In this interview with journalist Bascha Mika, political scientist Wolfgang Merkel on the close connection between open societies and capitalist economic systems and the consequences of social inequality.

Wolfgang Merkel is a director emeritus at the Wissenschaftszentrum Berlin and a professor emeritus at the Humboldt-University Berlin. He is a Senior Fellow at the Democracy Institute of Central European University in Budapest.

Are democracy and capitalism friends or enemies?

As is so often the case with fundamental questions, there is no fundamental answer to this question. Let me try it this way: Capitalism and democracy follow different logics, but under certain conditions they can engage with each other. Then, a space of possibility emerges where they can coexist.

What conditions are these?

A lot depends on which variant of capitalism we are talking about and which democracy we have in mind. I refer to liberal democracy, in which the rule of law is ensured. We still have to talk about the variants of capitalism.

Capitalism thrives on unequal property relations, democracy on equal citizenship rights and the goal of realizing the common good. So, capitalism per se is not democratic and democracy per se is not capitalistic …

… therefore not only democracies can coexist with capitalism, but also deeply autocratic systems. In this context, we have seen entirely new forms of capitalism after 1989 – for example, in post-Soviet states like Russia and Ukraine with their oligarchic capitalism. Politics leaves selected oligarchs a certain space in which they can operate freely. This leads to a paradoxical mixture of Manchester capitalism, as Friedrich Engels called it, and state regulation of foreign trade. In the autocratic capitalism we observe in China, this is particularly pronounced.

Unbridled economic activity also exists without oligarchs. Wasn’t it ex-Chancellor Angela Merkel who called for a “market-compliant democracy” for Germany?

As a good democrat, Angela Merkel should have demanded a “market that conforms to democracy”. But under neoliberal capitalism, the market has freed itself from restrictions, regulations, and social obligations with the help of politics. Politics has largely refrained from controlling financial and other markets. The heyday of neoliberalism began in the 1980s with Thatcher in Britain and Reagan in the U.S., and lasted until the 2008 financial crisis.

To what extent was the neoliberal variety of capitalism spurred on by the collapse of socialism? Suddenly, there was no longer a counter-model.

After the collapse of the Soviet empire, neoliberal capitalism was able to flourish. In 1989, Francis Fukuyama wrote his famous essay on the “end of history”. Fukuyama predicted this end in two respects: political and economic liberalism had finally decided the world-historical race of systems in their favor. Fukuyama was absolutely right about capitalism prevailing. But he was on the wrong track when he believed that democracy would also prevail worldwide. Since 2010 at the latest, we have seen its increasing erosion. Since then, we have been living in a phase of democratic regression – the same is by no means true for capitalism.

In this country, it was the Social Democratic Party (SPD), of all parties, that intensified the neoliberal course from the end of the 1990s. At the same time, there used to be a “social market economy” in the Federal Republic of Germany.

Yes, after World War II came the phase of welfare capitalism in Europe, in which the state socially contained capitalism. Politicians claimed control of the business cycle, tax policy and regulation of labor markets. A word about the SPD: I don’t entirely agree to your suggestion. The so-called third way was something different from neoliberal Thatcherism. But that’s a broad field.

Why have democratic states surrendered so willingly to neoliberalism?

To exaggerate, I would say: Democratic politics has democratically decided that the economy will no longer be controlled democratically. Democracy has thus disempowered itself. The welfare-state coexistence model of democracy and capitalism ran into heavy waters toward the end of the 1970s. Stagnation combined with inflation. This stagflation was the nail in the coffin for coexistence. No democratic state can afford zero growth with high inflation for long.

Inequality and thus social tensions – a democracy cannot afford that either.

At that time, various things came together: Parallel to developments in the real economy, a paradigm shift had long been announced in economics. Hayek and Friedman had replaced J.M. Keynes. Neoliberal theories were ready to flow into political practice. In addition, the neoliberal right formed an unholy alliance with the Marxist left; the welfare state was criticized by both as unsurvivable.

Crucially, however, the major capitalist democracies in Britain and the United States stamped coexistence as a discontinued model. There, market liberal forces were much stronger than on the European continent.

Do you see a fundamental difference between the ideology of neoliberal finance capitalism and that of the infamous Manchester capitalism of the 19th century?

No! There are two perspectives on such a historical comparison. Of course, in OECD countries it is largely ensured that people do not starve. There is poverty, but no mass misery like in 19th century England. But if we look to South Asia or Latin America, we see no substantial difference from the situation of the working class under Manchester capitalism. Civilizational progress applies to some extent to the rich countries, but not to the poor ones. There capitalism has similarly devastating consequences as we know from its early history.

