Contemporary populist parties typically claim that the state has been turned into a “swamp” by the mainstream political elites: a swamp that can only be drained by the new champions of the comparatively “pure” people. This juxtaposition of corrupt elites and betrayed masses is arguably the defining mode of populism.Footnote ¹ How can we explain the renewed resonance of this idea? How is it that we have moved from a relatively consensual post-war conception of the state as the primary force of social integration to the widespread conception that the state is a vehicle of betrayal?

The crisis of democracy in advanced capitalist states is deeply paradoxical. Europe and North America are wealthier than ever and yet more politically unstable, with more votes accruing to the political extremes than at any time since the 1930s. Critical scholars have long predicted a crisis but they have depicted the problem in terms of governments increasingly struggling but failing to satisfy social versus business needs, as if the state itself was a consistently neutral arbiter.Footnote ² Wolfgang Streeck argues that governments have worked through a number of strategies to manage the sharpening trade-off between the achievement of economic growth and social justice only to see each of these strategies run out of steam: they began with a tolerance of inflation in the 1970s, moved onto the accumulation of public debt in the 1980s and—via financialization—into the active encouragement of private debt by the 1990s.Footnote ³ This has been referred to as the so-called “privatized Keynesianism.”Footnote ⁴

But something far more radical has simultaneously been taking place through the latter era, namely the transformation of the state itself via privatization, outsourcing, internal managerialism and agencification, the rejection of interventionist industrial policies, and the concomitant development of quasi-markets in welfare provision, all within a context of liberalizing tax regimes. It is surely no coincidence that the countries that have seen the biggest rebellions against the mainstream elites are those that went furthest in transforming their states but also where a pro-market social-democratic left was most implicated in driving that process.

The problem is that very few of these reforms have worked in the terms by which they were justified. Moreover, the increased porosity of state structures relative to business involvement—to levels unprecedented in the era of universal suffrage—has enabled an upsurge in political corruption in all the states adopting these changes, albeit to varying degrees. What Europe and North America have experienced in practice are varieties of state failure combined with corruption scandals that create the most damaging possible scenario: one in which the mainstream political elites are seen to abuse the powers of the state for private gain while simultaneously withdrawing its protections from the public.

Behind each story of increasingly bipartisan state reforms was a governmental determination to manage the intensifying pressure on public finances. But in practice the failures of these reforms have only exacerbated the fiscal and social tensions of de-industrialization already emerging in the 1970s which were then amplified by the liberalization of capital movements through the 1980s: pressures experienced as a radical shock in post-Communist Europe but as an intensifying challenge in western capitalist states. The transformation of the state was typically begun in good faith and according to prevailing liberalizing orthodoxies. Many of the assumptions behind these newly radicalized orthodoxies proved flawed, however, and not just in their internal theoretical logic but in the failure to anticipate what would happen when marketization could only be partially applied, as was bound to be the case in real world conditions. The necessary conditions for competitive and hence efficient markets are remarkably extensive and strict: their natural existence is rare and their near approximation has historically required the active interventions of the state. Highly incomplete markets in the meantime can produce unexpected and socially perverse outcomes, as the cases below show. The fantasy pushed by so-called “supply-side” economists—that pure markets could exist if only the state would “get out of the way”—has nevertheless persisted.Footnote ⁵ Moreover, when the global financial crisis threw these wider reform failures into relief, mainstream political elites proved unwilling to acknowledge the magnitude of the crisis for at least two reasons: first, because they shared responsibility for the failed policies and second, because of the continuing absence of any alternative developmental model beyond the still prevailing utopia of eventual market “completion.” The remainder of this essay offers a brief illustration of state failure in the four most surprising cases of the populist wave, namely in Hungary, Poland, the UK and the US: four former trailblazers at the historically-leading edge of democracy.

Poland and Hungary were in the vanguard of the anti-communist revolutions of 1989 and had the strongest social basis for stable and “mainstream” electoral competition. In the mid-2000s, Hungary and Poland had the highest proportion of voters who identified themselves as social democrats in central Europe, on a par with Swedish rates, for example.Footnote ⁶ Why was it then that a growing segment of the population, including former leftist voters, became susceptible to the idea “that the nation cannot be in opposition,” and turned from narratives that had championed the nation's place within the new Europe towards those that berated the EU as an oppressive force? Put at its simplest: both countries have seen an intensifying political crisis because of the necessarily partial nature of liberalization. Existing communist production regimes could not in practice be turned into textbook liberal production regimes, and necessarily partial liberalization created particular difficulties. Both Hungary and Poland actually developed hybrid political economies: highly liberalized and open economies with critically missing liberal institutions such as domestic sources of business credit, dispersed corporate ownership, and venture capital. This path-dependent lack of internal institutions that efficiently complement each other has led to highly polarizing socio-economic outcomes made worse by the retreating state. Low unemployment protections in the context of weakly-dynamic labor markets and weak innovation capacity unimproved by state assistance, in stark contrast to the high state investment in research in the US, for example, has exacerbated such outcomes.

