soskice also extend the double-path thesis on democratization to the adoption of electoral rules. Again, a long debate in the literature has provided no evidence showing that elites designed electoral systems to meet the functional needs of each variety of capitalism. The level of economic coordination did not matter when choosing proportional representation (PR); it was rather the vulnerability of old parties that shaped their preferences, with the constitutional structures and majorities in place determining the final selection of an electoral system (Carles Boix, “Electoral Markets, Party Strategies and Proportional Representation,” American Political Science Review 104, 2010). In turn, the nature of the welfare state derived from the interaction of electoral rules and the geographical distribution of left-wing voters, rather than from the coalition incentives generated by the electoral system per se (Jonathan Rodden, Why Cities Lose, 2019).
