How excessive inequality undermines democracy

Development Policy11 Aug 2011Evert-jan Quak

England has been in the grip of looting, rioting and vandalism during the past days. And being in England at the moment – with BBC News on in the background – I’m reading a speech by Professor of Economics at the Institut d’Etudes Politiques de Paris Jean-Paul Fitoussi. At the Bretton Woods conference organised by the Institute for New Economic Thinking earlier this year, Fitoussi was one of the participants in a panel discussion. Now seems the perfect moment and place to read Fitoussi’s words, because while the British media and politicians are trying to cope with the massive outbreak of violence across the country we also face the most uncertain moment for global financial markets in decades.

Fitoussi argues that excessive inequality contributes to the financial crisis and that it undermines democracy. He starts with the limitation of our capacity to predict the future. ‘We have no theory, no past experience on which to build a framework of what lies ahead. We have been surprised by the turn of events. None of us had ex-ante foreseen the financial crisis, although many of us ex-post are pretending that we did. (…) But still no one forecasted when and how the crisis would arise.’

He brings that in line with the unpredicted Arab Spring, the revolution in the Arabic world that took us by surprise, as no political scientist had predicted this outcome. These two events, the financial crisis and the Arab Spring, are interestingly the main focus of Fitoussi’s plea because ‘they hinge upon the two major systems in which we will probably live for a long time: capitalism and democracy’.

‘People all over the world are indeed demanding more environmental protection, more public goods, more education, more health care, more decent jobs, more economic security, more political participation, and more social capital. These are the key determinants of well-being. This is also where the growth reserves of the world lie. One lesson of the crisis and of the revolution in the Arabic world is that neither autocratic capitalism, nor market democracy has delivered those goods.’

He further states that the acceptance of an intolerable level of inequality by democratic regimes is unacceptable. Fitoussi shows that the annual rate of growth of real incomes has been well under average for 80% of the population of OECD countries and above average for the fifth quintile. ‘This fact is striking because our system is based on tension between two principles, firstly, the market and inequality (1 euro, one vote), and secondly, democracy and equality (one man, one vote), which leads to a never-ending search for a go-between or a compromise.’

When this compromise is in turn giving the market too much power, as is happening nowadays, this will lead to inequality. The consequence is that confronted with an unfair devolution of income, wealth and possessions, people will revolt. In the words of Fitoussi: ‘Besides, the capability of choosing one’s own life is an essential element of well being. People will not accept being deprived of this capacity for too long. If the economic system and/or the political order systematically jeopardize the main determinants of well-being such as freedom, economic security, employment and so on, they may both collapse.’

That’s why Fitoussi calls for a hierarchy of values that requires the economic principle to be subordinated to democracy rather than vice versa. ‘The relationships between democracy and the market are thus more complementary than conflicting. By preventing market-based exclusion, democracy increases the legitimacy of the economic system, and the market makes for a greater level of backing for democracy, by limiting political control over people’s lives. Accordingly, each of the principles governing the political and economic realms is limited and is also legitimised by the other. The impoverishment of the middle class almost everywhere in the developed world and the stagnation of median wages, mean that democracy has not accomplished its task of preventing market based exclusion.’

Fitoussi suggests that determining the acceptable degree of inequality should be the subject of an annual public debate by parliaments. Is this the way in which the world is moving now? No. ‘The illusion that the crisis was just a brief interlude and that the post-crisis world will resemble the world as it was before, is still alive and well. And there is great pressure to re-write the story of this crisis by depicting effects as if they were causes,’ says Fitoussi.

It’s even worse. As the voices to curtail public and social spending are becoming louder, the causes of the financial and economic crisis – inequality, debt, and short-termism – have thus no prospect of being curtailed. Austerity policies will increase inequality even more. In the words of Fitoussi: ‘In a way, the rich countries seem to be characterized by a regression of democracy, as doctrine-ready thinking seems to have more influence than democratic debate.’

Watching the riots in England I think there are some striking similarities with the words of Fitoussi. We have to find innovative ways to deal with the economic downturn, the demands of the financial markets and at the same time remain accountable for the human well-being of all citizens.

(You can watch and listen to the speech of Fitoussi. What other panelists said during the Bretton Woods conference is also interesting.)