The social contract offered in the early 1990s in both Hungary and Poland was a minimum income guarantee to the most vulnerable—pensioners and the unemployed—to forestall a backlash against marketization. This guarantee was predicated on the gamble that renewed economic growth would make the new welfare contract sustainable. Despite being the fastest and most consistently growing economy in the region, Poland's social contract liabilities, its pension liabilities in particular, proved both fiscally and politically sticky. By 2000 Poland was spending far more than the Organization for Economic Cooperation and Development (OECD) average on income transfers and twice the average on disability pensions.Footnote ⁷ The increasing rigidity in Poland's public spending effectively crowded out the Polish state's ability to adjust its welfare system to insure its population against the new social risks of globalization, and this despite successive governments cutting back entitlements for unemployment benefits to some of the lowest levels in the OECD. Poland has a politically polarizing structure of poverty as a result, in which it already has British rates of relative poverty but at Chilean income levels, and those in poverty are the young, those with large families, and those in rural areas.Footnote ⁸ The Polish elderly meanwhile are relatively well off and politically mobilized, as witnessed by the massive public demonstrations against raising the pension age: an essential measure which the populist Law and Justice Party promptly reversed when they returned to power in 2015.

As its new developmental challenges emerged, Poland wrestled with persistent tensions on the supply side of its economy. Its dependence on foreign economic investment, even though less than elsewhere in the region, constrained successive governments’ ability to make its institutional regime more coherent. For example, the region-wide tax competition for foreign investment meant that Poland has steadily reduced its corporate and personal income tax rates but its ongoing welfare liabilities forced the persistent burden of taxation to be shifted onto the value-added tax (VAT) and, more damagingly still, onto labor. The practical result has been an exceptionally high tax wedge on labor that has stalled domestic employment and pushed employers towards the use of temporary contracts, so that Poland now has the highest number of 15–24 years-olds on temporary contracts in Europe: a staggering 69% in 2013.Footnote ⁹ The neoclassical economics on which transition economics was based operated from deductive “ceteris paribus” assumptions, which implied that any liberalizing reform created efficiency gains, but the real economies had “cetera” that were far more dynamically problematic.Footnote ¹⁰

A similar unintended consequence of the radical opening of Poland's economy was the incompatibility of the emerging domestic market needs for business credit and the severe risk aversion of Poland's internationalized banking sector to lend to Polish businesses. Poland's small and medium-sized enterprises have been starved of credit as international banks focused on lending to home country multi-national companies and the lucrative domestic mortgage and retail markets. It has not helped, politically, that the old EU member states had insisted that this region internationalize its banking system as an article of liberal faith while assiduously rejecting this option themselves.Footnote ¹¹ The more salient political point, however, is that the Blairite left in Poland is now as associated as the neoliberal right with reforms that seemed to favor external constituencies at the expense of those domestic workers not employed within the foreign direct investment sector. Leszek Miller's Social Democratic government had lowered the corporate rate to 19% as part of its 2004 reforms, outdoing the proposals of even the radically neoliberal Leszek Balcerowicz.Footnote ¹²

The underlying dichotomy between the changing economic-production regime and social justice is perhaps even better illustrated by the Hungarian story, which demonstrates the “damned if you do, damned if you don't” socio-economic experience of contemporary democratic governments in search of social cohesion. Successive Hungarian governments liberalized their tax regimes and opened their economy to foreign direct investment while maintaining not just the minimal social contract for the most vulnerable, but also relatively high social investment. They aimed to create a virtuous circle of human capital investment and higher valued-added production. But again the result was an exceptionally severe fiscal crisis when sufficient growth failed to materialize.

