In his sophisticated and ambitious book, Carles Boix takes a bird’s-eye view of the development of democratic capitalism since the industrial revolution. The central driver of change in Boix’s story is technology. He makes a useful distinction between Manchester, Detroit, and Silicon Valley capitalism, with a focus on the transition to the last type. In the terminology of our book, this is the transition from Fordist mass production to the knowledge economy. For Boix, as for us, each technological regime is associated with distinct economic, institutional, and political dynamics. Detroit capitalism, which became fully entrenched after World War II, caused high demand for mid-level skills, a relative equalization of wages, and a political convergence around a generous welfare state. “The roots of that new political order,” writes Boix, “were economic” (p. 8). Silicon Valley capitalism has different economic and institutional imperatives, with a steep drop in demand for low- and semiskilled workers, sharply rising inequality, and a new contentious politics represented by the rise of populist parties. Governments can modify the distributive consequences of new technology, especially through education and redistribution, but they are reactive, not proactive, agents.
Throughout the book, Boix makes use of well-trodden arguments about the skill-biased nature of new technology, as well as the effects of deindustrialization, to explain rising inequality. Like others he also links the dislocations created by the transition from a “Detroit” to a “Silicon Valley” economy to the rise of populism. The “bite” in the argument lies in the conjecture that each major technological shock drove the entire set of broad economic, political, and institutional changes. But in our view, the advanced democratic states in which knowledge economies are embedded played the central role, with key parts of the electorate in support of state strategies, in contrast to Boix’s fundamentally technology-driven approach.
Across advanced capitalist democracies, we argue, governments promoted the advanced sectors of the economy through a series of reforms: financialization, strengthening of competition policies, lifting of capital controls and restrictions on foreign direct investment, central bank independence and inflation targeting, and massive investment in higher education. All of these reforms, in our view, were required to leverage the new information and communications technologies (ICTs) and transform advanced capitalist democracies (ACDs) into much more decentralized, knowledge-based economies, but they were not caused by the availability of these technologies. The economic-institutional transformation in turn caused major social and political upheaval, as well as a complete reconfiguration of the social and economic position of women.
Of course, new technologies are rarely caused directly by government policies (apart from ICTs, in the United States), but whether they are widely adopted and have broad political-economic consequences is very much a matter of deliberate and major political choices. The knowledge economy would not have been feasible without government reforms, and it failed where such reforms were lacking. For example, the Soviet Union had the centralized scientific computing expertise in the 1970s and 1980s to evolve into a knowledge economy, but it was not prepared to pay the necessary political price in terms of a decentralized institutional framework; indeed, it was felt necessary to maintain prohibitions on personal computers until the late 1980s. Without politically initiated reforms, economies stagnate, even when they possess the necessary technologies and know-how.
The core difference between Boix and us is therefore this: Boix takes major new technologies as exogenous drivers of societal change. We instead argue that government strategies in reconfiguring institutional frameworks are preconditions for the new technologies to be successfully and widely adopted. And we further argue that governments reconfigure these frameworks in advanced democracies in response to an electoral concern that the advanced economy is (however painfully) remaining competitive. If these reforms are called (a bit misleadingly) neoliberal, then in our view the move of most advanced democracies to adopting similar reforms is ultimately a democratic one.
Thus our differences relate to the question of the politics of major institutional reforms and, more fundamentally, to how we should understand the relationship between democracy and capitalism. Like Boix, we emphasize the role of political and economic institutions in conditioning distributive outcomes—indeed, this has been a central theme in our work over the past two decades—but there is a prior and more fundamental question about the motivation of democratic governments to initiate major institutional reforms. Boix does not engage much with that question. He briefly considers the neoliberal reforms of Reagan and Thatcher but concludes that they cannot be an important part of the story, because other countries also made the transition to the new economy under very different partisan governments (pp. 137–38). We agree, but the new economy would not have been feasible without major reforms, which democratic governments undertook everywhere, often against the interests of the dominant companies at the time (no longer).