If one considers democracy as progression of civilization – which is not true for capitalism – why are all democracies so far capitalist?

Because a democracy includes the fundamental right to property. It is one of the great rights of freedom that is difficult to suppress or abolish. You cannot forbid people to become proactive and innovative and to accumulate wealth through economic endeavors without repression. It is possible to nationalize and socialize profits through taxes. But anything else would require strong political repression – which cannot be justified in a democratic framework.

The attack on Ukraine has created a new cold war. But in contrast to the last century, all political players are now capitalists. What does this mean for the competition of systems?

The geopolitical situation has changed as a result of Putin’s war of aggression, but above all as a result of the rise of China. We live in an interim period in which the geopolitical blocs are not yet fixed again. China is challenging the Western superpower, the United States. The U.S. is responding by combining its economic and military might with the suggestive power of liberal values …

… Values that they repeatedly violate through wars of aggression and war crimes …

True. But despite all the damage, there is a normative superiority of liberal, libertarian democracy. That both sides are now capitalist does not exacerbate the conflict, but neither does it moderate it. However, Chinese state capitalism has proven to be faster growing than the Western model over the past two decades.

Financial capitalism, which has long held sway in our country as well, is tearing open a huge gulf between self-interested profit-seeking and democratic commitment to the common good. The result: social inequality is growing. What are the political consequences of this?

Economic inequality translates into political inequality. This primarily affects the lower third of society, the lower educational strata, which are hardly represented by trade unions or political parties anymore. Education is the most important factor for political participation. The disengaged rarely get involved in politics, not in parties or political civil society. They do not even use the simplest form of participation, voting. But there is hardly any protest among this segment of the population; apathy prevails. These people are outside, and the rest of us live relatively comfortably with that, because democracy works for the upper two-thirds of the population.

In the financial crisis starting in 2008, money was redistributed from the bottom to the top in favor of the banks. Is it the same today when energy companies are saved from bankruptcy?

It is very similar.

A bankruptcy of the gas companies would be a catastrophe for the current energy supply; this would cause major systemic disruptions. That would be politically unbearable for a government, which would certainly be voted out of office amid massive protests. But it’s the same old story: big profits are privatized; big losses are socialized.

At the same time, however, the government puts together one aid package after another to counteract energy prices and the consequences of inflation.

In contrast to the socialization of losses, aid for the population at large is a democratic moment. It buffers protests, and the government shows that it is responding to people’s needs. So, it’s ambivalent: On the one hand, it’s the same old story; on the other, it responds to the needs of the broad population.

So, what form of capitalism are we looking at?

Compared with the period before the financial crisis, we are now dealing with more regulated crisis capitalism. The government is intervening more decisively than it has in previous decades. In the great transformation from a fossil-fueled economy to a post-fossil economy, it will have to intervene for a long time to come. If only because the free market alone would not meet climate targets.

Overall, the 2020s will be a decade of massive government intervention. Capitalism will become more political again, even in the democratic West. But there will also be a sharp rise in inequality – as was always the case at the beginning of such truly great innovation cycles.

Capitalism is further contained by democracy, but nevertheless evil distortions cannot be avoided?

Despite necessary state support for the transformations of the 2020ies, capitalism will continue to produce inequality. Democracies will have to respond to buffer the greatest injustices. If the state fails here, the political level will also start to slide. The legitimacy of democratic politics is at stake. So, it’s not just about procedural issues and free elections, but about output. What is important is what comes out at the end, as Helmut Kohl said in his inimitable popular style. These 1920s are a kind of fateful decade for capitalism – but also and especially for democracy.

Democracy does not have to say goodbye to capitalism in order to survive?

No, that is a forced marriage. Capitalism follows a different principle, but democracy is dependent on capitalism, on its efficiency and innovative power, otherwise it will lose legitimacy among its own citizens.

Capitalism does not need democracy, but democracy needs capitalism.

Does that mean that you really can’t imagine an alternative, more desirable model than that of a tamed capitalism?

I don’t see such an alternative model. Even the interesting advice from Mariana Mazucato to Thomas Piketty is within the boundaries of capitalism. However, they rightly promise more political control, more effective climate policies, and less inequality. It is now a matter of combining the creative destruction of markets with governmental guidance. The time pressure of the current transformation decade does not permit ideological one-sidedness. Only an intelligent dovetailing of market and state can do the trick.

The interview was published also at the Frankfurter Rundschau.

In collaboration with Hannah Vos.