The Hungarian Socialist Party had tried to combine radical liberalization with sustained state spending on education, training, and public employment, and Fidesz's first administration had offered mortgage subsidies and failed to reduce pension liabilities. As in Poland, the result was the shifting of a high tax burden onto labor and employment and rising public debt to a cumulatively ungovernable level. Hungary increasingly combined the lowest employment rate in Europe with one of the highest tax wedges on labor and with the highest overall public spending of the Visegrád states. By 2006, this meant French levels of public spending at Polish levels of per capita income. When coupled with a post-2007 crisis in privately-held foreign debt, the last Hungarian Socialist government was left with nowhere to go other than unprecedented austerity measures. By 2010, given corruption scandals and public knowledge that the Hungarian Socialist Party (HSP) had misrepresented the real condition of public finances, it had squandered its public trust.Footnote ¹³ Orban's Fidesz duly won on a promise of “no austerity,” only to implement exactly that alongside a shift to constitutional lock-in and increasingly concerted crony-state capitalism.

The Hungarian and Polish political systems were thus confronted with the challenge of maintaining popular legitimacy for radical reform in the face of socially-exclusive modes of economic growth and rising fiscal pressure for ever-deeper public spending cuts. This was essentially the western capitalist experience of de-industrialization concentrated into a shorter time span, and at the point where democracy's merits had still to be proved. In both cases the social-democratic left saw the shattering of their electoral support (first in Poland, then in Hungary), as the parties appeared to vacate the leftist socio-economic space entirely. But the irony is terrible: these former young communist technocrats had become the region's most Blairite, pro-market social-democratic parties in order to demonstrate their liberal virtue!

So what similarities exist between the political-economic gamble of post-communist central Europe and the rise of populism in the already highly-liberalized, advanced capitalist economies such as the US and the UK? In the latter cases the evidence is again of a deepening crisis of the state's capacity to act effectively in the public interest, and the association of that crisis with the social-democratic left as much as the more traditionally pro-market right. To take the case of the US, the argument has been made since the beginning of the global financial crisis that a coalition of organized big business and increasingly co-opted political elites has replaced the post-war political consensus in which ideologically competing parties strove to support the American middle class and to enable the upward mobility of the poor into that class. The phenomenal rise in business lobbying and recently uncapped corporate party funding in the US have been described as spawning a “predator state.”Footnote ¹⁴ The main function of such a state is to divert public money to private hands, clearly demonstrating a “winner takes all politics” in which large corporations concertedly intervene in politics to manage institutional and regulatory changes to their overwhelming advantage.Footnote ¹⁵ A second-wave literature has duly begun on how the various dimensions of corporate state or “regulatory” capture already are, or can be limited.Footnote ¹⁶

The key to understanding the American case is the unprecedented undermining of opportunities for social mobility within a relatively liberal economy that constitutes America's historical social contract. As the tax expert James Henry noted, by 2013, some 22 per cent of all US children were living in poverty, the highest rate since the 1960s, and overall real per capita household incomes have stagnated since the 1980s. In fact, all of the increased income generated by the post-2009 recovery was consumed by the top 1 per cent. In the meantime, “government assistance for the poor and the unemployed, as well as funding for public investments in education, roads, hospitals and schools was starved for funding.”Footnote ¹⁷ Henry concludes that rising inequality “was a policy-made phenomenon,” and as such it cannot be surprising that such outcomes have proved peculiarly crippling to the credibility of the mainstream parties.Footnote ¹⁸

This un-mandated breach of the prevailing social contract is repeated in the UK. It is actually the UK which initiated the era of hybridizing state reforms with Margaret Thatcher's drive towards a more business-oriented approach to government, preceding similar moves in the US, Canada, and New Zealand.Footnote ¹⁹ Launched on the promise of “better government for less money,” these leading edge reforms were based on the idea that not only should the economy be liberalized but the state itself should be opened up directly to business involvement in both policy-making and delivery. The Blaire New Labour and New Democrat left then embraced these reform ideas as a new way to combine wealth creation with greater efficiency and responsiveness in public service provision. In practice, however, these experiments have produced contrary results. In the UK, reported administration costs have risen by 40 per cent in constant prices, despite a third of civil service numbers being cut over the same thirty year period, whilst total public spending over the same period has doubled. Complaints and judicial challenges have soared and running costs have been driven up in the outsourced domains.Footnote ²⁰