Given that these reforms happened in all varieties of capitalism and under all stripes of governments, what was the common underlying engine of change? Here we come to what we see as one of the most important logics of ACDs, which we refer to as the symbiotic relationship. Very broadly, and over long periods of time, democracy and advanced capitalism have been in a symbiotic relationship across advanced nation-states. Democracies positively reinforce advanced capitalism, and advanced capitalism reinforces democratic support. In our framework, advanced capitalism is driven by the democratic nation-state via politicians and political parties keen on building reputations for good governance. Because advanced capitalism is skill intensive, voters with good education, as well as “aspirational voters” with an ambition to enter the advanced sectors (even just on behalf of their children), support parties and policies that push the advanced sectors forward. That logic, in our perspective, underpins the range of reforms listed earlier. Democracy continuously reinvents capitalism.
One way to think of the relationship between government policies and middle-class voting is in the form of an implicit social contract: the government invests in education and in the broader institutional infrastructure of the advanced sectors while individuals delay consumption in order to acquire skills and then work in well-paid occupations. This is an intergenerational contract—in addition to an intragenerational contract—because many will vote for economically transformative policies if they believe that they will help their children gain a foothold in the new economy. Mobility within and across generations is a hallmark of the implicit social contract and indeed of all ACDs. What remains a constant in the social contract is the inclusion of the middle class in the sharing of the gains of economic progress. It is therefore not surprising that in terms of net income the middle class has by and large retained its relative position in the economy, measured as a share of average income.
Yet, democracy only guarantees that a majority benefits, and many have not benefited from the knowledge economy. Here we see a notable overlap with Boix’s explanation for the rise of populism. In the Fordist industrial economy (“Detroit capitalism”), semiskilled workers did well, in large part because the Fordist assembly-line logic made them strong complements in production to skilled workers. Such complementarities extended to peripheral areas, which served as “feeder towns” for the urban industrial machine. In the new knowledge economy (“Silicon Valley capitalism”), these types of complementarities have collapsed. Semiskilled workers are now segregated into low-paid services with few linkages to skilled workers; geographical agglomeration effects are increasingly confined to the urban centers. Boix uses a somewhat different language to discuss these changes, but the logic, we think, is very congruent.
Boix interprets this new cleavage in strictly economic terms and suggests that the “old” middle classes are turning against globalization in all its forms, including trade and immigration. It is this discontent that fuels populism. We agree but favor a somewhat broader interpretation. For people who are shut out of the new economy, and therefore usually also the cities, the negation of the old economy is felt as a rejection of their own skills, values, and lifestyles—indeed, of their very identity. It is perceived as a broken social contract, which implies a cultural-political divide in addition to an economic one. It recalls divisions between workers and the bourgeoisie, and between the center and periphery, in nineteenth-century Europe, which gave rise to the party systems of the twentieth century, as famously recounted by Lipset and Rokkan.
Are rising inequality and populism threats to democracy or, for that matter, capitalism? Boix takes a cautious view and argues that the prosperity attained by ACDs and the long-run consolidation of democratic institutions provide insurance against a breakdown. To us, both prosperity and institutional resilience are reflections of the continued symbiotic relationship. Advanced capitalism generates a large constituency for policies that promote the advanced sectors, and this pillar of support is a barrier to any attempt to subvert the system.
Still, the fundamental differences in our understanding of the coevolution of democracy and capitalism are clear in our approach to contemporary politics. Boix concludes, “In exploring … the evolution of contemporary capitalism, we have learned that, because they operate according to very different principles, democracy and the market are in tension with each other” (p. 214). On this tension, Boix is in good company: Schumpeter and Hayek agreed. We take the opposite view that advanced capitalism and democracy are symbiotic. In understanding the workings of capitalist markets, including the roots of inequality, we should look to how democracy works. The huge transformation from a Fordist to a knowledge economy was induced by democratic governments in advanced democracies, even when this reinvention of capitalism created massive economic and political upheaval.