The hybridized state in the UK has proved more expensive and, as the now sizeable public administration and policy literatures attest, largely less efficient, resulting in poorer social, economic, and political outcomes. Hybridization nevertheless continues to proliferate not just in the UK but globally, and it is still actively encouraged by the World Bank, OECD, and EU as the route to greater efficiency despite the mounting evidence to the contrary. The risks of outsourcing, moreover, are starkest in the most poorly-regulated states. In the Czech Republic the value of public contracts awarded through opaque, non-tendered channels between 2006 and 2010 is estimated at 276 billion crowns or roughly one-fifth of the current national debt. The Czech Republic is a cautionary tale of how neoliberalism can be instrumentalized by political elites for private gain.Footnote ²¹ This deepening of state hybridization in the face of chronically poor results is profoundly dangerous because it creates an irreconcilable tension between our basic norms of democracy, dependent as these are on state autonomy, and the increasing permeation of that state authority by private businesses. Again, it is hard to imagine a process that more directly produces the idea that political elites are in collusion with business at the expense of the public interest. Moreover, this increasing role for private businesses has typically been replicated throughout the wider state administration and its regulatory agencies. In the UK this has led to a level of administrative and informational fragmentation that has radically complicated bureaucracy rather than reducing it, exacerbating the so-called “principle-agent” problem, wherein the interests of the agents and the principles (the latter delegating tasks to the former) potentially diverge. Thus, far from becoming cheaper, this greater government complexity has necessarily increased the transaction costs involved. Matthew Flinders argues that institutional fragmentation has ended the capacity of UK central government to operate “meta-governance” over state authority, and that authority is increasingly wielded by private hands.Footnote ²²

The theory of quasi-markets for welfare and public services was based on a focus on the end-user and provider market and analytically ignored the inalienable persistence of the state procurement market, as long as taxpayer funding for politically-mandated public services continues.Footnote ²³ Theoretically speaking, the idea of quasi-markets functioned within the standard welfare economic principles that supported it, rooted in the conventional preoccupation with possible trade-offs between equity of outcomes and the efficiency of processes. But the ideas behind quasi-markets ignored the contract and property-rights theory that would have identified the still-procuring state as doomed to be on the losing side of chronically inadequate private-service contracts, owing to the complexity of most of the goods in question. The predictable outcome is “incomplete”—essentially unfair—contracts in which the (state) buyer lacks the information of the (private) seller and hence is vulnerable to hold-up and opportunism. In practice, the UK's taxpayer funded quasi-markets are characterized by public service industry oligopolies with a tendency to sweat the guaranteed public funding while only producing perfunctory behavior within hard-to-monitor contracts. This explains the higher costs, lower service quality, and increased regulatory complexity of goods as pivotal to the public experience of the state, including health, education, and prison services. Ironically, quasi-market reforms of the capitalist state turn out to produce many of the pathologies of late communism's mixed markets, including a regulatory reliance on incentive-distorting indicative planning and chronic gaming practices. Meanwhile the results are experienced by citizens, most notably those earning lower and middle incomes, are the opposite of what they were promised.

In the short term, a cheering note is hard to find. It is not clear how this trend toward social and political polarization can be reversed without a radical shift in the political economic paradigm because our current production regimes offer up an increasingly divergent set of social interests. The knowledge economy encourages a dramatic shift in the dominant producer coalition landscape and its favored welfare regime. There were distinct patterns in the Brexit vote and the US election of divergent voting preferences between the centers of the new knowledge economy—rooted in information and computer technology and services—versus those of the rural, industrial and mid-range technology economies. These trends support a worrying thesis, that increasing structural divisions exist in advanced capitalist economies between those higher-educated voters who feel able to self-insure in minimal or even failing state conditions and who prefer the flexibility of highly-liberalized labor markets versus the rest, who have poor prospects in this system.Footnote ²⁴ There is a similar trend in the central European economies fortunate enough to receive German-dominated high quality investment in the complex manufacturing sector, where those employed within these new sectors typically have better prospects than those outside them, especially since the domestic state is impoverished as a developmental entity.

So it is unclear where the new, consensual center ground of public policy-making is to be found, and with it a legitimizing role for the democratic state as a socially-integrative force. Historically we have accepted the authority of the state to act in any respect on the basis of its capacity to fulfil a social contract. As T.H. Marshall has classically pointed out, our conceptual basis toward this social contract is always changing: from the state as defender of our civic, to our political, and beginning in the post-war era, to our social rights.Footnote ²⁵ This expectation of rights still exists, and while the “new” social democrats of the 1990s may have successfully parsed the language of social equality into the language of social justice, the results of public policy have increasingly failed to resemble any such a thing, and many voters have reacted with understandable disgust. In the meantime, the new populists promise economic and cultural protection: from Scandinavia to the US they now outflank the social democrats on the left but with added nativism. In government they have proved the worst crony capitalists of all.